DIAMONDHEAD CASINO CORP - Quarter Report: 2010 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		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

(Exact name of registrant as specified in charter)

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

1301 Seminole Boulevard, Suite 142, Largo, Florida 33770
(Address of principal executive offices)
Registrant’s telephone number, including area code: 727/674-0055

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 May 1, 2010: 34,129,222.

 

 

TABLE OF CONTENTS

PART I:		FINANCIAL INFORMATION
ITEM 1:		Financial Statements
		Condensed Consolidated Statements of Loss (Unaudited) for the Three Months Ended March 31, 2010 and March 31, 2009			1
		Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009			2
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2010 and March 31, 2009			3
		Notes to Condensed Consolidated Financial Statements			4-11
ITEM 2:		Management’s Discussion and Analysis of Financial Condition and Financial Results			11-16
ITEM 3:		Quantitative and Qualitative Disclosures about Market Risk			16
ITEM 4:		Controls and Procedures			16
PART II:		OTHER INFORMATION
ITEM 1:		Legal Proceedings			17
ITEM 1A:		Risk Factors			17-18
ITEM 2:		Unregistered Sales of Equity Securities and Use of Proceeds			18
ITEM 3:		Default Upon Senior Securities			18
ITEM 4:		Submission of Matters to a Vote of Security Holders			18
ITEM 5:		Other Information			18
ITEM 6:		Exhibits			18
		Signatures			19
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
		March 31
		2010				2009
Costs and Expenses:
General and Administrative		$	162,637			$	216,738
Other			31,336				21,569
		$	193,973			$	238,307
Other Income (Expense)
Amortization of debt discount			(306,460	)			(1,594	)
Interest Earned On Invested Cash			55				937
Interest Expense			(22,956	)			(8,988	)
			(329,361	)			(9,645	)
Net Loss			(523,334	)			(247,952	)
Preferred Stock Dividends			(25,400	)			(25,400	)
Net Loss Applicable to Common Stockholders		$	(548,734	)		$	(273,352	)
Net Loss per Common Share Applicable to Common Stockholders Basic and Diluted		$	(.016	)		$	(.008	)
Weighted Average Number of Common Shares Outstanding, Basic and Diluted			34,061,280				33,845,820

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)
		March 31, 2010				December 31, 2009
ASSETS
Current Assets:
Cash		$	217,570			$	42,410
Other Current Assets			11,208				16,154
Total Current Assets			228,778				58,564
Land Held for Development			5,476,097				5,409,913
Deferred Financing Costs (net of accumulated amortization of $13,945 at March 31, 2010 and $11,550 at December 31, 2009)			25,149				27,544
Other			80				80
Total Assets		$	5,730,104			$	5,496,101
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Note Payable		$	5,692			$	8,538
Accounts Payable and Accrued Expenses			353,420				269,782
Total Current Liabilities			359,112				278,320
Long-Term Debt (net of unamortized discount of $67,782 at March 31, 2010 and $74,242 at December 31, 2009)			1,232,218				925,758
Contingencies
Stockholders’ Equity:
Preferred Stock: $.01 par value; shares authorized: 5,000,000, outstanding: 2,086,000 at March 31, 2010 and December 31, 2009; (aggregate liquidation preference $2,519,080 at March 31, 2010 and December 31, 2009)			20,860				20,860
Common Stock: $.001 par value; shares authorized: 50,000,000, issued: 36,931,395 at March 31, 2010 and 36,804,486 at December 31, 2009, outstanding: 34,116,841 at March 31, 2010 and 33,970,045 at December 31, 2009			36,931				36,805
Additional Paid-In-Capital			33,997,282				33,631,573
Unearned ESOP Shares			(4,121,436	)			(4,151,086	)
Accumulated Deficit			(25,787,204	)			(25,238,470	)
Treasury Stock, at Cost, 50,346 Shares			(7,659	)			(7,659	)
Total Stockholders’ Equity			4,138,774				4,292,023
Total Liabilities and Stockholder’s Equity		$	5,730,104			$	5,496,101

See accompanying notes to condensed consolidated financial statements.

