UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File No:
(Exact name of registrant as specified in charter)
| (State of Incorporation) | (I.R.S. EIN) |
(Address of principal executive offices)
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b)-2 of the Exchange Act.:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| None |
Indicate
by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.
Indicate
by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the Issuer’s classes of common equity as of the latest practicable date: Number of shares outstanding as of November 8, 2022: .
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
| i |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
(Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Total current assets | ||||||||
| Land (Note 3) | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses due related parties (Note 4) | $ | $ | ||||||
| Accounts payable and accrued expenses - others (Note 4) | ||||||||
| Convertible notes and line of credit payable (Note 5) | ||||||||
| Debenture payable (Note 6) | ||||||||
| Convertible debenture payable (Note 6) | ||||||||
| Short term notes and interest bearing advance (Note 7) | ||||||||
| Notes payable due related parties (net of unamortized debt discount of $ | ||||||||
| Notes payable due others (net of unamortized debt discount of $ | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Notes 3 and 11) | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, $ par value; shares authorized , outstanding at September 30, 2022 and December 31, 2021
(aggregate liquidation preference of $ | ||||||||
| Common stock, $ par value; shares authorized , issued: at September 30, 2022 and December 31, 2021 outstanding: at September 30, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Unearned ESOP shares | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost, shares at September 30, 2022 and December 31, 2021 | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
| 1 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| COSTS AND EXPENSES | ||||||||
| Administrative and general | $ | $ | ||||||
| Other | ||||||||
| Total costs and expenses | ||||||||
| OTHER EXPENSE (INCOME) | ||||||||
| Interest expense: | ||||||||
| Related parties | ||||||||
| Other | ||||||||
| Change in fair value of stock issuance liability | ( | ) | ||||||
| Total other expense | ||||||||
| NET LOSS | ( | ) | ( | ) | ||||
| PREFERRED STOCK DIVIDENDS | ( | ) | ( | ) | ||||
| NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding - basic and diluted | ||||||||
| Net loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
See the accompanying notes to these unaudited condensed consolidated financial statements.
| 2 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| COSTS AND EXPENSES | ||||||||
| Administrative and general | $ | $ | ||||||
| Other | ||||||||
| Total costs and expenses | ||||||||
| OTHER EXPENSE | ||||||||
| Interest expense: | ||||||||
| Related parties | ||||||||
| Other | ||||||||
| Change in fair value of stock issuance liability | ||||||||
| Total other expense | ||||||||
| NET LOSS | ( | ) | ( | ) | ||||
| PREFERRED STOCK DIVIDENDS | ( | ) | ( | ) | ||||
| NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding - basic and diluted | ||||||||
| Net loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
See the accompanying notes to these unaudited condensed consolidated financial statements.
| 3 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
| Additional | Total | |||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Unearned ESOP | Accumulated | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Shares | Amount | Deficit | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Common stock to be issued in connection with notes payable | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Debt discount | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
| 4 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization | ||||||||
| Change in fair value of stock issuance liability | ||||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts payable and accrued expenses - related parties | ||||||||
| Accounts payable and accrued expenses - other | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from note payable - others | ||||||||
| Proceeds (repayments) from notes payable issued to related parties | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| - | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Unpaid preferred stock dividends in accounts payable and accrued expenses | $ | $ | ||||||
| Common stock to be issued in connection with note payable | $ | $ | ||||||
| Stock issuance liability | $ | $ | ||||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
| 5 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Business
Diamondhead Casino Corporation (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”), as well as Casino World. The Company’s intent was and is 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 , the Company was 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.
Note 2. Liquidity and Going Concern
These
unaudited condensed 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 unaudited condensed
consolidated financial statements, incurred a net loss applicable to common stockholders of $
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 through 9 to these unaudited
condensed 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 September 30, 2022, the Company had $
The above conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
COVID-19
The Company had no casino or other operations in 2020 and 2021 when COVID-19 surfaced. Therefore, the Company did not experience the adverse consequences that other casino companies experienced from COVID-19 based on their cessation of casino-related operations. However, as a result of COVID, the Company’s sole employee, its President, was unable to travel domestically or internationally to meet with potential investors or potential joint venture partners or to meet with outside, independent contractors. The extent to which COVID-19 may have affected the market for financing new construction in the hospitality, hotel and casino industries given the impact of COVID-19 on this segment of the economy is unknown. The Company did not incur any extraordinary expenses as a result of COVID-19, nor did it obtain any loans under the CARES Act.
