cdii10-k.htm
 


UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
Form 10-K
 
x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the year ended September 30, 2011
or
 
o           TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from _____to _____
 
 Commission file number: 001-33694
 
CHINA DIRECT INDUSTRIES, INC.
 
(Exact name of registrant as specified in its charter)
 
Florida
 
13-3876100
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 363-7333
Securities registered under Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.0001
 
Nasdaq Global Market

Securities registered under Section 12(g) of the Act:
None
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  oYes x No 

 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
 
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.  x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  xYes  o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  o Yes x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $40,463,624 on March 31, 2011.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 40,614,416 shares of common stock are issued and outstanding as of December 16, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 
 

 
 
 

 
TABLE OF CONTENTS

Part I
   
 Item 1.
Business.
1
 Item 1A.
Risk Factors.
11
 Item 1B.
Unresolved Staff Comments.
22
 Item 2.
Properties.
22
 Item 3.
Legal Proceedings.
23
 Item 4.
(Removed and Reserved).
24
Part II
   
 Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
24
 Item 6.
Selected Financial Data.
25
 Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
25
 Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
39
 Item 8.
Financial Statements and Supplementary Data.
39
 Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
39
 Item 9A.
Controls and Procedures.
40
 Item 9B.
Other Information.
41
Part III
   
 Item 10.
Directors, Executive Officers and Corporate Governance.
41
 Item 11.
Executive Compensation.
46
 Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
51
 Item 13.
Certain Relationships and Related Transactions, and Director Independence.
52
 Item 14.
Principal Accounting Fees and Services.
57
Part IV
   
 Item 15.
Exhibits, Financial Statement Schedules.
58
Signatures
  62


 
i

 
 
 

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

We have defined various periods that are covered in this report as follows:
 
 
 
“fiscal 2012” — October 1, 2011 through September 30, 2012.
 
 
“fiscal 2011” — October 1, 2010 through September 30, 2011.
 
 
“fiscal 2010” — October 1, 2009 through September 30, 2010.

When used in this report the terms:

 
 
"China Direct Industries”, "we”, "us” or “our” refers to China Direct Industries, Inc., a Florida corporation, and our subsidiaries;
 
 
“CDI China”, refers to CDI China, Inc., a Florida corporation, and a wholly owned subsidiary of China Direct; and
 
 
“PRC” refers to the People’s Republic of China.

Magnesium Segment

 
 
“Chang Magnesium", refers to Taiyuan Changxin Magnesium Co., Ltd., a company organized under the laws of the PRC and a 51% owned subsidiary of CDI China;
 
 
“Chang Trading”, refers to Taiyuan Changxin YiWei Trading Co., Ltd., a company organized under the laws of the PRC and a wholly owned subsidiary of Chang Magnesium;
 
 
“Excel Rise”, refers to Excel Rise Technology Co., Ltd., a Brunei company and a wholly owned subsidiary of Chang Magnesium;
 
 
“CDI Magnesium”, refers to CDI Magnesium Co., Ltd., a Brunei company and a former 51% owned subsidiary of Capital One Resources;
 
 
“Asia Magnesium”, refers to Asia Magnesium Corporation Limited, a company organized under the laws of Hong Kong and a wholly owned subsidiary of Capital One Resource;
 
 
“Golden Magnesium" refers to Shanxi Gu County Golden Magnesium Co., Ltd., a company organized under the laws of the PRC and a 100% owned subsidiary of Asia Magnesium;
 
 
“Pan Asia Magnesium”, refers to Pan Asia Magnesium Co., Ltd., a company organized under the laws of the PRC and a former 51% owned subsidiary of CDI China;
 
 
“Baotou Changxin Magnesium”, refers to Baotou Changxin Magnesium Co., Ltd., a company organized under the laws of the PRC, a 51% owned subsidiary of CDI China, and a 39% owned subsidiary of Excel Rise. Effectively China Direct holds a 70.9% interest;
 
 
“IMG” or “International Magnesium Group”, refers to International Magnesium Group, Inc., a Florida corporation and a 100% owned subsidiary of China Direct Industries;
 
 
“IMTC” or “International Magnesium Trading”, refers to International Magnesium Trading Corp., a company organized under the laws of Brunei and a 100% owned subsidiary of IMG;
 
 
“Ruiming Magnesium”, refers to Taiyuan Ruiming Yiwei Magnesium Co., Ltd., a company organized under the laws of the PRC and an 80% majority owned subsidiary of CDI China; and
 
 
 “Beauty East”refers to Beauty East International, Ltd., a Hong Kong company and a 100% subsidiary of CDI China.

Basic Materials Segment

 
 
“Lang Chemical”, refers to Shanghai Lang Chemical Co., Ltd. a company organized under the laws of the PRC and a 51% owned subsidiary of CDI China;
 
 
“CDI Jingkun Zinc”, refers to CDI Jingkun Zinc Industry Co., Ltd., a company organized under the laws of the PRC and a 95% owned subsidiary of CDI Shanghai Management;
 
 
“CDI Jixiang Metal”, refers to CDI Jixiang Metal Co., Ltd., a company organized under the laws of the PRC and a wholly owned subsidiary of CDI China;
 
 
“CDI Metal”, refers to Shanghai CDI Metal Material Co., Ltd. (a/k/a Shanghai CDI Metal Recycling Co., Ltd.), a company organized under the laws of the PRC and a wholly owned subsidiary of CDI Shanghai Management; and
 
 
“CDI Beijing” refers to CDI (Beijing) International Trading Co., Ltd., a company organized under the laws of the PRC and a 51% owned subsidiary of CDI Shanghai Management.
 
 
“CDII Trading” refers to CDII Trading, Inc., a Florida corporation and a 100% owned subsidiary of China Direct Industries.

Consulting Segment

 
 
“China Direct Investments”, refers to China Direct Investments, Inc., a Florida corporation, and a wholly owned subsidiary of China Direct;
 
 
“CDI Shanghai Management”, refers to CDI Shanghai Management Co., Ltd., a company organized under the laws of the PRC and a wholly owned subsidiary of CDI China; and
 
 
“Capital One Resource”, refers to Capital One Resource Co., Ltd., a Brunei company, and a wholly owned subsidiary of CDI Shanghai Management.


 
ii

 
 
 


PART I

ITEM 1.
BUSINESS.

Overview

We are a U.S. based company that sources, produces and distributes industrial products in China and the Americas. We also provide business and financial consulting services to public and private American and Chinese businesses. We operate in three identifiable business segments: Magnesium, Basic Materials and Consulting. Beginning in 2006, we established our Magnesium and Basic Materials segments which have grown through acquisitions of controlling interests of Chinese private companies. We consolidate these acquisitions as either our wholly or majority owned subsidiaries. Through our U.S. based industrial commodities business, established in 2009, we source, finance, manage logistics, and sell industrial commodities from North and South America for ultimate distribution in China. We are a U.S. company that manages a portfolio of Chinese entities and also provide consulting services to Chinese businesses.

In our Magnesium segment, our largest segment in revenues and total assets, we produce, sell and distribute pure magnesium ingots, magnesium powder and scraps.

