Exhibit 99.5
SHANXI GOLDEN TRUST YIWEI MAGNESIUM INDUSTRY CORP.
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2011 AND 2010
INDEX TO FINANCIAL STATEMENTS
| | | Page Number |
| Financial Statements: | | |
| Statements of Operations and Comprehensive Income | | 2 |
| Balance Sheets | | 3 |
| Statements of Equity | | 4 |
| Statements of Cash Flows | | 5 |
| Notes to Financial Statements | | 6 |
SHANXI GOLDEN TRUST YIWEI MAGNESIUM INDUSTRY CORP.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three month periods ended December 31, 2011 and 2010
| | | 2011 | | | 2010 | |
| | | (Unaudited) | | | (Unaudited) | |
| Revenues | | $ | 3,398,883 | | | $ | 4,830,680 | |
| Revenues-related party | | | 599,803 | | | | 852,473 | |
| Total revenues | | | 3,998,686 | | | | 5,683,153 | |
| Cost of revenues | | | 3,877,221 | | | | 5,500,780 | |
| Gross profit | | | 121,465 | | | | 182,373 | |
| Operating expenses (net): | | | | | | | | |
| Selling, general, and administrative | | | (185,212 | ) | | | (157,706 | ) |
| Operating income | | | (63,747 | ) | | | 24,667 | |
| Other (expenses) income: | | | | | | | | |
| Other (expense) income | | | 80,343 | | | | (6,248 | ) |
| Interest income (expense) | | | 1,057 | | | | (1,185 | ) |
| Total other (expense) income | | | 81,400 | | | | (7,433 | ) |
| Income before income taxes | | | 17,653 | | | | 17,234 | |
| Income tax expense | | | (2,486 | ) | | | (7,803 | ) |
| Net income | | $ | 15,167 | | | $ | 9,431 | |
| | | | | | | | | |
| COMPREHENSIVE INCOME (LOSS): | | | | | | | | |
| Net income | | | 15,167 | | | | 9,431 | |
| Foreign currency translation adjustments | | | (242,357 | ) | | | (145,414 | ) |
| Comprehensive loss | | $ | (227,190 | ) | | $ | (135,983 | ) |
The accompanying notes are an integral part of these financial statements.
SHANXI GOLDEN TRUST YIWEI MAGNESIUM INDUSTRY CORP.
BALANCE SHEETS
| | | December 31, 2011 | | | September 30, 2011 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | | $ | 716,747 | | | $ | 879,022 | |
| Accounts and notes receivables, net | | | 94,454 | | | | 77,659 | |
| Accounts and other receivables, and prepaid expenses - related parties | | | 544,914 | | | | 541,827 | |
| Inventories, net | | | 5,077,547 | | | | 2,891,785 | |
| Prepaid expenses and other current assets, net | | | 457,404 | | | | 176,821 | |
| Total current assets | | | 6,891,066 | | | | 4,567,114 | |
| Property, plant and equipment, net | | | 7,237,099 | | | | 7,737,881 | |
| Total assets | | $ | 14,128,165 | | | $ | 12,304,995 | |
| LIABILITIES AND EQUITY | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | | 1,377,147 | | | | 1,038,015 | |
| Accounts and other payables-related parties | | | 1,416,810 | | | | 745,551 | |
| Advances from customers | | | 905,882 | | | | 31,306 | |
| Other liabilities | | | 426,731 | | | | 101,042 | |
| Taxes payable | | | | | | | 160,296 | |
| Dividends payable | | | - | | | | - | |
| Total Liabilities | | | 4,126,570 | | | | 2,076,210 | |
| | | | | | | | | |
| SHAREHOLDERS' EQUITY | | | | | | | | |
| Paid-in capital | | | 8,538,722 | | | | 8,538,722 | |
| Accumulated other comprehensive income | | | 727,702 | | | | 970,059 | |
| Retained earnings | | | 735,171 | | | | 720,004 | |
| Total equity | | | 10,001,595 | | | | 10,228,785 | |
| Total liabilities and equity | | $ | 14,128,165 | | | $ | 12,304,995 | |
The accompanying notes are an integral part of these financial statements.
