TGSI TGS International Ltd (CE)

The accompanying notes are an integral part of these interim consolidated financial statements.

The accompanying notes are an integral part of these interim consolidated financial statements.

The accompanying notes are an integral part of these interim consolidated financial statements.

The accompanying notes are an integral part of these interim consolidated financial statements.

NOTE 1 – NATURE OF OPERATIONS AND GOING CONCERN

TGS International Ltd. (“TGS”, “the Company”) was incorporated in the state of Nevada, United States on December 1, 2016. On September 14, 2018, the Company entered into a Share Exchange Agreement with Arcus Mining Holdings Limited (“Arcus”) and Mr. Chi Kin Loo, Billion Plus Limited, First Fortune Investment Limited, Great Win Limited and Master Value Holdings Limited (the “Selling Stockholders”), 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 the Company. Arcus, which was incorporated in the Republic of Seychelles on June 17, 2014, and its subsidiaries are engaged in fluorite mining operations in Mongolia, including the processing and sales of fluorite products. Up to September 30, 2021 and the date of this report, the Company owns three mining rights in Mongolia (Mining license numbers: MV-009918, MV-016819 and MV-017305). The Company has adopted open-pit mining at Mine A which is located in Uulbayansoum, Sukhbaatar province (Mining license number: MV-009918). Due to COVID-19, the Mongolian Government has implemented various precautionary measures, including but not limited to closing all ports of entry from and into China (“Precautionary Measures”). The Company has not been able to perform any exploration work at Mine B which is located in Bayan-Ovoo soum, Khentii province (Mining license number: MV-016819) since early 2020.

Basis of presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes of the Company included in its annual report on Form 10-K for the year ended December 31, 2020.

Going concern

The Company incurred an operating loss of $750,242 for the nine months ended September 30, 2021 and, as of that date, had a working capital deficit of $1,792,929 and a net deficit $209,978. Notwithstanding the operating loss incurred for the nine months ended September 30, 2021, the net current liabilities and net deficit as of September 30, 2021, 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 ability of the Company to emerge from the exploration stage depends upon the success of management's plans. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The management expects formal production will gradually resume after the Precautionary Measures in Mongolia are relaxed. Based on our current level of operations, the management believes its future cash flows from operating activities and existing balances of cash will be sufficient to meet our cash requirements for at least the next 12 months. Future operating activities are expected to be funded by loans from directors, major shareholders and related parties until we have ongoing sources of revenue.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently issued accounting standards

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which amends the scope and transition requirements of ASU 2016-13. Topic 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Topic 326 was originally to be effective for the Company beginning January 1, 2020, with early adoption permitted, on a modified retrospective approach. As a smaller reporting company, the effective date for the Company has been delayed until fiscal years beginning after December 15, 2022, in accordance with ASU 2019-10, although early adoption is still permitted. This standard is not expected to have a material impact to the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in this ASU simplify the accounting for income taxes, eliminate certain exceptions to the general principles in Topic 740 and clarify certain aspects of the current guidance to improve consistent application among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2022, though early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. This standard is not expected to have a material impact to the Company’s consolidated financial statements.

In August 2020, the FASB issued No. ASU 2020-06, ”Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)”. This ASU simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.

Other mainly represents temporary fund transfers from employees to support short-term operations.

Convertible bond agreements of HK$1.5 million

On November 26, 2019, a convertible bond agreement was signed including a HK$1.5 million (equivalent to $192,308) loan bearing interest of 5% per annum for six months. The convertible bond had a maturity date of May 25, 2020 with a conversion price of $3.60 per share. In addition, the Company recognized a beneficial conversion feature discount to the bond of $5,342 that was amortized over the period using the effective interest method. On May 11, 2020, the Company signed an extension letter with the bondholder to extend the maturity date from May 25, 2020 to September 30, 2020. Therefore, the Company recognized an additional beneficial conversion feature discount to the bond of $234 that was amortized over the period using the effective interest method. On September 11, 2020, the Company signed an extension letter with the bondholder to further extend the maturity date from September 30, 2020 to April 30, 2021. Therefore, the Company further recognized an additional beneficial conversion feature discount to the bond of $147 that is being amortized over the period using the effective interest method. For the year ended December 31, 2020, the Company amortized $3,340 of the discount and recognized non-cash interest of $9,634 to interest expenses. The unamortized debt discount on the convertible bond as of December 31, 2020 was $1,354.

For the nine months and three months ended September 30, 2021, the Company amortized $1,354 and $341 of the discount and recognized non-cash interest of $3,161 and $790 to interest expenses. For the nine months and three months ended September 30, 2020, the Company amortized $2,317 of the discount (three months ended September 30, 2020 was immaterial), and for the nine months and three months ended September 30, 2020 recognized non-cash interest of $7,210 and $2,424 to interest expenses. All the debt discount on the convertible bond has been amortized as of September 30, 2021. On April 30, 2021, the Company signed a supplementary agreement with the bondholder to further extend the maturity date from April 30, 2021 to May 20, 2021, change the interest rate from 5% to 8%, and revoke the convertible option. As a result, the HK$1.5m is reclassified to other loans. Please see note 6 for additional information.

Other convertible bond agreements

For the year ended December 31, 2020, four new convertible bond agreements were entered into between the Company, Arcus and third party investors. All of them matured during 2020 and were settled by issuing 92,275 common shares at a price stated in the respective agreements, representing loans of HK$2.6 million and interest expenses of HK$5,521, for a total of HK$2,605,521 (equivalent to $334,027) (see note 8). In addition, the Company recognized a beneficial conversion discount of $7,390, of which $695 was amortized as non-cash interest expense for the year ended December 31, 2020.

