DIAMONDHEAD CASINO CORP - Quarter Report: 2009 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No: 0-17529

 

DIAMONDHEAD CASINO CORPORATION

Delaware		59-2935476
(State of Incorporation)		(I.R.S. EIN)

1301 Seminole Boulevard, Suite 142, Largo, Florida 33770
(Address of principal executive offices)

     Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes þ No o

     Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).          Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the Issuer’s classes of common equity as of the latest practicable date: Number of shares outstanding as of November 1, 2009: 33,950,159.

 

 

TABLE OF CONTENTS

PART I:		FINANCIAL INFORMATION
ITEM 1:		Financial Statements
		Condensed Consolidated Statements of Loss (Unaudited) for the Three Months Ended September 30, 2009 and September 30, 2008			1
		Condensed Consolidated Statements of Loss (Unaudited) for the Nine Months Ended September 30, 2009 and September 30, 2008			2
		Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008			3
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2009 and September 30, 2008			4
		Notes to Condensed Consolidated Financial Statements			5-13
ITEM 2:		Management’s Discussion and Analysis of Financial Condition and Financial Results			13-17
ITEM 3:		Quantitative and Qualitative Disclosures about Market Risk			17
ITEM 4:		Controls and Procedures			17-18
PART II:		OTHER INFORMATION
ITEM 1:		Legal Proceedings			18
ITEM 1A:		Risk Factors			19-20
ITEM 2:		Unregistered Sales of Equity Securities and Use of Proceeds			20
ITEM 3:		Default Upon Senior Securities			20
ITEM 4:		Submission of Matters to a Vote of Security Holders			20
ITEM 5:		Other Information			20
ITEM 6:		Exhibits			20
EX-31.1
EX-31.2
EX-32.1
EX-32.2

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)

		Three Months Ended
		September 30
		2009				2008
Costs and Expenses:
General and Administrative		$	234,258			$	191,041
Other			29,522				48,195
		$	263,780				239,236
Other Income (Expense)
Interest Earned On Invested Cash			599				346
Interest Expense			(29,288	)			(1,249	)
			(28,689	)			(903	)
Net Loss			(292,469	)			(240,139	)
Preferred Stock Dividends			(25,400	)			(25,400	)
Net Loss Applicable to Common Stockholders		$	(317,869	)		$	(265,539	)
Net Loss per Common Share Applicable to Common Stockholders Basic and Diluted		$	(.009	)		$	(.008	)
Weighted Average Number of Common Shares Outstanding, Basic and Diluted			33,923,167				33,759,559

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)

		Nine Months Ended
		September 30
		2009				2008
Costs and Expenses:
General and Administrative		$	680,099			$	630,986
Stock-based Compensation			25,133				2,072,927
Other			79,619				148,463
			784,851				2,852,376
Other Income (Expense)
Interest Earned On Invested Cash			1,980				3,732
Interest Expense			(59,275	)			(3,041	)
			(57,295	)			691
Net Loss			(842,146	)			(2,851,685	)
Preferred Stock Dividends			(76,200	)			(77,640	)
Net Loss Applicable to Common Stockholders			(918,346	)			(2,929,325	)
Net Loss per Common Share Applicable to Common Stockholders Basic and Diluted		$	(.027	)		$	(.087	)
Weighted Average Number of Common Shares Outstanding, Basic and Diluted			33,888,746				33,661,205

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)
		September 30, 2009				December 31, 2008
ASSETS
Current Assets:
Cash		$	177,343			$	295,968
Other			6,691				22,468
Total Current Assets			184,034				318,436
Land Held for Development			5,409,913				5,409,913
Deferred Financing Costs (net of accumulated amortization of $9,102 at September 30, 2009 and $1,836 at December 31, 2008)			29,992				37,258
Long Term Receivable and Other			80				26,514
Total Assets		$	5,624,019			$	5,792,121
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Note payable to Director		$	—			$	55,000
Accounts Payable and Accrued Expenses			173,087				203,884
Total Current Liabilities			173,087				258.884
Long-Term Debt (net of unamortized discount of $80,853 at September 30, 2009 and $23,095 at December 31, 2008)			919,147				276,905
Contingencies
Stockholders’ Equity:
Preferred Stock: $.01 par value; shares authorized: 5,000,000, outstanding: 2,086,000 at September 30, 2009 and December 31, 2008; (aggregate liquidation preference $2,519,080 at September 30, 2009 and December 31, 2008)			20,860				20,860
Common Stock: $.001 par value; shares authorized: 50,000,000, issued: 36,804,486 at September 30, 2009 and 36,731,687 at December 31, 2008, outstanding: 33,950,159 at September 30,2009 and 33,817,701 at December 31, 2008			36,805				36,732
Additional Paid-In-Capital			33,649,292				33,544,516
Unearned ESOP Shares			(4,180,737	)			(4,269,687	)
Accumulated Deficit			(24,986,776	)			(24,068,430	)
Treasury Stock, at Cost, 50,346 Shares			(7,659	)			(7,659	)
Total Stockholders’ Equity			4,531,785				5,256,332
Total Liabilities and Stockholder’s Equity		$	5,624,019			$	5,792,121