In our Basic Materials segment, we sell and distribute a variety of products including industrial grade synthetic chemicals, steel products, non ferrous metals, recycled materials, and industrial commodities. This segment also includes our zinc ore mining property which has not commenced operations.

In our Consulting segment, we provide business and financial consulting services to U.S. public companies that operate primarily in China. The consulting fees we charge vary based upon the scope of the services to be rendered.

Our corporate headquarters are in Deerfield Beach, Florida which houses the U.S. executive and administrative team that guides our overall operations. Our U.S. office employs both English and Chinese speaking business and accounting staff and our legal and other executive management. These professionals focus on due diligence, business development, finance, accounting and compliance with the reporting requirements of the Securities and Exchange Commission (“SEC”) and other applicable laws in the U.S. and the PRC.

Corporate Initiatives

In fiscal 2011 management moved forward with several corporate initiatives to strengthen our Magnesium Segment in China and diversify our revenue base internationally.  In our Magnesium Segment, we continued with management’s consolidation plan of magnesium facilities owned or controlled by Yuwei Huang, general manager of our Magnesium segment and member of our board of directors, in our effort to become the industry leader in the production and distribution of pure magnesium products.  In May 2011 we acquired the remaining 48% non-controlling interest in Golden Magnesium, making it a wholly owned subsidiary of our company. In September of 2011 we entered into a definitive agreement, subject to shareholder approval, to acquire 100% of Golden Trust Magnesium Industry Co., Ltd. and 80% of Lingshi Xinghai Magnesium Industry Co., Ltd.  Additionally, in September 2011, we sold our 51% interest in Pan Asia Magnesium, our only magnesium operation unaffiliated with Mr. Huang, for $3.05 million in cash.  As a result of the implementation of our consolidation plan and improvements in demand for our magnesium products throughout fiscal 2011, we were able to achieve a 95% improvement in revenues in this segment as compared to fiscal 2010, including reaching profitability in the three month period ended September 30, 2011 where we recorded net income attributable to China Direct Industries of approximately $243,000. Management expects our annual magnesium ingot production capacity to reach 80,000 metric tons upon completion of these acquisitions and our annual magnesium powder production capacity to remain at 10,000 metric tons. Management intends to rationalize our overall magnesium operations to achieve effective utilization rates based on magnesium demand trends throughout the course of fiscal 2012.

In our Basic Materials segment we commenced sales from our U.S. based industrial commodities business.  We established operations in Mexico, Chili and Bolivia where we entered into contracts with local operators and producers to secure supplies of iron ore. Throughout the course of fiscal 2011 we have established domestic logistics and materials processing capabilities and a relationship with a leading European logistics and trading solutions company to sell our sourced iron ore for delivery into China. We have also worked with our suppliers and local governmental authorities to obtain the necessary permits and approvals to process and export iron ore on a continuous basis in these countries.  We believe we are well positioned to progressively build revenue from these operations throughout fiscal 2012 and for the foreseeable future.  We are also evaluating potential strategic alternatives for non-core assets in this segment including but not limited to possible sale.

 
- 1 -

 
 
 


In our Consulting segment we have increased our marketing efforts in the U.S. and in China.  These efforts include our recently launched marketing initiative for our new One-Stop China ValueTM  program. This program is designed to implement a broad range of strategies to enhance and maximize shareholder value for China-based U.S. listed companies. We primarily focus our marketing efforts on companies with good corporate governance, management integrity, and the potential for growth and profitability. Other marketing plans include sponsoring trade symposiums, investment forums, and forming strategic alliances with industry and trade associations under the auspices of the Chinese Government. We believe these efforts will lead to additional clients and create significant growth in this segment in the coming years.

Magnesium Segment

We operate four magnesium facilities in China that produce and/or distribute pure magnesium ingots, powders and scraps. In fiscal 2011 revenues from this segment were $99.9 million, including revenues of $6.6 million from related parties, and represented 53.2% of our total consolidated revenues. In fiscal 2010 revenues from this segment were $51.1 million, including revenues of $7.4 million from related parties, and represented 45.3% of our total consolidated revenues.

We produced, sold and distributed approximately 36,637 metric tons of magnesium products in fiscal 2011. Through our acquisition of Ruiming Magnesium we produced and sold 3,484 metric tons of magnesium powders. As of September 30, 2011, we have total annual magnesium ingot production capacity of 50,000 metric tons and annual magnesium powder production capacity of 10,000 metric tons. In fiscal 2011 our average selling price of magnesium was approximately $2,703 per metric ton as compared to $2,348 per metric ton in fiscal 2010.

Magnesium is the third most commonly used structural metal, following steel and aluminum.  It is the lightest and strongest of the structural metals, it is one fourth the weight of steel, two fifths the weight of titanium and two thirds the weight of aluminum. Magnesium has multiple industrial and consumer applications. Magnesium ingots are a prime raw material input for the production of titanium and aluminum alloys and magnesium alloys.  Magnesium powder and granules are used to remove sulfur in the production of steel.  Due to their unique light weight and high strength properties, magnesium alloys are used in a variety of aircraft and automobile parts, as well as in electronic equipment such as computers, cameras and cellular phones.

Our magnesium production facilities are located in the Shanxi Province and Inner Mongolia, China. These regions are rich in natural resources such as dolomite and ferrosilicon, the primary raw materials used to produce our pure magnesium. In addition, these areas have vast deposits of coal. Our magnesium facilities in the Shanxi Province utilize waste gas to fuel their furnaces. Waste gas is a by-product in the processing of coal into coke. The utilization of waste gas as an energy source is less expensive than burning coal and provides a more environmentally friendly source of energy compared to magnesium producers who burn coal to fuel their furnaces.
 
The exploitation of waste gas as energy is an important element to our Magnesium segment in light of the regulations implemented by the PRC to control industrial pollution. In April 2008, the PRC amended the Energy Conservation Law, previously adopted in 1997 which regulates national standards on energy conservation. The amendment establishes per unit energy consumption quotas for magnesium smelting, effective as of June 2008. Companies failing to meet the new environmental protection standards may be subject to penalties, in the form of fines and/or suspension. Our facilities have obtained a license from the appropriate provincial environmental protection administrations permitting them to produce magnesium. In addition, on March 7, 2011, the Ministry of Industry and Information Technology (MIIT) of the People’s Republic of China published new conditions for the magnesium industry setting standards for the layout, production capacity and environmental protection for the industry and to accelerate industry restructuring, enhance environmental protection, regulate investment and prevent redundant construction. The new conditions require existing producers to have annual production capacity of at least 15,000 metric tons per year. If an existing producer wishes to apply for renovation or expansion of its production, it will need to have a production capacity of at least 20,000 metric tons per year.  Any new magnesium producers must have a planned capacity of at least 50,000 metric tons per year.  In addition, new magnesium refining projects will be prohibited in areas 1 kilometer from drinking water sources, basic farmland protection areas, natural reserves, scenic spots and other areas that require strict environmental quality. See Item 1. Business – Government Regulation – Environment.

We utilize a production method for magnesium ingots known as the silicothermic manufacturing process, sometimes referred to as the ‘pidgeon process’. The pidgeon process, a common method employed in China, offers several advantages including reduced costs and production cycles. From an environmental perspective the process is beneficial when compared with alternative production methods. In addition, all of our facilities utilize high temperature air combustion technology, also known as flameless combustion in an attempt to further reduce production costs.

