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EX-31.2 - EXHIBIT 31.2 - DIAMONDHEAD CASINO CORPex312.htm
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EX-31.1 - EXHIBIT 31.1 - DIAMONDHEAD CASINO CORPex311.htm
EX-32.1 - EXHIBIT 32.1 - DIAMONDHEAD CASINO CORPex321.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                                         
FORM 10-Q

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

For the quarterly period ended March 31, 2016
or
  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)

1013 Princess Street, Alexandria, Virginia  22314
(Address of principal executive offices)
Registrant's telephone number, including area code:  703-683-6800

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     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 þ 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):

Large accelerated filer ☐
Accelerated filer  ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company

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

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 10, 2016: 36,297,576.



 
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

TABLE OF CONTENTS

PART 1
FINANCIAL INFORMATION
Page
     
 
     
   
 
     
   
 
     
   
     
 
     
 
 
     
     
     
PART II
OTHER INFORMATION
 
     
     
     
     
     
     
     
     

 
i
 
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
March 31,
   
December 31,
 
   
2016
   
2015
 
ASSETS
           
             
Current assets
           
Cash
 
$
4,298
   
$
15,655
 
Other current assets
   
3,034
     
498
 
Total current assets
   
7,332
     
16,153
 
                 
Land held for development (Note 3)
   
5,476,097
     
5,476,097
 
                 
Deferred financing costs (net of amortization of $65,514 at March 31, 2016 and $56,218
               
     at December 31, 2015)
   
135,586
     
144,882
 
Other assets
   
80
     
80
 
                 
   
$
5,619,095
   
$
5,637,212
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
                 
Current liabilities
               
Notes, line of credit and advances payable (Note 5) due to related parties
 
$
100,000
   
$
75,000
 
Notes, line of credit and advances payable (Note 5) other
   
1,905,000
     
1,887,500
 
Short term financing agreement
   
2,673
     
 
Accounts payable and accrued expenses due related parties (Note 4)
   
2,320,155
     
2,173,008
 
Accounts payable and accrued expenses – other  (Note 4)
   
2,014,189
     
1,899,404
 
Total current liabilities
   
6,342,017
     
6,034,912
 
                 
Debenture payable (net of unamortized discount of  $47,249 at March 31, 2016 and $47,703
               
        at December 31, 2015) (Note 6)
   
2,751
     
2,297
 
                 
Convertible debentures payable (net of unamortized discount of  $1,719,959 at March 31,
   
80,041
     
66,843
 
        2016 and $1,733,157 at December 31, 2015) (Note 6)
               
                 
Derivative liability (Note 6)
   
1,750,144
     
1,704,570
 
                 
Total liabilities
   
8,174,953
     
7,808,622
 
                 
Commitments and contingencies (Notes  2, 3, 5, 6, and 8)
               
                 
Stockholders' deficiency (Note 8)
               
Preferred stock, $.01 par value; shares authorized 5,000,000, outstanding 2,086,000 at March 31, 2016 and December 31, 2015 (aggregate liquidation preference of $2,519,080 at March 31, 2016 and December 31,2015).
   
20,860
     
20,860
 
Common stock, $.001 par value; shares authorized 50,000,000, Issued: 39,052,472 at March 31, 2016  and December 31,2015, outstanding: 36,297,576 at March 31, 2016 and December 31, 2015.
   
39,052
     
39,052
 
Additional paid-in capital
   
35,757,201
     
35,757,201
 
Unearned ESOP shares
   
(3,439,476
)
   
(3,439,476
)
Accumulated deficit
   
(34,792,757
)
   
(34,408,309
)
Treasury stock, at cost, 448,071 shares at March 31, 2016 and December 31, 2015
   
(140,738
)
   
(140,738
)
                 
Total stockholders' deficiency
   
(2,555,858
)
   
(2,171,410
)
                 
   
$
5,619,095
   
$
5,637,212
 

See the accompanying notes to these condensed consolidated financial statements
 
 

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
FOR THE THREE MONTHS ENDING MARCH 31,
(UNAUDITED)

   
2016
   
2015
 
COSTS AND EXPENSES
           
Administrative and general
 
$
174,765
   
$
256,588
 
Amortization
   
9,296
     
9,296
 
Other
   
15,658
     
21,492
 
     
199,719
     
287,376
 
                 
OTHER (EXPENSE) INCOME
               
Amortization of debt discount
   
(13,652
)
   
(17,860
)
Interest expense
   
(100,103
)
   
(82,980
)
    Change in fair value of derivative liability
   
(45,574
)
   
1,353,280
 
     
(159,329
)
   
1,252,440
 
                 
NET  (LOSS) INCOME
   
(359,048
)
   
965,064
 
                 
PREFERRED STOCK DIVIDENDS
   
(25,400
)
   
(25,400
)
                 
NET (LOSS) INCOME APPLICABLE TO
               
   COMMON STOCKHOLDERS
 
$
(384,448
)
 
$
939,664
 
                 
Net (loss) earnings per common share, basic
 
$
(.01
)
 
$
.03
 
                 
Net (loss) earnings per common share, fully diluted
 
$
(.01
)
 
$
.02
 
                 
Weighted average number of common shares, basic
   
36,297,576
     
36,297,576
 
                 
Weighted average number of common shares, fully diluted
   
36,297,576
     
44,359,076
 


See the accompanying notes to these condensed consolidated financial statements.

