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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

 

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: 0-17529

 

 

 

DIAMONDHEAD CASINO CORPORATION

(Exact name of registrant as specified in charter)

 

Delaware   59-2935476
(State of Incorporation)   (I.R.S. EIN)

 

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)-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. Yes ☒ No ☐

 

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 ☐ No

 

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 ☐
Non-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 ☐ No

 

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: 36,297,576.

 

 

 

 
 

 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

    Page
PART 1: FINANCIAL INFORMATION  
     
ITEM 1: Financial Statements  
     
  Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 1
     
  Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2022 and September 30, 2021 2
     
  Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2022 and September 30, 2021 3
     
  Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficiency for the Three and Nine Months Ended September 30, 2022 and September 30, 2021 4
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and September 30, 2021 5
     
  Notes to Unaudited Condensed Consolidated Financial Statements 6
     
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Financial Results 17
     
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 20
     
ITEM 4: Controls and Procedures 20
     
PART II: OTHER INFORMATION 20
     
ITEM 1: Legal Proceedings 20
     
ITEM 1A: Risk Factors 20
     
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds 20
     
ITEM 3: Default Upon Senior Securities 20
     
ITEM 4: Mine Safety Disclosures 21
     
ITEM 5: Other Information 21
     
ITEM 6: Exhibits 21
     
  Signatures 22

 

i
 

 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2022   2021 
  

(Unaudited)

     
ASSETS          
Current assets:          
Cash  $61,042   $82,091 
Total current assets   61,042    82,091 
Land (Note 3)   5,476,097    5,476,097 
Other assets   80    80 
Total assets  $5,537,219   $5,558,268 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable and accrued expenses due related parties (Note 4)  $7,261,274   $6,585,289 
Accounts payable and accrued expenses - others (Note 4)   4,510,588    4,132,371 
Convertible notes and line of credit payable (Note 5)   1,962,500    1,962,500 
Debenture payable (Note 6)   50,000    50,000 
Convertible debenture payable (Note 6)   1,800,000    1,800,000 
Short term notes and interest bearing advance (Note 7)   80,504    80,504 
Notes payable due related parties (net of unamortized debt discount of $0 and $13,583, respectively) (Note 8)   720,651    722,172 
Notes payable due others (net of unamortized debt discount of $51,517 and $55,017, respectively) (Note 9)   505,983    372,483 
Total liabilities   16,891,500    15,705,319 
           
Commitments and contingencies (Notes 3 and 11)   -      
           
Stockholders’ deficit:          
Preferred stock, $0.01 par value; shares authorized 5,000,000, outstanding 2,086,000 at September 30, 2022 and December 31, 2021 (aggregate liquidation preference of $2,519,080 at September 30, 2022 and December 31, 2021)   20,860    20,860 
Common stock, $0.001 par value; shares authorized 50,000,000, issued: 39,052,472 at September 30, 2022 and December 31, 2021 outstanding: 36,297,576 at September 30, 2022 and December 31, 2021   39,052    39,052 
Additional paid-in capital   36,210,453    36,100,973 
Unearned ESOP shares   (2,727,866)   (2,727,866)
Accumulated deficit   (44,710,780)   (43,394,070)
Treasury stock, at cost, 925,341 shares at September 30, 2022 and December 31, 2021   (186,000)   (186,000)
Total stockholders’ deficit   (11,354,281)   (10,147,051)
Total liabilities and stockholders’ deficit  $5,537,219   $5,558,268 

 

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  $184,288   $173,100 
Other   16,940    16,912 
Total costs and expenses   201,228    190,011 
           
OTHER EXPENSE (INCOME)          
Interest expense:          
Related parties   87,541    73,339 
Other   92,643    110,456 
Change in fair value of stock issuance liability   -    (17,500)
Total other expense    180,184    166,295 
           
NET LOSS    (381,412)   (356,308)
           
