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.





  16







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.





  17

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.





  18







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.

19

© Edgar Online, source Glimpses