UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT |
| For the fiscal year ended |
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________ | |
Commission File No. 001-34864 |
For the transition period from_________ to ___________
Commission file number 333-217451
TGS |
(Exact |
Nevada |
| N/A |
(State or |
| (I.R.S. Employer Identification |
Suite 1023, 10/F., Ocean Centre
5 Canton Rd., Tsim Sha Tsui
Kowloon, Hong Kong
(Address of principal executive offices) (zip code)
(852)2116-3863
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant tounder Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 x No ¨ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-K (ss.229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K. ¨ | ||||||
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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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging grown company,” in Rule 12b-2 of the Exchange Act. |
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
| Emerging Growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
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The aggregate market value of Common Stockthe voting and non-voting common equity held by non-affiliates of the Registrant on November 30, 2017 was zeroregistrant, based on a zeroupon the average bid and asked price of suchthe registrant’s common equity, as ofstock on June 28, 2019, the last business day of the registrant’s most recently completed thirdCompany’s second fiscal quarter.quarter, was $4,101,839.
As of March 20, 2020, the number of shares outstanding of the registrant’s common stock was 14,858,328. | |
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DOCUMENTS INCORPORATED BY REFERENCE
None.
FORWARD-LOOKING STATEMENTS This annual report on Form 10-K (the “Report”) and other reports (collectively the “Filings”) filed by the registrant from time to time with the Securities and Exchange Commission (the “SEC”) contain or may contain forward looking statements and information that are based upon beliefs of, and information currently available to, the registrant’s management as well as estimates and assumptions made by the registrant’s management. When used in the filings the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan” or the negative of these terms and similar expressions as they relate to the registrant or the registrant’s management identify forward looking statements. Such statements reflect the current view of the registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this Report entitled “Risk Factors”) relating to the registrant’s industry, the registrant’s operations and results of operations and any businesses that may be acquired by the registrant. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Although the registrant believes that the expectations reflected in the forward looking statements are reasonable, the registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the registrant’s financial statements and the related notes thereto included in this Report. In this Report, “we,” “our,” “us,” “TGS International Ltd.” or the “Company” sometimes refers collectively to TGS International Ltd. and its subsidiaries and affiliated companies. General Overview The Company was established on December 1, 2016 in Nevada, USA. On September 14, 2018, the Company and Arcus Mining Holdings Limited (“Arcus”) entered into a Share Exchange Agreement, dated September 14, 2018 (the “Share Exchange Agreement”), with 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, through its wholly owned subsidiaries, is engaged in the exploration, mining, processing and sale of fluorite in Mongolia. Arcus currently owns three fluorite projects through its subsidiaries. Its official mining licenses in Mongolia are shown below: Details of Three Fluorite Projects transferred to the Company by Arcus
According to the staged exploration results, there are abundant resources as well as a large potential to expand the resource base of the mines, laying a solid foundation for the sustainable development of the Company.
Arcus strives to create more value through efficiency in mining. The initial expected annual production capacity of fluorite (“CaF2”) for 2020 and 2021 is described below:
Arcus intends to start producing 97% Acid Grade powder products and further increase the production of the metallurgical grade products in 2020.
In summary, the Company intends to make full use of Mongolia’s fluorite resource advantages and market under the guidance of our experienced management team.
The founders and the management of Arcus have extensive experience in the mining industry in Africa, China, Russia and Mongolia. Their industrial experience includes exploration, mining and mineral investment. With extensive experience in the manufacture and sale of fluorite and related products, Arcus believes the Company will be able to produce the raw material needed for various high standard industrial products, including the manufacture of acid grade fluorite, metallurgical grade fluorite and more. To meet ever-changing demands from customers, Arcus established a management team comprised of several experienced persons in the industry, as well as financial and marketing experts from international and local markets. The mines use advanced production equipment to produce high-quality products for the market. In 2014, the Mongolian Parliament waived several restrictions on issuing new minerals exploration licenses and introduced a series of new regulations to encourage foreign investments in the Mongolian mining sector. Arcus is well positioned to take advantage of new opportunities in this promising business environment.
Arcus Company Structure Arcus indirectly holds three fluorite projects in Mongolia through its wholly owned subsidiaries incorporated in Hong Kong, namely Best Metro (Hong Kong) Limited, China Aim (Hong Kong) Limited, which in turn wholly own Mongolian based fluorite mining companies Khan Shashir LLC (“Khan Shashir”), Shek Hung Gold LLC (“Shek Hung”) respectively. Arcus Hong Kong Limited wholly own the PRC based Best Metro Import & Export Trading (Inner Mongolia) Limited as a trading arm. The demand for metallurgical grade fluorite in China and other Asian countries currently exceeds supply, and current market conditions are expected to continue for the foreseeable future, creating excellent opportunities for the Company. Inherent uncertainties in the mining industry as well as the changing legal and political environment in Mongolia potentially bring additional business risks, as detailed under “Risk Factors” below. Shek Hung currently owns a project called Altan Ovoo, while Khan Shashir owns the mines Oosmonskogo 1 and Oosmonskogo 2. Mining Licenses The three fluorite projects in Mongolia are Altan Ovoo (“Mine A”), Oosmonskogo 1 (“Mine B”) and Oosmonskogo 2 (“Mine C”). The three projects have all been issued official mining licenses. The mining licenses allow the right to conduct mining activities throughout the license areas and to construct structures within the license areas that are related to its mining activities. Mine A is located in Uulbayan soum, Sukhbaatar province, 530 kilometers (“km”) from Ulaanbaatar, the capital of Mongolia. Mine A’s mining license, reference number MV-009918, is valid until December 29, 2034. Mine A covers an area of 39.35 hectares (97.24 acres). Mine B is located in the Bayan-Ovoo soum, Khentii province, 440 km from Ulaanbaatar. Mine B’s license, reference number MV-016819, is valid until April 28, 2041. Mine B covers an area of 98.37 hectares (243.08 acres). Mine C is adjacent to Mine B. Mine C’s license, reference number MV-017305, is valid until April 23, 2043. Mine C covers an area of 300.96 hectares (743.69 acres).
The location map of Mines A, B and C are shown below: Resources and Reserves After years of exploration, a significant potential for high grade fluorite resources for Mine A and Mine B has been positively demonstrated. The historic exploration of Mine A and Mine B can be divided into three phrases:
Arcus’ own geological team will continue to search for other resources through continued exploration in the areas surrounding existing deposits. Mine A Phase 1: Investigation conducted by former Soviet Union government agencies in 1980’s The former Soviet Union politically governed Mongolia between 1925 and 1991. Its governmental agencies performed the first systematic exploration on Mine A between 1985 and 1987. Only one vein was located, east-trending with a strike length of 600 to 700 meters. The major work performed included drilling and digging six trenches three to four meters deep along the vein. Phase 2: Investigation conducted by an independent surveyor in 2012 Since the date of the report by the Soviet Union governmental agencies, 27 new holes were drilled (2,916 m) underneath the trenches excavated in the 1980s to investigate the resource in Mine A. Most holes were drilled vertically or at an angle of 60° to the north, as the vein dips approximately 45° to the south. Phase 3: Investigation conducted by SRK Consulting Considering the advice from the independent explorer on the possibility of re-drilling some core holes to increase output of Mine A and Mine B, Arcus formally engaged SRK Consulting to perform a formal survey on both mines. In late 2014, a specialist from SRK Consulting visited both Mine A and Mine B. SRK Consulting collected 43 extra drill core samples in Mine A during its visit. The finding by SRK Consulting is at a better grade with an average CaF2 of 34%.
Mine B Phase 1: Investigation conducted by former Soviet Union government agencies in 1930s to 1950s Former Soviet Union governmental agencies performed the first systemic exploration on Mine B in 1937 and continued until approximately 1950. The main vein located was north-striking. It was traced by trenching and defined to be at least 400 meters in length in the 1940’s. Major work performed in Phase 1 included:
Phase 2: Investigation conducted by an independent surveyor in 2012 The Company has drilled 9 vertical core holes with an aggregate length of 877 meters in 2011 to update information on Mine B. Based on the samples obtained from the 9 vertical core holes drilled and assays of 4 drill hole cores in the Soviet Union period. Phase 3: Investigation conducted by SRK Consulting During the site visit to Mine B, the specialist consultant from SRK Consulting observed that most of the fluorite ores in Mine B have a grade of more than 90% CaF2 and could be used for ornamental and lapidary purposes. Based on the samples taken by SRK Consulting, the average grade of CaF2 is 67%. Mine C No exploration or resource estimate has been done on Mine C, but initial surface investigations suggest that the resource of Mine B may extend onto the license of Mine C. Future development The Company is planning to continue with a second round of exploration in Mine A and Mine B and start a first round of exploration in Mine C. The primary objective would be to gain a better understanding of the geological structure to assist in mine planning and to upgrade the identified inferred resource to the indicated resource category. According to SRK Consulting, the drill holes in Mine A do not provide consistent coverage of all areas. Therefore, another round of exploration would allow a more detailed understanding of the resource allocation and help upgrade much of the inferred resource into the indicated resource category. Full feasibility studies for Mine A and Mine B will be prepared once it’s the right time. These feasibility studies will be conducted by external specialist consultants together with Arcus’ experienced team. Mine C is adjacent to Mine B, and given the large cover area of Mine C, we are optimistic regarding the resources of Mine C. Based on preliminary estimates by the geologists, it is possible that the resource of Mine C could be greater than that of Mine B. Conducting a thorough exploration of the resource will allow better planning on mining Mine C and ensure sustainability of the Company’s growth. Operations Both Mine A and Mine B were in the exploration stage in 2019. Revenue generated during the year were $101,222 by Mine A and $181,635 by Mine B. We expected to further extend the operation of Mine A and Mine B in the second quarter of 2020. There are two types of products available from Mine B, metallurgical and acid grade fluorite. Metallurgical grade fluorite is sold mainly to steel manufacturers for use as flux in steel production. Acid grade fluorite which is used to manufacture hydrofluoric acid, a feedstock for many different chemical processes. At the moment, there is only metallurgical grade fluorite available from Mine A. The Company ran trial productions at Mine A and Mine B in 2019. Below is the summary of revenue for 2019 from the trial productions.
Workflow of Operations The operation at Mine A and Mine B of the Company involves several steps as shown below: Mine Preparation Preparing a mine involves investigation, exploration, evaluation and the construction of necessary infrastructures and utilities facilities, among other tasks. Both Mine A and Mine B are now equipped with the necessary facilities, but the infrastructure in Mine B is more comprehensive. The basic facilities information of Mine A and Mine B is shown below:
Water Resources It is probable that there is sufficient water from drilled wells for mining and processing operations in Mine A and Mine B. Several such wells have been completed at both Mine A and Mine B. All the water will be recycled, but in the dry climate, evaporation is high. Electricity Resources Mine B is currently connected to the Bayan-Ovoo soum electrical power grid. Power generation in Mine A is currently supported by a set of wind turbines. Both Mine A and Mine B have sufficient power to meet daily usage, and each has two sets of contingent diesel generators. Infrastructures At Mine B, the construction of offices, living quarters and explosive stores has been completed. Of the four shafts built in Mine B, one shaft and the other shaft has been excavated with a 150 meter long and 180 meter long development drive in the fluorite ore respectively. There was no vertical development in 2019. Construction on excavating an underground tunnel to connect the four shafts is completed in 2019. Mining activities are halted for the winter break, which takes place between January and March every year. Since mining activities are conducted underground, which is more dependent on the weather condition, the winter break for the mining activities is one month longer than the winter break for the production line. We have adopted open-pit mining at Mine A which is different from Mine B. Although mining activities are subject to weather, open-pit mining is more flexible so we decided to suspend the mining activities at Mine A in mid-February instead of late November 2019 as we did with Mine B. Production of both Mine A and Mine B is to be continued after the winter break and is expected to commence in the second quarter of 2020. Mine A is planned as an open pit mine because the mineralization outcrops on the surface are relatively easy to begin mining. Four temporary offices and storage containers have been set up at Mine A. Since the resource in Mine A is large, management plans to develop Mine A in stages. Mining of the open pit has been commenced in 2019, while the deeper ores will be subjected to further exploration. Mine A is originally planned to produce fluorite powder. However, in order to cope with our business development, the management decided to put the construction of refinery at Mine A on hold for now. Once it is the suitable time for further expanding our business, the management may resume the plan of the construction of refinery at Mine A.
Mining A strategic open pit exploration at Mine A has been started in 2019. The refinery operations described below apply only to Mine B but can serve as a general reference regarding the future production of Mine A. Starting from year 2019, we have outsourced the mining activities to subcontractors. Refining The Company will not outsource its core fluorite processing to third parties but rather work together with the strategic partners. Major fluorite processing of metallurgical grade fluorite includes gravity separation, which refines the fluorite granules, followed by sorting the granules by sizes in accordance with a customer’s needs. The major machines employed in Mine B are the shakers and the jiggers. A jigger is a vertical container where a pulsing action divides ores into different layers according to their densities. When sorted by a shaker, ore is placed on a horizontal water surface, and the shaker applies longitudinal forces. As ores of different densities respond to longitudinal forces, they are sorted accordingly. Both shakers and jiggers are common tools in conducting gravity selection, but jiggers mainly divide coarse ores into different size groups (30 mm - 80 mm) and shakers mainly refine smaller ores (3 mm – 10 mm or 1 mm – 3 mm). Sales and Marketing From 2015 throughout 2019, the mines have still been in exploration stage so the Company decided to sell metallurgical grade fluorite within the territory of Mongolia to avoid incurring cross-border freight and transportation. The Company would like to further expand its production in the second quarter of 2020. Some of the ultimate target customers include foreign steel manufacturers. Customers The Company intends to develop a pool of customers to reduce its distribution risk. The Company’s targeted customer base is set forth below:
The Market for Fluorite in Mongolia Fluorite and its Applications Fluorite, commercially termed as fluorspar, is a transparent halide mineral of various colors, composed primarily of calcium fluoride (CaF2). Fluorite is the dominant source for the chemical element fluorine. Due to its unique chemical properties, fluorine is largely irreplaceable in its use. The major applications of fluorite and the corresponding requirement of content percentage are summarized below: Most of the world demand for fluorite is for acid-grade fluorite, which is used to manufacture hydrofluoric acid, a feedstock for many different chemical processes. The second greatest demand is for metallurgical grade fluorite, used as flux in steel and aluminum production. A small portion is produced as ceramic grade fluorite for the manufacture of ceramics and enamels due to the high content percentage requirement.