PREFERRED STOCK DIVIDENDS   (25,400)   (25,400)
           
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS  $(406,812)  $(381,708)
           
Weighted average common shares outstanding - basic and diluted   36,297,576    36,297,576 
Net loss per common share - basic and diluted   $(0.011)  $(0.011)

 

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  $552,467   $510,871 
Other   51,214    51,111 
Total costs and expenses   603,681    561,982 
           
OTHER EXPENSE           
Interest expense:          
Related parties   340,881    308,904 
Other   295,948    284,416 
Change in fair value of stock issuance liability   -    54,250 
Total other expense    636,829    647,570 
           
NET LOSS    (1,240,510)   (1,209,552)
           
PREFERRED STOCK DIVIDENDS   (76,200)   (76,200)
           
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS  $(1,316,710)  $(1,285,752)
           
Weighted average common shares outstanding - basic and diluted   36,297,576    36,297,576 
Net loss per common share - basic and diluted   $(0.036)  $(0.035)

 

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)

 

   Shares   Amount   Shares   Amount   Capital   Shares   Amount   Deficit   Shares   Amount   Deficit 
                   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   2,086,000   $20,860    39,052,472   $39,052   $36,042,139    1,909,100   $(2,846,468)  $(41,773,364)   845,796   $(166,114)  $    (8,683,895)
Dividends   -    -    -    -    -    -    -    (25,400)   -    -    (25,400)
Net loss   -    -    -    -    -    -    -    (418,692)   -    -    (418,692)
Balances at March 31, 2021   2,086,000    20,860    39,052,472    39,052    36,042,139    1,909,100    (2,846,468)   (42,217,456)   845,796    (166,114)   (9,127,987)
Dividends   -    -    -    -    -    -    -    (25,400)   -    -    (25,400)
Net loss   -    -    -    -    -    -    -    (434,552)   -    -    (434,552)
Balances at June 30, 2021   2,086,000    20,860    39,052,472    39,052    36,042,139    1,909,100    (2,846,468)   (42,677,408)   845,796    (166,114)   (9,587,939)
Dividends   -    -    -    -    -    -    -    (25,400)   -    -    (25,400)
Net loss   -    -    -    -    -    -    -    (356,308)   -    -    (356,308)
Balances at September 30, 2021   2,086,000   $20,860    39,052,472   $39,052   $36,042,139    1,909,100   $(2,846,468)  $(43,059,116)   845,796   $(166,114)  $(9,969,647)
                                                        
Balances at December 31, 2021   2,086,000   $20,860    39,052,472   $39,052    36,100,973    1,829,555   $(2,727,866)  $(43,394,070)   925,341   $(186,000)  $(10,147,051)
Common stock to be issued in connection with notes payable   -    -    -    -    64,000    -    -    -    -    -    64,000 
Stock-based compensation   -    -    -    -    11,480    -    -    -    -    -    11,480 
Dividends   -    -    -    -    -    -    -    (25,400)   -    -    (25,400)
Net loss   -    -    -    -    -    -    -    (471,522)   -    -    (471,522)
Balances at March 31, 2022   2,086,000    20,860    39,052,472    39,052    36,176,453    1,829,555    (2,727,866)   (43,890,992)   925,341    (186,000)   (10,568,493)
Debt discount   -    -    -    -    34,000    -    -    -    -    -    34,000 
Dividends   -    -    -    -    -    -    -    (25,400)   -    -    (25,400)
Net loss   -    -    -    -    -    -    -    (387,576)   -    -    (387,576)
Balances at June 30, 2022   2,086,000    20,860    39,052,472    39,052    36,210,453    1,829,555    (2,727,866)   (44,303,968)   925,341    (186,000)   (10,947,469)
Dividends   -    -    -    -    -    -    -    (25,400)   -    -    (25,400)
Net loss   -    -    -    -    -    -    -    (381,412)   -    -    (381,412)
Balances at September 30, 2022   2,086,000   $20,860    39,052,472   $39,052   $36,210,453    1,829,555   $(2,727,866)  $(44,710,780)   925,341   $(186,000)  $(11,354,281)

