See the accompanying notes to these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Business
Diamondhead Casino Corporation and Subsidiaries (the “Company”) own a total of approximately 404.5 acres of unimproved land in Diamondhead, Mississippi on which the Company plans, unilaterally, or in conjunction with one or more partners, to construct a casino resort and hotel and associated amenities.
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 no operations and generates no operating revenues. During the three months ended March 31, 2017 and 2016 the Company incurred net losses applicable to common shareholders, exclusive of the recording of change in the fair value of derivatives, of $326,723 and $338,874, respectively.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi Property. The development of the Diamondhead Property is dependent on obtaining the necessary capital, through equity and/or debt financing, unilaterally, or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort.
In the past, 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 and other means, which are more fully described in Notes 5, 6, 7 and 8 to these unaudited condensed consolidated financial statements. Some of these instruments are past due for payment of both principal and interest. In addition, at March 31, 2017, the Company had current liabilities totaling $9,013,635 and only $3,742 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 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 months ended March 31, 2017 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
4
conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2016, attached as Exhibit 99.1 to our annual report on Form 10-K.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Land Held for Development
Land held for development is carried at cost. Costs directly related to site development, such as licenses, permitting, engineering, and other costs, are capitalized.
Land development costs, which have been capitalized, consist of the following at March 31, 2017 and December 31, 2016:
|
Land under development
|
$ 4,934,323
|
|
Licenses
|
77,000
|
|
Engineering and costs associated with permitting
|
464,774
|
|
|
|
|
Total land held for development
|
$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.
5
The table listed below provides a reconciliation of the beginning and ending net balances for the derivative liability measured at fair value using significant unobservable inputs (Level 3) at March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Beginning balance
|
$ 2,030,289
|
|
$ 1,704,570
|
|
|
|
|
|
|
Total unrealized (appreciation) depreciation
|
(212,658)
|
|
325,719
|
|
|
|
|
|
|
Ending balance
|
$ 1,817,631
|
|
$ 2,030,289
|
Sensitivity Analysis to Changes in Level 3 Assumptions
Significant inputs include the dates when required conditions are expected to be met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses and discount for lack of marketability while the stock was delisted and reversed when the Company's stock became publicly listed again on or about October 26, 2015. In addition, use of different ranges of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.
Current assets and current liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature.
The convertible debentures and derivative liability approximate fair value based on Level 3 inputs, as further discussed in Note 7.
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of longlived 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 March 31, 2017.
Net Loss per Common Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. 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.
6
The table below summarizes the components of potential dilutive securities at March 31, 2017 and 2016.
|
|
March 31,
|
|
March 31,
|
|
Description
|
2017
|
|
2016
|
|
|
|
|
|
|
Convertible Preferred Stock
|
260,000
|
|
260,000
|
|
Options to Purchase Common Shares
|
3,415,000
|
|
3,440,000
|
|
Private Placement Warrants
|
1,036,500
|
|
1,111,500
|
|
Convertible Promissory Notes
|
1,925,000
|
|
1,925,000
|
|
|
|
|
|
|
Total
|
6,636,500
|
|
6,736,500
|
Note 4
.
Accounts Payable and Accrued Expenses
The table below outlines the elements included in accounts payable and accrued expenses at March 31, 2017 and December 31, 2016 :
|
|
|
March 31,
|
|
December 31,
|
|
|
Description
|
|
2017
|
|
2016
|
|
|
Related Parties:
|
|
|
|
|
|
|
Accrued payroll due officers
|
|
1,844,711
|
|
1,769,711
|
|
|
Accrued interest due officers and directors
|
|
610,397
|
|
568,161
|
|
|
Accrued director fees
|
|
333,750
|
|
311,250
|
|
|
Base rents due to the President
|
|
90,428
|
|
76,826
|
|
|
Associated rental costs
|
|
32,071
|
|
28,908
|
|
|
Other
|
|
17,308
|
|
17,308
|
|
|
|
|
|
|
|
|
|
Total Related Parties
|
|
2,928,665
|
|
2,772,164
|
|
|
|
|
|
|
|
|
|
Non-Related Parties:
|
|
|
|
|
|
|
Accrued interest
|
|
1,285,409
|
|
1,220,516
|
|
|
Accrued dividends
|
|
584,200
|
|
558,800
|
|
|
Accrued fines and penalties
|
|
12,150
|
|
7,650
|
|
|
Other accounts payable and accrued expenses
|
|
225,346
|
|
225,560
|
|
|
|
|
|
|
|
|
|
Total Non-related Parties
|
|
2,107,105
|
|
2,012,526
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
5,035,770
|
|
4,784,690
|
|
Note 5. Convertible Notes and Line of Credit
Line of Credit
On October 23, 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 provided for funds to be drawn as needed and carries an interest rate on amounts borrowed of 9% per annum, originally payable quarterly, based on the pro rata number of days outstanding. 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. At March 31, 2017, the principal and accrued interest due on the obligation, which totals $1,695,860, remains unpaid.