Competition There are a number of listed companies that are primarily focused on mining fluorite. We have presented them in the table set forth below.
Patents, Trademarks, Licenses, Franchises, Concessions and Royalty Agreements Licenses The three projects owned by the Company all hold official mining licenses from the Mineral Resources and Petroleum Authority of Mongolia. The mining licenses allow the holder the right to conduct mining activities throughout the license areas and to construct structures within the license areas that are related to its mining activities. Mine A is located in Uulbayan soum, Sukhbaatar province, 530 kilometers from Ulaanbaatar, the capital of Mongolia. Mine A’s mining license, reference number MV-009918, is valid until December 29, 2034. Mine A covers an area of 39.35 hectares (97.24 acres). Mine B is located in the Bayan-Ovoo soum, Khentii province, 440 kilometers from Ulaanbaatar. Mine B’s license, reference number MV-016819, is valid until April 28, 2041. Mine B covers an area of 98.37 hectares (243.08 acres). Mine C is adjacent to Mine B. Mine C’s license, reference number MV-017305, is valid until April 23, 2043. Mine C covers an area of 300.96 hectares (743.69 acres). Government Approval and Regulation of the Company’s Principal Products or Services The Mineral Law of Mongolia governs our operations. The Company endeavors to ensure the safe and lawful operation of its facilities in its operations and the distribution of its products and believes it is in compliance in all material respects with applicable laws and regulations. Employees The Company currently has approximately 100 employees. Principal Executive Offices Our principal executive office is located at Suite 1023, 10/F., Ocean Centre, 5 Canton Rd., Tsim Sha Tsui, Kowloon, Hong Kong. Risks Related to our Business Our limited operating history makes it difficult to evaluate our future prospects and results of operations. The Company is in the process of developing its mines and bringing its fluorite products to the market. Accordingly, we have a limited operating history. You should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving geographical areas such as Mongolia. Some of these risks and uncertainties relate to our ability to:
If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations. Our operating results may fluctuate as a result of a number of factors, many outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly, year-to-date and annual expenses as a percentage of our revenues may differ significantly from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause our stock price to fall. Each of the risk factors listed in this section and the following factors may affect our operating results:
Because our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating results. Our business operations may be adversely affected by present or future governmental regulations or political changes. Mongolia, the country where the Company’s mines are situated, is currently undergoing rapid development. Our operations may be affected by changes to Mongolian regulation of the mining sector or changing levels of political involvement in mining. The Mongolian Parliament passed an amendment to the Minerals Law on July 1, 2014 to ease certain restrictions on the mining industry and also to give some incentives to foreign mining companies and investors. These changes have clarified many areas of the law and settled issues around government interests in mines of national or strategic importance. These changes have brought potential benefits to the Company. Visits paid by Chinese president Xi Jinping to Mongolia have indicated Chinese support for strengthening cooperation between Mongolian and Chinese entities in the future. Corresponding lobbying by the Chinese government may help ensure that the Mongolian government respects the rights of foreign mining companies investing in Mongolia. Our business operations may be adversely affected by the recent COVID-19 Due to the current outbreak of novel coronavirus that was first reported from Wuhan, China, on December 31, 2019 and since then, the government of Mongolia officially announced on January 31, 2020 that it will close all ports of entry from and into China with immediate effect until March 2, 2020. However, The Embassy of the PRC in Mongolia further announced on February 19, 2020 that all ports of entry from and into China will be closed until March 30, 2020. We expect that such temporary closures might result in a delay in the resumption of our exploratory work and production in the newly set up refinery at Mine A and Mine B respectively. However, we have started the preparation work for arranging working visas for the Chinese workers in advance and will hire more Mongolian workers in case all ports of entry from and into China are not open before we resume our work at both Mine A and Mine B so as to minimize the effect of the delay. Taking the recent worldwide outbreak and development of the COVID-19 into account, the management worried the development of 2020 but we have been strictly prudent towards the epidemic. We will keep tracking the measures of different governments, especially the Chinese and Mongolian Government, are going to implement so to determine what the Company will do in order to minimize the negative effect of the COVID-19 on our business. The management will strengthen all necessary measures and make special arrangement so to protect our workers from the COVID-19 after the winter break as well as sticking to our expected performance in 2020. Deviations between inferred resources and actual mineable resources may have an adverse effect on the Company’s results. Actual mine output usually deviates to a certain extent when compared to the inferred resource, as every estimation model is based on certain assumptions made in the calculation. In order to enhance estimation accuracy and maximize output quantity and quality, the Company engaged SRK Consulting, a leading mining consultant company, to conduct a detailed resource and reserve assessment. However, there can be no assurance as to the accuracy of SRK Consulting’s estimate. Adverse weather conditions may limit the periods during which the Company may conduct its operations or may cause a disruption in its utilities or the delivery of its products to its customers. Due to the severe weather in Mongolia during the winter, we have scheduled a regular winter break between January and March for mining activities and processing every year. However, it is possible that severe weather conditions may occur outside their normal range in some years, which would hinder the Company’s mining and production operations and require the extension of the scheduled winter break. Severe weather may also cause a disruption in the Company’s essential utilities. Although the production lines will be roofed to minimize the impact of severe weather and the Company will maintain a backstock of ore to reduce the chances of production suspension from interruptions in mining, there can be no assurance that these measures will be adequate to compensate for the effects of especially severe weather. As a further precaution, we will also maintain a sufficient inventory level in our Baganuur warehouse to secure a continuous supply to customers during the winter, but there can be no assurance that our rail and trucking transportation methods will not be disrupted by weather events. We may suffer losses resulting from industry-related accidents. Despite the safety precautions taken by the Company in its mining operations, there can be no assurance that we will not suffer losses resulting from industry-related accidents. To minimize the occurrence of industrial incidents, we regularly monitor mine site construction in order to identify and implement practical protective measures.
We may not be successful in implementing important strategic initiatives, which may have a material adverse impact on our business and financial results. There is no assurance that we will be able to implement important strategic initiatives in accordance with our expectations, which may result in a material adverse impact on our business and financial results. These strategic initiatives are designed to drive long-term stockholder value and improve our results of operations. We face significant competition, and if we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected. Increased competition could reduce our profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages, such as significantly greater financial, marketing or other resources, and may successfully mimic and adopt our business models. We cannot assure you that we will be able to successfully compete against new or existing competitors. Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and prospects. We intend to expand our operations and plan to expand as rapidly as possible. The continued growth of our business will result in, substantial demand on our management, operational and other resources. In particular, the management of our growth will require, among other things:
As we continue this effort, we may incur substantial costs and expend substantial resources. We may not be able to manage our current or future operations effectively and efficiently or compete effectively in new markets we enter. If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected. Attracting skilled personnel are essential to growing our business. We face competition for attracting skilled personnel. If we fail to attract and retain qualified personnel to meet current and future needs, this could slow our ability to grow our business, which could result in a decrease in market share. We may need additional capital and we may not be able to obtain it at acceptable terms, or at all, which could adversely affect our liquidity and financial position. We may need additional cash resources due to changed business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
We do not have a majority of independent directors serving on our board of directors, which could present the potential for conflicts of interest. We do not have a majority of independent directors serving on our board of directors. In the absence of a majority of independent directors, our executive officers could establish policies and enter into transactions without independent review and approval thereof. This could present the potential for a conflict of interest between us and our stockholders, generally, and the controlling officers, stockholders or directors. However, we are going to invite different professionals as our independent directors gradually. An independent director was added in April 2019.
We have limited insurance coverage. The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. We have determined that the risks of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and office furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption, litigation or property insurance coverage for our operations in China except for insurance on some company owned vehicles. Any uninsured occurrence of loss or damage to property, or litigation or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results. Similarly, although it has been 80 years since the introduction of insurance in Mongolia, the penetration of insurance is still low and its development is still immature which the insurance industry is still yet to be up to international standard. As a result, we do not have any business liability, disruption, litigation or property insurance coverage for our operations in Mongolia except for insurance on some company owned vehicles. Any uninsured occurrence of loss or damage to property, or litigation or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. As a public company, we have significant additional requirements for enhanced financial reporting and internal controls. We are required to document and test our internal control procedures in order to satisfy the requirements of SOX 404, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock. Lack of experienced officers of publicly-traded companies may hinder our ability to comply with Sarbanes-Oxley Act. It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s internal controls requirements, we may not be able to obtain the independent auditor certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain. We incur increased costs as a result of being a public company. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC, has required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we incur additional costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate that there is a high probability of additional costs we may incur or the timing of such costs.
Risks Relating to Our Securities There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities. There is currently only a limited public market for our common stock, which is listed on the Over-the-Counter (“OTC”) Pink Sheets, and there can be no assurance that a trading market will develop further or be maintained in the future. The market price of our common stock may be volatile. The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general, and the market for OTC Pink Sheet quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. Our common stock may be considered a “penny stock” and may be difficult to sell. The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and, therefore, it may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares. The market for penny stocks has experienced numerous frauds and abuses, which could adversely impact investors in our stock. OTC Pink Sheet securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTC Pink Sheet reporting requirements are less stringent than those of the stock exchanges or NASDAQ. Patterns of fraud and abuse include:
Our management is aware of the abuses that have occurred historically in the penny stock market. We have not paid dividends in the past and do not expect to pay dividends in the foreseeable future and any return on investment may be limited to the value of our stock. We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be limited to the value of our stock. We plan to retain any future earnings to finance growth. Item 1B. Unresolved Staff Comments None. The Company’s corporate headquarters is located at Suite 1023, 10/F., Ocean Centre, 5 Canton Rd., Tsim Sha Tsui, Kowloon, Hong Kong. We believe that our existing mining and processing facilities in Mongolia, which are described above, are well maintained and in good operating condition, and will be sufficient for our production goals for the next year. There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings. Item 4. Mine and Safety Disclosure Not applicable.
Market Information Our common stock is currently traded on the OTC Pink Sheets under the trading symbol “TGSI”. There is a limited trading market in our securities. Our transfer agent is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY, 11598, telephone: (212) 828-8436, fax: (646) 536-3179. Holders As of March 20, 2020, there were 35 holders of record of our common stock and 14,858,328 shares of our common stock were issued and outstanding. Dividends We have not declared or paid any cash dividends since inception. We intend to retain future earnings, if any, for use in the operation and expansion of our business and do not intend to pay any cash dividends in the foreseeable future. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities In 2019, the Company issued a subscription package (the “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 shares within three years from the respective issuance dates, to accredited investors. The Company also issued the placement agent 33,000 common shares at a price of $3.70 per common share for services rendered. In 2019, there were four convertible bond agreements entered into between the Company, Arcus and third party investors. Three of the bonds matured in 2019 and were settled by issuing 141,782 common shares at a price stated in the respective agreements, representing loans of HK$4 million and interest expenses of HK$8,333, for a total of HK$4,008,333 (equivalent to US$513,888). In November 2019, one convertible bond agreement was signed including a HK$1.5 million (equivalent to US$192,308) loan bearing interest of 5% per annum for six months. The convertible bond will mature on May 25, 2020 with a conversion price of $3.60 per share. The shares issued in connection with the transactions were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant Section 4(a)(2) of the Securities Act and Regulation S promulgated thereunder. Equity Compensation Plans We do not have in effect any compensation plans under which our equity securities are authorized for issuance and we do not have any outstanding stock options. Purchases of Equity Securities by the Company We did not purchase any of our shares of common stock or other securities during the fiscal year ended December 31, 2019. Item 6. Selected Financial Data As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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
The following discussion should be read in conjunction with our
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 only production at Mine B started in 2018 and has been ongoing since that time. In 2019, there were a few unpredictable events, including delay in exploratory work at Mine B due to the tightened working visa application procedure by the Mongolian Government, delay in explosives delivery due to the temporary suspension of the only two explosive factories in Mongolia, which have brought about significant postponement of our exploratory work. Therefore, the production forecast for 2019 was not reached. Nonetheless, the management has devoted all their effort to minimize any impact on the Company. For instance, workers were instructed to work on the foundation of the refinery and other on-site infrastructures until the explosives arrived at our mine. We have suspended the work at Mine B since November 25, 2019 due to the annual winter break and expect to resume our work in early April 2020, depending on the weather and overall situation. All workers working at Mine B were sent home the same day. Right before the winter break, there were 2,221 tons of output from Mine B in the last quarter of 2019. Although open pit mining is adopted at Mine A, as the weather has become more frigid, we have put the exploratory work at Mine A on hold since mid-February 2020 to make sure the workers are safe and sound. The output in the last quarter of 2019 is 4,418 tons. We would like to take advantage of adopting open pit mining at Mine A so as to resume the exploratory work earlier once the winter break comes to an end and boost the production, presumably in early April 2020. The construction of the refinery at Mine B was completed in late November 2019. However, the power supply upgrade at Mine B is still in progress and we hope to get it done in early April 2020 to put the refinery into use as early as possible. This is a strategic cooperation with Yantai Fulin Mining Machinery Co., Ltd (“Fulin”) which provided construction funds in advance to the construction and installation of the refinery. We expect that the production and the sales would have a certain increase in 2020 as well as the profits. During 2019, we have upgraded the infrastructures at Mine B as well as building the refinery at Mine B. The cost, therefore, was unavoidably much larger than the last year’s. With the experienced engineers and construction teams provided by Fulin, our strategic partner, we could get the construction of the refinery completed in merely six months. The refinery is basically ready. Once we get the power supply upgrade done in April 2020, the entire refinery could be put into trial in late April or early May 2020. As what we have known that the operation of the refinery and the production line is straightforward and simple with approximately 3 steps – breaking apart and grinding, flotation separation, and drying out the acid grade fluorite, the end product. We expect to increase manpower to accelerate the exploration at Mine B by the end of the second quarter of 2020 to escalate production. The fluorite with higher grading could be sold to the market directly while the fluorite with lower grading could be used as the raw materials for producing acid grade fluorite. The management are confident in the overall development and sales of the Company. Mine C is still intact and we have not had any development there because we would like to prioritize and focus the use of our resources for the development of Mine A and Mine B. Once we have sufficient resources, we would start exploring and developing Mine C, for example, getting SRK Consulting China Limited for resource exploration as the first step, to maximize the value of the Company.
