NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
|
1.
|
Nature of Operations and Ability to Continue as a Going Concern
|
The Company is devoting its efforts
to exploring new investment opportunities, including real estate development projects.
These financial statements
have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes
that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization
values may be substantially different from carrying values as shown and these financial statements do not give effect to
adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be
unable to continue as a going concern. At December 31, 2016, the Company had not yet achieved profitable operations, has an
accumulated deficit of $13,802,715 since its inception, has a working capital deficiency of $1,605,799 and expects to incur
further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to
continue as a going concern. Management anticipates that it requires approximately $93,000 over the twelve months ended
December 31, 2017 to continue operations and estimates it will accrue interest expenses of $108,000 over the next 12 months
on loans due to related parties. In addition to funding the Company’s general, administrative and corporate expenses
the Company is obligated to address its current obligations totaling $1,606,174. To the extent that cash needs are not
achieved from operating cash flow and existing cash on hand, the Company will be required to raise necessary cash through
shareholder loans, equity issuances and/or other debt financing. Amounts raised will be used to continue the development of
the Company's investment activities, and for other working capital purposes, which may be dilutive to existing shareholders.
The Company currently has no agreement in place to raise funds for current liabilities and no guarantee can be given that we
will be able to raise funds for this purpose on terms acceptable to the company. Failure to raise funds for general,
administrative and corporate expenses and current liabilities could result in a severe curtailment of the company operations. These circumstances raise substantial doubt about our ability to continue as a going concern, as described
in the explanatory paragraph to our independent auditors’ report on the December 31, 2016 and 2015 financial statements which
are included with this annual report. The financial statements do not include any adjustments that might result from the outcome
of that uncertainty.
|
|
The Company’s ability to continue as a going concern is dependent upon its ability to generate
future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due. Management has no formal plan in place to address this concern but considers
that the Company will be able to obtain additional funds by equity financing and/or related party advances; however there is no
assurance of additional funding being available. The Company has historically satisfied its capital needs primarily by issuing
equity securities and/or related party advances. Management plans to continue to provide for its capital needs during the year
ended December 31, 2017, by issuing equity securities and/or related party advances.
|
Summary of Significant
Accounting Policies
|
|
The financial statements of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America. Because a precise determination of many assets and liabilities is dependent
upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have
been made using careful judgment. Actual results may differ from those estimates.
|
The financial statements have,
in management’s opinion, been properly prepared within the framework of the significant accounting policies summarized below:
|
|
Cash and Cash Equivalents
|
The Company
classifies all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents.
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
The preparation of 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 and 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.
Income Taxes
The Company accounts for income
taxes in accordance with Accounting Standards Codification ("ASC") 740,
Income
Taxes
. There are two major
components of income tax expense, current and deferred. Current income tax expense approximates cash to be paid or refunded for
taxes for the applicable period. Deferred tax assets and liabilities are determined based upon the difference between the financial
statement and tax basis of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences
reverse. Deferred tax expense or benefit is the result of changes between deferred tax assets and liabilities.
A valuation allowance is established
when, based on an evaluation of objective verifiable evidence, it is more likely than not that some portion or all of deferred
tax assets will not be realized.
|
|
Basic and Diluted Loss Per Share
|
The basic loss per
share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding.
Diluted loss per common share is computed similar to basic loss per share except that the denominator is increased to include the
number of additional shares that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted
to add back any convertible preferred dividend and the after-tax amount of interest in the period associated with any convertible
debt. The numerator is also adjusted for any other changes in income or loss that would result from the assumed conversion of these
potential common shares. The if-converted method is used in calculating diluted loss per share for the convertible debentures.
The treasury stock method is used in calculating diluted loss per share, which assumes that any proceeds received from the exercise
of in-the-money stock options and share purchase warrants would be used to purchase common shares at the average market price for
the period.
Common share equivalents
represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method,
and the dilutive effect of the assumed conversion of convertible debt and convertible preferred shares, using the if-converted
method, only if the common stock equivalents are considered dilutive based upon the Company’s net loss position at the calculation
date.
At December 31,
2016, the Company had 18,862,588 (2015 – 18,862,588) common share equivalents in respect to convertible preferred shares,
stock options, and convertible debt. Because the Company incurred a loss, diluted loss per share is the same as basic loss per
share.
Foreign Currency Translation
|
|
Foreign currency transactions are translated into U.S. dollars, the functional and reporting currency,
by the use of the exchange rate in effect at the date of the transaction, in accordance with ASC 830,
Foreign Currency Matters
.
At each balance sheet date, recorded balances that are denominated in a currency other than U.S. dollars are adjusted to reflect
the current exchange rate. Any exchange gains or losses are included in the Statements of Operations.
|
Financial Instruments
The carrying value of cash, accounts
payable, and loans payable approximates fair value because of the demand or short term to maturity of such instruments. Unless
otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks
arising from these financial instruments.
