DIAMONDHEAD CASINO CORP - FORM 10-Q

DIAMONDHEAD CASINO CORP - FORM 10-Q - May 16, 2011

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DIAMONDHEAD CASINO CORP Reports

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DIAMONDHEAD CASINO CORP Reports

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file	filename
EX-32.2 - SECTION 906 CFO CERTIFICATION - DIAMONDHEAD CASINO CORP	dex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - DIAMONDHEAD CASINO CORP	dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - DIAMONDHEAD CASINO CORP	dex311.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - DIAMONDHEAD CASINO CORP	dex321.htm

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

For the quarterly period ended March 31, 2011

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

For the transition period from to

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 x No ¨

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 ¨ No ¨

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 ¨ No x

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 5, 2011: 34,359,579.

TABLE OF CONTENTS


PART I:	FINANCIAL INFORMATION

ITEM 1:	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Loss for the Three Months Ended March 31, 2011 and March 31, 2010	1

	Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010	2

	Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2011 and March 31, 2010	3

	Notes to Condensed Consolidated Financial Statements	4-10

ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Financial Results	10-15

ITEM 3:	Quantitative and Qualitative Disclosures about Market Risk	15

ITEM 4:	Controls and Procedures	16

PART II:	OTHER INFORMATION

ITEM 1:	Legal Proceedings	16

ITEM 1A:	Risk Factors	16-17

ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds	17

ITEM 3:	Default Upon Senior Securities	18

ITEM 4:	“Removed and Reserved”	18

ITEM 5:	Other Information	18

ITEM 6:	Exhibits	18

	Signatures	19

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(Unaudited)


	Three Months Ended March 31
	2011			2010
Costs and Expenses:
General and Administrative	$	176,045		$	162,637
Other		24,102			31,336

	$	200,147		$	193,973


Other Income (Expense)
Amortization of debt discount		(281,460	)		(306,460	)
Interest Earned On Invested Cash		186			55
Interest Expense		(45,320	)		(22,956	)

		(326,594	)		(329,361	)


Net Loss		(526,741	)		(523,334	)
Preferred Stock Dividends		(25,400	)		(25,400	)

Net Loss Applicable to Common Stockholders	$	(552,141	)	$	(548,734	)


Net Loss per Common Share Applicable to Common Stockholders
Basic and Diluted	$	(.016	)	$	(.016	)


Weighted Average Number of Common Shares Outstanding,
Basic and Diluted		34,314,998			34,061,280

See the accompanying notes to these condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2011			December 31, 2010

ASSETS
Current Assets:
Cash	$	195,086		$	98,855
Cash – Restricted in Escrow		—			250,000
Other Current Assets		12,037			13,593

Total Current Assets		207,123			362,448

Land Held for Development		5,476,097			5,476,097
Deferred Financing Costs (net of accumulated amortization of $25,885 at March 31, 2011 and $21,264 at December 31, 2010)		38,209			17,830
Other		80			80

Total Assets	$	5,721,509		$	5,856,455


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Current Portion of Long Term Debt	$	300,000		$	—
Deposits Held in Escrow		—			250,000
Accounts Payable and Accrued Expenses		599,450			552,443

Total Current Liabilities		899,450			802,443


Long-Term Debt (net of unamortized discount of $41,583 at March 31, 2011 and $48,043 at December 31, 2010) – Net of Current Portion		1,620,917			1,639,457


Contingencies

Stockholders’ Equity:
Preferred Stock: $.01 par value; shares authorized: 5,000,000, 2,086,000 issued and outstanding at March 31, 2011 and December 31, 2010; (aggregate liquidation preference $2,519,080 at March 31, 2011 and December 31, 2010)		20,860			20,860
Common Stock: $.001 par value; shares authorized: 50,000,000, issued: 37,094,588 at March 31, 2011 and 37,030,339 at December 31, 2010, outstanding: 34,359,579 at March 31, 2011 and 34,275,443 at December 31, 2010		37,095			37,030
Additional Paid-In-Capital		34,918,401			34,609,390
Unearned ESOP Shares		(4,002,834	)		(4,032,486	)
Accumulated Deficit		(27,764,721	)		(27,212,580	)
Treasury Stock, at Cost, 50,346 Shares		(7,659	)		(7,659	)

