FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may", "should",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results.
Our unaudited financial statements are stated in United States Dollars ($) and
are prepared in accordance with United States Generally Accepted Accounting
Principles. The following discussion should be read in conjunction with our
financial statements and the related notes to the consolidated financial
statements included elsewhere in this Form 10-Q. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this quarterly report.
In this quarterly report, unless otherwise specified, all dollar amounts are
expressed in United States dollars and all references to "common stock" refer to
the common stock in our capital stock.
As used in this quarterly report, the terms "we", "us", "our" or the "Company"
mean TGS International Ltd., a Nevada corporation, and our subsidiaries, unless
otherwise indicated.
General Overview
TGS International Ltd. was established on December 1, 2016 in Nevada, USA. On
September 14, 2018, TGS International Ltd. and Arcus entered into a Share
Exchange Agreement, dated September 14, 2018, with Chi Kin Loo, Billion Plus
Limited, First Fortune Investment Limited, Great Win Limited and Master Value
Holdings Limited, pursuant to which the Selling Stockholders agreed to sell all
of their ordinary shares of Arcus to the Company in exchange for an aggregate of
7,000,000 shares of common stock of TGS International Ltd.
We are a mining company focused on both fluorite mining operations in Mongolia
(3 mines in total, Mining license numbers: MV-016819, MV-017305 and MV-009918)
and sales of fluorite across Mongolia and China. During 2015 to 2017, we were
setting up infrastructure at Mine B and appointed SRK Consulting China Limited
for resource exploration for Mine A and Mine B. The trial production at Mine A
and Mine B started in 2019 and 2018 respectively and have been ongoing since
that time.
The global COVID-19 situation shows no sign of improvement in some countries and
regions, remaining very volatile and is gradually getting worse. This reflects
the fact that the pandemic is yet to peak globally. The World Health
Organization and health experts have advised that COVID-19 would not be
eradicated without effective treatment and vaccination. According to BBC News,
most experts think a vaccine is likely to become widely available by mid-2021
but there are uncertainties.
The Mongolian Government has implemented the measure of closing all ports of
entry from and into China, extending this for the tenth time since February
2020. The Government proposes to lift the measure on December 31, 2020. Our
business could be materially and adversely affected by the outbreak of a
widespread pandemic, causing labor shortages and increasing government
regulations, all of which may negatively impact the business, financial
condition, growth strategies and results of operations of the Company.
Since our operation of Mine B, which generates major operation income for the
Company, has been suspended since late November 2019 due to the regular winter
break and the unpredictable outbreak of COVID-19 since the first quarter of
2020, the Company is in financial difficulty - there is extremely low operation
income which generated mainly from Mine A but there are high expenses in our
three offices: the Hong Kong headquarters, the Erenhot office in China and the
Mongolian office.
The construction of the refinery at Mine B was completed in late November 2019
while the last step of power supply upgrade at Mine B is still in progress. We
expect to get the power supply upgraded in 2021 once our Chinese workers are
allowed to enter Mongolia. The entire refinery could be put to trial once it is
ready.
The resolution of current global health issues remains uncertain - as well as
the government's response to the changing situation. The global economic outlook
for 2020 remains pessimistic, given it dependency on the future development of
global trade tensions, the monetary policy stance of major central banks, and
the impact of COVID-19. Taking a strictly prudent response, the Company is
stringently managing working capital, from both existing and potential
investors, to ensure we have sufficient cash for daily operations, which is
vital to weathering the currently difficult operating environment.
The financial situation of the Company is volatile and unforeseen as ever.
Currently, we have been strictly prudent towards the pandemic. The Company will
continuously and closely monitor the developments of COVID-19, evaluate and
proactively address its impact on the Company's financial position and
performance. For the remainder of 2020, the management will continue to be
diligent in keeping the operations streamlined and optimizing operations,
endeavoring to do our best so to minimize the negative impact on our operations
and trial production.
On April 20, 2020, the Company issued 25,641 common shares at a price of $4.00
per share to settle the amount due to a stockholder of HK$800,000 (equivalent to
$102,564).
On September 14, 2020, the Company issued 39,677 common shares at a price of
$4.00 per share to settle the amount due to a stockholder of HK$1,237,941
(equivalent to $158,710).
On September 22, 2020, two directors, Mr. Shaowei DENG and Miss Ka Yi POON,
resigned from the Company for personal reasons.