7
Convertible Notes and Warrants
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, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. The five-year Warrants issued in connection with the Units have expired.
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, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. The five-year Warrants issued in connection with the Units have expired.
The Convertible Notes issued pursuant to the Private Placements discussed above total $962,500 in principal and became due and payable beginning in March 2012 and extending at 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 $479,225 of accrued interest on the above notes remains outstanding.
The table below summarizes the Company’s debt arising from the above-described sources as of March 31, 2017 and December 31, 2016:
|
|
Gross Amount
|
Amount Due
|
Amount Due
|
|
Loan Facility
|
Owed
|
Related 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 and Derivative Liability
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 in three tranches of $1,000,000 each, 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. 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
8
Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000.
On December 31, 2014, investors who had purchased $950,000 of First Tranche Debentures consented to Amendment I to the Private Placement, which amended certain terms and conditions, including the conversion terms of the First Tranche Debentures. The remaining First Tranche 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 to the Private Placement, which amended 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. 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 a total of 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, the remaining $850,000 being held in escrow for the purchase of the Third Tranche Debentures was returned to the investors in July 2015.
For purposes of determining the proper accounting treatment and valuation of the instruments, the Company applied the provisions set forth in ASC Topic 820, "Fair Value in Financial Instruments" and ASC Topic 815, "Accounting for Derivative Instruments and Hedging Activities." Since the Notes issued have derivative features, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability. In addition, the valuation is required to be conducted for each reporting period the instrument is in existence.
The Company's stock was not trading from approximately September 4, 2014, when its stock registration was revoked, through approximately October 26, 2015, when its' stock began to trade again. The Company engaged an independent valuation expert to determine the fair value of its shares of common stock for each quarter beginning with the quarter ended September 30, 2014. For periods from September 30, 2014 through September 30, 2015, the fair value of the common stock was estimated by adjusting the most recent market price by changes in the underlying market cap due to changes in the value of net assets and applying a discount for lack of marketability inasmuch as the stock was not trading. After the stock began to trade again on or about October 26, 2015, the closing price of the stock was used in the valuation beginning with the quarter ending December 31, 2015 through this most recent valuation at March 31, 2017. Monte Carlo models were developed to value the derivative liability within the Notes using a historical volatility rate, based on comparable companies, of 159% at March 31, 2017 and 179% at December 31, 2016, and using discount bond rates based on the expected remaining term of each instrument ranging from 5.28% to 5.82% at March 31, 2017 and 5.26% at December 31, 2016. In addition, the valuation assumed that conversion requirements for Tranche 1 Debentures, exclusive of price, were met as of March 31, 2017, while conversion requirements for Tranche 2 Debentures were expected to be met by October 27, 2017 for the March 31, 2017 calculation.
9
The estimated fair value for the derivative liability relating to each Debenture at the balance sheet dates is as follows:
|
|
March 31,
2017
|
December 31,
2016
|
|
|
|
|
|
Tranche 1
|
$935,786
|
$1,008,068
|
|
Tranche 2
|
881,845
|
1,022,221
|
|
|
|
|
|
Derivative Liability
|
$1,817,631
|
$2,030,289
|
At the initial valuation date of each Tranche, a portion of the derivative liability was allocated to the Convertible Debentures as debt discount, with the remainder being recorded as other income/expense. At March 31, 2014, the initial valuation of the First Tranche Debentures, $1,000,000 was allocated to debt discount and, at December 31, 2014, the initial valuation of the Second Tranche Debentures, $850,000 was allocated to debt discount. The debt discount is subsequently amortized to expense using an effective interest methodology. Amortization of debt discount amounted to $26,920 and $13,197 for Convertible Debentures and $929 and $455 for the non-convertible Debenture for the three months ended March 31, 2017 and 2016, respectively.
The interest payment on these Debentures for the calendar year 2015 in the amount of $57,233 was due March 1, 2016 and the interest payment in the amount of $74,000 for 2016 was due March 31, 2017. The Company failed to make these payments and therefore is in default under the terms of the Debenture.