Total Stockholder’s Equity		3,201,142			3,414,555

Total Liabilities and Stockholder’s Equity	$	5,721,509		$	5,856,455

See the accompanying notes to these condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31
	2011			2010
Operating Activities:
Net Loss	$	(526,741	)	$	(523,334	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization		4,621			2,395
Release of ESOP Shares		12,927			20,086
Amortization of debt discount		281,460			306,460

(Increase) Decrease in:
Other Prepaid Expenses		1,556			4,945

Increase in:
Accounts Payable and Accrued Expenses		72,408			83,638


Net cash used in Operating Activities		(153,769	)		(105,810	)


Investing Activities:
Purchase of Land Held for Development		—			(1,184	)


Net cash used in Investing Activities		—			(1,184	)


Financing Activities:
Proceeds from Private Placement		275,000			300,000
Restricted Cash in Escrow		(250,000	)		—
Deposits Held in Escrow		250,000			—
Payment of Deferred Financing Costs		(25,000	)		—
Payment on Note payable		—			(2,846	)
Payment of Preferred Stock dividends		—			(15,000	)


Net cash provided by Financing Activities		250,000			282,154


Net increase in cash		96,231			175,160

Cash beginning of period		98,855			42,410


Cash end of period	$	195,086		$	217,570

See the accompanying notes to these 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, 2011 and for the three month periods ended March 31, 2011 and 2010. 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 filed with our 2010 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 2010 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.

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 $552,141 for the three months ended March 31, 2011. 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, 2010.

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.

In an effort to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds from various sources in the past. Most recently, on March 25, 2010, as discussed in Note 6, the Company announced that, pursuant to a Private Placement Memorandum, it had accepted subscriptions of Units totaling $275,000 from unrelated accredited investors. Each Unit consists of a two year unsecured, convertible promissory note in the principal amount of $25,000 with interest at 12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes is payable either in cash or common stock at the option of the Company. Subsequent to March 25, 2010, the Company accepted subscriptions for an additional $200,000 which included one Unit purchased by a Director of the Company, Gregory Harrison. The offering of these Units expired on June 29, 2010 pursuant to the terms of the Private Placement Memorandum.

Pursuant to a second Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. The offering of Units will terminate upon the earlier of: (a) the sale of 30 Units, or (b) April 30, 2011, unless extended without notice by the Company for up to two additional 30 day periods. The Company has since extended the offering for two additional 30 day periods. As of March 31, 2011, the Company had accepted subscriptions totaling $487,500 from unrelated accredited investors and paid finders commissions of $25,000 to an unrelated third party.

The Company used the proceeds from both of these offerings to pay certain current liabilities, to pay partial accrued, but unpaid salaries, for general corporate purposes and to sustain the Company while it sought additional financing.

The Company is currently engaged in discussions with third parties with respect to obtaining funding to develop the project and for the Company to sustain itself on a short term basis. The Company is also seeking funds which would allow the Company to move forward by retaining architects and engineers whose work is required to obtain permits for any type of development on the property. Even assuming the Company was successful in obtaining some funding, the Company would still require major financing to construct any development on the property. As of the date of the filing of this report, the Company does not have a definitive agreement in place with any party.

As of March 31, 2011, the Company had $195,086 of operating cash on hand and current accounts payable and accrued expenses totaling $599,450. In addition, a Line of Credit in the amount of $1,000,000 obtained in October 2008 is payable in November 2012. The Convertible Notes issued via the Private Placements discussed above total $962,500 in aggregate and become payable beginning in March 2012 and extending at various dates through February 2013. 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, 2011 and 2010, potentially dilutive securities included 6,725,000 and 4,075,000 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, 2011 and 2010.


Description	March 31, 2011		March 31, 2010

Convertible Preferred Stock		260,000		260,000
Options to Purchase Common Shares		2,615,000		2,615,000
Private Placement Warrants		1,925,000		600,000
Convertible Promissory Notes		1,925,000		600,000


Total		6,725,000		4,075,000

The table below summarizes the outstanding common shares.


	March 31, 2011			December 31, 2010
Common Shares outstanding includes:
Issued Shares		37,094,588			37,030,339
Less: Treasury Shares		(50,346	)		(50,346	)
Unallocated, uncommitted ESOP Shares		(2,684,663	)		(2,704,550	)

Outstanding Shares		34,359,579			34,275,443

Note 4. Fair Value

The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”, for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. 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.

Current assets and current liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature.

The fixed interest Line of Credit approximates fair value since the interest rate inherent in the instrument approximates interest rates currently available to the Company.