 

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  $(1,240,510)  $(1,209,552)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization   115,083    90,248 
Change in fair value of stock issuance liability   -    54,250 
Stock-based compensation   11,480    - 
Changes in operating assets and liabilities:          
Accounts payable and accrued expenses - related parties   599,785    586,489 
Accounts payable and accrued expenses - other   378,217    224,440 
Net cash used in operating activities   (135,945)   (254,125)
           
Cash flows from financing activities:          
Proceeds from note payable - others   130,000    175,000 
Proceeds (repayments) from notes payable issued to related parties   (15,104)   114,078 
Net cash provided by financing activities   114,896    289,078 
           
Net change in cash   (21,049)   34,953 
Cash at beginning of period   82,091    88,711 
Cash at end of period  $61,042   $123,664 
    -      
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  $76,200   $76,200 
Common stock to be issued in connection with note payable  $98,000   $- 
Stock issuance liability  $-   $104,500 

 

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 $1,316,710 for the nine months ended September 30, 2022. In addition, the Company had an accumulated deficit of $44,710,780 as of September 30, 2022. Due to its lack of financial resources, the Company has been forced to explore other alternatives, including a sale of part or all of the Property.

 

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 $11,771,862 of accounts payable and accrued expenses and $61,042 in cash on hand.

 

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  $4,934,323 
Licenses   77,000 
Engineering and costs associated with permitting   464,774 
      
Total land  $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 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 no impairment existed at September 30, 2022.

 

Net Loss per Common Share

 

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 860,000 shares subject to be issued in connection with notes payables (see note 9) and 35,000 shares subject to be issued to Mr. Harrison (see note 10). The dilutive securities below do not include 5,055,555 potentially convertible Debentures since the requirements for possible conversion have not yet been met and may never be met.

 

The table below summarizes the components of potential dilutive securities at September 30, 2022 and 2021.

 

   September 30,   September 30, 
Description  2022   2021 
         
Convertible Preferred Stock   260,000    260,000 
Options to Purchase Common Shares   4,555,000    4,555,000 
           
Total   4,815,000    4,815,000 

 

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   $3,494,711   $3,269,711 
Accrued interest due officers and directors    2,385,998    2,066,096 
Accrued director fees    816,250    748,750 
Base rents due to the President    389,672    348,866 
Associated rental costs    157,335    134,558 
Other   17,308    17,308 
Total related parties  $7,261,274   $6,585,289 
           
Non-related parties:          
Accrued interest  $2,731,755   $2,529,910 
Accrued dividends   1,143,000    1,066,800 
Accrued fines and penalties   397,550    312,600 
Other   238,283    223,061 
Total non-related parties  $4,510,588   $4,132,371 

 

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 carries an interest rate on amounts borrowed of 9% per annum. 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. The Company is in default under the repayment terms of the agreement. At September 30, 2022 and December 31, 2021, the unpaid principal and accrued interest due on the obligation totaled $2,190,737 and $2,123,422, respectively.

 

Convertible Notes

 

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. The Promissory Notes were convertible into 50,000 shares of common stock of the Company upon issuance and for a period of five years at the option of the investor. The conversion rights have expired.

 

9
 

 

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. The Promissory Notes bear interest at 9% per annum and were convertible into 50,000 shares of common stock of the Company upon issuance and for a period of five years at the option of the investor. The conversion rights have expired.

 

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 to 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 November 2020, the Superior Court of the State of Delaware awarded Judgments in favor of certain holders of these Promissory Notes who filed suit against the Company. As a result, the Company must carry an aggregate of $486,796 (total principal and interest) as debt owed to these noteholders. As of September 30, 2022 and December 31, 2021, all Notes issued had a total outstanding principal of $962,500 and accrued interest, including the additional interest awarded pursuant to the Court Judgments, of $1,023,331 and $950,371, respectively.