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended
		September 30
		2009				2008
Operating Activities:
Net Loss		$	(842,146	)		$	(2,851,685	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			—				180
Release of ESOP Shares			44,744				111,363
Issuance of stock-based compensation			25,133				2,072,927
Amortization			18,730				—
Write off of long term receivable			26,434				—
Decrease in:
Other Current Assets			15,777				13,012
(Decrease) in:
Accounts Payable and Accrued Liabilities			(7,297	)			(47,688	)
Net cash used in Operating Activities			(718,625	)			(701,891	)
Financing Activities:
Proceeds from Line of Credit			700,000				—
Proceeds from issuance of Notes payable to Directors			—				205,000
Payment of Note payable to Director			(55,000	)			(25,000	)
Proceeds from exercise of options to purchase common stock			—				75,000
Payment of Preferred Stock dividends			(45,000	)			(30,000	)
Net cash provided by Financing Activities			600,000				225,000
Net decrease in cash			(118,625	)			(476,891	)
Cash beginning of period			295,968				739,831
Cash end of period		$	177,343			$	262,940

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Basis of Presentation

These condensed consolidated financial statements contain unaudited information as of September 30, 2009 and for the three and nine-month periods ended September 30, 2009 and 2008. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with our audited consolidated financial statements and the related notes thereto. The financial information as of December 31, 2008 is derived from our 2008 Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2008 Annual Report on Form 10-K. The financial results for the interim period presented are not necessarily indicative of the results to be expected for the full year.

The accompanying condensed consolidated financial statements were approved by Management of the Company as well as the Audit Committee of the Board of Directors and were issued on November 6, 2009. Management of the Company has evaluated subsequent events through this date.

Note 2. Going Concern

The 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 revenues, and as reflected in the accompanying condensed consolidated financial statements, incurred a loss applicable to common shareholders of $918,346 for the nine months ended September 30, 2009. Our auditors have expressed substantial doubt about the Company’s ability to continue as a going concern in their audit report on our consolidated financial statements included with the Annual Report on Form 10-K for the year ended December 31, 2008.

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, in conjunction with one or more partners, through either equity and/or debt financing, to master plan, design, obtain permits for, construct, open, and operate a casino resort.

The Company had been dependent over the past two years on raising cash to meet its on-going costs and expenses through the sale of its equity securities. However, on October 23, 2008, the Company secured a $1,000,000 Line of Credit from an unrelated third party, the terms of which are more fully discussed in Note 9 to these condensed consolidated financial statements. At September 30, 2009, the Company had $177,343 of cash on hand and has drawn all funds available to it from the aforementioned Line of Credit. The Company is exploring options available to raise the cash necessary to continue to meet its ongoing costs and expenses. In the absence of obtaining any additional working capital for immediate needs, the Company will exhaust all cash resources prior to the end of the current year.

The Company continues to discuss the development of the property as well as financing options with various interested parties. At September 30, 2009, the Company does not have the financial resources to develop a casino resort on its own. There can be no assurance that the Company can successfully develop any of its Diamondhead, Mississippi property and in the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, it may have a significant adverse impact on the Company’s ability to ultimately develop the property. The development of this property is subject to risks and uncertainties which include, but are not limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. The Company may be affected by some or all of these factors and other risks and uncertainties, many of which are beyond the Company’s control.

Note 3. Net Loss per Common Share

Net loss per common share applicable to common stockholders is based on the net loss applicable to common stockholders divided by the weighted average number of common shares outstanding during each period. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury.

Basic net loss per share applicable to common stockholders is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is calculated by using the weighted average number of common shares outstanding plus other potentially dilutive securities. As of September 30, 2009 and 2008, dilutive securities included 3,400,000 and 3,100,000 respectively of potential, additional common shares consisting of stock purchase options and convertible preferred stock. The foregoing, potentially dilutive securities are excluded from diluted net loss per share applicable to common stockholders as their effect would be antidilutive.

