UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2018
COMMISSION FILE NO: 0-17529
DIAMONDHEAD CASINO CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 59-2935476 | |
| (State of Incorporation) | (I.R.S. Employer Identification Number) |
1013 Princess Street, Alexandria, Virginia 22314
(Address of principal executive offices)
| Registrant’s telephone number, including area code: | 703/683-6800 |
| Securities registered pursuant to Section 12 (b) of the Act: | None |
| Securities registered pursuant to Section 12 (g) of the Act: | Common Stock, par value $.001 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the voting common equity held by non-affiliates of the Company based on the closing price of the stock on the over-the-counter market at June 30, 2018 was $974,126.
The number of common shares outstanding as of April 9, 2019: 36,297,576
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, for which the Private Securities Litigation Reform Act of 1995 provides a safe harbor. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and intentions and are not historical facts and typically are identified by use of terms such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given,” or “there is no way to anticipate with certainty.” These statements include, among other things, statements regarding our ability to implement our business plan and business strategy, our ability to obtain financing to sustain the Company, our ability to finance any future development, construction or operations, our ability to attract key personnel, and our ability to operate profitably in the future. These forward-looking statements are based on current expectations and assumptions that are subject to substantial risks and uncertainties which could cause our actual results to differ materially from those reflected in the forward-looking statements. In evaluating these forward-looking statements, you should consider risks and uncertainties relating to various factors, including, but not limited to, financing, licensing, construction and development, competition, legal actions, federal, state, county and/or city government actions, general financing conditions, and general economic conditions.
The Company’s actual results may differ significantly from results projected in the forward-looking statements. We undertake no obligation to revise or update forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Throughout this Annual Report references to “we,” “our,” “us,” “Diamondhead Casino Corporation,” the “Company,” and similar terms refer to Diamondhead Casino Corporation and its wholly-owned subsidiaries, unless the context indicates otherwise.
The Company is a Delaware corporation which was incorporated on November 15, 1988, under the name “Europa Cruises Corporation.” In 1989, the Company became a publicly-held company. On November 22, 2002, the Company amended its Certificate of Incorporation to change its name to “Diamondhead Casino Corporation.” The Company currently has three subsidiaries.
The Company has no current operations in any state. The Company has had no income or revenue from any operations since 2000. The Company currently has only one employee who serves in an executive officer capacity.
For the years ending December 31, 2017 and December 31, 2018, the Company’s limited resources were consumed by extensive litigation relating to various lawsuits and unsuccessful efforts to obtain financing. See item 3; Legal Proceedings.
Mississippi
The Company owns, through its wholly-owned subsidiary, Mississippi Gaming Corporation, an approximate 400-acre undeveloped property located at 7051 Interstate 10, Diamondhead, Mississippi 39525 (hereafter “the Diamondhead Property” or “the Property”). The Company’s intent was to construct a casino resort and other amenities on the Property unilaterally or, in conjunction with one or more joint venture partners. However, the Company has been unable, to date, to obtain financing to move the project forward and/or enter into a joint venture partnership. There can be no assurance that the substantial funds required for the design and construction of the project can be obtained or that such funds can be obtained on acceptable terms. In addition, the Company has been unable to obtain financing to sustain the Company. Due to its lack of financial resources and certain lawsuits filed by creditors against the Company, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. The Company’s preference is to sell only part of the Property inasmuch as this would appear to be in the best interest of the stockholders of the Company. However, there can be no assurance the Company will be able to sell only part of the Property. The Company intends to continue to pursue a joint venture partnership and/or other financing while seeking a viable purchaser for part or all of the Property. Finally, there can be no assurance that if the requisite financing for the project were obtained and the project were constructed, that the project would be successful.
The Company has no current operations in Mississippi, no offices in Mississippi, and no employees in Mississippi.
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Property Zoning
The Diamondhead Property is located entirely within the City of Diamondhead and Hancock County. The City of Diamondhead incorporated in February of 2012. On October 15, 2012, the Mayor and City Council adopted a Zoning Ordinance in which the City of Diamondhead zoned the entire Property as “C-2-Interstate Commercial/Gaming/Resort.” Thus, the requisite City zoning is currently in place for a casino.
Land-Based Gaming
All references in this section to Mississippi law are qualified in their entirety by reference to the actual text of the law.
On August 29, 2005, Hurricane Katrina struck the Gulf coast of the United States causing extensive damage to Louisiana and Mississippi, including Biloxi, Gulfport, and Bay St. Louis, Mississippi. Hurricane Katrina damaged or destroyed most of the casinos on the Gulf coast. Prior to Hurricane Katrina, Mississippi law required that casinos on the Gulf coast be built in, on, or above the water and be located a minimum of fifty percent below mean high tide.
On October 17, 2005, in response to the devastation caused by Hurricane Katrina, Mississippi passed new legislation that allows casinos located in certain statutorily-described areas, including St. Louis Bay, where the Diamondhead Property is located, to be constructed on land no more than 800 feet from the mean high-water line. Under Mississippi’s new legislation, the part of the structure in which licensed gaming activities are conducted must be located entirely in an area which is located no more than eight hundred (800) feet from the mean high-water line (as defined in Section 29-15-1 of the Mississippi Code) of the waters within the State of Mississippi, which lie adjacent to the State of Mississippi south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay or, with regard to Harrison County only, no farther north than the southern boundary of the right-of-way for U.S. Highway 90, whichever is greater. In the case of a structure that is located in whole or part on shore, the part of the structure in which licensed gaming activities are conducted must lie adjacent to state waters south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay. When the site upon which the structure is located consists of a parcel of real property, easements and rights-of-way for public streets and highways are not construed to interrupt the contiguous nature of the parcel, nor is the footage contained within the easements and rights-of-way counted in the calculation of the distances specified above.
The Company intends to take advantage of the Mississippi legislation that allows casinos to be built on land.
Annual In-Lieu Tidelands Assessment
Since the Company intends to construct a casino on land in Mississippi, the Company will no longer require a tidelands lease from the Secretary of State. Under Mississippi’s prior law, which required that the Company’s casino be in, on, or above water and a minimum of fifty percent at or below mean high tide, the Company would have required a tidelands lease to lease water-bottoms owned by the State.
However, on or about October 17, 2005, when Mississippi passed new legislation permitting casinos to be built on land in certain locations, Mississippi also passed a companion law that requires any person possessing a license under the Mississippi Gaming Control Act, who operates a gaming establishment in any of the three most southern counties of the State (including Hancock County in which the Company’s Property is located), and who does not lease public trust tidelands from the State, to pay an annual in-lieu tidelands assessment to the Public Trust Tidelands Assessments Fund. For calendar year 2006, the annual in-lieu tidelands assessment was between $400,000 and $750,000, based on an escalating scale which is measured by the capital investment in the part of the structure in which the licensed gaming activities are conducted. For each calendar year thereafter, the Secretary of State is required to review and adjust the value of the capital investment and the annual in-lieu tidelands assessment due. Such review and adjustment shall be tied to the Consumer Price Index.
This annual in-lieu tidelands assessment will apply to any casino constructed on land on the Diamondhead Property.
Mississippi Gaming Site Approval
In the State of Mississippi, in addition to local zoning, a proposed gaming site must obtain Gaming Site Approval. Only the Mississippi Gaming Commission has the authority to grant Gaming Site Approval. On or about May 29, 2014, the title holder of the Property, Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company, applied for Gaming Site Approval for a fifty (50) acre site on the Diamondhead Property. In its Notice of Intent, the applicant anticipated the casino would contain approximately 1250 slot machines and approximately 40 table games and contain an estimated 80,000 square feet of gaming space. On August 21, 2014, the Mississippi Gaming Commission granted Gaming Site Approval to Mississippi Gaming Corporation for a fifty acre site on the Diamondhead Property.
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The Mississippi Gaming Commission found, in pertinent part, as follows: 1) that in accordance with the Mississippi Gaming Control Act of 1990, codified as Miss. Code Ann. § 75-76-1 et seq., Miss. Code Ann. § 19-3-79, and Miss. Code Ann. §97-33-1, as amended, the citizens of Hancock County, Mississippi voted to authorize gaming in Hancock County, and thus gaming is legal at qualifying locations within Hancock County, Mississippi; that the proposed gaming area is within 800 feet of the mean high water line of the Bay of St. Louis and is thus a legal gaming site under the Mississippi Control Act of 1990, as amended, and 13 Mississippi Administrative Code Part 2 Rule 2.2(a)(1) and (3); and that the Proposed Site is properly zoned for gaming.
The Gaming Site Approval was granted for a period expiring three years after the date Approval to Proceed with Development is granted. The Property owner has not applied for Approval to Proceed with Development. Thus, the three year period has not yet begun to run.
Additional Permits, Authorizations and Approvals Are Required
In addition to Gaming Site Approval, the development of the Diamondhead Property requires the Company to obtain additional permits, authorizations and approvals from various federal, state, county, and/or city agencies, boards and commissions, which may include, but not be limited to, the following: U.S. Army Corps of Engineers, Environmental Protection Agency, U.S. Fish and Wildlife Service, U.S. Coast Guard, Port and Harbor Commission, Mississippi Gaming Commission, Mississippi Department of Marine Resources, Mississippi Commission on Environmental Quality, Mississippi Department of Transportation, Hancock County, and/or the City of Diamondhead. The regulatory environment relating to such permits, authorizations and approvals is uncertain and subject to constant change. There can be no assurance that all permits, authorizations and/or approvals can be obtained, or that if obtained, that they will be renewed. While there is no pending environmental litigation, the foregoing permits, authorizations and approvals remain subject to future litigation and the actions of environmental groups and various federal, state, county and/or local governments and agencies, including, but not limited to, the foregoing. The Company will be required to spend significant funds to pay the architects, surveyors, engineers, accountants, attorneys, consultants and other experts required to prepare and process the applications required for the permits, authorizations and approvals required. The amount ultimately required is unknown at this time, but the Company does not have any funds required for this purpose. There can be no assurance the Company will be able to obtain the funds required for this purpose or that it will be able to obtain the funds required on acceptable terms.
Uncertain Regulatory and Political Environment
The political environment in which the Company and/or its subsidiaries intend to operate is also uncertain, dynamic and subject to rapid change. Existing operators often propose and support legislation and/or litigation designed to make it difficult or impossible for competition to enter a market. This political and regulatory environment makes it impossible to predict the effects that the adoption of and changes in gaming laws, rules and regulations and/or competition will have on development of a gaming resort. Moreover, legislatures in states in which gaming is legal often consider wide-ranging legislation and regulations which could adversely affect operations and expected revenues. Likewise, the federal government often considers legislation which could adversely affect operations and expected revenues and certain states have legalized internet gaming. The long term effects of legalizing internet gaming on the casino industry in general and on the Company’s proposed casino operations are unknown.
Anti-Gaming Referenda
On at least three separate occasions since 1998, certain anti-gaming groups have proposed referenda that, if adopted, would have banned gaming in Mississippi and required that gaming entities cease operations within two years after the ban. All three of the proposed referenda were ruled illegal by Mississippi State trial courts. If such a referendum were to be approved by the voters, it would have a material adverse effect on the Company.
Mississippi Regulation
The Company has no current operations in Mississippi and does not operate any gaming facility in Mississippi. The Company intends to develop its Diamondhead property as a destination casino resort.
Assuming it is successful in developing its resort, the Company and its subsidiaries and/or affiliates will be subject to federal, state, county, city and local, laws, rules, ordinances and regulations with respect to the operation of any gaming facility. The following is intended to serve as a partial description of the Mississippi regulatory environment in which the Company or its subsidiaries or joint venture partner(s) would seek approvals to construct and operate a gaming facility and is not intended to be a complete, precise, or up-to-date recitation of all applicable laws, rules, regulations or ordinances that might affect the Company’s operations or with which the Company would be required to comply. Additional or more restrictive laws, rules and regulations could be adopted at any time or gambling could be completely banned.
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The location of, ownership of, and operation of gaming facilities in Mississippi are subject to extensive state and local regulation, primarily through the licensing and control of the Mississippi Gaming Commission and the Mississippi State Tax Commission. The Company and/or its subsidiaries must register and be licensed under the Mississippi Gaming Control Act and its gaming operations will be subject to the regulatory control of the Mississippi Gaming Commission, the Mississippi State Tax Commission and various state, county and local regulatory agencies.
The Mississippi Gaming Control Act gives the Mississippi Gaming Commission (the “Commission”) extensive power to enforce the Act and adopt regulations in furtherance of the Act (the “Mississippi Regulations”). The laws, regulations and supervisory procedures of Mississippi and the Mississippi Gaming Commission seek to: (1) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (2) establish and maintain responsible accounting practices and procedures; (3) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Gaming Commission; (4) prevent cheating and fraudulent practices; (5) provide a source of state and local revenues through taxation and licensing fees; and (6) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Commission. Changes in Mississippi law or the regulations or the Commission’s interpretation thereof may limit or otherwise materially affect the types of gaming that may be conducted and could have a material adverse effect on Mississippi gaming operations.
Approval Process
The Commission has divided the approval process into two separate phases: (1) gaming site approval; and (2) approval to proceed with development.
1. Gaming Site Approval
Mississippi Gaming Corporation, which holds title to the Property and is a wholly-owned subsidiary of the Company, obtained Gaming Site Approval on August 21, 2014. With respect to gaming site approval, approval constitutes only the Commission’s finding that the location complies with applicable gaming laws and regulations. Gaming site approval does not entitle the recipient to proceed with development, nor does it constitute a license to engage in gaming or a right to a gaming license. Gaming site approval is a revocable privilege and no holder acquires any vested right therein. The Mississippi Gaming Commission reserves the right to revoke any site approval should the circumstances change that would make the site illegal or unsuitable.
An application for gaming site approval in the three most southern counties must include evidence satisfactory to the Commission in support thereof including: (1) a survey indicating the specific location of the property; (2) the current use of any adjacent property as well as the location of the nearest residential area, church and school; (3) evidence that all applicable zoning ordinances allow gaming at the proposed site; and (4) a survey establishing the mean high water line, performed by a qualified surveyor for performance of tidal surveys.
Gaming establishments in the three most southern counties in the State of Mississippi, including Hancock County, are permitted to be permanent inland structures. No point in the gaming area may be more than eight hundred (800) feet from the nineteen (19) year mean high water line. Harrison County establishments south of Highway 90 may exceed the eight hundred (800) foot measurement up to the southern boundary of Highway 90. All public easements and rights-of-way for public streets and highways are excluded from the 800 foot measurement. Any point of reference used to determine the 800 foot distance from the mean high water line must be located on the applicant or licensee’s premises. The applicant or licensee must own and/or lease the land that is contiguous both to the parcel used to conduct gaming and the point of reference used to determine the mean high water line, and this land must be shown to be an integral part of the project. The Commission has final authority in reviewing and approving each site as it pertains to meeting the requirements of this regulation.
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2. Approval to Proceed with Development
With respect to obtaining the Commission’s approval to proceed with development, the following information, together with documentation to support this information, must be submitted to the Commission:
1) Architectural plans or renderings showing details of all proposed construction and renovation for the project, together with a footprint of the project and a description of the construction and type of parking facilities, as well as parking lot capacity. Commission approval requires that the project include a 500-car, or larger parking facility in close proximity to the casino complex, and infrastructure facilities shall include a 300-room, or larger hotel of at least a three diamond rating as defined by an acceptable travel publication to be determined by the Commission. In addition, infrastructure facilities must include a restaurant capable of seating at least 200 people and a fine dining facility capable of seating at least 75 people, and the casino floor must be at least 40,000 square feet. The project will also have or support an amenity that will be unique to the market and will encourage economic development and promote tourism. The Commission will have authority in determining the quality of the amenity and the ultimate approval of the amenity, and may, in its discretion, reduce the requirements above should it determine that there is a justification to do so in certain markets. The Commission will further determine, in its discretion, if the prerequisite hotel and dining facilities may be supplanted by an amenity of high value to the overall tourism market in that the amenity will likely encourage economic development and promote tourism. As used herein, infrastructure facilities are not such items as parking facilities, roads, sewage and water systems, or civic facilities normally provided by cities and/or counties.
The qualifying infrastructure must be owned or leased by; (i) the holder of the site approval, or (ii) an affiliated company of the holder of the site approval where both the affiliated company and the holder of the site approval have identical direct or indirect equity ownership. This regulation shall apply to any new applicant for a gaming license for a new gaming facility and to the acquisition or purchase of a licensee or gaming facility for which gaming operations have ceased prior to the time of acquisition or purchase. It does not apply to any licensee, who has been licensed by the Commission, or to any person which has received Approval to Proceed with Development from the Commission prior to December 31, 2013 (or to such licensee upon any licensing renewal after such date.)
Any change to the plan, or placement or design of the establishment, cruise vessel or vessel, shall be submitted in advance to the Executive Director for determination of whether such a change constitutes a material change. If the Executive Director determines that a material change has occurred, Commission approval is required for same.
2) Statements reflecting the total estimated cost of construction or renovation of the establishment, vessel, or cruise vessel and shore and dock facilities, distinguishing between known costs and projections, and separately identifying: facility design expense; land acquisition costs; site preparation costs; construction costs or renovation costs; equipment acquisition costs; costs of interim financing; organization, administrative and legal expenses; projected permanent financing costs; qualified infrastructure costs; and non-qualifying infrastructure costs.
3) A construction schedule for completion of the project, including an estimated date of project completion, indicating whether a performance bond will be required by the applicant to be furnished by the contractor.
4) Current financial statements, including, at a minimum, a balance sheet and profit and loss statement for the proposed licensee.
5) A detailed statement of the sources of funds for all construction and renovation proposed by the site development plans. Any funding, whether equity or debt, to be obtained, must be supported by firm written commitments satisfactory to the Commission. The applicant will have 120 days in which to close all financing and start construction or the approval is deemed void.
6) Evidence that the following agencies (if applicable) were notified of the development and/or do not oppose the site development: U.S. Corps of Engineers, U.S. Coast Guard, Mississippi Department of Transportation, Mississippi Department of Environmental Quality, Department of Marine Resources, Port and Harbor Commission, Levee Board, City and County government, and such other agencies as the Executive Director deems appropriate.
The application for a Gaming Operator’s License must be filed no later than ninety (90) days after the Commission grants approval to proceed with development. The gaming site approval will expire three (3) years from the date approval to proceed with development is granted unless the Commission grants an extension. Approval to proceed with development is not subject to sale, assignment or transfer.
Opening of a Casino
Before any gaming facility may open to the public, all infrastructure requirements must be fully operational. The development shall be completed in accordance with the approved plan and be ready for operation within the gaming site approval time period. Gaming site approval may be extended within the discretion of the Commission.
Application Information Required is Extensive and Must be Complete and Accurate
In addition to other information required by law and Commission regulations, an applicant must provide complete information regarding the proposed operation, including but not limited to, a certification that any establishment to be used by the proposed operation has been inspected and approved by all appropriate authorities; fingerprints for each individual applicant; the nature, source, and amount of any financing; the proposed uses of all available funds; the amount of funds available after opening for the actual operation of the establishment; and economic projections for the first three years of operation of the establishment. Each applicant must provide complete information regarding his or her background for the ten-year period preceding submission of the application.
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Every application to become a license holder must contain the following additional information: actual establishment blueprints, including a layout of each floor stating the projected use of each area; the number of miles from the nearest population center and a description of transportation facilities serving that population center, a description of the casino size and configuration of slot machines, video games of chance and table games; a description of the availability of fire protection and the adequacy of law enforcement at the establishment and emergency evacuation plans for hurricane and flooding disasters; a description of the arrangements for food and drink concessions, the names and addresses of the concessionaires and the terms of the concession contracts, if applicable; the type of slot machines and video games of chance to be used and the proposed distributors and manufacturers of this equipment; a description of the physical location, size and floor plan of the section of the establishment reserved for patrons under 21 years of age and plans for activities and staffing for this section; periods of time that the gaming areas will be in operation; a description of the proposed management of the facility, management personnel by function, and tip distribution policies; all known feasibility studies made available to the applicant which have been done on the type of gaming in the particular locale where the applicant intends to conduct gaming, and a description of procurement policies that emphasize the utilization of Mississippi employees, resources, and goods and services in the operation of the gaming establishment.
Timetable for Financing and Construction
License applicants must submit, simultaneously with submission of their completed application, a timetable for financing arrangements (including applications for approval of public offerings or private placements), and commencement and completion of construction activities, setting forth the date upon which gaming activities will commence. The timetable will be subject to approval by the Commission and monitored for compliance by the Executive Director. The Commission may grant extensions of time upon the recommendation of the Executive Director. License applicants must not advertise or promote the opening of their proposed casino nor the commencement of employee training for their proposed casino until the applicant is granted a license by the Mississippi Gaming Commission. Applicants may request a waiver of this regulation from the Executive Director, which waiver, if granted would be subject to revocation.
Unsuitable Locations
The Executive Director may recommend that an application for a license be denied if the Executive Director believes that the place or location for which the license is sought is unsuitable for the conduct of gaming operations. The Commission may deny an application for a state gaming license if it deems that the place or location for which the license is sought is unsuitable for the conduct of gaming operations. Without limiting the generality of the foregoing, the following locations may be deemed unsuitable: premises located within the immediate vicinity of residential areas, churches, schools and children’s public playgrounds; premises where gaming is contrary to any county or city ordinance, including, but not limited to, zoning ordinances restricting the permissible locations for gaming facilities, so long as such ordinances do not have the effect of absolutely excluding or prohibiting legal gaming; premises which fail to meet federal, state or local health and safety standards, and any other applicable laws or regulations; premises frequented by minors; premises lacking adequate supervision or surveillance; premises difficult to police or where adequate fire protection may be difficult; any other premises where the conduct of gaming would be inconsistent with the public policy of the State of Mississippi.
Building Standards
Any establishment to be constructed for gaming will be required to meet the Southern Standard Building Code. If the local county or city has a building code, then the local code will be the applicable standard. The Commission requires, as a condition of licensure, that gaming establishments meet strict hurricane emergency standards and procedures.
Objection by County or Municipality
Whenever the Commission receives a completed application for a gaming license proposing to operate a gaming establishment in a particular county or municipality, the Executive Director, within ten days after receipt of the application, must notify the board of supervisors of the county and, if applicable, the chief executive of the municipality in which the proposed operation will be located of the receipt of the application and specify the name of the applicant and the proposed location for the gaming establishment. The county or municipality in which the applicant proposes to operate may file a duly enacted resolution specifying any objections or endorsements with the Executive Director.
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Individual Licensing of Shareholders of Corporate Licensee
The Commission may request persons, affiliated entities and greater than 5% equity owners to submit an application for finding of suitability in which event the application must be submitted within thirty days of the request.
All Officers and Directors of a Corporation Must be Licensed
All officers and directors of a corporation which holds or applies for a state gaming license must be licensed individually and, if in the judgment of the Mississippi Gaming Commission the public interest will be served by requiring any or all of the corporation’s individual stockholders, lenders, holders of evidence of indebtedness, underwriters, key executives, agents, or employees to be licensed, the corporation shall require such persons to apply for a license. An officer or director shall apply for a license within thirty days after he becomes an officer or director. A person required to be licensed pursuant to a decision of the commission must apply for a license within thirty days after the executive director requests him to do so.
Licensing is a Privilege and Revocable
It is the declared policy of the State of Mississippi that all establishments where gambling games are conducted or operated must be licensed and controlled so as to better protect the public health, safety, morals, good order and welfare of its inhabitants. Any license, registration, finding of suitability, or approval by the Commission is deemed to be a revocable privilege and no person holding such a license, registration, finding of suitability, or approval is deemed to have any vested rights therein.
An application for a state gaming license or any other affirmative Commission action is seeking the granting of a privilege and the burden of proving his qualification to receive any license, registration, finding of suitability or approval, is at all times on the applicant. The applicant must document compliance with all applicable federal, state and local rules, regulations and permit requirements. An applicant must accept any risk of adverse publicity, embarrassment, criticism, or other action, or financial loss which may result from action with respect to an application and expressly waive any claim for damages as a result thereof. An application for a license, finding of suitability, or registrations constitutes a request to the Executive Director for a recommendation and to the Commission for a decision upon the applicant’s general suitability, character, integrity, and ability to participate or engage in, or be associated with, the gaming industry in the manner or position sought by the application, or the manner or position generally similar thereto.
Certain Commission Considerations for Licensing
The Commission will consider various factors when deciding whether to issue a license to conduct gaming in an establishment, including but not limited to, the following: revenue provided by a facility to the state and local communities through direct taxation on its operation and indirect revenues from tourism, ancillary businesses, creation of new industry and taxes on employees and patrons. It will consider whether the proposed establishment is: economically viable and properly financed, planned in a manner that provides for adequate security for all aspects of its operation and for people working, visiting, or traveling to the establishment; planned in a manner which promotes efficient and safe operation; is planned in a manner that provides efficient, safe, and enjoyable use by patrons of the establishment and parking facilities, concessions, the casino, access to cashier windows and rest rooms; compliance with state and federal laws regarding fire, health, construction, zoning, and other similar matters; whether the applicant will employ the persons necessary to operate the establishment in a manner consistent with the needs, safety, and interests of persons who will be in the establishment; the population of the area to be served by the establishment and the location of other establishments within and without the state. The Commission will consider the character and reputation of all persons identified with ownership and operation of the establishment and their capability to comply with rules of the Commission and the Mississippi Code; whether the proposed operation will maximize development; whether it is beneficial to Mississippi tourism, the number and quality of employment opportunities for Mississippians created and promoted by the proposed operation, and the amount and type of shore developments associated with the establishment.
A license which authorizes a holder to operate a gaming establishment is granted for no longer than three years from the date of issue and may be granted for a period of less than three years based within the discretion of the Commission.
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Gaming Licenses
Neither the Company nor any of its subsidiaries has a license to operate a casino in Mississippi or in any other jurisdiction. Gaming licenses require the periodic payment of fees and taxes and are not transferable except in accordance with applicable Mississippi law and regulations and with the prior approval of the Commission. Gaming licenses in Mississippi are issued for a maximum term of three years and must be renewed periodically thereafter. There can be no assurance that the Company or any of its subsidiaries will be licensed. There can be no assurance that if licensed, new licenses can be obtained at the end of any particular licensure period. Moreover, the Commission may, at any time, and for any cause it deems reasonable, revoke, suspend, condition or limit a license or approval to own shares of stock in a company that operates in Mississippi. The Mississippi Act also requires that a publicly traded company register under the Act. The Company and/or its subsidiaries will be required to periodically submit detailed financial, operating and other reports to the Commission and Mississippi State Tax Commission. A violation under a gaming license held by a subsidiary of a Company operating in Mississippi could be deemed a violation of all other licenses, if any, then held by the Company. Numerous transactions, including substantially all loans, leases, sales of securities and similar financing transactions entered into by any subsidiary of the Company operating a casino in Mississippi must be reported to or approved by the Commission. In addition, the Commission may, at its discretion, require additional information about the operations of the Company.
Deborah Vitale, President and Chief Executive Officer of the Company, though not currently licensed, previously held a gaming license in Colorado.
Finding of Suitability
The following persons must apply for a finding of suitability and must be found suitable by the Commission in order to be involved with a licensee: i) each person who serves as Chairman of the Board of Directors of any corporation, public or private, licensed or registered by the Commission; and ii) each person who has a vote on any issue before the Board of Directors of any corporation, public or private, licensed or registered by the Commission and who is also an employee of the corporation or any of its subsidiaries. In addition, the following persons shall apply for a finding of suitability: i) each person who serves as Chairman of the audit or compliance committee of any corporation, public or private, licensed or registered by the Commission, and ii) any executive, employee, or agent of a gaming licensee that the Commission determines as having the power to exercise a significant influence over decisions concerning any part of the operation of a gaming licensee. If the nature of the job changes from that for which the applicant is found suitable, he may be required to submit himself to a new determination of her or his suitability.
The Commission can require any employee to be found suitable if it finds that the public interest and policies set forth in the Act will be served thereby. The Commission is not restricted by job titles, but will consider the functions and responsibilities of the person, including but not limited to, persons acting in the capacity of a property level general manager, assistant general manager, or executive level personnel actively and directly engaged in the administration or supervision of the activities of a licensee. Any executive, employee or agent of a gaming licensee who is listed or should be listed in an annual employee report may be required to apply for a finding of suitability.
A finding of suitability is granted for a period of no longer than ten years from the date of issue. A finding of suitability may be granted for a period of less than ten years within the discretion of the Commission. A holder of a finding of suitability must file with the Investigations Division of the Commission by June 30th of each year, the “Investigations Division Annual Report,” providing all information requested on forms provided by the Commission and any other information requested by the Executive Director. A holder of a finding of suitability must immediately inform the Commission of any arrest or conviction.