 

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*  $475,000   $475,000 
Private placements - October 25, 2010   487,500    487,500 
   $962,500   $962,500 

 

*   Of the 2010 placements above, $75,000 is due to a related party.

 

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) $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 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 $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 Debenture agreements in the amount of $427,081 and as a result, the Debentures payable are reported as current liabilities. Certain Debenture holders sued the Company for failing to make payments due under the terms of the Debentures and the case was settled. See Note 15 below. Total accrued interest due on all outstanding Debentures amounted to $556,581 and $501,081 at September 30, 2022 and December 31, 2021 respectively.

 

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 $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 was 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 payments since March 1, 2018 have not been made. Accrued interest due on this obligation amounted to $9,971 and $8,553 at September 30, 2022 and December 31, 2021, respectively.

 

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.

 

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Interest Bearing Advances

 

In 2016, the Company received cash advances totaling $47,500 from seven lenders which included $22,500 from third parties (see Note 8 for related party advances). 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 $14,200 and $12,000 at September 30, 2022 and December 31, 2021, respectively.

 

On February 2, 2017, the Company borrowed $25,000 from an unrelated third party. The Note carries an annual interest rate of approximately 12.5% 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 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 $17,705 and $15,342 at September 30, 2022 and December 31, 2021, respectively.

 

Of the amounts discussed above, $80,504 in short-term notes and advances are in default under the original agreed to terms.

 

Note 8. Current Notes Payable Due Related Parties

 

In 2016, the Company received cash advances totaling $47,500 from seven lenders which included $25,000 from three Current Directors of the Company (see Note 7). 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 $14,000 and $12,000 at September 30, 2022 and December 31, 2021, respectively. These amounts are included in current liabilities on the consolidated balance sheets as of September 30, 2022 and December 31, 2021. This note is secured by a second lien on the Diamondhead Property.

 

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 $77,706 and $68,262 at September 30, 2022 and December 31, 2021, 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, 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; and (v) he be indemnified for any losses sustained on the sale of that common stock sold to cover the payment of real estate property taxes and any credit card fees associated with payment (“the indemnification”). The Chairman identified the common stock sold and provided the Company with the documentation required to document the sale of said stock and to calculate the loss, if any, on said stock. The fair value measurement of the derivative indemnification liability at December 31, 2021 was developed using Level 1 inputs, which was valued at $0. 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. See Note 10. On September 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. Accrued interest on the note amounted to $58,679 and $49,194 at September 30, 2022 and December 31, 2021, respectively.

 

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 identified the common stock sold and provided the Company with the documentation required to document the sale of said stock and to calculate the loss, if any, on said stock. 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 indemnifications. See Note 10. On September 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.

 

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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.

 

In July 2020, the Chairman of the Board of the Company paid a total of $67,076 for property taxes due for the year 2019 on the Company’s 400-acre Diamondhead, Mississippi Property plus $1,573 in related fees. The Company placed a fourteenth lien on the Property in July 2021 to secure a promissory note in the amount of $150,000 issued to the Chairman of the Board of the Company to secure the payment of these taxes and interest due thereon.

 

In May 2021, the Chairman of the Board of the Company paid a total of $62,610 for property taxes due for the year 2020 on the Company’s 400-acre Diamondhead, Mississippi Property plus $1,468 in related fees. The Company placed a fifteenth lien on the Property in July 2021 to secure a promissory note in the amount of $100,000 issued to the Chairman of the Board of the Company to secure the payment of these taxes and interest due thereon.