 
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
 
   
2016
   
2015
 
OPERATING ACTIVITIES
           
Net (loss) income
 
$
(359,048
)
 
$
965,064
 
Adjustments to reconcile net (loss) income to net cash used in
               
operating activities:
               
  Amortization
   
9,296
     
9,296
 
  Change in fair value of derivative liability
   
45,574
     
(1,353,280
)
  Amortization of debt discount
   
13,652
     
17,860
 
Change in other assets and liabilities:
               
   Other current assets
   
(2,536
)
   
21,324
 
   Accounts payable and accrued expenses
   
236,532
     
(39,434
)
Net cash used in operating activities
   
(56,530
)
   
(379,170
)
                 
FINANCING ACTIVITIES
               
  Proceeds from interest bearing advances from related parties
   
25,000
     
-
 
  Proceeds from other interest bearing advances
   
17,500
      -  
  Proceeds from short term note
   
2,946
     
-
 
  Payment of short term note
   
(273
)
   
(5,874
)
Net cash provided by (used in)  financing activities
   
45,173
     
(5,874
)
                 
Net decrease  in cash
   
(11,357
)
   
(385,044
)
Cash beginning of period
   
15,655
     
843,083
 
Cash end of period
 
$
4,298
   
$
458,039
 
                 
Cash paid for interest
 
$
32
   
$
252
 
                 
Non-Cash Financing activities:
               
                 
   Warrants included in deferred financing costs
 
$
25,100
   
$
25,100
 
                 
   Unpaid preferred stock dividends included
               
      in accounts payable and accrued expenses
 
$
482,600
   
$
381,000
 

See the accompanying notes to these condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
Note 1. Organization and Business

Diamondhead Casino Corporation and Subsidiaries (the "Company") own a total of approximately 404.5 acres of unimproved land in Diamondhead, Mississippi on which the Company plans, unilaterally, or in conjunction with one or more partners, to construct a casino resort and hotel and associated amenities. The Company was originally formed to principally own, operate and promote gaming vessels offering day and evening cruises in international waters.

The Company's Common Stock was previously registered with the Securities and Exchange Commission ("SEC") and traded on the over-the-counter ("OTC") market under the symbol "DHCC". The Company's stock registration was revoked effective September 4, 2014, at which time the Company's Common Stock ceased trading in the public market. On March 31, 2015, the Company filed a registration statement on Form 10 to again register its stock with the SEC. The registration became effective May 30, 2015.  On or about October 26, 2015, the Company's Common Stock resumed trading on the OTC market under the symbol "DHCC".

Note 2. Liquidity and Going Concern

These unaudited condensed consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has no operations and generates no operating revenues. During the three months ended March 31, 2016 and 2015 the Company incurred net losses applicable to common shareholders, exclusive of the recording of change in the fair value of derivatives, of $313,474 and $413,616, respectively.

The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi Property. The development of the Diamondhead Property is dependent on obtaining the necessary capital, through equity and/or debt financing, unilaterally, or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort.

In the past, in order to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds, through Private Placements of convertible instruments and other means, which are more fully described in Notes 5 and 6 to these condensed consolidated financial statements. Some of these instruments are past due for payment of both principle and interest. In addition, at March 31, 2016, the Company had current liabilities totaling $6,342,017 and only $4,298 cash on hand. On August 6, 2015, certain holders of past due two year convertible promissory notes issued in conjunction with Private Placements dated March 25, 2010 and October 25, 2010, filed an involuntary petition with the United States bankruptcy Court, District of Delaware, seeking relief under Chapter 7 of the U.S. Bankruptcy Code. The current status of this petition is more fully discussed in Note 8 to the unaudited condensed consolidated financial statements.

The above conditions raise substantial doubt as to the Company's ability to continue as a going concern.


 
Note 3. Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of the financial statements, have been included. Interim results are not necessarily indicative of results to be expected for the full year. The interim financial information should be read in conjunction with information included in the 2015 year-end financial statements attached as Exhibit 99.1 to our annual report filed on Form 10-K.

Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the 2015 financial statements to conform to the consolidated 2016 financial statements presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.

Land Held for Development

Land held for development is carried at cost. Costs directly related to site development, such as licenses, permitting, engineering, and other costs, are capitalized.

Land development costs, which have been capitalized, consist of the following:

Land under development
 
$
4,934,323
 
Licenses
   
77,000
 
Engineering and costs associated with permitting
   
464,774
 
         
   
$
5,476,097
 

Fair Value Measurements

The Company follows the provisions of ASC Topic 820 "Fair Value Measurements" for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 

Level 3: Unobservable input that reflects management's own assumptions.
 
The table listed below provides a reconciliation of the beginning and ending net balances for the derivative liability measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2016 and for the year ended December 31, 2015:
 
   
March 31,
   
December 31,
 
   
2015
   
2015
 
             
Beginning balance
 
$
1,704,570
   
$
3,754,233
 
                 
Total decrease in unrealized appreciation
               
   (depreciation) included in net assets
   
45,574
     
(2,049,663
)
                 
Ending balance
 
$
1,750,144
   
$
1,704,570
 

Sensitivity Analysis to Changes in Level 3 Assumptions

Significant inputs include the dates when required conditions are expected to be met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses and discount for lack of marketability while in the delisted mode and reversed when the Company's stock became publicly listed again on or about October 26, 2015. In addition, use of different ranges of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.