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
As a basis for considering market
participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that
are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The fair value hierarchy, as defined
by ASC 820-10, contains three levels of inputs that may be used to measure fair value as follows:
▪
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
▪
|
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and
|
▪
|
Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
|
In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement
in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its
entirety requires judgment and considers factors specific to the asset or liability.
Certain assets and liabilities are
measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but
are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). There
were no assets or liabilities measured at fair value on a nonrecurring basis during the periods ended December 31, 2016 and 2015.
Stock-based Compensation
|
|
The Company accounts for stock-based compensation using ASC 718 which requires public companies
to recognize the cost of services received in exchange for equity instruments, based on the grant-date fair value of those instruments.
The Company uses the Black-Scholes option valuation model to calculate stock-based compensation at the date of the grant. Option
valuation models require the input of highly subjective assumptions, including the expected price volatility. Changes in assumptions
can materially affect the fair value estimate. Compensation expense for unvested options to non-employees is revalued at each period
end and is being amortized over the vesting period of the options.
|
Convertible Instruments and Beneficial
Conversion Feature
When the Company issues
convertible instruments with detachable instruments, the proceeds of the issuance are allocated between the convertible
instrument and other detachable instruments based on their relative fair values. The resulting discount of the convertible
instrument is amortized into income as interest expense over the term of the convertible instrument. As of December 31, 2016
and 2015, there were no convertible instruments with detachable instruments outstanding.
When the Company issues convertible
debt securities with a non-detachable conversion feature that provides for an effective rate of conversion that is below market
value on the commitment date, it is known as a beneficial conversion feature. For the convertible debt securities outstanding as
at December 31, 2016 and 2015, the embedded conversion features met the exemption criteria to be classified as equity instruments.
The conversion feature of the security that has characteristics of an equity instrument is measured at its intrinsic value at the
commitment date and is recorded as additional paid in capital. A portion of the proceeds of the security issued is allocated to
the conversion feature equal to its intrinsic value to a maximum of the amount allocated to the convertible instrument. The resulting
discount of the debt instrument is amortized into income as interest expense using the effective interest rate over the term of
the loan.
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
However, due to demand nature of
the convertible debt securities, the discount of the debt instrument was immediately expensed.
New Accounting Standards
The Company does not expect the
adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position
or cash flow.
Reclassifications
For comparability, certain prior
period amounts have been reclassified, where appropriate, to conform to the financial statement presentation used in 2016. The
reclassifications have no impact on net loss.
|
2.
|
Convertible loan payable
|
On January 5, 2014 Company
entered into a Convertible Loan Agreement and issued a convertible note for $50,000. This loan is unsecured, bearing interest
at 10% per annum, and was repayable at maturity on January 7, 2015, or on demand after that date. At any time, the lender may
convert the principle amount of the loan into units of the Company, each unit consisting of one common share and one
non-transferable share purchase warrant, at a conversion rate of $0.20 per unit. Each share purchase warrant entitles the
holder to purchase one additional common share for a period of two years from the warrant issue date, at an exercise price of
$0.20 during the first year, and $0.35 during the second year. As of December 31, 2016 and 2015, $16,363 and $10,106,
respectively, was accrued in interest on the note.
The Company calculated
a beneficial conversion feature on the convertible note of $22,826, and this amount was fully amortized to interest
expense during the year ended December 31, 2014. Upon conversion of this loan, which triggers the issuance of the warrants,
the $42,000 fair value of the warrants will be recognized as an interest expense and credited to additional paid-in
capital.
The fair value of the warrants was
estimated at the date the convertible note was issued using the Black-Scholes valuation model. The Black-Scholes valuation model
requires the input of highly subjective assumptions including the expected price volatility.
|
3.
|
Loans payable – related parties
|
|
December 31,
|
December 31,
|
|
2016
|
2015
|
|
|
|
a) Loan payable to a company controlled by a director of the Company plus accrued interest of $20,488 (2015 - $17,437). The loan is unsecured, bearing interest at 12% per annum and is repayable on demand.
|
$ 6,802
|
$ 6,802
|
|
|
|
b) Loans payable to a company controlled by a director of the Company. The loans are unsecured, non-interest bearing, and repayable upon demand.
|
325,521
|
325,030
|
|
|
|
c) Loans payable to a company controlled by a former director of the Company. The loans are unsecured, non-interest bearing, and repayable upon demand.
|
7,295
|
1,919
|
|
|
|
d) Loans payable to a director of the Company. The loans are unsecured, non-interest bearing, and repayable upon demand.
|
46,288
|
-
|
|
|
|
Total Loans Payable – related parties
|
$ 385,906
|
$ 333,751
|
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
|
4.
|
Convertible notes payable – related parties
|
|
December 31,
|
December 31,
|
|
2016
|
2015
|
|
|
|
a) Loan payable to a
company controlled by a former director of the Company, plus accrued interest payable of $236,584 (2015 - $198,835), pursuant
to a Convertible Loan Agreement. The loan is unsecured, bearing interest at 10% per annum and is repayable on demand. The
lender may at any time convert the principal sum into units of the Company. Each unit will consist of one common share plus
one common share purchase warrant. Each warrant is exercisable for a period of 2 years from the date of conversion at a price
ranging from $0.05 to $0.23. The principal sum of $163,766 may be converted into 2,320,858 units.