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

		Three Months Ended
		March 31
		2010				2009
Operating Activities:
Net Loss		$	(523,334	)		$	(247,952	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization			2,395				2,395
Release of ESOP Shares			20,086				9,944
Amortization of debt discount			306,460				1,594
Decrease in:
Other Current Assets			4,945				9,764
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities			83,638				(2,673	)
Net cash used in Operating Activities			(105,810	)			(226,928	)
Investing Activities:
Purchase of Land Held for Development			(1,184	)			—
Net cash used in Investing Activities			(1,184	)			—
Financing Activities:
Proceeds from Line of Credit			—				300,000
Proceeds from Private Placement			300,000				—
Repayment on Note payable			(2,846	)			—
Payment of Preferred Stock dividends			(15,000	)			(15,000	)
Net cash provided by Financing Activities			282,154				285,000
Net increase in cash			175,160				58,072
Cash beginning of period			42,410				295,968
Cash end of period		$	217,570			$	354,040
Non-cash Investing and Financing Activities:
Purchase of Land with 108,000 shares of common stock		$	65,000			$	—

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 March 31, 2010 and for the three month period ended March 31, 2010 and 2009. 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, 2009 is derived from our 2009 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 2009 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. Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation.

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 stockholders of $548,734 for the three months ended March 31, 2010. 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, 2009.

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 7 to these condensed consolidated financial statements. By the end of 2009, the Company had expended almost all funds available to it under the Line of Credit.

On March 25, 2010, as discussed in Note 7, the Company announced that pursuant to a Private Placement Memorandum, it had accepted subscriptions of Units totaling $275,000 from unrelated accredited investors and was able to access those funds inasmuch as the amount exceeded the Minimum Offering. Each Unit consists of an 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 Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes is payable either in cash or common stock at the option of the Company. On March 31, 2010, the Company accepted a subscription for an additional $25,000 from a Director of the Company, Gregory Harrison. In April 2010, the Company accepted additional subscriptions from unrelated accredited investors totaling $125,000. The offering of Units will continue until the earlier of: (a) the sale of 30 Units, or (b) April 30, 2010, unless extended without notice by the Company for up to two additional 30 day periods (the “Termination Date”). The Company has extended the offering period through May 30, 2010.

The Company intends to use the proceeds from this offering, depending upon the amount raised, to pay certain current liabilities, to pay partial accrued, but unpaid salaries, for general corporate purposes and working capital, and to sustain the Company while it seeks additional financing. In addition to the above, the Company has taken steps to actively pursue alternatives to raise additional capital, including mortgaging a portion of its Diamondhead property and possible sale of all or part of that property.

As of March 31, 2010, the Company does not have the financial resources to develop its proposed casino resort. There can be no assurance that the Company can successfully develop 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 could have a significant adverse impact on the Company’s ability to continue as a going concern and ultimately develop the property.

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 March 31, 2010 and 2009, potentially dilutive securities included 4,075,000 and 3,300,000 respectively of potential, additional common shares. The foregoing, potentially dilutive securities are excluded from diluted net loss per share applicable to common stockholders as their effect would be antidilutive. The table below summarizes the components of potentially dilutive securities at March 31, 2010 and 2009.

Description		March 31, 2010				March 31, 2009
Convertible Preferred Stock			260,000				260,000
Options to Purchase Common Shares			2,615,000				3,040,000
Private Placement Warrants			600,000				—
Convertible Promissory Notes			600,000				—
Total			4,075,000				3,300,000

The table below summarizes the outstanding common shares.

		March 31,				December 31,
		2010				2009
Common Shares outstanding includes:
Issued Shares			36,931,395				36,804,486
Less: Treasury Shares			(50,346	)			(50,346	)
Unallocated, uncommitted ESOP Shares			(2,764,208	)			(2,784,095	)
Outstanding Shares			34,116,841				33,970,045

Note 4. Recent Accounting Pronouncements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-0, “Improving Disclosures about Fair Value Measurements” (the “Update”). The Update provides amendments to FASB Accounting Standards Codification (“ASC”) 820-10 that require entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, the Update requires entities to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements are effective for the Company in 2010 and the disclosures related to Level 3 fair value measurements are effective for us in 2011. The Update requires new disclosures only, and will have no impact on the Company’s consolidated financial position, results of operations, or cash flows.

In April 2010, the FASB issued ASU 2010-16, “Accruals for Casino Jackpot Liabilities.” The Update standardizes the accounting for both base and progressive jackpots that generate revenue from gaming activities. These entities should not accrue jackpot liabilities before a jackpot is won and charged to revenue when the jackpot is actually won. This standard is effective for periods beginning on or after December 31, 2010. The Update is not expected to have an impact on the Company’s consolidated financial statements.

Note 5. Fair Value

In the first quarter of 2008, the Company adopted “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 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 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.

In the first quarter of 2009, the Company adopted “Fair Value Measurements” for nonfinancial assets and nonfinancial liabilities, as required.

In October 2008, the FASB issued a standard on “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This standard clarifies the application of “Fair Value Measurements” in a market that is not active and provides examples to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The guidance in this standard was effective immediately and did not have a material impact on the Company’s consolidated financial statements.

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 the Company’s consolidated financial position or results of operations upon adoption.