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 2019. On August 30 2019, a convertible bond agreement was entered into between the Company, Arcus and a third party investor including a HK$1 million (equivalent to US$128,205) loan bearing interest of 2.5% per annum for one month. The convertible bond matured and was converted into 34,722 shares of the Company’s common stock on September 29, 2019 with a conversion price of $3.70 per share.
On November 4, 2019, a convertible bond agreement was entered into between the Company, Arcus and a third party investor including a HK$1 million (equivalent to US$128,205) loan bearing interest of 2.5% per annum for one month. The
Subsequent to the year ended December 31, 2019, there were four convertible bond agreements entered into between the Company, Arcus and third party investors. On January 2, 2020 a convertible bond agreement was signed including a HK$1.5 million (equivalent to US$192,308) loan bearing interest of 2.5% per annum for one month. The convertible bond matured and was converted into 53,236 shares of the Company’s common stock on February On January 14, 2020, a convertible bond agreement was signed including a HK$400,000 (equivalent to US$51,282) loan bearing interest of 2.5% per annum for one month. The convertible bond matured and was converted into 14,196 shares of the Company’s common stock on February 13, 2020 with a conversion price of $3.62 per share. On February 24, 2020, a convertible bond agreement was signed including a HK$200,000 (equivalent to US$25,641) loan bearing interest of 2.5% per annum for one month. The convertible bond will mature on March 25, 2020 with a conversion price of $3.62 per share. On February 29, 2020, a convertible bond agreement was signed including a HK$500,000 (equivalent to US$64,103) loan bearing interest of 2.5% per annum for one month. The convertible bond will mature on March 30, 2020 with a conversion price of $3.62 per share. Apart from the exploration and infrastructure work at Mine A and Mine B, 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, 2019 and December 31, 2018 Revenue Revenue consisted mainly of fluorspar products generated from production at our mines. In 2019, we had total revenue of $282,857, as compared to revenue of $274,238 during 2018. The percentage of such increase was approximately 3% as a result of the increase in average price of metallurgical fluorite. Commission income Commission income was recognized when the Company purchased minerals from suppliers and received payments from the customers on selling minerals. The Company has been determined as an agent for the ultimate customers in these transactions and the revenue is recorded net of the related fulfillment costs as commission income. The Company had commission income of $393,566 in 2018 and Cost of goods sold Cost of goods sold included raw material costs. The total cost of goods sold decreased from $10,544 in 2018 to nil in 2019. The significant decrease was mainly due to no raw material costs in 2019. Exploration cost Exploration costs are expensed as incurred and
Year Ended February 28, 2018 Year Ended February 28, 2017 Cumulative from December 1, 2016 (Inception) to February 28, 2018 Revenues Cost of Goods Sold Operating Expenses Income Tax Expense NIL Nil NIL Net Loss
Year Ended June 30, 2016 Year Ended June 30, 2015 Cumulative from July 19, 2010 (Inception) to June 30, 2016 Depreciation $ 2,038 nil 2,038 Filing Fees $ 20,293 nil 20,293 General and administrative expenses $ 8,989 $ 3,594 12,583 Management fees $ 8,588 $ nil 8,588 Professional fees $ 52,599 $ 11,733 64,332 Total Expenses $ 92,507 $ 15,327 107,834
Administrative expenses
Administrative expenses increased significantly from $1,342,830 in 2018 to $1,645,900 in 2019. The percentage of such increment was approximately 23% and Other income Other income increased significantly from $34,083 in 2018 to $195,576 in 2019. The percentage of such increment was approximately 474% as a result of a waiver of consultancy fee in 2019 and Interest expenses Interest expenses mainly included other loan interest, related party loan interest and bond interest arising from convertible bonds. Interest expenses decreased from $83,548 in 2018 to $76,824 in 2019. The percentage of such reduction was approximately 8% as a result of the repayment of related party loans of HK$3 million (equivalent to US$382,945), in which HK$2 million (equivalent to US$255,297) was settled by Net loss As a result of the factors described above, we had a net loss of $2,115,716 for the year ended
Liquidity and Capital Resources
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, 2019, we had $106,850 in cash and cash equivalents, compared Net cash used Our net cash used in operating activities increased to $1,228,886 in 2019 from $888,079 in 2018. Net cash used in operating activities for the year ended Net cash Our net cash used in investing activities increased to $976,818 in 2019 from $38,379 in 2018. This was
Net cash provided by financing activities Our net cash provided by financing activities increased to $2,216,864 in 2019 from $989,312 in 2018. This was mainly the result of advances from stockholders and directors, proceed from unrelated party loan, issuance of common stock and convertible bonds in 2019.
We
Off-Balance Sheet Arrangements
We
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. Going Concern The Company incurred an operating loss of $2,115,716 for the year ended December 31, 2019, and as of that date, the Company’s current liabilities exceeded its current assets by $1,555,450. Notwithstanding the operating loss incurred for the year ended December 31, 2019 and the net current liabilities as of December 31, 2019, the accompanying consolidated financial statements have been
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of TGS International Ltd.
The accompanying consolidated financial statements have been prepared assuming
Basis for Opinion
These consolidated financial statements are the responsibility of the
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moore Stephens CPA Limited Certified Public Accountants We have served as the Company’s auditor since 2015. Hong Kong March 20, 2020
TGS International Ltd. Consolidated Statements of Financial Position Stated in US dollars As at February 28, 2018 February 28, 2017 ASSETS Current Cash Prepaid expenses Trade receivables Long-term Equipment & fixtures 7,880 Total Assets 18,539 LIABILITIES Current Trade and other payables Due to related parties (Note 4) Total Liabilities STOCKHOLDERS' (DEFICIENCY) EQUITY Capital Stock Authorized 200,000,000 common stock, voting, par value $0.0001 each 100,000,000 preferred stock, non-voting, par value $0.0001 each Issued 13,530,000 common stock (Note 5) Additional paid in capital (Note 5) Deficit (95,319 Accumulated other comprehensive income (loss) (255 ) Total Stockholders' (Deficiency) Equity (61,127 Total Liabilities and Stockholders' Equity (Deficiency) 18,539
The accompanying notes are an integral part of these consolidated financial
TGS International Ltd. Consolidated Statements of Loss and Comprehensive Loss Stated in US dollars Year ended February 28, Period from December 1, 2016 (inception) to February 28, 2018 2017 Revenue Cost of goods sold Gross profit Expenses Depreciation 2,038 Filing fees General & administration Management fee Professional fees 92,507 Net loss (80,992 Other comprehensive income (loss) Foreign currency adjustment (3 ) Comprehensive loss (80,995 Basic and diluted loss per common stock Weighted average number of common stock outstanding The accompanying notes are an integral part of these consolidated financial
TGS International Ltd. Consolidated Statements of Changes in Equity (Deficit) Stated in US dollars Common stock Additional paid in Accumulated other comprehensive Stocks Amount capital income (Loss) Deficit Total Balance, December 1, 2016 (inception) Common stock issued Shareholder contribution on acquisition Net loss for the period Other comprehensive loss for the period Balance, February 28, 2017 Net loss for the year (80,992 (80,992 Other comprehensive income for the year ) ) Balance, February 28, 2018 )
The accompanying notes are an integral part of these consolidated financial
TGS International Ltd. Consolidated Statements of Cash Flows Stated in US dollars Year ended February 28, Period from December 1, 2016 (inception) to February 28, 2018 2017 Operating activities Net loss for the period (80,992 Item not affecting cash: Depreciation 2,038 Changes in non-cash working capital: Trade receivables Prepaid expenses Trade and other payables Due to related parties Net cash used in operating activities Financing activities Common stock issued Net cash provided by financing activities Investing activities Acquisition Net cash used in investing activities Effect of exchange rate changes on cash Net cash increase (decrease) for period Cash, beginning of the period Cash, end of the period The accompanying notes are an integral part of these consolidated financial
NOTE 1
TGS International Ltd. (“TGS” Reverse merger On September 14, 2018, the Company and Arcus entered into a Share Exchange Agreement, dated September 14, 2018 with 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. The merger closed on September 14, 2018 and resulted in the Immediately prior to the Share Exchange, 6,500,000 shares of our outstanding common stock were cancelled and retired. A further 30,000 shares were cancelled after the Share Exchange. As a result of the transactions described above, the Company became the record and beneficial owner of 100% of the share capital of Arcus and therefore owns 100% of the share capital of its subsidiaries. As a result of the Share Exchange, the cancellation of 6,530,000 shares and the issuance of 7,000,000 shares, the Company had 14,000,000 shares of common stock issued and outstanding on September 14, 2018. The transaction is accounted for as a “reverse acquisition”, with Arcus being treated as the accounting acquirer for financial reporting purposes. The historical consolidated financial statements include the operations of the accounting acquirer and its subsidiaries for all periods presented. Going Concern The Company incurred an operating loss of $2,115,716 for the year ended December 31, 2019, and as of that date, the Company’s current liabilities exceeded its current assets by $1,555,450. Notwithstanding the operating loss incurred for the year ended December 31, 2019 and the net current liabilities as of December 31, 2019, 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 party loans and upon their experience and their assessment of the Company’s projected performance, production ability and product market. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation
These consolidated financial statements include the accounts of the Company, TGS, and all of the wholly owned subsidiaries of TGS. All intercompany balances have been Use of estimates in the
The preparation of consolidated financial statements in
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TGS International Ltd. | Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Cash is measured using level 1 inputs.
AssetsConcentration and Liabilities that are measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The Corporation’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The fair value of financial instruments consisting of cash, trade receivables, trade and other payables, and due to related parties were estimated to approximate their carrying values based on the short-term maturity of these instruments.
Riskscredit risks
Financial instruments that potentially subject the CorporationCompany to significant concentrations of credit risk consist principallyprimarily of cash and trade receivables.cash equivalents.
ManagementAll of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The Company has not experienced any losses on cash and cash equivalents to date. The Company does not believe the Corporation is exposedrequire collateral or other securities to significant credit risk. Management, as well, does not believe the Corporation is exposed to significant interest rate risks during the periods presented in these consolidated financial statements as the Corporation does not hold any interest-bearing financial instruments.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Fair Value Measurements
The Corporation follows FASB ASC 820, Fair Value Measurements and Disclosures, for allsupport financial instruments and non-financial instruments accounted for at fair value on a recurring basis. This accounting standard establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchythat are subject to be used to classify the source of information used in fair value measurement and expands disclosures about fair value measurements required under other accounting pronouncements. It does not change existing guidance as to whether or not an instrument is carried at fair value. The Corporation defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Corporation considers the principal or most advantageous market in which the Corporation would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
The Corporation has adopted FASB ASC 825, Financial Instruments, which allows companiesCompany operates principally in the People’s Republic of China (“PRC”) (including Hong Kong) and Mongolia and grants credit to chooseits customers in these geographic regions. Although the PRC is economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Company’s operations.
As of December 31, 2019 and 2018, the Company had credit risk exposure of uninsured cash and deposits with maturities of less than one year in banks of $96,495 and $116,744, respectively.
The net sales to measure eligiblecustomers representing at least 10% of net total sales are as follows:
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| Year ended December 31, 2019 |
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| Amount |
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| % |
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Customer A |
| $ | 40,907 |
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| 15 |
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Customer B |
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| 60,314 |
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| 21 |
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Customer C |
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| 181,636 |
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|
| 64 |
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| $ | 282,857 |
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|
| 100 |
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| Year ended December 31, 2018 |
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| Amount |
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| % |
| ||
|
|
|
|
|
|
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Customer D |
| $ | 261,159 |
|
|
| 39 |
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Customer E |
|
| 393,566 |
|
|
| 59 |
|
|
| $ | 654,725 |
|
|
| 98 |
|
Accounts receivable
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in administrative expenses.
The Company recognizes an allowance for doubtful receivables to ensure accounts and other receivables are not overstated due to uncollectibility. Allowance for doubtful receivables is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional allowance for individual accounts is recorded when the Company becomes aware of customers’ or other debtors’ inability to meet their financial instrumentsobligations, such as bankruptcy filings or deterioration in the customer’s or other debtor’s operating results or financial position. If circumstances related to customers or debtors change, estimates of the recoverability of receivables will be further adjusted. Accounts receivable are written off when deemed uncollectible. As of December 31, 2019 and certain other items2018, there were no allowance of accounts receivable.
Cash and cash equivalents
Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less. As of December 31, 2019 and 2018, the Company’s cash amounted to $106,850 and $98,121, respectively, and there were no cash equivalents.