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

The convertible debentures and derivative liability approximate fair value based on Level 3 inputs, as further discussed in Note 6.

Long-Lived Assets

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long‑lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of March 31, 2016.

Net (Loss) Earnings per Common Share

Basic (loss)/earnings per share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding. Fully diluted earnings per share are calculated by using the weighted average number of common shares outstanding plus other potentially dilutive securities. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. The dilutive securities below do not include 5,055,555 potentially convertible Debentures since the requirements for possible conversion have not yet, and may never be, met.
 

The table below summarizes the components of potential dilutive securities at March 31, 2016 and 2015.
 
   
March 31,
   
March 31,
 
Description
 
2016
   
2015
 
             
Convertible Preferred Stock
   
260,000
     
260,000
 
Options to Purchase Common Shares
   
3,440,000
     
3,440,000
 
Private Placement Warrants
   
1,111,500
     
2,436,500
 
Convertible Promissory Notes
   
1,925,000
     
1,925,000
 
                 
Total
   
6,736,500
     
8,061,500
 

Segment Information

Operating segments are components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company currently operates solely in one segment, development of land, which relates to planned future operations.

Note 4. Accounts Payable and Accrued Expenses

The table below outlines the elements included in accounts payable and accrued expenses at March 31, 2016 and December 31, 2015:
 
   
March 31,
   
December 31,
 
   
2016
   
2015
 
Description
           
Related Parties:
           
Accrued payroll due officers
   
1,544,711
     
1,469,711
 
Accrued interest due officers
   
416,336
     
382,976
 
Accrued director fees
   
243,750
     
221,250
 
Base rents due to the President
   
63,224
     
49,622
 
Associated rental costs
   
34,826
     
32,141
 
Other
   
17,308
     
17,308
 
                 
   Total Related Parties
   
2,320,155
     
2,173,008
 
                 
Non-Related Parties:
               
Accrued interest
   
1,061,090
     
994,379
 
Accrued dividends
   
482,600
     
457,200
 
Accrued fines and penalties
   
256,371
     
232,849
 
Other accounts payable and accrued expenses
   
214,128
     
214,976
 
                 
   Total Non-related Parties
   
2,014,189
     
1,899,404
 
                 
Total accounts payable and accrued expenses
   
4,334,344
     
4,072,412
 

Note 5.  Notes Payable

Line of Credit

On October 23, 2008, the Company entered into an agreement with an unrelated third party for an unsecured Line of Credit up to a maximum of $1,000,000. The Line of Credit provided for funds to be drawn as needed and carries an interest rate on amounts borrowed of 9% per annum originally payable quarterly based on the pro rata number of days outstanding. All funds originally advanced under the facility were due and payable by November 1, 2012. As an inducement to provide the facility, the lender was awarded an immediate option to purchase 50,000 shares of common stock of the Company at $1.75 per share. In addition, the lender received an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share. The options expire following repayment in full by the Company of the amount borrowed.
 

As of December 31, 2009, the Company had borrowed all of the $1,000,000 available to it under the Line of Credit. Interest on this debt incurred prior to June 30, 2009 has been paid in full. The Company was unable to satisfy the principal obligation of $1,000,000 by the due date of November 1, 2012 or any interest which accrued on the obligation after June 30, 2009 and is in default under the repayment terms of the note.

Convertible Notes and Warrants

Pursuant to a Private Placement Memorandum dated March 1, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 with interest at 12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company's common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes was originally payable either in cash or common stock at the option of the Company. However, interest may now be required to be paid in cash. The Company ultimately accepted subscriptions totaling $450,000 from unrelated accredited investors and an additional $25,000 for one Unit purchased by a Director of the Company. In addition, one previously non-related accredited investor who subscribed to $50,000 of notes became a Director in April of 2015. The five-year Warrants issued in connection with the Units have expired.

Pursuant to an additional Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000, together with a five year Warrant to purchase 50,000 shares of the Company's common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. Interest on the notes was originally payable in either cash or common stock at the option of the Company. However, interest may now be required to be paid in cash. The Company accepted subscriptions totaling $512,500 from unrelated accredited investors. On July 2, 2011, the Company redeemed a note in the principal amount of $25,000 by issuing 50,000 shares of common stock. At March 31, 2016, warrants to purchase 50,000 shares of common stock are outstanding. The remaining warrants issued in connection with this private placement have expired.

The Convertible Notes issued via the Private Placements discussed above total $962,500 and became due and payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, all of the aforementioned debt obligations remain unpaid and in default under the repayment terms of the notes.

Interest Bearing Advances

In the first quarter of 2016, the Company solicited and received cash advances totaling $42,500 of which $25,000 came from current Directors of the Company. Proceeds from the advanced funds were earmarked for the payment of accounting and auditing fees. The advances are unsecured and carry an annual interest rate of 8%. A full year of interest will accrue in any year in which the advance remains unpaid for a portion of the year.
 