 
- 2 -

 
 
 


As of September 30, 2011, our available annual production capacity is approximately 50,000 metric tons of magnesium and 10,000 tons of magnesium powder as set forth in the table below:

   
Capacity
(In metric tons)
 
Facility
 
Magnesium Ingot
   
Magnesium Powder
 
Baotou Changxin Magnesium
   
24,000
       
Chang Magnesium
   
10,000
       
Golden Magnesium
   
12,000
       
Ruiming Magnesium
   
4,000
     
10,000
 
Totals
   
50,000
     
10,000
 

Sources and Availability of Raw Materials

We obtain dolomite and ferrosilicon, the primary raw materials used to produce pure magnesium and waste gas used to fuel our magnesium producing furnaces from a variety of sources including mining companies, coke refineries who produce waste gas as a by-product in the production of coke, washing coal, coal tar, sulfur, ammonium sulfate and benzene. We have a fixed price supply agreement for a specified quantity of waste gas for our Golden Magnesium facility which expires in August 2027. In fiscal 2011, Pine Capital Enterprise Inc., a related party accounted for over 10% of the purchases of finished goods for resale and raw materials used in our Magnesium segment. We purchase dolomite and ferrosilicon on a purchase order basis from local suppliers at market prices based on our production requirements.

Although we experienced short term shortages of electricity and coke gas during portions of fiscal 2010 and fiscal 2011 at some of our magnesium facilities due to government imposed power restrictions and the diversion of waste gas resources due to extreme cold weather conditions, we believe we will have access to sufficient electricity, dolomite, ferrosilicon and coke gas to meet our needs for the foreseeable future as the government imposed energy restrictions expire and demand for coke increases.  See Item 1A – Risk Factors - Fluctuations in the cost or availability of electricity, coke, coal and/or natural gas would lead to higher manufacturing costs, thereby reducing our margins and limiting our cash flows from operations.

Proposed Acquisition of Golden Trust Magnesium and Lingshi Magnesium

In anticipation of continuing increases in worldwide demand for our magnesium products, in August 2011 we entered into a series of agreements (the “Transfer Agreements”) to acquire a 100% ownership interest in Golden Trust Magnesium Industry Co., Ltd. (“Golden Trust”) and an 80% ownership interest in Lingshi Xinghai Magnesium Industry Co., Ltd. (“Lingshi Magnesium”) from entities owned or controlled by Yuwei Huang, a director and executive officer of our company and Kong Tung, a director of our company.  Golden Trust and Lingshi Magnesium have a combined pure magnesium production capacity of 32,000 metric tons per year.  We agreed to pay an aggregate of $26,705,070 to acquire these companies payable $4,802,530 in cash or proceeds from repayment of our intercompany loans, $2,210,291 in cash or our common stock, $14,996,165 in shares of our common stock and $4,696,085 by way of assignment of our interest in a subsidiary of ours, Excel Rise.  If all $17,206,456 of the purchase price is paid in shares of our common stock (18,188,642 shares), these shares will represent 31.1% of the total post closing shares of our company. Completion of this acquisition is subject to our shareholders’ approval of the issuance of our common stock under the Transfer Agreements. Although either party may terminate the Transfer Agreements if the transaction does not close by December 31, 2011, the parties are in discussions to extend the closing date while we seek the required regulatory and shareholder approval.  In addition, in connection with our proposed acquisition of Golden Trust and Lingshi Magnesium, we plan on entering into a management agreement with Messrs. Huang and Tung to provide management services to the Golden Trust and Lingshi Magnesium and our other magnesium operations (the “Management Agreement”). The Management Agreement provides for the payment to Mr. Huang of an annual salary of RMB 2,400,000 (approximately US $375,000) and he and his management team are entitled to earn up to 960,000 shares of our common stock. Mr. Tung will be entitled to receive an annual salary of RMB 1,200,000 (approximately US $187,000) and he and his management team will be entitled to earn up to 480,000 Shares of the Company’s common stock.  The shares of our common stock will be awarded by us upon achievement of the performance benchmark and other performance criteria set forth in the Management Agreement.  The term of the Management Agreement will be three years.

 
- 3 -

 
 
 


Basic Materials Segment

In our Basic Materials segment, our primary business focus is selling and distributing a variety of products in Asia including industrial grade synthetic chemicals, steel products, non ferrous metals, recycled materials and industrial commodities. This segment also includes our zinc mining property. In fiscal 2011 our Basic Materials segment generated revenues of $69.0 million, representing approximately 36.7% of our total consolidated revenues. In fiscal 2010 revenues from this segment were $58.8 million and represented 52% of our total consolidated revenues.

Distribution of Synthetic Chemicals and Basic Resources. Through our Lang Chemical subsidiary, we act as a third party agent in the sale and distribution of industrial chemicals which are employed as raw materials in the production of a variety of finished products such as paint, glue, plastics, textiles, leather goods as well as various medical products. We sell and distribute four primary product categories of industrial grade synthetic chemicals, glacial acetic acid and acetic acid derivatives, acrylic acid and acrylic ester, vinyl acetate-ethylene (“VAE”) and polyvinyl alcohol (“PVA”). Through our CDI Beijing subsidiary we also sell and distribute steel related products including reinforcing steel bars and other industrial related commodities.

In July 2009, we launched our industrial industrial commodities business to engage in the global purchase and sale of industrial commodities. These commodities include mineral ores, non-ferrous metals, scrap metals, rare metals, petrochemicals, and other related commodities. In fiscal 2011 we have entered into agreements with suppliers in Mexico and parts of South America for the ongoing supply of iron ore for sale to our customers in China. We also market products from our other business units as well as some of our consulting clients by leveraging our relationships with buyers in China and abroad with worldwide suppliers we source. In fiscal 2011, we have entered into supply agreements in three countries.

Zinc Ore Mining.   We are in the process of renewing our lease for the mining rights to approximately 51 acres located in the Yongshun Kaxi Lake Mining area which is known to hold zinc ore. The mining rights we obtained from the Ministry of Land and Resources in 2004 allow for the mining of an aggregate of 10,000 metric tons of zinc ore per year expired in October 2009. See Note 9 – Property Use Rights to our financial statements included in this report. We have not commenced amortization of the acquisition costs for the mining rights as it has not started operations. We have no other mining rights and consequently do not have any history, positive or negative, regarding renewals of mining rights.

Due to a number of factors including the global economic downturn beginning in 2008, we did not commence operations or establish a reserve on the property.  Management believes that its resources can be better utilized in its other businesses and is currently evaluating strategic alternatives for its zinc ore mine including acquisition of additional rights to adjacent mining sites and the partial or full sale of its interest in this business. Presently we do not have a timetable for when or if this business will be expended or sold.

