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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/19/19 Diamondhead Casino Corp 10-Q 9/30/19 56:3.4M M2 Compliance/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 383K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 21K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 21K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 19K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 19K
24: R1 Document and Entity Information HTML 49K
53: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 99K
36: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 43K
(Parenthetical)
20: R4 Condensed Consolidated Statements of Operations HTML 54K
(Unaudited)
25: R5 Consolidated Statements of Changes in HTML 67K
Stockholders' Deficiency (Unaudited)
54: R6 Condensed Consolidated Statements of Cash Flows HTML 70K
(Unaudited)
37: R7 Organization and Business HTML 23K
18: R8 Liquidity and Going Concern HTML 24K
28: R9 Summary of Significant Accounting Policies HTML 42K
42: R10 Accounts Payable and Accrued Expenses HTML 30K
49: R11 Convertible Notes and Line of Credit HTML 32K
30: R12 Convertible Debentures Payable HTML 32K
12: R13 Short Term Notes and Interest Bearing Advance HTML 32K
43: R14 Current Notes Payable Due to Related Parties HTML 32K
50: R15 Long Term Notes Payable HTML 30K
31: R16 Related Party Transactions HTML 24K
13: R17 Commitments and Contingencies HTML 45K
41: R18 Subsequent Events HTML 21K
51: R19 Summary of Significant Accounting Policies HTML 66K
(Policies)
23: R20 Summary of Significant Accounting Policies HTML 28K
(Tables)
19: R21 Accounts Payable and Accrued Expenses (Tables) HTML 28K
35: R22 Convertible Notes and Line of Credit (Tables) HTML 28K
52: R23 Short Term Notes and Interest Bearing Advance HTML 27K
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21: R25 Organization and Business (Details Narrative) HTML 19K
38: R26 Liquidity and Going Concern (Details Narrative) HTML 31K
55: R27 Summary of Significant Accounting Policies HTML 61K
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27: R28 Summary of Significant Accounting Policies - HTML 24K
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Schedule of Components of Potential Dilutive
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48: R32 Convertible Notes and Line of Credit (Details HTML 70K
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32: R39 Long Term Notes Payable - Schedule of Long Term HTML 31K
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29: R41 Commitments and Contingencies (Details Narrative) HTML 114K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
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 [X] 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 [X] 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 [X] | Smaller reporting company [X] |
| 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 [X]
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 18, 2019: 36,297,576.
C:
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
C:
| C: i |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September
30, 2019 | December
31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 4,667 | $ | - | ||||
| Other current assets | 1,475 | 16,608 | ||||||
| Total current assets | 6,142 | 16,608 | ||||||
| Land (Note 3) | 5,476,097 | 5,476,097 | ||||||
| Other assets | 80 | 80 | ||||||
| Total assets | $ | 5,482,319 | $ | 5,492,785 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||
| Current liabilities | ||||||||
| Convertible notes and line of credit payable (Note 5) | $ | 1,962,500 | $ | 1,962,500 | ||||
| Debenture payable (net of unamortized finance costs of $478 at September 30, 2019 and $1,194 at December 31, 2018) (Note 6) | 49,522 | 48,806 | ||||||
| Convertible debentures payable (net of unamortized finance costs of $21,802 at September 30, 2019 and $43,026 at December 31, 2018) (Note 6) | 1,778,198 | 1,756,974 | ||||||
| Short term notes and interest bearing advance (Note 7) | 58,769 | 58,004 | ||||||
| Current notes payable due related parties (Note 8) | 427,118 | 309,015 | ||||||
| Accounts payable and accrued expenses due related parties (Note 4) | 4,732,013 | 4,141,814 | ||||||
| Accounts payable and accrued expenses – others (Note 4) | 3,185,020 | 2,840,306 | ||||||
| Total current liabilities | 12,193,140 | 11,117,419 | ||||||
| Notes payable due related parties (Note 9) | 115,000 | 115,000 | ||||||
| Notes payable due others (Note 9) | 72,500 | 72,500 | ||||||
| Total liabilities | 12,380,640 | 11,304,919 | ||||||
| Commitments and contingencies (Notes 3 and 12) | ||||||||
| Stockholders’ deficiency | ||||||||
| Preferred stock, $.01 par value; shares authorized 5,000,000, outstanding 2,086,000 at September 30, 2019 and December 31, 2018 (aggregate liquidation preference of $2,519,080 at September 30, 2019 and December 31, 2018). | 20,860 | 20,860 | ||||||
| Common stock, $.001 par value; shares authorized 50,000,000, issued: 39,052,472 at September 30, 2019 and December 31, 2018, outstanding: 36,297,576 at September 30, 2019 and December 31, 2018. | 39,052 | 39,052 | ||||||
| Additional paid-in capital | 35,430,445 | 35,430,445 | ||||||
| Unearned ESOP shares | (3,083,672 | ) | (3,083,672 | ) | ||||
| Accumulated deficit | (39,156,790 | ) | (38,070,603 | ) | ||||
| Treasury stock, at cost, 686,706 shares at September 30, 2019 and December 31, 2018. | (148,216 | ) | (148,216 | ) | ||||
| Total stockholders’ deficiency | (6, 898,321 | ) | (5,812,134 | ) | ||||
| Total liabilities and stockholders’ deficiency | $ | 5,482,319 | $ | 5,492,785 | ||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
C:
| C: 1 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| 2019 | 2018 | |||||||
| COSTS AND EXPENSES | ||||||||
| Administrative and general | $ | 184,633 | $ | 131,454 | ||||
| Other | 27,412 | 17,359 | ||||||
| Total costs and expenses | 212,045 | 148,813 | ||||||
| OTHER EXPENSE (INCOME) | ||||||||
| Interest expense: | ||||||||
| Related parties | 73,207 | 55,445 | ||||||
| Other | 65,835 | 74,250 | ||||||
| Change in derivative indemnification liability - related party | (240,507 | ) | - | |||||
| Total other (income) expense, net | (101,465 | ) | 129,695 | |||||
| NET LOSS | (110,580 | ) | (278,508 | ) | ||||
| PREFERRED STOCK DIVIDENDS | (25,400 | ) | (25,400 | ) | ||||
| NET LOSS APLICABLE TO COMMON STOCKHOLDERS | $ | (135,980 | ) | $ | (303,908 | ) | ||
| Net loss per common share, basic and fully diluted | $ | (.00 | ) | $ | (.01 | ) | ||
| Weighted average number of common shares outstanding, basic and fully diluted | 36,297,576 | 36,297,576 | ||||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
C:
| 2 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| 2019 | 2018 | |||||||
| COSTS AND EXPENSES | ||||||||
| Administrative and general | $ | 523,574 | $ | 448,944 | ||||
| Stock-based compensation | - | 21,570 | ||||||
| Other | 59,348 | 53,544 | ||||||
| Total costs and expenses | 582,922 | 524,058 | ||||||
| OTHER EXPENSE (INCOME) | ||||||||
| Interest expense: | ||||||||
| Related parties | 242,323 | 195,635 | ||||||
| Other | 220,742 | 219,031 | ||||||
| Litigation settlement | (36,000 | ) | - | |||||
| Total other expense, net | 427,065 | 414,666 | ||||||
| NET LOSS | (1,009,987 | ) | (938,724 | ) | ||||
| PREFERRED STOCK DIVIDENDS | (76,200 | ) | (76,200 | ) | ||||
| NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ | (1,086,187 | ) | $ | (1,014,924 | ) | ||
| Net loss per common share, basic and fully diluted | $ | (.03 | ) | $ | (.03 | ) | ||