		September 30,				December 31,
		2009				2008
Common Shares outstanding includes:
Issued Shares			36,804,486				36,731,687
Less: Treasury Shares			(50,346	)			(50,346	)
Unallocated, uncommitted ESOP Shares			(2,803,981	)			(2,863,640	)
Outstanding Shares			33,950,159				33,817,701

Note 4. Recent Accounting Pronouncements.

In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 111 (“SAB 111”). SAB 111 amends Topic 5.M. in the SAB series entitled “Other Than Temporary Impairment of Certain Investments, Debt and Equity Securities.” SAB 111 was codified into Accounting Standards Codification (“ASC”) Sub-Topic 320-10 “Investments — Debt and Equity Securities — Overall” and maintains the previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. SAB 111 was effective for the Company as of March 31, 2009. There was no material impact on our consolidated financial position or results of operations upon adoption of this SAB.

In April 2009, the FASB issued FASB Staff Position (“FSP”) No. 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments,” which was codified into ASC Topic 825 “Financial Instruments.” This standard amends prior requirements concerning disclosures about fair values of financial instruments for interim reporting periods as well as in annual financial statements. The

standard also amends prior guidance requiring those disclosures in summarized financial information at interim reporting periods. This standard is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this standard for the interim reporting period ending March 31, 2009.

In April 2009, the FASB issued FSP No. 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments,” which was codified into ASC Section 320-10-65 “Investments — Debt and Equity Securities-Transition and Open Effective Date Information.” This section amends the other-than-temporary impairment guidance in GAAP for debt securities. If an entity determines that it has an “other-than-temporary impairment” on a security, it must recognize the credit loss on the security in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The section expands disclosures about other-than-temporary impairment, requires that disclosures be made for interim reporting periods and is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this standard for the interim reporting period ending March 31, 2009. There was no material impact on the consolidated financial position or results of operations upon adoption.

In April 2009, the FASB issued FSP No. FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” which was codified into ASC Section 820-10-65 “Fair Value Measurements and Disclosures — Overall — Transition and Open Effective Date Information.” This amendment provides additional guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability. A significant decrease in the volume or level of activity for the asset or liability is an indication that transactions or quoted prices may not be determinative of fair value because transactions may not be orderly. In that circumstance, further analysis of transactions or quoted prices is needed and an adjustment to the transactions or quoted prices may be necessary to estimate fair value. This amendment became effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this standard for the interim reporting period ending March 31, 2009. There was no material impact on our consolidated financial position or results of operations upon adoption.

In May 2009, the FASB issued SFAS No. 165 “Subsequent Events” which was codified into ASC Topic 855 “Subsequent Events.” This Topic establishes general guidance for accounting for and disclosure of events that occur after the balance sheet date but before statements are issued or available to be issued. The amendment does not result in significant changes in the subsequent events that an entity currently would recognize or disclose in its financial statements, but requires the disclosure of the date through which it has evaluated subsequent events and the basis for that date. The statement is effective for interim and annual periods ending after June 15, 2009 and is not expected to have a material effect on our consolidated financial position or results.

In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets” an amendment to SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No. 166 has not yet been incorporated into the ASC and, therefore, remains authoritative. The statement defines the term “participating interest” to establish specific conditions for reporting a transfer of financial assets as a sale and improves financial reporting by eliminating (a) the exception for qualifying special-purpose entities from consolidation guidance and (b) the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. The statement is effective for annual reports for

years beginning after November 15, 2009 and is not expected to have a material effect on our consolidated financial position or results.

In June 2009, the FASB issued SFAS No. 167, an amendment to FASB Interpretation 46(R) “Consolidation of Variable Interest Entities.” SFAS No. 167 has not yet been incorporated into the ASC and, therefore, remains authoritative. The statement requires an entity to perform an analysis to determine whether the entity’s variable interest give it a controlling financial interest in a variable interest entity by rationalizing characteristics that would give it power to direct the activities of a variable interest entity and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The statement is effective for years beginning after November 15, 2009 and is not expected to have a material effect on our consolidated financial position or results.

In June 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01 “Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” The statement notifies issuers of financial statements that the FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles recognized by FASB to be applied to all nongovernmental entities. The Standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of this Statement, the Codification supersedes all then-existing, non-SEC accounting and reporting standards. The update was included in ASC Topic 105-10.

In August 2009, the FASB issued ASU 2009-05, an amendment to ASC Subtopic 820-10, “Fair Value Measurements and Disclosures — Overall” for the fair value measurement of liabilities. The update provides clarification in cases where a quoted price in an active market for the identical liability is not available and requires entities to measure fair value using one or more of the following techniques:

1) A valuation technique that uses:

a) The quoted price of the identical liability when traded as an asset.

b) Quoted prices for similar liabilities or similar liabilities when traded as an asset.