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Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2020 and 2019
Revenue
Revenue consisted mainly of fluorspar products generated from production at Mine
A. For the nine months ended September 30, 2020, we had a total revenue of
$107,351, as compared to nil revenue in the nine months ended September 30,
2019. The increase was due to the adoption of open-pit mining at Mine A in the
first nine months ended September 30, 2020. Although mining activities are
subject to weather, open-pit mining is more flexible.
For the three months ended September 30, 2020, we had a total revenue of
$14,628, as compared to nil revenue in the three months ended September 30,
2019. The result of such increase is similar to the first nine months as
discussed above.
Exploration cost
Exploration costs are expensed as incurred and included labor and benefits,
construction service fee, mining overhead, including food, supplies, utilities
and lubricants related to mine exploration. Exploration costs decreased from
$422,180 for the first nine months in 2019 to $114,454 for the first nine months
in 2020. The percentage of such decrease was approximately 73% and was mainly
because of the decrease in service fee paid and utilities cost as no operating
activities were carried out in Mine B for the first nine months in 2020 and the
decrease in mining overheads in Mine B.
For the three months ended September 30, the exploration cost decreased
significantly from $304,521 in 2019 to $15,074 in 2020. The result of such
reduction is similar to the first nine months as discussed above.
Selling and distribution cost
Selling and distribution costs included transportation and handling costs
related to the movement of finished goods from mines to customer designated
locations, security fee, royalty and custom tax. Selling and distribution costs
increased from $23,572 for the first nine months in 2019 to $64,043 for the
first nine months in 2020. The increment was approximately 2 times and was
mainly due to the increase in security fee and royalty tax paid to the Mongolian
Government.
For the three months ended September 30, the selling and distribution costs
decreased slightly from $8,240 in 2019 to $7,415 in 2020. The result of such
decrease was mainly due to the net effect of the increase in tax paid to the
Mongolian Government and the decrease in monthly security fee.
Administrative expenses
Administrative expenses included salaries and benefits, consulting, audit, tax,
legal, insurance, rent and utilities, net foreign exchange losses and other
general operating expenses.
Administrative expenses increased slightly from $920,069 for the first nine
months in 2019 to $927,545 for the first nine months in 2020. The percentage of
such increment was approximately 1% and was mainly due to the net effect of the
increase in net foreign exchange losses and the decrease in commission expenses
related to subscription package, entertainment, legal and professional fee and
travelling expenses.
For the three months ended September 30, the total administrative expenses are
increased from $256,294 in 2019 to $267,711 in 2020. The result of such increase
is similar to the first nine months as discussed above.
Other income
Other income increased significantly from $691 for the first nine months in 2019
to $17,174 for the first nine months in 2020. The increment was approximately 24
times as a result of subsidy received from Hong Kong and Mongolian Governments
in 2020 resulting from the outbreak of COVID-19 so as to ease the effects
impacted on the corporation's business.
For the three months ended September 30, other income increased from $25 in 2019
to $1,581 in 2020. The result of such increase is similar to the first nine
months as discussed above.
Interest expenses
Interest expenses mainly included other loan interest, related party loan
interest and bond interest arising from convertible bonds.
Interest expenses increased from $69,530 for the first nine months in 2019 to
$74,888 for the first nine months in 2020. The percentage of such increment was
approximately 8% as a result of amortization of non-cash interest expenses and
bond discount related to the convertible bonds for the first nine months in 2020
and an increase in the interest expenses of loans.
For the three months ended September 30, the interest expenses increased from
$19,086 in 2019 to $20,695 in 2020. The increment was mainly due to the net
effect of the increase of amortization of non-cash interest expenses and
interest expenses of loans and the decrease in lease payment representing
interest of Hong Kong office incurred in 2019, but nil in 2020.
Net loss
As a result of the factors described above, we had a net loss of $1,083,705 for
the nine months ended September 30, 2020 as compared to a net loss of $1,455,077
for the nine months ended September 30, 2019, and a net loss of $303,697 for the
three months ended September 30, 2020 as compared to $596,618 for the three
months ended September 30, 2019. Although we had revenue in the first nine
months in 2020, the net loss resulted mainly from the increase in selling and
distribution cost and net foreign exchange losses.
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Liquidity and Capital Resources
Cash and cash equivalents are short-term, highly liquid investments with
original maturities of three months or less. As of September 30, 2020 and
December 31, 2019, the Company's cash was $84,571 and $106,850, respectively.