| Weighted average number of common shares outstanding, basic and fully diluted | 36,297,576 | 36,297,576 | ||||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
C:
| 3 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
| Perferred stock | Preferred | Common stock | Common | Additional Paid-In | Unearned ESOP | Unearned | Accumulated | Treasury Stock | Treasury | |||||||||||||||||||||||||||||||||||
| Shares | Stock | Shares | Stock | Capital | Shares | ESOP | Deficit | Shares | Stock | TOTAL | ||||||||||||||||||||||||||||||||||
| BALANCE 12/31/2017 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,526,362 | 2,147,735 | $ | (3,202,274 | ) | $ | (36,679,875 | ) | 607,161 | $ | (147,101 | ) | $ | (4,442,976 | ) | ||||||||||||||||||||||
| STOCK-BASED COMPENSATION | - | - | - | - | 21,570 | - | - | - | - | - | 21,570 | |||||||||||||||||||||||||||||||||
| DIVIDENDS | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
| NET LOSS | - | - | - | - | - | - | - | (360,084 | ) | - | - | (360,084 | ) | |||||||||||||||||||||||||||||||
| BALANCE 3/31/2018 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,547,932 | 2,147,735 | $ | (3,202,274 | ) | $ | (37,065,359 | ) | 607,161 | $ | (147,101 | ) | $ | (4,806,890 | ) | ||||||||||||||||||||||
| DIVIDENDS | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
| NET LOSS | - | - | - | - | - | - | - | (300,132 | ) | - | - | (300,132 | ) | |||||||||||||||||||||||||||||||
| BALANCE 6/30/2018 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,547,932 | 2,147,735 | $ | (3,202,274 | ) | $ | (37,390,891 | ) | 607,161 | $ | (147,101 | ) | $ | (5,132,422 | ) | ||||||||||||||||||||||
| DIVIDENDS | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
| NET LOSS | - | - | - | - | - | - | - | (278,508 | ) | - | - | (278,508 | ) | |||||||||||||||||||||||||||||||
| BALANCE 9/30/18 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,547,932 | 2,147,735 | $ | (3,202,274 | ) | $ | 37,694,799 | 607,161 | $ | (147,101 | ) | $ | (5,436,330 | ) | |||||||||||||||||||||||
| BALANCE 12/31/2018 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,430,445 | 2,068,190 | $ | (3,083,672 | ) | $ | (38,070,603 | ) | 686,706 | $ | (148,216 | ) | $ | (5,812,134 | ) | ||||||||||||||||||||||
| DIVIDENDS | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
| NET LOSS | - | - | - | - | - | - | - | (1,007,008 | ) | - | - | (1,007,008 | ) | |||||||||||||||||||||||||||||||
| BALANCE 3/31/2019 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,430,445 | 2,068,190 | $ | (3,083,672 | ) | $ | (39,103,011 | ) | 686,706 | $ | (148,216 | ) | $ | (6,844,542 | ) | ||||||||||||||||||||||
| DIVIDENDS | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
| NET INCOME | - | - | - | - | - | - | - | 107,601 | - | - | 107,601 | |||||||||||||||||||||||||||||||||
| BALANCE 6/30/2019 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,430,445 | 2,068,190 | $ | (3,083,672 | ) | $ | (39,020,810 | ) | 686,706 | $ | (148,216 | ) | $ | (6,762,341 | ) | ||||||||||||||||||||||
| DIVIDENDS | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
| NET LOSS | - | - | - | - | - | - | - | (110,580 | ) | - | - | (110,580 | ) | |||||||||||||||||||||||||||||||
| BALANCE 9/30/2019 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 35,430,445 | 2,068,190 | $ | (3,083,672 | ) | $ | (39,156,790 | ) | 686,706 | $ | (148,216 | ) | $ | (6,898,321 | ) | ||||||||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
C:
| 4 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| 2019 | 2018 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,009,987 | ) | $ | (938,724 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization | 21,940 | 21,934 | ||||||
| Stock-based compensation | - | 21,570 | ||||||
| Change in assets and liabilities: | ||||||||
| Other assets | 15,133 | (816 | ) | |||||
| Accounts payable and accrued expenses – related parties | 590,199 | 533,078 | ||||||
| Accounts payable and accrued expenses – other | 268,514 | 201,558 | ||||||
| Net cash used in operating activities | (114,201 | ) | (161,400 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from notes payable issued to related parties | 154,270 | 162,773 | ||||||
| Payments of notes payable issued to related parties | (36,167 | ) | - | |||||
| Proceeds from short term notes and interest bearing advances | 2,734 | 6,962 | ||||||
| Payments of short term notes | (1,969 | ) | (3,810 | ) | ||||
| Net cash provided by financing activities | 118,868 | 165,925 | ||||||
| Net increase in cash | 4,667 | 4,525 | ||||||
| Cash beginning of period | - | 65 | ||||||
| Cash end of period | $ | 4,667 | $ | 4,590 | ||||
| Cash paid for interest | $ | 943 | $ | 1,240 | ||||
| Non-cash financing activities: | ||||||||
| Unpaid preferred stock dividends included in accounts payable and accrued expenses | $ | 76,200 | $ | 76,200 | ||||
See the accompanying notes to these unaudited condensed consolidated financial statements.
C:
| 5 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 lawsuits 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. 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.
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 $1,086,187 for the nine months ended September 30, 2019. In addition, the Company had an accumulated deficit of $39,156,790 at September 30, 2019. Due to its lack of financial resources and certain lawsuits filed against it, the Company has been forced to explore other alternatives, including a sale of part or all of the Property. In addition, in the event it becomes necessary in order to protect the Company’s assets, the Board of Directors has authorized the Company to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi property. That development is dependent upon the Company obtaining the necessary capital, through either equity and/or debt financing, unilaterally or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, open, and operate a casino resort.
In the past, in order to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds, through Private Placements of convertible instruments as well as through other secured notes which are more fully described in Notes 5 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, 2019, the Company had $7,917,033 of accounts payable and accrued expenses and only $4,667 cash on hand.
The above conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
Note 3. Summary of Significant Accounting Policies
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 three and nine months ended September 30, 2019 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, 2018, attached to our annual report on Form 10-K filed on April 12, 2019.
C:
| 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.
Reclassifications
The reclassification of interest expense to related party have been made to the unaudited condensed consolidated 2018 statements of operations to conform to the unaudited condensed consolidated 2019 statements of operations presentation. In addition, the Company made reclassification of the accounts payable and accrued expenses to related party in the unaudited condensed consolidated 2018 cash flows. The reclassification had no effect on net earnings or cash flows as previously reported.
Land
Land is carried at cost. Costs directly related to site development, such as permitting, engineering, and other costs, are capitalized. In the first quarter of 2019, the Company entered into a brokerage agreement for sale of all or part of the Property, or, alternatively, to seek a joint venture partner for the project. This agreement was extended through December 31, 2019.