SHANXI GOLDEN TRUST YIWEI MAGNESIUM INDUSTRY CORP.
STATEMENTS OF EQUITY
For the three months ended December 31, 2011
(Unaudited)
| | | Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income | | | Total Equity | |
| Balance, September 30, 2011 | | $ | 8,538,722 | | | $ | 720,004 | | | $ | 970,059 | | | $ | 10,228,785 | |
| | | | | | | | | | | | | | | | | |
| Net income | | | | | | | 15,167 | | | | | | | | 15,167 | |
| Foreign currency translation adjustment | | | | | | | | (242,357 | ) | | | (242,357 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | $ | 8,538,722 | | | $ | 735,171 | | | $ | 727,702 | | | $ | 10,001,595 | |
The accompanying notes are an integral part of these financial statements.
SHANXI GOLDEN TRUST YIWEI MAGNESIUM INDUSTRY CORP.
STATEMENTS OF CASH FLOWS
For the three months December 31, 2011 and 2010
| | | 2011 | | | 2010 | |
| | | (Unaudited) | | | (Unaudited) | |
| OPERATING ACTIVITIES: | | | | | | |
| Net income | | $ | 15,167 | | | $ | 9,431 | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 292,588 | | | | 284,966 | |
| Allowance for bad debt | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Prepaid expenses and other assets | | | (277,777 | ) | | | (475,809 | ) |
| Accounts receivable and other assets-related parties | | | (3,056 | ) | | | 4,453 | |
| Inventories | | | (2,163,904 | ) | | | 800,921 | |
| Accounts receivable | | | 16,627 | | | | (1,819,122 | ) |
| Accounts payable and accrued expenses | | | 335,741 | | | | 423,071 | |
| Accounts and other payable - related parties | | | 664,546 | | | | 148,563 | |
| Advances from customers | | | 865,830 | | | | (1,779,815 | ) |
| Other payables | | | 163,739 | | | | 365,874 | |
| CASH USED IN OPERATING ACTIVITIES | | | (90,499 | ) | | | (2,037,467 | ) |
| | | | | | | | | |
| INVESTING ACTIVITIES: | | | | | | | | |
| Purchases of property, plant and equipment | | | (143,604 | ) | | | - | |
| CASH USED IN INVESTING ACTIVITES | | | (143,604 | ) | | | - | |
| | | | | | | | | |
| FINANCING ACTIVITIES: | | | | | | | | |
| Cash dividend payment to stakeholders | | | - | | | | | |
| CASH USED IN FINANCING ACTIVITIES | | | - | | | | - | |
| | | | | | | | | |
| EFFECT OF EXCHANGE RATE ON CASH | | | 71,828 | | | | 102,293 | |
| Net decrease in cash | | | (162,275 | ) | | | (1,935,174 | ) |
| Cash and cash equivalents, beginning of the period | | | 879,022 | | | | 2,582,741 | |
| Cash and cash equivalents, end of the period | | $ | 716,747 | | | $ | 647,567 | |
The accompanying notes are an integral part of these financial statements.
GOLDEN TRUST YIWEI MAGNESIUM INDUSTRY CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Shanxi Golden Trust Yiwei Magnesium Industry Corp., a Chinese corporation, is referred to in this report as “we”, “us”, “our”, the “Company” or “Golden Trust.”
Golden Trust, located in Shanxi province, China, was established under the laws of the People’s Republic of China (the “PRC”) in February 2003. We produce and sell pure magnesium ingots in China. The shareholders of Golden Trust are Marvelous Honor Holdings Inc. (“Marvelous Honor”), a Brunei Darussalam company formed in August 2008, and Baotou Changxin Yiwei Magnesium Co., Ltd. (“Baotou Magnesium”), a company formed under the laws of the PRC in 2008. Marvelous Honor and Baotou Magnesium holds 72.5% and 27.5% of the company, respectively.