The Commission has full and absolute power and authority, at any time, to deny any application or limit, condition, restrict, revoke, or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered, found suitable or approved, for any cause deemed reasonable by the commission. The Commission has the power, at any time, to investigate and require the finding of suitability of any record or beneficial stockholder of the Company. The Act requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 5% of any class of voting securities of a publicly traded corporation registered with the Mississippi Gaming Commission, must notify the Mississippi Gaming Commission of this acquisition. The Act also requires that each person who, individually or in association with others acquires, directly or indirectly, beneficial ownership of more than 10% of any class of voting securities of a publicly traded corporation registered with the Commission must be found suitable by the Mississippi Gaming Commission and pay the costs and fees that the Commission incurs in conducting the investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Commission may be found unsuitable. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the Company’s securities beyond such time as the Commission prescribes, may be guilty of a misdemeanor.
The Company may be required to disclose to the Commission upon request, the identities of holders of any debt or other securities. Under the Act, the Commission may, in its discretion, (1) require holders of debt securities of registered corporations to file applications; (2) investigate such holders; and (3) require the holders to be found suitable to own such securities.
The Mississippi regulations provide that a change in control of a Company may not occur without the prior approval of the Commission. Mississippi law prohibits the Company from making a public offering of its securities without the approval of the Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for one or more such purposes. The Commission has the authority to grant a continuous approval of securities offerings subject to renewal every three years by certain issuers.
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Employees associated with gaming in Mississippi must obtain work permits that are subject to immediate suspension under certain circumstances. The Commission will refuse to issue a work permit to a person who has been convicted of a felony, committed certain misdemeanors or knowingly violated the Mississippi Gaming Control Act, and it may refuse to issue a work permit to a gaming employee for any other reasonable cause.
The Company believes there may be persons with prior felony convictions, who are affiliated with certain shareholders, who beneficially own in excess of 5% of a class of voting stock of the Company, who may be found unsuitable by the Mississippi Gaming Commission. Article X of the Company’s Articles of Incorporation, as amended, provides that the “Company may repurchase or redeem shares, at fair market value, held by any person or entity whose status as a shareholder, in the opinion of the Company’s Board of Directors, jeopardizes the approval, continued existence, or renewal by any gaming regulatory authority, of a contract to manage gaming operations, or any other tribal, federal or state license or franchise held by the Company or any of its subsidiaries.” However, there can be no assurance the Company would have sufficient funds to purchase shares held by such a person or entity. In the event the Company was unable to purchase such shares, its ability to obtain a license could be materially and adversely affected.
License Fees and Taxes
License fees and taxes are payable to the State of Mississippi and to the counties and cities in which the Mississippi Gaming Subsidiary’s respective operations will be conducted. The license fee payable to the State of Mississippi is based upon “gaming receipts,” which are generally defined as gross receipts less payouts to customers as winnings. The fee equals 4% of the first $50,000 or less of gross revenue per calendar month, plus 6% of the next $84,000 of gross revenue per calendar month, plus 8% of gross revenue over $134,000 per calendar month. License fees paid in any taxable year are allowed as a credit against the Mississippi State income tax liability of a licensee for that taxable year.
A licensee must pay an annual license fee of $5,000. In addition, each licensee must pay a license fee based on the number of games it operates. If it operates over 35 games, the fee is equal to $81,200 plus $100 for each game over 35 games. In addition to state gaming license fees or taxes, a municipality or county may impose a gross revenue fee upon a licensee based on all gaming receipts derived from the establishment equal to approximately 4%. An additional license tax may apply to gaming devices.
Beer, Wine and Liquor Licensing
The sale of alcoholic beverages by casinos, including beer and wine, is subject to licensing, regulation and control by both the local jurisdiction and the Alcoholic Beverage Control Division (the “ABC”) of the Mississippi Department of Revenue. All licenses are revocable and non-transferable. The ABC has full power to limit, condition, suspend or revoke any license, and any disciplinary action could, and revocation would, have a material adverse impact upon the operations of an affected casino, its financial condition and its results of operations.
Extensive Non-Gaming Laws and Regulations
In addition to the foregoing, the Company and/or its subsidiaries will be subject to additional federal, state, county and city, safety, food, alcohol, health, employment, and other laws, rules, regulations and ordinances that apply to non-gaming businesses generally. In addition, Regulations adopted by the Financial Crimes Enforcement Network of the U.S. Treasury Department require currency transactions in excess of $10,000 occurring within a gaming day to be reported, including identification of the patron by name and social security number. Substantial penalties can be imposed for failure to comply with these and numerous other regulations. The foregoing is just one example of the pervasiveness of the non-gaming laws, rules, regulations and ordinances that would apply to a casino operator.
Competition
There is intense competition in the Mississippi market in which the Company intends to operate and in surrounding markets. The Company will compete directly with other existing gaming facilities located in Mississippi and in bordering states, including Louisiana. In addition, there may be additional casinos opening on the Gulf Coast of Mississippi and in Diamondhead where the Company’s Property is located. The Company will also be competing directly and indirectly, with gaming facilities throughout the United States and throughout the world, as well as with Native American gaming operations which enjoy certain tax advantages. The Company expects this competition to increase as new gaming operators enter these markets, existing competitors expand their operations, gaming activities expand in existing jurisdictions, gaming is legalized in new jurisdictions, and legalized gaming expands on the internet. Assuming it is successful in developing a destination casino resort, the Company will also be competing with other forms of gaming and entertainment, including but not limited to, bingo, online gambling, pull tab games, card parlors, sports-book operations, pari-mutuel betting, dog racing, lotteries, jai-alai, video lottery terminals, and video poker terminals.
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The following chart identifies casinos which are located in Mississippi and with which the Company will compete. Except for distances, the information contained in the chart is derived from the Mississippi Gaming Commission’s Monthly Survey Information (Property Data) for the period December 1, 2018 through December 31, 2018.
| Approximate | ||||||||||||||||||||||||||||
| Distance to | ||||||||||||||||||||||||||||
| Gaming | Slot | Table | Poker | Hotel | Total | Diamondhead | ||||||||||||||||||||||
| REGION | Sq. Ft | Games | Games | Games | Rooms | Parking | (in miles) | |||||||||||||||||||||
| COASTAL REGION | ||||||||||||||||||||||||||||
| Beau Rivage Casino | 84,819 | 1,786 | 80 | 16 | 1,740 | 3,320 | 35 | |||||||||||||||||||||
| Boomtown Casino | 37,891 | 674 | 14 | 0 | 0 | 1,490 | 33 | |||||||||||||||||||||
| Golden Nugget | 54,728 | 1,110 | 44 | 9 | 706 | 1,345 | 35 | |||||||||||||||||||||
| Hard Rock Casino | 50,984 | 1,146 | 53 | 0 | 479 | 2,332 | 35 | |||||||||||||||||||||
| Harrah’s Gulf Coast | 31,419 | 768 | 29 | 0 | 499 | 2,705 | 35 | |||||||||||||||||||||
| IP Casino Resort Spa | 81,733 | 1,472 | 53 | 10 | 1,088 | 3,400 | 33 | |||||||||||||||||||||
| Palace Casino | 38,000 | 777 | 26 | 0 | 234 | 1,590 | 33 | |||||||||||||||||||||
| Treasure Bay Casino | 28,140 | 810 | 26 | 0 | 195 | 1,096 | 31 | |||||||||||||||||||||
| Island View Casino | 117,500 | 2,598 | 49 | 0 | 974 | 4,150 | 23 | |||||||||||||||||||||
| Hollywood Casino | 56,300 | 948 | 20 | 5 | 291 | 1,700 | 12 | |||||||||||||||||||||
| Silver Slipper Casino | 38,926 | 920 | 26 | 0 | 129 | 1,057 | 15 | |||||||||||||||||||||
| Scarlet Pearl | 60,445 | 1,148 | 37 | 0 | 300 | 2,333 | 33 | |||||||||||||||||||||
| Region Totals | 680,855 | 14,157 | 457 | 40 | 6,635 | 26,518 | ||||||||||||||||||||||
| NORTHERN REGION | ||||||||||||||||||||||||||||
| 1st Jackpot Casino Tunica | 46,535 | 874 | 14 | 0 | 0 | 1,699 | 377 | |||||||||||||||||||||
| Fitzgerald’s Casino Tunica | 38,457 | 858 | 19 | 0 | 506 | 1,795 | 379 | |||||||||||||||||||||
| Gold Strike Casino Resort | 50,000 | 1,144 | 65 | 0 | 1,133 | 2,412 | 373 | |||||||||||||||||||||
| Hollywood Casino- Tunica | 55,000 | 957 | 15 | 6 | 494 | 1,801 | 379 | |||||||||||||||||||||
| Horseshoe Casino and Hotel | 63,000 | 1,008 | 76 | 24 | 505 | 1,775 | 373 | |||||||||||||||||||||
| Isle of Capri-Lula | 56,985 | 870 | 17 | 0 | 486 | 1,500 | 345 | |||||||||||||||||||||
| Resorts Tunica Hotel and Casino | 42,902 | 765 | 3 | 0 | 201 | 2,738 | 378 | |||||||||||||||||||||
| Sam’s Town- Tunica | 53,000 | 795 | 16 | 0 | 700 | 4,308 | 378 | |||||||||||||||||||||
| Tunica Roadhouse Casino | 31,000 | 689 | 17 | 0 | 135 | 4,265 | 373 | |||||||||||||||||||||
| Region Totals | 436,879 | 7,960 | 242 | 30 | 4,160 | 22,293 | ||||||||||||||||||||||
| CENTRAL REGION | ||||||||||||||||||||||||||||
| Ameristar Casino Hotel | 72,210 | 1,288 | 33 | 10 | 148 | 3,063 | 210 | |||||||||||||||||||||
| Harlow’s Casino Resort | 33,000 | 734 | 15 | 0 | 105 | 1,500 | 285 | |||||||||||||||||||||
| Lady Luck Casino | 25,000 | 607 | 0 | 0 | 89 | 1,063 | 212 | |||||||||||||||||||||
| Magnolia Bluffs Casino | 16,032 | 483 | 14 | 3 | 140 | 427 | 199 | |||||||||||||||||||||
| Riverwalk Casino | 25,000 | 650 | 15 | 0 | 76 | 748 | 211 | |||||||||||||||||||||
| Trop Casino Greenville | 22,822 | 590 | 10 | 0 | 40 | 734 | 287 | |||||||||||||||||||||
| Water View Casino & Hotel | 28,000 | 520 | 12 | 0 | 122 | 631 | 211 | |||||||||||||||||||||
| Region Totals | 222,064 | 4,872 | 99 | 13 | 720 | 8,166 | ||||||||||||||||||||||
| STATE TOTALS | 1,339,828 | 26,989 | 798 | 83 | 11,515 | 56,977 | ||||||||||||||||||||||
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Louisiana Competition
The Company believes that its greatest competition will come from any existing and any new casinos that might be constructed in or around Diamondhead, Bay St. Louis, Gulfport and Biloxi, Mississippi due to their close proximity to the Diamondhead Property. While the Company’s primary competition will come from the foregoing, the Company’s Diamondhead, Mississippi casino will also compete with casinos and other gaming located in the adjacent State of Louisiana.
Louisiana has four land-based casinos. Inasmuch as the Company’s casino will be land-based, the Company’s primary competition is expected to come from Harrah’s land-based casino located in downtown New Orleans. This casino is approximately one hour from the Diamondhead site. Three of the land-based casinos in Louisiana are Indian casinos, which are located in Marksville in central Louisiana and in Kinder and Charenton in southern Louisiana. These are not expected to represent significant competition because of their distance from the Diamondhead site.
Based on the Louisiana Gaming Control Board’s 21st Annual Report to the Louisiana State Legislature for 2017, there are fifteen riverboat casinos authorized to operate in Louisiana. There are six riverboat casinos in the Shreveport-Bossier City area, which is about 360 miles from the Diamondhead Property; three in Lake Charles, which is approximately 246 miles from the Diamondhead Property; three in East Baton Rouge Parish, which is approximately 123 miles from the Diamondhead Property; and one each in Kenner, Harvey and Amelia, which are approximately 73, 71, and 139 miles, respectively, from the Diamondhead Property. As of June 30, 2016, there were approximately 1,798 video poker outlets and 13,160 video poker devices in the 31 parishes in Louisiana where video poker gaming had been approved in the local option election of November 5, 1996. These machines are authorized in bars, restaurants, hotels, off-track betting parlors and truck stops. Louisiana also has slot machine gaming at racetracks. Louisiana generated direct gaming revenue of $705,517,316, a decrease of $8,341,668 from the previous fiscal year. Riverboat gaming continues to be the most dominant area in gaming in Louisiana, providing more than half of the state’s gaming revenue. The cumulative effect of the foregoing could be seen as having a significant competitive effect on the Diamondhead Property project.
Smaller reporting companies are not required to provide the information required by this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
This section is not applicable to smaller reporting companies.
Diamondhead, Mississippi Property
The Company owns, through its wholly-owned subsidiary, Mississippi Gaming Corporation, an approximate 400-acre tract of unimproved land in Diamondhead, Mississippi. The property is located at 7051 Interstate 10, Diamondhead, Mississippi 39525 (hereafter “the Diamondhead Property” or “the Property”). The Property is located entirely within the City of Diamondhead and Hancock County. The Property is zoned “C-2-Interstate Commercial/Gaming/Resort.”
Liens on Diamondhead Property
In September of 2014, a first lien was placed on the Diamondhead Property (“Property”) pursuant to a Private Placement dated February 14, 2014, as amended, to secure certain obligations of the Company. The first lien is composed of an Executives Lien and an Investors’ Lien which are in pari passu.
The first lien is composed of an “Executives Lien” for a maximum of $2 million in favor of certain executives to whom monies are owed for accrued, but unpaid salaries, expenses and Directors fees. The President of the Company is the primary beneficiary of this lien.
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The first lien on the Property is also composed of an Investors’ Lien, which secures the investment of purchasers of securities in a Private Placement dated February 14, 2014, as amended. There is a lien in the aggregate amount of $1 million in favor of the Holders of the original and/or Amended and Restated First Tranche Collateralized Convertible Senior Debentures issued for an aggregate of $1 million and a lien in the aggregate amount of $850,000 in favor of the Holders of the Second Tranche Collateralized Convertible Senior Debentures issued for an aggregate of $850,000.
In 2016, a second lien in the maximum amount of $250,000 was placed on the Property to secure the principal and interest due on various notes payable which were issued in 2016. The details of these notes are more fully discussed in Note 9 of the consolidated financial statements attached as Exhibit 99.1 to this report.
In 2018, a third lien in the amount of $400,000 was placed on the Property to secure the principal and interest due on various notes payable which were issued in 2017 and 2018. The details of these notes are more fully discussed in Note 8 of the consolidated financial statements attached as Exhibit 99.1 to this report.
The Amended and Restated First Tranche Collateralized Convertible Senior Debentures and the Second Tranche Collateralized Convertible Senior Debentures are convertible, under certain circumstances, to common stock of the Company. If and when these Debentures have been converted to common stock of the Company, the liens securing these Debentures would be removed. There can be no assurance that the foregoing Debentures will be able to be converted to common stock of the Company and that these liens would be removed. Moreover, certain Debenture holders have filed suit against the Company for the principal and interest due under these Debentures. Therefore, the lien underlying these Debentures is not likely to be removed based on the conversion of the Debentures to stock.
Residential Lot
In January 2010, the Company purchased a small, residential lot located on a canal southwest of the Property near the back entrance of the Property. The Company paid $65,000 for the lot. The purchase price was paid with 108,000 shares of common stock of the Company. The property, which comprises less than a quarter of an acre, was acquired to permit the Company to control the appearance and approach to the back entrance of its commercial Property. The residential lot is located at 3518 Diamondhead Drive South, Diamondhead, Mississippi 39525.
Office Location
The Company leases a furnished and equipped townhouse office from its President at 1013 Princess Street, in Alexandria, Virginia 22314, pursuant to a Landlord/Tenant Month to Month Lease. The terms of the lease, as adjusted for square footage and certain other applicable differences, were based on the terms of the last lease signed by the Company with an unrelated third party for unfurnished office space leased in Largo, Florida. The Company pays a base rent in the amount of $4,534 per month for approximately 2,473 square feet of commercial space, in addition to any and all expenses relating to the property, including property taxes, property insurance, telephone, electric, water and cable. The Company’s executive office and all of its active files are located in this office.
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, the above-named Debenture holders filed a Complaint against Diamondhead Casino Corporation (the Company) in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on October 31, 2016. On November 21, 2016, the Company filed a motion to dismiss for lack of subject matter jurisdiction due to failure to plead diversity. On February 21, 2017, the plaintiffs filed a motion for leave to amend their complaint based upon declarations of citizenship filed with the court. On September 26, 2017, the motion for leave to amend was granted and the Company’s motion to dismiss was granted in part and denied in part. The Court also granted plaintiffs leave to file a Second Amended Complaint which was filed on October 2, 2017. On October 16, 2017, the Company filed Defendant’s Answer and Affirmative Defenses and Counterclaim. On November 2, 2017, the Plaintiffs filed an Answer to the Counterclaim. The parties have exchanged discovery in the case. On September 27, 2018, the Plaintiffs’ filed a motion for summary judgment. On October 18, 2018, the Company filed its opposition to the motion for summary judgment. On November 8, 2018, the Plaintiff’s filed their reply to the Company’s opposition. On January 2, 2019, the Court canceled the trial previously scheduled for March 22, 2019. On April 2, 2019, the Court heard argument on the Plaintiff’s motion for summary judgment. On April 3, 2019, the Court scheduled a teleconference for April 15, 2019 for the parties to discuss alternative dispute resolution with a Magistrate.
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John Hawley, as servicing agent for Argonaut 2000 Partners, L.P. v. Diamondhead Casino Corporation (Superior Court of the State of Delaware) (Case No. N19C-02-239 RRC)
On February 28, 2019, the above-named Debenture holder filed a Complaint against Diamondhead Casino Corporation (the Company) in the Superior Court of the State of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiff is seeking $100,000 in principal, plus interest from January 1, 2015, together with costs and fees. The principal and interest due on this Debenture through December 31, 2018 are shown as current liabilities on the Company’s balance sheet. The Company was served with the Complaint on March 8, 2019. On March 28, 2019, the Company filed its Answer, Affirmative Defenses and Counterclaim and Affidavit of Defense.
Arnold J. Sussman, Robert Skaff and David J. Towner v. Diamondhead Casino Corporation (Superior Court of the State of Delaware) (Case No. N18C-11-091-WCC )
On November 9, 2018, Sussman filed suit against the Company for breach of a Promissory Note issued November 10, 2010, in the principal amount of $50,000, with interest payable at 9% per annum, with a maturity date of November 10, 2012. Plaintiff seeks payment of principal of $50,000 and interest due from June 30, 2012 to present, which Plaintiff alleges is approximately $28,500 as of October 31, 2018. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. On December 6, 2018, the Company’s registered agent was served with the Sussman Complaint. On November 28, 2018, Skaff and Towner also filed suit against the Company in the same court for breach of Promissory Notes (Case No. N18C-11-232 ALR). Skaff filed suit i) for breach of a note issued on November 29, 2010, in the principal amount of $37,500 with interest payable at 9% per annum, with a maturity date of November 29, 2012 and ii) for breach of a note issued on June 21, 2011, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of June 21, 2013. Towner filed suit for breach of a note issued on November 29, 2010, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of November 29, 2012. Skaff alleges interest is due on his two notes from June 30, 2012 in the amount of $36,038 as of November 28, 2018. Towner alleges interest is due on his note from June 30, 2012 in the amount of $14,413 as of November 28, 2018. On December 6, 2018, the Company’s registered agent was served with the Skaff and Towner Complaint. All of the foregoing Notes, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. Counsel for the Plaintiffs in the foregoing cases requested that the cases be consolidated and the Company agreed to the consolidation. On February 15, 2019, the Plaintiffs filed their Consolidated Complaint. On March 7, 2019, the Company filed its Answer and Affirmative Defenses and Affidavit of Defense.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price
The Company’s common stock is traded on the Over the Counter Market. The market price of the Company’s common stock is highly volatile. A lack of liquidity in the stock, announcements by the Company, its competitors, the industry, or other casino-related, gaming-related, economy-related, or various other announcements, can lead to wide swings in the market price of the Common Stock.
On April 1, 2019, there were 850 registered holders of record of the Common Stock of the Company.
Dividends on Common Stock
We have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We intend to retain future earnings, if any, to fund operations and promote our business strategy. Any future determination to pay cash dividends on our Common Stock will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, if any, capital requirements, and such other factors as the Board of Directors deems relevant.
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Equity Compensation Plans
Plan Stock Options
On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to 1,000,000 shares of the Company’s common stock. Accordingly, the Company reserved 1,000,000 shares for issuance under the Plan. The option price may not be less than 100% of the market value of the shares on the date of the grant. The options expire within ten years from the date of grant. At December 31, 2018, no options from this plan were issued or exercised.
Non-Plan Stock Options
The Company has, from time to time, awarded non-plan stock options to its Directors, Officers and key employees. The table below summarizes the status of all non-plan options currently outstanding issued to Company Directors, Officers, and former Officers and employees of the Company.
| December 31, 2018 | December 31, 2017 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Shares | Price | Shares | Price | |||||||||||||
| Outstanding at beginning of year | 3,415,000 | $ | 0.44 | 3,415,000 | $ | 0.44 | ||||||||||
| Granted | — | — | — | — | ||||||||||||
| Exercised | — | — | — | — | ||||||||||||
| Expired | — | — | - | - | ||||||||||||
| Outstanding at end of year | 3,415,000 | $ | 0.44 | 3,415,000 | $ | 0.44 | ||||||||||
| Options exercisable at year-end | 3,415,000 | 3,415,000 | ||||||||||||||
On January 3, 2018, the Board of Directors voted to extend from March 13, 2018 to December 31, 2020, the expiration date for a total of 3,115,000 currently outstanding options previously issued to the Chairman, the President, the Vice President and two former employees of the Company. The Company recorded stock-based compensation expense of $21,570.
Employee Stock Ownership Plan
The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan and an employee stock ownership plan. All employees having one year of service are eligible to participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The shares of common stock are pledged to the Company as security for the loans. The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In the event that the Company elects not to make a Plan contribution in any given year, the corresponding shares applicable to that year are released from the Trust to the Company in consideration of that years’ note payment. In January 2001, the Plan and accompanying promissory notes were amended to conform to the Company’s current employment structure, by extending the note repayment terms through 2044.
In 2011, the Company decided to temporarily suspend contributions to the Plan. Therefore the Trust was unable to make its annual loan payment to the company and a loan default occurred. In accordance with the Pledge Agreement between the Company and the Trust, the shares attached to the loan payments subsequent to the 2010 contribution reverted back to the Company as treasury shares. In 2018, 79,545 shares, with a market value of $1,115, reverted back to the Company treasury. In 2017, 79,545 shares, with a market value of $1,590, reverted back to the Company treasury.
Recent Sales of Equity Securities
None.
Repurchase of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required for smaller reporting companies.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read together with the consolidated financial statements and related notes thereto, for the years ended December 31, 2018 and 2017, attached as Exhibit 99.1 to this report.
Liquidity, Capital Resources, and Financial Results
Overview
The Company’s intent was to construct a casino resort and other amenities on the Property unilaterally or, in conjunction with one or more joint venture partners. However, the Company has been unable to date, to obtain financing to move the project forward and/or enter into a joint venture partnership. Now, due to its lack of financial resources and certain lawsuits filed by creditors against the Company, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. The Company’s preference is to sell only part of the Property inasmuch as this would appear to be in the best interest of the stockholders of the Company. However, there can be no assurance the Company will be able to sell only part of the Property. The Company intends to continue to pursue a joint venture partnership and/or other financing while seeking a viable purchaser for part or all of the Property. Thus, on March 25, 2019, Mississippi Gaming Corporation, a wholly owned subsidiary of the Company, entered into a brokerage agreement with an unrelated third party to seek a buyer for all or part of the Property or, alternatively, to seek a joint venture partner for the project. In addition, in the event it becomes necessary in order to protect the Company’s assets, the Board of Directors has authorized the Company to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code.
Liquidity
The Company has incurred continued losses over the years and certain conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company had concentrated its efforts on the development of its Diamondhead, Mississippi Property. The development of the Diamondhead Property would be dependent on obtaining the necessary capital, through equity and/or debt financing, unilaterally, or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort. In the past, the Company has been able to sustain itself through various short term borrowings, however, as of December 31, 2018, the Company had no cash, while accounts payable and accrued expenses totaled $6,982,120 and the Company had an accumulated deficit of $38,070,603. In addition, the Company reported a net loss applicable to common shareholders of $1,390,728 for the year ended December 31, 2018. Therefore, in order to sustain itself, it is imperative that the Company secure a source of funds to provide further working capital.
In addition, a Line of Credit in the amount of $1,000,000 obtained in October 2008, was payable in November 2012 and Convertible Notes issued pursuant to two Private Placements offered in 2010, totaling $962,500 in principal at December 31, 2018, had become payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, none of the aforementioned debt obligations have been satisfied and the Company is in default of the repayment terms of those facilities. In addition, holders of Debentures representing $1,500,000 of the $1,850,000 of Debentures issued, filed Complaints against the Company in the United States District Court for the District of Delaware and in the Superior Court for the State of Delaware for amounts they assert are due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.5 million in principal plus interest from January 1, 2015, together with costs and fees.
Management of the Company believes it will be difficult to secure suitable financing that would allow it to continue to pursue ultimate development of the Property. Therefore, on March 25, 2019, Mississippi Gaming Corporation entered into a brokerage agreement with an unrelated third party to seek a buyer for all or part of the Property or, alternatively, to seek a joint venture partner for the project.
The above conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Financial Results and Analysis
As reflected in the accompanying consolidated financial statements, the Company recorded a net loss applicable to common shareholders of $1,390,728 for the year ending December 31, 2018 and a net loss applicable to common shareholders of $1,309,603 for the year ending December 31, 2017, and expects continued losses for the foreseeable future. General and administrative expenses incurred totaled $643,269 and $667,260 for the years ending December 31, 2018 and 2017, respectively. The table below depicts the major categories comprising those expenses:
| December 31, | December 31, | |||||||
| DESCRIPTION | 2018 | 2017 | ||||||
| Payroll and Related Taxes | $ | 300,000 | $ | 300,000 | ||||
| Director Fees | 85,000 | 82,500 | ||||||
| Professional Fess | 90,858 | 139,700 | ||||||
| Rents and Insurances | 76,448 | 76,394 | ||||||
| Fines and Penalties | 33,350 | 33,635 | ||||||
| Appraisal fee | 33,750 | - | ||||||
| Edgar Reporting Fees | 2,440 | 5,175 | ||||||
| All Other Expenses | 21,423 | 29,856 | ||||||
| Total General and Administrative Expenses | $ | 643,269 | $ | 667,260 | ||||
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The amount reported as payroll includes amounts not actually paid to employees, but accrued and payable to employees. The Company accrued salary payable to only one employee in 2018, the President and CEO of the Registrant, who also served as a Director, Chief Financial Officer, Treasurer and Secretary of the Registrant and held various positions in the Registrant’s subsidiaries.
Professional fees decreased $48,842 in 2018 versus the prior year. The decrease was due to legal fees paid in settlement of certain lawsuits in 2017.
Interest expense incurred in 2018 totaled $554,743. This included interest of $363,377 accrued for outstanding notes and advances, debentures, a line of credit, amortization of finance cost and interest of $191,366 accrued for unpaid payroll due officers. Interest expense incurred in 2017 totaled $498,334. This included interest of $333,968 accrued for outstanding notes, debentures, a line of credit, amortization of finance costs and interest of $164,366 accrued for unpaid payroll due officers. The increase in interest on notes, debentures and the line of credit in the amount of $29,409 is primarily due to interest accruing under the terms of new interest bearing loans obtained in 2018 which, net of repayments, totaled $225,093 in principal.
Off-Balance Sheet Arrangements
Management Agreement
On June 19, 1993, two subsidiaries of the Company, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. The Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.
Brokerage Agreement
On March 25, 2019, Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company and the title owner of the Diamondhead Property (the "Owner"), entered into an agreement with an unrelated commercial real estate brokerage firm to sell all or part of the Diamondhead, Mississippi Property or, alternatively, to find a joint venture partner for the project. The agreement provides for an exclusive right to sell all or part of the Property beginning March 25, 2019 and ending October 31, 2019, unless extended by the parties. The agreement provides for a commission equal to three percent (3%) of the gross sales price for property sold if the Buyer does not have a broker or four percent (4%) of the gross sales price of property sold if the Buyer does have a broker, in which case the commission due will be split between the brokers. In the event the Owner consummates and closes a deal with a Joint Venture Partner introduced to the Owner by the broker, the Owner will pay the broker a commission equal to four percent (4%) of the amount contributed by the Joint Venture Partner as its capital contribution. This will not apply in the event the Owner consummates a deal with a Joint Venture Partner who is not introduced to the Owner by the broker. The agreement does not apply to loans obtained by or on behalf of the Owner using the Property as collateral or as security for a loan. The agreement also provides for a reduced commission to the broker in the event of a sale to certain potential purchasers already involved in discussions with the Owner.