Intangible assets
Intangible assets consist of acquired mining rights and are initially measured at fair value thatas at the date of acquisition. Following the initial recognition, intangible assets are not required to be measuredstated at fair value. The Corporation has not elected the fair value option for any eligible financial instruments.cost less accumulated amortization and impairment losses.
Currency RisksIntangible assets are amortized on the units-of-production method utilizing only proven and probable fluorite reserves in the depletion base.
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Table of Contents |
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Property, plant and equipment
(i) | Property, plant and equipment are stated at cost less accumulated depreciation. Buildings are depreciated on a straight-line basis over 15 to 40 years, representing the shorter of the remaining term of the mining right or the expected useful life to the Company. | |
(ii) | Other categories of property, plant and equipment are recorded at cost and depreciated to their estimated residual values using the straight-line method over their estimated useful lives, as follows: |
· | Leasehold improvements: 5 years or the shorter of the remaining term of the lease | |
· | Furniture and equipment: 3 to 10 years | |
· | Motor vehicles: 3 to 10 years | |
· | Factory equipment: 3 to 10 years | |
· | Mineral properties: Unit-of-production |
(iii) | Normal repairs and maintenance are charged to operating expenses as incurred, while costs incurred that extend the useful life of an asset, improve the safety of our operations, or improve operating efficiency are capitalized. |
Impairment of long-lived assets
The Corporation’s presentation currency is in US dollarsCompany reviews and evaluates its functional currency is in Canadian dollars. Consequently, assets and liabilities carried in any currency other than Canadian dollars are subject to foreign currency fluctuations.
As at February 28, 2018, cash of $785 (2017 - $nil) and due to related parties of $15,614 (2017 - $nil) were denominated in US dollars.
Impairment of Long-Lived Assets
Impairment losses on long-lived assets are recognizedfor impairment when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than theirrelated carrying value and, accordingly, all or a portion of such carrying valueamounts may not be recoverable. Impairment lossesis considered to exist if the total estimated future cash flows on an undiscounted basis are thenless than the carrying amount of the assets. An impairment loss is measured by comparingand recorded based on discounted estimated future cash flows or upon an estimate of fair value that may be received in an exchange transaction. Future cash flows are estimated based on quantities of recoverable minerals, expected fluorspar prices, production levels and operating costs of production and capital, based upon the projected remaining future fluorspar production from each mining site. Existing proven and probable reserves and value beyond proven and probable reserves, including mineralization that is not part of the measured, indicated or inferred resource base, are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term “recoverable minerals” refers to their carrying amounts. No impairmentsthe estimated amount of these typesfluorspar that will be obtained after taking into account losses during processing and treatment. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of assets were recognized duringfuture cash flows from other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the year ended February 28, 2018.estimates, as actual future quantities of recoverable minerals, fluorspar prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties. As of December 31, 2019 and 2018, there was no impairment of long-lived assets.
Revenue RecognitionIncome taxes
The Corporation recognizes revenue when persuasive evidence of an arrangement exists, shipment has occurred or services rendered, the price is fixed or determinable and payment is reasonably assured. Customers take ownership at point of sale and bear the costs and risks of delivery.
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Income Taxes
The Corporation follows FASB ASC Topic 740, “Income Taxes” which requires the use ofDeferred income taxes are provided using the asset and liability method of accounting for income taxes.in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 740, “Income Taxes”. Under this method, deferred tax assets and liabilitiesincome taxes are recognized for future tax consequences attributable toall significant temporary differences between the consolidated financial statements carrying amounts of existing assetsat enacted rates and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expectedclassified as a non-current asset or liability. A valuation allowance is provided to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The tax consequences of most events recognized in the current year’s consolidated financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise betweenreduce the amount of taxable income and pre-tax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements.
Because the Corporation assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, which gives rise to a deferred tax asset. The Corporation must then assess the likelihoodassets if it is considered more likely than not that some portion of, or all, the deferred tax assets will not be recovered from future taxable income and to the extent the Corporation believes that recovery is not likely, the Corporation must establish a valuation allowance.realized.
The Corporation has adopted FASB guidance onASC 740 clarifies the accounting for uncertainty in income taxes which providesrecognized in an enterprise’s financial statements, and prescribes a consolidated financial statement recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under thisIt also provides accounting guidance on de-recognition, classification, interest and penalties, accounting in years, disclosure and transition. Interest and penalties from tax assessments, if any, are included in income taxes in the Corporation may recognize the tax benefit from an uncertainstatements of operations and comprehensive income.
A tax position only if it ismust be more likely than not that the tax position willof being sustained in order to be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based onstatements. As of December 31, 2019 and 2018, the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance also extends to de-recognition of incomeCompany did not have any uncertain tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting forpositions or accrued interest and penalties associated withrelated to uncertain tax positions, andpositions. The Company does not expect to have a material change to its income tax disclosures. As of February 28, 2018,provisions in the Corporation had no uncertain tax positions.next year.
Foreign Currency TranslationRestoration and remediation costs (Asset retirement obligations)
The functional currencyIn Mongolia, the mining laws and regulations require the Company to reclaim the surface areas and restore underground water quality for its mine projects to the pre-existing mine area average quality after completion of the Corporation and its subsidiary is Canadian dollars (“C$”). The Corporation’s reporting currency is the United States currency (“US dollars”).mining activities.
(i) Foreign currency transactionsFuture reclamation and remediation costs, which include extraction equipment removal and environmental remediation, are accrued at the end of each period based on management’s best estimate of the costs expected to be incurred for each project. Such estimates consider the costs of future surface and groundwater activities, current regulations, actual expenses incurred, and technology and industry standards.
TransactionsIn accordance with FASB ASC 410, “Asset Retirement and Environmental Obligations”, the Company capitalizes the measured fair value of asset retirement obligations to mineral properties. The asset retirement obligations are accreted to an undiscounted value until the time at which they are expected to be settled. The accretion expense is charged to earnings and the actual retirement costs are recorded against the asset retirement obligations when incurred. Any difference between the recorded asset retirement obligations and the actual retirement costs incurred will be recorded as a gain or loss in foreign currencies are initially recorded by the Corporationperiod of settlement.
On a regular basis, the Company reviews the assumptions used to estimate the expected cash flows required to settle the asset retirement obligations, including changes in estimated probabilities, amounts and its subsidiary at their respective functional currency rates prevailing at the datetiming of the transaction.settlement of the asset retirement obligations, as well as changes in any regulatory or legal obligations for each of its mineral projects. Changes in any one or more of these assumptions may cause revision of asset retirement obligations for the corresponding assets.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange at the reporting date. All differences are taken to the consolidated statement of operations.
Table of Contents |
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Revenue recognition
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
(ii) Foreign operations
The assets and liabilities of foreign operations are translated to US dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated into US dollars at exchange rates at the dates of the transactions.
Foreign currency adjustments are recognized in other comprehensive income (loss) in the accumulated other comprehensive income (loss).
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the cumulative amount of foreign currency translation differences.
Recent Accounting Pronouncements
The Corporation adopts new pronouncements relating to accounting principles generally accepted in the United States of America applicable to the Corporation as they are issued, which may be in advance of their effective date. Management does not believe that any recently issued, but not yet effective accounting standards, if currentlyCompany adopted would have a material effect on the accompanying consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09,ASC 606, “Revenue from Contracts with Customers” (“ASU 2014-09”) and issued subsequent amendments, applying the modified retrospective method. The adoption did not result in a material adjustment to the initial guidance during 2015 and 2016, collectively referred toaccumulated deficit as “Topic 606”. These updates supersedeof January 1, 2018.
The Company recognizes revenue in accordance with ASC 606 when control of the revenue recognition requirements in ASC Topic 605, "Revenue Recognition" and nearly all other existing revenue recognition guidance under US GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services areis transferred to customersthe customer in an amount that reflects the consideration that is expectedthe Company expects to be receivedentitled to in exchange for those goods or services. Topic 606
The Company has two kinds of revenue, sales of fluorite and commission income.
The Company recognizes revenue when it satisfies a performance obligation in accordance with the provisions of a customer order or contract. This is achieved when control of the product has been transferred to the customer, which is generally determined when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product. In determining when and how much revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation. The sales of the Company’s products to its customers represent a single performance obligation for which revenue is recognized at a point in time. Based on the foregoing, no significant judgment is required to determine when control of a product has been transferred to a customer.
When another party is involved in providing goods or services to a customer, the Company must determine whether the obligation is to provide the specified good or service itself (i.e., the Company is the principal in the transaction) or to arrange for that good or service to be provided by the other party (i.e., the Company is an agent in the transaction). When the Company is responsible for satisfying a performance obligation, based on the ability to control the product or service provided, the Company is considered as a principal and revenue is recognized for the gross amount of consideration. When the other party is primarily responsible for satisfying a performance obligation, the Company is considered as an agent and revenue is recognized in the amount of any fee or commission to which the Company is entitled. The Company purchase minerals from suppliers and receive payments from the customers on selling certain goods. The Company has been determined as an agent for the ultimate customers in these transactions and the revenue is recorded net of the related fulfillment costs as commission income.
The Company measures revenue based on the consideration it expects to be entitled to receive in exchange for its products. The standard terms and conditions of customer orders and contracts does not provide its customers with the right of return (except for quality), price protection, rebates or discounts. All sales are based on firm customer orders with fixed terms and conditions, which generally cannot be modified.
See note 13 regarding the Company’s revenue disaggregated by reporting segment.
Provision for exploration asset compensation
The Government of Mongolia issued a policy that requires all mining companies to pay compensation to the Government if the exploration work on their mining license area was funded by the Government. The compensation amount for the exploration work done has been estimated by the Mineral Resources and Petroleum Authority of Mongolia.
The provision for exploration expenditure is calculated as the discounted net present value of estimated future net cash outflows of the reclamation and closure costs.
Cost of goods sold
Cost of goods sold included raw material costs.
Exploration costs
Exploration costs are expensed as incurred. Costs to identify new mineral resources and to evaluate potential resources are considered exploration costs.
Selling and distribution costs
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.
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Table of Contents |
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Administrative expenses
Administrative expenses include salaries and benefits, consulting, audit, tax, legal, insurance, rent and utilities, and other general operating expenses.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred.
Foreign currency transactions and translations
These consolidated financial statements are presented in United States dollars (“USD”), which is different from TGS subsidiaries’ functional currencies. The functional currency of the subsidiaries in Mongolia, Khan Shashir LLC and Shek Hung Gold LLC, is the Mongolian Tugrik (“MNT”). The functional currency of the subsidiary in the People’s Republic of China (“PRC”), Best Metro Import & Export Trading (Inner Mongolia) Limited is the Chinese Renminbi (“RMB”), while the functional currency of all other subsidiaries is the Hong Kong dollar (“HKD”).
The functional currency of TGS is the USD. The financial statements of foreign subsidiaries where HKD, MNT and RMB are the functional currencies and which have transactions denominated in non-HKD/MNT/RMB currencies are translated into HKD/MNT/RMB at the exchange rates existing on that date. The translation of local currencies into HKD/MNT/RMB creates transaction adjustments which are included in the statements of operations and comprehensive income.
The financial statements of TGS’s foreign subsidiaries, where non-USD currencies are the functional currencies, are translated into USD using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for the statement of operations. Adjustments resulting from translation of these financial statements are reflected as a separate component of stockholders’ deficit.
Comprehensive loss
Comprehensive loss is defined as all changes in equity/(deficit), exclusive of transactions with stockholders, such as capital investments. Comprehensive loss includes net loss and changes in certain assets and liabilities that are reported directly in equity.
Basic and Diluted Loss per Share
The Company computes loss per share in accordance with FASB ASC 260, “Earnings per Share” which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common stock equivalents outstanding during the period. Dilutive loss per share excludes all common stock equivalents if their effect is anti-dilutive.
As of December 31, 2019, the Company had warrants and convertible bonds outstanding which 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.
Fair value measurement
The Company complies with FASB ASC 820, “Fair Value Measurements”, which clarifies the definition of fair value, prescribes methods for measuring fair value and establishes a fair value hierarchy to classify the inputs used in measuring fair value.
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:-
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be applied either (i) retrospectivelycorroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Financial instruments are measured as follows:-
The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, deposits, accounts payable, accrued charges, other payables, loans from related persons, convertible bonds, other loan, amount due to each prior reporting period presenteddirectors and amounts due to stockholders, approximate their fair values due to the short term nature of these instruments.
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Table of Contents |
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Conversion Option – Convertible bonds
The Company accounts for convertible bond in accordance with the guidelines established by ASC 470-20, Debt with Conversion and Other Options. The Company separates the convertible bond into liability and equity components. The Beneficial Conversion Feature ("BCF") of a convertible bond, which is the equity component and recorded as additional paid-in capital, is normally characterized as the convertible portion or feature of certain bonds payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a convertible bond when issued.
To determine the effective conversion price, the Company first allocates the proceeds received to the convertible instrument, and then uses those allocated proceeds to determine the effective conversion price. The intrinsic value of the conversion option should be measured using the effective conversion price for the convertible instrument on the proceeds allocated to that instrument.
The accounting for a BCF requires that the BCF be recognized by allocating the intrinsic value of the conversion option to electadditional paid in capital, resulting in a discount to the convertible instrument. This discount should be accreted from the date on which the BCF is first recognized through the earliest conversion date for instruments that do not have a stated redemption date.
The discount is amortized to interest expense over the expected term of the convertible bonds using the effective interest method.
Warrants
ASC 815-40, “Contracts in Entity’s Own Equity”, requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of ASC 815-40, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in the Company’s results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required from period to period.