Sources and Availability of Raw Materials

We obtain the industrial chemicals and steel related products which we distribute primarily from a variety of sources including manufacturers in China. We purchase these chemicals and steel related products on a fixed price supply agreement for a specified quantity for a specified period of time and on a spot basis at market prices based on our orders we receive or anticipated demand. In fiscal 2011, we have one supplier that accounted for over 10% of the purchases of chemicals we resell, Shanghai Wujing Chemical Co., Ltd. and three suppliers of steel related products, Jiu Rui Long (Beijing) Trading Co., Ltd., Beijing Bo Xing Tong Da Material Trade, Co., Ltd., Beijing Jiu Ding Ao Ye Trading Co., Ltd. We believe we will have access to sufficient supply of the chemicals and steel related products we sell for the foreseeable future.

Consulting Segment

In our Consulting segment, we provide a suite of consulting services to U.S. public companies that operate primarily in China. We currently have service contracts with clients who conduct business in China or seek to conduct business within China. We generate revenues by providing consulting services in the areas of financing structures and arrangements, mergers, acquisitions and other business transactions, identifying potential areas of growth, translation services, managing and coordinating all necessary government approvals and licenses in the PRC, marketing services, investor relations services, and coordination of the preparation of required SEC filings.

 
- 4 -

 
 
 

Our consulting fees vary based upon the scope of the services to be rendered. Historically, a significant portion of the fees we earned have been paid in the form of our clients’ securities. We classify these securities as investments in marketable securities available-for-sale or investment in marketable securities available for sale-related party. We value these securities at fair market value at the time of receipt for the purposes of our revenue recognition. Primarily all of the securities we receive as compensation are from small public companies and are typically restricted as to resale under Federal securities laws.

We have been actively marketing our advisory services in China and expect to add new consulting clients and complete additional transactions through these enhanced marketing efforts coupled with increasing demand from PRC companies seeking to list, or currently trading on, U.S. equity markets. We have and will continue to focus our efforts on those companies with potential for growth and profitability which are in need of business development and public relations expertise and capital. These efforts include sponsoring trade symposiums, investment forums, formation of strategic alliances with the industry and trade associations under the auspices of the Chinese government and our recently launched One-Stop China ValueTM program to help enhance shareholder value and provide essential corporate services.

In addition to potential transaction fees, we also anticipate receiving additional client fees generated from our ongoing annual service contracts. Management expects that revenues from transactional and activity–based fees from our existing clients and our current pipeline of prospects will be sufficient to support our advisory operations in the U.S. throughout the remainder of fiscal 2011 and beyond. Overall, management foresees our Consulting segment will remain an important revenue and earnings driver for our future growth in the years to come.

EMPLOYEES

As of November 30, 2011 we have approximately 1,578 full time employees, including 18 employees in the United States and 1,560 employees in the PRC. We believe we have good working relationships with our employees. We are currently not a party to any collective bargaining agreements.

For our employees in the PRC, we are required to contribute a portion of their total salaries to the Chinese government’s social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, as well as a housing assistance fund, in accordance with relevant regulations. We expect the amount of our contribution to the government’s social insurance funds to increase in the future as we expand our workforce and operations.

Executive Officers of the Company

The following sets forth the names and ages of each of our executive officers as of September 30, 2011 and the positions they hold:

Name
 
Age
 
Position with the Company
Yuejian (James) Wang, Ph.D
   
49
 
Chairman, President and Chief Executive Officer
Andrew X. Wang
   
49
 
Executive Vice President and Chief Financial Officer
Yuwei Huang
   
57
 
Executive Vice President - Magnesium
Lazarus Rothstein
   
53
 
Executive Vice President, General Counsel and Secretary

Each of our executive officers holds office for such term as may be determined by our board of directors. Set forth below is a brief description of the business experience of each of our executive officers.

Yuejian (James) Wang, Ph.D. has served as our CEO and Chairman of the board of directors since August 2006. Dr. Wang, a co-founder of China Direct Investments, has served as its CEO and Chairman of its board of directors since its inception in January 2005. Dr. Wang has also been a member of the board of directors of CIIC Investment Banking Services (Shanghai) Company Limited from since June 2004 to 2007. From 2001 to 2004, he was President and Chairman of the board of directors of Genesis Pharmaceuticals, Inc. (formerly Genesis Technology Group, Inc.). From 2000 until 2001, Dr. Wang was President, Chief Operating Officer and director of China Net & Technologies, Inc., a technology firm. From 2000 until 2001, Dr. Wang was Vice President, Chief Operating Officer and director of Ten Sleep Corporation, a California-based integrated Internet company that acquired and licensed technology, identified, acquired and developed development-stage technology and service entities and focused on the internet infrastructure market-PC, application-ready devices. From January 2000 until November 2000, Dr. Wang was President of Master Financial Group, Inc., a St. Paul, Minnesota-based company which was a wholly-owned subsidiary of Ten Sleep Corporation that provided consulting services for small private and public entities in the area of corporate finance, investor relations and business management. Between 1997 and 2000, Dr. Wang was a research scientist and Assistant Professor, Lab Director at the University of Minnesota, School of Medicine. Dr. Wang received a Bachelor of Science degree from the University of Science and Technology of China in He Fei, China in 1985, a Master of Science Degree from the Shanghai Second Medical University, Shanghai, China in 1988, and his Ph.D. degree from the University of Arizona in 1994.

 
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Yuwei Huang has served as as a member of our board of directors since January 2009 and our Executive Vice President – Magnesium since February 2009 and as Chief Executive Officer of our subsidiary, Chang Magnesium, since June 2006. Mr. Huang is responsible for the operations of Chang Magnesium. Mr. Huang also serves as General Manager of Taiyuan YiWei Magnesium Industry Co., Ltd. (“YiWei Magnesium”) since founding the company in 1999 and serves in various positions with its affiliated entities including Vice Chairman of Shanxi Golden Trust YiWei Magnesium Industry Co., Ltd. since 2002, Vice Chairman of Taiyuan Qingcheng YiWei Magnesium Industry Co., Ltd. since 2001, Vice Chairman and General Manager of Taiyuan Minwei Magnesium Industry Co., Ltd. since 2000, General Manager of Taiyuan YiWei Magnesium Factory since 1998 and Chairman of Shangxi NiChiMen YiWei Magnesium Co., Ltd. since 1994. YiWei Magnesium, a minority owner of Chang Magnesium, owns interests in seven subsidiary magnesium factories, a magnesium alloy factory and a magnesium powder desulphurization reagent factory, all located in China.

Andrew X. Wang has served as our Executive Vice President and Chief Financial Officer since December 2009 and from August of 2009 through early December 2009 as a consultant to us.  As a consultant, Mr. Wang was responsible for overseeing the financial management of our subsidiaries in China. Prior to joining, from 2006 to 2008, Mr. Wang served as International Accounting and Project Manager for Healthways, Inc. (NASDAQ: HWAY) a multinational company where he oversaw general ledger accounting, month-end closing, foreign currency translations, consolidation, and financial reporting over all subsidiaries and controlled entities outside the United States. From 2002 to 2006, Mr. Wang served as International Finance Manager for Adtran, Inc, (NASDAQ: ADTN), a telecommunication and network equipment manufacturer, where his responsibilities included overhauling and overseeing all global accounting and financial reporting, taxation, trade finance, banking, foreign currency transactions, and other treasury operations. Mr. Wang held various financial and business development positions from 1986 through 2002, with an emphasis on global operations. Mr. Wang received a Masters Degree in Business Administration from Pepperdine University in 2001, and a Bachelor of Arts Degree from the University of Southern California in 1986. Mr. Wang is also a Certified Public Accountant.
 