Related Party
On July 26, 2017, the Chairman paid $67,628 for all property taxes due, together with all interest due thereon, to Hancock County, Mississippi for an approximate 400-acre tract of land (“the Diamondhead Property”), owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. In 2018, the Chairman advanced additional funds totaling $205,250 to the Company. The conditions of the notes under which the Chairman agreed to make the above payments and advances are discussed in full detail in Note 8 of attached consolidated financial statements.
Of particular note to those conditions is item (v) which calls for the Chairman to be indemnified for any loss sustained on the sale of certain common stock sold to cover the property taxes paid. The Chairman has identified the common stock sold and has provided the Company with the documentation required to document the sale of said stock and to calculate the contingent future loss, if any, on said stock.
Had the Company paid the note in full at December 31, 2018, in addition to the principal and interest due, the Company would have been liable for approximately $124,260 in additional funds to indemnify the Chairman for his loss from the sale of the stock to pay the taxes due.
There are no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to our stockholders.
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Critical Accounting Policies
In May 2017, the FASB issued Accounting Standards Update (“ASU) 2017-09 – Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting. The Update provides clarity and reduces cost and complexity when applying the guidance of Topic 718 to a change in the terms or conditions of a share-based payment award. The Update mandates that an entity should account for the effects of the modification unless all three of the following conditions are met:
i) the fair value of the modified award is the same as the fair value of the original award immediately before the modification.
ii) the vesting provisions of the modified award are the same as the original award immediately before the award is modified.
iii) the classification of the modified award as an equity instrument of a liability instrument is the same as the original award immediately before the award is modified.
The Update is effective for periods beginning after December 15, 2017 and was adopted by the Company in its 2018 financial statements. The Update had no effect on the Company’s 2018 financial statements.
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting” which addresses accounting for issuance of all share-based payments on the same accounting model. Previously, accounting for share-based payments to employees was covered by Accounting Standards Codification (“ASC”) Topic 718 while accounting for such payments to non-employees was covered by ASC Topic 505. As it considered recently issued updates to ASC Topic 718, the FASB, as part of its simplification initiatives, decided that ASC Topic 718 would also be used as the guidance for non-employee share-based awards. Under this new guidance, both employee and non-employee awards will essentially follow the same model, with small variances related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards. The ASU is effective beginning calendar 2019. The Company does not expect the amendments to have a material effect on its consolidated financial statements.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure under this item is not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements for the years ended December 31, 2018 and 2017 are attached to this report as Exhibit 99.1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, our management, with the participation of the Chief Executive Officer/Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC Rules and Forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer/Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the results of this evaluation, the Chief Executive Officer/Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2018.
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Management’s Report on Internal Control Over Financial Reporting
The management, under the supervision of our Chief Executive Officer/Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.
The Chief Executive Officer/Chief Financial Officer conducted an evaluation of the effectiveness of internal control over financial reporting. Based on this evaluation, the Chief Executive Officer/Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2018 to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the fourth quarter of the year ending December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Officers of the Company are appointed annually by the Board of Directors to hold office until an officer’s successor has been duly appointed and qualified, unless an officer dies, resigns, is replaced, or is removed by the Board of Directors. Directors are elected to serve until the next Annual Meeting of Stockholders and until their successors are elected and qualified. A majority of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at a meeting, in person or telephonically, to constitute a quorum. Any action required or permitted to be taken by the Board of Directors individually or collectively, may be taken without a meeting if all members of the Board of Directors consent, in writing, to the action.
| Officers and | ||||
| Directors | Age | Position(s) | ||
| Deborah A. Vitale | 68 | Director, President, Secretary, Treasurer and Chief Financial Officer | ||
| Martin Blount | 56 | Director | ||
| Benjamin J. Harrell | 65 | Director, Vice-President | ||
| Gregory A. Harrison | 74 | Chairman of the Board of Diamondhead Casino Corporation, Vice-President | ||
| Robert S. Crow III | 63 | Director | ||
| Daniel G. Burstyn | 34 | Director |
Background of Current Executive Officer and Directors
Deborah A. Vitale has served as President, Chief Executive Officer and Treasurer of the Company since February 1998, as Chief Financial Officer of the Company since September 2011, and as Chairman of the Board of the Company from March 1995 through March 31, 2014. Ms. Vitale served as Secretary of the Company from November 1994 until July 2002, and as Interim Secretary from January 11, 2012 until appointed Secretary again on January 29, 2015. As President and CEO, Ms. Vitale was responsible for all phases of the day-to-day operations of four casino ships sailing out of three Florida ports into international waters and for the management and supervision of approximately 400 casino, marine and land-based employees. She has been a Director of the Company since December 1992. On February 14, 1997, Ms. Vitale was appointed Chairman of the Board of Directors of Casino World, Inc. and Chairman of the Board of Directors of Mississippi Gaming Corporation, each a subsidiary of the Company. On September 2, 1997, Ms. Vitale was appointed President of Casino World, Inc. and Mississippi Gaming Corporation. On March 31, 2014, Ms. Vitale stepped down as Chairman of the Board of the Company and as President and CEO of Casino World, Inc. On June 16, 2015, Ms. Vitale was again appointed Chairman of the Board and President of Casino World, Inc. Ms. Vitale is a trial attorney by background with over thirty years of experience handling complex civil litigation. Ms. Vitale is licensed to practice law in Washington, D.C., Maryland, and Virginia. The Board believes Ms. Vitale is qualified to serve as a Director due to her experience as President and Chief Executive Officer of the Company, her management experience in operating ship-based casinos, her knowledge of and participation in all aspects of the Diamondhead Project, and her extensive legal background and experience.
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Martin C. Blount has served as a Director of the Company since June 9, 2010. Since approximately 1986, Mr. Blount has been a stock broker and a registered investment banking representative. Since approximately April of 2013, Mr. Blount has also served as a licensed structured settlement agent for various parties. Mr. Blount also represents professional athletes and is a certified Major League Baseball agent. Mr. Blount is a graduate of West Virginia Wesleyan College and holds a B.A. degree in Sociology. The Board believes Mr. Blount is qualified to serve as a Director due to his prior experience as a Director of the Company and his experience in the securities and financial industry.
Benjamin J. Harrell has served as a Director of the Company since July 18, 2002. On June 16, 2015, Mr. Harrell was appointed a Vice President of the Company. Mr. Harrell was the founder and served as President and CEO of Pete Fountain Productions, Inc. from 1979 until it was acquired in 1999 by Production Group International, Inc. (“PGI”), a global event communications company, which was subsequently acquired by TBA Global Events, LLC in 2005. Mr. Harrell managed the acquiring company’s business in the New Orleans area. He currently serves as Head of U.S. Operations of Kuoni Destination Management, Inc., a global event and travel company which specializes in event solutions, corporate meetings, incentive programs and sporting events. He also served as Vice President of Pete Fountain Entertainment, LLC, which until March 2003 operated one of the largest jazz clubs in New Orleans. Since 1975, Mr. Harrell has served as personal manager for the internationally noted jazz artist, Pete Fountain. Mr. Harrell handled all aspects of Mr. Fountain’s career, including promotion, concerts, personal appearances and commercial endorsements. From 1985 through 2003, Mr. Harrell served as President of Crescent Sound & Light, Inc, a professional sound, lighting, video and staging company for the convention and entertainment industry. Mr. Harrell served as a Director of the New Orleans Metropolitan Convention and Visitors Bureau from 1997 through 1999. On January 15, 2004, Mr. Harrell was elected to the Board of Directors of Mississippi Gaming Corporation, a wholly owned subsidiary of the Company. The Board believes Mr. Harrell is qualified to serve as a Director due to his prior experience as a Director of the Company and his extensive knowledge of, familiarity with, and active participation in all aspects of the Diamondhead Project, including site approval.
Gregory A. Harrison, Ph.D., P.E. has served as a Director of the Company since February 20, 1998. On June 16, 2015, Dr. Harrison was appointed Chairman of the Board of the Company. Dr. Harrison was appointed Vice-President of the Company on July 18, 2002. Mr. Harrison served as Secretary of the Company from July 25, 2002 until January 2012. Dr. Harrison is a consulting forensic engineer with fifty years of diversified fire protection/safety/project engineering experience with NASA, DOD, NBS, NRC, ARAMCO, and Tenera, L.P. Dr. Harrison is licensed in six states and, effective August 27, 2004, became a Professional Engineer licensed to practice in the state of Mississippi. Dr. Harrison is an expert with respect to the concept of Highly Protective Risk (HPR) and HPR insurance principles and is intimately familiar with Factory Mutual Global Insurance construction requirements. Dr. Harrison has qualified as an expert witness in various courts in fifteen states. Dr. Harrison received a B.S. degree in Fire Protection Engineering from the University of Maryland, an M.S. degree in Civil Engineering from the University of Maryland, an M.S. degree in Engineering Administration from George Washington University and a Ph.D. in Safety Engineering from Kennedy-Western University. Dr. Harrison has held a top secret security clearance with the U.S. Department of Energy, the U.S. Nuclear Regulatory Commission, and the Department of Defense. Dr. Harrison has served on the Board of Directors of Data Measurement Corporation and was an Advisory Board member of United Bank and First Patriot National Bank. The Board believes Mr. Harrison is qualified to serve as a Director due to his prior experience as a director on other Boards, due to his prior experience as a Director and Vice-President of the Company when it was an operating casino entity, and due to his background and experience in construction management, structural engineering, environmental engineering, fire protection and life safety.
Robert S. Crow, III has served as a Director of the Company since April 20, 2015. Mr. Crow is a licensed real estate agent with extensive experience in contract negotiations involving real estate and mortgage banking, having closed on approximately five hundred homes. Mr. Crow also has experience in land development, home renovations, and real estate marketing. Since approximately 1976, Mr. Crow’s sales have placed him in the top 1% of real estate agents in the United States. Since 1991, Mr. Crow has worked as an independent contractor for RE/MAX Realty Group located in Gaithersburg, Maryland. Mr. Crow has been involved in various City projects and several zoning related matters and has served on the Executive Committee of his neighborhood Citizen’s Association. Mr. Crow has been a shareholder of the Company for over fifteen years, is intimately familiar with the Company, its history, its former operations, and the history of the Diamondhead Property, which he has inspected. The Board believes Mr. Crow is qualified to serve as a Director due to his extensive experience in contract negotiations and real estate.
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Daniel G. Burstyn was appointed to the Board of Directors May 1, 2018. Mr. Burstyn is a technology-focused entrepreneur. Mr. Burstyn has developed his own proprietary applications as a programmer and develops web, mobile, and cryptocurrency and/or blockchain solutions for entrepreneurs and various corporations and other entities. From approximately October of 2010 to approximately July of 2012, Mr. Burstyn co-created an online aggregate shopping cart platform which was built, but never launched by Stashr, an entity he co-founded. From approximately October of 2012 to February of 2014, Mr Burstyn founded and co-developed SpaceMatch, LLC, which sought to develop an online commercial real estate marketplace. From approximately March of 2014 to December of 2015, Mr. Burstyn acted as Chief Operating Officer of Neuromore, LLC, a signal-processing software company where he planned and directed global business strategy and the implementation of cloud-based SaaS revenue channels with biosensor manufacturers, research institutions and other customers. Since approximately October of 2016, Mr. Burstyn has co-owned and operated CliqFix, LLC, a business that develops web and mobile applications as well as cutting-edge cryptocurrency, cryptoasset, and blockchain solutions. Since January of 2018, Mr. Burstyn has owned and operated Live Rigs, LLC, a business that builds machines for the purpose of mining cryptocurrencies. Mr. Burstyn received a B.S. degree in commerce in 2010 from the University of Virginia, McIntire School of Commerce where he concentrated on marketing and finance.
Committees of the Board of Directors
The Securities and Exchange Commission has adopted rules to implement certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public company audit committees. One of the rules requires a company to disclose whether it has an “audit committee financial expert” serving on its audit committee. Based on its review of the criteria of an audit committee financial expert under the rule adopted by the SEC, the Board of Directors does not believe that any member of the Board of Directors would be described as an audit committee financial expert. At this time, the Board of Directors acts collectively as the Audit Committee and such efforts are coordinated by Director Martin Blount, who, by virtue of the fact that he is not an officer or employee of the Company, is considered an independent Director.
The Compensation Committee is composed of two Directors: Robert S. Crow II and Martin C. Blount. The Board of Directors has determined that all members of the Committee are independent Directors based on the general independence standards adopted by the Board.
The Compensation Committee has no written charter and convenes at regularly scheduled meetings of the Board of Directors. The Compensation Committee advises and makes recommendations to the Board of Directors as to the compensation to be paid to Executive Officers of the Company. In addition, the Compensation Committee advises and makes recommendations to the Board of Directors as to options to purchase common stock, if any, to be awarded.
The Nominating Committee is composed of two Directors: Martin C. Blount and Benjamin J. Harrell. The Board of Directors has determined that Mr. Blount is an independent Director based on the general independence standards adopted by the Board. Mr. Harrell does not meet the general independence standards as adopted by the Board of Directors and, therefore, serves in an ex-officio capacity.
The Committee considers and reviews, from time to time, the appropriate size and composition of the Board and anticipates future vacancies and needs of the Board. In evaluating possible nominees, the Board considers, among other things, the background, experience, education and knowledge of a candidate, his familiarity with the gaming industry and related industries, his experience with publicly-traded entities, and his integrity and judgment. The Board considers the potential contribution a candidate will bring to the backgrounds, experience, and skills of the existing Board of Directors. The Board also considers a candidate’s ability to devote sufficient time and effort to his duties as a Director. After evaluation and review of candidates who meet the Board’s criteria, the Committee considers its then-current needs and selects the nominees that best suit those needs.
The Board will consider candidates recommended by stockholders, provided the names of such nominees, accompanied by relevant biographical information, are properly submitted, in writing, to the Secretary of the Company. The nominees will be submitted to the Board of Directors and receive the same consideration as those nominees identified by members of the Board of Directors.
Code of Ethics
The Company adopted a Code of Ethics in 2004 that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code was attached as an exhibit in a prior year’s annual report. A copy of the Code of Ethics will be made available to any shareholder, free of charge, upon written request to the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s outstanding Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock. These persons are required by SEC regulations to furnish the Company with copies of all such reports they file.
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On January 3, 2018, the Board of Directors voted to modify the terms of options to purchase 2,000,000 common shares at $0.19 per share, 750,000 common shares $0.30 per share and 75,000 common shares at $0.75 per share issued to the President by extending the expiration date of the options from March 13, 2018 until December 31, 2020. The President should have filed a Form 4 with the Securities and Exchange Commission by January 5, 2018 reporting the transaction. No filing regarding these option modifications was made.
Similarly, on January 3, 2018, the Board of Directors voted to modify the terms of options to purchase 150,000 common shares at $1.25 per share, issued to the Chairman and 75,000 common shares $0.75 per share issued to the Vice President by extending the expiration date of the options from March 13, 2018 until December 31, 2020. Both the Chairman and Vice President should have filed a Form 4 with the Securities and Exchange Commission by January 5, 2018 reporting the transaction. No filing regarding these option modifications was made.
On May 1, 2018, Daniel G. Burstyn was appointed to the Board of Directors. Mr. Burstyn should have filed a Form 3 with the Securities and Exchange Commission by May 11, 2018 to report his holdings in the Company, if any. No filing regarding this matter was made.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Company accrued salary payable to only one executive in 2018, the President and CEO, who also serves as a Director, and Chief Financial Officer, Treasurer and Secretary of the Registrant and held various positions in the Registrant’s subsidiaries. The Board of Directors monitors and approves compensation paid to executives of the Company.
Executive Compensation
The Board of Directors determined Ms. Vitale’s base salary to be $300,000 per annum. Ms. Vitale’s base salary reflects her contribution to the Company in a myriad of corporate roles and responsibilities. The Board recognized that Ms. Vitale manages the Company’s business without the benefit of any administrative staff normally associated with the management of a publicly-traded company at significant savings to the Company. Since mid-November of 2009, the Company has, from time to time, been unable to pay Ms. Vitale the salary due her because of a lack of funds. At December 31, 2018, Ms. Vitale was entitled to cash compensation of $2,166,996 for services rendered from 2010 through 2018, which has accrued and is unpaid at December 31, 2018. In addition, on October 12, 2012, the Board of Directors approved a motion to pay interest at 9% per annum on the unpaid compensation due Ms. Vitale retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. The following table sets forth the amounts due Ms. Vitale for unpaid salary for each of the years 2010 through 2018 and the interest due thereon. None of the accrued salary or interest has been paid to Ms. Vitale to date.
| TOTAL | SALARY | SALARY | INTEREST | |||||||||||||
| YEAR | SALARY | PAID | ACCRUED | EARNED | ||||||||||||
| 2010 | $ | 300,000 | $ | 161,538 | $ | 138,462 | $ | 3,221 | ||||||||
| 2011 | 300,000 | 96,466 | 203,534 | 18,837 | ||||||||||||
| 2012 | 300,000 | None | 300,000 | 43,462 | ||||||||||||
| 2013 | 300,000 | None | 300,000 | 70,428 | ||||||||||||
| 2014 | 300,000 | 150,000 | 150,000 | 91,739 | ||||||||||||
| 2015 | 300,000 | 125,000 | 175,000 | 101,899 | ||||||||||||
| 2016 | 300,000 | None | 300,000 | 126,463 | ||||||||||||
| 2017 | 300,000 | None | 300,000 | 153,463 | ||||||||||||
| 2018 | 300,000 | None | 300,000 | 180,463 | ||||||||||||
| $ | 2,700,000 | $ | 533,004 | $ | 2,166,996 | $ | 789,975 | |||||||||
The following table provides information concerning the accrual of salary and other compensation of the President and Chief Executive Officer. No salary was paid to any officer of the Company in 2018 or 2017.
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SUMMARY COMPENSATION TABLE
| Non-Equity | Nonqualified | (3) | ||||||||||||||||||||||||||||||||||
| (2) | Incentive | Deferred | All | |||||||||||||||||||||||||||||||||
| Name and | (1) | Stock | Option | Plan | Compensation | Other | ||||||||||||||||||||||||||||||
| Occupation | Year | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||||||||
| Deborah A. Vitale | 2018 | $ | 300,000 | None | None | $ | 20,923 | None | None | $ | 195,463 | $ | 516,386 | |||||||||||||||||||||||
| President | 2017 | $ | 300,000 | None | None | None | None | None | $ | 168,463 | $ | 468,463 | ||||||||||||||||||||||||
| (1) | In 2018 and 2017, none of Ms. Vitale’s salary compensation was paid to her and, therefore, the $300,000 of salary compensation owing to her for 2018 and 2017 will be paid to her when Company finances permit. |
| (2) | In the first quarter of 2018, the Board of Directors voted to extend the expiration dates of previously-awarded option grants to Ms. Vitale from March 13, 2018 to December 31, 2020 with respect to options previously granted to her to purchase 750,000 shares of common stock at $0.30 per share, 75,000 shares of common stock at $0.75 per share and 2,000,000 shares of common stock at $0.19 per share; |
| Reference is hereby made to Note 3, “Summary of Significant Accounting Policies – Stock Based Compensation” in the attached 2018 consolidated financial statements, for a determination of the variables used in computing the value of option awards. | |
| (3) | In 2018, Ms. Vitale earned an annual Director’s fee of $15,000. In addition, in 2018, Ms. Vitale earned interest in the amount of $180,463 on the portion of her unpaid salary for the years 2010 through 2018. In 2017, Ms. Vitale earned an annual Director’s fee of $15,000. In addition, in 2017, Ms. Vitale earned interest in the amount of $153,463 on the portion of her unpaid salary for the years 2010 through 2017. |
The following tables provide a summary of the outstanding equity awards of the President at December 31, 2018.
SUMMARY OF OUTSANDING EQUITY AWARDS AT FISCAL YEAR END
Option Awards
| Equity | ||||||||||||||||||||
| Incentive | ||||||||||||||||||||
| Plan | ||||||||||||||||||||
| Awards | ||||||||||||||||||||
| Number of | Number of | Number of | ||||||||||||||||||
| Securities | Securities | Securities | ||||||||||||||||||
| Underlying | Underlying | Underlying | ||||||||||||||||||
| Unexercised | Unexercised | Unexpired | Option | Option | ||||||||||||||||
| Options | Options | Unexercised | Exercise | Expiration | ||||||||||||||||
| Name | Exercisable | Unexercisable | Options | Price | Date | |||||||||||||||
| Deborah A. Vitale | 2, 000,000 | None | None | $ | 0.19 | 12/31/20 | ||||||||||||||
| 750,000 | None | None | $ | 0.30 | 12/31/20 | |||||||||||||||
| 75,000 | None | None | $ | 0.75 | 12/31/20 | |||||||||||||||
Stock Awards
| Equity | Incentive | |||||||
| Incentive | Plan Awards | |||||||
| Plan Awards | Market or | |||||||
| Number of | Payout Value | |||||||
| Number of | Market Value of | Unearned | of Unearned | |||||
| Shares or Units | Shares or Units | Shares, Units or | Shares, Units or | |||||
| Of Stock That | Of Stock That | Other Rights That | Other Rights That | |||||
| Have Not | Have Not | Have Not | Have Not | |||||
| Name | Vested | Vested | Vested | Vested | ||||
| Deborah A. Vitale | None | None | None | None |
| 22 |
| Option Awards | Stock Awards | |||||||||||
| Number of | Number of | |||||||||||
| Shares | Value | Shares | Value | |||||||||
| Acquired | Realized | Acquired | Realized | |||||||||
| On | On | On | On | |||||||||
| Name | Exercise | Exercise | Vesting | Vesting | ||||||||
| Deborah A. Vitale | None | None | None | None | ||||||||
The Company sponsors an employee stock ownership plan which is a tax deferred defined contribution pension plan formed in 1994. Ms. Vitale has been a plan participant since 1998. No contributions were made to Ms. Vitale’s participant account for the years ending December 31, 2018 or 2017.
At December 31, 2018, Ms. Vitale was 100% vested in 447,272 shares of common stock which were contributed to the plan on her behalf in past years.
Directors’ Compensation
Effective January 1, 2013, the directors of the Company are entitled to be compensated at a rate of $15,000 per annum. No director received directors’ fees in the years 2017 or 2018. Each Director is eligible for an annual payment in the amount of $15,000 as long as they remain a Director through December 31 of the applicable year, absent death or incapacitation. The annual payment to new directors will be prorated based upon months served in their initial year as a Director. Directors are reimbursed for certain approved expenses incurred in connection with Company business and for certain approved expenses incurred in connection with attendance at non-telephonic Board, committee, or other meetings. Directors are from time to time, awarded non-qualified options to purchase common stock of the Company.
The table below summarizes Director Compensation for the year ended December 31, 2018.
DIRECTOR COMPENSATION
| Earned or | (1) | Non- Equity | Deferred | (2) | ||||||||||||||||||||||
| Paid in | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||
| Name | Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||
| Gregory A. Harrison | $ | 15,000 | None | $ | 254 | None | None | $ | 10,903 | $ | 26,157 | |||||||||||||||
| Benjamin Harrell | $ | 15,000 | None | $ | 211 | None | None | None | $ | 15,211 | ||||||||||||||||
| Martin Blount | $ | 15,000 | None | None | None | None | None | $ | 15,000 | |||||||||||||||||
| Robert Crow | $ | 15,000 | None | None | None | None | None | $ | 15,000 | |||||||||||||||||
| Daniel Burstyn | $ | 10,000 | None | None | None | None | None | $ | 10,000 | |||||||||||||||||
| (1) | In the first quarter of 2018, the Board of Directors voted to extend the expiration dates of previously-awarded options from March 13, 2018 until December 31, 2020 granted to the current Chairman of the Board to purchase 150,000 shares of common stock at $1.25 per share and previously-awarded options granted to a Vice president and Director of the Company to purchase 75,000 shares of common stock at $0.75. |
| Reference is hereby made to Note 3, “Summary of Significant Accounting Policies – Stock Based Compensation” in the attached 2018 financial statements, for a determination of the variables used in computing the value of option awards. | |
| (2) | Mr. Harrison earned $10,903 of interest in 2018 which accrued to his benefit for unpaid salary for the years 2010 and 2011. None of the above interest due was paid to Mr. Harrison in 2018. |
Other Compensation Arrangements
Gregory A. Harrison, the current Chairman of the Board of Directors and a Vice President of the Company was previously a compensated employee of the Company until December 31, 2011. Mr. Harrison is still due compensation for unpaid salary of $121,140 for services rendered in years prior to 2012. On October 12, 2012, the Board of Directors approved a motion to pay interest at 9% per annum on the unpaid compensation due Mr. Harrison retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. Interest on the unpaid salary due to Mr. Harrison amounted to $10,903 in 2018 and $10,903 in 2017. The total accrued interest through December 31, 2018 was $86,098. None of the interest due to Mr. Harrison has been paid to date.
| 23 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 31, 2019, to the Company’s knowledge, based on filings with the Securities & Exchange Commission by certain beneficial owners and/or information received by the Company, the beneficial ownership of the outstanding Voting Stock held by (i) each person or entity beneficially owning more than 5% of the shares of any class of Voting Stock, (ii) each director, nominee, and certain executive officers, individually, and (iii) all directors and executive officers as a group. The Common Stock and the Voting Preferred Stock vote as a single class and each share thereof is entitled to one vote per share.
| BENEFICIAL OWNER | AMOUNT OF BENEFICIAL OWNERSHIP | CLASS
OF STOCK | PERCENT OF CLASS | PERCENT OF VOTING (1) | ||||||||||
| Europa
Cruises Corporation Employee Stock Ownership Plan Trust Deborah A. Vitale, Trustee (2) 1013 Princess Street Alexandria, Virginia 22314 | 2,068,190 | Common | 4.88 | % | 4.68 | % | ||||||||
| Deborah
A. Vitale (2)(3) Director, President, Secretary, Treasurer and Chief Financial Officer Chairman, President, Secretary and Treasurer of Casino World, Inc. Chairman, President, Secretary and Treasurer of Mississippi Gaming Corporation 1013 Princess Street Alexandria, Virginia 22314 | 6,107,462 | Common | 13.89 | % | 13.34 | % | ||||||||
| Gregory
Harrison (4) Chairman and Vice President 16209 Kimberly Grove Gaithersburg, Maryland 20878 | 1,462,554 | Common | 3.33 | % | 3.19 | % | ||||||||
| Benjamin
J. Harrell (5) Director and Vice President 162 Hesper Avenue Metairie, Louisiana 70005 | 475,000 | Common | 1.08 | % | 1.04 | % | ||||||||
| Martin
Blount Director 1320 Maryland Ave Washington, D.C. 20002 | — | - | - | |||||||||||
| Robert
S. Crow III (6) Director 5910 Coral Sea Avenue Rockville, Maryland 20851 | 1,079,869 | Common | 2.46 | % | 2.36 | % | ||||||||
| Daniel
G. Burstyn Director 2828 Lemmon Ave., Apt. 5103 Dallas, Texas 75204 | - | - | - | |||||||||||
| Serco International Financial Advisory and | 901,831 | Common | 2.05 | % | 5.96 | % | ||||||||
| Management Services Limited (7) | 900,000 | Preferred S-NR | 100.00 | % | ||||||||||
| P.O.