NOTE 5 – SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES

(a) Loan from a related person

As of September 30, 2021 and December 31, 2020, loan from a related person included HK$3 million (equivalent to $385,353 and $386,916, respectively) borrowed from the wife of one of the Company’s stockholders on May 21, 2018. The loan is unsecured, is guaranteed by three stockholders and carried interest at a monthly rate of 3.08% for the first month and a monthly rate of 1.08% for the rest of the term, repayable on May 20, 2019 and subsequently extended to May 20, 2020. The related party lender borrowed the funds that were loaned to Arcus Mining Holdings Limited (“Arcus”), a subsidiary of the Company. Arcus has guaranteed the repayment by the related party of the funds borrowed by the related party. On April 28, 2020, the repayment date was extended to May 20, 2021, and the interest changed to be at a monthly rate of 2.08% for the first month and a monthly rate of 1.08% for the rest of the term. As of the date of this report, no further agreements have been signed. The Company is negotiating the repayment schedule and/or renewal terms with the loan holder. Until such time as the negotiations result in more favorable terms for the Company, the loan is repayable on demand.

(b) Loan from a stockholder

As of September 30, 2021, amount due to a stockholder, Kwing Chun Chu, was HK$513,937 (equivalent to $66,016). The amount due is unsecured, carries interest at 5% per annum and is repayable on September 11, 2021. The amount is then extended from September 12, 2021 to December 31, 2022.

(c) Interest expense incurred to related persons

During the nine months ended September 30, 2021 and 2020, interest expense of HK$323,991 (equivalent to $41,617) and HK$322,500 (equivalent to $41,572), respectively, was incurred to related persons.

During the three months ended September 30, 2021 and 2020, interest expense of HK$121,320 (equivalent to $15,509) and HK$97,500 (equivalent to $12,583), respectively, was incurred to related persons.

(d) Amounts due to stockholders

As of September 30, 2021, amounts due to stockholders, Tak Leung Ho, Kwong Bun Mak, and Kwing Chun Chu, were $261,210, and as of December 31, 2020, amounts due to stockholders, Kwong Bun Mak, Xianqin Pan and Kwing Chun Chu, were $376,246. The stockholders advanced $68,832 of working capital to meet the financing requirements for the nine months ended September 30, 2021. Amounts due to stockholders are unsecured, had no collateral or guaranty, are interest-free and there are no fixed terms for repayment. The stockholders have agreed not to demand repayment within the next 12 months from September 30, 2021.

(e) Amounts due to directors

On December 10, 2020, Mr. Chi Kin Loo was appointed as a director of the Company. On August 27, 2021, Mr. Pan Xianqin was appointed as director of the Company. As of September 30, 2021, there was an amount due to these directors of $1,197,104. During the nine months ended September 30, 2021, the directors advanced $133,663 to the Company. The amount due is unsecured, had no collateral or guaranty, are interest-free and there are no fixed terms for repayment. The directors have agreed not to demand repayment within 12 months from September 30, 2021.

As of December 31, 2020, amount due to a director, Mr. Tak Shing Eddie Wong, of HK$604,500 (equivalent to $77,964) was unsecured, had no collateral or guaranty and was interest-free. The amount was fully repaid on March 3, 2021. Mr. Tak Shing Eddie Wong resigned as director on March 31, 2021.

NOTE 6 – OTHER LOANS

As of September 30, 2021 and December 31, 2020, a loan of HK$232,718 (equivalent to $29,893) and HK$217,133 (equivalent to $27,837), respectively, was outstanding from an unrelated party. The loan is unsecured, has no collateral or guaranty, carries interest at 10% per annum, and was repayable on June 23, 2021 until extended to December 23, 2021.

On April 30, 2020, at the maturity of the convertible bond of HK$1,500,000 (equivalent to $192,308) (see note 4), the Company signed a supplementary agreement that revoked the conversion option and renewed the loan to May 20, 2021. As a result, the convertible bond has been reclassified to other loans, and on May 21, 2021, the Company signed an amended loan agreement with the unrelated party. The loan is repayable on May 31, 2021, carries interest at 8% per annum and is guaranteed by a director of the Company. As of the date of this report, no further agreements have been signed. The Company is negotiating the repayment schedule and/or renewal terms with the loan holder. Until such time as the negotiations result in more favorable terms for the Company, the loan is repayable on demand.

As of September 30, 2021 and December 31, 2020, a loan of $160,175 and $147,326, respectively, was outstanding from an unrelated party. The loan is unsecured, has no collateral or guaranty, carries interest at 11.61% per annum and the indebtedness of $395,801 matures on December 31, 2029.

Note: During the three and nine months ended September 30, 2021 and 2020, the Company had warrants outstanding of 57,111, which under dilutive effect, could potentially dilute basic loss per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive due to the net losses.

NOTE 8 – CAPITAL STOCK

For the year ended December 31, 2020, there was a total of four new convertible bond agreements entered into between the Company, Arcus, and third party investors.

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).

NOTE 9 – WARRANT EQUITY

In 2019, the Company issued Second Subscription Package of up to $825,000, consisting of 330,000 common shares and 66,000 warrants exercisable at $3.00 to purchase common stock within three years from the respective issuance dates, to accredited subscribers.

The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the subscriptions. All of the Company’s outstanding warrants are considered to be indexed to the Company’s own stock and are therefore classified as equity under ASC 480. The warrants, in specified situations, provide for certain compensation remedies to a holder if the Company fails to timely deliver the shares underlying the warrants in accordance with the warrant terms.