Lazarus Rothstein has served as our Executive Vice President, General Counsel and Secretary since February 2009 and as our Vice President, General Counsel and Secretary since April 2008. From 2003 to 2006, Mr. Rothstein was an Assistant General Counsel at Elizabeth Arden, Inc. a global prestige fragrance and beauty products company. From 2001 to 2003, Mr. Rothstein was a Senior Corporate Counsel at The Sports Authority, Inc., a national full line sporting goods retailer. From 2000 to 2001, Mr. Rothstein was Vice President and General Counsel at Daleen Technologies, Inc., a billing and customer care software provider. From 1996 to January 2000, Mr. Rothstein was General Counsel at Let’s Talk Cellular and Wireless, Inc., a wireless communications retailer. In 2007 and 2008 prior to joining China Direct and prior to 1996, Mr. Rothstein was engaged in the private practice of law. Mr. Rothstein received a Bachelors of Science degree in Accounting from Florida State University in 1980 and a Juris Doctor Degree from Nova Southeastern University Law School in 1983.

Key Employees

We employ certain individuals who, while not executive officers, make significant contributions to our business and operations and hold various positions within our subsidiaries.

Kong Tung, age 58, has been a member of our board of directors since May 2011 and the president and a member of the board of directors of Golden Magnesium since 2008.  Since 2003, Mr. Tung has served as the president of Golden Trust which owns and operates a magnesium production facility in China.  Mr. Tung has been the president of Beauty East since 1995 and its chairman since 1999. Beauty East owns a 48% interest in Golden Magnesium. Mr. Tung graduated from Shanxi University, China in 1978 with a degree in engineering.

Huaqin (Kim) Chen, age 55, has served as our Controller and Internal Audit Manager since April 2009 and as our Principal Financial and Accounting Officer from May 2009 to December 2009. From January 2001 to March 2009, Ms. Chen was the Assistant Controller at International Paper Company where she was responsible for financial reporting, analysis and budgeting, internal controls, domestic and international audits, supervision of accounts receivable and payables, payroll and project managers and the establishment of the financial controls over a Hong Kong based business. From January 1992 to November 2000, Ms. Chen held various corporate accounting positions. From August 1980 through December 1989, Ms. Chen was an Assistant Professor of English at Shanghai International Studies University in China where she received a Bachelors of Arts Degree in English and Literature in 1980. Ms. Chen also received a Masters in Business Administration with a Concentration in Accounting and Finance from Winthrop University, Rock Hill, South Carolina in 1992.


 
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Jingdong Chen, age 43, has served as chief executive officer of Lang Chemical since co-founding the company in 1998. Mr. Chen is also a minority owner of Lang Chemical. Since our acquisition of Lang Chemical in November 2006, Mr. Chen has served as the General Manager, responsible for the daily operations. Mr. Chen has in excess of 10 years of experience operating in the chemical industry in China. From 1990 to July 1996, Mr. Chen was sales manager for Shanghai Chemical Industry Sales Corporation and from August 1996 to September 1998 he was Vice General Manager for Vinda Group in the Shanghai Branch, a paper manufacture in China. Mr. Chen received a master’s degree from East China Normal University in 1990. Mr. Chen is the spouse of Ms. Qian Zhu.
 
Chi Chen, age 40, has served as as general manager and chairman of CDI Beijing since September 2008 and as vice president of our Basic Materials segment from September 2008 to February 2010. From 2004 to 2008 Mr. Chen served as general manager and chairman of Beijing Kaiyuan Tongbao Trading Co., Ltd., a steel and lumber distribution company. From 2002 to 2004, Mr. Chen served as chairman of Beijing Putaoyuan Investment Consulting Co., Ltd., a real estate company. From 2000 to 2002 Mr. Chen served as the general manager of Beijing Guohuan Exhibition Center, a property management company. From 1997 to 2000 Mr. Chen served as China’s Chief Representative for the Western Caroline Trading Co., Ltd., a food distribution company. From 1993 to 1997 Mr. Chen served as chairman of Baotou Dongfu Industry Co., Ltd. a lumber distribution company. Mr. Chen holds a Bachelor degree from Fuzhou University.
 
Richard Galterio, age 48, has served as Vice President – Investor Relations of China Direct since February 2009 and from February 2007 to January 2009 Executive Vice President. His responsibilities include corporate development and communications as well as the management of all public and investor relations for China Direct, subsidiaries and client companies. Mr. Galterio has over 16 years of experience in investment banking with a focus on early stage companies. Mr. Galterio served as COO of Skyebanc, Inc., a FINRA member broker/dealer from 2005 to 2007. Prior to that position, he served as Director of Private Equity for vFinance Investments, Inc., a FINRA member broker/dealer from 2001 to 2005. Mr. Galterio had been engaged by vFinance Investments, Inc. since the acquisition of First Level Capital in 2000, a company co-founded by Mr. Galterio in September of 1998. Mr. Galterio served as Compliance and Operations Director for First Level Capital from 1998 to 2000. Prior to First Level Capital, Mr. Galterio was Managing Director of Commonwealth Associates from 1994 to 1998 where his responsibilities included branch management and compliance. Mr. Galterio was a member of the board of directors of Spare Backup, Inc. (OTCBB: SPBU) from June of 2003 to September of 2008. Mr. Galterio has a Bachelor of Science degree in Business Administration and Psychology from Villanova University.

COMPETITION

Our subsidiaries and the business segments they operate in face unique challenges and extensive competition.

Magnesium segment. The magnesium market in China is dominated by several large manufacturers. Our main competitors in the industry are Tongxiang Magnesium Co., Ltd., Yingguang Magnesium Co., Ltd. and YiWei Magnesium, a related party. Production costs associated with the energy needed to fuel the magnesium refinery, raw material costs and availability of labor are a significant challenge facing all producers. We believe we are competitive with other local magnesium producers because all of our production facilities are located in close geographic proximity to coke refineries who, when in production, supply waste gas that fuels our magnesium refineries. We believe that competitors with refineries that use coal as the sole source of fuel for production will face continued pressure from environmental regulation and higher energy costs that may limit their ability to operate in the future. Effective January 2008, a 10% export tariff on magnesium was imposed that equally impacted the profit margins of all China based producers and has somewhat affected our competitive advantage over non-China based magnesium producers. In addition, we are unable to compete on price in the U.S. market because the U.S. imposes significant import duties on magnesium imported from China.

Basic Materials segment. While we believe our subsidiaries in this segment have viable business models, we also recognize that many rival entities possess greater financial and technical resources to compete in these businesses. We compete with a variety of companies which include global and domestic distribution agents as well as manufacturers. These companies have more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial and marketing resources than us. These competitors may offer a more comprehensive array of products and services than we are able to provide. For these and other reasons, these competitors may achieve greater acceptance in the marketplace than our company, limiting our ability to gain market share and customer loyalty and increase our revenues. We believe that we compete primarily on the basis of price and availability of the products we sell.