 

On May 30, 2021, the Chairman of the Board of the Company loaned the Company $50,000. The note is non-interest bearing and matures one year from the date of issuance. The Company placed a sixteenth lien on the Property in July 2021 to secure this non-interest bearing note which totals $50,000 in principal and calls for the issuance of 100,000 shares of common stock. The note is not convertible. As of the issuance date of these financial statements, no shares have been issued. The Company recorded a fair value of the stock of $33,500, which was determined by the fair value of the Company’s common stock at the date of the loan. The fair value of the stock was recorded as a debt discount, which will be amortized to interest expense over the life of the note. During the nine months ended September 30, 2022, $13,583 of the debt discount was amortized to interest expense to related parties.

 

As of September 30, 2022, the Chairman had advanced a total of $467,953, net of repayment of $16,250, under both the March 2018 and March 2019 arrangements and was owed accrued interest in the amount of $279,754 and $210,094 at September 30, 2022 and December 31, 2021, respectively.

 

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.

 

As of September 30, 2022, the President had advanced a total of $23,620, net of repayments of $49,949, 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 September 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. Accrued interest due on this note amounted to $41,409 and $33,361 at September 30, 2022 and December 31, 2021, 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 due to the officers and directors discussed above was $720,651, net of debt discount of $0 and $722,172, net of debt discount of $13,583, as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, $686,605 was past due.

 

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Note 9. Notes Payable Due Others

 

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 note is currently in default.

 

In December 2020, the Company entered into three promissory notes with unrelated lenders in exchange for an aggregate principal amount of $126,250. The Company received total proceeds of $100,000 for the notes, resulting in an original issue discount of $26,250. 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 December 2021, one year after the notes’ issuances. These notes are currently in default.

 

In January and February 2021, the Company entered into two additional promissory notes with unrelated lenders in exchange for a principal amount of $25,000 and $31,250, respectively. The Company received total proceeds of $50,000 for the notes, resulting in an original issue discount of $6,250. 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 $70,000, $25,000 and $25,000, respectively. The Company received total proceeds of $100,000 for the notes, resulting in an original issue discount of $20,000. 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 $25,000. The Company received proceeds of $25,000 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 $50,000. The Company received proceeds of $50,000 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 $60,436 for property taxes due for the year 2021 on the Company’s Mississippi Property and loaned the Company an additional $19,564 for a total of $80,000. In return for the $80,000, the Company issued two non-interest bearing secured promissory notes for $40,000 each, due and payable in one year and, in addition, agreed to issue 80,000 shares of common stock for each $40,000 loaned, for a total repayment due of $80,000 plus 160,000 shares of common stock.

 

In April 2022, the Company entered into an additional promissory note with an unrelated lender in exchange for a principal amount of $50,000. The Company received proceeds of $50,000 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. There is a call for the issuance of a total of 760,000 shares of common stock in connection with the notes and liens, however, no shares have been issued to date. In December 2020, the Company recorded a fair value of the stock of $22,050, 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 $102,000. In the nine months ended September 30, 2022, the Company recorded a fair value of the stock pertaining to the 2022 notes of $98,000. 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, $101,499 and $90,428 of the debt discount was amortized to interest expense to others. As of September 30, 2022 and December 31, 2021, total notes payable due others, net of unamortized discount, was $505,983 and $372,483, respectively.

 

Note 10. Related Party Transactions

 

As of September 30, 2022, the President of the Company is owed deferred salary in the amount of $3,291,996 and the Vice President and the current Chairman of the Board of Directors of the Company is owed deferred salary in the amount of $121,140. The Board of directors agreed to pay interest at 9% per annum on the foregoing amounts owed. Interest expense under this agreement amounted to $221,372 and $201,177 during the nine months ended September 30, 2022 and 2021, respectively. Total interest accrued under this agreement totaled $1,833,530 and $1,612,158 as of September 30, 2022 and December 31, 2021, respectively.