Box 52 A-1072 Vienna, Austria | 926,000 | Preferred S | 100.00 | % | ||||||||||
| Austroinvest International Limited (7) | 901,831 | Common | 2.05 | % | 5.96 | % | ||||||||
| 30, DeCastro Street, | 900,000 | Preferred S-NR | 100.00 | % | ||||||||||
| Road
Town Tortola, British Virgin Islands | 926,000 | Preferred S | 100.00 | % | ||||||||||
| Serco International Limited (7) | 901,831 | Common | 2.05 | % | 5.96 | % | ||||||||
| 4, George Street | 900,000 | Preferred S-NR | 100.00 | % | ||||||||||
| Mareva
House P.O. Box N-3937 Nassau, Bahamas | 926,000 | Preferred S | 100.00 | % | ||||||||||
| Ernst G. Walter (7) | 901,831 | Common | 2.05 | % | 5.96 | % | ||||||||
| P.O. Box 15 | 900,000 | Preferred S-NR | 100.00 | % | ||||||||||
| 1072 Vienna, Austria | 926,000 | Preferred S | 100.00 | % | ||||||||||
| College
Health and Investment Ltd. (8) College Health and Investment LP (8) Samuel I. Burstyn, General Partner | 2,865,982 | Common | 6.52 | % | 6.26 | % | ||||||||
| 701
Brickell Avenue, 24th Fl Miami, FL 33131 | ||||||||||||||
| All
Directors & Executive Officers (5 Persons) | 9,124,885 | Common | 20.75 | % | 19.93 | % | ||||||||
| 24 |
| (1) | Common Stock, Series S-NR Preferred Stock and Series S Preferred Stock have been combined for the purpose of calculating voting percentages. |
| (2) | The Europa Cruises Corporation Employee Stock Ownership Plan (“ESOP”) was established on August 18, 1994. The Trustee of the ESOP is Deborah A. Vitale. As of December 31, 2018, a total of 2,295,450 ESOP shares had been released for allocation to participants in the ESOP and an additional 636,360 shares had been forfeited by the Trust. The participants in the ESOP are entitled to direct the Trustee as to the manner in which the Company’s allocated shares are voted. The remaining 2,068,190 unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries. |
| (3) | Includes 2,068,190 unallocated common shares of the ESOP Trust; 767,000 shares of Common Stock owned directly by Ms. Vitale; options to purchase 2,825,000 shares of Common Stock; and 447,272 shares of Common Stock, which represent shares of Common Stock held in Ms. Vitale’s fully vested ESOP participant account. |
| (4) | Includes 1,247,279 shares of Common Stock owned directly by Mr. Harrison; options to purchase 150,000 shares of Common Stock; a convertible Promissory Note which is convertible or exercisable into a total of 50,000 shares of common stock and 15,275 shares of Common Stock held in Mr. Harrison’s fully vested ESOP participation account. Pursuant to a Private Placement dated February 14, 2014, on March 31, 2014, Mr. Harrison purchased a Collateralized Convertible Senior Debenture convertible into 166,667 shares of Common Stock. The conditions required for conversion of this Debenture into Common Stock of the Company have not yet been met. Assuming the conditions required for conversion are met in the future, Mr. Harrison’s Debenture would be converted into a total of 166,667 shares of Common Stock without any action on the part of Mr. Harrison, at which time his holdings, assuming no other changes occurred, would total 1,629,221. |
| (5) | Includes 400,000 shares of Common Stock owned directly by Mr. Harrell and an option to purchase 75,000 shares of Common Stock. |
| (6) | Includes 979,869 shares of Common Stock owned directly by Mr. Crow and a convertible Promissory Note which is convertible or exercisable into a total of 100,000 shares of Common Stock. |
| (7) | Serco International Financial Advisory and Management Services Ltd., Austroinvest International Limited, and Serco International Limited (f/k/a Serco International Financial Advisory and Management Services, Ltd.), are affiliated entities. The Company is informed that Dr. Ernst Walter is the sole Director and President of each company. The total beneficial ownership of securities of the Company held by the foregoing includes: 901,831 shares of Common Stock owned by Serco International Financial Advisory and Management Services, Ltd.; 926,000 shares of Series S Preferred Stock owned by Austroinvest International Limited; and 900,000 shares of Series S-NR Preferred Stock owned by Serco International Limited. |
| 25 |
| (8) | Includes 1,659,868 shares of Common Stock owned by College Health & Investment LP, 506,164 shares of Common Stock owned by College Health & Investment Ltd, 200,000 shares of Common Stock owned by Alana Burstyn, 199,950 shares of Common Stock owned by Sean Burstyn, c/o Burstyn. College Health & Investment Ltd. holds a Promissory Note issued March 25, 2010, convertible into 300,000 shares of Common Stock The foregoing persons and entities appear to share a common address, 701 Brickell Avenue, Miami, FL 33131. Samuel I. Burstyn is the General Partner of College Health & Investment LP, which the General Partner maintains, is also known as College Health & Investment, Ltd. Does not include 200,000 shares of Common Stock held by Shari Jakobowitz, Custodian FBO Ava Burstyn under the Florida Uniform Transfer Minor Act. College Health & Investment L.P. claims it assigned the Promissory Note dated March 25, 2010 to DDM Holdings, LLC. The Company does not recognize the alleged assignment. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
On August 18, 1994, the Company (f/k/a Europa Cruises Corporation), established the Europa Cruises Corporation Employee Stock Ownership Plan (the “ESOP”). The ESOP, which is a qualified retirement plan under the provisions of Section 401(a) of the Internal Revenue Code and an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Internal Revenue Code, was established primarily to invest in stock of the Company. All employees as of December 31, 1994, and subsequent new employees having completed 1,000 hours of service, are eligible to participate in the ESOP. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. Deborah A. Vitale is the sole Trustee of the Trust.
As of December 31, 2018 a total of 2,295,450 shares of Common Stock had been released for allocation to participants in the ESOP. An additional 636,360 shares had been forfeited by the Trust. The Company made no contributions to the ESOP Plan for the years ended December 31, 2011 through December 31, 2018. The participants in the ESOP are entitled to direct the Trustee as to the manner in which the Company’s allocated shares are voted. The remaining 2,068,190 unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries.
On August 21, 1994, the Company loaned $4,275,000 to the ESOP in exchange for a ten-year promissory note bearing interest at eight percent per annum. On August 24, 1994, the ESOP purchased 2,880,000 shares of the Company’s Common Stock with the proceeds of the loan. On August 25, 1994, the Company loaned an additional $3,180,000 to the ESOP in exchange for a ten year promissory note bearing interest at eight percent per annum. On August 26, 1994, the ESOP purchased an additional 2,120,000 shares of the Company’s Common Stock with the proceeds of the loan. The shares of Common Stock were pledged to the Company as security for the loans. The promissory notes will be repaid with the proceeds of annual contributions made by the Company to the ESOP. In April of 1995, the Company agreed to extend the maturity of the loans to twenty years. Effective for the Plan year beginning January 1, 2001, the Company amended the plan and related loans for the purpose of limiting excise tax liability for plan contributions in excess of IRS Code Section 415 limitations. To accomplish this, the Company agreed to extend the maturity of the loans to fifty years.
The Company leases a furnished and equipped townhouse office from its President at 1013 Princess Street, in Alexandria, Virginia 22314, pursuant to a Landlord/Tenant Month to Month Lease. The terms of the lease, as adjusted for square footage and certain other applicable differences, were based on the terms of the last lease signed by the Company with an unrelated third party for unfurnished office space leased in Largo, Florida. The lease calls for payment by the Company of a base rent in the amount of $4,534 per month, or $54,408 per year, for approximately 2,473 square feet of commercial space, in addition to any and all expenses relating to the property, including property taxes, property insurance, telephone, electric, water and cable. The Company’s office and all of its active files are located in this office.
In 2018 and 2017, the President received no payments for base rent and the entire base rent due, in the amount of $54,408 per year, was accrued.
Rent expense associated with this lease amounted to base rent in the amount of $54,408 and associated rental costs of $18,610 for a total of $73,108 for the year ended December 31, 2018 and base rent in the amount of $54,408 and associated rental costs of $15,140 for a total of $69,548 for the year ended December 31, 2017.
At December 31, 2018, The President is owed a total of $246,983 under the lease agreement.
| 26 |
The President of the Company is owed deferred salary in the principal amount of $2,166,996 and the Vice President and current Chairman of the Board of the Company is owed deferred salary in the principal amount of $121,140 as of December 31, 2018. On October 12, 2012, the Board of Directors approved a motion to pay these individuals interest on their deferred compensation retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. Accrued interest through December 31, 2018 and 2017 amounted to $876,074 and $684,708, respectively.
In July, 2017, at the request of the Company, the current Chairman of the Board of Directors, who is also a Vice President of the Company (“the Chairman”), paid all property taxes due, together with all interest due thereon, to Hancock County, Mississippi on an approximate 400-acre tract of land (“the Diamondhead Property”), owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. The total amount advanced was $67,628.
The Chairman is one of the secured parties under that Land Deed of Trust recorded on September 26, 2014 in Hancock County, Mississippi, to secure Tranche I and Tranche II Debentures issued by the Company in 2014. Under paragraph 5 of the Land Deed of Trust, a secured party who advances sums for taxes due on the Diamondhead Property is secured by the same Land Deed of Trust, but only at that interest rate specified in the note representing the primary indebtedness, namely, 4% per annum.
The Chairman advanced the $67,628 on condition that: (i) the advance constitute a lien with interest at 4% per annum under that Land Deed of Trust recorded September 26, 2014; (ii) he be paid additional interest of 11% per annum on the amount advanced and owing and that the full 11% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (iii) this additional interest obligation be treated as a separate and secured debt of the Company, to be evidenced by a separate note and is secured with a separate and third lien to be placed on the Diamondhead Property (hereafter “the Third Lien”); (iv) the entire obligation will be treated as an advance to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V); and (v) he be indemnified for any losses sustained on the sale of that common stock sold to cover the credit card payments. The Chairman has identified the common stock to be sold and will provide the Company with the documentation required to document the sale of said stock and to calculate the future loss, if any, on said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue, to the Chairman for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $100,000.
In March of 2018, the Board of Directors voted to increase up to an additional $200,000 the amount secured by the third lien in favor of the Chairman of the Board, for amounts advanced by the Chairman on behalf of the Company, on the following terms and conditions, namely, that (i) the advance constitutes a lien on the Diamondhead Property with interest at 15% per annum; (ii) that the full interest of 15% per annum is payable during any calendar year in which all or part of the amount advanced is due and owing or interest due thereon remains unpaid; (iii) that this debt be evidenced by a separate promissory note and is to be included in and secured with a third lien that is to be placed on the Diamondhead Property to secure previous advances made to the Company (hereafter “the Third Lien”); (iv) that he be indemnified for any losses sustained on the sale of his common stock in an unrelated publicly-traded company to be sold to cover this advance based on a sales price of approximately $2.80 per share with a cap on the maximum loss per share to be at a sales price of $10.00 per share; and (v) that the Chairman’s previous indemnification approved by the Board of Directors on July 24, 2017 with respect to any loss on the sale of the same stock also be capped at a maximum of $10.00 per share. The Chairman will provide the Company with the documentation required to document the sale of said stock and to calculate the losses on said stock for all amounts loaned to the Company from the sale of said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue to the Chairman, for an amount up to $200,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $200,000.
In November of 2018, the Board of Directors voted to increase up to an additional $100,000 of advances from the Chairman and in March of 2019, the Board of Directors voted to increased the limit of the advances to $200,000. The terms of this advance are identical to the terms as approved above in March 2018. However, the additional funds will be secured by a fourth lien to be placed on the Property in favor of the Chairman.
At December 31, 2018, the Chairman had advanced a total of $205,250 under both the March 2018 and November 2018 arrangements.
| 27 |
On July 24, 2017, the President of the Company, who is a Director of the Company, agreed to advance the Company up to $20,000 for the payment of expenses. In March of 2018, the Board of Directors voted to increase to up to $100,000 the amount to be secured by a third lien in favor of the President of the Company for amounts advanced by the President under this note, on the following terms and conditions, namely, that (i) she be paid interest of 15% per annum on the amount advanced and owing and that the full 15% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (ii) the obligation in the maximum principal amount of $100,000 with interest due thereon be treated as a secured debt of the Company, to be evidenced by a separate note and to be secured with a separate lien to be placed on the Diamondhead Property (“the Third Lien”) together with the Chairman’s Third Lien, as well as a first lien to be placed on the residential lot owned by the Company; (iii) that the Third Lien on the Diamondhead Property also include the two loans ($25,000 and $15,000) and interest due thereon and credit facilities in the maximum amount of $15,000; and (iv) that the foregoing will be treated as advances to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V).
As of December 31, 2018 and 2017, the President had advanced a total of $36,137 and $20,000, respectively, under this agreement. The President previously agreed to secure a $25,000 loan and interest due thereon and to secure and guarantee a $15,000 loan and interest due thereon due non-related parties discussed above. The President is also personally liable for certain bank-issued credit cards used by the Company to pay expenses incurred by the Company in the approximate amount of $18,000. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from date of issue, to the President for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $100,000.
The third lien placed on the Diamondhead Property, which secures the above three promissory notes, totals up to $400,000 and is payable to the Chairman of the Board ($300,000) and President ($100,000) of the Company.
The Company’s policies and procedures require Board of Director approval of any related party transaction that involves an Officer or Director of the Company or any of its subsidiaries.
Director Independence
The Company has no written independence standards it follows in making a determination as to Director independence. However, in evaluating the independence of its members, the Company’s management determined that Mr. Blount, Mr. Crow and Mr. Burstyn are independent directors by virtue of the fact that they are not officers or employees of the Company.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The table below depicts the fees paid to Friedman LLP in each of the last two years:
| Description of Services | 2018 | 2017 | ||||||
| Audit Fees | $ | 50,900 | $ | 50,300 | ||||
| Audit-Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total Fees Paid to Friedman LLP | $ | 50,900 | $ | 50,300 | ||||
The Board of Directors, acting collectively as the audit committee, assures that the Company complies with SEC rules to maintain auditor independence as set forth in Rule 2-01(c)(7)(i) of Regulation S-X. The services above were approved, in advance, by the Board of Directors.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Subsidiaries of the Registrant:
Mississippi Gaming Corporation (Delaware)
Casino World, Inc. (Delaware)
Europasky Corporation (Delaware)
Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company pursuant to Rule 13A–14 of the Securities and Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| 28 |
| 29 |
Index to Exhibits
| (a) | Previously filed as an Exhibit to Form 10 – Amendment 1 as filed on May 27, 2015 and incorporated by reference. |
| (b) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated by reference. |
| (c) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and incorporated by reference. |
| (d) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed April 4, 2014 and incorporated by reference. |
| (e) | Previously filed as an Exhibit to Form 10 as filed on March 31, 2015 and incorporated by reference. |
| (f) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and incorporated by reference. |
| (g) | Attached to this Form 10-K. |
| 30 |
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Diamondhead Casino Corporation | ||||
| (Registrant) | ||||
| Date: | April 12, 2019 | /s/ Deborah A. Vitale | ||
| By: | Deborah A. Vitale | |||
| President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Gregory A. Harrison | Chairman of the Board of Directors | April 12, 2019 | ||
| Gregory A. Harrison | ||||
| /s/ Deborah A. Vitale | Director | April 12, 2019 | ||
| Deborah A. Vitale | ||||
| /s/ Benjamin J. Harrell | Director | April 12, 2019 | ||
| Benjamin J. Harrell | ||||
| /s/ Martin C. Blount | Director | April 12, 2019 | ||
| Martin C. Blount | ||||
| /s/ Robert S. Crow III | Director | April 12, 2019 | ||
| Robert S. Crow III | ||||
| /s/ Daniel G. Burstyn | Director | April 12, 2019 | ||
| Daniel G. Burstyn |
| 31 |
Exhibit 31.1
CERTIFICATIONS
I, Deborah A. Vitale, certify that:
1. I have reviewed this annual report on Form 10-K of Diamondhead Casino Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present, in all material respects, the consolidated financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
| Date: April 12, 2019 | |
| /s/ Deborah A. Vitale | |
| Deborah A. Vitale | |
| Chief Executive Officer |
| 1 |
Exhibit 31.2
CERTIFICATIONS
I, Deborah A. Vitale, certify that:
1. I have reviewed this annual report on Form 10-K of Diamondhead Casino Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present, in all material respects, the consolidated financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
| Date: April 12, 2019 | |
| /s/ Deborah A. Vitale | |
| Deborah A. Vitale | |
| Chief Financial Officer |
| 1 |
Exhibit 32.1
CERTIFICATION
In connection with the Annual Report of Diamondhead Casino Corporation (the “Company”) on Form 10-K for the year ending December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) I, Deborah A. Vitale, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company. |
| DATE: April 12, 2019 | /s/ Deborah A. Vitale | |
| By: | Deborah A. Vitale | |
| President and Chief Executive Officer | ||
| 1 |
Exhibit 32.2
CERTIFICATION
In connection with the Annual Report of Diamondhead Casino Corporation (the “Company”) on Form 10-K for the year ending December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) I, Deborah A. Vitale, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
| (3) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (4) | The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company. |
| DATE: April 12, 2019 | /s/ Deborah A. Vitale | |
| By: | Deborah A. Vitale | |
| President and Chief Executive Officer | ||
| 1 |
Exhibit 99.1
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONTENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Diamondhead Casino Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Diamondhead Casino Corporation and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant recurring net losses over the past several years. In addition, the Company has no operations, except for its efforts to develop the Diamondhead, Mississippi property. Such efforts may not contribute to the Company’s cash flows for the foreseeable future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon its ability to raise the necessary capital with which to satisfy liabilities, fund future costs and expenses and develop the Diamondhead, Mississippi property. Management’s plans in regard to these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ Friedman LLP | |
| We have served as the Company’s auditor since 2009 | |
Marlton, NJ |
|
April 12, 2019 |
| F-2 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | - | $ | 65 | ||||
| Other current assets | 16,608 | 370 | ||||||
| Total current assets | 16,608 | 435 | ||||||
| Land held for development (Note 3) | 5,476,097 | 5,476,097 | ||||||
| Other assets | 80 | 80 | ||||||
| Total assets | $ | 5,492,785 | $ | 5,476,612 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||
| Current liabilities | ||||||||
| Convertible notes and line of credit payable (Note 5) | $ | 1,962,500 | $ | 1,962,500 | ||||
| Debenture payable (net of unamortized finance costs of $1,194 at December 31, 2018 and $2,153 at December 31, 2017) (Note 6) | 48,806 | 47,847 | ||||||
| Convertible debentures payable (net of unamortized finance costs of $43,026 at December 31, 2018 and $71,394 at December 31, 2017) (Note 6) | 1,756,974 | 1,728,606 | ||||||
| Short term notes and interest bearing advance (Note 7) | 58,004 | 39,299 | ||||||
| Current notes payable due related parties (Note 8) | 309,015 | - | ||||||
| Accounts payable and accrued expenses due related parties (Note 4) | 4,141,814 | 3,427,168 | ||||||
| Accounts payable and accrued expenses – others (Note 4) | 2,840,306 | 2,424,040 | ||||||
| Total current liabilities | 11,117,419 | 9,629,460 | ||||||
| Notes payable due related parties (Note 9) | 115,000 | 202,628 | ||||||
| Notes payable due others (Note 9) | 72,500 | 87,500 | ||||||
| Total liabilities | 11,304,919 | 9,919,588 | ||||||
| Commitments and contingencies (Notes 3 and 12) | ||||||||
| Stockholders’ deficiency | ||||||||
| Preferred stock, $.01 par value; shares authorized 5,000,000, outstanding 2,086,000 at December 31, 2018 and 2017 (aggregate liquidation preference of $2,519,080 at December 31, 2018 and 2017). | 20,860 | 20,860 | ||||||
| Common stock, $.001 par value; shares authorized 50,000,000, issued: 39,052,472 at December 31, 2018 and 2017, outstanding: 36,297,576 at December 31, 2018 and 2017. | 39,052 | 39,052 | ||||||
| Additional paid-in capital | 35,430,445 | 35,526,362 | ||||||
| Unearned ESOP shares | (3,083,672 | ) | (3,202,274 | ) | ||||
| Accumulated deficit | (38,070,603 | ) | (36,679,875 | ) | ||||
| Treasury stock, at cost, 686,706 shares at December 31, 2018 and 607,161 shares at December 31, 2017. | (148,216 | ) | (147,101 | ) | ||||
| Total stockholders’ deficiency | (5,812,134 | ) | (4,442,976 | ) | ||||
| Total liabilities and stockholders’ deficiency | $ | 5,492,785 | $ | 5,476,612 | ||||
See the accompanying notes to these consolidated financial statements.
| F-3 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
| 2018 | 2017 | |||||||
| COSTS AND EXPENSES | ||||||||
| Administrative and general | $ | 643,269 | $ | 667,260 | ||||
| Stock-based compensation | 21,570 | - | ||||||
| Other | 69,546 | 64,107 | ||||||
| 734,385 | 731,367 | |||||||
| OTHER EXPENSE (INCOME) | ||||||||
| Net proceeds from litigation settlement | - | (20,000 | ) | |||||
| Interest expense: | ||||||||
| Related parties | 261,326 | 199,576 | ||||||
| Other | 293,417 | 298,758 | ||||||
| Other | - | (1,698 | ) | |||||
| 554,743 | 476,636 | |||||||
| NET LOSS | (1,289,128 | ) | (1,208,003 | ) | ||||
| PREFERRED STOCK DIVIDENDS | (101,600 | ) | (101,600 | ) | ||||
| NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ | (1,390,728 | ) | $ | (1,309,603 | ) | ||
| Net loss per common share, basic and fully diluted | $ | (.038 | ) | $ | (.036 | ) | ||
| Weighted average number of common shares outstanding, basic and fully diluted | 36,297,576 | 36,297,576 | ||||||
See the accompanying notes to these consolidated financial statements.
| F-4 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
YEARS ENDED DECEMBER 31,
| 2018 | 2017 | |||||||
| Preferred Stock | ||||||||
| Balance January 1 | $ | 20,860 | $ | 20,860 | ||||
| Balance December 31 | $ | 20,860 | $ | 20,860 | ||||
| Common Stock | ||||||||
| Balance January 1 | $ | 39,052 | $ | 39,052 | ||||
| Balance December 31 | $ | 39,052 | $ | 39,052 | ||||
| Additional Paid-In Capital | ||||||||
| Balance January 1 | $ | 35,526,362 | $ | 35,643,373 | ||||
| Stock-based compensation | 21,570 | - | ||||||
| ESOP defaulted shares | (117,487 | ) | (117,011 | ) | ||||
| Balance December 31 | $ | 35,430,445 | $ | 35,526,362 | ||||
| Unearned ESOP Shares | ||||||||
| Balance January 1 | $ | (3,202,274 | ) | $ | (3,320,875 | ) | ||
| Shares acquired from ESOP | 118,602 | 118,601 | ||||||
| Balance December 31 | $ | (3,083,672 | ) | $ | (3,202,274 | ) | ||
| Accumulated Deficit | ||||||||
| Balance January 1 | $ | (36,679,875 | ) | $ | (35,370,272 | ) | ||
| Preferred stock dividends | (101,600 | ) | (101,600 | ) | ||||
| Net loss for year | (1,289,128 | ) | (1,208,003 | ) | ||||
| Balance December 31 | $ | (38,070,603 | ) | $ | (36,679,875 | ) | ||
| Treasury Stock | ||||||||
| Balance January 1 | $ | (147,101 | ) | $ | (145,511 | ) | ||
| Shares acquired from ESOP | (1,115 | ) | (1,590 | ) | ||||
| Balance December 31 | $ | (148,216 | ) | $ | (147,101 | ) | ||
| Total Stockholders’ Deficiency | $ | (5,812,134 | ) | $ | (4,442,976 | ) | ||
See the accompanying notes to these consolidated financial statements.
| F-5 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
| 2018 | 2017 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,289,128 | ) | $ | (1,208,003 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization | 29,327 | 33,635 | ||||||
| Stock-based compensation | 21,570 | - | ||||||
| Change in assets and liabilities: | ||||||||
| Other assets | (16,238 | ) | (18 | ) | ||||
| Accounts payable and accrued expenses | 1,029,312 | 964,918 | ||||||
| Net cash used in operating activities | (225,157 | ) | (209,468 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from notes payable issued to related parties | 221,387 | 87,628 | ||||||
| Proceeds from notes payable issued to others | - | 65,000 | ||||||
| Proceeds from short term note | 8,355 | 44,454 | ||||||
| Payment of short term note | (4,650 | ) | (5,155 | ) | ||||
| Net cash provided by financing activities | 225,092 | 191,927 | ||||||
| Net decrease in cash | (65 | ) | (17,541 | ) | ||||
| Cash beginning of year | 65 | 17,606 | ||||||
| Cash end of year | $ | - | $ | 65 | ||||
| Cash paid for interest | $ | 1,307 | $ | 1,519 | ||||
| Unpaid preferred stock dividends included in accounts payable and accrued expenses | $ | 101,600 | $ | 101,600 | ||||
See the accompanying notes to these consolidated financial statements.
| F-6 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
Diamondhead Casino Corporation and its Subsidiaries (the “Company”) own a total of approximately 400 acres of unimproved land in Diamondhead, Mississippi (“the Property”). Active subsidiaries of the Company include Mississippi Gaming Corporation, which owns the approximate 400-acre site and Casino World, Inc.
The Company’s intent was to construct a casino resort and other amenities on the Property unilaterally or, in conjunction with one or more joint venture partners. However, the Company has been unable to date, to obtain financing to move the project forward and/or enter into a joint venture partnership. Due to its lack of financial resources and certain law suits filed against it, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. The Company’s preference is to sell only part of the Property inasmuch as this would appear to be in the best interest of the stockholders of the Company. However, there can be no assurance the Company will be able to sell only part of the Property. The Company intends to continue to pursue a joint venture partnership and/or other financing while seeking a viable purchaser for part or all of the Property. Thus, on March 25, 2019, Mississippi Gaming Corporation entered into a brokerage agreement with an unrelated third party to seek a buyer for all or part of the Property or, alternatively, to seek a joint venture partner for the project.
Note 2. Liquidity and Going Concern
These consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several years, has no operations, generates no operating revenues, and as reflected in the accompanying consolidated financial statements, incurred a net loss applicable to common stockholders of $1,390,728 for the year ended December 31, 2018. In addition, the Company had an accumulated deficit of $38,070,603 at December 31, 2018. Due to its lack of financial resources and certain law suits filed against it, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. In addition, in the event it becomes necessary in order to protect the Company’s assets, the Board of Directors has authorized the Company to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi property. That development is dependent upon the Company obtaining the necessary capital, through either equity and/or debt financing, unilaterally or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, open, and operate a casino resort.
In the past, in order to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds, through Private Placements of convertible instruments as well as through other secured notes which are more fully described in Notes 5, 6, 7 and 8 to these consolidated financial statements. The Company is in default with respect to payment of both principal and interest under the terms of most of these instruments. In addition, at December 31, 2018, the Company had $6,982,120 of accounts payable and accrued expenses and no cash on hand.
The above conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
Note 3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| F-7 |
Reclassifications
Certain reclassifications have been made to the 2017 financial statements to conform to the consolidated 2018 financial statements presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Land Held for Development
Land held for development is carried at cost. Costs directly related to site development, such as licensing, permitting, engineering, and other costs, are capitalized.
Land development costs, which have been capitalized, consist of the following at December 31, 2018 and 2017:
| Land held for development | $ | 4,934,323 | ||
| Licenses | 77,000 | |||
| Engineering and costs associated with permitting | 464,774 | |||
| $ | 5,476,097 |
Fair Value Measurements
The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable input that reflects management’s own assumptions.
Current assets and liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature.
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of December 31, 2018.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. The President and Chief Executive Officer is the sole Trustee of the Trust. Compensation expense was measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations.
| F-8 |
As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:
(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid; and (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.
For the years 2011 through 2018, the Company elected to temporarily suspend contributions to the Plan, in accordance with the loan pledge agreement between the Company and the ESOP Trust. For each year in which there was no contribution to the Plan, the Plan returned the 79,545 shares, which would have been allocated to employees annually, to treasury.
Income Taxes
Under the asset and liability method of ASC Topic 740, “Accounting for Income Taxes,” deferred tax liabilities and assets are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.
The Company follows the provisions of ASC Topic 740, “Accounting for Uncertainty in Income Taxes.” The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under this standard, an entity may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The standard also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods and requires increased disclosures. The Company does not have a liability for unrecognized tax benefits.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2018 and 2017, the Company has no accrued interest or penalties related to uncertain tax positions.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act was enacted into law and the new legislation contains key tax provisions that affect the company. The Company is required to recognize the effect of the tax law changes in the periods of enactment, such as determining the transition tax, measuring it to U.S. deferred tax assets and liabilities as well as reassessing the net realization of deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118), which allows the Company to record provisional amounts during a measurement period not extended beyond one year of the enactment date.
The Tax Reform Act lowers the corporate income tax rate from 35% to 21%. Aside from the effect on the Company’s net operating loss carryforward valuation allowance, the Act is not expected to have a material impact on the Company’s consolidated financial statements in the foreseeable future.
Net Loss per Common Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Potentially dilutive securities are excluded from the computation of diluted loss per shares since their effect would be antidilutive. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. The dilutive securities below do not include 5,055,555 potentially convertible Debentures, since the requirements for possible conversion had not yet been met and may never be met.
The table below summarizes the components of potential dilutive securities at December 31, 2018 and 2017.
| Description | December 31, 2018 | December 31, 2017 | ||||||
| Convertible Preferred Stock | 260,000 | 260,000 | ||||||
| Options to Purchase Common Shares | 3,415,000 | 3,415,000 | ||||||
| Convertible Promissory Notes | 1,925,000 | 1,925,000 | ||||||
| Total | 5,600,000 | 5,600,000 | ||||||
| F-9 |
Stock Based Compensation
The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. In the first quarter of 2018, the Board of Directors voted to extend the expiration dates of previously-awarded option grants from March 13, 2018 to December 31, 2020 with respect to the following: i) options previously granted to the President to purchase 750,000 shares of common stock at $0.30 per share, 75,000 shares of common stock at $0.75 per share and 2,000,000 shares of common stock at $0.19 per share; ii) options previously granted to the current Chairman of the Board to purchase 150,000 shares of common stock at $1.25 per share; iii) options previously granted to a Director of the Company to purchase 75,000 shares of common stock at $0.75; and iv) options previously granted to former employees of the Company to purchase a combined total of 65,000 shares of common stock at $0.75 per share. No share-based awards were issued or amended in 2017.