Upon conversion of this loan, the $73,685 fair value of the warrants, as measured at inception, will be recognized as
an interest expense and credited to additional paid-in capital.
|
$ 163,766
|
$ 163,766
|
|
|
|
b) Loan
payable to a company controlled by a director of the Company, plus accrued interest of $356,133 (2015 - $298,488), pursuant
to a Convertible Loan Agreement. The loan is unsecured, bearing interest at 10% per annum and is repayable on demand. The
lender may at any time convert the principal sum into units of the Company. Each unit will consist of one common share plus
one common share purchase warrant. Each warrant is exercisable for a period of 2 years from the date of
conversion at a price ranging from $0.05 to $0.12. The principal sum of $255,209 may be converted into 4,526,436 units.
Upon conversion of this loan, the $113,338 fair value of the warrants, as measured at inception, will be recognized as an
interest expense and credited to additional paid-in capital.
|
255,209
|
255,209
|
|
|
|
Total Convertible Notes Payable – related parties
|
$ 418,975
|
$ 418,975
|
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
Class A Convertible Preferred
Shares
|
|
The Class A convertible preferred shares issued in 2003 have a par value of $0.001 and are convertible
to common shares at $4.00 per share during the first 180 days following issuance, and thereafter at the average of twenty consecutive
days closing prices, but shall not be less than $1.50 per share or greater than $6.00 per share. The Company has the right to redeem
its Class A convertible preferred stock at any time by paying to the holders thereof the sum of $4 per share.
|
The aggregate liquidation value
of the Class A convertible preferred shares is $792,000. A merger or consolidation of the Company that results in the Company’s
stockholders immediately prior to the transaction not holding at least 50% of the voting power of the surviving entity shall be
deemed a liquidation event.
No common shares were
issued during 2016; during 2015, the Company issued common shares as follows:
|
a)
|
On February 13, 2015, the Company issued 1,500,000 common shares for cash proceeds of $80,000.
|
|
b)
|
On June 25, 2015, the Company issued 2,000,000 common shares for cash proceeds of $160,000.
|
6.
|
Stock-based Compensation
|
Stock Option Plan
|
|
No options were granted and no compensation expense was recorded during 2015 and 2016.
|
As at December 31, 2016, the Company
had share purchase options outstanding as follows:
Expiration Date
|
Exercise Price
|
Remaining Contractual Life
|
Number of Options
|
|
|
|
|
October 15, 2017
|
$0.10
|
0.79 years
|
1,200,000
|
January 16, 2018
|
$0.12
|
1.04 years
|
2,940,000
|
|
|
|
|
Total options outstanding
|
|
0.97 years
|
4,140,000
|
At December 31, 2016 and 2015 all
the outstanding share purchase options were exercisable.
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
7.
Related Party Transactions
The Company was charged the following
by stockholders, directors, by companies controlled by directors and/or stockholders of the Company, and by companies with directors
in common:
|
Year ended December 31,
|
|
2016
|
2015
|
|
|
|
Interest
|
$ 98,445
|
$ 88,880
|
Management fees
|
4,100
|
53,000
|
|
|
|
Total related party transactions
|
$ 102,545
|
$ 141,880
|
|
|
At December 31, 2016, accounts payable includes $8,211 (2015 - $5,200) due to two directors, a
former director, and a company controlled by a director of the Company in respect of unpaid management fees and expenses incurred
on behalf of the Company.
|
|
|
At December 31, 2016, accounts payable also includes $15,527 (2015 - $15,527) of expenses for operating
costs paid on behalf of the Company by a company with directors in common.
|
|
|
On August 21, 2012 the Company entered into a Management Services Agreement with a director (the
“Director”). As remuneration for the management services, the Company agreed to pay the Director $20 per hour for time
spent on the affairs of the Company, pursuant to which the company has paid or accrued management fees of $3,000 (2015 - $4,000).
|
|
|
See footnote 9 for other related party transactions for Skytower and Marriot.