Land development costs, which have been capitalized, consist of the following at September 30, 2019 and December 31, 2018:
| 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.
The fair value measurement of the derivative indemnification liability at September 30, 2019 listed in Note 4 below was developed using Level 1 inputs.
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 at September 30, 2019.
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. 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, 2019 and 2018.
| September 30, | September 30, | |||||||
| Description | 2019 | 2018 | ||||||
| Convertible Preferred Stock | 260,000 | 260,000 | ||||||
| Options to Purchase Common Shares | 3,415,000 | 3,415,000 | ||||||
| Convertible Promissory Notes | 1,925,000 | 1,925,000 | ||||||
| Total | 5,600,000 | 5,600,000 | ||||||
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Stock Based Compensation
The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. In the first quarter of 2018, the Board of Directors voted to extend the expiration dates of previously-awarded option grants from March 13, 2018 to December 31, 2020 with respect to the following: i) options previously granted to the President to purchase 750,000 shares of common stock at $0.30 per share, 75,000 shares of common stock at $0.75 per share and 2,000,000 shares of common stock at $0.19 per share; ii) options previously granted to the current Chairman of the Board to purchase 150,000 shares of common stock at $1.25 per share; iii) options previously granted to a Director of the Company to purchase 75,000 shares of common stock at $0.75; and iv) options previously granted to former employees of the Company to purchase a combined total of 65,000 shares of common stock at $0.75 per share. No share-based awards were issued or amended in 2019.
In determining the fair value of each option modified, the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility of 103% and a risk-free interest rate of 2.79%. This resulted in a charge to the statement of operations in the amount of $21,570 for the nine months ending September 30, 2018.
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
Recently Adopted Accounting Pronouncements
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting” which addresses accounting for issuance of all share-based payments on the same accounting model. Previously, accounting for share-based payments to employees was covered by Accounting Standards Codification (“ASC”) Topic 718, while accounting for such payments to non-employees was covered by ASC Topic 505. As it considered recently issued updates to ASC Topic 718, the FASB, as part of its simplification initiatives, decided that ASC Topic 718 would also be used as the guidance for non-employee share-based awards. Under this new guidance, both employee and non-employee awards will essentially follow the same model, with small variances related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards. The ASU is effective beginning in calendar year 2019 and did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires lessees to recognize lease assets and lease liabilities on the consolidated balance sheet and requires expanded disclosures about leasing arrangements. We adopted the standard on January 1, 2019. Based on our assessment of the new standard on our unaudited condensed consolidated financial statements we have concluded that the impact is insignificant to our unaudited condensed consolidated financial statements based on the month-to-month nature of our singular lease currently in effect.
Note 4. Accounts Payable and Accrued Expenses
The table below outlines the elements included in accounts payable and accrued expenses at September 30, 2019 and December 31, 2018:
September 30, | December 31, | |||||||
| Description | 2019 | 2018 | ||||||
| Related parties: | ||||||||
| Accrued payroll due officers | $ | 2,594,711 | $ | 2,369,711 | ||||
| Accrued interest due officers and directors | 1,271,386 | 1,029,062 | ||||||
| Accrued director fees | 546,250 | 478,750 | ||||||
| Base rents due to the President | 226,448 | 185,642 | ||||||
| Associated rental costs | 75,910 | 61,341 | ||||||
| Other | 17,308 | 17,308 | ||||||
| Total related parties | $ | 4,732,013 | $ | 4,141,814 | ||||
| Non-related parties: | ||||||||
| Accrued interest | $ | 1,964,097 | $ | 1,743,658 | ||||
| Accrued dividends | 838,200 | 762,000 | ||||||
| Accrued fines and penalties | 121,700 | 77,700 | ||||||
| Other | 261,023 | 256,948 | ||||||
| Total non-related parties | $ | 3,185,020 | $ | 2,840,306 | ||||
As of September 30, 2019, the Chairman had advanced a total of $391,524, net of repayment of $16,250, to the Company under certain conditions. The conditions of the notes under which the Chairman agreed to make these advances are discussed in full detail in Note 8 of these unaudited condensed consolidated financial statements.
Of particular note to those conditions, item (v) calls for the Chairman to be indemnified for any losses sustained on the sale of common stock of another publicly traded company, sold to raise the funds necessary to make the above advances. The Chairman has identified the common stock sold and has provided the Company with the documentation required to document the sale of said stock and to calculate the contingent future loss, if any, on said stock.
As of September 30, 2019, the Chairman incurred no loss on stock sold to raise funds advanced to or on behalf of the Company. No liability for this circumstance existed at December 31, 2018.
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, 2019 and December 31, 2018, the unpaid principal and accrued interest due on the obligation totaled $1,920,984 and $1,853,669, 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 are and were convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor.
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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 are and were convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor.
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 addition, a total of $729,787 and $654,998 of accrued interest on the above notes remains outstanding at September 30, 2019 and December 31, 2018, respectively.
The table below summarizes the Company’s debt arising from the above-described sources as of September 30, 2019 and December 31, 2018:
| Principal | Amount Due | |||||||||||
| Amount | Related | Amount Due | ||||||||||
| Loan Facility | Owed | Parties | Others | |||||||||
| Line of Credit | $ | 1,000,000 | $ | - | $ | 1,000,000 | ||||||
| Private Placements: | ||||||||||||
| March 1, 2010 | 475,000 | 75,000 | 400,000 | |||||||||
| October 25, 2010 | 487,500 | - | 487,500 | |||||||||
| Total Private Placements | 962,500 | 75,000 | 887,500 | |||||||||
| Total | $ | 1,962,500 | $ | 75,000 | $ | 1,887,500 | ||||||
Note 6. Convertible Debentures Payable
Pursuant to a Private Placement Memorandum dated February 14, 2014 (the “Private Placement”), the Company offered up to a maximum of $3,000,000 of Collateralized Convertible Senior Debentures to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000. The Debentures, once issued, bear interest at 4% per annum after 180 days, mature six years from the date of issuance, and are secured by a lien on the Company’s Mississippi property. The debentures were offered in three tranches as follows:
(a) $1,000,000 of First Tranche Collateralized Convertible Senior Debentures convertible into an aggregate of 3,333,333 shares of Common Stock of the Company at a conversion price of $.30 per share (the “First Tranche Debentures”);
(b) $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures, convertible into an aggregate of 2,222,222 shares of Common Stock of the Company at a conversion price of $.45 per share (the “Second Tranche Debentures”); and
(c) $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures, convertible into either 1,818,182 shares of Common Stock or 1,333,333 shares of Common Stock of the Company, at a conversion price of $.55 or $.75 per share depending upon certain conditions described in the Private Placement Memorandum (the “Third Tranche Debentures”).
The conversion rights on each issued Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the conversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:
(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.
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The Anti-Dilution Provisions with respect to a Debenture terminate the earlier of (a) the date (if ever) the Company receives an “Approval to Proceed” from the Mississippi Gaming Commission to develop a casino/hotel on the Property, (b) the date on which the Debenture is converted in full, (c) the date on which the Debenture is paid in full, or (d) the Final Maturity Date of the Debenture (as defined in the Debenture).
Since the issuance of the Debentures, there have been no events that would trigger the above anti-dilution provisions. Should an event take place which would trigger the provision, the Company would be required to record dividend expense in an amount equal to the difference in the fair value of the embedded derivatives before the event versus the fair value of the derivative after the triggering event.