Note 3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements and, in our opinion, reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the nine months ended September 30, 2022 are not necessarily indicative of the results that we will have for any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2021, attached to our annual report on Form 10-K.
| 6 |
Principles of Consolidation
The unaudited condensed 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 GAAP 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.
Land
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 September 30, 2022 and December 31, 2021:
| Land | $ | |||
| Licenses | ||||
| Engineering and costs associated with permitting | ||||
| Total land | $ |
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 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). 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.
Financial instruments included in current assets and liabilities are reported at carrying value in the unaudited condensed consolidated balance sheets, which approximate fair value due to their short term nature.
The fair value measurement of the derivative indemnification liability discussed in Note 8 below was computed using Level 1 inputs. There was no derivative indemnification liability at December 31, 2021. Inasmuch as the Company repurchased the indemnification in February 2022, there could be no further liability relating to the indemnification following the repurchase.
| 7 |
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. As of September 30, 2022, there was a triggering event due to recurring losses and an
impairment test was conducted. However, the fair value of the long-lived assets exceeded the carrying value and the Company
determined that that
Basic loss per share is computed by dividing net loss applicable 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. Common shares outstanding excludes the shares subject to be issued in connection with notes payables (see note 9) and shares subject to be issued to Mr. Harrison (see note 10). The dilutive securities below do not include potentially convertible Debentures since the requirements for possible conversion have not yet been met and may never be met.
| September 30, | September 30, | |||||||
| Description | 2022 | 2021 | ||||||
| Convertible Preferred Stock | ||||||||
| Options to Purchase Common Shares | ||||||||
| Total | ||||||||
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivative and Hedging (Topic 815, and Leases (Topic 841). This new guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date to entities that qualify as a small reporting company. The Company has elected this extension and the effective date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. The Company has not completed its assessment of the standard, but does not expect the adoption to have a material impact on the Company’s unaudited condensed consolidated financial position, results of operations, or cash flows.
No other recent accounting pronouncements were issued by FASB that are believed by management to have a material impact on the Company’s present or future financial statements.
| 8 |
Note 4. Accounts Payable and Accrued Expenses
The table below outlines the elements included in accounts payable and accrued expenses at September 30, 2022 and December 31, 2021:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Related parties: | ||||||||
| Accrued payroll due officers | $ | $ | ||||||
| Accrued interest due officers and directors | ||||||||
| Accrued director fees | ||||||||
| Base rents due to the President | ||||||||
| Associated rental costs | ||||||||
| Other | ||||||||
| Total related parties | $ | $ | ||||||
| Non-related parties: | ||||||||
| Accrued interest | $ | $ | ||||||
| Accrued dividends | ||||||||
| Accrued fines and penalties | ||||||||
| Other | ||||||||
| Total non-related parties | $ | $ | ||||||
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 $
Convertible Notes
Pursuant
to a Private Placement Memorandum dated March 1, 2010, the Company offered Units consisting of a
| 9 |
Pursuant
to an additional Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a
The
Convertible Notes issued pursuant to the two Private Placements discussed above total $
The table below summarizes the Company’s debt arising from the above-described sources as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Private placements - March 1, 2010* | $ | $ | ||||||
| Private placements - October 25, 2010 | ||||||||
| $ | $ | |||||||
| * |
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, originally bore interest at 4% per annum after 180 days, matured six years from the date of issuance, and were secured by a lien on the Company’s Mississippi property. The interest rate on these debentures was raised pursuant to subsequent agreements. The debentures were offered in three tranches as follows:
(a)
$
(b)
$
(c)
$
The conversion rights on each issued Debenture carried an Anti-Dilution Provision. If the Company issued any shares of Common Stock or other securities after March 31, 2014 at a price per security that was less than the conversion price of a Debenture, then the Debenture would have had a new conversion price equal to the price per security that was less than the Conversion Price of the Debenture. The foregoing provision did not apply to the following:
(a) 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;
(b) 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.
| 10 |
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.