 

The table below summarizes the Company's debt arising from the above-described sources as of March 31, 2016 and December 31, 2015:
   
Gross Amount
 
Loan Facility
 
Owed
 
       
Line of Credit
 
$
1,000,000
 
         
Private Placements:
       
   March 1, 2010
   
475,000
 
   October 25, 2010
   
487,500
 
         
Total Private Placements
   
962,500
 
         
Interest Bearing Advances
   
42,500
 
         
Total
 
$
2,005,000
 

Note 6. Convertible Debentures and Derivative Liability

Pursuant to a Private Placement Memorandum dated February 14, 2014 (the "Private Placement"), the Company offered up to a maximum of $3,000,000 of Collateralized Convertible Senior Debentures to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000. The Debentures, once issued, bear interest at 4% per annum after 180 days, mature six years from the date of issuance, and are secured by a lien on the Company's Mississippi property. The Debentures were offered in three tranches as follows:

 (a)  $1,000,000 of First Tranche Collateralized Convertible Senior Debentures convertible into an aggregate of 3,333,333 shares of Common Stock of the Company at a conversion price of $ .30 per share (the "First Tranche Debentures");
 
(b)  $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures, convertible into an aggregate of 2,222,222 shares of Common Stock of the Company at a conversion price of $ .45 per share (the "Second Tranche Debentures"); and
 
(c)  $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures, convertible into either 1,818,182 shares of Common Stock or 1,333,333 shares of Common Stock of the Company, at a conversion price of $ .55 or $ .75 per share depending upon certain conditions described in the Private Placement Memorandum (the "Third Tranche Debentures").
 
On March 31, 2014, the First Closing occurred when subscriptions in the amount of $3,000,000 were received in Escrow and accepted by the Company. The Escrow Agent released $1,000,000 to the Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000.

The Company's stock registration was revoked effective September 4, 2014. Therefore, on December 4, 2014, the Company extended offers to the investors to amend the Private Placement.  The Company offered to amend certain terms and conditions, including the conversion terms of the First Tranche Debentures, which were issued on March 31, 2014 ("Amendment I"). The Company separately offered to amend certain terms and conditions, including those relating to issuance and conversion of the Second and Third Tranche Debentures, as well as the period of time within which to perform the Third Tranche Closing Obligations, as amended ("Amendment II").

On December 31, 2014, investors who had purchased $950,000 of First Tranche Debentures consented to the amended conversion terms of Amendment I. The remaining Debenture in the amount of $50,000 remains as originally issued with no conversion rights. Thus, the First Tranche Debentures can be converted into a total of 3,166,666 shares of common stock. On December 31, 2014, the Second Closing occurred when investors representing $850,000 of Second Tranche Debentures consented to Amendment II.  The Escrow Agent released $850,000 to the Company and the Company issued Second Tranche Debentures in the aggregate principle amount of $850,000. Thus, the Second Tranche Debentures can be converted into 1,888,889 shares of common stock. The Escrow Agent refunded $300,000 to those investors who did not consent to Amendment II.
 

The Company did not meet the closing obligations for the Third Tranche Debentures as of June 30, 2015, as was required, pursuant to the terms of the Private Placement, as amended. Therefore, the remaining $850,000 being held in escrow for the purchase of the Third Tranche Debentures was returned to the investors in July 2015.

For purposes of determining the proper accounting treatment and valuation of the instruments, the Company applied the provisions set forth in ASC Topic 820, "Fair Value in Financial Instruments" and ASC Topic 815, "Accounting for Derivative Instruments and Hedging Activities."  Since the Notes issued have derivative features, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability. In addition, the valuation is required to be conducted for each reporting period the instrument was in existence.

As previously noted, the Company's stock registration was revoked effective September 4, 2014. Therefore, the Company engaged an independent valuation expert to determine the fair value of its shares of common stock for each quarter beginning with the quarter ended September 30, 2014 through the quarter ended September 30, 2015. For periods after September 3, 2014, the fair value was estimated by adjusting the most recent market price by changes in the underlying market cap due to changes in the value of net assets and applying a discount for lack of marketability inasmuch as the stock was not trading. The stock began to trade again on or about October 26, 2015 and, therefore, the closing price of the stock was used in the valuation beginning with the quarter ending December 31, 2015. Monte Carlo models were developed to value the derivative liability within the Notes using a historical volatility rate of 147% at March 31, 2016 and 132% at December 31, 2015, and using discount bond rates based on the expected remaining term of each instrument ranging from 6.30% to 6.69% at March 31, 2016 and 6.45% to 7.07% at December 31, 2015, with conversion requirements expected to be met by June 30, 2016 for the March 31, 2016 calculation.

The estimated fair value for the derivative liability relating to each Debenture at the balance sheet dates is as follows:

   
March 31,
2016
   
December 31,
2015
 
             
Tranche 1
 
$
911,044
   
$
893,731
 
Tranche 2
   
839,100
     
810,839
 
                 
Derivative Liability
 
$
1,750,144
   
$
1,704,570
 

At the initial valuation date of each Tranche, a portion of the derivative liability was allocated to the Convertible Debentures as debt discount, with the remainder being recorded as other income/expense. At March 31, 2014, the initial valuation of First Tranche Debentures, $1,000,000, was allocated to debt discount and at December 31, 2014, the initial valuation of Second Tranche Debentures, $850,000, was allocated to debt discount. The debt discount is subsequently amortized to expense using an effective interest methodology. Amortization of debt discount amounted to $13,197 and $17,642 for Convertible Debentures and $455 and $218 for the non-convertible Debenture for the three months ended March 31, 2016 and 2015 respectively.