On October 25, 2016, certain Debenture holders filed a Complaint against the Company in the United States District Court for the District of Delaware
for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. 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 previously filed with the court.
Note 7. 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 a projected due date of December 31, 2017. 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.
10
Note 8. Long –Term Notes Payable
In the first four months of 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.
In the third quarter of 2016, the Chairman of the Board of Directors of the Company loaned the Company an additional $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.
The principal due under the foregoing loans 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 amount of $3.85 million. The first lien is held by holders of previously-issued convertible and non-convertible Debentures ($1.85 million) and certain executives and directors ($2 million), as outlined in Note 12.
The table below summarizes the Company’s long term notes payable as of March 31, 2017 and December 31, 2016:
|
|
Gross Amount
|
|
Amount Due
|
|
Amount Due
|
|
Loan Facility
|
Owed
|
|
Related Parties
|
|
Others
|
|
|
|
|
|
|
|
|
4 Year 8% secured note
|
$47,500
|
|
$25,000
|
|
$22,500
|
|
|
|
|
|
|
|
|
4 Year 14% secured note
|
90,000
|
|
90,000
|
|
-
|
|
|
|
|
|
|
|
|
Total
|
$137,500
|
|
$115,000
|
|
$22,500
|
Note 9. Related Party Transactions
As of March 31, 2017, the President of the Company is owed deferred salary in the amount of $1,641,996. As of March 31, 2017, a 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 $38,018 and $31,360 for the three months ended March 31, 2017 and 2016, respectively. Total interest accrued under this agreement totaled $558,360 and $520,342 as of March 31, 2017 and December 31, 2016, respectively.
11
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 $13,602 and associated rental costs of $3,763 for a total of $17,365 for the three months ended March 31, 2017 and base rent in the amount of $13,602 and associated rental costs of $3,505 for a total of $17,107 for the three months ended March 31, 2016. No payments associated with the lease were made in the first three months of 2017. At March 31, 2017 and December 31, 2016, amounts owing for base rent and associated rental costs totaled $122,499 and $105,734, 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 $333,750 and $311,250 was due and owing to the Company’s current and former directors as of March 31, 2017 and December 31, 2016, 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.
Note 10. Commitments and Contingencies
The Company’s obligations under the Collateralized Convertible Senior Debentures are secured by a lien on the Company’s 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, liens were placed on the Property in favor of the Investors for $1,850,000. The Investors Lien is in
pari passu
with a 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.
The Company has filed a second lien in the maximum amount of $250,000 on the Diamondhead property to secure certain notes payable totaling $137,500 in principal and accrued interest incurred. Details of these notes are more fully described in Note 8.
12
Litigation
College Health & Investment, L.P. v. Diamondhead Casino Corporation (Delaware Superior Court)(C.A. No. N15C-01-119-WCC)
On January 15, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principle amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff seeks payment of principle of $150,000, interest due through December 31, 2014 in the amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company’s balance sheet at December 31, 2015. On January 22, 2015, the defendant forwarded a Notice of Conversion to plaintiff, exercising the Borrower's right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. On July 2, 2015, the Court agreed with the Plaintiff and denied the Company's motion to dismiss. On July 16, 2015, the Company filed an Answer and Grounds of Defense. On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter was stayed due to the below-referenced bankruptcy action
(Case No. 15-11647)
which has now concluded. No further activity has occurred in this case.
College Health & Investment, L.P. v. Diamondhead Casino Corporation (In the Court of Chancery of the State of Delaware (C.A. No. 10663-CB)
On February 13, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed a Verified Complaint Pursuant to 8 Del.C.§211(c), with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn, seeking an order compelling the Company to hold an annual meeting. The Company agreed to entry of an Order setting a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015, and to clarify that there is no advance notice requirement for the submission of stockholder proposals at the Company's annual stockholders' meetings. The plaintiff sought costs and expenses, including attorneys' fees. On or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 for both this case and the following case. The Company filed an opposition to this motion. On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter was stayed due to the below-referenced bankruptcy action (Case No. 15-11647) which has now concluded. No further activity has occurred in this case.
