Exhibit 99.1
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONTENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Diamondhead Casino Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Diamondhead Casino Corporation and Subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of operations, changes in stockholders’ deficiency and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses, and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment Assessment on Land
Description of the Matter
As discussed in Note 3 to the financial statements, the Company has land held for development which is carried at cost of $5,476,097 at December 31, 2022. 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 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. The Company determined that no impairment existed as of December 31, 2022.
We identified the evaluation of the impairment analysis of land as a critical audit matter. There was a high degree of subjective auditor judgement required to evaluate whether the land was impaired.
How We Addressed the Matter in Our Audit
The following are the primary procedures we performed to address this critical audit matter. With the assistance of valuation specialists employed by us, our audit procedures included, among others, understanding of and evaluating the methodology used by the Company, assessing the reasonableness of the methodology of the underlying analysis, evaluating the significant assumptions and data inputs utilized in the Company’s analysis.
/s/
We have served as the Company’s auditor since 2004 (such date takes into account the acquisition of Friedman LLP by Marcum LLP effective September 1, 2022).
March 30, 2023
| F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Diamondhead Casino Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Diamondhead Casino Corporation and Subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statement of operations, changes in stockholders’ deficiency and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred significant recurring net losses over the past several years. In addition, the Company has no operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon its ability to raise the necessary capital with which to satisfy liabilities, fund future costs and expenses and develop the Diamondhead, Mississippi property. Management’s plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the board of directors and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment Assessment on Land
As discussed in Note 3 to the financial statements, the Company has land held for development which is carried at cost of $5,476,097 at December 31, 2021. 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 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. The Company determined that no impairment existed as of December 31, 2021.
We identified the evaluation of the impairment analysis of land as a critical audit matter. There was a high degree of subjective auditor judgement required to evaluate whether the land was impaired.
To test the Company’s evaluation of the land for impairment, we performed audit procedures that included, among others, obtaining an understanding of and evaluating the methodology used by the Company, and assessing the reasonableness of the methodology of the underlying analysis. In addition, we evaluated significant assumptions and data inputs utilized in the Company’s analysis.
/s/
We have served as the Company’s auditor from 2004-2022.
March 21, 2022
| F-3 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 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 14) | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, $ par value; shares authorized , outstanding at December 31, 2022 and December 31, 2021 (aggregate liquidation preference of $ | ||||||||
| Common stock, $ par value; shares authorized , issued: at December 31, 2022 and 2021, outstanding: at December 31, 2022 and 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Unearned ESOP shares | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost, and shares at December 31, 2022 and 2021 | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See the accompanying notes to these consolidated financial statements.
| F-4 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
| Year Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| COSTS AND EXPENSES | ||||||||
| Administrative and general | $ | $ | ||||||
| Other | ||||||||
| Total costs and expenses | ||||||||
| OTHER EXPENSE (INCOME) | ||||||||
| Interest expense: | ||||||||
| Related parties | ||||||||
| Other | ||||||||
| Total other expense (income), net | ||||||||
| 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 consolidated financial statements.
| F-5 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
| 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Shares acquired from ESOP | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock to be issued in connection with notes payable | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Common stock to be issued in connection with related party notes payable | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Shares acquired from ESOP | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock to be issued in connection with notes payable | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Stock compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
See the accompanying notes to these consolidated financial statements.
| F-6 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
| Year Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization | ||||||||
| 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 | ( | ) | ||||||
| Repayment of 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 notes payable | $ | $ | ||||||
| Common stock to be issued in connection with related party notes payable | $ | $ |
See the accompanying notes to these consolidated financial statements.
| F-7 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
Diamondhead Casino Corporation and its Subsidiaries (the “Company”) own a total of approximately 400 acres of unimproved land in Diamondhead, Mississippi (“the Property”). Active subsidiaries of the Company include Mississippi Gaming Corporation, which owns the approximate 400-acre site and Casino World, Inc.