|
|
|
The tax effects of temporary differences that give rise to deferred tax assets at December 31, 2016 and 2015 are presented
below:
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Net tax operating loss carryforwards
|
$
|
2,369,000
|
$
|
2,303,000
|
Valuation allowance for deferred tax asset
|
|
(2,369,000)
|
|
(2,303,000)
|
|
|
|
|
|
|
$
|
-
|
$
|
-
|
The Company evaluates its valuation
allowance requirements based on projected future operations. When circumstances change and this causes a change in management’s
judgment about the recoverability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current
income.
|
|
At December 31, 2015, the Company has estimated accumulated net operating losses of approximately
$6,768,000 (2015 - $6,580,000) which may be carried forward to reduce taxation income in future years. The non-operating losses
expire from 2018 to 2034.
|
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
On August 9, 2016, SIII entered
into a Securities Purchase Agreement (the “Kayu Agreement”) to acquire 60% of the issued capital stock Kayu Tekstil
Sanayi Ve Ticaret Limited Sirketi (“Kayu”), a Turkish company, from Najibi Investment Trading FZC (hereinafter “Najibi”),
G7 Entertainment Incorporated, (hereinafter “G7”), Royaltun General Trading LLC., (hereinafter “Royaltun”),
and Soha Investment Inc., (hereinafter “Soha) (jointly hereinafter the “Shareholders”). In consideration for
the Kayu shares, the Company agreed to issue convertible debentures in the amount of $30,205,939 to the Shareholders of Kayu. This
is a related party transaction as Mr. Abbas Salih is a Director and Officer, as well as the controlling shareholder, of
SIII and has an ownership interest in and/or control of the Shareholders. Kayu has an agreement to acquire the Skytower Hotel Atayol
in Akcakoca, Turkey (the “Skytower Property”), subject to the successful discharge of a debt on the Skytower Property
and the transfer of title to Kayu.
Upon discharge of the debt on the Skytower Property, the Company will issue convertible debentures in the amount of $12,656,768
to Najibi, a Company that settled the existing debt on the Skytower Property.
Upon transfer of the Skytower Property title to Kayu, the Company will issue convertible debentures in the amount of $20,137,293
to a shareholder of Kayu to acquire the remaining 40% of the capital stock of Kayu. Upon completion of these transactions, SIII
will own 100% of Kayu.
The Company has the right to terminate
the agreements to acquire the issued capital stock of Kayu and cancel the associated convertible debentures if the vendors do not
complete certain closing conditions. As of the filing date, the closing conditions in the Kayu agreement have not yet been met,
and the convertible debentures have not been issued to the Shareholders.
Marriott:
In August 2016, the Company entered
into agreements to acquire 50% of the issued capital stock of Par-San Turizm A.S. (“Par-San”), a Turkish company that
is the owner of a Marriott Renaissance Hotel in Izmir, Turkey (the “Marriott”). In consideration for the Par-San shares,
the Company agreed to issue convertible debentures in the amount of $44,365,532 to Najibi Investment Trading FZC, G7 Entertainment
Incorporated, SOHA Investment & Partners, and Royaltun General Trading L.L.C. (collectively “Shareholders”), the
shareholders of Par-San.
On October 14, 2016, the Company
and the Shareholders mutually agreed to terminate their agreements and cancel the associated convertible debentures. At the same
time, the Company and the Shareholders entered into new agreements to acquire 50% of the issued capital stock of Par-San. In consideration
for the Par-San shares, the Company agreed to issue convertible debentures in the amount of $47,400,000 to the Shareholders. This
is a related partytransaction as Mr. Abbas Salih is a Director and Officer, as well as the controlling shareholder, of
SIII and has an ownership interest in and/or control of the Shareholders. The closing the new agreement is subject to certain conditions,
which have not yet been met. The Company has the right to terminate the new agreements and cancel the associated debentures if
the closing conditions are not met in a reasonable amount of time.
The closing of the new agreement
is subject to certain conditions, which have not yet been met. The Company has the right to terminate the new agreements and cancel
the associated debentures if the closing conditions are not met in a reasonable amount of time.
All of the above mentioned convertible debentures have
the following terms:
|
b)
|
Mature on December 31, 2021 (the “Maturity Date”).
|
|
c)
|
At any time prior to the Maturity Date, the convertible debenture holder may convert the debenture into common stock of the
Company at a price of $1.00 per share.
|
|
d)
|
The convertible debenture will automatically convert into common stock upon the closing price of the Company’s common
stock closing above $1.00 per share for 20 consecutive trading days.
|
The Company has not yet determined the accounting treatment
for the above mentioned series of transactions.
STRATEGIC INTERNET INVESTMENTS, INCORPORATED
NOTES TO THE
FINANCIAL STATEMENTS
December 31, 2016 and 2015
(Expressed in U.S. Dollars)
The Company was advanced CDN $5,330 (approximately US
$4,000) by a director to pay certain service providers. The advance is unsecured, non-interest bearing and repayable on demand.