As discussed more fully in Note 8, on August 6, 2015, an Involuntary Petition was filed in the United States Bankruptcy Court by creditors holding convertible promissory notes issued by the Company. Under the terms of the Debentures, this filing could result in an "event of default" on the part of the Company which, if continuing, could require the Company to pay the outstanding principal amount of a Debenture plus all accrued and unpaid interest through the date the Debenture is paid in full. In addition, the interest payment on these Debentures for the calendar year 2015 in the approximate amount of $57,000 was due March 1, 2016. The Company failed to make the payment. This failure, if continuing, could represent an additional event of default under the terms of the Debenture.
 

Note 7.  Related Party Transactions

As of March 31, 2016, the President of the Company is owed deferred salary in the amount of $1,341,996. As of March 31, 2016, a Vice President and the current Chairman of the Board of Directors of the Company is owed deferred salary in the amount of $121,140. The Board of directors agreed to pay interest at 9% on the amounts owed the foregoing. Accrued interest under this agreement for the three months ended March 31, 2016 and 2015 amounted to $31,360 and $25,800, respectively.

Effective September 1, 2011, the Company entered into a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space in a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance, real estate taxes, expenses and utilities. Rent expense associated with this lease amounted to base rent in the amount of $13,602 and associated rental costs of $3,415 for a total of $17,017 for the three months ended March 31, 2016 and base rent in the amount of $13,602 and associated rental costs of $5,665 for a total of $19,267 for the three months ended March 31, 2015. In the first quarter of 2016, the Company paid none of the base rent due for that quarter and the base rent due, in the amount of $13,602, was accrued. In the first quarter of 2015, the Company paid $18,136 for base rent.

Directors of the Company are entitled to a director's fee of $15,000 per year for their services. The Company has been unable to pay directors' fees to date. A total of $243,750 and $221,250 was due and owing to the Company's current and former directors as of March 31, 2016 and December 31, 2015, respectively. Directors have previously been compensated and may, in the future, be compensated for their services with common stock or options to purchase common stock of the Company.

Note 8.  Commitments and Contingencies

Management Agreement

On June 19, 1993, two subsidiaries of Diamondhead Casino Corporation, 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. Management of the Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.

 
Related Parties

The Company has an agreement with a Director pursuant to which he will be paid a bonus in the event of any recovery received from certain litigation. This Director will receive ten percent of any amounts received by the Company, after deduction of attorney fees and expenses relating to the litigation.

Other

The Company's obligations under the Collateralized Convertible Senior Debentures are secured by a lien on the Company's Mississippi property (the "Investors Lien").  Liens were placed on the Property in favor of the Investors for $1,850,000. The Investors Lien is in pari passu with a lien placed on the Property in favor of the President of the Company, the Vice President of the Company, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the "Executives Lien"). Ms. Vitale will serve as Lien Agent for the Executives Lien.

The Company is currently delinquent in filing those documents and forms required to be filed in connection with its Employee Stock Ownership Plan ("ESOP") for the years ended December 31, 2010, 2011, 2012, 2013 and 2014. The Company did not have the funds to pay professionals to audit its ESOP and/or prepare and file required documents and forms when due.  Although these required filings normally do not result in any tax due to an agency of the government, the Company could be subject to significant penalties for failure to file these forms when due. Penalties are assessed by both the Department of Labor and the Internal Revenue Service on a per diem basis from the original due dates for the required informational filings until the filings are actually made. The Company has accrued $23,522 and $23,768 in penalties for the three months ended March 31, 2016 and 2015, respectively, based on the current delinquent filings. In addition, the Company expects that cumulative penalties for all delinquent ESOP filings could total $207,724 through September 30, 2015. The Company intends to bring its ESOP-required filings current and when current, will attempt to enroll in a voluntary compliance program with the Department of Labor and the Internal Revenue Service with respect to any penalties or fines incurred. However, there can be no assurance the Company will be able to enroll in any such program or obtain a reduction of the fines and penalties that may be due.

Litigation

College Health & Investment, L.P. v. Diamondhead Casino Corporation (Delaware Superior Court)(C.A. No. N15C-01-119-WCC)

On January 15, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principle amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff seeks payment of principle of $150,000, interest due through December 31, 2014 in the amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company's balance sheet at December 31, 2015. On January 22, 2015, the defendant forwarded a Notice of Conversion to plaintiff, exercising the Borrower's right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. On July 2, 2015, the Court agreed with the Plaintiff and denied the Company's motion to dismiss. On July 16, 2015, the Company filed an Answer and Grounds of Defense.  On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter has been stayed due to the below-referenced bankruptcy action (Case No. 15-11647).