In determining the fair value of each option modified, the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility of 103% and a risk-free interest rate of 2.79%. This resulted in a charge to the statement of operations in the amount of $21,570 and had no effect on net loss per share of common stock for the year ending December 31, 2018.
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
Recent Accounting Pronouncements
In May 2017, the FASB issued Accounting Standards Update (“ASU) 2017-09 – Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting. The Update provides clarity and reduces cost and complexity when applying the guidance of Topic 718 to a change in the terms or conditions of a share-based payment award. The Update mandates that an entity should account for the effects of the modification unless all three of the following conditions are met:
i) the fair value of the modified award is the same as the fair value of the original award immediately before the modification.
ii) the vesting provisions of the modified award are the same as the original award immediately before the award is modified.
iii) the classification of the modified award as an equity instrument of a liability instrument is the same as the original award immediately before the award is modified.
The Update is effective for periods beginning after December 15, 2017 and was adopted by the Company in its 2018 financial statements. The Update had no effect on the Company’s 2018 financial statements.
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting” which addresses accounting for issuance of all share-based payments on the same accounting model. Previously, accounting for share-based payments to employees was covered by Accounting Standards Codification (“ASC”) Topic 718 while accounting for such payments to non-employees was covered by ASC Topic 505. As it considered recently issued updates to ASC Topic 718, the FASB, as part of its simplification initiatives, decided that ASC Topic 718 would also be used as the guidance for non-employee share-based awards. Under this new guidance, both employee and non-employee awards will essentially follow the same model, with small variances related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards. The ASU is effective beginning in calendar year 2019. The Company does not expect the amendments to have a material effect on its consolidated financial statements.
Note 4. Accounts Payable and Accrued Expenses
The table below outlines the elements included in accounts payable and accrued expenses at December 31, 2018 and 2017:
| December 31, | December 31, | |||||||
| Description | 2018 | 2017 | ||||||
| Related parties: | ||||||||
| Accrued payroll due officers | $ | 2,369,711 | $ | 2,069,711 | ||||
| Accrued interest due officers and directors | 1,029,062 | 767,737 | ||||||
| Accrued director fees | 478,750 | 393,750 | ||||||
| Base rents due to the President | 185,642 | 131,234 | ||||||
| Associated rental costs | 61,341 | 42,731 | ||||||
| Other | 17,308 | 22,005 | ||||||
| Total related parties | $ | 4,141,814 | $ | 3,427,168 | ||||
| Non-related parties: | ||||||||
| Accrued interest | $ | 1,743,658 | $ | 1,483,923 | ||||
| Accrued dividends | 762,000 | 660,400 | ||||||
| Accrued fines and penalties | 77,700 | 44,350 | ||||||
| Other accounts payable and accrued expenses | 256,948 | 235,367 | ||||||
| Total non-related parties | $ | 2,840,306 | $ | 2,424,040 | ||||
| F-10 |
Note 5. Convertible Notes and Line of Credit
Line of Credit
In 2008, the Company entered into an agreement with an unrelated third party for an unsecured Line of Credit up to a maximum of $1,000,000. The Line of Credit provided for funds to be drawn as needed and carries an interest rate on amounts borrowed of 9% per annum originally payable quarterly based on the pro rata number of days outstanding. All funds originally advanced under the facility were due and payable by November 1, 2012. As an inducement to provide the facility, the lender was awarded an immediate option to purchase 50,000 shares of common stock of the Company at $1.75 per share. In addition, the lender received an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share. The options expire following repayment in full by the Company of the amount borrowed.
As of December 31, 2009, the Company had borrowed all of the $1,000,000 available to it under the Line of Credit. Interest on this debt incurred prior to June 30, 2009 has been paid in full. The Company was unable to satisfy the principal obligation of $1,000,000 by the due date of November 1, 2012 or any interest which accrued on the obligation after June 30, 2009 and is in default under the repayment terms of the note. At December 31, 2018 and 2017, principal and accrued interest of $1,853,669 and $1,763,669, respectively, remains unpaid on this obligation.
Convertible Notes and Warrants
Pursuant to a Private Placement Memorandum dated March 1, 2010, the Company offered units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 with interest at 12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes was originally payable either in cash or common stock at the option of the Company. However, interest is now required to be paid in cash. The Company ultimately accepted subscriptions totaling $450,000 from unrelated subscribers and an additional $25,000 for one unit purchased by a Director of the Company. The five-year Warrants issued in connection with the units have expired. Accrued interest due on these notes at December 31, 2018 and 2017 amounted to $369,630 and $315,571, respectively.
Pursuant to an additional Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. Interest on the notes was originally payable in either cash or common stock at the option of the Company. However, interest is now required to be paid in cash. The Company accepted subscriptions totaling $512,500 from unrelated accredited investors. On July 2, 2011, the Company redeemed a note in the principal amount of $25,000 by issuing 50,000 shares of common stock. The five-year Warrants issued in connection with the units have expired. Accrued interest due on these notes at December 31, 2018 and 2017 amounted to $285,368 and $241.493, respectively.
The Convertible Notes issued pursuant to the two Private Placements discussed above total $962,500 in principal and became due and payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, all of the aforementioned debt obligations remain unpaid and in default under the repayment terms of the notes. In October 2017, the Company entered into a settlement with one of the convertible note holders who had previously sued the Company for payment of the note and accrued interest. Under terms of the settlement, a judgment was entered against the parent Company for the principal due under the note in the amount of $150,000 plus accrued interest on the note to the date of the judgment for a total of $244,537. Thereafter, the note holder will be entitled to interest at the Delaware statutory rate (currently 7%) on the entire amount of the judgment.
| F-11 |
The table below summarizes the Company’s convertible notes payable and line of credit at December 31, 2018 and 2017:
| Gross Amount | ||||
| Loan Facility | Owed | |||
| Line of Credit | $ | 1,000,000 | ||
| Private Placements: | ||||
| March 1, 2010 | 475,000 | |||
| October 25, 2010 | 487,500 | |||
| Total Private Placements | 962,500 | |||
| Total Notes Payable | $ | 1,962,500 | ||
Note 6. Convertible Debentures
Pursuant to a Private Placement Memorandum dated February 14, 2014 (the “Private Placement”), the Company offered up to a maximum of $3,000,000 of Collateralized Convertible Senior Debentures to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000. The Debentures, once issued, bear interest at 4% per annum after 180 days, mature six years from the date of issuance, and are secured by a lien on the Company’s Mississippi property. The debentures were offered in three tranches as follows:
(a) $1,000,000 of First Tranche Collateralized Convertible Senior Debentures convertible into an aggregate of 3,333,333 shares of Common Stock of the Company at a conversion price of $.30 per share (the “First Tranche Debentures”);
(b) $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures, convertible into an aggregate of 2,222,222 shares of Common Stock of the Company at a conversion price of $.45 per share (the “Second Tranche Debentures”); and
(c) $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures, convertible into either 1,818,182 shares of Common Stock or 1,333,333 shares of Common Stock of the Company, at a conversion price of $.55 or $.75 per share depending upon certain conditions described in the Private Placement Memorandum (the “Third Tranche Debentures”).
The conversion rights on each issued Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the conversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:
1. The issuance of any of the other Debentures in the Offering or the issuance of shares of Common Stock upon conversion of any of the Debentures in the Offering;
2. The issuance of any shares of Common Stock if such issuance relates to an agreement, arrangement or grant to issue shares of Common Stock entered into by the Company prior to the Issue Date of the First Tranche Debentures in the Offering, including but not limited to, for example, previously issued convertible promissory notes, previously issued warrants, previously issued options to purchase Common Stock, or common stock vested or to be issued pursuant to a pre-existing Employee Stock Ownership Plan.
| F-12 |
The Anti-Dilution Provisions with respect to a Debenture terminate the earlier of (a) the date (if ever) the Company receives an “Approval to Proceed” from the Mississippi Gaming Commission to develop a casino/hotel on the Property, (b) the date on which the Debenture is converted in full, (c) the date on which the Debenture is paid in full, or (d) the Final Maturity Date of the Debenture (as defined in the Debenture).
Since the issuance of the Debentures, there have been no events that would trigger the above anti dilution provisions. Should an event take place which would trigger the provision, the Company would be required to record dividend expense in an amount equal to the difference in the fair value of the embedded derivatives before the event versus the fair value of the derivative after the triggering event.
On March 31, 2014, the First Closing occurred when subscriptions in the amount of $3,000,000 were received in Escrow and accepted by the Company. The Escrow Agent released $1,000,000 to the Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000.
The Company’s stock registration was revoked effective September 4, 2014. Therefore, on December 4, 2014, the Company extended offers to the investors to amend the Private Placement. The Company offered to amend certain terms and conditions, including the conversion terms of the First Tranche Debentures, which were issued on March 31, 2014 (“Amendment I”). The Company separately offered to amend certain terms and conditions, including those relating to issuance and conversion of the Second and Third Tranche Debentures, as well as the period of time within which to perform the Third Tranche Closing Obligations, as amended (“Amendment II”).
On December 31, 2014, investors who had purchased $950,000 of First Tranche Debentures consented to the amended conversion terms of Amendment I. The remaining Debenture in the amount of $50,000 remains as originally issued with no conversion rights. Thus, the First Tranche Debentures can be converted into a total of 3,166,666 shares of common stock. On December 31, 2014, the Second Closing occurred when investors representing $850,000 of Second Tranche Debentures consented to Amendment II. The Escrow Agent released $850,000 to the Company and the Company issued Second Tranche Debentures in the aggregate principle amount of $850,000. Thus, the Second Tranche Debentures can be converted into 1,888,889 shares of common stock. The Escrow Agent refunded $300,000 to those investors who did not consent to Amendment II.
The Company did not meet the closing obligations for the Third Tranche Debentures as of June 30, 2015, as was required, pursuant to the terms of the Private Placement, as amended. Therefore, the remaining $850,000 being held in escrow for the purchase of the Third Tranche Debentures was returned to the investors in July 2015.
When originally issued, in the event the Company failed to meet the conditions for conversion of the Debentures, the First Tranche Convertible Debentures, which total $950,000, would have been due on March 31, 2020 and the Second Tranche Convertible Debentures, which total $850,000, would have been due December 31, 2020. The sole remaining non-convertible Debenture in the amount of $50,000 would have been due March 31, 2020. However, the Company is in default with respect to interest payments due under the Debentures and as a result, they are reported as current liabilities. Certain Debenture holders maintain that the Company is in default, not only with respect to interest due under the Debentures, but with respect to principal due under the Debentures in the amount of $1,850,000, as well. The ramifications of a potential default are more fully discussed in Notes 14 and 15 below.
Total accrued interest due on all outstanding Debentures amounted to $279,233 and $205,233 at December 31, 2018 and 2017, respectively.
Note 7. Short Term Notes and Interest Bearing Advance
Promissory Note
On June 9, 2017, the Company entered into a Promissory Note with an unrelated lender in exchange for proceeds in the amount of $15,000. Interest on the note is 12.5% per annum and payable March 1 of each year the note remains outstanding. Payment in full of the Note is due June 9, 2019. Mississippi Gaming Corporation, a wholly owned subsidiary of the Company, guaranteed the Note. In addition, the President of the Company agreed to personally guarantee the Note and to personally secure the Note with an assignment of proceeds due to her under the first lien on the Diamondhead property. The interest payment, which was due March 1, 2018, was not made. Accrued interest due on this obligation amounted to $2,928 and $1,053 at December 31, 2018 and 2017, respectively. This Note was classified as long term on the Company’s 2017 balance sheet (See Note 9).
Bank Credit Facility
Wells Fargo Bank provides an unsecured credit facility of up to $15,000 to the Company. The facility requires a variable monthly payment of amounts borrowed plus interest, which is applied at 11.24% on direct charges and 24.99% on any cash advanced through the facility. At December 31, 2018, a principal balance of $18,004 remained outstanding on the facility. The lending bank has since cancelled privileges under the facility for non-payment.
| F-13 |
Interest Bearing Advance
On February 2, 2017, the Company borrowed $25,000 from an unrelated third party. The Company expects to enter into a formal note for these funds however the terms of the note have not been finalized. The Note is expected to carry an annual interest rate of approximately 12.5% with a projected due date of December 31, 2017. The Company is in default and as such, the lender may increase the interest rate due by an amount of up to 3% per annum in excess of the rate then otherwise applicable. The Company does not have the funds to repay the advance. The President of the Company has agreed to personally secure the note with an assignment of proceeds due to her under the first lien on the Property. Accrued interest on this obligation amounted to $5,967 and $2,842 at December 31, 2018 and 2017, respectively.
The above short term notes and interest bearing advances total $58,004 in aggregate and all are in default under the original agreed to terms.
Note 8. Current Notes Payable Due Related Parties
In July, 2017, at the request of the Company, the current Chairman of the Board of Directors, who is also a Vice President of the Company (“the Chairman”), paid all property taxes due, together with all interest due thereon, to Hancock County, Mississippi on an approximate 400-acre tract of land, owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. The total amount advanced was $67,628.
The Chairman is one of the secured parties under that Land Deed of Trust recorded on September 26, 2014 in Hancock County, Mississippi, to secure Tranche I and Tranche II Debentures issued by the Company in 2014. Under paragraph 5 of the Land Deed of Trust, a secured party who advances sums for taxes due on the Property is secured by the same Land Deed of Trust, but only at that interest rate specified in the note representing the primary indebtedness, namely 4% per annum.
The Chairman advanced the $67,628 on condition that: (i) the advance constitute a lien with interest at 4% per annum under that Land Deed of Trust recorded September 26, 2014; (ii) he be paid additional interest of 11% per annum on the amount advanced and owing and that the full 11% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (iii) this additional interest obligation be treated as a separate and secured debt of the Company, to be evidenced by a separate note and is secured with a separate and third lien to be placed on the Property (hereafter “the Third Lien”); (iv) the entire obligation will be treated as an advance to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V); and (v) he be indemnified for any losses sustained on the sale of that common stock sold to cover the credit card payments. The Chairman has identified the common stock to be sold and will provide the Company with the documentation required to document the sale of said stock and to calculate the future loss, if any, on said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue, to the Chairman for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Property to secure this obligation for $100,000. This note was classified as long term on the Company’s 2017 balance sheet (See Note 9). Accrued interest on the note amounted to $18,762 and $8,610 at December 31, 2018 and 2017.
In March of 2018, the Board of Directors voted to increase up to an additional $200,000 the amount secured by the third lien in favor of the Chairman of the Board, for amounts advanced by the Chairman on behalf of the Company, on the following terms and conditions, namely, that (i) the advance constitutes a lien on the Property with interest at 15% per annum; (ii) that the full interest of 15% per annum is payable during any calendar year in which all or part of the amount advanced is due and owing or interest due thereon remains unpaid; (iii) that this debt be evidenced by a separate promissory note and is to be included in and secured with a third lien that is to be placed on the Diamondhead Property to secure previous advances made to the Company (hereafter “the Third Lien”); (iv) that he be indemnified for any losses sustained on the sale of his common stock in an unrelated publicly-traded company to be sold to cover this advance based on a sales price of approximately $2.80 per share with a cap on the maximum loss per share to be at a sales price of $10.00 per share; and (v) that the Chairman’s previous indemnification approved by the Board of Directors on July 24, 2017 with respect to any loss on the sale of the same stock also be capped at a maximum of $10.00 per share. The Chairman will provide the Company with the documentation required to document the sale of said stock and to calculate the losses on said stock for all amounts loaned to the Company from the sale of said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue to the Chairman, for an amount up to $200,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $200,000.
In November of 2018, the Board of Directors voted to increase up to an additional $100,000 of advances from the Chairman and in March of 2019, the Board of Directors voted to increase the limit of the advances to $200,000. The terms of this advance are identical to the terms as approved above in March 2018. However, the additional funds will be secured by a fourth lien to be placed on the Property in favor of the Chairman.
At December 31, 2018, the Chairman had advanced a total of $205,250 under both the March 2018 and November 2018 arrangements and was owed accrued interest in the amount of $30,788 at December 31, 2018.
| F-14 |
On July 24, 2017, the President of the Company, who is a Director of the Company, agreed to advance the Company up to $20,000 for the payment of expenses. In March of 2018, the Board of Directors voted to increase to up to $100,000 the amount to be secured by a third lien in favor of the President of the Company for amounts advanced by the President under this note, on the following terms and conditions, namely, that (i) she be paid interest of 15% per annum on the amount advanced and owing and that the full 15% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (ii) the obligation in the maximum principal amount of $100,000 with interest due thereon be treated as a secured debt of the Company, to be evidenced by a separate note and to be secured with a separate lien to be placed on the Diamondhead Property (“the Third Lien”) together with the Chairman’s Third Lien, as well as a first lien to be placed on the residential lot owned by the Company; (iii) that the Third Lien on the Diamondhead Property also include the two loans ($25,000 and $15,000) and interest due thereon and credit facilities in the maximum amount of $15,000; and (iv) that the foregoing will be treated as advances to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V).
As of December 31, 2018 and 2017, the President had advanced a total of $36,137 and $20,000, respectively, under this agreement. The President previously agreed to secure a $25,000 loan and interest due thereon and to secure and guarantee a $15,000 loan and interest due thereon due non-related parties discussed above. The President is also personally liable for certain bank-issued credit cards used by the Company to pay expenses incurred by the Company in the approximate amount of $18,000. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from date of issue, to the President for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $100,000. The amount advanced in 2017 in the amount of $20,000, was classified as long term on the Company’s 2017 balance sheet (See Note 9). Accrued interest due on this note amounted to $8,421 and $3,000 at December 31, 2018 and 2017, respectively.
The third lien placed on the Diamondhead Property, which secures the above three promissory notes, totals up to $400,000 and is payable to the Chairman of the Board ($300,000) and President ($100,000) of the Company.
The principal balance of the notes payable to the officers and directors discussed above, are due in June 2019 and total $309,015 in aggregate. All amounts advanced in the prior year were presented as long term liabilities of the Company at December 31, 2017, but were recorded as current liabilities on the Company’s December 31, 2018 balance sheet.
Note 9. Long-Term Notes Payable
In 2016, the Company received cash advances totaling $47,500 from seven lenders which included $25,000 from three current Directors of the Company. The proceeds from the cash advances were earmarked for the payment of accounting and auditing fees and other expenses required to file the Company’s Form 10-Q. On August 25, 2016, the Company issued a Note to the foregoing lenders, which matures four years from the date of issuance and bears interest at 8% per annum, with a full year of interest accruing in any year in which the advance remains unpaid. Accrued interest due on the above notes amounted to $11,400 and $7,600 at December 31, 2018 and 2017, respectively.
In the third quarter of 2016, the Chairman of the Board of Directors of the Company loaned the Company $90,000. On August 25, 2016, the Company issued a Note to the Chairman of the Board. The Note bears interest at 14% per annum effective August 1, 2016 and matures four years from the date of issuance. The proceeds of the loan were used for the payment of Mississippi property taxes and auditing, accounting and other corporate expenses. Accrued interest due on the above note amounted to $30,482 and $17,882 at December 31, 2018 and 2017, respectively.
The principal due under the two foregoing loan arrangements totals $137,500. The Company has filed a second lien on its Mississippi property in favor of the note holders to secure both principal and interest in the maximum amount of $250,000. The lien is second to the existing first lien on the Mississippi property in the principal amount of $3.85 million.
| F-15 |
In October 2017, the Company entered into a settlement with a holder of $150,000 of convertible notes as described in Note 5 above. As part of the settlement, the Company agreed to pay legal fees in the amount of $50,000 and issued a four year note at 0% interest to satisfy this obligation.
The table below summarizes the Company’s long-term notes payable as of December 31, 2018 and December 31, 2017:
Principal |
Amount Due |
Amount Due |
||||||||||
| Loan Facility | Owed | Related Parties | Others | |||||||||
| 4 Year 8% secured note | $ | 47,500 | $ | 25,000 | $ | 22,500 | ||||||
| 4 Year 14% secured note | 90,000 | 90,000 | - | |||||||||
| 4 Year 0% note | 50,000 | - | 50,000 | |||||||||
| Total Due December 31, 2018 | $ | 187,500 | $ | 115,000 | $ | 72,500 | ||||||
| 2 Year 12.5% secured note – See Note 7. | $ | 15,000 | $ | - | $ | 15,000 | ||||||
| 2 Year 4%/15% secured | ||||||||||||
| note due Chairman – See Note 8. | 67,628 | 67,628 | - | |||||||||
| 2 Year 15% secured note | ||||||||||||
| due President – See Note 8. | 20,000 | 20,000 | - | |||||||||
| Total Due December 31, 2017 | $ | 290,128 | $ | 202,628 | $ | 87,500 | ||||||
Note 10. Related Party Transactions
The President of the Company is owed deferred salary in the principal amount of $2,166,996 and the Vice President and current Chairman of the Board of the Company is owed deferred salary in the principal amount of $121,140 as of December 31, 2018. On October 12, 2012 the Board of Directors approved a motion to pay these individuals interest on their deferred compensation retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. Accrued interest through December 31, 2018 and 2017 amounted to $876,074 and $684,708, respectively.
Effective September 1, 2011, the Company entered into a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space in a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance, real estate taxes, expenses and utilities. Rent expense associated with this lease amounted to base rent in the amount of $54,408 and associated rental costs of $18,610 for a total of $73,108 for the year ended December 31, 2018 and base rent in the amount of $54,408 and associated rental costs of $15,140 for a total of $69,548 for the year ended December 31, 2017. The Company did not pay any of the base rent due in 2018 or 2017.
Effective January 1, 2013, the directors of the Company are compensated at a rate of $15,000 per annum. Each Director is eligible for an annual payment in the amount of $15,000 as long as they remain a Director through December 31 of the applicable year, absent death or incapacitation. The annual payment to new directors is prorated based upon months served in their initial year as a Director.
The Company has been unable to pay directors’ fees to date. As of December 31, 2018 and 2017 a total of $478,750 and $393,750 respectively, was due and owing to the Company’s directors. Directors have previously been compensated and may, in the future, be compensated for their services with Common Stock or options to purchase Common Stock of the Company. Directors are reimbursed for expenses incurred in attending meetings. Directors may be paid a consulting fee for services performed outside the scope of their directorship.
See notes 7, 8, 12 and 14 for other related party transactions.
Note 11. Stockholders’ Equity
At December 31, 2018 and 2017, the Company had a stock option plan and non-plan options, which are described below.
Non-Plan Stock Options
On January 3, 2018, the Board of Directors voted to extend from March 13, 2018 to December 31, 2020, the expiration date for a total of 3,115,000 currently outstanding options previously issued to the Chairman, the President, the Vice President and two former employees of the Company. The Company recorded stock-based compensation expense of $21,570.
| F-16 |
Stock Option Plan
On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to 1,000,000 shares of the Company’s common stock. Accordingly, the Company reserved 1,000,000 shares for issuance under the Plan. The exercise price may not be less than 100% of the market value of the shares on the date of the grant. The options expire within ten years from the date of grant. At December 31, 2018, no options from this plan were issued or exercised.
Summary of Stock Options
A summary of the status of the Company’s fixed Plan and non-plan options as of December 31, 2018 and 2017, and changes during the years ended December 31, 2018 and 2017 is presented below.
| December 31, 2018 | December 31, 2017 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Shares | Price | Shares | Price | |||||||||||||
| Outstanding at beginning of year | 3,415,000 | $ | .44 | 3,415,000 | $ | .44 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Outstanding at end of year | 3,415,000 | $ | .44 | 3,415,000 | $ | .44 | ||||||||||
| Options exercisable at year-end | 3,415,000 | 3,415,000 | ||||||||||||||
| Weighted-average fair value of options granted during the year | $ | .00 | $ | .00 | ||||||||||||
The following tables summarize information about stock options outstanding and exercisable at December 31, 2018 and 2017:
December 31, 2018
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted- | ||||||||||||||||||||
| Number | Average | Weighted | Number | Weighted- | ||||||||||||||||
| Range of | Outstanding | Remaining | Average | Exercisable | Average | |||||||||||||||
| Exercise | At | Contractual | Exercise | At | Exercise | |||||||||||||||
| Prices | 12/31/18 | Life (Yrs.) | Price | 12/31/18 | Price | |||||||||||||||
| $ | .19 | 2,000,000 | 2.0 | $ | .19 | 2,000,000 | $ | .19 | ||||||||||||
| $ | .30 | 750,000 | 2.0 | .30 | 750,000 | .30 | ||||||||||||||
| $ | .75 | 215,000 | 2.0 | .75 | 215,000 | .75 | ||||||||||||||
| $ | 1.25 | 150,000 | 2.0 | 1.25 | 150,000 | 1.25 | ||||||||||||||
| $ | 1.75 | 300,000 | (a) | 1.75 | 300,000 | 1.75 | ||||||||||||||
| 3,415,000 | 3,415,000 | |||||||||||||||||||
December 31, 2017
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted- | ||||||||||||||||||||
| Number | Average | Weighted | Number | Weighted- | ||||||||||||||||
| Range of | Outstanding | Remaining | Average | Exercisable | Average | |||||||||||||||
| Exercise | At | Contractual | Exercise | At | Exercise | |||||||||||||||
| Prices | 12/31/17 | Life (Yrs.) | Price | 12/31/17 | Price | |||||||||||||||
| $ | .19 | 2,000,000 | .20 | $ | .19 | 2,000,000 | $ | .19 | ||||||||||||
| $ | .30 | 750,000 | .20 | .30 | 750,000 | .30 | ||||||||||||||
| $ | .75 | 215,000 | .20 | .75 | 215,000 | .75 | ||||||||||||||
| $ | 1.25 | 150,000 | .20 | 1.25 | 150,000 | 1.25 | ||||||||||||||
| $ | 1.75 | 300,000 | (a) | 1.75 | 300,000 | 1.75 | ||||||||||||||
| 3,415,000 | 3,415,000 | |||||||||||||||||||
| F-17 |
(a) These options expire upon payment in full of an outstanding note payable with an original due date of November 1, 2012. The note payable remains outstanding at December 31, 2018 and 2017.
Warrants
The Company has previously issued warrants to purchase shares of the Company’s common stock in conjunction with convertible promissory notes issued in private placements dated March 25, 2010 and October 25, 2010. The Company also issued warrants in conjunction with a private placement of shares of the Company’s common stock dated July 1, 2012. The Company also issued warrants for brokerage services rendered for issuance of convertible debentures in 2014.
A total of 1,061,500 warrants expired during the year ended December 31, 2017 and as of December 31, 2018, there are no warrants outstanding.
Preferred Stock
Series S Preferred Stock
On June 14, 1993, the Company issued 926,000 shares of $.01 par value Series S Voting, Non-Convertible Preferred Stock to Austroinvest International, Inc. in exchange for proceeds of $1,000,080. The Company is required to pay quarterly cumulative dividends of three percent per annum on these shares.
These shares may be redeemed at the option of the Company at $1.08 per share plus $.0108 per share for each quarter that such shares are outstanding for a total of $2.18 per share at December 31, 2018. The shares also have a $1.08 per share preference in involuntary liquidation of the Company. At December 31, 2018 and 2017, outstanding Series S preferred stock totaled 926,000 shares. Cumulative dividends in arrears at December 31, 2018 and 2017 amounted to $225,000 and $195,000 respectively.
Series S-NR Preferred Stock
On September 13, 1993, the Company issued 900,000 shares of its $.01 par value Series S-NR Voting, Non-Convertible, Non-Redeemable, Preferred Stock to Serco International Limited (a wholly-owned subsidiary of Austroinvest International, Inc.), in exchange for proceeds of $999,000. The Company is required to pay quarterly, non-cumulative dividends of three percent per annum on these shares. Upon involuntary liquidation of the Company, the liquidation preference of each share is $1.11. At December 31, 2018 and 2017, outstanding Series S-NR preferred stock totaled 900,000 shares. Non-cumulative dividends in arrears at December 31, 2018 and 2017 amounted to $225,000 and $195,000 respectively.
Series S-PIK Preferred Stock
In March 1994, the Company offered, pursuant to Regulation S, one million units at $5.50 per unit, each unit consisting of one share of the Company’s $.001 par value common stock and two shares of the Company’s Series S-PIK Junior, cumulative, convertible, non-redeemable, non-voting $.01 par value preferred stock. Each share of Series S-PIK preferred stock is convertible into one share of the Company’s common voting stock at any time after February 15, 1995. No shares were converted during 2018 or 2017. The Series S-PIK preferred stock ranks junior to the Series S and Series S-NR preferred shares as to the distribution of assets upon liquidation, dissolution, or winding up of the Company. Upon liquidation of the Company, the S-PIK preferred stock will have a liquidation preference of $2.00 per share. A cumulative quarterly dividend of $0.04 per share is payable on Series S-PIK preferred stock. At December 31, 2018 and 2017, outstanding Series S-PIK preferred stock totaled 260,000 shares. Cumulative dividends in arrears at December 31, 2018 and 2017 amounted to $312,000 and $270,400, respectively.