2) Another valuation technique that is consistent with the principles of Topic 820. This would include an income approach, such as a present value technique, or a market approach, such as a technique based on the amount an entity would pay to transfer the identical liability or would receive to enter into the identical liability.

The update is effective for the first reporting period beginning after issuance and is not expected to have a material effect on the Company’s condensed consolidated financial statements.

Note 5. Stock-Based Compensation

The Company follows the provisions of Accounting Standards Codification (“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 June 2009, the Company modified outstanding option grants originally issued in 2004 resulting in a net loss applicable to common stockholders for the nine months ended September 30, 2009 being $25,133 higher than if the Company had not modified the terms of those option grants. The impact on basic and diluted loss per share for the nine months ended September 30, 2009 was an increase of $.001 per share. In addition, as a result of a modification to all outstanding option grants originally issued in 2003, net loss applicable to common stockholders for the nine months ended

September 30, 2008 was $2,072,927 higher than if the Company had not modified the terms of those option grants. The impact on basic and diluted loss per share for the nine months ended September 30, 2008 was an increase of $.062 per share.

In determining the fair value of each option modified, the Black-Scholes option-pricing model, consistent with the provisions of ASC paragraph 718-20-35-1, was used. In the case of a modification, the valuation at the modification dates, in excess of the valuation at the original grant date, is expensed.

The valuation was determined using the following weighted-average assumptions shown in the table below.

		Nine Months Ended
		Sept 30				Sept 30
		2009				2008
Dividend Yield			0	%			0	%
Expected Volatility			89.49	%			49.25% - 96.10	%
Expected Option Life (years)			3.1				5
Average Risk-Free Interest Rate			2.03	%		2.31% to 2.82%

All awards were fully vested at September 30, 2009.

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.

Note 6. Fair Value

The Company follows the provisions of ASC Section 820-10-65 “Fair Value Measurements and Disclosures — Overall — Transition and Open Effective Date Information.” This section defines fair value, provides guidance for measuring fair value and requires certain disclosures. This section does not require any new fair value measurements, but 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 section 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 our own assumptions.

The carrying amounts of cash and other current assets, the prior year note payable to a Director, accounts

payable and accrued expenses approximate fair value due to the short term nature of the instruments. It was not practicable and the Company was unable to reasonably estimate the fair value of its fixed interest rate note payable in the original amount of $1,000,000 due to the inability to obtain quotes for similar types of financing.

Note 7. Impairment of 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.

The Diamondhead, Mississippi property was last appraised on or about August 4, 2003, by J. Daniel Schroeder Appraisal Company at $108,900,000. The appraisal was subject to certain material assumptions and was predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site. In addition, the Company rejected an offer to purchase the entire 404 acre site for $100 million in July 2007 as not being in the best interest of the shareholders. Management of the Company stays informed of property values in close proximity to the Company’s Diamondhead, Mississippi property and based on Level 2 observations as described in ASC Topic 820, “Fair Value Measurements and Disclosures,” the fair value of the land held for development exceeds the carrying value of $5.4 million and, therefore, no impairment exists at September 30, 2009.

Note 8. Promissory Notes Due Directors

In March 2008, the Company borrowed $205,000 from two Directors to meet its short term liquidity needs pursuant to the terms of two promissory notes. The first note provided for the repayment of $150,000 to the Vice President of the Company, who is also a Director of the Company. The second note provided for the repayment of $55,000 to a Director of the Company. Both loans were due and payable on or before May 1, 2009 and provided for interest at the rate of 9% per annum. Both loans were unsecured.

On March 28, 2008, the Vice President of the Company, who had previously loaned the Company $150,000 pursuant to the aforementioned promissory note, exercised an option to purchase 100,000 shares of common stock at an exercise price of $1.25 per share by applying $125,000 of the $150,000 which the Company owed him to exercise the option. The remaining balance on this note was retired in the second quarter of 2008. The remaining balance on the second note in the amount of $55,000 was paid in full on May 1, 2009.

Note 9. Long-Term Debt

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 borrowings of 9% per annum payable quarterly based on the prorata number of days outstanding. All funds originally advanced under the facility are 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 has an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share based on the proportion that the amount borrowed bears to the

$1,000,000 Line of Credit. The options expire on the earlier of November 1, 2012 or following repayment in full by the Company of the amount borrowed. The Company incurred finders’ fees in obtaining the facility, including a fee paid to an unrelated party in January 2009 by issuing 20,000 shares of common stock then-valued at $13,100. In addition, under the terms of an agreement with the Company, a Director and Vice President of the Company received 6% of the amount of funds borrowed under the facility for his efforts in securing the Line of Credit. A total of $20,000 was paid to him in 2008 and an additional $40,000 was paid to him in 2009.