Basis of Presentation
We have defined various periods that are covered in this report as follows:
| | - | “fiscal 2011” – October 1, 2010 through September 30, 2011 |
| | - | “three months ended December 31, 2011 – October 1, 2011 through December 31, 2011. |
The audited financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Summary of Significant Accounting Policies
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates in fiscal 2011 and fiscal 2010 include the allowance for doubtful accounts receivable, the allowance for obsolete inventory, and the useful life of property, plant and equipment.
Our estimate for allowance for uncollectible accounts is based on an evaluation of our outstanding accounts receivable, other receivables, and loans receivable including the aging of amounts due, the financial condition of our specific customers, knowledge of historical bad debt experience. We group property plant and equipment into similar groups of assets and estimate the useful life of each group of assets; see Note 4 – Property, Plant and Equipment for further information on asset groups and estimated useful lives. Assumptions and estimates employed in these areas are material to our reported financial condition and results of operations. Actual results could differ from these estimates.
Accounts Receivable
Accounts receivable are reported at net realizable value. We have established an allowance for uncollectible accounts based upon factors pertaining to the credit risks of specific customers and clients, historical trends, aging of the receivable and other information. Delinquent accounts are written off when it is determined that the amounts are uncollectible.
Inventories
Inventories, consisting of raw materials and finished goods, are stated at the lower of cost or market utilizing the weighted average method. Inventories as of December 31, 2011 and September 30, 2011 were $5,077,547 and $2,891,785, respectively. Due to the nature of our business and the short duration of the manufacturing process of our products, there was no material work-in-process inventory at December 31 and September 30, 2011.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of (i) prepayments to vendors for merchandise that had not yet been shipped, (ii) other prepaid expenses, (iii) loans receivable and (iv) other receivables. At December 31 and September 30, 2011, prepaid expenses and other current assets were $457,404 and $176,821, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated on a straight line basis over their estimated useful lives of three to forty years. Maintenance and repairs are charged to expense as incurred. Significant renewals and improvements are capitalized.
Impairment of Long-Lived Assets
In accordance with ASC 360, “Property, Plant, and Equipment”, we periodically review our long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the estimated fair value and the book value of the underlying asset. We did not record any impairment charges on property, plant and equipment during the three months ended December 31, 2011 and 2010.
Advances from Customers
Advances from customers represent prepayments to us for merchandise that had not yet been shipped to customers. Advances from customers totaled $905,882 and $31,306 at December 31 and September 30, 2011, respectively.
Comprehensive Income (loss)
We follow ASC 220, “Comprehensive Income” to recognize the elements of comprehensive income (loss). Comprehensive income (loss) is comprised of net income (loss) and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Our comprehensive income for the three months ended December 31, 2011 and 2010 included net income and foreign currency translation adjustments.
Foreign Currency Translation
The accompanying financial statements are presented in United States dollars. The functional currency of our Chinese subsidiaries is the Renminbi (“RMB”), the official currency of the People’s Republic of China. Capital accounts of the financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rates for the twelve month periods ended September 30, 2011 and September 30, 2010, respectively. A summary of the conversion rates for the periods presented is as follows:
| | | December 31, 2011 | | | December 31, 2010 | |
| Period end RMB: U.S. dollar exchange rate | | | 6.3523 | | | | 6.6118 | |
| Average fiscal-year-to-date RMB: U.S. dollar exchange rate | | | 6.3535 | | | | 6.6670 | |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through PRC authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at the rates applied in the translation.
Income Taxes
We account for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in our financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between the financial reporting and tax basis of our assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability that we will generate sufficient taxable income to be able to realize the future benefits indicated by the deferred tax assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or the entire deferred tax asset will not be realized.
Revenue Recognition
We follow the guidance of ASC 605, “Revenue Recognition,” for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
Value Added Taxes
Pursuant to the Provisional Regulation of China on Value Added Tax (“VAT”) and their rules, all entities and individuals that are engaged in the sale of goods in China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to a portion of or a full refund of the VAT that it has already paid or borne.