The First Tranche Debentures were issued on March 31, 2014. The Final Maturity Date of the First Tranche Debentures was six years from the issuance date of the Debentures, or March 31, 2020. Therefore, the anti-dilution provisions of the First Tranche Debentures have expired.
The Second Tranche Debentures were issued on December 31, 2014. The Final Maturity Date of the Second Tranche Debentures was six years from the issuance date of the Debentures, or December 31, 2020. Therefore, the anti-dilution provisions of the Second Tranche Debentures have expired.
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 $
Note 7. Short Term Notes and Interest-Bearing Advance
Promissory Notes
On
June 9, 2017, the Company entered into a Promissory Note with an unrelated lender in exchange for proceeds in the amount of $
Bank Credit Facility
Wells Fargo Bank provided an unsecured credit facility of up to $15,000 to the Company. The facility required a variable monthly payment of amounts borrowed plus interest, which was applied at 11.24% on direct charges and 24.99% on any cash advanced through the facility. At September 30, 2022 and December 31, 2021, a principal balance of $18,004 remained outstanding on the facility. The lending bank has since cancelled privileges under the facility for non-payment.
| 11 |
Interest Bearing Advances
In
2016, the Company received cash advances totaling $
On
February 2, 2017, the Company borrowed $ from an unrelated third party. The Note carries an annual interest rate of approximately
% and is past due. The Company is in default and as such, the lender may increase the interest rate due by an amount of up to
Of
the amounts discussed above, $
Note 8. Current Notes Payable Due Related Parties
In
2016, the Company received cash advances totaling $
In
the third quarter of 2016, the Chairman of the Board of Directors of the Company loaned the Company $
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
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
The
Chairman advanced the $
In
March of 2018, the Board of Directors voted to increase up to an additional $
| 12 |
In
November of 2018, the Board of Directors voted to increase up to an additional $
In
July 2020, the Chairman of the Board of the Company paid a total of $
In
May 2021, the Chairman of the Board of the Company paid a total of $
On
May 30, 2021, the Chairman of the Board of the Company loaned the Company $
As
of September 30, 2022, the Chairman had advanced a total of $
On
July 24, 2017, the President of the Company, who is a Director of the Company, agreed to advance the Company up to $
As
of September 30, 2022, the President had advanced a total of $
The
third lien placed on the Diamondhead Property, which secures the above three promissory notes, totals up to $
The
principal balance of the notes payable due to the officers and directors discussed above was $
| 13 |
Note 9. Notes Payable Due Others
In
October 2017, the Company entered into a settlement with a holder of $
In December 2020, the Company entered into three promissory notes with unrelated lenders in exchange for an aggregate principal amount of $. The Company received total proceeds of $ for the notes, resulting in an original issue discount of $. This original issue discount was recorded as a debt discount, which will be amortized to interest expense over the life of the notes. .
In January and February 2021, the Company entered into two additional promissory notes with unrelated lenders in exchange for a principal amount of $ and $, respectively. The Company received total proceeds of $ for the notes, resulting in an original issue discount of $. This original issue discount was recorded as a debt discount, which will be amortized to interest expense over the life of the notes. The notes are non-interest bearing and matured in January and February 2022, respectively, one year after the notes’ issuances. These notes are currently in default.
In April and May 2021, the Company entered into three additional promissory notes with unrelated lenders in exchange for a principal amount of $, $ and $, respectively. The Company received total proceeds of $ for the notes, resulting in an original issue discount of $. This original issue discount was recorded as a debt discount, which will be amortized to interest expense over the life of the notes. The notes are non-interest bearing and matured in April and May 2022, respectively, one year after the notes’ issuances. The notes are currently in default.