College Health & Investment, L.P. v. Diamondhead Casino Corporation (In the Court of Chancery of the State of Delaware (C.A. No. 10663-CB)

On February 13, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed a Verified Complaint Pursuant to 8 Del.C.§211(c), with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn, seeking an order compelling the Company to hold an annual meeting. The Company agreed to entry of an Order setting  a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015, and to clarify that there is no advance notice requirement for the submission of stockholder proposals at the Company's annual stockholders' meetings. The plaintiff sought costs and expenses, including attorneys' fees. On or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 for both this case and the following case.  The Company filed an opposition to this motion. On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter has been stayed due to the below-referenced bankruptcy action (Case No. 15-11647).

College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount and Benjamin Harrell(In the Court of Chancery of the State of Delaware)(C.A. No. 10793-CB)

On March 14, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleges that the defendants breached their fiduciary duty of disclosure. In Count II, the plaintiff alleges that defendants breached their fiduciary duties of loyalty and care. The plaintiff sought injunctive relief, but no monetary damages other than attorney's fees. The defendants believe that plaintiff's claims are without merit and intend to vigorously defend this lawsuit.  In addition, on or about July 30, 2015, the defendant directors filed Defendants' Answer and Verified Counterclaims for defamation, breach of fiduciary duty and aiding and abetting a breach of fiduciary duty. On August 19, 2015, the plaintiff filed a Motion to Dismiss the Counterclaims. As noted above, on or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 in this case and the above-referenced case.  On or about August 26, 2015, the defendants filed an Opposition to Plaintiff's Motion for an Award of Fees and Reimbursement of Expenses.  On September 25, 2015, the parties entered into a Stipulation and [Proposed] Order Staying Litigation pending the below-referenced bankruptcy action.(Case No. 15-11647).

In re Diamondhead Casino Corporation (United States Bankruptcy Court)(District of Delaware)(Case No. 15-11647-LSS)

On August 6, 2015, an Involuntary Petition was filed in the United States Bankruptcy Court by three promissory note holders under title 11, United States Code, requesting an order for relief under chapter 7 of the Bankruptcy Code. The three creditors listed combined claims of $150,000 in principal, plus interest due on certain promissory notes. On August 28, 2015, the Company filed a Motion to Dismiss the Involuntary Petition or, in the Alternative, to Convert the Case to Chapter 11 (the "Motion to Dismiss"). The Company maintains that the Petition was filed in bad faith by supporters of the dissident slate which lost the proxy contest that was decided by the stockholders on June 8, 2015 and that it was filed in retaliation for the Company's refusal, following the stockholders' vote, to place several of the losing dissident's nominees on the Board of Directors. On September 11, 15 and 17, 2015, three additional promissory note holders filed Joinders to the Involuntary Petition listing additional combined claims of $237,500 plus interest. The Company does not recognize one of the joining petitioners as a bona fide creditor of the Company.  On September 17, 2015, the six Petitioners, who are represented by the same attorneys, filed an Objection to the Company's Motion to Dismiss. On September 18, 2015, the six Petitioners filed an Emergency Motion for Entry of an Order Directing the Appointment of (I) an Interim Chapter 7 Trustee, or (II) Alternatively, a Chapter 11 Trustee Should the Involuntary Case be Converted (the "Emergency Motion").  The Court held an evidentiary hearing on the Emergency Motion in October 2015. On November 13, 2015, the Court denied the Petitioners' Emergency Motion as it relates to the request for an interim Chapter 7 trustee. On January 15, 2016, the Court held an evidentiary hearing on the Company's Motion to Dismiss the Involuntary Petition. The parties filed briefs in support of and in opposition to the motion and are awaiting the Court's ruling on the motion.


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

Forward Looking Statements

This section should be read together with the consolidated financial statements and related notes thereto, for the year ended December 31, 2015, attached as Exhibit 99.1 to our annual report filed on Form 10-K.

This Quarterly Report on Form 10-Q contains forward-looking statements and involves risks and uncertainties that could materially affect the Company's future plans, business strategy, expected results of operations, liquidity, cash flows, and business prospects. These statements include, among other things, statements regarding our ability to implement our business plan and business strategy, our ability to obtain financing to sustain the Company, our ability to finance our future development and future operations, our ability to attract key personnel, and our ability to operate profitably in the future. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Any statements contained in this document that are not statements of historical fact may be deemed to be forward-looking statements. You can identify forward-looking statements as those that are not historical in nature, particularly those that use terminology such as "may", "will", "should", "expects", "anticipates", "contemplates", "estimates", "believes", "assumes", "intends", "plans", "projects", "predicts", "potential" or "continue" or the negative of these or similar terms. In evaluating these forward-looking statements, you should consider risks and uncertainties relating to various factors, including, but not limited to, financing, licensing, construction and development, competition, legal actions, federal, state, county and/or city government actions, general financing conditions, and general economic conditions.

The Company's actual results may differ significantly from results projected in the forward-looking statements. We undertake no obligation to revise or update forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements

Throughout this report references to "we", "our", "us", "Diamondhead Casino Corporation", the "Company", and similar terms refer to Diamondhead Casino Corporation and its wholly-owned subsidiaries, unless the context indicates otherwise.

Overview

The Company's current priority is the development of a casino resort on its Property located in Diamondhead, Mississippi. The Company's management, financial resources and assets will be devoted towards the development of this Property. There can be no assurance that the Property can be developed or, that if developed, that the project will be successful.