Lease
The Company determines if an arrangement is a lease at inception of the contract. Leases are recorded in "Right-of-use ("ROU") assets" and "lease liabilities" in the Company's consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. For leases in which the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date for determining the present value of lease payments. Lease term includes the effects of options to extend or terminate the lease when it is reasonably certain practical expedients; or (ii) retrospectively withthat the cumulative effectCompany will exercise that option. Lease expense for operating lease arrangements is recognized aton a straight-line basis over the lease term.
On January 1, 2019, the date of initial application, and providing certain additional disclosures (the “cumulative effect approach”). Topic 606 is effective for annual periods, and interim periods withinthe Company adopted, “Leases” (Topic 842), using the modified retrospective method. The modified retrospective method provides a method of recognizing those annual periods, beginning after December 15, 2017,leases which will behad not expired as of the Corporation’s fiscal year beginning March 1, 2018 (fiscal 2019). The Corporation does not expect thedate of adoption of thisJanuary 1, 2019. The prior period consolidated financial statements have not been retrospectively adjusted and continues to be reported under Topic 840.
The Company elected the practical expedient permitted under the transition guidance will haveunder Topic 842, which amongst other matters, allowed the Company (i) not to apply the recognition requirements to short-term leases (leases with a materiallease term of 12 months or less), (ii) not to reassess whether any expired or existing contracts are or contain leases, (iii) not to reassess the lease classification for any expired or existing leases, and (iv) not to reassess initial direct costs for any existing leases.
The adoption resulted in the recognition of ROU assets of $369,874 and lease liabilities of $369,874 for operating leases as of January 1, 2019. The adoption had no impact on itsopening balance of accumulated deficit. Refer to note 5 to the consolidated financial statements.statements for details.
The Company reviews ROU assets for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.
Recent changes in accounting standards
Pending Adoption as at year end
In June 2016, the FASB issued ASU No. 2016-13, Financial“Financial Instruments –- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ThisInstruments”. In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which amends guidance on reporting credit losses for assets heldthe 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 availablereasonable and supportable forecasts that affect the collectability of the reported amount. Topic 326 will originally become effective for sale debt securities.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 after evaluation.
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Table of Contents |
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Recent changes in accounting standards (continued)
Pending Adoption as at year end (continued)
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to the financial statements by removing, modifying, and adding certain fair value disclosure requirements to facilitate clear communication of the information required by generally accepted accounting principles. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted upon issuance of this ASU. This standard is not expected to have a material impact to the Company’s consolidated financial statements after evaluation.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This Update states a private company (reporting entity) may elect not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. This Update also states indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a VIE. For the Company, this Update is effective for fiscal years beginning after December 15, 2019, (fiscal 2021), includingand interim periods within those fiscal years,years. All entities are required to apply the amendments in this Update retrospectively with earlya cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The Corporation does not expect the adoption of this guidance willASU 2018-17 is not expected to have a material impact on itsthe consolidated financial statements.statements of the Company.
In August 2016,December 2019, the FinancialFASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting Standards Board (“FASB) issued Accounting Standards Update (“ASU”) 2016-15, Statementfor Income Taxes. The amendments in this ASU simplify the accounting for income taxes, eliminates certain exceptions to the general principles in Topic 740 and clarifies certain aspects of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Thisthe current guidance to improve consistent application among reporting entities. ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU2019-12 is effective for fiscal years beginning after December 15, 2017 (fiscal 2019),2021 and interim periods within those fiscal years, withannual periods beginning after December 15, 2022, though early adoption permitted. An entity that elects earlyis permitted, including adoption must adopt all of the amendments in the same period. The Corporation doesany interim period for which financial statements have not expect the adoption of this guidance willyet been issued. This standard is not expected to have a material impact onto the Company’s consolidated financial statements after evaluation.
The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Other recentstatements and does not believe that there are any other new accounting pronouncements that have been issued, by the FASB (including its Emerging Issues Task Force) and the SEC did not orbut are not believed toyet effective, that might have a material impact on the Corporation’s present or future consolidated financial statements.statements of the Company.
NOTE 3 – BUSINESS ACQUISITIONPROPERTY, PLANT AND EQUIPMENT
On December 21, 2016,Property, plant and equipment include the Corporation acquired allfollowing:-
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
|
|
|
|
|
|
| ||
Buildings |
| $ | 159,364 |
|
| $ | 164,223 |
|
Leasehold improvements |
|
| 120,524 |
|
|
| 119,887 |
|
Furniture, fixture and equipment |
|
| 66,582 |
|
|
| 176,883 |
|
Motor vehicles |
|
| 338,320 |
|
|
| 245,217 |
|
Factory equipment |
|
| 230,290 |
|
|
| 23,936 |
|
Mineral properties |
|
| 1,375,608 |
|
|
| 1,276,766 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
| (522,609 | ) |
|
| (481,672 | ) |
|
|
| 1,768,079 |
|
|
| 1,525,240 |
|
Construction in progress |
|
| 638,289 |
|
|
| 32,382 |
|
Total property, plant and equipment |
| $ | 2,406,368 |
|
| $ | 1,557,622 |
|
Construction in progress is mainly related to a power station under construction and stall cables to be used during the construction of the issuedshaft at the mine sites. During the years ended December 31, 2019 and outstanding shares2018, depreciation expenses charged to the consolidated statements of TGS Alberta from related parties for cashoperations amounted to $51,898 ($23,000 to administrative expenses and $28,898 to depreciation of $154. This acquisition enables the Corporationfactory equipment) and $52,149 ($23,947 to operate in the Canadian market.administrative expenses and $28,202 to depreciation of factory equipment), respectively.
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31 |
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TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consist of acquired mining rights.
As of December 31, 2019 and 2018, the Company owned three mining rights in Mongolia.
Cost |
|
|
| |
At December 31, 2019 and 2018 |
| $ | 1,097,362 |
|
|
|
|
|
|
Accumulated amortization and impairment loss |
|
|
|
|
At December 31, 2019 and 2018 |
|
| - |
|
|
|
|
|
|
Net book value |
|
|
|
|
At December 31, 2019 |
| $ | 1,097,362 |
|
|
|
|
|
|
At December 31, 2018 |
| $ | 1,097,362 |
|
As of December 31, 2019, future minimum amortization expenses in respect of intangible assets are as follows:
Year ending December 31,
2020 |
| $ | - |
|
2021 |
|
| 85,330 |
|
2022 |
|
| 85,632 |
|
2023 |
|
| 91,474 |
|
2024 |
|
| 97,377 |
|
Thereafter |
|
| 737,549 |
|
|
| $ | 1,097,362 |
|
NOTE 5 – LEASING ARRANGEMENT
The Company leases certain office and warehouse spaces under operating leases in Hong Kong and Mongolia. Operating lease assets and obligations are reflected within right-of-use asset, and current lease liability respectively, on the Consolidated Balance Sheet.
The discount rate implicit within the leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for the leases is determined based on lease term and currency in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure the operating lease liabilities as of December 31, 2019 was 11%.
Balance Sheet as of December 31, 2019
Assets |
|
|
| |
Right-of-use assets |
| $ | 189,456 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Current portion of operating lease liabilities |
| $ | 189,456 |
|
|
|
|
|
|
Total lease liabilities |
| $ | 189,456 |
|
| |
|
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
NOTE 5 – LEASING ARRANGEMENT (CONTINUED)
Maturity Analysis of Lease Liabilities:
December 31, 2020 |
| $ | 217,033 |
|
December 31, 2021 |
|
| 4,106 |
|
Total lease payments, undiscounted |
|
| 221,139 |
|
Less short-term lease payments |
|
| (20,564 | ) |
Less amount of lease payment representing interest |
|
| (11,119 | ) |
Total present value of lease payments |
|
| 189,456 |
|
Less: Current portion of operating leases liabilities |
|
| (189,456 | ) |
Non-current operating leases liabilities |
| $ | - |
|
Lease costs for all operating leases classified under Topic 842 for the year ended December 31, 2019 was $206,643.
Lease cost for all operating leases classified under Topic 840 for the year ended December 31, 2018 was $225,126.
Supplemental cash flow and other information related to leases is as follows:
|
| December 31, 2019 |
| |
Total lease liabilities |
| $ | 189,456 |
|
Cash payment for amounts included in the measurement of lease liabilities within operating cash flows |
| $ | 206,643 |
|
Weighted average remaining lease term (years) |
|
| 0.97 |
|
Weighted average discount rate |
|
| 11 | % |
NOTE 6 – INCOME TAXES
The Company is subject to tax on an entity basis on income arising in or derived from the United States of America, Republic of Seychelles, Mongolia, PRC and Hong Kong.
United States Tax
The federal income tax rate in the United States is 21%. The Company is subject to income taxes in the United States of America for each of the years ended December 31, 2019 and 2018.
Seychelles Tax
The statutory tax rate in the Republic of Seychelles is 25% on the first 1 million Seychelles Rupee of taxable income and 33% on the remainder. The Company is subject to income taxes in the Republic of Seychelles for each of the years ended December 31, 2019 and 2018.
Hong Kong Tax
BMHK, AHK and CAHK are subject to Hong Kong profits tax at the rate of 16.5% on the assessable profits. No provision for Hong Kong profits tax has been made as these companies incurred a loss for each of the years ended December 31, 2019 and 2018.
Mongolia Corporate Income Tax
KSS and SHG are registered and operate in Mongolia and are subject to Mongolia Corporate Income Tax at the rate of 10% on taxable income below MNT3 billion, or MNT300 million plus 25% on taxable income exceeding MNT3 billion. No provision for Mongolia corporate income tax has been made as these companies incurred a loss for each of the years ended December 31, 2019 and 2018.
PRC Enterprise Income Tax
BMIM is subject to PRC Enterprise Income Tax at the statutory rate of 25%. No provision for PRC Enterprise Income Tax has been made as this company incurred a loss for each of the years ended December 31, 2019 and 2018.
The Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 are attributable to the following:
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| As of |
| |||||
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
|
|
|
|
|
|
| ||
Tax loss carry forwards |
| $ | 301,091 |
|
| $ | 287,735 |
|
Less: Valuation allowance |
|
| (301,091 | ) |
|
| (287,735 | ) |
|
| $ | - |
|
| $ | - |
|
|
Table of Contents |
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
NOTE 6 – INCOME TAXES (CONTINUED)
Changes in valuation allowance are as follows:
|
| As of |
| |||||
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
|
|
|
|
|
|
| ||
Beginning balance |
| $ | 287,735 |
|
| $ | 212,789 |
|
Increase in valuation allowance |
|
| 13,011 |
|
|
| 66,756 |
|
Exchange difference |
|
| 345 |
|
|
| 8,190 |
|
Ending balance |
| $ | 301,091 |
|
| $ | 287,735 |
|
As of December 31, 2019 and 2018, the Hong Kong subsidiaries have tax losses arising in Hong Kong of approximately $1,602,522 (2018: $1,592,556) that are available indefinitely for offsetting against its future taxable profits. The PRC subsidiary has tax losses arising in PRC of approximately $146,700 (2018: $99,851) that are available for offsetting against its future taxable profits, which expire between 2022-2024 and between 2022-2023, respectively. The Company had total accumulated tax losses amounting to approximately $1,749,222 and $1,692,407 (the tax effect thereon being approximately $301,091 and $287,735), respectively, subject to the final agreement by the relevant tax authorities, which may be carried forward and applied to reduce future taxable income which is earned in or derived from the jurisdictions in which the tax losses were incurred. Realization of deferred tax assets associated with tax losses carry forwards is dependent upon generating sufficient taxable income prior to their expiration. A full valuation allowance is established against such tax losses at each balance sheet date since management believes it is more likely than not that such tax losses will not be utilized.
A reconciliation of the income tax expense to the amount computed by applying the statutory tax rate of 21% to the loss before income taxes in the consolidated statements of comprehensive income is as follows:-
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
|
|
|
|
|
|
| ||
Loss before income taxes |
| $ | (2,115,716 | ) |
| $ | (1,241,452 | ) |
|
|
|
|
|
|
|
|
|
Tax loss at the statutory tax rate of 21% |
|
| (444,300 | ) |
|
| (260,705 | ) |
Effect of different tax rates in other jurisdictions |
|
| (12,910 | ) |
|
| (9,921 | ) |
Non-deductible items |
|
| 488,717 |
|
|
| 203,873 |
|
Non-taxable items |
|
| (44,518 | ) |
|
| (3 | ) |
Change in valuation allowance |
|
| 13,011 |
|
|
| 66,756 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
| $ | - |
|
| $ | - |
|
NOTE 7 – OTHER PAYABLES
|
| As of |
| |||||
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
|
|
|
|
|
|
| ||
Tax and social insurance payable |
| $ | 53,087 |
|
| $ | 9,384 |
|
Contract liabilities |
|
| 289,786 |
|
|
| 215,359 |
|
Temporary receipts |
|
| 720,278 |
|
|
| - |
|
Other payables |
|
| 241,204 |
|
|
| 12,424 |
|
|
| $ | 1,304,355 |
|
| $ | 237,167 |
|
Contract liabilities are consideration received from the customers or billed in advance of providing goods or services promised in the future. The Company defers recognizing this consideration as revenue until it has satisfied the related performance obligation to the customer.
Temporary receipts represented the fund received from Yantai Fulin Mining Machinery Co., Ltd, a strategic partner of the Company, to build a refinery factory in Mongolia.