 
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Consulting segment. The services we offer in our Consulting segment competes with the services offered by many entities and individuals seeking to take advantage of the growing need of Chinese entities seeking management advice in order to obtain access to U.S. capital markets for their expansion. This competition ranges from large management consulting firms and investment banks that offer a broad range of consulting and financial services, to small companies and independent contractors that provide specialized services. Many of the firms prospecting these clients are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Furthermore, we acknowledge we are competing with firms that may possess greater financial, marketing, technical, human and other resources. We believe that we compete primarily on the basis of our ability to offer a wider range of value-added services than our competitors. In light of the current global economic environment and a continuation of the downturn in the global capital markets and concerns of China based companies, we believe it is difficult for smaller companies with operations based in China to attract interest in the financial community, make acquisitions and increase revenues and profitability. These factors impact our clients’ ability to pay the management fees needed to meet the costs of providing the services needed to comply with U.S. securities laws which our competitors may be able to provide at lower rates.

TRADEMARKS, LICENSES AND PATENTS

We own the trademark for “China Direct”, “Your Direct Link to China” and “CDI”. These trademarks are registered in the United States. We do not consider the protection of our trademarks and brand names to be important to our business.

GOVERNMENT REGULATION

Despite efforts to develop the legal system over the past several decades, including but not limited to legislation dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, the PRC continues to lack a comprehensive system of laws. Further, the laws that do exist in the PRC are often vague, ambiguous and difficult to enforce, which could negatively affect our ability to do business in the PRC and compete with other companies in our segments.

In September 2006, the Ministry of Commerce (“MOFCOM”) promulgated the Regulations on Foreign Investors' Mergers and Acquisitions of Domestic Enterprises (M&A Regulations) in an effort to better regulate foreign investment in the PRC. The M&A Regulations were adopted in part as a needed codification of certain joint venture formation and operating practices, and also in response to the government's increasing concern about protecting domestic companies in perceived key industries and those associated with national security, as well as the outflow of well-known trademarks, including traditional Chinese brands.
 
As a U.S. based company doing business in the PRC, we seek to comply with all PRC laws, rules and regulations and pronouncements, and endeavor to obtain all necessary approvals from applicable PRC regulatory agencies such as the MOFCOM, the State Assets Supervision and Administration Commission (“SASAC”), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (“SAFE”).

Economic Reform Issues. Since 1979, the Chinese government has reformed its economic systems. Many reforms are unprecedented or experimental; therefore they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment, inflation, or the disparities in per capita wealth between regions in the PRC, could lead to further readjustment of the reform measures. We cannot predict if this refining and readjustment process may negatively affect our operations in future periods, particularly in relation to future policies including but not limited to foreign investment, taxation, inflation and trade.

Currency. The value of the Renminbi (“RMB”), the main currency used in the PRC, fluctuates and is affected by, among other things, changes in the PRC’s political and economic conditions. The conversion of RMB into foreign currencies such as the U.S. dollar have been generally based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. The currency exchange and fund transfers are regulated by China’s State Administration of Foreign Exchange (SAFE), which sets the relevant laws, regulations, and carries out the supervision of currency exchanges and cross border transfers of related funds, and imposes restrictions and regulatory controls over such exchanges and transfers.

 
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Environment. We are currently subject to numerous Chinese provincial and local laws and regulations relating to the protection of the environment which are highly relevant to our Magnesium, and Basic Materials segments. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. In fiscal 2011 we did not spend any funds related to compliance with environmental regulations.

The Environmental Protection Law requires production facilities that may cause pollution or produce other toxic materials to take steps to protect the environment and establish an environmental protection and management system. Penalties for breaching the Environmental Protection Law include a warning, payment of a penalty calculated on the damage incurred, or payment of a fine. When an entity has failed to adopt preventive measures or control facilities that meet the requirements of environmental protection standards, it may be required to suspend its production or operations and pay a fine.

The State Environmental Protection Administration Bureau is responsible for the supervision of environmental protection, the implementation of national standards for environmental quality and discharge of pollutants, and supervision of the environmental management system in the PRC. Environmental protection bureaus at the county level or above are responsible for environmental protection in their jurisdictions. The laws and regulations on environmental protection require each company to submit environmental impact statements for construction project to the environmental protection bureaus at the county level. These must be prepared prior to when the construction, expansion or modification commences.

On March 7, 2011, the Ministry of Industry and Information Technology (MIIT) of the People’s Republic of China published new conditions for the magnesium industry setting standards for the layout, production capacity and environmental protection for the industry and to accelerate industry restructuring, enhance environmental protection, regulate investment and prevent redundant construction.

The new conditions require existing producers to have annual production capacity of at least 15,000 metric tons per year. If an existing producer wishes to apply for renovation or expansion of its production, it will need to have a production capacity of at least 20,000 metric tons per year.  Any new magnesium producers must have a planned capacity of at least 50,000 metric tons per year.  In addition, new magnesium refining projects will be prohibited in areas 1 kilometer from drinking water sources, basic farmland protection areas, natural reserves, scenic spots and other areas that require strict environmental quality.

There remains some uncertainty as to how this regulation will be interpreted or implemented. If MIIT or another PRC regulatory agency subsequently determines that we are not in compliance with these conditions, we may incur substantial costs or liabilities that could reduce our overall profitability. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could have a material adverse effect on our business, financial condition, results of operations.

We recognize this tighter scrutiny surrounding environmental protection in the PRC and this consideration is a material factor in our due diligence process when selecting and acquiring companies in the PRC. In our Magnesium segment, for example, the production facilities we have acquired utilize waste gas to fuel their plants or have been upgraded to use more energy efficient waste gas. We believe this mitigates the risk of our magnesium production being limited in the future due to environmental protection actions initiated by the PRC.

We believe our operations in the PRC comply with the current environmental protection requirements and the March 7, 2011 regulations regarding minimum production capacity. We are not subject to any admonition, penalty, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to which we are named as a defendant for violation of any environmental laws and regulations.
 
Other regulations particularly applicable to Basic Materials segment.

Regulation of the chemical industry in the PRC is monitored by The Ministry of China Chemical Industry. Industry participants are governed by the Industrial Chemical Control Law (“ICCL”) issued by the Ministry of China Chemical Industry. The Shanghai provincial government issues licenses for the distribution of chemical products in the PRC. Lang Chemical received its license to operate in the chemical industry in January 1998, and presently believes it is in substantial compliance with all provisions of those PRC registrations, inspections and licenses and has no reason to believe it will not be renewed as required by the applicable rules of the Central Government and Shanghai City.


 
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Other regulations particularly applicable to Magnesium and Basic Resource segments.

The PRC's Mining Ministry, and other provincial, county and local authorities in jurisdictions in which our products are processed or sold, monitors the processing, storage, and distribution of our magnesium products. Our processing facilities are subject to periodic inspection by national, provincial, county and local authorities. We may not be able to comply with current laws and regulations, or any future laws and regulations. To the extent that new regulations are adopted, we will be required to conform our activities in order to comply with such regulations. We may be required to incur substantial costs in order to comply. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material and adverse effect on our business, operations and finances. Changes in applicable laws and regulations may also have a negative impact on our sales.