On March 31, 2014, the First Closing occurred when subscriptions in the amount of $3,000,000 were received in Escrow and accepted by the Company. The Escrow Agent released $1,000,000 to the Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000.
The Company’s stock registration was revoked effective September 4, 2014. Therefore, on December 4, 2014, the Company extended offers to the investors to amend the Private Placement. The Company offered to amend certain terms and conditions, including the conversion terms of the First Tranche Debentures, which were issued on March 31, 2014 (“Amendment I”). The Company separately offered to amend certain terms and conditions, including those relating to issuance and conversion of the Second and Third Tranche Debentures, as well as the period of time within which to perform the Third Tranche Closing Obligations, as amended (“Amendment II”).
On December 31, 2014, investors who had purchased $950,000 of First Tranche Debentures consented to the amended conversion terms of Amendment I. The remaining Debenture in the amount of $50,000 remains as originally issued with no conversion rights. Thus, the First Tranche Debentures can be converted into a total of 3,166,666 shares of common stock. On December 31, 2014, the Second Closing occurred when investors representing $850,000 of Second Tranche Debentures consented to Amendment II. The Escrow Agent released $850,000 to the Company and the Company issued Second Tranche Debentures in the aggregate principle amount of $850,000. Thus, the Second Tranche Debentures can be converted into 1,888,889 shares of common stock. The Escrow Agent refunded $300,000 to those investors who did not consent to Amendment II.
The Company did not meet the closing obligations for the Third Tranche Debentures as of June 30, 2015, as was required, pursuant to the terms of the Private Placement, as amended. Therefore, in July 2015, the remaining $850,000 then being held in escrow for the purchase of the Third Tranche Debentures was returned to the investors.
When originally issued, in the event the Company failed to meet the conditions for conversion of the Debentures, the First Tranche Convertible Debentures, which total $950,000, would have been due on March 31, 2020 and the Second Tranche Convertible Debentures, which total $850,000, would have been due December 31, 2020. The sole remaining non-convertible Debenture in the amount of $50,000 would have been due March 31, 2020. However, the Company is in default with respect to interest payments due under the Debentures agreements in the amount of $279,233 and as a result, the Debentures payable are reported as current liabilities. Certain Debenture holders maintain that the Company is in default, not only with respect to interest due under the Debentures, but with respect to principal due under the Debentures in the amount of $1,850,000, as well. See Note 12. Commitments and Contingencies-Litigation.
Total accrued interest due on all Debentures amounted to $334,581 and $279,233 at September 30, 2019 and December 31, 2018, respectively.
Note 7. Short Term Notes and Interest Bearing Advance
Property Liability Insurance Financing
In January 2019, the Company financed $2,734 of the premium due for liability insurance on its Mississippi property. The financing requires monthly installments of $258 of principal and interest at a rate of 7.751% through December of 2019. At September 30, 2019, a principal balance of $765 remained outstanding on the note.
Promissory Note
On June 9, 2017, the Company entered into a Promissory Note with an unrelated lender in exchange for proceeds in the amount of $15,000. Interest on the note is 12.5% per annum and payable March 1 of each year the note remains outstanding. Payment in full of the Note is due June 9, 2019. The Note is presently in default but interest continues to accrue. 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, which were due March 1, 2018 and March 1, 2019, were not made. Accrued interest on the note amounted to $4,331 and $2,928 at September 30, 2019 and December 31, 2018, respectively.
Bank Credit Facility
Wells Fargo Bank provides an unsecured credit facility of up to $15,000 to the Company. The facility requires a variable monthly payment of amounts borrowed plus interest, which is applied at 11.24% on direct charges and 24.99% on any cash advanced through the facility. In the fourth quarter of 2018, the lending bank cancelled privileges under the facility for non-payment and at September 30, 2019, a principal balance of $18,004 remained outstanding on the facility.
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Interest Bearing Advance
On February 2, 2017, the Company borrowed $25,000 from an unrelated third party. The Company expects to enter into a formal note for these funds. However, the terms of the note have not been finalized. The Note is expected to carry an annual interest rate of approximately 12.5% with an original projected due date of December 31, 2017. The Company is in default and as such, the lender may increase the interest rate due by an amount of up to 3% per annum in excess of the rate then otherwise applicable. The Company does not have the funds to repay the advance. The President of the Company has agreed to personally secure the note with an assignment of proceeds due to her under the first lien on the Diamondhead property. Accrued interest on the advance amounted to $8,305 and $5,967 at September 30, 2019 and December 31, 2018 respectively.
The table below summarizes the short-term notes and interest bearing advance at September 30, 2019 and December 31, 2018.
| Interest | September 30, | December 31, | ||||||||||
| Description of Facility | Rate | 2019 | 2018 | |||||||||
| Property liability insurance financing | 7.751 | % | $ | 765 | $ | - | ||||||
| Promissory note | 12.5 | % | 15,000 | 15,000 | ||||||||
| Bank credit facility | 11.24% - 24.99 | % | 18,004 | 18,004 | ||||||||
| Interest bearing advance | 12.50 | % | 25,000 | 25,000 | ||||||||
| Total short term notes and interest bearing advance | $ | 58,769 | $ | 58,004 | ||||||||
Note 8. Current Notes Payable Due to Related Parties
In July, 2017, at the request of the Company, the current Chairman of the Board of Directors, who is also a Vice President of the Company (“the Chairman”), paid all property taxes due, together with all interest due thereon, to Hancock County, Mississippi on an approximate 400-acre tract of land, owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. The total amount advanced was $67,628.
The Chairman is one of the secured parties under that Land Deed of Trust recorded on September 26, 2014 in Hancock County, Mississippi, to secure Tranche I and Tranche II Debentures issued by the Company in 2014. Under paragraph 5 of the Land Deed of Trust, a secured party who advances sums for taxes due on the Property is secured by the same Land Deed of Trust, but only at that interest rate specified in the note representing the primary indebtedness, namely 4% per annum.
The Chairman advanced the $67,628 on condition that: (i) the advance constitute a lien with interest at 4% per annum under that Land Deed of Trust recorded September 26, 2014; (ii) he be paid additional interest of 11% per annum on the amount advanced and owing and that the full 11% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (iii) this additional interest obligation be treated as a separate and secured debt of the Company, to be evidenced by a separate note and is secured with a separate and third lien to be placed on the Property (hereafter “the Third Lien”); (iv) the entire obligation will be treated as an advance to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V); and (v) he be indemnified for any losses sustained on the sale of that common stock sold to cover the credit card payments. The Chairman has identified the common stock to be sold and will provide the Company with the documentation required to document the sale of said stock and to calculate the future loss, if any, on said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue, to the Chairman for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Property to secure this obligation for $100,000. Accrued interest on the note amounted to $28,224 and $18,762 at September 30, 2019 and December 31, 2018, 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 will provide the Company with the documentation required to document the sale of said stock and to calculate the losses on said stock for all amounts loaned to the Company from the sale of said stock. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue to the Chairman, for an amount up to $200,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $200,000.
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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. However, the additional funds will be secured by a fourth lien to be placed on the Property in favor of the Chairman.