There were no cash equivalents.
Factors affecting our liquidity include (i) net cash used in operating
activities that consists of (a) cash required to fund the mining sites operating
activities and continued expansion of our mining sites and (b) our working
capital needs, which include advanced payments for several mining supplies and
repair and maintenance, payment of our operating expenses; and (ii) net cash
used in investing activities that consists of the investments in purchasing new
and additional property, plant and equipment for mining sites. To date, we have
financed our liquidity needs primarily through advances from stockholders,
proceeds from related parties and unrelated parties loans, proceeds from
issuance of common stock and the proceeds from issuance of convertible bonds.
We expect to continue to make capital expenditures to keep pace with the
expansion of the production and scale of operations of our mining sites, which
we expect to fund in part with the proceeds from issuance of convertible bonds
and other loans in the future. We expect that the proceeds from the above and
our existing cash and cash equivalents will be used to fund working capital and
for capital expenditures and other general corporate purposes, such as
partnering arrangements, or reduction of debt obligations. However, there can be
no assurance that we will be able to obtain financing, if at all or upon terms
that will be acceptable to us.
Cash Flows
As of September 30, 2020, we had $84,571 in cash and cash equivalents, compared
to $106,850 on December 31, 2019.
Net cash used in operating activities
Our net cash used in operating activities increased to $687,547 for the first
nine months of 2020 from $541,245 for the first nine months of 2019. Net cash
used in operating activities for the first nine months of 2020 primarily
reflected our net loss of $1,083,705 and the add-back of non-cash items, mainly
consisting of depreciation of property, plant and equipment of $36,905, loss on
disposal of property, plant and equipment of $4,105, amortization of non-cash
interest expenses and bond discount related to convertible bonds of $17,612,
non-cash interest expenses related to other loans of $13,099, exchange
difference of $347,856, and changes in operating assets and liabilities
primarily consisting of an increase in accounts receivable of $38,887, an
increase of other receivables of $49,024, an increase of deposits and
prepayments of $11,551, a decrease in accrued charges of $79,182, and offset by
an increase of trade and other payables of $155,225.
Net cash used in investing activities
Our net cash used in investing activities decreased to $82,558 for the first
nine months of 2020 from $719,055 for the first nine months of 2019. This was
represented by net effect of acquisition of property, plant and equipment at
mine sites and proceeds from disposal of property, plant and equipment.
Net cash provided by financing activities
Our net cash provided by financing activities decreased to $750,778 for the
first nine months of 2020 from $1,277,815 for the first nine months of 2019.
This was mainly the net result of settlement of amount due to a director of
$61,810, an increase in advances from stockholders of $453,615, proceeds from
other loan and issuance of convertible bonds of $25,641 and $333,332
respectively in the first nine months of 2020.
Future Financings
We anticipate continuing to rely on related party and unrelated party loans,
convertible bonds or equity sales of our common stock in order to continue to
fund our business operations. We believe this will enable us to meet our cash
needs for the next 12 months. Issuances of additional shares will result in
dilution to our existing stockholders. Importantly, there is no assurance that
we will achieve any additional sales of our equity securities or arrange for
debt or other financing (whether from related parties or otherwise) to fund our
planned business activities.
Except for the convertible bonds and other loans, we presently do not have any
other arrangements or commitments for additional financing for the expansion of
our operations, and no potential lines of credit or sources of financing are
currently available for the purpose of proceeding with our plan of operations.
Going Concern
The Company incurred an operating loss of $1,083,705 for the nine months ended
September 30, 2020, and as of that date, the Company's current liabilities
exceeded its current assets by $1,445,357. Notwithstanding the operating loss
incurred for the nine months ended September 30, 2020 and the net current
liabilities as of September 30, 2020, the accompanying consolidated financial
statements have been prepared on a going concern basis. Since the Company is
currently in the exploration stage, it is still in the capital investing period.
Management has prepared a business cash flow forecast and it indicates that the
Company will have positive cash inflow after the commencement of formal
production in 2021. Management believes the Company will have sufficient working
capital to meet its financing requirements for the next 12 months based on the
financial support of certain stockholders, issuance of new convertible bonds,
proceeds from unrelated parties loans and upon their experience and their
assessment of the Company's projected performance, production ability and
product market.
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