FORWARD LOOKING STATEMENTS

This annual 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 audited 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-K. 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 annual report.

In this annual 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 annual 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 most countries and regions. We expect that the global economy will take a considerably long time to stabilize and recover from the ongoing pandemic as the situation remains very volatile and uncertain. Although COVID-19 vaccines are now available, no side effects and 100% success rate are not guaranteed at this point and the World Health Organization and health experts have advised that COVID-19 will not be eradicated without effective treatment and vaccination.

Many countries around the world have imposed travel restrictions in response to the outbreak of COVID-19, including Mongolia. The Mongolian Government has implemented the measure of closing all ports of entry from and into China, effective until April 30, 2021. Continuously evolving government responses to the pandemic may create challenges for us. For example, the Mongolian Government has extended the measure of closing ports since early 2020, and has not changed their stance after reviewing more than ten times. It is difficult to predict if the Mongolian Government will further extend the measures in place. Our Chinese workers are not allowed to enter into Mongolia, which has led to no activity at Mine B. Furthermore, with limited operation income which is generated mainly from Mine A, is compounded with the high expenses in our three offices: the Hong Kong headquarters, the Erenhot office in China and the Mongolian office.

The Company is always ready and prepared for the ports to reopen - our office in Ulaanbaatar has liaised with the relevant government departments to prepare visa applications for our Chinese workers, in case workers are allowed to enter into Mongolia.

The construction of the refinery at Mine B was almost completed in late November 2019, while the last step of power supply upgrade at Mine B is still underway. We expect to get the power supply upgraded in 2021 once our Chinese workers are allowed to enter into Mongolia. The entire refinery could be put to trial once it is ready. Nonetheless, keeping workers safe is at the top of our priority. Paramount importance will be given to the health and safety of all of our workers, even if the Mongolian Government lifts the above measures.

In this unprecedented time, COVID-19 has transformed the world since earlier 2020, affecting every corner of society and shaking the global economy. The global economy has been dramatically impacted by the COVID-19 pandemic which continues to have a profound impact on our operations and markets around the world. Despite the unpredictable nature of the pandemic, our response has remained strong - the management has been endeavoring to do their best to minimize the negative impact on our operations and trial production. We have worked extremely hard and tried every single possible way to keep the Company's operations running in these most challenging circumstances.

On September 22, 2020, two directors, Mr. Shaowei DENG and Miss Ka Yi POON, resigned from the Company for personal reasons.

On December 10, 2020, Mr. Chi Kin LOO was appointed as a director of the Company.






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There were a total of four convertible bond agreements entered into between the Company, a subsidiary of the Company, Arcus Mining Holdings Limited ("Arcus"), and third party investors during 2020.

On January 2, 2020, a convertible bond agreement was entered into between the Company, Arcus and a third party investor. On February 1, 2020, the convertible bond matured and was settled by issuing 53,236 common shares at a price of $3.62 per share representing loans of HK$1.5 million and interest expenses of HK$3,185, for a total of HK$1,503,185 (equivalent to $192,708).

On January 14, 2020, a convertible bond agreement was entered into between the Company, Arcus and a third party investor. On February 13, 2020, the convertible bond matured and was settled by issuing 14,196 common shares at a price of $3.62 per share representing loans of HK$400,000 and interest expenses of HK$849, for a total of HK$400,849 (equivalent to $51,389).

On February 24, 2020, a convertible bond agreement was entered into between the Company, Arcus and a third party investor. On March 25, 2020, the convertible bond matured and was settled by issuing 7,098 common shares at a price of $3.62 per share representing loans of HK$200,000 and interest expenses of HK$425, for a total of HK$200,425 (equivalent to $25,695).

On February 29, 2020, a convertible bond agreement was entered into between the Company, Arcus and a third party investor. On March 30, 2020, the convertible bond matured and was settled by issuing 17,745 common shares at a price of $3.62 per share representing loans of HK$500,000 and interest expenses of HK$1,062, for a total of HK$501,062 (equivalent to $64,235).

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 December 21, 2020, the Company issued 13,809 common shares at a price of $4.00 per share to settle the amount due to a director of HK$430,855 (equivalent to $55,238).

Apart from the exploration and infrastructure work at the mine sites, the Company might consider further fund raising activities through the capital markets and from stockholders with the aim of speeding up the development of the Company.





Results of Operations

Comparison of Years Ended December 31, 2020 and December 31, 2019





Revenue

Revenue consisted mainly of fluorite products generated from production at Mine A. In 2020, we had total revenue of $753,694, as compared to revenue of $282,857 during 2019. The percentage of such increment was approximately 166% as a result of the adoption of open-pit mining at Mine A. This method is more flexible to cope with weather conditions. Although revenue in Mine A increased in 2020, nil revenue was generated from Mine B as a result of the closure of Mongolia since January 31, 2020 due to COVID-19.