At September 30, 2019, the Chairman had advanced a total of $323,896, net of repayments of $16,250, under both the March 2018 and March 2019 arrangements and was owed accrued interest in the amount of $79,372 and $30,788 at September 30, 2019 and December 31, 2018, 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 (Case No. 426962-V).
As of September 30, 2019, the President had advanced a total of $35,594 net of repayments of $19,917, under this agreement. The President previously agreed to secure a $25,000 loan and interest due thereon and to secure and guarantee a $15,000 loan and interest due thereon due non-related parties discussed above. The President is also personally liable for certain bank-issued credit cards used by the Company to pay expenses incurred by the Company in the approximate amount of $18,000. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from date of issue, to the President for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $100,000. Accrued interest due on this note amounted to $13,761 and $8,421 at September 30, 2019 and December 31, 2018, respectively.
The third lien placed on the Diamondhead Property, which secures the above three promissory notes, totals up to $400,000 and is payable to the Chairman of the Board ($300,000) and President ($100,000) of the Company.
The principal balance of the notes payable to the officers and directors discussed above were due in September 2019 and totaled $427,118 and $309,015 in aggregate, at September 30, 2019 and December 31, 2018, respectively.
Note 9. Long Term Notes Payable
In 2016, the Company received cash advances totaling $47,500 from seven lenders which included $25,000 from three current Directors of the Company. The proceeds from the cash advances were earmarked for the payment of accounting and auditing fees and other expenses required to file the Company’s Form 10-Q. On August 25, 2016, the Company issued a Note to the foregoing lenders, which matures four years from the date of issuance and bears interest at 8% per annum, with a full year of interest accruing in any year in which the advance remains unpaid. Accrued interest due on the above notes amounted to $15,600 and $11,400 at September 30, 2019 and December 31, 2018, respectively.
In the third quarter of 2016, the Chairman of the Board of Directors of the Company loaned the Company $90,000. On August 25, 2016, the Company issued a Note to the Chairman of the Board. The Note bears interest at 14% per annum effective August 1, 2016 and matures four years from the date of issuance. The proceeds of the loan were used for the payment of Mississippi property taxes and auditing, accounting and other corporate expenses. Accrued interest due on the above note amounted to $39,906 and $30,482 at September 30, 2019 and December 31, 2018, respectively.
The principal due under the two foregoing loan arrangements totals $137,500. The Company has filed a second lien on its Mississippi property in favor of the note holders to secure both principal and interest in the maximum amount of $250,000. The lien is second to the existing first lien on the Mississippi property in the principal amount of $3.85 million.
In October 2017, the Company entered into a settlement with a holder of $150,000 of convertible notes as described in Note 5 above. As part of the settlement, the Company agreed to pay legal fees in the amount of $50,000 and issued a four year note at 0% interest to satisfy this obligation.
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The table below summarizes the Company’s long-term notes payable as of September 30, 2019 and December 31, 2018:
| Loan Facility | Principal Amount Owed |
Amount Due Related Parties |
Amount Due Others |
|||||||||
| 4 Year 8% secured note | $ | 47,500 | $ | 25,000 | $ | 22,500 | ||||||
| 4 Year 14% secured note | 90,000 | 90,000 | - | |||||||||
| 4 Year 0% note | 50,000 | - | 50,000 | |||||||||
| Total Long-Term Notes Payable | $ | 187,500 | $ | 115,000 | $ | 72,500 | ||||||
Note 10. Related Party Transactions
As of September 30, 2019, the President of the Company is owed deferred salary in the amount of $2,391,996 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 $160,782 and $140,594 for the nine months ended September 30, 2019 and 2018, respectively. Total interest accrued under this agreement totaled $1,036,855 and $876,074 as of September 30, 2019 and December 31, 2018, respectively.
Effective September 1, 2011, the Company entered into a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space in a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance, real estate taxes, 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 $15,931 for a total of $56,737 for the nine months ended September 30, 2019 and base rent in the amount of $40,806 and associated rental costs of $13,833 for a total of $54,639 for the nine months ended September 30, 2018. No payments associated with the base rents were made in the first nine months of 2019. At September 30, 2019 and December 31, 2018, amounts owing for base rent and associated rental costs totaled $302,358 and $246,983, respectively.
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 $546,250 and $478,750 was due and owing to the Company’s current and former directors as of September 30, 2019 and December 31, 2018, 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.
See Notes 4, 5, 7, 8, 9, 11 and 12 for other related party transactions.
Note 11. Commitments and Contingencies
Liens
The Company’s obligations under the Collateralized Convertible Senior Debentures are secured by a 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 on the Diamondhead property 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 Notes 8.
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Litigation
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, the above-named Debenture holders filed a Complaint against Diamondhead Casino Corporation (the Company) in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on October 31, 2016. On November 21, 2016, the Company filed a motion to dismiss for lack of subject matter jurisdiction due to failure to plead diversity. On February 21, 2017, the plaintiffs filed a motion for leave to amend their complaint based upon declarations of citizenship filed with the court. On September 26, 2017, the motion for leave to amend was granted and the Company’s motion to dismiss was granted in part and denied in part. The Court also granted plaintiffs leave to file a Second Amended Complaint which was filed on October 2, 2017. On October 16, 2017, the Company filed Defendant’s Answer and Affirmative Defenses and Counterclaim. On November 2, 2017, the Plaintiffs filed an Answer to the Counterclaim. The parties have exchanged discovery in the case. On September 27, 2018, the Plaintiffs’ filed a motion for summary judgment. On October 18, 2018, the Company filed its opposition to the motion for summary judgment. On November 8, 2018, the Plaintiff’s filed their reply to the Company’s opposition. On January 2, 2019, the Court canceled the trial previously scheduled for March 22, 2019. On April 2, 2019, the Court heard argument on the Plaintiff’s motion for summary judgment. On June 4, 2019, the Court denied Plaintiffs’ motion for summary judgment. On June 14, 2019, the Plaintiffs filed a motion for leave to file a third amended complaint. On June 26, 2019, the Company filed an opposition to the motion. On July 1, 2019, the plaintiffs filed their reply. On July 24, 2019, the Court denied the motion for leave to amend without prejudice. On June 7, 2019, the Court scheduled a mediation conference for July 11, 2019. At the mediation conference, the parties reached a settlement agreement in principle which is being memorialized in a written agreement.
The Company expects the settlement agreement, in addition to other terms and conditions, will provide as follows: i) in the event Mississippi Gaming Corporation (“MGC”) has entered into a contract for the sale of the Diamondhead Property on or before December 31, 2019, the Plaintiffs will be paid the principal due under the debentures and interest stated in the debentures of four percent (4%) per annum through the payment date; ii) in the event MGC has entered into a contract for the sale of the Property on or before June 30, 2020, the Plaintiffs will be paid the principal due under the debentures, interest of four percent (4%) per annum through December 31, 2019 and, beginning January 1, 2020, interest of five percent (5%) per annum through the payment date; iii) in the event MGC has not entered into a contract for the sale of the Property on or before June 30, 2020, but has done so on or before December 31, 2021, the Plaintiffs will be paid the principal due under the debentures, interest of four percent (4% ) per annum through December 31, 2019 and, beginning January 1, 2020, interest of six percent (6%) per annum through the payment date; and iv) If MGC has not entered into a contract for the sale of the Property on or before December 31, 2021, the Plaintiffs will be entitled to a Judgment for the principal due under the debentures, interest of four percent (4%) per annum through December 31, 2019 and, beginning January 1, 2020, interest of six percent (6%) per annum through the date of Judgment. Following entry of Judgment, interest will accrue at the then post-judgment rate of interest charged pursuant to the laws of the State of Delaware. There is a provision for the payment of reasonable attorneys fees to counsel for Plaintiffs in the event MGC has not entered into a contract for the sale of the Property on or before December 31, 2019. If the parties cannot agree on the amount that constitutes reasonable attorneys fees, the parties will submit the matter to the Court for determination, but in no event will such fees exceed $160,000 unless there is a default in the Settlement Agreement.