34 | |
| |
|
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
NOTE 8 – CONVERTIBLE BONDS
As of December 31, 2019 and 2018, the Company had the following convertible bond outstanding:
|
| As of |
| |||||||||||||
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
|
|
|
|
|
| ||||||||||
|
| Principal |
|
| Accrued Interest |
|
| Principal |
|
| Accrued Interest |
| ||||
November 2019 HK$1.5 million (equivalent to $192,308) convertible into common shares at $3.60 per share, 5% interest, due May 25, 2020 |
| $ | 192,308 |
|
| $ | 930 |
|
| $ | - |
|
| $ | - |
|
Less: Bond discount |
|
| (4,313 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| $ | 187,995 |
|
| $ | 930 |
|
| $ | - |
|
| $ | - |
|
In the year of 2019, four convertible bond agreements were entered into between the Company, Arcus and third party investors. Three of the bonds matured in 2019 and were settled by issuing 141,782 common shares at a price stated in the respective agreements, representing loans of HK$4 million and interest expenses of HK$8,333, for a total of HK$4,008,333 (equivalent to $513,888) (see note 12). In addition, the Company recognized a beneficial conversion feature discount to the bond of $10,705 that is being amortized over the life of the convertible bond using the effective interest method. For the year ended December 31, 2019, the Company amortized $10,705 of the discount and recognized non-cash interest of $1,068 to interest expenses.
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 will mature on 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 is being amortized over a six-month period using the effective interest method. For the year ended December 31, 2019, the Company amortized $1,029 of the discount and recognized non-cash interest of $930 to interest expenses. The unamortized debt discount on the convertible bond as of December 31, 2019 was $4,313.
NOTE 9 – OTHER LOAN
As of December 31, 2019, a loan of $132,423 was borrowed from an unrelated party. The loan is unsecured, has no collateral or guarantee and carries interest at 11.61% per annum and repayable on December 31, 2029.
NOTE 10 – PROVISION FOR ASSET RETIREMENT OBLIGATIONS
The Company’s asset retirement obligations relate to future remediation and decommissioning activities at the three fluorite mines.
At December 31, 2017 |
| $ | 30,696 |
|
Additions |
|
| 3,408 |
|
Exchange adjustments |
|
| (2,721 | ) |
|
|
|
|
|
At December 31, 2018 |
|
| 31,383 |
|
Additions |
|
| 6,081 |
|
Exchange adjustments |
|
| (4,021 | ) |
|
|
|
|
|
At December 31, 2019 |
| $ | 33,443 |
|
NOTE 11 – PROVISION FOR EXPLORATION ASSET COMPENSATION
At December 31, 2017 |
| $ | 111,239 |
|
Exchange adjustments |
|
| (9,112 | ) |
|
|
|
|
|
At December 31, 2018 |
|
| 102,127 |
|
Exchange adjustments |
|
| (3,385 | ) |
|
|
|
|
|
At December 31, 2019 |
| $ | 98,742 |
|
35 | |
| |
|
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
NOTE 12 – CAPITAL STOCK
On September 14, 2018, the Company and Arcus entered into a Share Exchange Agreement, dated September 14, 2018 with 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. The merger closed on September 14, 2018 and resulted in the following:
Immediately prior to the Share Exchange, 6,500,000 shares of the outstanding common stock were cancelled and retired. A further 30,000 shares were cancelled after the Share Exchange.
On November 21, 2018, the Company completed the first subscription package (the “First Subscription Package”) of 150,000 common shares at a price of $0.35 per share with a warrants option to purchase an aggregate of 50,000 common shares. The warrants will be exercisable within three years from the date of the Company receiving fund from investors at an exercise price of $1.00 per common share. The Company also issued to the placement agent 15,000 common shares at a price of $2.49 per common share for the services rendered (equivalent to $37,350).
As a result of the Share Exchange and the First Subscription Package, the cancellation of 6,530,000 shares and the issuance of 7,165,000 shares, the Company had 14,165,000 shares of common stock issued and outstanding as of December 31, 2018.
For the year ended December 31, 2019, the Company issued a second subscription package (the “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 investors. The Company also issued to the placement agent 33,000 common shares at a price of $3.70 per common share for the services rendered (equivalent to $122,100).
On May 15, 2019, the Company issued 88,018 common shares at a price of $3.29 per share to settle the loans from related persons of HK$2 million and accrued interest expenses of HK$258,709, for a total of HK$2,258,709 (equivalent to $289,578).
On August 30, 2019, a convertible bond agreement was entered into between the Company, Arcus and a third party investor. On September 29, 2019, the convertible bond matured and was settled by issuing 34,722 common shares at a price of $3.70 per share representing loans of HK$1 million and interest expenses of HK$2,083, for a total of HK$1,002,083 (equivalent to $128,472).
On September 29, 2019, the Company issued 33,096 common shares at a price of $3.66 per share to settle the amount due to a director of HK$944,832 (equivalent to $121,133).
On October 25, 2019, a convertible bond agreement was entered into between the Company, Arcus and a third party investor. On November 27, 2019, the convertible bond matured and was settled by issuing 71,373 common shares at a price of $3.60 per share representing loans of HK$2 million and interest expenses of HK$4,167, for a total of HK$2,004,167 (equivalent to $256,944).
On November 4, 2019, a convertible bond agreement was entered into between the Company, Arcus and a third party investor. On December 3, 2019, the convertible bond matured and was settled by issuing 35,687 common shares at a price of $3.60 per share representing loans of HK$1 million and interest expenses of HK$2,083, for a total of HK$1,002,083 (equivalent to $128,472).
NOTE 13 – REVENUE
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
Disaggregation of revenue:- |
|
|
|
|
|
| ||
Revenue from contract with customers within the scope of ASC 606, types of goods and services |
|
|
|
|
|
| ||
Sales of minerals – point in time |
| $ | 282,857 |
|
| $ | 274,238 |
|
Commission income – point in time |
|
| - |
|
|
| 393,566 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 282,857 |
|
| $ | 667,804 |
|
| |||
| |||
Table of Contents |
Notes to Consolidated Financial Statements December 31, 2019 and |
NOTE 14 – SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Trade and other payables
Foreign exchange
| (a) | Loans from related persons |
The acquisition constitutes a business combinationAs of December 31, 2019 and is accounted for in accordance with Accounting Standards Codification 805 – Business Combinations.
The acquisition date fair valueDecember 31, 2018, loans from related persons included HK$3 million (equivalent to $385,158) and HK$4 million (equivalent to $510,830) respectively borrowed from the wife of consideration transferred in the transaction was $3,145 which approximates the fair valueone of the net assets received. All costs associated withCompany’s stockholders on May 21, 2018. The loan is unsecured, has no collateral or guarantee and carries interest at a monthly rate of 3.08% for the transaction were expensed as incurred.
NOTE 4 – DUE TO RELATED PARTIESfirst month and a monthly rate of 1.08% for the rest of the term. The loan originally was due to be repaid on May 20, 2019, however, on April 24, 2019, the repayment date was extended to May 20, 2020. The Company repaid HK$1 million (equivalent to $127,648) loan on April 24, 2019.
As of December 31, 2018, loans from related persons included a HK$1 million (equivalent to $127,708) loan borrowed from the son of the CFO of TGS on October 6, 2016. The loan is unsecured, has no collateral or guarantee and carries interest at February 28, 2018, the Corporation8% per annum. The loan was obligated to shareholders for funds advanced to the Corporation for working capital, in the amountfully repaid by issuing common stock of $54,690 (February 28, 2017 - $Nil)TGS on May 15, 2019 (see note 12). The advances are unsecured and no interest rate or payback schedule has been established.
|
NOTE 5 – COMMON STOCK
(i) Stock issued
On December 1, 2016, the date of inception, the Corporation received $723 to issue 9,500,000 common stocks.
On January 28, 2017, the Corporation closed a private placement to issue 4,030,000 common stocks for a gross proceed of $30,733.
(ii) Weighted average stock outstanding
As of December 31, 2018, loans from related persons included HK$1 million (equivalent to$127,708) loans borrowed from the sisters of one of the stockholders of TGS on October 31, 2016. The loans are unsecured, have no collateral or guarantee and carry interest at February 28,8% per annum. The loans were fully repaid by issuing common stock of TGS on May 15, 2019 (see note 12).
(b) | Interest expense paid to related persons |
During the years ended December 31, 2019 and 2018, weighted average numberinterest expense of HK$462,326 (equivalent to $59,015) and HK$581,264 (equivalent to $74,162), respectively, was paid to related persons.
(c) | Amounts due to stockholders |
On August 15, 2018, Arcus allotted and issued 884,871 ordinary shares of Arcus (equivalent to 6,999,209 shares of the Company; each share of Arcus was exchanged for 7.91 shares of the Company’s common stocksstock) at $10 each to repay the debts to Mr. Loo Chi Kin with total amount, HK$69,410,892 (equivalent to $8,848,710), within the group.
As of December 31, 2019 and 2018, amounts due to stockholders, Chi Kin Loo, Kwong Bun Mak, Xianqin Pan and Tak Leung Ho, included $872,968 and $398,208 at December 31, 2019 and December 31, 2018 respectively. The Company is currently in the exploration stage, and the stockholders advanced $517,329 working capital to meet the financing requirement for the loss per common stock calculation is 13,530,000 (2017 – 13,065,000).year of 2019. Amounts due to stockholders are unsecured, interest-free and there are no fixed terms for repayment. The stockholders have agreed not to demand for repayment within the next 12 months from the balance sheet date.
NOTE 6 – INCOME TAXES
(d) | Amount due to directors |
Potential benefitsAs of income tax losses have not been recognized in these consolidated financial statements because the Corporation cannot be assured itDecember 31, 2019 and 2018, amount due to a director, Tak Shing Eddie Wong, of HK$576,000 (equivalent to $73,950) and HK$576,000 (equivalent to $73,560) respectively. The amount is more likely-than-not it will utilize the net operating losses carried forward in future years.
Income tax recovery differs from that which would be expected by applying the effective rates to net loss as follows:
For the year ended February 28, 2018 For the period ended February 28, 2017 $ $ Net loss for the year / period (80,992 ) (14,327 ) Statutory and effective rates 34 % 34 % Income tax recovery at effective rate (27,537 ) (1,871 ) Income tax expense on Canadian income - (14 ) Difference in foreign tax rate 12,244 (5 ) Change in valuation allowance (15,293 ) 4,980 Corporate income tax recovery recognized in the accounts - -unsecured, has no collateral or guarantee and is interest-free. The amount was fully repaid on March 13, 2020 and February 14, 2019, respectively.
During the year, the Corporationdirector, Sai Kit Leung advanced HK$1,295,687 (equivalent to $165,392) to the Company. On September 29, 2019, the Company issued 33,096 common shares at a price of $3.66 to settle the amount due to the director of HK$944,832 (equivalent to $121,133) (see note 12). As of December 31, 2019, there is an amount due to a director of HK$350,855 (equivalent to $45,045). This amount is unsecured, interest-free and there are no fixed terms for repayment. The director has $541 of loss carry forwards in Canada that beginagreed not to expire in 2038. The Corporation has $92,795 of loss carry forwards in the United States that begin to expire in 2037. The componentsdemand for repayment within 12 months of the net deferred tax asset are below:balance sheet date.
February 28, 2018 February 28, 2017 $ $ Non-capital losses carried forward Deferred tax asset value Valuation allowance Deferred tax assets recognized NOTE 15 — NET LOSS PER SHARE95,374 14,382 15,293 4,980 (15,293 ) (4,980 ) - -
Loss per common share is presented under two formats: basic loss per common share and diluted loss per common share. Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, plus the potentially dilutive impact of common stock equivalents (e.g. stock options, warrants and convertible bonds). Dilutive common stock equivalents consist of the incremental common stock issuable upon exercise of stock options and warrants. The following table sets forth the computation of basic and diluted net loss per share:
|
| Years Ended |
| |||||
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
Numerator: |
|
|
|
|
|
| ||
Net loss |
| $ | (2,115,716 | ) |
| $ | (1,241,452 | ) |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common stock, basic |
|
| 14,532,189 |
|
|
| 4,736,382 |
|
Dilutive effect of warrants |
|
| – |
|
|
| – |
|
Dilutive effect of convertible bonds |
|
| – |
|
|
| – |
|
Incremental dilutive shares |
|
| – |
|
|
| – |
|
Weighted-average common stock, diluted |
|
| 14,532,189 |
|
|
| 4,736,382 |
|
Net loss per share, basic and diluted |
| $ | (0.15 | ) |
| $ | (0.26 | ) |
Table of Contents |
TGS International Ltd. Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
NOTE 16 — WARRANT EQUITY
On November 21, 2018 (“Issuance Date”), the Company issued First Subscription Package of up to $52,500, consisting of 150,000 common shares and 50,000 warrants exercisable at $1.00 (the “Warrants”) to purchase common stock within three years from the Issuance Date, to accredited subscribers.
For the year ended December 31, 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 two investors in the First Subscription Package, which was completed on November 21, 2018, forfeited their rights to exercise the 25,000 warrant at $1.00 of their own accord.
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.
As of December 31, 2019, the Company reviewed the valuation technique and inputs used to determine the fair value of the outstanding warrants. The Company engaged an outside valuation company to calculate the fair value of warrants based on the Binominal Option Pricing Model (“Binomial”).
Set out below are the major parameters adopted in the valuation:
Grant date |
| January 2019 |
|
| February 2019 |
|
| March 2019 |
|
| April 2019 |
| ||||
Stock price of the issuer at respective grant dates |
| $ | 3.50 |
|
| $ | 3.50 |
|
| $ | 3.50 |
|
| $ | 3.50 |
|
Risk-free rate |
|
| 14.01 | % |
|
| 14.01 | % |
|
| 13.99 | % |
|
| 14.27 | % |
Volatility |
|
| 56.74 | % |
|
| 56.74 | % |
|
| 55.80 | % |
|
| 54.63 | % |
Dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
The warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Grant date |
| Warrants Outstanding |
|
| Fair Value per Share |
|
| Fair Value $ |
| |||
2018 |
|
| 50,000 |
|
| $ | 0.07 |
|
| $ | 3,490 |
|
2019 |
|
| 66,000 |
|
|
| 2.11 |
|
|
| 139,115 |
|
Less: warrants forfeited |
|
| (50,000 | ) |
|
| (0.07 | ) |
|
| (3,490 | ) |
As at December 31, 2019 |
|
| 66,000 |
|
|
|
|
|
| $ | 139,115 |
|
NOTE 17 – SUBSEQUENT EVENTS
Subsequent to the year ended December 31, 2019, there were four convertible bond agreements entered into between the Company, Arcus and third party investors.