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, which was effective for the first reporting period beginning after issuance, did not have a material effect on the Company’s condensed consolidated financial statements.

The carrying amounts of cash, a note payable, accounts payable and accrued expenses approximate fair value due to the short term nature of the instruments. The carrying amount of the fixed interest loan payable approximates the fair value based on Level 2 observations as described above. The Line of Credit was entered into in the fourth quarter of 2008 at borrowing rates and on terms then-available to the Company. The fair value of the convertible notes is discussed in Note 7.

Note 6. 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 in August 2003 at a value of $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 March 31, 2010.

Note 7. Long Term Debt

Convertible Notes and Warrants

On March 25, 2010, the Company announced that, pursuant to a Private Placement Memorandum, it had accepted subscriptions of Units totaling $275,000 from unrelated accredited investors and was able to access those funds inasmuch as the amount exceeded the Minimum Offering as described in the Memorandum. Each Unit consists of an unsecured, convertible, two year 12% 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 are immediately convertible at the option of the investor into 50,000 shares of common stock of the Company. Interest on the notes is payable in either cash or common stock at the option of the Company. On March 31, 2010, the Company accepted a subscription for an additional $25,000 from a Director of the Company, Gregory Harrison. The offering of Units will continue until the earlier of: (a) the sale of 30 Units, or (b) April 30, 2010, unless extended without notice by the Company for up to two additional 30 day periods (the “Termination Date”). The Company has extended the offering period through May 30, 2010.

The Company valued the warrants at $449,800 using the Black Scholes option pricing model. In addition, the Company is required to determine if a beneficial conversion feature is present for the convertible notes issued under ASC 470-20 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” using the intrinsic value in the convertible notes adjusted for amounts allocated to the warrant valuation. The intrinsic value of the convertible notes amounted to $628,000 based on the fair market value of common stock on the date of issuance.

Since the combined value of the warrants ($449,800) plus the intrinsic value of the convertible notes ($628,000) exceeds the fair value of the proceeds received from the sale of the Units ($300,000), the Company is limited to the amount of the proceeds when recording the beneficial conversion feature as debt discount. Using a pro rata contribution, the Company allocated the proceeds first to the warrant valuation in the amount of $125,100 and the remainder to the beneficial conversion feature in the amount of $174,900. The Company immediately amortized the debt discount of $300,000 for the three months ended March 31, 2010 since the debt is immediately convertible.

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 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 December 31, 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 had verbally agreed that payment of all interest accrued subsequent to June 30, 2009 would be deferred until the date payment in full is due. The lender is now deceased and it is unclear if his estate will honor that verbal agreement. If it is not honored, the Company could be considered to be in default for non-payment of interest due on the note which totaled $65,860 at March 31, 2010.

The Company valued the first option to purchase 50,000 shares of common stock at $39,094 using the Black-Scholes option pricing model. 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 $2,395 for the three month periods ending March 31, 2010 and 2009, respectively.

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. These options are recorded as debt discount and amortized over the expected life of the loan.

Date		12/08/08				3/17/09				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 applicable to this loan amounted to $6,460 and $1,594 for the three month periods ended March 31, 2010 and 2009.

The table below summarizes the Company’s long-term debt at March 31, 2010:

						Unamortized Debt				Net
Loan Facility		Gross Amount Owed				Discount				Long-Term Debt
Line of Credit		$	1,000,000			$	67,782			$	932,218
Private Placement			300,000				—				300,000
Totals		$	1,300,000			$	67,782			$	1,232,218

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 8. 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 March 31, 2010, the Company had paid a total of $19,000 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.

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

This section should be read together with the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as well as the condensed consolidated financial statements for the three months ended March 31, 2010 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 incurred continued losses over the past several years and certain conditions raise substantial doubt about the Company’s ability to continue as a going concern. As reflected in the accompanying condensed consolidated financial statements, the Company incurred losses applicable to common shareholders of $548,734 and $273,352 for the three month periods ending March 31, 2010 and 2009 respectively and expects continued losses for the foreseeable future.

The Company has generated no operating revenues since it ended its gambling cruise ship operations in 2000 and has had to rely on alternative means to raise capital to meet its financial obligations. In prior years, the Company was able to sustain its cash position and continue to satisfy its ongoing expenses through the sale of common stock formerly held in treasury and receipt of cash from the exercise of options and warrants to purchase common stock. In October 2008, the Company obtained a Line of Credit from an unrelated third party in the total amount of $1,000,000 which the company has fully utilized.

At December 31, 2009, the Company had cash on hand totaling $42,410 and current liabilities totaling $278,320. The Company was able to continue to operate by deferring salaries and paying only those expenses required to remain operational.