In July 2021, the Company entered into an additional promissory note with an unrelated lender in exchange for a principal amount of $. The Company received proceeds of $ for the note. The note is non-interest bearing and matures in July 2022, one year after the note’s issuance. The note is currently in default.
In November 2021, the Company entered into an additional promissory note with an unrelated lender in exchange for a principal amount of $. The Company received proceeds of $ for the note. The note is non-interest bearing and matures in November 2022, one year after the note’s issuance.
In
March 2022, unrelated third parties paid a total of $
In April 2022, the Company entered into an additional promissory note with an unrelated lender in exchange for a principal amount of $. The Company received proceeds of $ for the note. The note is non-interest bearing and matures in April 2023, one year after the note’s issuance.
From April 2021 to June 2022, thirteen liens were placed on the Property to secure these notes. . In December 2020, the Company recorded a fair value of the stock of $, which was determined by the fair value of the Company’s common stock at the date of each loan issuance. In 2021, the Company recorded a fair value of the stock pertaining to the 2021 notes of $. In the nine months ended September 30, 2022, the Company recorded a fair value of the stock pertaining to the 2022 notes of $. The fair value of the stock was recorded as a debt discount, which will be amortized to interest expense over the life of the notes.
During
the nine months ended September 30, 2022 and 2021, $
Note 10. Related Party Transactions
As
of September 30, 2022, the President of the Company is owed deferred salary in the amount of $
The
Company has a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space owned
by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $
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Directors
of the Company are entitled to a director’s fee of $
On February 4, 2022, the Board of Directors entered into an agreement with Mr. Harrison, the Chairman of the Board of Directors, to issue shares of common stock of the Company to Mr. Harrison to repurchase the indemnifications the Company had previously agreed to pay Mr. Harrison for losses, if any, suffered on certain stock he had sold in prior years in an unrelated company to raise funds to pay property taxes due on the Diamondhead, Mississippi Property and to lend additional funds to the Company. This repurchase eliminates any risk to the Company arising from the indemnification which could have been material. During the nine months ended September 30, 2022, the Company recorded stock-based compensation of $for the fair value of these shares, which have not yet been issued as of the issuance date of these unaudited condensed consolidated financial statements.
See Notes 4, 5, 7, 8 and 11 for other related party transactions.
Note 11. Commitments and Contingencies
Liens
As of September 30, 2022, there were twenty-one liens on the Company’s Diamondhead, Mississippi Property as follows:
The Company’s obligations under the First Tranche Collateralized Convertible Senior Debentures are secured by a first lien on the Company’s Diamondhead, 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, on September 26, 2014, a first lien was placed on the Diamondhead Property in favor of the Investors to secure the principal due in the amount of $1,850,000 and interest due thereon. The Investors Lien is in pari passu with a first 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.
On
December 16, 2016, the Company filed a second lien on the Diamondhead Property in the maximum amount of $
On
August 21, 2018, the Company filed a third lien on the Diamondhead Property for up to $
On
January 26, 2021, a fourth lien in the amount of $
On
February 17, 2021, a fifth lien in the amount of $
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In
April 2021, six liens were placed on the Property to secure six non-interest-bearing notes payable to be issued to six lenders bringing
total liens on the Property to eleven. The six notes issued total $
In
June 2021, a twelfth and thirteenth lien were placed on the Property to secure two non-interest bearing notes issued in May of 2021 which
total $
In
July 2021, the Company placed a fourteenth lien on the Property to secure a promissory note in the amount of $
In
July 2021, the Company placed a fifteenth lien on the Property to secure a promissory note in the amount of $
In
July 2021, the Company placed a sixteenth lien on the Property to secure a non-interest bearing note issued to the Chairman in May 2021
which totals $
In
July 2021, the Company placed a seventeenth lien on the Property to secure a non-interest bearing note issued to a lender, which totals
$
In
November 2021, an eighteenth lien was placed on the Property to secure a non-interest bearing note issued in November 2021 which totals
$
In
March 2022, a nineteenth and twentieth lien were placed on the Property to secure two non-interest bearing notes issued in March of 2022
which total $
In
May 2022, a twenty-first lien was placed on the Property to secure a non-interest bearing note issued in April of 2022 which totals $
Other
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, 2021, 2020, 2019, 2018, 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 $
The Company and its subsidiaries file their federal tax return on a consolidated basis. The Company has not filed its consolidated federal tax returns for the years ended December 31, 2021, 2020, 2019, 2018, 2017 and 2016. The Company believes no tax will be due with these federal returns. Mississippi Gaming Corporation, a wholly owned subsidiary of the Company, has not filed its annual reports, together with its franchise tax due, with the state of Delaware for 2021, 2020, 2019 and 2018. Casino World, Inc., a wholly owned subsidiary of the Company, has not filed its annual reports, together with its franchise tax due, with the state of Delaware for 2021, 2020, 2019, 2018, 2017 and 2016. Mississippi Gaming Corporation has not filed its corporate income and franchise tax returns, together with the tax due, with the state of Mississippi for 2021, 2020, 2019, or 2018. Casino World, Inc. has not filed its corporate income and franchise tax returns, together with the tax due, with the state of Mississippi for 2021, 2020, 2019, 2018, 2017 and 2016.