John Hawley, as servicing agent for Argonaut 2000 Partners, L.P. v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N19C-02-239 RRC)
On February 28, 2019, the above-named Debenture holder filed a Complaint against Diamondhead Casino Corporation (the Company) in the Superior Court of the State of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiff is seeking $100,000, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on March 8, 2019. On March 28, 2019, the Company filed its Answer, Affirmative Defenses and Counterclaim and Affidavit of Defense. The plaintiff in this case is represented by the same law firms that represent plaintiffs in the above-referenced case. Thus, at the mediation conference held on July 11, 2019 in the above case, the parties agreed that the same settlement agreement reached in that case would apply to the plaintiff in this case as well.
Arnold J. Sussman, Robert Skaff and David J. Towner v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N18C-11-091-WCC)
On November 9, 2018, Sussman filed suit against the Company for breach of a Promissory Note issued November 10, 2010, in the principal amount of $50,000, with interest payable at 9% per annum, with a maturity date of November 10, 2012. Plaintiff seeks payment of principal of $50,000 and interest due from June 30, 2012 to present, which Plaintiff alleges is approximately $28,500 as of October 31, 2018. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. On December 6, 2018, the Company’s registered agent was served with the Sussman Complaint. On November 28, 2018, Skaff and Towner also filed suit against the Company in the same court for breach of Promissory Notes (Case No. N18C-11-232 ALR). Skaff filed suit i) for breach of a note issued on November 29, 2010, in the principle amount of $37,500 with interest payable at 9% per annum, with a maturity date of November 29, 2012 and ii) for breach of a note issued on June 21, 2011, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of June 21, 2013. Towner filed suit for breach of a note issued on November 29, 2010, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of November 29, 2012. Skaff alleges interest is due on his two notes from June 30, 2012 in the amount of $36,038 as of November 28, 2018. Towner alleges interest is due on his note from June 30, 2012 in the amount of $14,413 as of November 28, 2018. On December 6, 2018, the Company’s registered agent was served with the Skaff and Towner Complaint. All of the foregoing Notes, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. Counsel for the Plaintiffs in the foregoing cases requested that the cases be consolidated and the Company agreed to the consolidation. On February 15, 2019, the Plaintiffs filed their Consolidated Complaint. On March 7, 2019, the Company filed its Answer and Affirmative Defenses and Affidavit of Defense. Trial in this case is scheduled for July 13, 2020.
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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, 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 $91,200 on the currently delinquent filings. The Company intends to bring its ESOP-required filings current and when current, will attempt to enroll in a voluntary compliance program with the Department of Labor with respect to any penalties or fines incurred. However, there can be no assurance the Company will be able to enroll in any such program or obtain a reduction of the fines and penalties that may be due.
The Company has not filed its consolidated federal tax return for the years ended December 31, 2018, 2017 and 2016. The Company believes no tax is due with that return. Diamondhead Casino Corporation and its active subsidiary, Mississippi Gaming Corporation, are delinquent with respect to the filing of their franchise tax annual reports for 2018 with the state of Delaware. A second active subsidiary, Casino World, Inc, is also delinquent with respect to the filing of their franchise tax annual report for the years ended December 31, 2016, 2017 and 2018 with the state of Delaware. Casino World Inc. is delinquent with respect to its filings of franchise tax returns with the State of Mississippi for the years ending December 31, 2016, 2017 and 2018, while Mississippi Gaming Corporation is delinquent with respect to its franchise tax return for the year ending December 31, 2018 with the State of Mississippi.
The Company has made provision for the expected taxes due on these state filings in their unaudited condensed consolidated financial statements for the nine months ending September 30, 2019.
Note 12. Subsequent Events
In October 2019, the Chairman of the Board advanced a total of $6,750 for the payment of accounting expenses. The conditions of the note under which the Chairman agreed to make these advances are discussed in full detail in Note 8 of these unaudited condensed consolidated financial statements.
Of particular note to those conditions, item (v) calls for the Chairman to be indemnified for any losses sustained on the sale of certain common stock sold to cover the above payments. The Chairman has identified the common stock sold on or about October 9, 2019 to cover these payments and has provided the Company with the documentation required to document the sale of said stock and to calculate the contingent future loss, if any, on said stock. As of November 19, 2019, the Company would not have had to indemnify the Chairman for any loss on said stock.
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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, 2018 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.
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.
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Liquidity
The Company has incurred continued losses over the years and certain conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company had concentrated its efforts on the development of its Diamondhead, Mississippi Property. The development of the Diamondhead Property would be dependent on obtaining the necessary capital, through equity and/or debt financing, unilaterally, or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort. In the past, the Company has been able to sustain itself through various short term borrowings, however, as of September 30, 2019, the Company had $4,667 of cash on hand, while accounts payable and accrued expenses totaled $7,917,033 and the Company had an accumulated deficit of $39,156,790. In addition, the Company reported a net loss applicable to common shareholders of $1,086,187 for the nine months ended September 30, 2019. Therefore, in order to sustain itself, it is imperative that the Company secure a source of funds to provide further working capital.
In addition, a Line of Credit in the amount of $1,000,000 obtained in October 2008, was payable in November 2012 and Convertible Notes issued pursuant to two Private Placements offered in 2010, totaling $962,500 in principal at December 31, 2018, had become payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, none of the aforementioned debt obligations have been satisfied and the Company is in default of the repayment terms of those facilities. In addition, holders of Debentures representing $1,500,000 of the $1,850,000 of Debentures issued, filed Complaints against the Company in the United States District Court for the District of Delaware and in the Superior Court for the State of Delaware for amounts they assert are due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.5 million in principal plus interest from January 1, 2015, together with costs and fees.
Management of the Company believes it will be difficult to secure suitable financing that would allow it to continue to pursue ultimate development of the Property. Therefore, on March 25, 2019, Mississippi Gaming Corporation entered into a brokerage agreement with an unrelated third party to seek a buyer for all or part of the Property or, alternatively, to seek a joint venture partner for the project. In addition, in the event it becomes necessary in order to protect the Company’s assets, the Board of Directors has authorized the Company to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code.
The 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.