As of September 30, 2009, the Company had borrowed all of the $1,000,000 available to it under the Line of Credit. In addition, the Company and the lender have agreed that payment of all interest accrued subsequent to June 30, 2009 will be deferred until the date payment in full is due.

The Company valued the first option to purchase 50,000 shares of common stock at $39,094 using the Black-Scholes option pricing model with the following weighted-average assumptions: dividend yield of zero, expected volatility of 69.88%, expected life of 4.02 years and average risk-free interest rate of 1.76%. The value of this option is recorded as deferred financing cost and will be amortized over the expected life of the debt. Deferred financing cost amortization amounted to $7,266 for the nine months ended September 30, 2009.

While the Lender has not exercised any options pursuant to the Line of Credit Agreement, the Company valued the additional options to purchase 250,000 shares of common stock using the Black-Scholes option pricing model on the date of each draw. The table below summarizes each of the option grants associated with each draw and the weighted average valuation assumptions of the respective grant. The option valuations are recorded as debt discount and amortized to interest expense over the expected life of the loan.

Date		12/08/08				3/09/09				6/08/09
Amount of Draw		$	300,000			$	300,000			$	400,000
Options Granted			75,000				75,000				100,000
Valuation		$	23,491			$	9,640			$	59,582
Dividend Yield			0	%			0	%			0	%
Expected Volatility			64.99	%			76.77	%			86.47	%
Expected Life (Years)			3.90				3.63				3.40
Risk Free Interest Rate			1.357	%			1.790	%			2.110	%

Amortization of debt discount for the nine months ended September 30, 2009 amounted to $11,464.

Note 10. Contingencies

Sales Tax

On November 28, 1994, the Florida Department of Revenue issued a Notice of Intent to make Sales and Use Tax Audit Changes to five subsidiaries of the Company for the period February 1, 1989 through June 30, 1994. The total proposed assessments, including estimated penalties and interest, through June 15, 1997, totaled approximately $7.4 million. As of May 2005, the subsidiaries ceased all payments regarding the assessments and the total amount, including accrued interest, due the Florida Department of Revenue amounted to $1,125,752.

The five subsidiaries which were the subjects of the assessment are no longer operating, have no assets,

and are unable to make further payments pursuant to their respective Closing Agreements. The parent corporation did not guarantee the payments under these settlement agreements. On May 18, 2006, the Company received correspondence from the Florida Department of Revenue stating that the Department had filed tax warrants with respect to the amounts owed by the subsidiaries in question and had placed these warrants as uncollectible and no further collection efforts would be pursued by the Florida Department of Revenue.

Related Parties

The Company has agreements with various current Officers and Directors which would give rise to payment of a fee under certain conditions as follows:

The Company has agreements with Directors Harrell, Harrison and Norton in the event they are successful in obtaining funding for the Company and/or development of its Diamondhead property. The Company has agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of any equity investment obtained in connection with the development of the Diamondhead property as a result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of the gross sales price for property sold or for any loan or line of credit that does not require that the property be pledged as security for a loan. In the event a loan or line of credit requires that the property be pledged as security, the commission would be reduced to three percent (3%). Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales agreement, and/or joint venture agreement acceptable to the Company and payment of the loan proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The commission due will be paid at closing out of monies paid and upon receipt of good funds. If funds are received periodically, the commission due will be paid periodically upon receipt of said funds by the Company.

Master Plan

On September 21, 2009, the Company entered into an agreement with EDSA, a landscape architectural firm, to provide a Master Plan and supporting illustrative plan summary booklets at an approximate cost of $41,000. The funds are payable to EDSA in installments as phases in development of the plan are completed. As of September 30, 2009, the Company had paid a total of $7,000 for these services.

Other

The Company has agreements with various unrelated persons and entities that would be entitled to substantial commissions if the Company enters into an agreement relating to the development of its Diamondhead property as a result of their efforts.

Note 11. Supplemental Cash Flow Information

Supplemental cash flow information for the nine months ended September 30, 2009 and 2008 is as follows:

		September 30				September 30
		2009				2008
Cash paid for interest		$	29,924			$	1,794
Non-cash financing activities:
Common stock issued:
To satisfy Note payable to Director		$	—			$	125,000
For services		$	13,100			$	—
Preferred stock dividends satisfied with shares of common stock		$	31,200			$	32,640

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section should be read together with “Management’s Discussion and Analysis of Financial Condition and Plan of Operation” and the Consolidated Financial Statements and related notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as well as the condensed consolidated financial statements for the nine months ended September 30, 2009 and accompanying notes included elsewhere in this document.