 

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 $4,534 and payment of associated costs of insurance, real estate taxes, utilities and other expenses. Rent expense associated with this lease amounted to base rent in the amount of $40,806 and associated rental costs of $22,776 for a total of $63,582 for the nine months ended September 30, 2022 and base rent of $40,806 and associated rental costs of $19,931 for a total of $60,737 for the nine months ended September 30, 2021. No payments associated with the base rents were made in nine months ended September 30, 2022. At September 30, 2022 and December 31, 2021, amounts owing for base rent and associated rental costs totaled $547,007 and $483,424, respectively.

 

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Directors of the Company are entitled to a director’s fee of $15,000 per year for their services. The Company has been unable to pay directors’ fees to date. A total of $816,250 and $748,750 was due and owing to the Company’s current and former directors as of September 30, 2022 and December 31, 2021, respectively. Directors have previously been compensated and may, in the future, be compensated for their services with cash, common stock, or options to purchase common stock of the Company.

 

On February 4, 2022, the Board of Directors entered into an agreement with Mr. Harrison, the Chairman of the Board of Directors, to issue 35,000 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 $11,480 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 $250,000 to secure certain notes payable, including notes to related parties, totaling $137,500 in principal and accrued interest incurred.

 

On August 21, 2018, the Company filed a third lien on the Diamondhead Property for up to $400,000 to secure notes issued to the Chairman and President of the Company arising in the third quarter of 2017 and during 2018, as more fully described in Note 8.

 

On January 26, 2021, a fourth lien in the amount of $2,000,000 was placed on the Property to secure a non-interest-bearing note payable in the amount of $2,000,000, issued to secure amounts owed to the President of the Company for accrued, but unpaid, salary, rent and other expenses.

 

On February 17, 2021, a fifth lien in the amount of $658,750 was placed on the Property to secure a non-interest-bearing note payable in the amount of $658,750, issued to secure amounts owed to nine directors, including the Company’s six current directors.

 

15
 

 

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 $252,500 in principal and call for the issuance of 250,000 shares of common stock. The notes are not convertible. As of the issuance date of these financial statements, no shares have been issued.

 

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 $50,000 in principal and call for the issuance of a total of 100,000 shares of common stock. The notes are not convertible. As of the issuance date of these financial statements, no shares have been issued.

 

In July 2021, the Company placed a fourteenth lien on the Property to secure a promissory note in the amount of $150,000 issued to the Chairman of the Board of the Company to secure the payment of taxes and interest that were paid by the Chairman in July 2020.

 

In July 2021, the Company placed a fifteenth lien on the Property to secure a promissory note in the amount of $100,000 issued to the Chairman of the Board of the Company to secure the payment of taxes and interest that were paid by the Chairman in May 2021.

 

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 $50,000 in principal and calls for the issuance of 100,000 shares of common stock. The note is not convertible. As of the issuance date of these unaudited condensed consolidated financial statements, no shares have been issued.

 

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 $25,000 in principal and calls for the issuance of 50,000 shares of common stock. The note is not convertible. As of the issuance date of these unaudited condensed consolidated financial statements, no shares have been issued.

 

In November 2021, an eighteenth lien was placed on the Property to secure a non-interest bearing note issued in November 2021 which totals $50,000 in principal and calls for the issuance of 100,000 shares of common stock. The note is not convertible. As of the issuance date of these unaudited condensed consolidated financial statements, no shares have been issued.

 

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 $80,000 in principal and call for the issuance of a total of 160,000 shares of common stock. The notes are not convertible. As of the issuance date of these unaudited condensed consolidated financial statements, no shares have been issued.

 

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 $50,000 in principal and calls for the issuance of a total of 100,000 shares of common stock. The note is not convertible. As of the issuance date of these unaudited condensed consolidated financial statements, no shares have been issued.

 

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 $397,550 and $312,600 on the current delinquent filings as of September 30, 2022 and December 31, 2021, respectively. 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 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

 

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.

 

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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

 

Exhibits 31.1 and 31.2

 

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.

 

Exhibits 32.1 and 32.2

 

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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