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.
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
|
|
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.
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.
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.
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.
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.
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.
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.
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.