Overview

The Company’s current priority is the development of a casino resort on its 404-acre property located on Bay St. Louis 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, the project will be successful.

Liquidity

The Company has had no operations since it ended its gambling cruise ship operations in 2000 and incurred a net loss applicable to common stockholders of $918,346 and $2,929,325 for the nine months ended September 30, 2009 and 2008 respectively. Stock-based compensation expense recognized under ASC Topic 718 for the nine months ended September 30, 2009 and 2008 was $25,133 and $2,072,927 respectively, which consisted of modifications to all outstanding stock option awards originally granted in 2004 and 2003. Our auditors have expressed substantial doubt about the Company’s ability to continue as a going concern in their audit report on our consolidated financial statements included with the Annual Report on Form 10-K for the year ended December 31, 2008.

The Company had been dependent over the past two years on raising cash to meet its on-going costs and expenses through the sale of its equity securities. However, on October 23, 2008, the Company secured a $1,000,000 Line of Credit from an unrelated third party, the terms of which more fully discussed in Note 9 to the condensed consolidated financial statements. At September 30, 2009, the Company had $177,343 of cash on hand, and has drawn all funds available to it from the aforementioned Line of Credit. The Company is exploring options available to raise the cash necessary to continue to meet its ongoing costs and expenses. In the absence of obtaining any additional working capital for immediate needs, the

Company will exhaust all cash resources prior to the end of the current year and be unable to meet its ongoing costs and expenses.

The Company continues to discuss the development of the property as well as financing options with various interested parties, however at September 30, 2009 the Company does not have the financial resources to develop a casino resort on its own. There can be no assurance that the Company will be able to reach any agreement with respect to the development of the Diamondhead, Mississippi property. The development of this property is subject to risks and uncertainties which include, but are not limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. The Company may be affected by some or all of these factors and other risks and uncertainties, many of which are beyond the Company’s control.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally relate to our strategies, plans and objectives for future operations and are based upon management’s current plans and beliefs or estimates of future results or trends. Forward-looking statements also involve risks and uncertainties, including, but not limited to, the risks and uncertainties described in Part II, Item 1A of this report, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict.

The reader should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we will not update these forward-looking statements, even if our situation changes in the future. We caution the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect our actual results and cause actual results to differ materially from those discussed in forward-looking statements.

Off Balance Sheet Arrangements:

Permits

On October 17, 2005, Mississippi passed new legislation which allows casinos in certain statutorily-described areas to be built on land up to 800 feet from the mean high water line of certain bodies of water, including Bay St. Louis. Given the fact that the Company intends to take advantage of the new law and construct its casino resort on land rather than in, on, or above the water, the extent to which various permits, authorizations, and approvals, as well as studies and assessments in support thereof, will be required is unknown at this point. The Company believes that permitting for the project and plans for ultimate development will require significant capital expenditures for engineering, architectural, accounting, and legal services. The amount ultimately required is unknown at this time, but the Company does not have sufficient funds required for this purpose.

The development of the Diamondhead, Mississippi property requires the Company to obtain permits and approvals from various federal, state, and local agencies, boards and commissions. The regulatory environment relating to these permits and approvals is uncertain and subject to constant change. There can be no assurance that all permits and approvals can be obtained, or that if obtained, they will be renewed.

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. If the Company enters into a joint venture arrangement pursuant to which the joint venture partner acquires a controlling interest, CAMC may terminate the agreement. Unless earlier terminated 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 twenty-five million dollars $25,000,000.

Related Parties

The Company has agreements with various current Officers and Directors which would give rise to payment of a fee under certain conditions as follows:

The Company has agreements with Directors Harrell, Harrison and Norton in the event they are successful in obtaining funding for the Company and/or development of its Diamondhead property. The Company has agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of any equity investment obtained in connection with the development of the Diamondhead property as a result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of the gross sales price for property sold or for any loan or line of credit that does not require that the property be pledged as security for a loan. In the event a loan or line of credit requires that the property be pledged as security, the commission would be reduced to three percent (3%). Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales agreement, and/or joint venture agreement acceptable to the Company and payment of the loan proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds are received periodically, the commission due will be paid periodically upon receipt of said funds by the Company.