NOTE 2 – COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive income or loss. Other comprehensive income or loss refers to revenue, expenses, gains and losses that under US GAAP are included in comprehensive income but excluded from net income as these amounts are recorded directly as adjustments to stockholders’ equity.
The following table shows the accumulated other comprehensive income balance as of December 31, 2011.
| | | Foreign Currency Items | | | Accumulated Other Comprehensive Income | |
| Balance at September 30, 2011 | | $ | 970,059 | | | $ | 970,059 | |
| Adjustments | | | (242,357 | ) | | | (242,357 | ) |
| Balance at December 31, 2011 | | $ | 727,702 | | | $ | 727,702 | |
NOTE 3 - INVENTORIES
Inventories at December 31 and September 30, 2011 consisted of the following:
| | | December 31, 2011 | | | September 30, 2011 | |
| | | | | | | |
| Raw materials | | $ | 2,383,919 | | | $ | 1,748,302 | |
| Finished goods | | | 2,693,628 | | | | 1,143,483 | |
| Total Inventory | | $ | 5,077,547 | | | $ | 2,891,785 | |
Due to the nature of our business and the short duration of the manufacturing process for our products, there is no material work in progress inventory at December 31 and September 30, 2011.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
At December 31, 2011 and September 30, 2011, property, plant and equipment, consisted of the following:
| Property, Plant and Equipment | | | | | | |
| Description | | Useful Life | | | December 31, 2011 | | | September 30, 2011 | |
| | | | | | | | | | |
| Building | | 10-40 years | | $ | 5,071,560 | | | $ | 5,042,823 | |
| Manufacturing equipment | | 5-10 year | | | | 9,677,598 | | | | 9,565,222 | |
| Office equipment and furniture | | 3-5 year | | | | 55,103 | | | | 54,791 | |
| Autos and trucks | | 5 year | | | | 384,312 | | | | 382,134 | |
| Construction in progress | | | N/A | | | | - | | | | - | |
| Total | | | | | | | 15,188,573 | | | | 15,044,970 | |
| Less: accumulated depreciation | | | | | | | (7,951,474 | ) | | | (7,307,089 | ) |
| Property, Plant and Equipment, Net | | | | | | $ | 7,237,099 | | | $ | 7,737,881 | |
For the three months ended December 31, 2011 and 2010, depreciation expense totaled $292,588 and $284,966, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
List of Related Parties
We have specified the following persons and entities as related parties with ending balances as of December 31, and September 30, 2011:
| | | Yuwei Huang, is executive vice president of the Magnesium segment of China Direct Industries Inc. (“China Direct”), a member of the board of directors of China Direct and Taiyuan YiWei Magnesium, and a shareholder of Golden Trust; |
| | | Kong Tung, a member of the board of directors of China Direct and the legal representative of Golden Trust; |
| | | Taiyuan Office of Golden Trust, a company organized under the laws of the PRC (“Taiyuan Branch”), is under the management of an officer of Golden Trust; |
| | | Taiyuan Yiwei Magnesium Co. Ltd., a company organized under the laws of the PRC (“Yiwei Magnesium”), is under the management of an officer of Golden Trust; |
| | | CDI Shanghai Management Co. Ltd., a company organized under the laws of the PRC (“CDI Shanghai”), is a subsidiary of China Direct Industries Inc. |
| | | Taiyuan Yiwei Qingchen Magnesium Co. Ltd., a company organized under the laws of the PRC (“Qingchen Magnesium”), is legally represented by an officer of Golden Trust. |
| | | Hui Dong is a member of the board of directors of Golden Trust. |
As of December 31 and September 30, 2011, Other Receivables – related parties were $544,914 and $541,827 due from Taiyuan Office of Golden Trust.
As of December 31, 2011, other payables –related patties of $1,416,810 were due to Yiwei Magnesium.
As of September 30, 2011, Other Payables – related parties of $745,551 were comprised of the followings:
| | · | $2,028 Other Payables to CDI Shanghai; |
| | · | $743,524 Other Payables to Yiwei Magnesium. |