Our Corporate History

We were incorporated on June 7, 1999 in Delaware initially under the name Caprock Corporation to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. On November 26, 1999, International Internet, Inc., a Delaware corporation, acquired 100% of our issued and outstanding stock from TPG Capital Corporation, our sole stockholder, pursuant to a stock purchase agreement in exchange for 50,000 shares of common stock of International Internet, Inc.

In December 1999 Caprock Corporation was merged into International Internet, Inc., which became the surviving company. Effective November 21, 2000, International Internet, Inc. changed its name to Evolve One, Inc.

Between 1999 and 2005 we operated a number of small, start up or development stage businesses. During 2005 our operations consisted of two internet based businesses, StogiesOnline.com and AuctionStore.com. StogiesOnline.com was an online distributor and retailer of brand name premium cigars. AuctionStore.com was an eBay(R) Trading Assistant and internet based seller of consigned merchandise whose primary medium of sales is eBay(R). While we reported sales from these operations of $114,904 for the nine months ended September 30, 2005, as a result of competition in the marketplace and a lack of sufficient working capital, during October 2005 we determined that our business model was unprofitable and decided to discontinue the balance of our operations. We became a shell company and began a search for a business combination candidate.

On August 16, 2006 we acquired 100% of the issued and outstanding stock of China Direct Investments in exchange for 10,000,000 shares of our common stock, which at closing, represented approximately 95% of our issued and outstanding shares of common stock. China Direct Investments was incorporated under the laws of the State of Florida on January 18, 2005 and its operations constitute our Consulting segment. As a result of the reverse merger transaction, China Direct Investments became a wholly owned subsidiary and the transaction resulted in a change of control of our company. For financial accounting purposes, the transaction in which we acquired China Direct Investments was treated as a recapitalization of our company with our former stockholders retaining approximately 5.0% of our outstanding common stock.

In September 2006, we changed our name to China Direct, Inc. and in June 2007 we redomiciled our company from Delaware to Florida. Subsequent to the transaction with China Direct Investments in September 2006, we have substantially grown our business by acquiring growth oriented companies in the PRC.

On March 29, 2009 we changed our name to China Direct Industries, Inc. to more accurately reflect our principal business of producing magnesium and distributing basic materials in the PRC.
 
When we acquire a company in the PRC, we generally do so by creating a foreign invested entity (“FIE”) with a local person or company experienced in the business we seek to acquire. An FIE is created by submitting an application to the local PRC government to increase the “registered capital” of a Chinese domestic company. The local Chinese person or company will contribute assets to the FIE and we will contribute investment funds over time to satisfy the registered capital amount. Upon receipt of the requisite government approvals, a new FIE is created with our ownership percentage represented by the value of our registered capital contribution as compared to the new total registered capital amount. We endeavor to adhere to all rules and regulations governing foreign investment in the PRC and to obtain all necessary governmental approvals and business licenses for our subsidiaries.


 
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Our material acquisitions over the past three fiscal years and dispositions are as follows:

CDI Magnesium. In February 2007, CDI China acquired a 51% interest in CDI Magnesium in exchange for 25,000 shares of our common stock valued at $100,000. The fair value of our common stock was based on its value of $4.00 per share on February 6, 2007. Since its inception, CDI Magnesium had no operations and on October 10, 2009 its board of directors elected to dissolve the company and distribute its assets to its shareholders or otherwise dispose of the assets upon agreement among its shareholders. Beginning with our financial statements for the fiscal year ended September 30, 2009, we will treat CDI Magnesium as a discontinued operation. We dissolved CDI Magnesium as of September 30, 2011 and wrote off our investment of $100,000 in the company in fiscal 2011 upon completion of our sale of our 51% interest in Pan Asia Magnesium discussed below.

Pan Asia Magnesium. In September 2007, CDI China acquired a 51% interest in Pan Asia Magnesium in exchange for an aggregate investment of $7.4 million. We began presenting our interest in Pan Asia Magnesium as a discontinued operation beginning with our financial statements for the fiscal year ended September 30, 2009 as a result of a dispute with its former non controlling shareholder and recorded a $7.4 million impairment charge against our investment in Pan Asia Magnesium.  On September 15, 2011 we completed the sale of our 51% ownership interest in Pan Asia Magnesium to Bloomgain Investment Limited, a British Virgin Islands company (“Bloomgain”), an unrelated party for $3,047,582 in cash.

Baotou Changxin Magnesium. In February 2008, CDI China acquired a 51% interest in Baotou Changxin Magnesium in exchange for $7,084,000. Excel Rise, a wholly owned subsidiary of Chang Magnesium, acquired a 39% interest in Baotou Changxin Magnesium in exchange for $5,417,000. Accordingly, China Direct holds a 70.9% interest in Baotou Changxin Magnesium.

CDI Metal. In February 2008, CDI Shanghai Management invested $347,222 to acquire an 83% interest in CDI Metal. In July 2011, CDI Shanghai Management acquired the remaining 17% non controlling interest in CDI Metal from its former non controlling shareholder in exchange for the forgiveness of a loan from CDI Metal to such shareholder in the principal amount of RMB 100,000 (approximately $76,585).
 
CDI Beijing. In June 2008, CDI Shanghai Management entered into an agreement to form CDI Beijing. Under the terms of the Agreement, CDI Shanghai Management acquired a 51% interest in CDI Beijing, in exchange for $3.7 million. As of the date of this report, we have contributed $1.5 million.  On December 30, 2009, the shareholders of CDI Beijing agreed to limit their capital contributions to the $2.9 million they already contributed and waived their requirement to contribute additional capital including CDI Shanghai Management’s obligation to contribute $2,200,000 by September 30, 2009.
 
Ruiming Magnesium. On July 13, 2010, we entered into an Equity Transfer Agreement (the “Equity Transfer Agreement”) with Pine Capital and Yiwei Magnesium to acquire an 80% interest in Ruiming Magnesium effective as of July 1, 2010, for RMB 44,880,000 (approximately $6,451,677) comprised of (i) $2,428,864 in cash, (ii) 769,231 shares of our common stock valued at $846,154, and (iii) an assignment of a portion of our interest in Excel Rise in the amount of $2,367,038. The remaining 20% interest in Ruiming Magnesium is owned by Pine Capital.  Yuwei Huang, our executive vice president – magnesium and member of our board of directors, owns or controls Pine Capital and Yiwei Magnesium.

Golden Magnesium. On May 6, 2011 CDI China entered into a Stock Transfer Contract with Mr. Kong Tung, a member of our board of directors, and Mr. Hui Dong, his son, both of whom are the sole shareholders of Beauty East. Prior to our acquisition of Beauty East, it owned a 48% interest in our Golden Magnesium subsidiary. CDI China acquired 100% of Beauty East in exchange for 4,879,280 shares of our unregistered common stock, an equivalent of RMB 39,659,401 (approximately $6,099,107). At the closing date the total value of the shares of our common stock transferred was $6,147,893 or $1.26 per share. We now own a 100% interest in Golden Magnesium.
 