The Convertible Notes and attached warrants approximate fair value based on Level 1 and Level 2 inputs, as further discussed in Note 6.

Note 5. 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 inputs the fair value of the land held for development exceeds the carrying value of $5.5 million and, therefore, no impairment exists at March 31, 2011.

Note 6. Long Term Debt

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 received an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share. The options expire on the earlier of November 1, 2012 or following repayment in full by the Company of the amount borrowed.

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 $155,860 at March 31, 2011. Interest on this debt incurred prior to June 30, 2009 has been paid in full.

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. Amortization of deferred financing cost amounted to $2,395 for the each of the three month periods ending March 31, 2011 and 2010.

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.

Amortization of debt discount applicable to this loan amounted to $6,460 for the three month periods ended March 31, 2011 and 2010.

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. In April and May 2010, the Company accepted subscriptions for an additional $175,000 before the offering terminated June 29, 2010.

The Company valued the warrants issued under the subscriptions at $649,712 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 $923,500 based on the fair market value of common stock on the date of issuance.

Since the combined value of the warrants ($649,712) plus the intrinsic value of the convertible notes ($923,500) exceeds the fair value of the proceeds received from the sale of the Units ($475,000), 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 $196,169 and the remainder to the beneficial conversion feature in the amount of $278,831. The Company immediately amortized the debt discount for this Private Placement in the amount of $475,000, of which $300,000 applied to the first quarter of 2010 and the remaining $175,000 in the subsequent quarter.

Pursuant to a second Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. Interest on the notes is payable in either cash or common stock at the option of the Company. The offering of Units will terminate upon the earlier of: (a) the sale of 30 Units, or (b) April 30, 2011, unless extended without notice by the Company for up to two additional 30 day periods. The Company has since extended the offering for two additional 30 day periods. The Company accepted subscriptions totaling $212,500 from unrelated accredited investors in 2010 and accepted an additional $275,000 of subscriptions from unrelated accredited investors and paid a finders commission of $25,000 to an unrelated third party in the quarter ending March 31, 2011.

The Company valued the warrants issued under the subscriptions accepted as of December 31, 2010 at $179,766 using the Black-Scholes option pricing model and the intrinsic value of the convertible notes issued by December 31, 2010 amounted to $281,250 based on the fair market value of common stock on the date of issuance.

Since the combined value of the warrants ($179,766) plus the intrinsic value of the convertible notes ($281,250) exceeds the fair value of the proceeds received from the sale of the Units ($212,500), 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 $82,861 and the remainder to the beneficial conversion feature in the amount of $129,639. The Company immediately amortized additional debt discount of $212,500 during the year ended December 31, 2010.

The Company valued the warrants issued under the subscriptions accepted subsequent to December 31, 2010 at $315,374 using the Black-Scholes option pricing model and the intrinsic value of the convertible notes issued subsequent to December 31, 2010 amounted to $460,500 based on the fair market value of common stock on the date of issuance.

Since the combined value of the warrants ($315,374) plus the intrinsic value of the convertible notes ($460,500) exceeds the fair value of the proceeds received from the sale of the Units ($275,000), 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 $111,781 and the remainder to the beneficial conversion feature in the amount of $163,219. The Company immediately amortized additional debt discount of $275,000 during the quarter ending March 31, 2011.

The table below summarizes the Company’s long-term debt at March 31, 2011:


Loan Facility	Gross Amount Owed			Unamortized Debt Discount		Net Long-Term Debt

Line of Credit	$	1,000,000		$	41,583	$	958,417


Private Placements:
March 10, 2010		475,000			—		475,000
Less Current Portion		(300,000	)		—		(300,000	)

		175,000			—		175,000
October 25, 2010		487,500			—		487,500


Total Private Placements		662,500			—		662,500


Totals	$	1,662,500		$	41,583	$	1,620,917

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 7. Contingencies

Related Parties

The Company has agreements with various current Officers and Directors which would give rise to payment of a fee under certain conditions. The Company has agreements with various related and 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 8. Supplemental Cash Flow Information

Supplemental cash flow information for the three months ended March 31, 2011 and 2010 is as follows:


	March 31, 2011		March 31, 2010

Cash paid for interest	$	—	$	123


Non-cash financing activities:
Common stock issued:
For purchase of land	$	—	$	65,000


Preferred stock dividends satisfied with shares of common stock	$	50,800	$	10,400


Unpaid Preferred Stock dividends included in accounts payable and accrued expenses	$	15,000	$	25,400

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, 2010, as well as the condensed consolidated financial statements for the three month period ended March 31, 2011 and accompanying notes included elsewhere in this document.