Financial Results and Analysis
During the nine months ended September 30, 2019, the Company realized a net loss applicable to common stockholders of $1,086,187 as opposed to a net loss applicable to common stockholders of $1,014,924 for the nine months ended September 30, 2018, a increase of $71,263. The net loss is primarily attributable to an increase in real estate taxes and other expenses. No indemnification was incurred in the third quarter of 2019. The indemnification derivative liability arises from a condition in the notes issued to the Chairman of the Board of Directors of the Company pursuant to which the Company agreed to indemnify the Chairman for any losses he may incur from the sale of certain other equity holdings sold to raise the capital used to lend to the Company and/or pay certain taxes and expenses on behalf of the Company. There is no indemnification liability of any amount as of September 30, 2019 inasmuch as the Chairman has incurred no loss, as of said date, on the sale of the stock sold to raise the capital used to lend to the Company and/or pay certain taxes and expenses on behalf of the Company.
Administrative and general expenses incurred totaled $523,574 and $448,944 for the nine months ending September 30, 2019 and 2018, respectively. The table below depicts the major categories comprising these expenses:
| DESCRIPTION | September 30, 2019 | September 30, 2018 | ||||||
| Payroll and Related Taxes | $ | 225,000 | $ | 225,000 | ||||
| Director Fees | 67,500 | 62,500 | ||||||
| Professional Services | 113,373 | 66,518 | ||||||
| Rents and Insurances | 57,377 | 57,262 | ||||||
| Fines and Penalties | 45,404 | 19,550 | ||||||
| All Other Expenses | 14,920 | 18,114 | ||||||
| Total General and Administrative Expenses | $ | 523,574 | $ | 448,944 | ||||
Other Income and Expense
Interest expense incurred totaled $463,065 and $414,666 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $48,399. The increase in 2019 is primarily attributable to the impact of accrued interest on unpaid wages which continues to accrue quarterly as well as the impact from new borrowings arising during the last three quarters of 2018 and first three quarters of 2019.
In the first quarter of 2019, the Company received $36,000 in proceeds from a litigation settlement.
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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 $25,000,000. The Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.
Brokerage Agreement
On March 25, 2019, Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company and the title owner of the Diamondhead Property (the “Owner”), entered into an agreement with an unrelated commercial real estate brokerage firm to sell all or part of the Diamondhead, Mississippi Property or, alternatively, to find a joint venture partner for the project. The agreement provides for an exclusive right to sell all or part of the Property beginning March 25, 2019 and ending October 31, 2019, unless extended by the parties. The agreement was amended, effective October 31, 2019, to extend the listing period through December 31, 2019. The agreement provides for a commission equal to three percent (3%) of the gross sales price for property sold if the Buyer does not have a broker or four percent (4%) of the gross sales price of property sold if the Buyer does have a broker, in which case the commission due will be split between the brokers. In the event the Owner consummates and closes a deal with a Joint Venture Partner introduced to the Owner by the broker, the Owner will pay the broker a commission equal to four percent (4%) of the amount contributed by the Joint Venture Partner as its capital contribution. This will not apply in the event the Owner consummates a deal with a Joint Venture Partner who is not introduced to the Owner by the broker. The agreement does not apply to loans obtained by or on behalf of the Owner using the Property as collateral or as security for a loan. The agreement also provides for a reduced commission to the broker in the event of a sale to certain potential purchasers already involved in discussions with the Owner.
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
Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles 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.
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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 at September 30, 2019.
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.
The fair value measurement of the derivative indemnification liability at September 30, 2019 was developed using Level 1 inputs.
Stock-Based Compensation Expense
In determining the fair value of options and warrants granted or modified, the Company uses the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718. Valuations are determined using the weighted-average assumptions of dividend yield, expected volatility and risk-free interest rates.
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
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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, 2019. 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 effective at the reasonable assurance level as of September 30, 2019.
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, 2019 that are expected to materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, the above-named Debenture holders filed a Complaint against Diamondhead Casino Corporation (the Company) in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on October 31, 2016. On November 21, 2016, the Company filed a motion to dismiss for lack of subject matter jurisdiction due to failure to plead diversity. On February 21, 2017, the plaintiffs filed a motion for leave to amend their complaint based upon declarations of citizenship filed with the court. On September 26, 2017, the motion for leave to amend was granted and the Company’s motion to dismiss was granted in part and denied in part. The Court also granted plaintiffs leave to file a Second Amended Complaint which was filed on October 2, 2017. On October 16, 2017, the Company filed Defendant’s Answer and Affirmative Defenses and Counterclaim. On November 2, 2017, the Plaintiffs filed an Answer to the Counterclaim. The parties have exchanged discovery in the case. On September 27, 2018, the Plaintiffs’ filed a motion for summary judgment. On October 18, 2018, the Company filed its opposition to the motion for summary judgment. On November 8, 2018, the Plaintiff’s filed their reply to the Company’s opposition. On January 2, 2019, the Court canceled the trial previously scheduled for March 22, 2019. On April 2, 2019, the Court heard argument on the Plaintiff’s motion for summary judgment. On June 4, 2019, the Court denied Plaintiffs’ motion for summary judgment. On June 14, 2019, the Plaintiffs filed a motion for leave to file a third amended complaint. On June 26, 2019, the Company filed an opposition to the motion. On July 1, 2019, the plaintiffs filed their reply. On July 24, 2019, the Court denied the motion for leave to amend without prejudice. On June 7, 2019, the Court scheduled a mediation conference for July 11, 2019. At the mediation conference, the parties reached a settlement agreement in principle which is being memorialized in a written agreement.
The Company expects the settlement agreement, in addition to other terms and conditions, will provide as follows: i) in the event Mississippi Gaming Corporation (“MGC”) has entered into a contract for the sale of the Diamondhead Property on or before December 31, 2019, the Plaintiffs will be paid the principal due under the debentures and interest stated in the debentures of four percent (4%) per annum through the payment date; ii) in the event MGC has entered into a contract for the sale of the Property on or before June 30, 2020, the Plaintiffs will be paid the principal due under the debentures, interest of four percent (4%) per annum through December 31, 2019 and, beginning January 1, 2020, interest of five percent (5%) per annum through the payment date; iii) in the event MGC has not entered into a contract for the sale of the Property on or before June 30, 2020, but has done so on or before December 31, 2021, the Plaintiffs will be paid the principal due under the debentures, interest of four percent (4% ) per annum through December 31, 2019 and, beginning January 1, 2020, interest of six percent (6%) per annum through the payment date; and iv) If MGC has not entered into a contract for the sale of the Property on or before December 31, 2021, the Plaintiffs will be entitled to a Judgment for the principal due under the debentures, interest of four percent (4%) per annum through December 31, 2019 and, beginning January 1, 2020, interest of six percent (6%) per annum through the date of Judgment. Following entry of Judgment, interest will accrue at the then post-judgment rate of interest charged pursuant to the laws of the State of Delaware. There is a provision for the payment of reasonable attorneys fees to counsel for Plaintiffs in the event MGC has not entered into a contract for the sale of the Property on or before December 31, 2019. If the parties cannot agree on the amount that constitutes reasonable attorneys fees, the parties will submit the matter to the Court for determination, but in no event will such fees exceed $160,000 unless there is a default in the Settlement Agreement.
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John Hawley, as servicing agent for Argonaut 2000 Partners, L.P. v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N19C-02-239 RRC)
On February 28, 2019, the above-named Debenture holder filed a Complaint against Diamondhead Casino Corporation (the Company) in the Superior Court of the State of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiff is seeking $100,000, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on March 8, 2019. On March 28, 2019, the Company filed its Answer, Affirmative Defenses and Counterclaim and Affidavit of Defense. The plaintiff in this case is represented by the same law firms that represent plaintiffs in the above-referenced case. Thus, at the mediation conference held on July 11, 2019 in the above case, the parties agreed that the same settlement agreement reached in that case would apply to the plaintiff in this case as well.