The Company’s intent was to construct a casino resort and other amenities on the Property unilaterally or, in conjunction with one or more joint venture partners. However, the Company has been unable to date, to obtain financing to move the project forward and/or enter into a joint venture partnership. Due to its lack of financial resources and certain law suits filed against it, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. The Company’s preference is to sell only part of the Property inasmuch as this would appear to be in the best interest of the stockholders of the Company. However, there can be no assurance the Company will be able to sell only part of the Property. The Company intends to continue to pursue a joint venture partnership and/or other financing while seeking a viable purchaser for part or all of the Property. Thus, on March 25, 2019, Mississippi Gaming Corporation entered into a brokerage agreement with an unrelated third party to seek a buyer for all or part of the Property or, alternatively, to seek a joint venture partner for the project. The brokerage agreement has expired, but the Company continues to work with the broker on the same terms under the contract.
Note 2. Liquidity and Going Concern
These
consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several
years, has no operations, generates no operating revenues, and as reflected in the accompanying consolidated financial statements, incurred
a net loss applicable to common stockholders of $
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 consolidated
financial statements. The Company is in default with respect to payment of both principal and interest under the terms of most of these
instruments. In addition, at December 31, 2022, the Company had $
The above conditions raise substantial doubt as to the Company’s ability to continue as a going concern within one year after the date of that the consolidated financial statements are issued.
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
Principles of Consolidation
The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| F-8 |
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 December 31, 2022 and 2021:
| Land held for development | $ | |||
| Licenses | ||||
| Engineering and costs associated with permitting | ||||
| $ |
Fair Value Measurements
The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable input that reflects management’s own assumptions.
Financial instruments included in current assets and liabilities are reported at carrying value in the consolidated balance sheets, which approximate fair value due to their short term nature.
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of December 31, 2022.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. The President and Chief Executive Officer is the sole Trustee of the Trust. Compensation expense was measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations.
| F-9 |
As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:
(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid; and (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.
For the years 2011 through 2022, the Company elected to temporarily suspend contributions to the Plan, in accordance with the loan pledge agreement between the Company and the ESOP Trust. For each year in which there was no contribution to the Plan, the Plan returned the shares, which would have been allocated to employees annually, to treasury. The Company has not filed the annual Form 550 reports pertaining to the ESOP since the year ended December 31, 2015.
Income Taxes
Under the asset and liability method of ASC Topic 740, “Accounting for Income Taxes,” deferred tax liabilities and assets are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.
The Company follows the provisions of Financial Accounting Standard Board (“FASB”) No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under this standard, an entity may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The standard also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods and requires increased disclosures. The Company does not have a liability for unrecognized tax benefits.
The
Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2022
and 2021, the Company has
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Potentially dilutive securities are excluded from the computation of diluted loss per shares since their effect would be antidilutive. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. The dilutive securities below do not include potentially convertible Debentures, since the requirements for possible conversion had not yet been met and may never be met.
| Description | December 31, 2022 | December 31, 2021 | ||||||
| Convertible Preferred Stock | ||||||||
| Options to Purchase Common Shares | ||||||||
| Total | ||||||||
| F-10 |
The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values.
On November 9, 2020, the Board of Directors voted to award options to purchase common stock to its six current directors, including three officers of the Company, at a strike price of $ per share with an expiration date of December 31, 2023, as follows: Martin Blount: ; Daniel Burstyn: ; Robert Crow: ; Benjamin Harrell: ; Gregory Harrison: and Deborah Vitale: . All options are vested.
No share-based awards were issued or amended in 2021 or 2022.
On February 4, 2022, the Board of Directors entered into an agreement with the Chairman to issue 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 year ended December 31, 2022, the Company record stock-based compensation of $ for the fair value for these shares, which have not yet been issued as of the issuance date of the consolidated financial statements.
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
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 consolidated financial position, results of operations, or cash flows.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future financial statements.
Note 4. Accounts Payable and Accrued Expenses
The table below outlines the elements included in accounts payable and accrued expenses at December 31, 2022 and 2021:
| December 31, | 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 | $ | $ | ||||||
| F-11 |
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
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 $
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 December 31, 2022 and 2021:
December 31, 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 $
| (a) | $ | |
| (b) | $ | |
| (c) | $ |
| F-12 |
The conversion rights on each issued Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the conversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:
| (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. |
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.
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 $
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. In December 2022, the Company executed an amendment to the settlement agreement in which it agreed to increase interest due on the plaintiffs’ Debentures and to pay all principal and interest due to plaintiffs in full by March 31, 2023. In the event the plaintiffs are not paid in full by March 31, 2023, they are authorized to enter the consent judgment.