On January 2, 2020, a convertible bond agreement was signed including a HK$1.5 million (equivalent to $192,308) loan bearing interest of 2.5% per annum for one month. The convertible bond matured and converted into 53,236 shares of the Company’s common stock on February 1, 2020 with a conversion price of $3.62 per share.
On January 14, 2020, a convertible bond agreement was signed including a HK$400,000 (equivalent to $51,282) loan bearing interest of 2.5% per annum for one month. The convertible bond matured and converted into 14,196 shares of the Company’s common stock on February 13, 2020 with a conversion price of $3.62 per share.
On February 24, 2020, a convertible bond agreement was signed including a HK$200,000 (equivalent to $25,641) loan bearing interest of 2.5% per annum for one month. The convertible bond will mature on March 25, 2020 with a conversion price of $3.62 per share.
On February 29, 2020, a convertible bond agreement was signed including a HK$500,000 (equivalent to $64,103) loan bearing interest of 2.5% per annum for one month. The convertible bond will mature on March 30, 2020 with a conversion price of $3.62 per share.
NOTE 18 – COMPARATIVE AMOUNTS
Certain comparative figures have been reclassified to conform with the current year's presentation and disclosures.
38 |
Table of Contents |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements related to accounting principles or practices, financial statement disclosure, internal controls or auditing scope or procedure during the two fiscal years and interim periods.None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 underUnder the Exchange Act, our management evaluated the effectiveness of the designsupervision and operation of our disclosure controls and procedures as of February 28, 2018.
Our management, with the participation of our president (our principal executive officer, principal accounting officermanagement, including our Chief Executive Officer and principal financial officer), evaluatedour Chief Financial Officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on thissuch evaluation, our president (our principal executive officer, principal accounting officermanagement, including our Chief Executive Officer and principal financial officer)Chief Financial Officer, has concluded that as of the end of such period, our disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our president (our principal executive officer and our principal accounting officer and principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.of December 31, 2019.
(b) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, our president (our principal executive officer and our principal accounting officer and principal financial officer), to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of management and directors of our company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of our president (our principal executive officerChief Executive Officer and our principal accounting officer and principal financial officer),Chief Financial Officer, an evaluation of the effectiveness of our internal control over financial reporting as of February 28, 2018December 31, 2019 in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”) in Internal Control — Integrated Framework. Based on this assessment, management concluded that as of February 28, 2018,December 31, 2019, our company’s internal control over financial reporting was not effective based on present company activity. Our company is in the process of adopting specific internal control mechanisms with our board and officers’ collaboration to ensure effectiveness as we grow. We are presently engaging an outside consultant to assist in adopting new measures to improve upon our internal controls. Future controls, among other things, will include more checks and balances and communication strategies between the management and the board to ensure efficient and effective oversight over company activities as well as more stringent accounting policies to track and update our financial reporting.effective.
This annual report does not include an attestation report from our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only the management’s report in this annual report.
(c) Changes in Internal ControlControls over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the year ended February 28, 2018December 31, 2019 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Name | Age | Positions | ||
Tak Shing Eddie Wong | 56 | Chairman of the Board of Directors, Chief Executive Officer and President | ||
Sai Kit Leung | 63 | Chief Financial Officer and Secretary | ||
Shaowei Deng | 31 | Director | ||
Ka Yi Poon | 28 | Director |
Mr. Wong, 56, has held numerous senior management positions with various Asian companies in different industries. He is currently the chief executive officer of Peak Strategy Management Co., Ltd., a Hong Kong company providing business general consultancy services. Since March 2014, Mr. Wong has been the chief consultant of Conpak Management Group, a Hong Kong company providing corporate consultancy services, and is responsible for advising on its various projects and overall development. Mr. Wong is also the chief strategy officer of Sinostar Securities Limited, a Hong Kong company offering securities trading services, and is responsible for overseeing its overall business development. Mr. Wong previously served as the chief executive officer of He Zheng Yuan Agriculture Group Limited, a PRC company focusing on agricultural trades and provision of food and beverage, from June 2016 to February 2018 and Mondo Vantaggio Pte. Ltd., a Singaporean company operating luxury multi-brand stores, from October 2014 to June 2016. Between April 2016 and December 2016, he was the chief financial officer of Happy Animation (Shenzhen) Co., Ltd., a PRC company focusing on amination and education related development. Mr. Wong holds a certificate in Hotel Business Program offered by Cartas Bianchi College of Careers. He is also a member of China Academy of Management Science and a qualified Senior Financial Planner certified by the PRC.
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Item 10. Directors, Executive Officers and Corporate Governance (continued)
Mr. Leung, 63, has been the chief financial officer of Arcus Mining Holdings Limited since November 2015. Prior to joining Arcus Mining Holdings Limited, Mr. Leung had over 35 years of experience in the banking industry. In August 1975, Mr. Leung joined Nanyang Commercial Bank as a clerk. From March 1991 to August 2015, he served as the head of treasury of Nanyang Commercial Bank, and was responsible for treasury duties including cash and liquidity management, banking facilities arrangement, advising management on the treasury position of the business, short-term and long-term liquidity, preparing cash flow forecasts and performing financial modelling. Mr. Leung holds a Master Degree of Science in Financial Engineering from the City University of Hong Kong.
Mr. Shaowei Deng, age 31, serves as an independent director. He has been working in the financial industry since 2013 and has ample experience in both Hong Kong and PRC. Mr. Deng deals in and advises on securities (Type 1 and Type 4 HKSFC license holder respectively), deals in futures contracts (Type 2 HKSFC license holder) and participates in asset management activity (Type 9 HKSFC license holder). Mr. Deng was an investment manager of Hongta Security Company, a PRC company providing financial consultancy services, from July 2013 to August 2014 and was responsible for assisting in IPO projects. From August 2014 to May 2015, he served as the director of Dongguan Yuefang Trading Company, a PRC company specializing in tea trading, and was responsible for business development, financial management and product development. Mr. Deng has been the chairman of Dongguan Four Eyes Asset Management Limited, a PRC company providing professional wealth management consultancy services, since June 2015. He was responsible for advising high-net-worth clients on asset allocation and investment, as well as designing private equity products. Between December 2017 and June 2018, Mr. Deng was the representative of Orient Securities (Hong Kong) Limited, a Hong Kong company offering securities trading services, and was responsible for handling securities and futures contracts. Mr. Deng has been serving as an executive director of Deyu Family Office, a Hong Kong company providing family office services, since April 2017. He is responsible for building and maintaining relationship with the high-net-worth individual and corporate clients and overseeing its overall business development. He has been a senior manager of Aspenwood Capital Limited, a Hong Kong company offering securities trading services and asset management services, and is responsible for advising on securities trading and asset management. Mr. Deng holds a Master Degree of Science in Real Estate Investment and a Bachelor Degree of Art in Accounting and Finance from Cass Business School in London and Lancaster University in the UK respectively.
Miss Ka Yi Poon, age 28, joined Arcus Mining Holdings Limited in January 2018 and serves as a non-independent director. Prior to joining Arcus Mining Holdings Limited, she was a business development officer of Conpak CPA Limited, a Hong Kong company specializing in providing audit and assurance services, and was responsible for business development from September 2014 to September 2017. Miss Poon holds a Bachelor Degree of Art in Business Administration (Hons) from Hong Kong Shue Yan University.
Family Relationships
No family relationships exist among our directors, executive officers, or persons nominated or chosen by us to become directors or executive officers.
All directors of our Company hold office until the next annual stockholders’ meeting of the security holdersor until their death, resignation, retirement, removal, disqualification, or until their successors have been elected and are qualified. TheOur officers serve at the will of our Company are appointed by our boardthe Board of directors and hold office until their death, resignation or removal from office. Our directors and executive officers, their ages, positions held, and duration as such, are as follows:
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Business ExperienceDirectors.
The following is a brief account of the education and business experience during at least the past five years of our directors and executive officers, indicating their principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Chung Szeto – Director, President and CEO
Mr. Szeto is the President of TGS International. He began his career in the field of power engineering after receiving his diploma in Power Engineering Technology in 1998 at The Southern Alberta Institute of Technology in Alberta, Canada. In 1999, he moved to Hong Kong and worked for Gammon Construction Ltd. until 2003, initially as an engineer assistant and later as a site coordinator in one of Hong Kong’s large railway projects. In 2003, he returned to Canada and formed Szeto Renovations. After forming Szeto Renovations, he started to work in the construction industry in Canada. Since then, he has worked in a number of construction projects and has gained a diverse experience in the various sectors in the construction industry. In addition to his renovations business with Szeto Renovations, in 2014 he began a trading business which imports various products from China. In March, 2016, he formed TGS Building Products Ltd. of Alberta, which was in the business of the installation of PVC wall and ceiling panels imported from China.
Sau Chun Yu – Director, CFO and Secretary
Ms. Yu is the Treasurer and Secretary of TGS International. She has a diversified working experience. While in Hong Kong, she obtained a diploma in Executive Secretarial Studies in 2001 and another diploma in Business Administration in 2003. In 2003, she immigrated to Canada. In 2008, she obtained a certificate in Health Care Aide in Alberta, Canada. Since then, she worked as a health care aid for Wing Kei Care Centre of Calgary from 2008 to 2010 and for Bayshore Home Health Care of Calgary from 2010 to present. In addition to her work in the health care industry, she has also performed various administrative and accounting functions for a number of companies.
Our company believes that the educational background, accounting and business experience of Mr. Szeto and Ms. Yu provide the qualifications and skills necessary for them to serve as directors and officers of our Company.
Significant Employees
There are no individuals other than our executive officers who make a significant contribution to our business.
Family Relationships
Our President and CEO, Chung Szeto, and our Secretary and CFO are husband and wife.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers have been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years:five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Other Directorships
Our directors do not hold any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
Board of Directors and Director Nominees
The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, at any time not less than 90ninety (90) days prior to the next annual Board meeting at which a slate of director nominees is adopted, the Board will accept written submissions from proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the security holder submitting the proposed nominee believes that the nomination would be in the best interests of our security holders. If the proposed nominee is not the same person as the security holder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee’s qualifications to serve on the Board, as well as a list of references.
The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual’s experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of the slate of director nominees submitted to security holders for election to the Board.
Some of the factors which the Board considers when evaluating proposed nominees include their knowledge of and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from each candidate prior to reaching a determination, and it is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.
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Board and Committee Meetings
Our boardBoard of directorsDirectors held no in person meetings during the year ended February 28, 2018.December 31, 2019. All proceedings of the boardBoard of directorsDirectors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada General Corporate Law and our Bylaws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.
For the year ended February 28, 2018,December 31, 2019, there was no standing nominating committee or committee performing similar functions for our company. Mr. Szeto and Ms. Yu participateWong participates in the consideration of director nominees.
Conflicts of Interest
Our directors are not obligated to commit their full time and attention to our business and, accordingly, they may encounter a conflict of interest in allocating their time between our operations and those of other businesses. In the course of their other business activities, they may become aware of investment and business opportunities which may be appropriate for presentation to us as well as other entities to which they owe a fiduciary duty. As a result, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. They may also in the future become affiliated with entities, engaged in business activities similar to those we intend to conduct.
In general, officers and directors of a corporation are required to present business opportunities to a corporation if:
| · | the corporation could financially undertake the opportunity; |
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| · | the opportunity is within the corporation’s line of business; and |
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| · | it would be unfair to the corporation and its stockholders not to bring the opportunity to the attention of the corporation. |
We plan to adopt a code of ethics that obligates our directors, officers and employees to disclose potential conflicts of interest and prohibits those persons from engaging in such transactions without our consent.
Code of Ethics
We have not adopted a code of ethics that applies to our officers, directors and employees. When we do adopt a code of ethics, we will disclose it in a Current Report on Form 8-K.
Audit Committee
We do not currently have an audit committee or a committee performing similar functions. The boardBoard of directorsDirectors as a whole participates in the review of financial statements and disclosure.
Section 16(a) of the Securities Exchange Act of 1934
Our common stock is not registered pursuant to Section 12Based solely on review of the Securities Exchange Actcopies of 1934, as amended (the “Exchange Act”). Accordingly,such forms furnished to the Company, or written representations that no reports were required, the Company believes that for the year ended December 31, 2019, our officers, directors and principal stockholders are not subject to the beneficial ownership reporting requirements ofexecutive officers complied with Section 16(a) of the Exchange Act.filing requirements applicable to them.
Item 11. Executive Compensation
The following table summarizesExecutive Officer Compensation
Set forth below is information regarding the compensation paid during the years ended December 31, 2018 and 2019 to the following persons:our principal executive officer and principal financial officer, who are collectively referred to as “named executive officers” elsewhere in this Annual Report.