Arnold J. Sussman, Robert Skaff and David J. Towner v. Diamondhead Casino Corporation (Superior Court of the State of Delaware)(Case No. N18C-11-091-WCC)
On November 9, 2018, Sussman filed suit against the Company for breach of a Promissory Note issued November 10, 2010, in the principal amount of $50,000, with interest payable at 9% per annum, with a maturity date of November 10, 2012. Plaintiff seeks payment of principal of $50,000 and interest due from June 30, 2012 to present, which Plaintiff alleges is approximately $28,500 as of October 31, 2018. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. On December 6, 2018, the Company’s registered agent was served with the Sussman Complaint. On November 28, 2018, Skaff and Towner also filed suit against the Company in the same court for breach of Promissory Notes (Case No. N18C-11-232 ALR). Skaff filed suit i) for breach of a note issued on November 29, 2010, in the principle amount of $37,500 with interest payable at 9% per annum, with a maturity date of November 29, 2012 and ii) for breach of a note issued on June 21, 2011, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of June 21, 2013. Towner filed suit for breach of a note issued on November 29, 2010, in the principal amount of $25,000 with interest payable at 9% per annum, with a maturity date of November 29, 2012. Skaff alleges interest is due on his two notes from June 30, 2012 in the amount of $36,038 as of November 28, 2018. Towner alleges interest is due on his note from June 30, 2012 in the amount of $14,413 as of November 28, 2018. On December 6, 2018, the Company’s registered agent was served with the Skaff and Towner Complaint. All of the foregoing Notes, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet. Counsel for the Plaintiffs in the foregoing cases requested that the cases be consolidated and the Company agreed to the consolidation. On February 15, 2019, the Plaintiffs filed their Consolidated Complaint. On March 7, 2019, the Company filed its Answer and Affirmative Defenses and Affidavit of Defense. Trial in this case is scheduled for July 13, 2020.
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
The Company is currently in default on the following indebtedness:
1) Line of credit with a specified due date of November 1, 2012 in the amount of $1,000,000. Total principal and interest in arrears through September 30, 2019 totals $1,920,984.
2) Convertible notes issued pursuant to a private placement dated March 25, 2010 with an original due date of two years from date of issue (due on various dates in 2012) in the principal amount of $475,000. Total principal and interest in arrears through September 30, 2019 totals $886,603.
3) Convertible notes issued pursuant to a private placement dated October 25, 2010 with an original due date of two years from date of issue (due on various dates ranging from 2012 through 2013) in the principal amount of $487,500. Total principal and interest in arrears through September 30, 2019 totals $805,684.
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4) Convertible Debentures and one non-convertible debenture issued March 2014 due March 2020 in the principal amount of $1,000,000. The Company is in default of required interest payable through December 31, 2018 in the amount of $160,000. Total principal and interest owing through September 30, 2019 totals $1,189,918.
5) Convertible Debentures issued December 2014 due December 2020 in the principal amount of $850,000. The Company is in default of required interest payable through December 31, 2018 in the amount of $119,233. Total principal and interest owing through September 30, 2019 totals $994,663.
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 third quarter of 2019 in the amount of i) $7,500 on its Series S preferred stock; ii) $7,500 on its Series S-NR preferred stock; and iii) $10,400 on its Series S-PIK preferred stock. The table below summarizes total preferred stock dividends in arrears at September 30, 2019.
| Total Amount | ||||
| Description | In Arrears | |||
| Series S | $ | 247,500 | ||
| Series S-NR | 247,500 | |||
| Series S-PIK | 343,200 | |||
| Total In Arrears | $ | 838,200 | ||
Item 4. Mine Safety Disclosures
Not Applicable.
None.
Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company pursuant to Rule 13a-14 and Rule15d-14.
Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350.
| 101.INS | XBRL Instance Document | |
| 101.SHC | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
C:
| 22 |
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 19, 2019 | /s/ Deborah A. Vitale | |
| By: | Deborah A. Vitale | |
| Chief Executive Officer | ||
C:
| 23 |
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
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| 12/31/21 | ||||
| 12/31/20 | ||||
| 7/13/20 | ||||
| 6/30/20 | ||||
| 3/31/20 | ||||
| 1/1/20 | ||||
| 12/31/19 | ||||
| Filed on: | 11/19/19 | |||
| 11/18/19 | ||||
| 10/31/19 | ||||
| 10/9/19 | ||||
| For Period end: | 9/30/19 | NT 10-Q, NT 10-Q/A | ||
| 7/24/19 | ||||
| 7/11/19 | ||||
| 7/1/19 | ||||
| 6/26/19 | ||||
| 6/14/19 | ||||
| 6/9/19 | ||||
| 6/7/19 | ||||
| 6/4/19 | ||||
| 4/12/19 | 10-K | |||
| 4/2/19 | ||||
| 3/28/19 | ||||
| 3/25/19 | NT 10-K | |||
| 3/22/19 | ||||
| 3/8/19 | ||||
| 3/7/19 | ||||
| 3/1/19 | ||||
| 2/28/19 | ||||
| 2/15/19 | ||||
| 1/2/19 | ||||
| 1/1/19 | ||||
| 12/31/18 | 10-K, NT 10-K | |||
| 12/6/18 | ||||
| 11/28/18 | ||||
| 11/9/18 | ||||
| 11/8/18 | ||||
| 10/31/18 | ||||
| 10/18/18 | ||||
| 9/30/18 | 10-Q | |||
| 9/27/18 | ||||
| 8/21/18 | ||||
| 6/30/18 | 10-Q | |||
| 3/13/18 | ||||
| 3/1/18 | ||||
| 12/31/17 | 10-K, NT 10-K | |||
| 11/2/17 | ||||
| 10/16/17 | ||||
| 10/2/17 | ||||
| 9/26/17 | ||||
| 7/24/17 | ||||
| 6/9/17 | ||||
| 2/21/17 | ||||
| 2/2/17 | ||||
| 12/31/16 | 10-K, NT 10-K | |||
| 12/16/16 | ||||
| 11/21/16 | ||||
| 10/31/16 | ||||
| 10/25/16 | ||||
| 8/25/16 | ||||
| 8/1/16 | ||||
| 12/31/15 | 10-K, NT 10-K | |||
| 6/30/15 | 10-Q, 8-K | |||
| 1/1/15 | ||||
| 12/31/14 | ||||
| 12/4/14 | ||||
| 9/26/14 | ||||
| 9/4/14 | REVOKED | |||
| 3/31/14 | 8-K | |||
| 2/14/14 | ||||
| 6/21/13 | ||||
| 11/29/12 | ||||
| 11/10/12 | ||||
| 11/1/12 | ||||
| 6/30/12 | ||||
| 9/1/11 | ||||
| 6/21/11 | ||||
| 11/29/10 | ||||
| 11/10/10 | 8-K | |||
| 10/25/10 | 4 | |||
| 3/25/10 | 8-K | |||
| 3/1/10 | ||||
| 6/19/93 | ||||
| List all Filings | ||||