Total
accrued interest due on all outstanding Debentures amounted to $
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 $
| F-13 |
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. The total amount advanced was $
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 $
| F-14 |
In
March of 2018, the Board of Directors voted to increase up to an additional $
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 December 31, 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 $
| F-15 |
As
of December 31, 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 $
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 proceeds of $, 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 $, 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 $, 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. These 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 $. The note is non-interest bearing and matured in July 2022, one year after the note’s issuance. This 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 $. The note is non-interest bearing and matured in November 2022, one year after the note’s issuance. This note is currently in default.
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 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 years ended December 31, 2022 and 2021, $
| F-16 |
Note 10. Related Party Transactions
As
of December 31, 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 in
a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly
base rent in the amount of $
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 year ended December 31, 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 consolidated financial statements.
See Notes 4, 5, 7, 8 and 14 for other related party transactions.
Note 11. Stockholders’ Equity
At December 31, 2022 and 2021, the Company had a stock option plan and non-plan options, which are described below.
Non-Plan Stock Options
On
January 3, 2018, the Board of Directors voted to , the
expiration date for a total of currently outstanding options previously issued
to the Chairman, the President, the Vice President and two former employees of the Company. The Company recorded stock-based compensation
expense of $ for
the year ended December 31, 2018. share-based awards were issued or amended in
2019. On November 6, 2020,
On November 9, 2020, the Board of Directors voted to award options to purchase common stock to its six current directors, including three officers of the Company, at a strike price of $ per share with an expiration date of December 31, 2023, as follows: Martin Blount: ; Daniel Burstyn: ; Robert Crow: ; Benjamin Harrell: ; Gregory Harrison: and Deborah Vitale: . All options are vested.
| F-17 |
Stock Option Plan
On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to shares of the Company’s common stock. Accordingly, the Company reserved shares for issuance under the Plan. The exercise price may not be less than of the market value of the shares on the date of the grant. The options expire within from the date of grant. At December 31, 2022, options from this plan were issued or exercised.
Summary of Stock Options
| Shares | Weighted Average Exercise Price | |||||||
| Outstanding as of January 1, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ||||||||
| Forfeited | ||||||||
| Outstanding as of December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ||||||||
| Outstanding as of December 31, 2022 | $ | |||||||
| Exercisable as of December 31, 2021 | $ | |||||||
| Exercisable as of December 31, 2022 | $ | |||||||
| December 31, 2022 | ||||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding at 12/31/22 | Weighted-Average Remaining Contractual Life (Yrs.) | Weighted Average Exercise Price | Number Exercisable at 12/31/22 | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding at 12/31/21 | Weighted-Average Remaining Contractual Life (Yrs.) | Weighted Average Exercise Price | Number Exercisable at 12/31/21 | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| F-18 |
Preferred Stock
Series S Preferred Stock
The Company has shares outstanding of $ par value Series S Voting, Non-Convertible Preferred Stock which was issued to Austroinvest International, Inc. The Company is required to pay quarterly cumulative dividends of three percent per annum on these shares.
Series S-NR Preferred Stock
The
Company has shares outstanding of its $ par value Series S-NR Voting, Non-Convertible, Non-Redeemable, Preferred Stock, which
was issued to Serco International Limited. The Company is required to pay quarterly, non-cumulative dividends of three percent per annum
on these shares. Upon involuntary liquidation of the Company, the liquidation preference of each share is $
Series S-PIK Preferred Stock
The
Company has one million units outs, each unit consisting of one share of the Company’s $ par value common stock and two shares
of the Company’s Series S-PIK Junior, cumulative, convertible, non-redeemable, non-voting $.01 par value preferred stock.
Payment of Preferred Dividends
The Company did not pay any dividends due on its preferred stock in 2022 or 2021. However, payment of all cumulative and non-cumulative preferred stock dividends, outstanding at any time, is required before the Company can issue any dividends on its common stock.
| F-19 |
Note 12. Employee Stock Ownership Plan
The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan and an employee stock ownership plan. All employees having one year of service are eligible to participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The shares of common stock are pledged to the Company as security for the loans. The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In the event that the Company elects not to make a Plan contribution in any given year, the corresponding shares applicable to that year are released from the Trust to the Company in consideration of that years’ note payment. In January 2001, the Plan and accompanying promissory notes were amended to conform to the Company’s current employment structure, by extending the note repayment terms through 2044.