Master Plan

On September 21, 2009, the Company entered into an agreement with EDSA, a landscape architectural firm, to provide a Master Plan and supporting illustrative plan summary booklets at an approximate cost of $41,000. The funds are payable to EDSA in installments as phases in development of the plan are completed. As of September 30, 2009, the Company had paid a total of $7,000 for these services.

Other

The Company has agreements with unrelated persons and entities that would be entitled to substantial commissions if the Company enters into a financial agreement relating to the development of its Diamondhead property as a result of their efforts.

Critical Accounting Policies:

Impairment of Long-Lived Assets

In accordance with generally accepted accounting principles, the Company currently carries the Diamondhead, Mississippi property on its balance sheet at cost in the amount of $5,409,913 and has reviewed this carrying value for impairment. In the opinion of management, the carrying value is not in excess of the estimated market value of the property or the anticipated cash flows to be generated from the property.

The Diamondhead, Mississippi property was last appraised on or about August 4, 2003, by J. Daniel Schroeder Appraisal Company at $108,900,000. The appraisal was subject to certain material assumptions and was predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site. In addition, the Company rejected an offer to purchase the entire 404 acre site for $100 million in July 2007 as not being in the best interest of the shareholders. Management of the Company stays informed of property values in close proximity to the Company’s Diamondhead, Mississippi property and based on Level 2 observations as described in ASC Topic 820, “Fair Value Measurements and Disclosures,” the fair value of the land held for development exceeds the carrying value of $5.4 million and, therefore, no impairment exists at September 30, 2009.

Management believes that use of the property as a gaming site represents the highest and best use of the property and provides for the greatest potential for shareholder value. In the event the Company was unable to obtain all of the permits required to develop a casino resort, the property could be used for other commercial or residential purposes.

Stock Based Compensation Expense

The Company follows the provisions of Financial Accounting Standards Board Accounting Standard Codification 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 on estimated fair values.

Stock-based compensation expense recognized under ASC Topic 718 for the nine months ended September 30, 2009 and 2008 was $25,133 and $2,072,927 respectively, which consisted of modifications to all outstanding stock option awards originally granted in 2004 and 2003.

The Standard requires companies to estimate the fair value of share-based payment awards on the date of grant or modification using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s condensed consolidated statement of loss. Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of share-based payment awards or modifications to prior awards, are estimated at the grant date using the Black-Scholes option valuation model. The Company’s determination of fair value of share-based payment awards or modifications thereto, is measured on the date of grant using an option-pricing model and is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise history.

Fair Value

In the first quarter of 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. SFAS No. 157 was codified into Section 820-10-65 “Fair Value Measurements—Overall— Transition and Open Effective Date Information.” This section defines fair value, provides guidance for measuring fair value and requires certain disclosures. This section does not require any new fair value measurements, but 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 section 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 our own assumptions.

Item 3.		Quantitative and Qualitative Disclosure about Market Risk

The Company currently is not subject to any trading or non-trading market risk-sensitive instruments. The prior year note payable to a Director and the long-term debt listed on the Company’s balance sheet are at fixed interest rates and, therefore, are not market risk-sensitive.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

In connection with the preparation of this report on Form 10-Q, management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and other procedures designed to provide reasonable assurance that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As was discussed and disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008, management of the Company identified a material weakness regarding elements of our internal control over financial reporting which could also constitute a deficiency in our disclosure controls and procedures. Although management adopted policies during the first quarter of 2009 in an effort to remedy said weakness, insufficient time has elapsed to test the policies and procedures adopted and evaluate their effectiveness. Therefore, management has concluded that, as of September 30, 2009, the Company continued to have a material weakness regarding elements of its internal control over financial reporting,

and as a result, our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2009.

Interim Measures to Ensure the Accuracy of Financial Reporting

In response to the material weakness identified as a result of management’s assessment of internal control over financial reporting as disclosed in our 2008 Form 10-K, management with oversight from the Audit Committee, designed interim measures relating to contracts, agreements and other financial arrangements to ensure the accuracy of our financial reporting during each quarter of 2009. These procedures include but were not limited to: 1) a review of all written contracts, agreements and arrangements by members of management to ensure that the books and records accurately and timely reflect the terms and conditions of the foregoing; and 2) enhance communications among all members of management and the Board of Directors to capture oral agreements that did not exist in writing. As a result of these expanded procedures, we have concluded that the consolidated financial statements included in this report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

The certifications of our principal executive officer and principal financial officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures and our internal control over financial reporting referred to in those certifications.