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 significantly from $737,248 in 2019 to $467,745 in 2020. The percentage of such decrease was approximately 37% and was mainly because of the decrease in mining overheads and utilities cost as no operating activities were carried out in Mine B in 2020.

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 decreased slightly from $105,279 in 2019 to $102,715 in 2020. The percentage of such decrease was approximately 2% and was mainly due to the net effect of the increase in tax paid to the Mongolian Government and the decrease in transportation costs.





Administrative expenses

Administrative expenses included salaries and benefits, consulting, audit, tax, legal, insurance, rent, utilities, net foreign exchange losses and other general operating expenses.

Administrative expenses decreased significantly from $1,645,900 in 2019 to $1,252,925 in 2020. The percentage of such decrease was approximately 24% and was mainly due to commission expenses related to subscription package in 2019, but nil was incurred in 2020, and also the net effect of the increase in net foreign exchange losses, and the decrease in staff salaries, entertainment, legal and professional fees, travelling and other general operating expenses in 2020.





Other income

Other income decreased significantly from $195,576 in 2019 to $31,958 in 2020. The percentage of such decrease was approximately 84% as a result of the net effect of a waiver of consultancy fee and a write back of receipt in advance due to the dissolution of our customer in 2019, but nil in 2020, and the increase of subsidies 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.





Interest expenses

Interest expenses mainly included other loan interest, related party loan interest and bond interest arising from convertible bonds.

Interest expenses increased from $76,824 in 2019 to $124,040 in 2020. The percentage of such increment was approximately 61% and was mainly due to the net effect of the increase in amortization of non-cash interest expenses and bond discount related to the convertible bonds and non-current loan interest and the decrease in related party loans interest as a result of repayment of related party loans in 2019.





Net loss

As a result of the factors described above, we had a net loss of $1,218,463 for the year ended December 31, 2020 as compared to a net loss of $2,115,716 for the year ended December 31, 2019. The net loss decreased mainly resulted from the increase in revenue and decrease in cost on mining infrastructure project. This was within our management expectation since our mine is still under trial production and we expect to further increase the productions and revenue in 2021.






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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 December 31, 2020 and 2019, the Company's cash was $69,401 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 party 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 obtain financing, if at all or upon terms that will be acceptable to us.





Cash Flows

As of December 31, 2020, we had $69,401 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 decreased to $1,070,424 in 2020 from $1,228,886 in 2019. Net cash used in operating activities for the year ended December 31, 2020 primarily reflected our net loss of $1,218,463 and the add-back of non-cash items, mainly consisting of depreciation of property, plant and equipment of $48,884, loss on disposal of property, plant and equipment of $4,089, amortization of non-cash interest expenses and bond discount related to convertible bonds of $21,059, exchange difference of $327,779, non-cash interest expenses related to other loans of $17,603 and changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $727,979, an increase of other receivables of $68,596, an increase of deposits and prepayments of $48,607, decrease in accrued charges of $125,594 and offset by an increase of trade and other payables of $648,012, an increase in income tax payable of $23,212, an increase in provision for asset retirement obligations of $3,300 and an increase in provision for exploration asset compensation of $24,877.

Net cash used in investing activities

Our net cash used in investing activities decreased to $55,416 in 2020 from $976,818 in 2019. This was mainly due to a decrease of acquisition of property, plant and equipment at mine sites.

Net cash provided by financing activities

Our net cash provided by financing activities decreased to $1,092,060 in 2020 from $2,216,864 in 2019. This was mainly due to a decrease of proceeds from unrelated party loan, issuance of common stock and convertible bonds.





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 loans from others, 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.

Off-Balance Sheet Arrangements

We have no 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 or expenses, results of operations, liquidity, and capital expenditures or capital resources that are material to stockholders.





Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us 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 reported period. The critical accounting policies we employ in the preparation of our consolidated financial statements are those which involve impairment of long-lived assets, intangible assets and income taxes.






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Below, we discuss these policies further, as well as the estimates and judgments involved. We believe that our other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For a discussion of all our significant accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report.

Impairment of Long-Lived Assets and Intangible Assets

Long-lived assets held and used by the Company and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company evaluates recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment loss is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets calculated using a discounted future cash flows analysis.





Income Taxes

The Company complies with ASC 740 which prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of ASC 740. The Company's accounting policy is to treat interest and penalties as a component of income taxes.

Amounts in the consolidated financial statements related to income taxes are calculated using the principles of ASC 740 and ASU 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASC 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting bases and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits, such as net operating loss carry forwards, are recognized as deferred tax assets. Recognized deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.





Going Concern

The Company incurred an operating loss of $1,218,463 for the year ended December 31, 2020, and as of that date, the Company's current liabilities exceeded its current assets by $1,262,026. Notwithstanding the operating loss incurred for the year ended December 31, 2020 and the net current liabilities as of December 31, 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. The Company's business forecast indicates that the Company will have positive cash inflow after the commencement of formal production in 2022. 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 party loans and upon their experience and their assessment of the Company's projected performance, production ability and product market.

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