Assuming a Plan contribution is made, shares are allocated to the participants’ accounts in relation to repayments of the loans from the Company. At December 31, 2022, a total of with a fair market value of $.
In
2011, the Company decided to temporarily suspend contributions to the Plan. Therefore the Trust was unable to make its annual loan payment
to the company and a loan default occurred. In accordance with the Pledge Agreement between the Company and the Trust, the shares attached
to the loan payments subsequent to the 2010 contribution reverted back to the Company as treasury shares. In 2022 and 2021, shares,
with a market value of $
Note 13. Income Taxes
At
December 31, 2022, the Company had net operating loss carryforwards for income taxes of approximately $
Note 14. Commitments and Contingencies
Liens
As of December 31, 2022, the Company had placed twenty-one liens on the Company’s Diamondhead, Mississippi Property (“the Property”). No additional liens have been filed as of the filing of this report. The liens were as follows:
In September of 2014, a first lien was placed on the Property pursuant to a Private Placement dated February 14, 2014, as amended, to secure certain obligations of the Company. The first lien is composed of an (i) Executives Lien and (ii) an Investors’ Lien. The liens are in pari passu.
On
March 31, 2014, the Company issued $
On
December 16, 2016, the Company filed a second lien on the Property in the maximum amount of $
On
August 21, 2018, the Company filed a third lien on the Property in the maximum amount of $
On
January 26, 2021, the Company filed a fourth lien on the Property in the amount of $
On
February 17, 2021, the Company filed a fifth lien in the amount of $
In
April 2021, the Company filed six liens 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, the Company filed a twelfth and thirteenth on the Property to secure two non-interest bearing notes issued in May of 2021
which total $
| F-20 |
In
July 2021, the Company filed a fourteenth lien on the Property to secure a promissory note in the amount of $
In
July 2021, the Company filed a fifteenth lien on the Property to secure a promissory note in the amount of $
In
July 2021, the Company filed a sixteenth lien on the Property to secure a non-interest bearing note issued to the Chairman of the Board
in May 2021 which totals $
In
July 2021, the Company filed a seventeenth lien on the Property to secure a non-interest bearing note which totals $
In
November 2021, the Company filed an eighteenth lien on the Property to secure a non-interest bearing note issued in November 2021 which
totals $
In
March 2022, the Company filed a nineteenth and twentieth lien on the Property to secure two non-interest bearing notes issued in March
of 2022 which total $
In
May 2022, the Company filed a twenty-first lien 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, 2022, 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 $
| F-21 |
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, 2022, 2021, 2020, 2019, 2018, 2017 and 2016. The Company believes no tax will
be due with these federal returns. The Company has not filed its annual reports together with its franchise tax due with the state
of Delaware for 2020, 2019 and 2018. 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 2022, 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 2022, 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
2022, 2021, 2020, 2019, 2018, 2017 and 2016. As of December 31, 2022, the accrued franchise taxes for Delaware and Mississippi totaled $
The Company has made provision for the expected taxes due on these state filings in their consolidated financial statements for the years ending December 31, 2022 and 2021.
Management Agreement
Note 15. Pending and Threatened Litigation
CASE SETTLED
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners,
J.
Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark filed a Complaint against the Company in the United States
District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures
issued on March 31, 2014 and December 31, 2014. A companion case was filed in the Superior Court of the State of Delaware by John Hawley,
as servicing agent for Argonaut 2000 Partners, L.P. (John Hawley, as servicing agent for Argonaut 2000 Partners, L.P. v. Diamondhead
Casino Corporation (Superior Court of the State of Delaware)(Case No. N19C-02-239 RRC) The eight plaintiffs in the two cases were seeking
a total of $
In
or about December 2022, the parties entered into an Amendment to Settlement Agreement. The Amendment provides, in pertinent part, as
follows: that on or before March 31, 2023, the Plaintiffs would be paid the principal due under their debentures of $
Note 16. Subsequent Events
On
February 17, 2023, the Board of Directors agreed to issue a non-interest bearing promissory note to the Chairman in the principal amount
of $
| F-22 |