Management Agreement
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Item 2. Management’s Discussion and Analysis of Financial Condition and Financial Results
Forward Looking Statements
This section should be read together with the consolidated financial statements and related notes thereto, for the year ended December 31, 2021 included with our annual report filed on Form 10-K.
This Quarterly Report on Form 10-Q 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.
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The Company’s current priority is the development of a casino resort on its Property located in Diamondhead, Mississippi. The Company’s management, financial resources and assets will be devoted towards the development of this Property. There can be no assurance that the property can be developed or, that if developed, that the project will be successful.
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 has concentrated its efforts on the development of its Diamondhead, Mississippi Property. The development of the Diamondhead Property is 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 September 30, 2022, the Company had cash of $61,042, while accounts payable and accrued expenses totaled $11,771,862 and the Company had an accumulated deficit of $44,710,780. In addition, the Company reported a net loss applicable to common shareholders of $1,316,710 for the nine months ended September 30, 2022. Therefore, in order to sustain itself, it is imperative that the Company secure a source of funds to provide further working capital.
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 brokerage agreement has expired, but the Company continues to work with the broker on the same terms that applied under the contract.
The above conditions raise substantial doubt about the Company’s ability to continue as a going concern and its ability to generate cash to meet its cash requirements for the following twelve months as of the date of this Form 10-Q.
COVID-19
The Company had no casino or other operations in 2020 and 2021 when COVID-19 surfaced. Therefore, the Company did not experience the adverse consequences that other casino companies experienced from COVID-19 based on their cessation of casino-related operations. However, as a result of COVID, the Company’s sole employee, its President, was unable to travel domestically or internationally to meet with potential investors or potential joint venture partners or to meet with outside, independent contractors. The extent to which COVID-19 may have affected the market for financing new construction in the hospitality, hotel and casino industries given the impact of COVID-19 on this segment of the economy is unknown. The Company did not incur any extraordinary expenses as a result of COVID-19, nor did it obtain any loans under the CARES Act.
Financial Results and Analysis
During the nine months ended September 30, 2022 and 2021, the Company incurred net losses applicable to common stockholders of $1,316,710 and $1,285,752, respectively. The increase in the loss, which totaled $30,958, is primarily due to increased administrative and general expenses in 2022.
Administrative and general expenses incurred totaled $552,467 and $510,871 for the nine months ending September 30, 2022 and 2021, respectively. The table below depicts the major categories comprising these expenses:
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Payroll and Related Taxes | $ | 225,000 | $ | 225,000 | ||||
| Director Fees | 67,500 | 67,500 | ||||||
| Professional Services | 86,518 | 74,207 | ||||||
| Rents and Insurances | 63,584 | 60,737 | ||||||
| Fines and Penalties | 84,950 | 68,850 | ||||||
| All Other Expenses | 24,915 | 14,577 | ||||||
| Total General and Administrative Expenses | $ | 552,467 | $ | 510,871 | ||||
Other Income and Expense
Interest expense incurred totaled $636,829 and $593,320 for the nine months ending September 30, 2022 and 2021, respectively, an increase of $43,508. The increase in 2022 is primarily attributable to the impact of accrued interest on unpaid wages which continues to accrue yearly, and the impact from new borrowings and amortization of debt discount during the last quarter of 2021 and the first three quarters of 2022.