Liquidity

The Company has no operations, generates no revenues and has been dependent on various short term financings to raise sufficient cash to satisfy the expenses it incurs. The Company is concentrating its efforts on the development of its Diamondhead, Mississippi Property. The development of the Diamondhead Property is dependent on obtaining the necessary capital, through equity and/or debt financing, unilaterally, or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort. In the past, the Company has been able to sustain itself through various short term borrowings, however, at March 31, 2016, the Company cash on hand amounted to $4,298, while current liabilities totaled $6,342,017. Therefore, in order to sustain itself, it is imperative that the Company secure a source of funds to provide further working capital.
 

In addition, a Line of Credit in the amount of $1,000,000 obtained in October 2008, was payable in November 2012. Also, Convertible Notes issued pursuant to two Private Placements offered in 2010, totaling $962,500 at March 31, 2016, had become payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, none of the aforementioned debt obligations have been satisfied and the Company is in default of the repayment terms of the notes. On August 6, 2015, three holders of promissory notes filed an Involuntary Petition in the United States Bankruptcy Court for the District of Delaware. The status of the matter is more fully described in Part II, Item 1 – Legal Proceedings, of this report.

Financial Results and Analysis

During the three months ended March 31, 2016 and 2015, the Company incurred net losses, exclusive of the recording of change in the fair value of derivatives, of $313,474 and $413,616, respectively. However, the Company recorded an increase in the fair value of the derivative liability in the amount of $45,574, which increased the reported net loss applicable to common stockholders to $359,048 for the three months ended March 31, 2016. Conversely, the Company recorded a decrease in the fair value of the derivative liability in the amount of $1,353,280, which was a significant factor which benefited the reported net income applicable to common stockholders of $939,664 for the three months ended March 31, 2015. General and administrative expenses incurred totaled $174,765 and $256,588 for the three months ending March 31, 2016 and 2015, respectively. The table below depicts the major categories comprising these expenses:
 
   
March 31,
   
March 31,
 
DESCRIPTION
 
2016
   
2015
 
Payroll and Related Taxes
 
$
75,000
   
$
154,596
 
Director Fees
   
22,500
     
18,750
 
Professional Services
   
20,150
     
9,100
 
Annual Meeting Expenses
   
-
     
14,797
 
Stock Transfer and Escrow Fees
   
1,875
     
2,711
 
Rents and Insurances
   
17,904
     
22,947
 
Fines and Penalties
   
23,522
     
23,768
 
All Other Expenses
   
13,814
     
9,919
 
                 
Total General and Administrative Expenses
 
$
174,765
   
$
256,588
 
 
The decrease in payroll and related taxes for the three months ended March 31, 2016 versus 2015 in the amount of $79,596 was the result of the resignation of the former Chairman, effective June 8, 2015. Director fees increased $3,750  due to the addition of Directors.

Interest expense incurred totaled $100,103 and $82,980 for the three months ended March 31, 2016 and 2015, respectively, an increase of $17,123. The increase is primarily attributable to the impact of accrued interest on the Second Tranche Debentures which, under the terms of these Debentures, began accruing interest on June 29, 2015, coupled with interest expense associated with the interest bearing advances borrowed in the first quarter of 2016 which accrue a full year of interest at their inception.




Off-Balance Sheet Arrangements

Management Agreement

On June 19, 1993, two subsidiaries of the Company, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation ("CAMC").  Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company's proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000.  The Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.

There are no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to our stockholders.

Critical Accounting Policies

Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value Measurements

The Company follows the provisions of ASC Topic 820 "Fair Value Measurements" for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable input that reflects management's own assumptions.
 
The table listed below provides a reconciliation of the beginning and ending net balances for the derivative liability measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2016 and for the year ended December 31, 2015:
 
 
   
March 31,
   
December 31,
 
   
2015
   
2015
 
             
Beginning balance
 
$
1,704,570
   
$
3,754,233
 
                 
Total decrease in unrealized appreciation
               
   (depreciation) included in net assets
   
45,574
     
(2,049,663
)
                 
Ending balance
 
$
1,750,144
   
$
1,704,570
 

Sensitivity Analysis to Changes in Level 3 Assumptions

Significant inputs include the dates when required conditions are expected to be met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses and discount for lack of marketability while in the delisted mode and reversed when the Company's stock became publicly listed again on or about October 26, 2015. In addition, use of different ranges of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.

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

The convertible debentures and derivative liability approximate fair value based on Level 3 inputs.

Long-Lived Assets

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long‑lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of March 31, 2016.

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, who also serves as 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, 2016. 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/Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the results of this evaluation, the Chief Executive Officer/Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2016.
 

Changes in Internal Control Over Financial Reporting

There were no changes 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, 2016 that are expected to materially affect, or are  reasonably likely to materially affect, our internal control over financial reporting.

PART II:   OTHER INFORMATION

Item 1.  Legal Proceedings

College Health & Investment, L.P. v. Diamondhead Casino Corporation (Delaware Superior Court)(C.A. No. N15C-01-119-WCC)

On January 15, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principle amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff seeks payment of principle of $150,000, interest due through December 31, 2014 in the amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company's balance sheet at December 31, 2015. On January 22, 2015, the defendant forwarded a Notice of Conversion to plaintiff, exercising the Borrower's right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. On July 2, 2015, the Court agreed with the Plaintiff and denied the Company's motion to dismiss. On July 16, 2015, the Company filed an Answer and Grounds of Defense.  On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter has been stayed due to the below-referenced bankruptcy action (Case No. 15-11647).