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.

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 consolidated financial statements, the Company incurred a loss applicable to common shareholders of $552,141 and $548,734 for the three month periods ending March 31, 2011 and 2010 respectively and expects continued losses for the foreseeable future. The Company recorded amortization of debt discount in the amount of $275,000 and $300,000 for the three month periods ending March 31, 2011 and 2010 respectively in connection with convertible notes and warrants issued pursuant to subscription acceptances of two Private Placements originating in 2010 and described more fully in Note 6 of the accompanying condensed consolidated financial statements. General and administrative expenses incurred totaled $176,045 and $162,637 for the three month periods ending March 31, 2011 and 2010 respectively. The table below depicts the major categories comprising those expenses:


DESCRIPTION	March 31, 2011		March 31, 2010

Payroll and Related Taxes	$	113,108	$	101,213
Legal, Audit and Other Contracted Services		28,674		34,126
Rents and Insurances		8,249		9,470
Telephone, Office and Other Expenses		26,014		17,828


Total General and Administrative Expense	$	176,045	$	162,637

In an effort to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds from various sources in the past. Most recently, 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. Each Unit consists of an two year unsecured, convertible promissory note in the principal amount of $25,000 with interest at 12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes is payable either in cash or common stock at the option of the Company. Subsequent to March 25, 2010, the Company accepted subscriptions for an additional $200,000 which included one Unit purchased by a Director of the Company, Gregory Harrison. The offering of these Units expired on June 29, 2010 pursuant to the terms of the Private Placement Memorandum.

Pursuant to a second Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. Interest on the notes is payable in either cash or common stock at the option of the Company. The offering of Units will terminate upon the earlier of: (a) the sale of 30 Units, or (b) April 30, 2011, unless extended without notice by the Company for up to two additional 30 day periods. The Company has since extended the offering for two additional 30 day periods. The Company accepted subscriptions totaling $212,500 from unrelated accredited investors in 2010 and accepted an additional $275,000 of subscriptions from unrelated accredited investors and paid a finders commission of $25,000 to an unrelated third party in the quarter ending March 31, 2011.

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. 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 gaming tax 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, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above 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, Lewis and Blount 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 of between one percent (1%) and four percent (4%) of the amount of any debt financing obtained and a commission of between one and one-half percent (1.5%) and six percent (6%) 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. The Company agreed that Mr. Blount may elect to convert a maximum of $750,000 of any commission due him into common shares at $ .75 per share.

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 believes the fair value of the land held for development exceeds the carrying value of $5.5 million and, therefore, no impairment exists at March 31, 2011.

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.

Convertible Notes and Warrants

Since the combined value of the warrants ($649,712) plus the intrinsic value of the convertible notes ($923,500) exceeds the fair value of the proceeds received from the sale of the Units ($475,000), 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 $196,169 and the remainder to the beneficial conversion feature in the amount of $278,831. The Company immediately amortized the debt discount for this Private Placement in the amount of $300,000 in the first quarter of 2010 and the remaining $175,000 in the subsequent quarter.

Pursuant to a second Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. The offering of Units will terminate upon the earlier of: (a) the sale of 30 Units, or (b) April 30, 2011, unless extended without notice by the Company for up to two additional 30 day periods. The Company has since extended the offering for two additional 30 day periods. The Company accepted subscriptions totaling $212,500 from unrelated accredited investors in 2010 and an accepted an additional $275,000 of subscriptions from unrelated accredited investors in the quarter ending March 31, 2011.

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, 2011. 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, 2011.

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 quarter ended March 31, 2011 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, the Company has essentially exhausted all cash resources currently available to it. 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, 2010. 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.

On November 10, 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 October 25, 2010, which is incorporated herein by reference.

Item 3.

Default Upon Senior Securities

None.

Item 4.

“Removed and Reserved”

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.


	DIAMONDHEAD CASINO CORPORATION

DATE: May 16, 2011	/S/ DEBORAH A. VITALE
	By:	Deborah A. Vitale
		Chief Executive Officer

	/S/ ROBERT L. ZIMMERMAN
	By:	Robert L. Zimmerman
		Chief Financial Officer

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