Changes in Internal Control Over Financial Reporting

During the first quarter of 2009, in an effort to remedy the aforementioned weakness, management, with oversight of the Audit Committee, designed policies and procedures relating to contracts, agreements and other financial arrangements and the related recording of such transactions and financial reporting disclosures. During the quarter ended September 30, 2009, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Ongoing Remediation of Material Weakness

Management will continue to follow the interim measures described above and monitor the effectiveness of our internal control over financial reporting in the areas discussed above. In addition, management, with the oversight of the Audit Committee, will continue to evaluate its policies and procedures so as to identify and take steps to remedy material weaknesses, if any, as expeditiously as possible and to enhance the overall design and capability of the control environment. Management believes that these remedial actions have improved our internal control over financial reporting, as well as our disclosure controls and procedures. The Company expects to report that its internal control over financial and disclosure controls and procedures will be effective as of December 31, 2009.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance, that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company, have been detected.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The Company’s property in Diamondhead, Mississippi is the only asset of material value held by the Company. The Company is entirely dependent on the successful development of and/or sale or lease of part or all of this property to generate future cash flow. The successful development of the property will require substantial financial resources. The Company does not have the financial resources to develop the property or any portion thereof. To date, the Company has not found a partner(s) with whom to develop the property on terms that are acceptable to the Company.

The ultimate development of the property is subject to risks and uncertainties which include, but are not limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. In addition, the State of Mississippi could vote to prohibit gambling which would have an enormous, adverse effect on the value of the Company’s Diamondhead property, the development of the property, and any gaming operation that might be in operation at the time any such prohibition was instituted.

The design, construction, and on-time opening of a casino resort are subject to risks and uncertainties associated with cost overruns, contract-related contingencies, developer, contractor or subcontractor failures to perform, cost increases and availability of materials, supplies and equipment, labor shortages, strikes, walkouts and weather-related and other construction delays. The occurrence of a natural disaster could disrupt operations on the property for elongated periods of time. Any such occurrence could also alter the market for the project temporarily or permanently and have an adverse effect on the value of the property and the business of the Company.

The gaming industry is characterized by intense competition. Many companies, with which the Company will compete, are substantially larger and have significantly greater resources than the Company. Furthermore, it is likely that other competitors will emerge in the future. Assuming the Company is successful in constructing a casino resort, the success of the project will be subject to risks and uncertainties, including but not limited to those relating to local, national, and worldwide competition, including competition with Native American casinos which enjoy significant tax advantages. The Company will also be subject to operational risks, including but not limited to those relating to operations in general, insurance coverage problems unique to the area in which the property is located, weather-related problems, including hurricanes and floods, and labor-related problems unique to the area. The operation will also be subject to risks relating to security, licensing and suitability findings unique to the gaming industry. Moreover, while the Company previously operated gambling ships, the Company has never operated a hotel or land-based casino. The Company’s proposed operations are also subject to all of the risks inherent in the establishment of a new business enterprise, including the absence of an operating history.

The Company incurs ongoing expenses, but has no current revenue and no revenue stream with which to pay ongoing expenses. The Company will not have any revenue stream unless the Company is able to successfully develop its Diamondhead property, obtain funds prior to development of the property, or generate cash from the sale of parts or all of the property. The Company’s inability to raise cash to pay its expenses in the future could adversely affect its ability to continue in the future. Current economic conditions in the casino industry, as well as tight credit markets in general, could adversely affect the Company’s ability to obtain reasonable financing for development of the Diamondhead property. As of the date of this report, in lieu of any additional source of capital, management believes that the Company will essentially exhaust all cash resources currently available to it prior to December 31, 2009. In addition,

our auditors have expressed substantial doubt about the Company’s ability to continue as a going concern in their audit report included in our annual report on Form 10-K for the year ended December 31, 2008. The market price of the Company’s common stock may be highly volatile. Announcements by the Company and its competitors may lead to wide swings in the market price of the common stock.

While the Company is not currently engaged in litigation, the Company is always subject to risk associated with contract-related, employee-related, environmental-related and other litigation. Any such litigation would likely be expensive and time-consuming.

The foregoing are not intended to encompass and do not encompass every risk or uncertainty associated with investment in the Company. The Company may be affected by some or all of the foregoing and other risks and uncertainties, many of which are beyond the Company’s control.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item. 3. Default Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

A complete index of exhibits previously filed by the Registrant can be accessed under Item 13 in the Registrant’s Form 10-K for the year ending December 31, 2008 and is incorporated herein by reference.

Exhibits 31.1 and 31.2

Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company pursuant to Rule 13A—14 of the Securities and Exchange Commission Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.

Exhibits 32.1 and 32.2

Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.