Payment of Preferred Dividends
The Company did not pay any dividends due on its preferred stock in 2018 or 2017. However, payment of all cumulative and non-cumulative preferred stock dividends, outstanding at any time, is required before the Company can issue any dividends on its common stock.
| F-18 |
Note 12. Employee Stock Ownership Plan
The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan and an employee stock ownership plan. All employees having one year of service are eligible to participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The shares of common stock are pledged to the Company as security for the loans. The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In the event that the Company elects not to make a Plan contribution in any given year, the corresponding shares applicable to that year are released from the Trust to the Company in consideration of that years’ note payment. In January 2001, the Plan and accompanying promissory notes were amended to conform to the Company’s current employment structure, by extending the note repayment terms through 2044.
Assuming a Plan contribution is made, shares are allocated to the participants’ accounts in relation to repayments of the loans from the Company. At December 31, 2018, a total of 2,068,190 shares with a fair market value of $28,955 were unearned.
In 2011, the Company decided to temporarily suspend contributions to the Plan. Therefore the Trust was unable to make its annual loan payment to the company and a loan default occurred. In accordance with the Pledge Agreement between the Company and the Trust, the shares attached to the loan payments subsequent to the 2010 contribution reverted back to the Company as treasury shares. In 2018, 79,545 shares, with a market value of $1,115, reverted back to the Company as treasury shares. In 2017, 79,545 shares, with a market value of $1,590, reverted back to the Company as treasury shares.
Note 13. Income Taxes
At December 31, 2018, the Company had net operating loss carryforwards for income taxes of approximately $12.7 million, which expire during various periods through 2038. Realization of deferred income taxes as of December 31, 2018 and 2017 is not considered likely. Therefore, by applying a federal statutory rate of 21% to the carryforward amounts, a valuation allowance of approximately $2.7 million and $2.9 million, has been established for each year for the entire amount of deferred tax assets relative to the net operating loss at December 31, 2018 and 2017, respectively, resulting in an effective tax rate of 0% and no deferred tax asset recognition. The valuation allowance decreased by approximately $245,000 in 2018 and increased by $145,000 in 2017.
Enactment of corporate tax law changes in 2018 may limit the utilization of post 2017 net operating loss carryforwards.
Note 14. Commitments and Contingencies
| Leases |
Effective September 1, 2011, the Company entered into a month-to-month lease with the President and CEO of the Company for office space in a building owned by the President and CEO in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 or $54,408 per annum and payment of associated costs of insurance, real estate taxes, expenses and utilities.
Base rent and associated rental expenses totaled $73,018 in 2018 and $69,548 in 2017.
The Company is not liable for future minimum lease payments.
Management Agreement
On June 19, 1993, two subsidiaries of Diamondhead Casino Corporation, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. Management of the Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.
| F-19 |
Related Party
On July 26, 2017, the Chairman paid $67,628 for all property taxes due, together with all interest due thereon, to Hancock County, Mississippi on an approximate 400-acre tract of land (“the Property”), owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. The taxes had to be paid by July 31, 2017 to avoid a tax sale. The conditions of the note under which the Chairman agreed to make this payment are discussed in full detail in Note 6 of these consolidated financial statements.
Of particular note to those conditions, item (v) calls for him to be indemnified for any losses sustained on the sale of that common stock sold to cover the above payments. The Chairman has identified the common stock sold and has provided the Company with the documentation required to document the sale of said stock and to calculate the contingent future loss, if any, on said stock.
Had the Company paid the note in full at December 31, 2018, in addition to the principal and interest due, the company would have been additionally liable for approximately $124,260 in additional funds to indemnify the Chairman for his lost equity on the stock sale.
Other
The Company’s obligations under the Collateralized Convertible Senior Debentures are secured by a lien on the Company’s Mississippi property (the “Investors Lien”). On March 31, 2014, the Company issued $1 million of First Tranche Collateralized Convertible Senior Debentures and on December 31, 2014 the Company issued $850,000 of Second Tranche Collateralized Convertible Senior Debentures. Thus, liens were placed on the Property in favor of the Investors for $1,850,000. The Investors Lien is in pari passu with a lien placed on the Property in favor of the President of the Company, the Vice President of the Company, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the “Executives Lien”). The CEO will serve as Lien Agent for the Executives Lien.
The Company has filed a second lien in the maximum amount of $250,000 on the Property to secure the notes payable totaling $137,500 and accrued interest incurred. Details of these notes as more fully described in Note 9, above.
The Company has filed a third lien in the maximum amount of $400,000 on the Property to secure the notes payable totaling $309,015 and accrued interest incurred. Details of these notes as more fully described in Note 8, above.
The Company is currently delinquent in filing those documents and forms required to be filed in connection with its Employee Stock Ownership Plan (“ESOP”) for the year ended December 31, 2017, 2016 and 2015. The Company did not have the funds to pay professionals to prepare, audit and file these documents and forms when due. Although these required filings normally do not result in any tax due to an agency of the government, the Company could be subject to significant penalties for failure to file these forms when due. Penalties are assessed by the Department of Labor on a per diem basis from the original due dates for the required informational filings until the filings are actually made. The Company has accrued $77,700 on the current delinquent filings. The Company intends to bring its ESOP-required filings current and when current, will attempt to enroll in a voluntary compliance program with the Department of Labor with respect to any penalties or fines incurred. However, there can be no assurance the Company will be able to enroll in any such program or obtain a reduction of the fines and penalties that may be due.
The Company has not filed its consolidated federal tax returns for the years ended December 31, 2018, 2017 and 2016. The Company believes no tax is due with that return. Casino World, Inc. a wholly owned subsidiary of the Company, is delinquent with respect to the filing of their franchise tax annual reports for 2018, 2017 and 2016 with the state of Delaware and the state of Mississippi.
The Company has made provision for the expected taxes due on these state filings in their consolidated financial statements for the years ending December 31, 2018 and 2017.
| F-20 |
Note 15. Pending and Threatened Litigation
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, the above-named Debenture holders filed a Complaint against Diamondhead Casino Corporation (the Company) in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on October 31, 2016. On November 21, 2016, the Company filed a motion to dismiss for lack of subject matter jurisdiction due to failure to plead diversity. On February 21, 2017, the plaintiffs filed a motion for leave to amend their complaint based upon declarations of citizenship filed with the court. On September 26, 2017, the motion for leave to amend was granted and the Company’s motion to dismiss was granted in part and denied in part. The Court also granted plaintiffs leave to file a Second Amended Complaint which was filed on October 2, 2017. On October 16, 2017, the Company filed Defendant’s Answer and Affirmative Defenses and Counterclaim. On November 2, 2017, the Plaintiffs filed an Answer to the Counterclaim. The parties have exchanged discovery in the case. On September 27, 2018, the Plaintiffs’ filed a motion for summary judgment. On October 18, 2018, the Company filed its opposition to the motion for summary judgment. On November 8, 2018, the Plaintiff’s filed their reply to the Company’s opposition. On January 2, 2019, the Court canceled the trial previously scheduled for March 22, 2019. On April 2, 2019, the Court heard argument on the Plaintiff’s motion for summary judgment. On April 3, 2019, the Court scheduled a teleconference for April 15, 2019 for the parties to discuss alternative dispute resolution with a Magistrate.
John Hawley, as servicing agent for Argonaut 2000 Partners, L.P. v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N19C-02-239 RRC)
On February 28, 2019, the above-named Debenture holder filed a Complaint against Diamondhead Casino Corporation (the Company) in the Superior Court of the State of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiff is seeking $100,000, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on March 8, 2019. On March 28, 2019, the Company filed its Answer, Affirmative Defenses and Counterclaim and Affidavit of Defense.
Arnold J. Sussman, Robert Skaff and David J. Towner v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N18C-11-091-WCC )
On November 9, 2018, Sussman filed suit against the Company for breach of a Promissory Note issued November 10, 2010, in the principal amount of $50,000, with interest payable at 9% per annum, with a maturity date of November 10, 2012. Plaintiff seeks payment of principal of $50,000 and interest due from June 30, 2012 to present, which Plaintiff alleges is approximately $28,500 as of October 31, 2018. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. On December 6, 2018, the Company’s registered agent was served with the Sussman Complaint. On November 28, 2018, Skaff and Towner also filed suit against the Company in the same court for breach of Promissory Notes (Case No. N18C-11-232 ALR). Skaff filed suit i) for breach of a note issued on November 29, 2010, in the principle amount of $37,500 with interest payable at 9% per annum, with a maturity date of November 29, 2012 and ii) for breach of a note issued on June 21, 2011, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of June 21, 2013. Towner filed suit for breach of a note issued on November 29, 2010, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of November 29, 2012. Skaff alleges interest is due on his two notes from June 30, 2012 in the amount of $36,038.21 as of November 28, 2018. Towner alleges interest is due on his note from June 30, 2012 in the amount of $14,413.96 as of November 28, 2018. On December 6, 2018, the Company’s registered agent was served with the Skaff and Towner Complaint. All of the foregoing Notes, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. Counsel for the Plaintiffs in the foregoing cases requested that the cases be consolidated and the Company agreed to the consolidation. On February 15, 2019, the Plaintiffs filed their Consolidated Complaint. On March 7, 2019, the Company filed its Answer and Affirmative Defenses and Affidavit of Defense.
Note 16. Subsequent Events
On September 1, 2016, the Company was awarded $54,886 in attorneys’ fees and expenses against the six Petitioners who filed a Chapter 7 Involuntary Bankruptcy Petition against the Company in or about August 2015. The Bankruptcy Court found that the Petition had been filed in bad faith and for improper purposes. In November 2016, the Company recorded and enrolled the Delaware judgment in the Montgomery County Circuit Court of Maryland. One Petitioner, Arnold Sussman, filed a Motion to Reopen and Vacate Foreign Judgment. The Company settled with another Petitioner for $20,000. The Circuit Court denied Sussman’s Motion to Reopen and Vacate Foreign Judgment. Sussman appealed to the Court of Special Appeals which affirmed the judgment of the lower court. Sussman then filed a Petition for a Writ of Certiorari in the Maryland Court of Appeals, which denied the Petition. The Company has collected the $36,000 Sussman was required to post as a bond with the Circuit Court to stay enforcement of the judgment. The Company intends to pursue the remaining interest due on the judgment.
In the first quarter of 2019, the President advanced additional funds totaling $15,860 under the terms of her arrangement dated July 24, 2017 as more fully described in Note 8 of these consolidated financial statements. These funds were used primarily to pay those taxes and penalties required to reinstate the Company and Mississippi Gaming Corporation in both Delaware and Mississippi. In March 2019, the President was reimbursed for these advances from the $36,000 collected from Sussman in the above-referenced case.
In the first quarter of 2019, the Chairman advanced additional funds totaling $20,737 with the approval of the Board of Directors which voted on March 11, 2019 to increase up to an additional $200,000 of advances from the Chairman. The terms of this advance are identical to the terms of prior advances approved in March 2018 and more fully described in Note 8 of these consolidated financial statements. However, the additional funds will be secured by a fourth lien to be filed by the Company in favor of the Chairman.
On March 25, 2019, Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company and the title owner of the Diamondhead Property (the "Owner"), entered into an agreement with an unrelated commercial real estate brokerage firm to sell all or part of the Diamondhead, Mississippi Property or, alternatively, to find a joint venture partner for the project. The agreement provides for an exclusive right to sell all or part of the Property beginning March 25, 2019 and ending October 31, 2019, unless extended by the parties. The agreement provides for a commission equal to three percent (3%) of the gross sales price for property sold if the Buyer does not have a broker or four percent (4%) of the gross sales price of property sold if the Buyer does have a broker, in which case the commission due will be split between the brokers. In the event the Owner consummates and closes a deal with a Joint Venture Partner introduced to the Owner by the broker, the Owner will pay the broker a commission equal to four percent (4%) of the amount contributed by the Joint Venture Partner as its capital contribution. This will not apply in the event the Owner consummates a deal with a Joint Venture Partner who is not introduced to the Owner by the broker. The agreement does not apply to loans obtained by or on behalf of the Owner using the Property as collateral or as security for a loan. The agreement also provides for a reduced commission to the broker in the event of a sale to certain potential purchasers already involved in discussions with the Owner.
| F-21 |
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2018 |
Apr. 09, 2019 |
Jun. 30, 2018 |
|
| Document And Entity Information | |||
| Entity Registrant Name | DIAMONDHEAD CASINO CORP | ||
| Entity Central Index Key | 0000844887 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2018 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filer | No | ||
| Entity Reporting Status Current | Yes | ||
| Entity Filer Category | Non-accelerated Filer | ||
| Entity Small Business Flag | true | ||
| Entity Emerging Growth Company | false | ||
| Entity Ex Transition Period | false | ||
| Entity Shell Company | false | ||
| Entity Public Float | $ 974,126 | ||
| Entity Common Stock, Shares Outstanding | 36,297,576 | ||
| Trading Symbol | DHCC | ||
| Document Fiscal Period Focus | FY | ||
| Document Fiscal Year Focus | 2018 |
Consolidated Balance Sheets (Parenthetical) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Preferred stock, par value | $ 0.01 | $ 0.01 |
| Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
| Preferred stock, shares outstanding | 2,086,000 | 2,086,000 |
| Preferred stock, liquidation preference, value | $ 2,519,080 | $ 2,519,080 |
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 50,000,000 | 50,000,000 |
| Common stock, shares issued | 39,052,472 | 39,052,472 |
| Common stock, shares outstanding | 36,297,576 | 36,297,576 |
| Treasury stock, shares | 686,706 | 607,161 |
| Corporate Debt Securities [Member] | ||
| Unamortized discount | $ 1,194 | $ 2,153 |
| Convertible Senior Debentures [Member] | ||
| Unamortized discount | $ 43,026 | $ 71,394 |
Consolidated Statements of Operations - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| COSTS AND EXPENSES | ||
| Administrative and general | $ 643,269 | $ 667,260 |
| Stock-based compensation | 21,570 | |
| Other | 69,546 | 64,107 |
| Total costs and expenses | 734,385 | 731,367 |
| OTHER EXPENSE (INCOME) | ||
| Net proceeds from litigation settlement | (20,000) | |
| Interest expense | ||
| Related parties | 261,326 | 199,576 |
| Other | 293,417 | 298,758 |
| Other | (1,698) | |
| Total other expense | 554,743 | 476,636 |
| NET LOSS | (1,289,128) | (1,208,003) |
| PREFERRED STOCK DIVIDENDS | (101,600) | (101,600) |
| NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ (1,390,728) | $ (1,309,603) |
| Net loss per common share, basic and fully diluted | $ (.038) | $ (.036) |
| Weighted average number of common shares outstanding, basic and fully diluted | 36,297,576 | 36,297,576 |
Consolidated Statements of Changes in Stockholders' Deficiency - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Preferred Stock [Member] | ||
| Balance | $ 20,860 | $ 20,860 |
| Balance | 20,860 | 20,860 |
| Common Stock [Member] | ||
| Balance | 39,052 | 39,052 |
| Balance | 39,052 | 39,052 |
| Additional Paid-In Capital [Member] | ||
| Balance | 35,526,362 | 35,643,373 |
| Stock-based compensation | 21,570 | |
| ESOP defaulted shares | (117,487) | (117,011) |
| Balance | 35,430,445 | 35,526,362 |
| Unearned ESOP Shares [Member] | ||
| Balance | (3,202,274) | (3,320,875) |
| Shares acquired from ESOP | 118,602 | 118,601 |
| Balance | (3,083,672) | (3,202,274) |
| Accumulated Deficit [Member] | ||
| Balance | (36,679,875) | (35,370,272) |
| Preferred stock dividends | (101,600) | (101,600) |
| Net loss for year | (1,289,128) | (1,208,003) |
| Balance | (38,070,603) | (36,679,875) |
| Treasury Stock [Member] | ||
| Balance | (147,101) | (145,511) |
| Shares acquired from ESOP | (1,115) | (1,590) |
| Balance | (148,216) | (147,101) |
| Balance | (4,442,976) | |
| Net loss for year | (1,289,128) | (1,208,003) |
| Balance | $ (5,812,134) | $ (4,442,976) |
Consolidated Statements of Cash Flows - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| OPERATING ACTIVITIES | ||
| Net loss | $ (1,289,128) | $ (1,208,003) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Amortization | 29,327 | 33,635 |
| Stock-based compensation | 21,570 | |
| Change in assets and liabilities: | ||
| Other assets | (16,238) | (18) |
| Accounts payable and accrued expenses | 1,029,312 | 964,918 |
| Net cash used in operating activities | (225,157) | (209,468) |
| FINANCING ACTIVITIES | ||
| Proceeds from notes payable issued to related parties | 221,387 | 87,628 |
| Proceeds from notes payable issued to others | 65,000 | |
| Proceeds from short term note | 8,355 | 44,454 |
| Payment of short term note | (4,650) | (5,155) |
| Net cash provided by financing activities | 225,092 | 191,927 |
| Net decrease in cash | (65) | (17,541) |
| Cash beginning of year | 65 | 17,606 |
| Cash end of year | 65 | |
| Cash paid for interest | 1,307 | 1,519 |
| Unpaid preferred stock dividends included in accounts payable and accrued expenses | $ 101,600 | $ 101,600 |
Organization and Business |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Organization and Business |
Note 1. Organization and Business
Diamondhead Casino Corporation and its Subsidiaries (the “Company”) own a total of approximately 400 acres of unimproved land in Diamondhead, Mississippi (“the Property”). Active subsidiaries of the Company include Mississippi Gaming Corporation, which owns the approximate 400-acre site and Casino World, Inc.
The Company’s intent was to construct a casino resort and other amenities on the Property unilaterally or, in conjunction with one or more joint venture partners. However, the Company has been unable to date, to obtain financing to move the project forward and/or enter into a joint venture partnership. Due to its lack of financial resources and certain law suits filed against it, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. The Company’s preference is to sell only part of the Property inasmuch as this would appear to be in the best interest of the stockholders of the Company. However, there can be no assurance the Company will be able to sell only part of the Property. The Company intends to continue to pursue a joint venture partnership and/or other financing while seeking a viable purchaser for part or all of the Property. Thus, on March 25, 2019, Mississippi Gaming Corporation entered into a brokerage agreement with an unrelated third party to seek a buyer for all or part of the Property or, alternatively, to seek a joint venture partner for the project. |
Liquidity and Going Concern |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Liquidity and Going Concern |
Note 2. Liquidity and Going Concern
These consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several years, has no operations, generates no operating revenues, and as reflected in the accompanying consolidated financial statements, incurred a net loss applicable to common stockholders of $1,390,728 for the year ended December 31, 2018. In addition, the Company had an accumulated deficit of $38,070,603 at December 31, 2018. Due to its lack of financial resources and certain law suits filed against it, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. In addition, in the event it becomes necessary in order to protect the Company’s assets, the Board of Directors has authorized the Company to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi property. That development is dependent upon the Company obtaining the necessary capital, through either equity and/or debt financing, unilaterally or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, open, and operate a casino resort.
In the past, in order to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds, through Private Placements of convertible instruments as well as through other secured notes which are more fully described in Notes 5, 6, 7 and 8 to these consolidated financial statements. The Company is in default with respect to payment of both principal and interest under the terms of most of these instruments. In addition, at December 31, 2018, the Company had $6,982,120 of accounts payable and accrued expenses and no cash on hand.
The above conditions raise substantial doubt as to the Company’s ability to continue as a going concern. |
Summary of Significant Accounting Policies |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies |
Note 3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2017 financial statements to conform to the consolidated 2018 financial statements presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Land Held for Development
Land held for development is carried at cost. Costs directly related to site development, such as licensing, permitting, engineering, and other costs, are capitalized.
Land development costs, which have been capitalized, consist of the following at December 31, 2018 and 2017:
Fair Value Measurements
The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable input that reflects management’s own assumptions.
Current assets and liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature.
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of December 31, 2018.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. The President and Chief Executive Officer is the sole Trustee of the Trust. Compensation expense was measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations.
As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:
(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid; and (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.
For the years 2011 through 2018, the Company elected to temporarily suspend contributions to the Plan, in accordance with the loan pledge agreement between the Company and the ESOP Trust. For each year in which there was no contribution to the Plan, the Plan returned the 79,545 shares, which would have been allocated to employees annually, to treasury.
Income Taxes
Under the asset and liability method of ASC Topic 740, “Accounting for Income Taxes,” deferred tax liabilities and assets are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.
The Company follows the provisions of ASC Topic 740, “Accounting for Uncertainty in Income Taxes.” The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under this standard, an entity may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The standard also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods and requires increased disclosures. The Company does not have a liability for unrecognized tax benefits.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2018 and 2017, the Company has no accrued interest or penalties related to uncertain tax positions.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act was enacted into law and the new legislation contains key tax provisions that affect the company. The Company is required to recognize the effect of the tax law changes in the periods of enactment, such as determining the transition tax, measuring it to U.S. deferred tax assets and liabilities as well as reassessing the net realization of deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118), which allows the Company to record provisional amounts during a measurement period not extended beyond one year of the enactment date.
The Tax Reform Act lowers the corporate income tax rate from 35% to 21%. Aside from the effect on the Company’s net operating loss carryforward valuation allowance, the Act is not expected to have a material impact on the Company’s consolidated financial statements in the foreseeable future.
Net Loss per Common Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Potentially dilutive securities are excluded from the computation of diluted loss per shares since their effect would be antidilutive. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. The dilutive securities below do not include 5,055,555 potentially convertible Debentures, since the requirements for possible conversion had not yet been met and may never be met.
The table below summarizes the components of potential dilutive securities at December 31, 2018 and 2017.
Stock Based Compensation
The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. In the first quarter of 2018, the Board of Directors voted to extend the expiration dates of previously-awarded option grants from March 13, 2018 to December 31, 2020 with respect to the following: i) options previously granted to the President to purchase 750,000 shares of common stock at $0.30 per share, 75,000 shares of common stock at $0.75 per share and 2,000,000 shares of common stock at $0.19 per share; ii) options previously granted to the current Chairman of the Board to purchase 150,000 shares of common stock at $1.25 per share; iii) options previously granted to a Director of the Company to purchase 75,000 shares of common stock at $0.75; and iv) options previously granted to former employees of the Company to purchase a combined total of 65,000 shares of common stock at $0.75 per share. No share-based awards were issued or amended in 2017.
In determining the fair value of each option modified, the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility of 103% and a risk-free interest rate of 2.79%. This resulted in a charge to the statement of operations in the amount of $21,570 and had no effect on net loss per share of common stock for the year ending December 31, 2018.
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
Recent Accounting Pronouncements
In May 2017, the FASB issued Accounting Standards Update (“ASU) 2017-09 – Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting. The Update provides clarity and reduces cost and complexity when applying the guidance of Topic 718 to a change in the terms or conditions of a share-based payment award. The Update mandates that an entity should account for the effects of the modification unless all three of the following conditions are met:
i) the fair value of the modified award is the same as the fair value of the original award immediately before the modification.
ii) the vesting provisions of the modified award are the same as the original award immediately before the award is modified.
iii) the classification of the modified award as an equity instrument of a liability instrument is the same as the original award immediately before the award is modified.
The Update is effective for periods beginning after December 15, 2017 and was adopted by the Company in its 2018 financial statements. The Update had no effect on the Company’s 2018 financial statements.
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting” which addresses accounting for issuance of all share-based payments on the same accounting model. Previously, accounting for share-based payments to employees was covered by Accounting Standards Codification (“ASC”) Topic 718 while accounting for such payments to non-employees was covered by ASC Topic 505. As it considered recently issued updates to ASC Topic 718, the FASB, as part of its simplification initiatives, decided that ASC Topic 718 would also be used as the guidance for non-employee share-based awards. Under this new guidance, both employee and non-employee awards will essentially follow the same model, with small variances related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards. The ASU is effective beginning in calendar year 2019. The Company does not expect the amendments to have a material effect on its consolidated financial statements. |
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Accounts Payable and Accrued Expenses |
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| Accounts Payable and Accrued Expenses |
Note 4. Accounts Payable and Accrued Expenses
The table below outlines the elements included in accounts payable and accrued expenses at December 31, 2018 and 2017:
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Convertible Notes and Line of Credit |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Notes and Line of Credit |
Note 5. Convertible Notes and Line of Credit
Line of Credit
In 2008, the Company entered into an agreement with an unrelated third party for an unsecured Line of Credit up to a maximum of $1,000,000. The Line of Credit provided for funds to be drawn as needed and carries an interest rate on amounts borrowed of 9% per annum originally payable quarterly based on the pro rata number of days outstanding. All funds originally advanced under the facility were due and payable by November 1, 2012. As an inducement to provide the facility, the lender was awarded an immediate option to purchase 50,000 shares of common stock of the Company at $1.75 per share. In addition, the lender received an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share. The options expire following repayment in full by the Company of the amount borrowed.
As of December 31, 2009, the Company had borrowed all of the $1,000,000 available to it under the Line of Credit. Interest on this debt incurred prior to June 30, 2009 has been paid in full. The Company was unable to satisfy the principal obligation of $1,000,000 by the due date of November 1, 2012 or any interest which accrued on the obligation after June 30, 2009 and is in default under the repayment terms of the note. At December 31, 2018 and 2017, principal and accrued interest of $1,853,669 and $1,763,669, respectively, remains unpaid on this obligation.
Convertible Notes and Warrants
Pursuant to a Private Placement Memorandum dated March 1, 2010, the Company offered units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 with interest at 12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes was originally payable either in cash or common stock at the option of the Company. However, interest is now required to be paid in cash. The Company ultimately accepted subscriptions totaling $450,000 from unrelated subscribers and an additional $25,000 for one unit purchased by a Director of the Company. The five-year Warrants issued in connection with the units have expired. Accrued interest due on these notes at December 31, 2018 and 2017 amounted to $369,630 and $315,571, respectively.
Pursuant to an additional Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. Interest on the notes was originally payable in either cash or common stock at the option of the Company. However, interest is now required to be paid in cash. The Company accepted subscriptions totaling $512,500 from unrelated accredited investors. On July 2, 2011, the Company redeemed a note in the principal amount of $25,000 by issuing 50,000 shares of common stock. The five-year Warrants issued in connection with the units have expired. Accrued interest due on these notes at December 31, 2018 and 2017 amounted to $285,368 and $241.493, respectively.
The Convertible Notes issued pursuant to the two Private Placements discussed above total $962,500 in principal and became due and payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, all of the aforementioned debt obligations remain unpaid and in default under the repayment terms of the notes. In October 2017, the Company entered into a settlement with one of the convertible note holders who had previously sued the Company for payment of the note and accrued interest. Under terms of the settlement, a judgment was entered against the parent Company for the principal due under the note in the amount of $150,000 plus accrued interest on the note to the date of the judgment for a total of $244,537. Thereafter, the note holder will be entitled to interest at the Delaware statutory rate (currently 7%) on the entire amount of the judgment.
The table below summarizes the Company’s convertible notes payable and line of credit at December 31, 2018 and 2017:
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Convertible Debentures |
12 Months Ended |
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Dec. 31, 2018 | |
| Debt Disclosure [Abstract] | |
| Convertible Debentures |
Note 6. Convertible Debentures
Pursuant to a Private Placement Memorandum dated February 14, 2014 (the “Private Placement”), the Company offered up to a maximum of $3,000,000 of Collateralized Convertible Senior Debentures to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000. The Debentures, once issued, bear interest at 4% per annum after 180 days, mature six years from the date of issuance, and are secured by a lien on the Company’s Mississippi property. The debentures were offered in three tranches as follows:
(a) $1,000,000 of First Tranche Collateralized Convertible Senior Debentures convertible into an aggregate of 3,333,333 shares of Common Stock of the Company at a conversion price of $.30 per share (the “First Tranche Debentures”);
(b) $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures, convertible into an aggregate of 2,222,222 shares of Common Stock of the Company at a conversion price of $.45 per share (the “Second Tranche Debentures”); and
(c) $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures, convertible into either 1,818,182 shares of Common Stock or 1,333,333 shares of Common Stock of the Company, at a conversion price of $.55 or $.75 per share depending upon certain conditions described in the Private Placement Memorandum (the “Third Tranche Debentures”).
The conversion rights on each issued Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the conversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:
1. The issuance of any of the other Debentures in the Offering or the issuance of shares of Common Stock upon conversion of any of the Debentures in the Offering;
2. The issuance of any shares of Common Stock if such issuance relates to an agreement, arrangement or grant to issue shares of Common Stock entered into by the Company prior to the Issue Date of the First Tranche Debentures in the Offering, including but not limited to, for example, previously issued convertible promissory notes, previously issued warrants, previously issued options to purchase Common Stock, or common stock vested or to be issued pursuant to a pre-existing Employee Stock Ownership Plan.
The Anti-Dilution Provisions with respect to a Debenture terminate the earlier of (a) the date (if ever) the Company receives an “Approval to Proceed” from the Mississippi Gaming Commission to develop a casino/hotel on the Property, (b) the date on which the Debenture is converted in full, (c) the date on which the Debenture is paid in full, or (d) the Final Maturity Date of the Debenture (as defined in the Debenture).