College Health & Investment, L.P. v. Diamondhead Casino Corporation (In the Court of Chancery of the State of Delaware (C.A. No. 10663-CB)

On February 13, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed a Verified Complaint Pursuant to 8 Del.C.§211(c), with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn, seeking an order compelling the Company to hold an annual meeting. The Company agreed to entry of an Order setting  a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015, and to clarify that there is no advance notice requirement for the submission of stockholder proposals at the Company's annual stockholders' meetings. The plaintiff sought costs and expenses, including attorneys' fees. On or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 for both this case and the following case.  The Company filed an opposition to this motion. On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter has been stayed due to the below-referenced bankruptcy action (Case No. 15-11647).

College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount and Benjamin Harrell(In the Court of Chancery of the State of Delaware)(C.A. No. 10793-CB)

On March 14, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleges that the defendants breached their fiduciary duty of disclosure. In Count II, the plaintiff alleges that defendants breached their fiduciary duties of loyalty and care. The plaintiff sought injunctive relief, but no monetary damages other than attorney's fees. The defendants believe that plaintiff's claims are without merit and intend to vigorously defend this lawsuit.  In addition, on or about July 30, 2015, the defendant directors filed Defendants' Answer and Verified Counterclaims for defamation, breach of fiduciary duty and aiding and abetting a breach of fiduciary duty. On August 19, 2015, the plaintiff filed a Motion to Dismiss the Counterclaims. As noted above, on or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 in this case and the above-referenced case.  On or about August 26, 2015, the defendants filed an Opposition to Plaintiff's Motion for an Award of Fees and Reimbursement of Expenses.  On September 25, 2015, the parties entered into a Stipulation and [Proposed] Order Staying Litigation pending the below-referenced bankruptcy action.(Case No. 15-11647).
 

In re Diamondhead Casino Corporation (United States Bankruptcy Court)(District of Delaware)(Case No. 15-11647-LSS)

On August 6, 2015, an Involuntary Petition was filed in the United States Bankruptcy Court by three promissory note holders under title 11, United States Code, requesting an order for relief under chapter 7 of the Bankruptcy Code. The three creditors listed combined claims of $150,000 in principal, plus interest due on certain promissory notes. On August 28, 2015, the Company filed a Motion to Dismiss the Involuntary Petition or, in the Alternative, to Convert the Case to Chapter 11 (the "Motion to Dismiss"). The Company maintains that the Petition was filed in bad faith by supporters of the dissident slate which lost the proxy contest that was decided by the stockholders on June 8, 2015 and that it was filed in retaliation for the Company's refusal, following the stockholders' vote, to place several of the losing dissident's nominees on the Board of Directors. On September 11, 15 and 17, 2015, three additional promissory note holders filed Joinders to the Involuntary Petition listing additional combined claims of $237,500 plus interest. The Company does not recognize one of the joining petitioners as a bona fide creditor of the Company.  On September 17, 2015, the six Petitioners, who are represented by the same attorneys, filed an Objection to the Company's Motion to Dismiss. On September 18, 2015, the six Petitioners filed an Emergency Motion for Entry of an Order Directing the Appointment of (I) an Interim Chapter 7 Trustee, or (II) Alternatively, a Chapter 11 Trustee Should the Involuntary Case be Converted (the "Emergency Motion").  The Court held an evidentiary hearing on the Emergency Motion in October 2015. On November 13, 2015, the Court denied the Petitioners' Emergency Motion as it relates to the request for an interim Chapter 7 trustee. On January 15, 2016, the Court held an evidentiary hearing on the Company's Motion to Dismiss the Involuntary Petition. The parties filed briefs in support of and in opposition to the motion and are awaiting the Court's ruling on the motion.

Item 1A.  Risk Factors

As a smaller reporting company, information under this item is not required to be presented.

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

None.

Item 3. Default Upon Senior Securities

The Company is in arrears on the payment of dividends due on its three series of preferred stock currently issued and outstanding. The Company has not paid dividends due in the first three months of 2016 in the amount of i) $7,500 on its Series S preferred stock; ii) $7,500 on its Series S-NR preferred stock; and iii) $10,400 on its Series S-PIK preferred stock. The table below summarizes total preferred stock dividends in arrears at March 31, 2016:


 
   
Total Amount
 
Description
 
In Arrears
 
       
Series S
 
$
142,500
 
Series S-NR
   
142,500
 
Series S-PIK
   
197,600
 
         
   Total In Arrears
 
$
482,600
 

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibits 31.1 and 31.2

Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company pursuant to Rule 13a-14 and Rule15d-14.

Exhibits 32.1 and 32.2

Attached to this report is the certification of  the Chief Executive Officer/Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350.

101.INS
XBRL Instance Document
101.SHC
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


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, 2016
/s/
Deborah A. Vitale
 
 
By:
Deborah A. Vitale
 
   
Chief Executive Officer
 
 
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