During the nine months ended September 30, 2021, the Company recorded a $54,250 loss pertaining to the change in fair value of the stock issuance liability.
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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.
Related Party
In July 2017, the Chairman of the Board 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. In 2019, the Chairman advanced additional funds totaling $125,396 to the Company. In 2020, the Chairman advanced additional funds totaling $69,679 to the Company. The conditions of the notes under which the Chairman agreed to make the foregoing payments and advances are discussed in full detail in Note 8 of the attached unaudited condensed consolidated financial statements.
Of particular note to these conditions is that the Company agreed to indemnify the Chairman for losses, if any, sustained on the sale of certain common stock sold in an unrelated company to pay the property taxes due on the Diamondhead, Mississippi Property and to lend additional funds to the Company. On February 4, 2022, the Board of Directors entered into an agreement with the Chairman to issue 35,000 shares of common stock of the Company to the Chairman to repurchase the indemnification. This repurchase eliminates any risk to the Company arising from the indemnification which could have been material. During the nine months ended September 30, 2022, the Company recorded stock-based compensation of $11,480 for the fair value of these shares, which have not yet been issued as of the issuance date of the attached unaudited condensed consolidated financial statements.
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.
Critical Accounting Policies
Refer to Note 3 of the notes to the unaudited condensed consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
As a smaller reporting company, information under this item is not required to be presented.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
In connection with the preparation of this quarterly report on Form 10-Q, our management, with the participation of our Chief Executive Officer, who also serves as Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. 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’s 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 not effective at the reasonable assurance level as of December 31, 2021.
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 material weaknesses over financial reporting existed as of September 30, 2022. Management identified the following four material weaknesses that have caused management to conclude that, as of September 30, 2022, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
| 1. | We do not have sufficient segregation of duties within accounting functions. | |
| 2. | We have not been timely in our financial reporting functions. Management has not developed and effectively communicated its accounting policies and procedures. This has resulted in inconsistent practices with regards to complex debt and equity transactions. | |
| 3. | The loan and lien details are not reviewed by the board of directors. |
The Company has designed and instituted policies and procedures to eliminate and/or mitigate the foregoing.
As a result of the material weaknesses identified above, our internal control over financial reporting was not effective as of September 30, 2022. The Company has initiated policies and procedures to address the above weakness. While segregation of duties is very difficult in a small company, the Company intends to file timely reports and utilize third-party consultants to ensure effective financial reporting and disclosures are met.
To address the material weaknesses identified, management performed additional analyses and other procedures to ensure that the consolidated financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2022 that are expected to materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
As a smaller reporting company, information under this item is not required to be presented.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
Refer to the footnotes for all defaults on the Company’s indebtedness.
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The Company is in arrears on the payment of dividends due on its three series of preferred stock currently issued and outstanding. The Company has not paid preferred dividends due in the first nine months of 2022 in the amount of i) $22,500 on its Series S preferred stock; ii) 22,500 on its Series S-NR preferred stock; and iii) $31,200 on its Series S-PIK preferred stock. The table below summarizes total preferred stock dividends in arrears at September 30, 2022.
| Total Amount | ||||
| Description | In Arrears | |||
| Series S | $ | 337,500 | ||
| Series S-NR | 337,500 | |||
| Series S-PIK | 468,000 | |||
| Total in arrears | $ | 1,143,000 | ||
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company pursuant to Rule 13a-14 and Rule15d-14.
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.
| 101.INS | Inline XBRL Instance Document | |
| 101.SHC | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
| DIAMONDHEAD CASINO CORPORATION | ||
| Date: November 10, 2022 | /s/ Deborah A. Vitale | |
| By: | Deborah A. Vitale | |
| Chief Executive Officer | ||
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