Since the issuance of the Debentures, there have been no events that would trigger the above anti dilution provisions. Should an event take place which would trigger the provision, the Company would be required to record dividend expense in an amount equal to the difference in the fair value of the embedded derivatives before the event versus the fair value of the derivative after the triggering event.
On March 31, 2014, the First Closing occurred when subscriptions in the amount of $3,000,000 were received in Escrow and accepted by the Company. The Escrow Agent released $1,000,000 to the Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000.
The Company’s stock registration was revoked effective September 4, 2014. Therefore, on December 4, 2014, the Company extended offers to the investors to amend the Private Placement. The Company offered to amend certain terms and conditions, including the conversion terms of the First Tranche Debentures, which were issued on March 31, 2014 (“Amendment I”). The Company separately offered to amend certain terms and conditions, including those relating to issuance and conversion of the Second and Third Tranche Debentures, as well as the period of time within which to perform the Third Tranche Closing Obligations, as amended (“Amendment II”).
On December 31, 2014, investors who had purchased $950,000 of First Tranche Debentures consented to the amended conversion terms of Amendment I. The remaining Debenture in the amount of $50,000 remains as originally issued with no conversion rights. Thus, the First Tranche Debentures can be converted into a total of 3,166,666 shares of common stock. On December 31, 2014, the Second Closing occurred when investors representing $850,000 of Second Tranche Debentures consented to Amendment II. The Escrow Agent released $850,000 to the Company and the Company issued Second Tranche Debentures in the aggregate principle amount of $850,000. Thus, the Second Tranche Debentures can be converted into 1,888,889 shares of common stock. The Escrow Agent refunded $300,000 to those investors who did not consent to Amendment II.
The Company did not meet the closing obligations for the Third Tranche Debentures as of June 30, 2015, as was required, pursuant to the terms of the Private Placement, as amended. Therefore, the remaining $850,000 being held in escrow for the purchase of the Third Tranche Debentures was returned to the investors in July 2015.
When originally issued, in the event the Company failed to meet the conditions for conversion of the Debentures, the First Tranche Convertible Debentures, which total $950,000, would have been due on March 31, 2020 and the Second Tranche Convertible Debentures, which total $850,000, would have been due December 31, 2020. The sole remaining non-convertible Debenture in the amount of $50,000 would have been due March 31, 2020. However, the Company is in default with respect to interest payments due under the Debentures and as a result, they are reported as current liabilities. Certain Debenture holders maintain that the Company is in default, not only with respect to interest due under the Debentures, but with respect to principal due under the Debentures in the amount of $1,850,000, as well. The ramifications of a potential default are more fully discussed in Notes 14 and 15 below.
Total accrued interest due on all outstanding Debentures amounted to $279,233 and $205,233 at December 31, 2018 and 2017, respectively. |
Short Term Notes and Interest Bearing Advance |
12 Months Ended |
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Dec. 31, 2018 | |
| Debt Disclosure [Abstract] | |
| Short Term Notes and Interest Bearing Advance |
Note 7. Short Term Notes and Interest Bearing Advance
Promissory Note
On June 9, 2017, the Company entered into a Promissory Note with an unrelated lender in exchange for proceeds in the amount of $15,000. Interest on the note is 12.5% per annum and payable March 1 of each year the note remains outstanding. Payment in full of the Note is due June 9, 2019. Mississippi Gaming Corporation, a wholly owned subsidiary of the Company, guaranteed the Note. In addition, the President of the Company agreed to personally guarantee the Note and to personally secure the Note with an assignment of proceeds due to her under the first lien on the Diamondhead property. The interest payment, which was due March 1, 2018, was not made. Accrued interest due on this obligation amounted to $2,928 and $1,053 at December 31, 2018 and 2017, respectively. This Note was classified as long term on the Company’s 2017 balance sheet (See Note 9).
Bank Credit Facility
Wells Fargo Bank provides an unsecured credit facility of up to $15,000 to the Company. The facility requires a variable monthly payment of amounts borrowed plus interest, which is applied at 11.24% on direct charges and 24.99% on any cash advanced through the facility. At December 31, 2018, a principal balance of $18,004 remained outstanding on the facility. The lending bank has since cancelled privileges under the facility for non-payment.
Interest Bearing Advance
On February 2, 2017, the Company borrowed $25,000 from an unrelated third party. The Company expects to enter into a formal note for these funds however the terms of the note have not been finalized. The Note is expected to carry an annual interest rate of approximately 12.5% with a projected due date of December 31, 2017. The Company is in default and as such, the lender may increase the interest rate due by an amount of up to 3% per annum in excess of the rate then otherwise applicable. The Company does not have the funds to repay the advance. The President of the Company has agreed to personally secure the note with an assignment of proceeds due to her under the first lien on the Property. Accrued interest on this obligation amounted to $5,967 and $2,842 at December 31, 2018 and 2017, respectively.
The above short term notes and interest bearing advances total $58,004 in aggregate and all are in default under the original agreed to terms. |
Current Notes Payable Due Related Parties |
12 Months Ended |
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Dec. 31, 2018 | |
| Debt Disclosure [Abstract] | |
| Current Notes Payable Due To Related Parties |
Note 8. Current Notes Payable Due Related Parties
In July, 2017, at the request of the Company, the current Chairman of the Board of Directors, who is also a Vice President of the Company (“the Chairman”), paid all property taxes due, together with all interest due thereon, to Hancock County, Mississippi on an approximate 400-acre tract of land, owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. The total amount advanced was $67,628.
The Chairman is one of the secured parties under that Land Deed of Trust recorded on September 26, 2014 in Hancock County, Mississippi, to secure Tranche I and Tranche II Debentures issued by the Company in 2014. Under paragraph 5 of the Land Deed of Trust, a secured party who advances sums for taxes due on the Property is secured by the same Land Deed of Trust, but only at that interest rate specified in the note representing the primary indebtedness, namely 4% per annum.
The Chairman advanced the $67,628 on condition that: (i) the advance constitute a lien with interest at 4% per annum under that Land Deed of Trust recorded September 26, 2014; (ii) he be paid additional interest of 11% per annum on the amount advanced and owing and that the full 11% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (iii) this additional interest obligation be treated as a separate and secured debt of the Company, to be evidenced by a separate note and is secured with a separate and third lien to be placed on the Property (hereafter “the Third Lien”); (iv) the entire obligation will be treated as an advance to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V); and (v) he be indemnified for any losses sustained on the sale of that common stock sold to cover the credit card payments. The Chairman has identified the common stock to be sold and will provide the Company with the documentation required to document the sale of said stock and to calculate the future loss, if any, on said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue, to the Chairman for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Property to secure this obligation for $100,000. This note was classified as long term on the Company’s 2017 balance sheet (See Note 9). Accrued interest on the note amounted to $18,762 and $8,610 at December 31, 2018 and 2017.
In March of 2018, the Board of Directors voted to increase up to an additional $200,000 the amount secured by the third lien in favor of the Chairman of the Board, for amounts advanced by the Chairman on behalf of the Company, on the following terms and conditions, namely, that (i) the advance constitutes a lien on the Property with interest at 15% per annum; (ii) that the full interest of 15% per annum is payable during any calendar year in which all or part of the amount advanced is due and owing or interest due thereon remains unpaid; (iii) that this debt be evidenced by a separate promissory note and is to be included in and secured with a third lien that is to be placed on the Diamondhead Property to secure previous advances made to the Company (hereafter “the Third Lien”); (iv) that he be indemnified for any losses sustained on the sale of his common stock in an unrelated publicly-traded company to be sold to cover this advance based on a sales price of approximately $2.80 per share with a cap on the maximum loss per share to be at a sales price of $10.00 per share; and (v) that the Chairman’s previous indemnification approved by the Board of Directors on July 24, 2017 with respect to any loss on the sale of the same stock also be capped at a maximum of $10.00 per share. The Chairman will provide the Company with the documentation required to document the sale of said stock and to calculate the losses on said stock for all amounts loaned to the Company from the sale of said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue to the Chairman, for an amount up to $200,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $200,000.
In November of 2018, the Board of Directors voted to increase up to an additional $100,000 of advances from the Chairman and in March of 2019, the Board of Directors voted to increase the limit of the advances to $200,000. The terms of this advance are identical to the terms as approved above in March 2018. However, the additional funds will be secured by a fourth lien to be placed on the Property in favor of the Chairman.
At December 31, 2018, the Chairman had advanced a total of $205,250 under both the March 2018 and November 2018 arrangements and was owed accrued interest in the amount of $30,788 at December 31, 2018.
On July 24, 2017, the President of the Company, who is a Director of the Company, agreed to advance the Company up to $20,000 for the payment of expenses. In March of 2018, the Board of Directors voted to increase to up to $100,000 the amount to be secured by a third lien in favor of the President of the Company for amounts advanced by the President under this note, on the following terms and conditions, namely, that (i) she be paid interest of 15% per annum on the amount advanced and owing and that the full 15% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (ii) the obligation in the maximum principal amount of $100,000 with interest due thereon be treated as a secured debt of the Company, to be evidenced by a separate note and to be secured with a separate lien to be placed on the Diamondhead Property (“the Third Lien”) together with the Chairman’s Third Lien, as well as a first lien to be placed on the residential lot owned by the Company; (iii) that the Third Lien on the Diamondhead Property also include the two loans ($25,000 and $15,000) and interest due thereon and credit facilities in the maximum amount of $15,000; and (iv) that the foregoing will be treated as advances to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V).
As of December 31, 2018 and 2017, the President had advanced a total of $36,137 and $20,000, respectively, under this agreement. The President previously agreed to secure a $25,000 loan and interest due thereon and to secure and guarantee a $15,000 loan and interest due thereon due non-related parties discussed above. The President is also personally liable for certain bank-issued credit cards used by the Company to pay expenses incurred by the Company in the approximate amount of $18,000. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from date of issue, to the President for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $100,000. The amount advanced in 2017 in the amount of $20,000, was classified as long term on the Company’s 2017 balance sheet (See Note 9). Accrued interest due on this note amounted to $8,421 and $3,000 at December 31, 2018 and 2017, respectively.
The third lien placed on the Diamondhead Property, which secures the above three promissory notes, totals up to $400,000 and is payable to the Chairman of the Board ($300,000) and President ($100,000) of the Company.
The principal balance of the notes payable to the officers and directors discussed above, are due in June 2019 and total $309,015 in aggregate. All amounts advanced in the prior year were presented as long term liabilities of the Company at December 31, 2017, but were recorded as current liabilities on the Company’s December 31, 2018 balance sheet. |
Long-Term Notes Payable |
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| Long Term Notes Payable |
Note 9. Long-Term Notes Payable
In 2016, the Company received cash advances totaling $47,500 from seven lenders which included $25,000 from three current Directors of the Company. The proceeds from the cash advances were earmarked for the payment of accounting and auditing fees and other expenses required to file the Company’s Form 10-Q. On August 25, 2016, the Company issued a Note to the foregoing lenders, which matures four years from the date of issuance and bears interest at 8% per annum, with a full year of interest accruing in any year in which the advance remains unpaid. Accrued interest due on the above notes amounted to $11,400 and $7,600 at December 31, 2018 and 2017, respectively.
In the third quarter of 2016, the Chairman of the Board of Directors of the Company loaned the Company $90,000. On August 25, 2016, the Company issued a Note to the Chairman of the Board. The Note bears interest at 14% per annum effective August 1, 2016 and matures four years from the date of issuance. The proceeds of the loan were used for the payment of Mississippi property taxes and auditing, accounting and other corporate expenses. Accrued interest due on the above note amounted to $30,482 and $17,882 at December 31, 2018 and 2017, respectively.
The principal due under the two foregoing loan arrangements totals $137,500. The Company has filed a second lien on its Mississippi property in favor of the note holders to secure both principal and interest in the maximum amount of $250,000. The lien is second to the existing first lien on the Mississippi property in the principal amount of $3.85 million.
In October 2017, the Company entered into a settlement with a holder of $150,000 of convertible notes as described in Note 5 above. As part of the settlement, the Company agreed to pay legal fees in the amount of $50,000 and issued a four year note at 0% interest to satisfy this obligation.
The table below summarizes the Company’s long-term notes payable as of December 31, 2018 and December 31, 2017:
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Related Party Transactions |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Related Party Transactions [Abstract] | |
| Related Party Transactions |
Note 10. Related Party Transactions
The President of the Company is owed deferred salary in the principal amount of $2,166,996 and the Vice President and current Chairman of the Board of the Company is owed deferred salary in the principal amount of $121,140 as of December 31, 2018. On October 12, 2012 the Board of Directors approved a motion to pay these individuals interest on their deferred compensation retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. Accrued interest through December 31, 2018 and 2017 amounted to $876,074 and $684,708, respectively.
Effective September 1, 2011, the Company entered into a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space in a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance, real estate taxes, expenses and utilities. Rent expense associated with this lease amounted to base rent in the amount of $54,408 and associated rental costs of $18,610 for a total of $73,108 for the year ended December 31, 2018 and base rent in the amount of $54,408 and associated rental costs of $15,140 for a total of $69,548 for the year ended December 31, 2017. The Company did not pay any of the base rent due in 2018 or 2017.
Effective January 1, 2013, the directors of the Company are compensated at a rate of $15,000 per annum. Each Director is eligible for an annual payment in the amount of $15,000 as long as they remain a Director through December 31 of the applicable year, absent death or incapacitation. The annual payment to new directors is prorated based upon months served in their initial year as a Director.
The Company has been unable to pay directors’ fees to date. As of December 31, 2018 and 2017 a total of $478,750 and $393,750 respectively, was due and owing to the Company’s directors. Directors have previously been compensated and may, in the future, be compensated for their services with Common Stock or options to purchase Common Stock of the Company. Directors are reimbursed for expenses incurred in attending meetings. Directors may be paid a consulting fee for services performed outside the scope of their directorship.
See notes 7, 8, 12 and 14 for other related party transactions. |
Stockholders' Equity |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Equity |
Note 11. Stockholders’ Equity
At December 31, 2018 and 2017, the Company had a stock option plan and non-plan options, which are described below.
Non-Plan Stock Options
On January 3, 2018, the Board of Directors voted to extend from March 13, 2018 to December 31, 2020, the expiration date for a total of 3,115,000 currently outstanding options previously issued to the Chairman, the President, the Vice President and two former employees of the Company. The Company recorded stock-based compensation expense of $21,570.
Stock Option Plan
On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to 1,000,000 shares of the Company’s common stock. Accordingly, the Company reserved 1,000,000 shares for issuance under the Plan. The exercise price may not be less than 100% of the market value of the shares on the date of the grant. The options expire within ten years from the date of grant. At December 31, 2018, no options from this plan were issued or exercised.
Summary of Stock Options
A summary of the status of the Company’s fixed Plan and non-plan options as of December 31, 2018 and 2017, and changes during the years ended December 31, 2018 and 2017 is presented below.
The following tables summarize information about stock options outstanding and exercisable at December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
(a) These options expire upon payment in full of an outstanding note payable with an original due date of November 1, 2012. The note payable remains outstanding at December 31, 2018 and 2017.
Warrants
The Company has previously issued warrants to purchase shares of the Company’s common stock in conjunction with convertible promissory notes issued in private placements dated March 25, 2010 and October 25, 2010. The Company also issued warrants in conjunction with a private placement of shares of the Company’s common stock dated July 1, 2012. The Company also issued warrants for brokerage services rendered for issuance of convertible debentures in 2014.
A total of 1,061,500 warrants expired during the year ended December 31, 2017 and as of December 31, 2018, there are no warrants outstanding.
Preferred Stock
Series S Preferred Stock
On June 14, 1993, the Company issued 926,000 shares of $.01 par value Series S Voting, Non-Convertible Preferred Stock to Austroinvest International, Inc. in exchange for proceeds of $1,000,080. The Company is required to pay quarterly cumulative dividends of three percent per annum on these shares.
These shares may be redeemed at the option of the Company at $1.08 per share plus $.0108 per share for each quarter that such shares are outstanding for a total of $2.18 per share at December 31, 2018. The shares also have a $1.08 per share preference in involuntary liquidation of the Company. At December 31, 2018 and 2017, outstanding Series S preferred stock totaled 926,000 shares. Cumulative dividends in arrears at December 31, 2018 and 2017 amounted to $225,000 and $195,000 respectively.
Series S-NR Preferred Stock
On September 13, 1993, the Company issued 900,000 shares of its $.01 par value Series S-NR Voting, Non-Convertible, Non-Redeemable, Preferred Stock to Serco International Limited (a wholly-owned subsidiary of Austroinvest International, Inc.), in exchange for proceeds of $999,000. The Company is required to pay quarterly, non-cumulative dividends of three percent per annum on these shares. Upon involuntary liquidation of the Company, the liquidation preference of each share is $1.11. At December 31, 2018 and 2017, outstanding Series S-NR preferred stock totaled 900,000 shares. Non-cumulative dividends in arrears at December 31, 2018 and 2017 amounted to $225,000 and $195,000 respectively.
Series S-PIK Preferred Stock
In March 1994, the Company offered, pursuant to Regulation S, one million units at $5.50 per unit, each unit consisting of one share of the Company’s $.001 par value common stock and two shares of the Company’s Series S-PIK Junior, cumulative, convertible, non-redeemable, non-voting $.01 par value preferred stock. Each share of Series S-PIK preferred stock is convertible into one share of the Company’s common voting stock at any time after February 15, 1995. No shares were converted during 2018 or 2017. The Series S-PIK preferred stock ranks junior to the Series S and Series S-NR preferred shares as to the distribution of assets upon liquidation, dissolution, or winding up of the Company. Upon liquidation of the Company, the S-PIK preferred stock will have a liquidation preference of $2.00 per share. A cumulative quarterly dividend of $0.04 per share is payable on Series S-PIK preferred stock. At December 31, 2018 and 2017, outstanding Series S-PIK preferred stock totaled 260,000 shares. Cumulative dividends in arrears at December 31, 2018 and 2017 amounted to $312,000 and $270,400, respectively.
Payment of Preferred Dividends
The Company did not pay any dividends due on its preferred stock in 2018 or 2017. However, payment of all cumulative and non-cumulative preferred stock dividends, outstanding at any time, is required before the Company can issue any dividends on its common stock. |
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Employee Stock Ownership Plan |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Retirement Benefits [Abstract] | |
| Employee Stock Ownership Plan |
Note 12. Employee Stock Ownership Plan
The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan and an employee stock ownership plan. All employees having one year of service are eligible to participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The shares of common stock are pledged to the Company as security for the loans. The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In the event that the Company elects not to make a Plan contribution in any given year, the corresponding shares applicable to that year are released from the Trust to the Company in consideration of that years’ note payment. In January 2001, the Plan and accompanying promissory notes were amended to conform to the Company’s current employment structure, by extending the note repayment terms through 2044.
Assuming a Plan contribution is made, shares are allocated to the participants’ accounts in relation to repayments of the loans from the Company. At December 31, 2018, a total of 2,068,190 shares with a fair market value of $28,955 were unearned.
In 2011, the Company decided to temporarily suspend contributions to the Plan. Therefore the Trust was unable to make its annual loan payment to the company and a loan default occurred. In accordance with the Pledge Agreement between the Company and the Trust, the shares attached to the loan payments subsequent to the 2010 contribution reverted back to the Company as treasury shares. In 2018, 79,545 shares, with a market value of $1,115, reverted back to the Company as treasury shares. In 2017, 79,545 shares, with a market value of $1,590, reverted back to the Company as treasury shares. |
Income Taxes |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Income Tax Disclosure [Abstract] | |
| Income Taxes |
Note 13. Income Taxes
At December 31, 2018, the Company had net operating loss carryforwards for income taxes of approximately $12.7 million, which expire during various periods through 2038. Realization of deferred income taxes as of December 31, 2018 and 2017 is not considered likely. Therefore, by applying a federal statutory rate of 21% to the carryforward amounts, a valuation allowance of approximately $2.7 million and $2.9 million, has been established for each year for the entire amount of deferred tax assets relative to the net operating loss at December 31, 2018 and 2017, respectively, resulting in an effective tax rate of 0% and no deferred tax asset recognition. The valuation allowance decreased by approximately $245,000 in 2018 and increased by $145,000 in 2017.
Enactment of corporate tax law changes in 2018 may limit the utilization of post 2017 net operating loss carryforwards. |
Commitments and Contingencies |
12 Months Ended | |||
|---|---|---|---|---|
Dec. 31, 2018 | ||||
| Commitments and Contingencies Disclosure [Abstract] | ||||
| Commitments and Contingencies |
Note 14. Commitments and Contingencies
Effective September 1, 2011, the Company entered into a month-to-month lease with the President and CEO of the Company for office space in a building owned by the President and CEO in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 or $54,408 per annum and payment of associated costs of insurance, real estate taxes, expenses and utilities.
Base rent and associated rental expenses totaled $73,018 in 2018 and $69,548 in 2017.
The Company is not liable for future minimum lease payments.
Management Agreement
On June 19, 1993, two subsidiaries of Diamondhead Casino Corporation, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. Management of the Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.
Related Party
On July 26, 2017, the Chairman paid $67,628 for all property taxes due, together with all interest due thereon, to Hancock County, Mississippi on an approximate 400-acre tract of land (“the Property”), owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. The taxes had to be paid by July 31, 2017 to avoid a tax sale. The conditions of the note under which the Chairman agreed to make this payment are discussed in full detail in Note 6 of these consolidated financial statements.
Of particular note to those conditions, item (v) calls for him to be indemnified for any losses sustained on the sale of that common stock sold to cover the above payments. The Chairman has identified the common stock sold and has provided the Company with the documentation required to document the sale of said stock and to calculate the contingent future loss, if any, on said stock.
Had the Company paid the note in full at December 31, 2018, in addition to the principal and interest due, the company would have been additionally liable for approximately $124,260 in additional funds to indemnify the Chairman for his lost equity on the stock sale.
Other
The Company’s obligations under the Collateralized Convertible Senior Debentures are secured by a lien on the Company’s Mississippi property (the “Investors Lien”). On March 31, 2014, the Company issued $1 million of First Tranche Collateralized Convertible Senior Debentures and on December 31, 2014 the Company issued $850,000 of Second Tranche Collateralized Convertible Senior Debentures. Thus, liens were placed on the Property in favor of the Investors for $1,850,000. The Investors Lien is in pari passu with a lien placed on the Property in favor of the President of the Company, the Vice President of the Company, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the “Executives Lien”). The CEO will serve as Lien Agent for the Executives Lien.
The Company has filed a second lien in the maximum amount of $250,000 on the Property to secure the notes payable totaling $137,500 and accrued interest incurred. Details of these notes as more fully described in Note 9, above.
The Company has filed a third lien in the maximum amount of $400,000 on the Property to secure the notes payable totaling $309,015 and accrued interest incurred. Details of these notes as more fully described in Note 8, above.
The Company is currently delinquent in filing those documents and forms required to be filed in connection with its Employee Stock Ownership Plan (“ESOP”) for the year ended December 31, 2017, 2016 and 2015. The Company did not have the funds to pay professionals to prepare, audit and file these documents and forms when due. Although these required filings normally do not result in any tax due to an agency of the government, the Company could be subject to significant penalties for failure to file these forms when due. Penalties are assessed by the Department of Labor on a per diem basis from the original due dates for the required informational filings until the filings are actually made. The Company has accrued $77,700 on the current delinquent filings. The Company intends to bring its ESOP-required filings current and when current, will attempt to enroll in a voluntary compliance program with the Department of Labor with respect to any penalties or fines incurred. However, there can be no assurance the Company will be able to enroll in any such program or obtain a reduction of the fines and penalties that may be due.
The Company has not filed its consolidated federal tax returns for the years ended December 31, 2018, 2017 and 2016. The Company believes no tax is due with that return. Casino World, Inc. a wholly owned subsidiary of the Company, is delinquent with respect to the filing of their franchise tax annual reports for 2018, 2017 and 2016 with the state of Delaware and the state of Mississippi.
The Company has made provision for the expected taxes due on these state filings in their consolidated financial statements for the years ending December 31, 2018 and 2017. |
Pending and Threatened Litigation |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Pending and Threatened Litigation |
Note 15. Pending and Threatened Litigation
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, the above-named Debenture holders filed a Complaint against Diamondhead Casino Corporation (the Company) in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on October 31, 2016. On November 21, 2016, the Company filed a motion to dismiss for lack of subject matter jurisdiction due to failure to plead diversity. On February 21, 2017, the plaintiffs filed a motion for leave to amend their complaint based upon declarations of citizenship filed with the court. On September 26, 2017, the motion for leave to amend was granted and the Company’s motion to dismiss was granted in part and denied in part. The Court also granted plaintiffs leave to file a Second Amended Complaint which was filed on October 2, 2017. On October 16, 2017, the Company filed Defendant’s Answer and Affirmative Defenses and Counterclaim. On November 2, 2017, the Plaintiffs filed an Answer to the Counterclaim. The parties have exchanged discovery in the case. On September 27, 2018, the Plaintiffs’ filed a motion for summary judgment. On October 18, 2018, the Company filed its opposition to the motion for summary judgment. On November 8, 2018, the Plaintiff’s filed their reply to the Company’s opposition. On January 2, 2019, the Court canceled the trial previously scheduled for March 22, 2019. On April 2, 2019, the Court heard argument on the Plaintiff’s motion for summary judgment. On April 3, 2019, the Court scheduled a teleconference for April 15, 2019 for the parties to discuss alternative dispute resolution with a Magistrate.
John Hawley, as servicing agent for Argonaut 2000 Partners, L.P. v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N19C-02-239 RRC)
On February 28, 2019, the above-named Debenture holder filed a Complaint against Diamondhead Casino Corporation (the Company) in the Superior Court of the State of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiff is seeking $100,000, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on March 8, 2019. On March 28, 2019, the Company filed its Answer, Affirmative Defenses and Counterclaim and Affidavit of Defense.
Arnold J. Sussman, Robert Skaff and David J. Towner v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N18C-11-091-WCC )
On November 9, 2018, Sussman filed suit against the Company for breach of a Promissory Note issued November 10, 2010, in the principal amount of $50,000, with interest payable at 9% per annum, with a maturity date of November 10, 2012. Plaintiff seeks payment of principal of $50,000 and interest due from June 30, 2012 to present, which Plaintiff alleges is approximately $28,500 as of October 31, 2018. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. On December 6, 2018, the Company’s registered agent was served with the Sussman Complaint. On November 28, 2018, Skaff and Towner also filed suit against the Company in the same court for breach of Promissory Notes (Case No. N18C-11-232 ALR). Skaff filed suit i) for breach of a note issued on November 29, 2010, in the principle amount of $37,500 with interest payable at 9% per annum, with a maturity date of November 29, 2012 and ii) for breach of a note issued on June 21, 2011, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of June 21, 2013. Towner filed suit for breach of a note issued on November 29, 2010, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of November 29, 2012. Skaff alleges interest is due on his two notes from June 30, 2012 in the amount of $36,038.21 as of November 28, 2018. Towner alleges interest is due on his note from June 30, 2012 in the amount of $14,413.96 as of November 28, 2018. On December 6, 2018, the Company’s registered agent was served with the Skaff and Towner Complaint. All of the foregoing Notes, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. Counsel for the Plaintiffs in the foregoing cases requested that the cases be consolidated and the Company agreed to the consolidation. On February 15, 2019, the Plaintiffs filed their Consolidated Complaint. On March 7, 2019, the Company filed its Answer and Affirmative Defenses and Affidavit of Defense. |
Subsequent Events |
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Dec. 31, 2018 | |
| Subsequent Events [Abstract] | |
| Subsequent Events |
Note 16. Subsequent Events
On September 1, 2016, the Company was awarded $54,886 in attorneys’ fees and expenses against the six Petitioners who filed a Chapter 7 Involuntary Bankruptcy Petition against the Company in or about August 2015. The Bankruptcy Court found that the Petition had been filed in bad faith and for improper purposes. In November 2016, the Company recorded and enrolled the Delaware judgment in the Montgomery County Circuit Court of Maryland. One Petitioner, Arnold Sussman, filed a Motion to Reopen and Vacate Foreign Judgment. The Company settled with another Petitioner for $20,000. The Circuit Court denied Sussman’s Motion to Reopen and Vacate Foreign Judgment. Sussman appealed to the Court of Special Appeals which affirmed the judgment of the lower court. Sussman then filed a Petition for a Writ of Certiorari in the Maryland Court of Appeals, which denied the Petition. The Company has collected the $36,000 Sussman was required to post as a bond with the Circuit Court to stay enforcement of the judgment. The Company intends to pursue the remaining interest due on the judgment.
In the first quarter of 2019, the President advanced additional funds totaling $15,860 under the terms of her arrangement dated July 24, 2017 as more fully described in Note 8 of these consolidated financial statements. These funds were used primarily to pay those taxes and penalties required to reinstate the Company and Mississippi Gaming Corporation in both Delaware and Mississippi. In March 2019, the President was reimbursed for these advances from the $36,000 collected from Sussman in the above-referenced case.