13
College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount and Benjamin Harrell(In the Court of Chancery of the State of Delaware)(C.A. No. 10793-CB)
On March 14, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleges that the defendants breached their fiduciary duty of disclosure. In Count II, the plaintiff alleges that defendants breached their fiduciary duties of loyalty and care. The plaintiff sought injunctive relief, but no monetary damages other than attorney’s fees. The defendants believe that plaintiff's claims are without merit and intend to vigorously defend this lawsuit. In addition, on or about July 30, 2015, the defendant directors filed Defendants' Answer and Verified Counterclaims for defamation, breach of fiduciary duty and aiding and abetting a breach of fiduciary duty. On August 19, 2015, the plaintiff filed a Motion to Dismiss the Counterclaims. As noted above, on or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 in this case and the above-referenced case. On or about August 26, 2015, the defendants filed an Opposition to Plaintiff's Motion for an Award of Fees and Reimbursement of Expenses. On September 25, 2015, the parties entered into a Stipulation and [Proposed] Order Staying Litigation pending the below-referenced bankruptcy action
(Case No. 15-11647)
which has now concluded
.
No further activity has occurred in this case.
In re Diamondhead Casino Corporation (United States Bankruptcy Court)(District of Delaware)(Case No. 15-11647- LSS)
On August 6, 2015, an Involuntary Petition was filed in the United States Bankruptcy Court by three promissory note holders under title 11, United States Code, requesting an order for relief under chapter 7 of the Bankruptcy Code. The three creditors listed combined claims of $150,000 in principal, plus interest due on certain promissory notes. On August 28, 2015, the Company filed a Motion to Dismiss the Involuntary Petition or, in the Alternative, to Convert the Case to Chapter 11 (the "Motion to Dismiss"). The Company maintained that the Petition was filed in bad faith by supporters of the dissident slate which lost the proxy contest that was decided by the stockholders on June 8, 2015 and that it was filed in retaliation for the Company's refusal, following the stockholders' vote, to place several of the losing dissident's nominees on the Board of Directors. On September 11, 15 and 17, 2015, three additional promissory note holders filed Joinders to the Involuntary Petition listing additional combined claims of $237,500 plus interest. The Company does not recognize one of the joining petitioners as a bona fide creditor of the Company. On September 17, 2015, the six Petitioners, who were represented by the same attorneys, filed an Objection to the Company's Motion to Dismiss. On September 18, 2015, the six Petitioners filed an Emergency Motion for Entry of an Order Directing the Appointment of (I) an Interim Chapter 7 Trustee, or (II) alternatively, a Chapter 11 Trustee Should the Involuntary Case be converted (the "Emergency Motion"). The Court held an evidentiary hearing on the Emergency Motion in October 2015. On November 13, 2015, the Court denied the Petitioners' Emergency Motion as it related to the request for an interim Chapter 7 trustee. On January 15, 2016, the Court held an evidentiary hearing on the Company's Motion to Dismiss the Involuntary Petitions. The parties filed briefs in support of and in opposition to the motion.
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On June 7, 2016, the Court entered an Order granting the Company's Motion to Dismiss the Involuntary Petitions. In its accompanying Opinion, the Court found, in part, that based on the totality of the circumstances, the Creditors' primary concern in filing the involuntary petition was to effect a change in management to benefit their investments as stockholders, which was not a proper purpose for filing an involuntary bankruptcy petition. On June 30, 2016, the Company filed a Motion for an Award of Fees and Expenses and Punitive Damages. On August 11, 2016, the Petitioning Creditors filed an Opposition to the Company's Motion for an Award of Fees and Expenses and Punitive Damages. On August 31, 2016, the Court entered an Order awarding judgment to the Company for attorneys’ fees and expenses against the Petitioners, jointly and severally, in the amount of $54,886. On September 1, 2016, the Court filed an Amended Order in which it further stated that the amounts awarded were not subject to any setoff against amounts owed by the Company to the Petitioners. The Company has filed a collection action against the Petitioners to collect the attorneys' fees and expenses incurred in defending this action.
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-UNA)
On October 25, 2016, the above-named Debenture holders filed a Complaint against the Company in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. 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 previously filed with the court.
Employee Stock Ownership Plan
The Company failed to file information returns required to be filed in connection with its Employee Stock Ownership Plan (“ESOP”) for the 2015 calendar year in a timely fashion. The filings were due to be filed with the Department of Labor by October 15, 2016. The Company did not have sufficient funds to pay professionals to audit its ESOP and/or prepare and file required 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 penalties for failure to file these forms when due. 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 and the Internal Revenue Service 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 accrued $12,150 in anticipation of penalties as of March 31, 2017. Previously delinquent filings for the Plan for the years 2010 through 2014 were updated in 2016.
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