In March 2010, in order to obtain funds to sustain itself the Company engaged in a Private Placement of securities by offering Units for sale to a limited number of accredited investors. Each Unit consists of an unsecured, convertible 12% 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 Note is immediately convertible at the option of the investor into 50,000 shares of common stock of the Company. Interest on the notes is payable in either cash or common stock at the option of the Company. The Offering is being conducted contingent on the sale of a minimum of ten Units or $250,000 (“the Minimum Offering”) and up to a maximum of 30 Units, for a maximum offering of $750,000 (the “Maximum Offering.”) At the time of this filing, the Company has received in excess of the minimum offering amount and, pursuant to the use of proceeds, has paid partial, previously-deferred salaries. The Offering terminates upon the earlier of the sale of 30 Units or April 30, 2010 unless extended by the Company, without notice, for up to two additional thirty day periods. The Company has extended the offering period through May 30, 2010.

The Company raised $300,000 from the sale of subscriptions during the first quarter of 2010 and raised an additional $125,000 from the sale of subscriptions in April of 2010.

The Company is currently discussing possible development of all or part of the Diamondhead property with interested parties and is exploring opportunities for financing required to develop the property and meet the Company’s current liquidity needs.

The Company has obligations to pay the aforementioned $1 million Line of Credit on November 1, 2012 and $300,000 of convertible notes in March 2012.

There can be no assurance that the Company will be able to reach an agreement with any party regarding the development or financing of the Diamondhead property. The ultimate development of this project 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.

In or about 2008, a petition was filed in the Chancery Court of Hancock County to permit Diamondhead to incorporate. In or about January of 2009, a hearing was held in the matter. On or about December 31, 2009, the Chancery Court ruled in favor of Diamondhead incorporation. It appears that an appeal was filed in the case. Assuming the incorporation is affirmed on appeal, the Company’s Diamondhead property would be located within the newly-incorporated Diamondhead. What, if any, effect this incorporation would have on the Diamondhead project is unknown. The Company believes that once the incorporation is final, most of the casino revenues that would have gone to Hancock County would, instead, go to Diamondhead.

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 March 31, 2010, the Company had paid a total of $19,000 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 $5,476,097 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 in 2003 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 March 31, 2010.

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.

Fair Value

In the first quarter of 2008, the Company adopted ASC 820-10-65 “Fair Value Measurements—Overall—Transition and Open Effective Date Information” for its financial assets and liabilities. 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.

Convertible Notes and Warrants

On March 25, 2010, the Company announced that, pursuant to a Private Placement Memorandum, it had accepted subscriptions of Units totaling $275,000 from unrelated accredited investors and was able to access those funds inasmuch as the amount exceeded the Minimum Offering as described in the Memorandum. Each Unit consists of an unsecured, convertible, two year 12% 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 are immediately convertible at the option of the investor into 50,000 shares of common stock of the Company. Interest on the notes is payable in either cash or common stock at the option of the Company. On March 31, 2010, the Company accepted a subscription for an additional $25,000 from a Director of the Company, Gregory Harrison. The offering of Units will continue until the earlier of: (a) the sale of 30 Units, or (b) April 30, 2010, unless extended without notice by the Company for up to two additional 30 day periods (the “Termination Date”). The Company has extended the offering period through May 30, 2010.

The Company valued the warrants at $449,800 using the Black Scholes option pricing model. In addition, the Company is required to determine if a beneficial conversion feature is present for the convertible notes issued under ASC 470-20 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” using the intrinsic value in the convertible notes adjusted for amounts allocated to the warrant valuation. The intrinsic value of the convertible notes amounted to $628,000 based on the fair market value of common stock on the date of issuance.

Since the combined value of the warrants ($449,800) plus the intrinsic value of the convertible notes ($628,000) exceeds the fair value of the proceeds received from the sale of the Units ($300,000), the Company is limited to the amount of the proceeds when recording the beneficial conversion feature as debt discount. Using a pro rata contribution, the Company allocated the proceeds first to the warrant valuation in the amount of $125,100 and the remainder to the beneficial conversion feature in the amount of $174,900. The Company immediately amortized the debt discount of $300,000 for the three months ended March 31, 2010 since the debt is immediately convertible.

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 note payable 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 quarterly report on Form 10-Q, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the results of this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2010.

Management’s Report on Internal Control Over Financial Reporting

The management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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, 2010. 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, 2009. 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

On March 30, 2010 the registrant filed a Form 8-K with the Securities and Exchange Commission notifying them of the sale of Units and use of proceeds pursuant to a Private Placement Memorandum dated March 1, 2010, which is incorporated herein by reference.

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

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.