Name and Principal Compensation |
| Year |
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| Salary ($) |
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Tak Shing Eddie Wong |
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| 2019 |
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| 121,777 |
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Chairman of the Board of Directors, Chief Executive Officer and President |
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| 2018 |
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| 45,265 |
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Sai Kit Leung |
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| 2019 |
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| Nil |
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Chief Financial Officer and Secretary |
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| 2018 |
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| Nil |
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Table of Contents |
whom we will collectively refer to as the named executive officers of our company, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officers, whose total compensation did not exceed $100,000 for the respective fiscal year:
SUMMARY COMPENSATION TABLE | |||||||||||||||||||||
Name and Principal Position |
| Year |
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| Salary ($) |
| Bonus ($) |
| Stock Awards ($) |
| Option Awards ($) |
| Non-Equity Incentive Plan Compensa- tion ($) |
| Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) |
| All Other Compensa- tion ($) |
| Total ($) | ||
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Chung Szeto(1) |
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| 2018 |
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| 8,588 |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| 8,588 | |
President, Chief Executive Officer, and Director |
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| 2017 |
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| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
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Sau Chun Yu (2) |
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| 2018 |
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| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil | |
Secretary, Chief Financial Officer, and Director |
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| 2017 |
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| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
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____________
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Narrative Disclosure to Summary Compensation TableEmployment Agreements
There are no employment contracts, compensatory plans or arrangements, including payments to be received from our companyCompany with respect to any executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with our company,Company, or its subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of our company.Company.
Options Grants During the Last Fiscal Year / Stock Option Plans
We do not currently have a stock option plan in favor of any director, officer, consultant or employee of our company. No individual grants of stock options, whether or not in tandem with stock appreciation rights known as SARs or freestanding SARs have been made to any executive officer or director during the last fiscal year; accordingly, no stock options have been granted or exercised by any of the officers or directors during our last fiscal year.
Aggregated Options Exercises in Last Fiscal Year
No individual grants of stock options, whether or not in tandem with stock appreciation rights known as SARs or freestanding SARs have been made to any executive officer or any director during our last fiscal year; accordingly, no stock options have been granted or exercised by any of the officers or directors since during our last fiscal year.
Long-Term Incentive Plans and Awards
We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance. No individual grants or agreements regarding future payouts under non-stock price-based plans have been made to any executive officer or any director or any employee or consultant since our inception; accordingly, no future payouts under non-stock price-based plans or agreements have been granted or entered into or exercised by any of the officers or directors or employees or consultants since we were founded.
Outstanding Equity Awards at Fiscal Year End
No equity awards were outstanding as of the year ended June 30, 2016.December 31, 2019.
Director Compensation of Directors
The members of our board ofOur directors are not compensated by our Company for acting as such. Directors are reimbursed for reasonable out-of-pocket expenses incurred. There are no arrangements pursuantincurred by them in connection with attending Board of Directors’ meetings. During the years ended December 31, 2018 and 2019, salary amounting $45,265 and $121,777 was paid to which directors are or will be compensated indirector, Tak Shing Eddie Wong, respectively. During the future for any services provided as ayear ended December 31, 2019, salary amounting $22,517 was paid to director, Ka Yi Poon. No compensation was paid to the other director.
We do not have any agreements for compensating our directors for their services in their capacity as directors, although such directors are expected in the future to receive stock options to purchase shares of our common stock as awarded by our board of directors.
Name and Principal Compensation |
| Year |
| Salary ($) |
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Ka Yi Poon |
| 2019 |
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| 22,517 |
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| 2018 |
| Nil |
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Shaowei Deng |
| 2019 |
| Nil |
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| 2018 |
| Nil |
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We have determined that none of our directors are independent directors, as that term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Securities Exchange Act of 1934, as amended, and as defined by Rule 4200(a)(15) of the NASDAQ Marketplace Rules.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance.
Indebtedness of Directors, Senior Officers, Executive Officers and Other Management
None of our directors or executive officers or any associate or affiliate of our company during the last two fiscal years, is or has been indebted to our company by way of guarantee, support agreement, letter of credit or other similar agreement or understanding currently outstanding.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
On March 20, 2020, we had 14,858,328 shares of common stock and 66,000 warrants issued and outstanding. The following table sets forth as of February 28, 2018, certain information with respect to the beneficial ownership of our common shares bysecurities as of March 20, 2020, for (i) each shareholder known by us to be the beneficial owner of our directors and executive officers; (ii) all of our directors and executive officers as a group; and (iii) each person who we know beneficially owns more than 5% of our common stock.
Beneficial ownership data in the table has been calculated based on Commission rules that require us to identify all securities that are exercisable or convertible into shares as well as by each of our current directorscommon stock within 60 days of March 20, 2020 and executive officerstreat the underlying stock as a group. Each person hasoutstanding for the purpose of computing the percentage of ownership of the holder.
Except as indicated below, the stockholders listed possess sole voting and investment power with respect to their shares. Unless otherwise noted, the sharesprincipal address of common stock, except as otherwise indicated. Beneficial ownership consistseach of a direct interest in the shares of common stock, except as otherwise indicated.stockholders, directors and officers listed below is at Suite 1023, 10/F., Ocean Centre, 5 Canton Rd., Tsim Sha Tsui, Kowloon, Hong Kong.
Name of Beneficial Owner |
| Number of Shares of Common Stock Beneficially Owned |
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| Percent of Class |
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5% Holders |
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Chi Kin Loo |
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| 7,252,194 |
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| 48.81 | % |
Talent World Group Limited (1) |
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| 7,252,194 |
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| 48.81 | % |
New Precision Global Limited (1) |
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| 7,252,194 |
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| 48.81 | % |
Kwong Bun Mak |
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| 1,570,830 |
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| 10.57 | % |
Brilliant New Ventures Limited (2) |
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| 1,570,830 |
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| 10.57 | % |
Xianqin Pan |
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| 1,676,208 |
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| 11.28 | % |
Empire Glory International Limited (3) |
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| 1,676,208 |
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| 11.28 | % |
Tak Leung Ho |
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| 1,570,830 |
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| 10.57 | % |
Virtue Success Global Limited (4) |
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| 1,570,830 |
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| 10.57 | % |
Linfa Sun |
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| 1,156,344 |
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| 7.78 | % |
Go Achiever International Limited (5) |
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| 1,156,344 |
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| 7.78 | % |
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Directors and Officers: |
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Tak Shing Eddie Wong |
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| 281,007 |
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| 1.89 | % |
Sai Kit Leung |
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| 190,010 |
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| 1.28 | % |
Ka Yi Poon |
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| 5,848 |
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| 0.04 | % |
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Directors and officers as a group (3 Individuals) (6) |
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| 476,865 |
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| 3.21 | % |
Name and Address of Beneficial Owner |
| Amount and Nature of Beneficial Ownership(1) |
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| Percentage of Class |
| ||
Chung Szeto(2) Unit 3, 6420 4 Street NE, Calgary, AB, Canada T2K 5M8 |
| 4,000,000 |
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| 29.56 | % | |
Sau Chun Yu(3) Unit 3, 6420 4 Street NE, Calgary, AB, Canada T2K 5M8 |
| 2,500,000 common |
|
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| 18.48 | % | |
Directors and Executive Officers as a Group(1) |
| 6,500,000 common |
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| 48.04 | % | |
Djong Djung Tjhin Flat F, 9/F, Winning Heights, 8 Wun Tung Street, Tsuen Wan, Hong Kong |
| 1,500,000 common |
|
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| 11.09 | % | |
Ng Kam Shing Raymond Room 85, 15/F, Block 3, Lotus Tower, Kwun Tong Garden Estate, Ngau Tau Kok, Kowloon, Hong Kong |
| 1,500,000 common |
|
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| 11.09 | % | |
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All 5%+ Shareholders as a Group |
| 9,500,000 common |
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| 70.21 | % |
_________________
(1) |
Chi Kin Loo. |
(2) |
Brilliant New Ventures Limited is controlled by Kwong Bun Mak. |
(3) |
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(4) | Virtue Success Global Limited is controlled by Tak Leung Ho. |
(5) | Go Achiever International Limited is controlled by Linfa Sun. |
(6) | Represents common stock held by Tak Shing Eddie Wong, Sai Kit Leung and |
Changes in Control
WeThere are unaware ofno arrangements known to us, including any contract or other arrangement or provisionspledge by any person of our Articles or Bylawssecurities, the operation of which may at a subsequent date result in a change of control of our company. There are not any provisions in our Articles or Bylaws, the operation of which would delay, defer, or prevent a change in control of our company.the Company.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
Except as disclosed below, there have been no transactions or proposed transactions in whichAs of December 31, 2019 and December 31, 2018, loans from related persons included a HK$3 million (equivalent to US$385,158) and HK$4 million (equivalent to US$510,830) respectively loan borrowed from the amount involved exceeds the lesserwife of $120,000 or 1%one of the averageCompany’s stockholders on May 21, 2018. The loan is unsecured, has no collateral or guarantee and carries interest at a monthly rate of our total assets at year-end3.08% for the last two completed fiscal years in which anyfirst month and a monthly rate of our directors, executive officers or beneficial holders of more than 5%1.08% for the rest of the outstanding sharesterm. The loan originally was due to be repaid on May 20, 2019, however, on April 24, 2019, the repayment date was extended to May 20, 2020. The Company repaid HK$1 million (equivalent to US$127,648) loan on April 24, 2019.
As of ourDecember 31, 2018, loans from related persons included a HK$1 million (equivalent to US$127,708) loan borrowed from the son of the CFO of TGS on October 6, 2016. The loan is unsecured, has no collateral or guarantee and carries interest at 8% per annum. The loan was fully repaid by issuing common stock or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest.TGS on May 15, 2019.
As of December 31, 2019 and 2018, amounts due to stockholders, Chi Kin Loo, Kwong Bun Mak, Xianqin Pan and Tak Leung Ho, included $872,968 and $398,208 at December 31, 2019 and December 31, 2018 respectively. The Company is currently in the exploration stage, and the stockholders advanced $517,329 working capital to meet the financing requirement for the year of 2019. Amounts due to stockholders are unsecured, interest-free and there are no fixed terms for repayment. The stockholders have agreed not to demand for repayment within the next 12 months for the balance sheet date.
As of December 31, 2019 and 2018, amount due to a director, Tak Shing Eddie Wong, of HK$576,000 (equivalent to US$73,950) and HK$576,000 (equivalent to US$73,560) respectively. The amount is unsecured, has no collateral or guarantee and is interest-free. The amount was fully repaid on March 13, 2020 and February 14, 2019, respectively.
During the year, ended February 28, 2018, we paidthe director, Sai Kit Leung advanced HK$1,295,687 (equivalent to US$165,392) to the Company. On September 29, 2019, the Company issued 33,096 common shares at a management feeprice of $8,588$3.66 to Chung Szeto, our president, chief executive officer, director and shareholder.
As at February 28, 2018, we are obligated to Chung Szeto, our president, chief executive officer, director and shareholder and other shareholders, for funds advanced to us for working capital, insettle the amount due to the director of $55,097 (2017 - Nil)HK$944,832 (equivalent to US$121,133). The advances areAs of December 31, 2019, there is an amount due to a director of HK$350,855 (equivalent to US$45,045). This amount is unsecured, interest-free and no interest rate or payback schedule has been established.
As at the date of this Annual Report there are no written agreements between our company and Chung Szeto or Sau Chun Yu regarding their respective consulting, officer, orfixed terms for repayment. The director serviceshas agreed not to demand for repayment within 12 months of the company.balance sheet date.
Director Independence
We currently act with two directors. We do not have a director that would qualify as an “independent director” as defined by Nasdaq Marketplace Rule 4200(a)(15).
four directors, one of which is independent. We do not have a standing audit, compensation or nominating committee, but our entire board of directors’ acts in such capacities. We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our company does not believe that it is necessary to have a standing audit, compensation or nominating committee because we believe that the functions of such committees can be adequately performed by the board of directors. Additionally, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development.
Indemnification
Our Bylaws provide that we will indemnify our directors and officers to the fullest extent not prohibited by Nevada law.
The general effect of the foregoing is to indemnify a control person, officer or director from liability, thereby making us responsible for any expenses or damages incurred by such control person, officer or director in any action brought against them based on their conduct in such capacity, provided they did not engage in fraud or criminal activity.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or control persons pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item 14. Principal Accountant Fees and Services
The aggregate fees billed forDuring the most recently completed fiscal year ended February 28,December 31, 2018, the total fees billed by Moore Stephens CPA Limited for audit-related services was $148,063, for tax services was $0 and for all other services was $0.
During the fiscal year ended February 28, 2017 for professional services rendered byDecember 31, 2019, the principal accountant for the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
Year Ended February 28, 2018 CAD$ February 28, 2017 CAD$ Audit Fees Audit Related Fees Nil Nil Tax Fees All Other Fees Nil Total 10,000 (1) 10,000 3,000 (1) 3,000 4,000 17,000 13,000
________
Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.
Our board of directors has considered the nature and amount oftotal fees billed by our independent auditorsMoore Stephens CPA Limited for audit-related services was $124,457, for tax services was $0 and believes that the provision offor all other services for activities unrelated to the audit is compatible with maintaining our independent auditors’ independence.was $0.
Table of Contents |
PART IV
Item 15. Exhibits and Financial Statement Schedules
Exhibit No. |
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| XBRL Instance Document |
___________
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__________(1) Incorporated herein by reference to the current report on Form 8-K filed on September 14, 2018.
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(2) Incorporated by reference to our registration statement on Form S-1 filed on April 25, 2017. None.
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Table of Contents |
SIGNATURES
In accordance withPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TGS | |||
Date: March 20, 2020 | By: | /s/ Tak Shing Eddie Wong | |
Tak Shing Eddie Wong | |||
President, Chief Executive Officer and Chairman of the Board of Directors |
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Date: March 20, 2020 | By: | /s/ |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| March 20, 2020 | |
Tak Shing Eddie Wong | (Principal Executive Officer) | |||
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/s/ Sai Kit Leung |
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| March 20, 2020 | ||
Sai Kit Leung |
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/s/ Shaowei Deng | Director | March 20, 2020 | ||
Shaowei Deng | ||||
/s/ Ka Yi Poon | Director | March 20, 2020 | ||
Ka Yi Poon |
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