In the first quarter of 2019, the Chairman advanced additional funds totaling $20,737 with the approval of the Board of Directors which voted on March 11, 2019 to increase up to an additional $200,000 of advances from the Chairman. The terms of this advance are identical to the terms of prior advances approved in March 2018 and more fully described in Note 8 of these consolidated financial statements. However, the additional funds will be secured by a fourth lien to be filed by the Company in favor of the Chairman.
On March 25, 2019, Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company and the title owner of the Diamondhead Property (the "Owner"), entered into an agreement with an unrelated commercial real estate brokerage firm to sell all or part of the Diamondhead, Mississippi Property or, alternatively, to find a joint venture partner for the project. The agreement provides for an exclusive right to sell all or part of the Property beginning March 25, 2019 and ending October 31, 2019, unless extended by the parties. The agreement provides for a commission equal to three percent (3%) of the gross sales price for property sold if the Buyer does not have a broker or four percent (4%) of the gross sales price of property sold if the Buyer does have a broker, in which case the commission due will be split between the brokers. In the event the Owner consummates and closes a deal with a Joint Venture Partner introduced to the Owner by the broker, the Owner will pay the broker a commission equal to four percent (4%) of the amount contributed by the Joint Venture Partner as its capital contribution. This will not apply in the event the Owner consummates a deal with a Joint Venture Partner who is not introduced to the Owner by the broker. The agreement does not apply to loans obtained by or on behalf of the Owner using the Property as collateral or as security for a loan. The agreement also provides for a reduced commission to the broker in the event of a sale to certain potential purchasers already involved in discussions with the Owner. |
Summary of Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles of Consolidation |
Principles of Consolidation
The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. |
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| Estimates |
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
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| Reclassifications |
Reclassifications
Certain reclassifications have been made to the 2017 financial statements to conform to the consolidated 2018 financial statements presentation. These reclassifications had no effect on net earnings or cash flows as previously reported. |
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| Land Held for Development |
Land Held for Development
Land held for development is carried at cost. Costs directly related to site development, such as licensing, permitting, engineering, and other costs, are capitalized.
Land development costs, which have been capitalized, consist of the following at December 31, 2018 and 2017:
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| Fair Value Measurements |
Fair Value Measurements
The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable input that reflects management’s own assumptions.
Current assets and liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature. |
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| Long-Lived Assets |
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of December 31, 2018. |
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| Employee Stock Ownership Plan |
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. The President and Chief Executive Officer is the sole Trustee of the Trust. Compensation expense was measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations.
As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:
(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid; and (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.
For the years 2011 through 2018, the Company elected to temporarily suspend contributions to the Plan, in accordance with the loan pledge agreement between the Company and the ESOP Trust. For each year in which there was no contribution to the Plan, the Plan returned the 79,545 shares, which would have been allocated to employees annually, to treasury. |
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| Income Taxes |
Income Taxes
Under the asset and liability method of ASC Topic 740, “Accounting for Income Taxes,” deferred tax liabilities and assets are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.
The Company follows the provisions of ASC Topic 740, “Accounting for Uncertainty in Income Taxes.” The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under this standard, an entity may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The standard also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods and requires increased disclosures. The Company does not have a liability for unrecognized tax benefits.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2018 and 2017, the Company has no accrued interest or penalties related to uncertain tax positions.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act was enacted into law and the new legislation contains key tax provisions that affect the company. The Company is required to recognize the effect of the tax law changes in the periods of enactment, such as determining the transition tax, measuring it to U.S. deferred tax assets and liabilities as well as reassessing the net realization of deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118), which allows the Company to record provisional amounts during a measurement period not extended beyond one year of the enactment date.
The Tax Reform Act lowers the corporate income tax rate from 35% to 21%. Aside from the effect on the Company’s net operating loss carryforward valuation allowance, the Act is not expected to have a material impact on the Company’s consolidated financial statements in the foreseeable future. |
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| Net Loss Per Common Share |
Net Loss per Common Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Potentially dilutive securities are excluded from the computation of diluted loss per shares since their effect would be antidilutive. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. The dilutive securities below do not include 5,055,555 potentially convertible Debentures, since the requirements for possible conversion had not yet been met and may never be met.
The table below summarizes the components of potential dilutive securities at December 31, 2018 and 2017.
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| Stock Based Compensation |
Stock Based Compensation
The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. In the first quarter of 2018, the Board of Directors voted to extend the expiration dates of previously-awarded option grants from March 13, 2018 to December 31, 2020 with respect to the following: i) options previously granted to the President to purchase 750,000 shares of common stock at $0.30 per share, 75,000 shares of common stock at $0.75 per share and 2,000,000 shares of common stock at $0.19 per share; ii) options previously granted to the current Chairman of the Board to purchase 150,000 shares of common stock at $1.25 per share; iii) options previously granted to a Director of the Company to purchase 75,000 shares of common stock at $0.75; and iv) options previously granted to former employees of the Company to purchase a combined total of 65,000 shares of common stock at $0.75 per share. No share-based awards were issued or amended in 2017.
In determining the fair value of each option modified, the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility of 103% and a risk-free interest rate of 2.79%. This resulted in a charge to the statement of operations in the amount of $21,570 and had no effect on net loss per share of common stock for the year ending December 31, 2018.
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options. |
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| Recent Accounting Pronouncements |
Recent Accounting Pronouncements
In May 2017, the FASB issued Accounting Standards Update (“ASU) 2017-09 – Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting. The Update provides clarity and reduces cost and complexity when applying the guidance of Topic 718 to a change in the terms or conditions of a share-based payment award. The Update mandates that an entity should account for the effects of the modification unless all three of the following conditions are met:
i) the fair value of the modified award is the same as the fair value of the original award immediately before the modification.
ii) the vesting provisions of the modified award are the same as the original award immediately before the award is modified.
iii) the classification of the modified award as an equity instrument of a liability instrument is the same as the original award immediately before the award is modified.
The Update is effective for periods beginning after December 15, 2017 and was adopted by the Company in its 2018 financial statements. The Update had no effect on the Company’s 2018 financial statements.
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting” which addresses accounting for issuance of all share-based payments on the same accounting model. Previously, accounting for share-based payments to employees was covered by Accounting Standards Codification (“ASC”) Topic 718 while accounting for such payments to non-employees was covered by ASC Topic 505. As it considered recently issued updates to ASC Topic 718, the FASB, as part of its simplification initiatives, decided that ASC Topic 718 would also be used as the guidance for non-employee share-based awards. Under this new guidance, both employee and non-employee awards will essentially follow the same model, with small variances related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards. The ASU is effective beginning in calendar year 2019. The Company does not expect the amendments to have a material effect on its consolidated financial statements. |
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Summary of Significant Accounting Policies (Tables) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Land Development Cost Capitalized |
Land development costs, which have been capitalized, consist of the following at December 31, 2018 and 2017:
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| Schedule of Components of Potential Dilutive Securities |
The table below summarizes the components of potential dilutive securities at December 31, 2018 and 2017.
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Accounts Payable and Accrued Expenses (Tables) |
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| Schedule of Accounts Payable and Accrued Expenses |
The table below outlines the elements included in accounts payable and accrued expenses at December 31, 2018 and 2017:
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Convertible Notes and Line of Credit (Tables) |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Convertible Notes and line of credit |
The table below summarizes the Company’s notes payable at December 31, 2018 and 2017:
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Long-Term Notes Payable (Tables) |
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| Schedule of Long Term Notes Payable |
The table below summarizes the Company’s long-term notes payable as of December 31, 2018 and December 31, 2017:
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Stockholders' Equity (Tables) |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Fixed Plan and Non-plan Options |
A summary of the status of the Company’s fixed Plan and non-plan options as of December 31, 2018 and 2017, and changes during the years ended December 31, 2018 and 2017 is presented below.
|
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| Schedule of Stock Options Outstanding and Exercisable |
The following tables summarize information about stock options outstanding and exercisable at December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
(a) These options expire upon payment in full of an outstanding note payable with an original due date of November 1, 2012. The note payable remains outstanding at December 31, 2018 and 2017. |
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Organization and Business (Details Narrative) |
Dec. 31, 2018
a
|
|---|---|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Area of land, owned | 400 |
Liquidity and Going Concern (Details Narrative) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||
| Net loss applicable to common stockholders | $ 1,390,728 | $ 1,309,603 | |
| Accumulated deficit | 38,070,603 | 36,679,875 | |
| Accounts payable and accrued expenses | 69,821 | ||
| Cash on hand | $ 65 | $ 17,606 | |
Summary of Significant Accounting Policies - Schedule of Land Development Cost Capitalized (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Land held for development | $ 5,476,097 | $ 5,476,097 |
| Land Held for Development [Member] | ||
| Land held for development | 4,934,323 | 4,934,323 |
| Licenses [Member] | ||
| Land held for development | 77,000 | 77,000 |
| Engineering and Costs Associated With Permitting [Member] | ||
| Land held for development | $ 464,774 | $ 464,774 |
Summary of Significant Accounting Policies - Schedule of Components of Potential Dilutive Securities (Details) - shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Accounting Policies [Abstract] | ||
| Convertible Preferred Stock | 260,000 | 260,000 |
| Options to Purchase Common Shares | 3,415,000 | 3,415,000 |
| Convertible Promissory Notes | 1,925,000 | 1,925,000 |
| Total | 5,600,000 | 5,600,000 |
Accounts Payable and Accrued Expenses - Schedule of Accounts Payable and Accrued Expenses (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Payables and Accruals [Abstract] | ||
| Accrued payroll due officers | $ 2,369,711 | $ 2,069,711 |
| Accrued interest due officers and directors | 1,029,062 | 767,737 |
| Accrued director fees | 478,750 | 393,750 |
| Base rents due to the President | 185,642 | 131,234 |
| Associated rental costs | 61,341 | 42,731 |
| Other | 17,308 | 22,005 |
| Total related parties | 4,141,814 | 3,427,168 |
| Accrued interest | 1,743,658 | 1,483,923 |
| Accrued dividends | 762,000 | 660,400 |
| Accrued fines and penalties | 77,700 | 44,350 |
| Other accounts payable and accrued expenses | 256,948 | 235,367 |
| Total non-related parties | $ 2,840,306 | $ 2,424,040 |
Convertible Notes and Line of Credit - Schedule of Convertible Notes and line of credit (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Convertible notes and line of credit payable | $ 1,962,500 | $ 1,962,500 |
| Private Placement [Member] | ||
| Convertible notes and line of credit payable | 962,500 | 962,500 |
| Line of Credit [Member] | ||
| Convertible notes and line of credit payable | 1,000,000 | 1,000,000 |
| Convertible Promissory Note [Member] | March 1, 2010 Private Placement [Member] | ||
| Convertible notes and line of credit payable | 475,000 | 475,000 |
| Convertible Promissory Note [Member] | October 25, 2010 Private Placement [Member] | ||
| Convertible notes and line of credit payable | $ 487,500 | $ 487,500 |
Current Notes Payable Due Related Parties (Details Narrative) |
1 Months Ended | 9 Months Ended | 12 Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Aug. 21, 2018
USD ($)
|
Jun. 30, 2018
USD ($)
|
Jul. 24, 2017
USD ($)
|
Jun. 09, 2017 |
Mar. 31, 2018
USD ($)
|
Jul. 31, 2017
USD ($)
a
|
Dec. 31, 2016
USD ($)
|
Dec. 31, 2018
USD ($)
a
|
Dec. 31, 2017
USD ($)
|
Dec. 31, 2008
USD ($)
|
Nov. 30, 2018
USD ($)
|
Jul. 26, 2017
a
|
Aug. 25, 2016 |
Sep. 26, 2014 |
|
| Area of land, owned | a | 400 | |||||||||||||
| Debt instrument, interest rate, stated percentage | 4.00% | |||||||||||||
| Proceeds from related parties | $ 221,387 | $ 87,628 | ||||||||||||
| Credit facilities, maximum amount | $ 1,000,000 | |||||||||||||
| Debt instrument, maturity date | Jun. 30, 2019 | Nov. 01, 2012 | ||||||||||||
| Notes payable to officers and directors | $ 309,015 | |||||||||||||
| Diamondhead Property [Member] | ||||||||||||||
| Secured promissory note | 400,000 | |||||||||||||
| Promissory Note [Member] | ||||||||||||||
| Debt instrument, interest rate, stated percentage | 12.50% | |||||||||||||
| Accrued interest due | 2,928 | 1,053 | ||||||||||||
| Debt instrument, maturity date | Jun. 09, 2019 | |||||||||||||
| Mississippi Gaming Corporation [Member] | Secured Promissory Note [Member] | ||||||||||||||
| Accrued interest due | 18,762 | 8,610 | ||||||||||||
| Chairman [Member] | ||||||||||||||
| Debt instrument, interest rate, stated percentage | 15.00% | |||||||||||||
| Accrued interest due | 30,788 | |||||||||||||
| Debt instrument, face amount | $ 200,000 | $ 100,000 | ||||||||||||
| Terms on advances from chairman description | (i) the advance constitutes a lien on the Diamondhead Property with interest at 15% per annum; (ii) that the full interest of 15% per annum is payable during any calendar year in which all or part of the amount advanced is due and owing or interest due thereon remains unpaid; (iii) that this debt be evidenced by a separate promissory note and is to be included in and secured with a third lien that is to be placed on the Diamondhead Property to secure previous advances made to the Company (hereafter "the Third Lien"); (iv) that he be indemnified for any losses sustained on the sale of his common stock in an unrelated publicly-traded company to be sold to cover this advance based on a sales price of approximately $2.80 per share with a cap on the maximum loss per share to be at a sales price of $10.00 per share; and (v) that the Chairman's previous indemnification approved by the Board of Directors on July 24, 2017 with respect to any loss on the sale of the same stock also be capped at a maximum of $10.00 per share. The Chairman will provide the Company with the documentation required to document the sale of said stock and to calculate the losses on said stock for all amounts loaned to the Company from the sale of said stock. | |||||||||||||
| Due from officers | 205,250 | |||||||||||||
| Chairman [Member] | Diamondhead Property [Member] | ||||||||||||||
| Area of land, owned | a | 400 | |||||||||||||
| Chairman [Member] | March 2019 [Member] | ||||||||||||||
| Debt instrument, face amount | 200,000 | |||||||||||||
| President [Member] | ||||||||||||||
| Secured obligation | $ 100,000 | |||||||||||||
| Due from officers | 36,137 | 20,000 | ||||||||||||
| Proceeds from related parties | $ 20,000 | |||||||||||||
| Incurred expenses | 18,000 | |||||||||||||
| President [Member] | Loan One [Member] | ||||||||||||||
| Loan amount | $ 25,000 | 25,000 | ||||||||||||
| President [Member] | Loan Two [Member] | ||||||||||||||
| Loan amount | 15,000 | 15,000 | ||||||||||||
| President [Member] | Two Loans [Member] | ||||||||||||||
| Credit facilities, maximum amount | 15,000 | |||||||||||||
| President [Member] | Third Lien [Member] | ||||||||||||||
| Loan amount | 100,000 | |||||||||||||
| President [Member] | Secured Promissory Note [Member] | ||||||||||||||
| Accrued interest due | 8,421 | 3,000 | ||||||||||||
| Maximum [Member] | President [Member] | ||||||||||||||
| Secured promissory note | $ 100,000 | |||||||||||||
| Maximum [Member] | Board of Directors [Member] | ||||||||||||||
| Proceeds from related parties | $ 100,000 | |||||||||||||
| Related party transaction, terms and manner of settlement | Interest of 15% per annum on the amount advanced and owing and that the full 15% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (ii) the obligation in the maximum principal amount of $100,000 with interest due thereon be treated as a secured debt of the Company, to be evidenced by a separate note and to be secured with a separate lien to be placed on the Diamondhead Property ("the Third Lien") together with the Chairman's Third Lien, as well as a first lien to be placed on the residential lot owned by the Company; (iii) that the Third Lien on the Diamondhead Property also include the two loans ($25,000 and $15,000) and interest due thereon and credit facilities in the maximum amount of $15,000; and (iv) that the foregoing will be treated as advances to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V). | |||||||||||||
| Payable During any Calendar Year [Member] | ||||||||||||||
| Debt instrument, interest rate, stated percentage | 11.00% | |||||||||||||
| Chairman of the Board of Directors [Member] | ||||||||||||||
| Increase (decrease) in property and other taxes payable | $ 67,628 | |||||||||||||
| Debt instrument, interest rate, stated percentage | 14.00% | |||||||||||||
| Proceeds from related parties | $ 90,000 | |||||||||||||
| Chairman of the Board of Directors [Member] | Promissory Note [Member] | ||||||||||||||
| Accrued interest due | 30,482 | $ 17,882 | ||||||||||||
| Chairman [Member] | ||||||||||||||
| Secured obligation | 100,000 | |||||||||||||
| Chairman [Member] | Promissory Note [Member] | ||||||||||||||
| Secured obligation | $ 200,000 | |||||||||||||
| Chairman [Member] | Maximum [Member] | ||||||||||||||
| Secured promissory note | 100,000 | |||||||||||||
| Chairman [Member] | Maximum [Member] | Promissory Note [Member] | ||||||||||||||
| Secured promissory note | $ 200,000 | |||||||||||||
| Chairman of Board [Member] | Diamondhead Property [Member] | ||||||||||||||
| Secured promissory note | 300,000 | |||||||||||||
| President [Member] | Diamondhead Property [Member] | ||||||||||||||
| Secured promissory note | $ 100,000 | |||||||||||||
| Mississippi Property [Member] | ||||||||||||||
| Area of land, owned | a | 400 | |||||||||||||
Long-Term Notes Payable - Schedule of Long Term Notes Payable (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Principal Amount Owed | $ 187,500 | $ 290,128 |
| Amount Due Related Parties | 115,000 | 202,628 |
| Amount Due Others | 72,500 | 87,500 |
| 4 Year 8% Secured Note [Member] | ||
| Principal Amount Owed | 47,500 | |
| Amount Due Related Parties | 25,000 | |
| Amount Due Others | 22,500 | |
| 4 Year 14% Secured Note [Member] | ||
| Principal Amount Owed | 90,000 | |
| Amount Due Related Parties | 90,000 | |
| Amount Due Others | ||
| 4 Year 0% Secured Note [Member] | ||
| Principal Amount Owed | 50,000 | |
| Amount Due Related Parties | ||
| Amount Due Others | $ 50,000 | |
| 2 Year 12.5% Secured Note [Member] | ||
| Principal Amount Owed | 15,000 | |
| Amount Due Related Parties | ||
| Amount Due Others | 15,000 | |
| 2 Year 4%/15% Secured Note [Member] | Chairman [Member] | ||
| Principal Amount Owed | 67,628 | |
| Amount Due Related Parties | 67,628 | |
| Amount Due Others | ||
| 2 Year 15% Secured Note [Member] | President [Member] | ||
| Principal Amount Owed | 20,000 | |
| Amount Due Related Parties | 20,000 | |
| Amount Due Others |
Related Party Transactions (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Accrued payroll due officers | $ 2,369,711 | $ 2,069,711 |
| Accrued interest | 1,743,658 | 1,483,923 |
| Directors fees | 15,000 | |
| Accrued directors fees | 478,750 | 393,750 |
| Office Space Lease [Member] | ||
| Debt instrument, periodic payment | 4,534 | |
| Base rent expense | 54,408 | 54,408 |
| Associated rental costs | 18,610 | 15,140 |
| Operating leases, rent expense, net | 73,108 | 69,548 |
| President [Member] | ||
| Accrued payroll due officers | 2,166,996 | |
| Vice President and Current Chairman of Board of Directors [Member] | ||
| Accrued payroll due officers | 121,140 | |
| Management [Member] | ||
| Accrued interest | 876,074 | $ 684,708 |
| Director [Member] | ||
| Directors fees | $ 15,000 | |
Stockholders' Equity - Schedule of Fixed Plan and Non-plan Options (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Equity [Abstract] | ||
| Options, Outstanding, Beginning Balance | 3,415,000 | 3,415,000 |
| Options, Outstanding, Weighted Average Exercise Price, Beginning Balance | $ .44 | $ .44 |
| Options, Granted | ||
| Options, Granted, Weighted Average Exercise Price | ||
| Options, Exercised | ||
| Options, Exercise, Weighted Average Exercise Price | ||
| Options, Expired | ||
| Options, Expired, Weighted Average Exercise Price | ||
| Options, Outstanding, Ending Balance | 3,415,000 | 3,415,000 |
| Options, Outstanding, Weighted Average Exercise Price, Ending Balance | $ .44 | $ .44 |
| Options, Exercisable, Ending Balance | 3,415,000 | 3,415,000 |
| Weighted-average fair value of options granted during the year | $ .00 | $ .00 |
Employee Stock Ownership Plan (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Employee Stock Ownership Plan (ESOP), Number of Unearned Shares | 2,068,190 | |
| Employee Stock Ownership Plan (ESOP), Deferred Shares, Fair Value | $ 28,955 | |
| Stock issued during period, value, treasury stock reissued, shares | 79,545 | 79,545 |
| Stock issued during period, value, treasury stock reissued, shares | $ 1,115 | $ 1,590 |
| Employee Stock Ownership Plan [Member] | ||
| Equity ownership percentage | 8.00% | |
Income Taxes (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Tax Disclosure [Abstract] | ||
| Net operating loss carryforwards | $ 12,700,000 | |
| Net operating loss carryforwards, expiration date | Expire during various periods through 2038. | |
| Federal statutory income tax rate | 21.00% | |
| Deferred tax assets valuation allowance | $ 2,700,000 | $ 2,900,000 |
| Effective income tax rate | 0.00% | |
| Deferred income tax assets | ||
| Valuation allowance, deferred tax asset, increase (decrease), amount | $ 245,000 | $ 145,000 |
Commitments and Contingencies (Details Narrative) |
12 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Jul. 26, 2017
USD ($)
a
|
Sep. 26, 2014
USD ($)
|
Jun. 19, 1993 |
Dec. 31, 2018
USD ($)
a
|
Dec. 31, 2017
USD ($)
|
Nov. 30, 2018
USD ($)
|
Mar. 31, 2018
USD ($)
|
Jul. 31, 2017
a
|
Dec. 31, 2014
USD ($)
|
Mar. 31, 2014
USD ($)
|
|
| Area of land, owned | a | 400 | |||||||||
| Accrued current delinquent filings | $ 77,700 | $ 44,350 | ||||||||
| Notes Payable Principal Due [Member] | ||||||||||
| Debt instrument, face amount | 137,500 | |||||||||
| Mississippi Property [Member] | ||||||||||
| Area of land, owned | a | 400 | |||||||||
| Mississippi Property [Member] | Notes Payable Principal Due [Member] | ||||||||||
| Debt instrument, face amount | 137,500 | |||||||||
| Mississippi Property [Member] | Notes Payable Principal Due [Member] | Second Lien [Member] | ||||||||||
| Lien amount | 250,000 | |||||||||
| Chairman [Member] | ||||||||||
| Lost equity on stock sale | 124,260 | |||||||||
| Debt instrument, face amount | $ 100,000 | $ 200,000 | ||||||||
| Accrued interest | 30,788 | |||||||||
| Investors Lien [Member] | Collateralized Convertible Senior Debentures [Member] | Mississippi Property [Member] | ||||||||||
| Lien amount | $ 1,850,000 | |||||||||
| Investors Lien [Member] | Collateralized Convertible Senior Debentures [Member] | Tranche 1 [Member] | ||||||||||
| Debt instrument, face amount | $ 1,000,000 | |||||||||
| Investors Lien [Member] | Collateralized Convertible Senior Debentures [Member] | Tranche 2 [Member] | ||||||||||
| Debt instrument, face amount | $ 850,000 | |||||||||
| Executives Lien [Member] | Collateralized Convertible Senior Debentures [Member] | Mississippi Property [Member] | ||||||||||
| Lien amount | 2,000,000 | |||||||||
| Diamondhead Property [Member] | ||||||||||
| Secured promissory note | 400,000 | |||||||||
| Diamondhead Property [Member] | Chairman [Member] | ||||||||||
| Related party tax paid | $ 67,628 | |||||||||
| Area of land, owned | a | 400 | |||||||||
| Diamondhead Property [Member] | Third Lien [Member] | ||||||||||
| Secured promissory note | 400,000 | |||||||||
| Accrued interest | 309,015 | |||||||||
| Office Space Lease [Member] | ||||||||||
| Monthly lease payments | 4,534 | |||||||||
| Base rent expense | 54,408 | 54,408 | ||||||||
| Operating leases, rent expense, net | $ 73,108 | $ 69,548 | ||||||||
| Management Agreement [Member] | ||||||||||
| Operating agreement description for camc | On June 19, 1993, two subsidiaries of Diamondhead Casino Corporation, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company's proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. Management of the Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation. | |||||||||
Pending and Threatened Litigation (Details Narrative) - USD ($) |
12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
Nov. 28, 2018 |
Nov. 09, 2018 |
Oct. 31, 2018 |
Jun. 09, 2017 |
Oct. 25, 2016 |
Sep. 01, 2016 |
Dec. 31, 2018 |
Dec. 31, 2008 |
Sep. 26, 2014 |
|
| Debt instrument interest percentage | 4.00% | ||||||||
| Debt instrument maturity date | Jun. 30, 2019 | Nov. 01, 2012 | |||||||
| Sussman [Member] | |||||||||
| Loss contingency allegation amount | $ 28,500 | ||||||||
| Promissory Note [Member] | |||||||||
| Debt instrument interest percentage | 12.50% | ||||||||
| Debt instrument maturity date | Jun. 09, 2019 | ||||||||
| Seven Debenture Holders US District Court Case [Member] | |||||||||
| Loss contingency, damages sought, value | $ 1,400,000 | ||||||||
| Seven Debenture Holders US District Court Case [Member] | February 28, 2019 [Member] | |||||||||
| Loss contingency, damages sought, value | $ 100,000 | ||||||||
| Sussman [Member] | |||||||||
| Loss contingency, damages sought, value | $ 50,000 | ||||||||
| Litigation settlement, expense | $ 36,000 | ||||||||
| Sussman [Member] | November 10, 2010 [Member] | Promissory Note [Member] | |||||||||
| Debt instrument principal amount | $ 50,000 | ||||||||
| Debt instrument interest percentage | 9.00% | ||||||||
| Debt instrument maturity date | Nov. 10, 2012 | ||||||||
| Skaff and Towner [Member] | November 29, 2010 [Member] | Promissory Note [Member] | |||||||||
| Debt instrument principal amount | $ 37,500 | ||||||||
| Debt instrument interest percentage | 9.00% | ||||||||
| Debt instrument maturity date | Nov. 29, 2012 | ||||||||
| Skaff and Towner [Member] | June 21, 2011 [Member] | Promissory Note [Member] | |||||||||
| Debt instrument principal amount | $ 25,000 | ||||||||
| Debt instrument interest percentage | 9.00% | ||||||||
| Debt instrument maturity date | Jun. 21, 2013 | ||||||||
| Towner [Member] | November 29, 2010 [Member] | Promissory Note [Member] | |||||||||
| Debt instrument principal amount | $ 25,000 | ||||||||
| Debt instrument interest percentage | 9.00% | ||||||||
| Debt instrument maturity date | Nov. 29, 2012 | ||||||||
| Towner [Member] | June 30, 2012 [Member] | Promissory Note [Member] | |||||||||
| Litigation settlement, expense | $ 14,414 | ||||||||
| Skaff [Member] | June 30, 2012 [Member] | Promissory Note [Member] | |||||||||
| Litigation settlement, expense | $ 36,038 | ||||||||
Subsequent Events (Details Narrative) - USD ($) |
Sep. 01, 2016 |
Mar. 31, 2019 |
Mar. 25, 2019 |
Mar. 11, 2019 |
|---|---|---|---|---|
| Subsequent Event [Member] | Sale of Property [Member] | Buyer [Member] | ||||
| Commision percentage | 3.00% | |||
| Subsequent Event [Member] | Sale of Property [Member] | Buyer and Broker [Member] | ||||
| Commision percentage | 4.00% | |||
| Subsequent Event [Member] | Joint Venture Partnership [Member] | ||||
| Commision percentage | 4.00% | |||
| Subsequent Event [Member] | President [Member] | ||||
| Due form related party | $ 15,860 | |||
| Subsequent Event [Member] | Board of Directors Chairman [Member] | ||||
| Due form related party | 20,737 | |||
| Subsequent Event [Member] | Board of Directors Chairman [Member] | Maximum [Member] | ||||
| Due form related party | $ 200,000 | |||
| United States Bankruptcy Court [Member] | ||||
| Litigation settlement, amount awarded from other party | $ 54,886 | |||
| Litigation settlement expense | 20,000 | |||
| Sussman [Member] | ||||
| Litigation settlement expense | $ 36,000 | |||
| Sussman [Member] | Subsequent Event [Member] | President [Member] | ||||
| Due form related party | $ 36,000 |