ITEM 1A.
RISK FACTORS

The risk factors in this section describe the material risks to our business, prospects, results of operations, financial condition or cash flows, and should be considered carefully. In addition, these factors constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 and could cause our actual results to differ materially from those projected in any forward-looking statements (as defined in such act) made in this Annual Report on Form 10-K. Investors should not place undue reliance on any such forward-looking statements. Any statements that are not historical facts and that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intends,” “plans,” “believes” and “projects”) may be forward-looking and may involve estimates and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements.

 
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Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
Risks Related To Our Business

The metals industry is highly cyclical. Fluctuations in the pricing and availability of magnesium and in levels of customer demand have historically been severe, and future changes and/or fluctuations could cause us to experience lower sales volumes and revenues, which would negatively impact our profit margins.

The metals industry is highly cyclical. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions, levels of industry capacity and availability of usable raw materials. The overall levels of demand for our magnesium and magnesium-based products reflect fluctuations in levels of end-user demand, which depend in large part on general macroeconomic conditions worldwide which then impact the level of production in the PRC. For example, many of the principal uses of magnesium and magnesium-related products are for the production of structural metal, steel and aluminum manufacturing, production of alloys used in aircraft and automobile parts, the manufacture of electronic equipment such as computers, cameras, and cellular phones and the use of magnesium powder in flares, flashes and pyrotechnics. The market for these products are heavily dependent on general economic conditions, including the availability of affordable energy sources, employment levels, interest rates, consumer confidence and construction demand. These cyclical shifts in our customers’ industries tend to result in significant fluctuations in demand and pricing for our products. As a result, in periods of recession or low economic growth, metals companies, including ours, have generally tended to under-perform compared to other industries. We generally have high fixed costs, so changes in industry demand that impact our production volume also can significantly impact our profit margins and our overall financial condition. Economic downturns in the worldwide economy or a prolonged decline in demand in our Magnesium segment has had a negative impact on our operations and a continuation or further deterioration of current economic conditions could have a negative impact on our future financial condition or results of operations.

Changes in the prices of magnesium and magnesium-related products will have a significant impact on our operating results and financial condition.

We derive a substantial portion of our revenue from the sale of magnesium and magnesium-based products. Changes in the market price of magnesium impact the selling prices of our products, and therefore our profitability is significantly affected by decreased magnesium prices. Market prices of magnesium are dependent upon supply and demand and a variety of factors over which we have little or no control, including:

 
 
world economic conditions;
 
 
availability and relative pricing of metal substitutes;
 
 
labor costs;
 
 
energy prices;
 
 
environmental laws and regulations;
 
 
weather; and
 
 
import and export restrictions.

Declines in the price of magnesium and higher production costs have had a negative impact on our operations since commencing in September 2008, and f could have a negative impact on our future financial condition or results of operations. Market conditions beyond our control determine the prices for our products, and the price for any one or more of our products may fall below our production costs, requiring us to either incur short-term losses. Furthermore, the decline in the price of zinc and zinc related products resulted in us delaying completion of construction of our planned zinc ore mining and production facility.. Consequently, we continue to evaluate our strategic alternatives for these operations including the partial or full sale of our interest in this business, the launch of operations in fiscal 2012, or seeking potential joint venture partners to operate the business. Market prices for magnesium may decrease even further, and therefore our operating results may be significantly harmed.
 

 
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Fluctuations in the cost or availability of electricity, coke, coal and/or natural gas would lead to higher manufacturing costs, thereby reducing our margins and limiting our cash flows from operations.

Energy is one of our most significant costs in our Magnesium segment. All of our magnesium production facilities utilize coke gas as energy (our Baotou Changxin Magnesium facility upgraded its coal burning facility to primarily utilize more energy efficient coke waste gas in December, 2010). Energy prices, particularly for coal and coke gas, are volatile. While we have a fixed price supply agreement for a specified quantity of waste gas for our Golden Magnesium facility which expires in August 2027, fluctuations in price impact our manufacturing costs and contribute to earnings volatility.

During the fourth quarter of fiscal 2010 and the first quarter of fiscal 2011 the Chinese authorities mandated a significant reduction of energy usage and instituted “rolling brownouts” in an effort to meet the targets for energy consumption and emissions set by the 11th Five Year Plan (2006-2010).  This policy resulted in a one month shut down of production at our Golden Magnesium facility because our electrical supply was interrupted. In addition, we have been unable to restart production at Baotou Changxin Magnesium because our coke gas supplier temporarily ceased production due to a lack of demand for coke. These shut downs will reduce our production at Golden Magnesium and Baotou Changxin Magnesium, reducing our net sales and potentially impacting our ability to deliver products to our customers in the first quarter of fiscal 2011. We believe that the current energy restrictions will be eliminated with the implementation of the PRC’s 12th Five Year Plan (2011-2015) on January 1, 2011, although there are no assurances that additional energy use restrictions may be imposed in the future. Any continuation of these restrictions will adversely impact our results of operations in future periods.  We are also unable to predict at this time whether additional energy policies will be adopted by the Chinese government that could adversely impact our operations in future periods.

In the event of further interruptions in the supply of electricity or coke gas to our magnesium facilities, production at our manufacturing facilities would have to be shut down. In addition, we do not maintain sources of secondary power at our facilities, and therefore any prolonged interruptions in the supply of energy to our facilities could result in lengthy production shutdowns, increased costs associated with restarting production and waste of production in progress.

If we were to lose order volumes from any of our major customers, our sales could decline significantly and our cash flows may be reduced.

In fiscal 2011, our five largest customers (exclusive of related parties) in our Magnesium segment were responsible for approximately 54% of our total revenues in this segment and approximately 29 % of our total consolidated revenues. These customers purchase products from us on a spot or short term contract basis and may choose not to continue to purchase our products. A loss of order volumes from any major customer, including a related party, or a significant reduction in their purchase orders could negatively affect our financial condition and results of operations by lowering sales volumes, increasing costs and lowering profitability.

If we fail to implement our expansion plans, our financial condition and results of operations could be materially and adversely affected.

An important part of our strategy is to grow our business by acquiring additional production facilities for magnesium and magnesium related products by acquiring Golden Trust and Lingshi Magnesium (the “Magnesium Acquisitions”). In addition, the operation of our industrial commodities business may require a significant cash investment to finance purchases of commodities we intend to sell. We will need to issue additional financing to implement our expansion strategy to acquire additional magnesium production facilities and finance the operations of our industrial commodities business.  We may not have access to the funding required for these plans on acceptable terms. Our expansion plans may also suffer significant delays as a result of a variety of factors, such as legal and regulatory requirements, either of which could prevent us from completing our plans as currently expected. Our expansion plans may also result in other unanticipated adverse consequences, such as the diversion of management’s attention from our existing operations. In addition, even if we can implement our strategy, expansion in the magnesium and industrial commodities market, increased sales to various industries, including the automobile industry may not materialize to the extent we expect, or at all, resulting in unutilized magnesium production capacity and unrecoverable expenses and investments in our trading business. Any failure to successfully implement our business strategy, including for any of the above reasons, could materially and adversely affect our financial condition and results of operations. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.

 
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The acquisition of the Golden Trust and Lingshi Magnesium may not be accretive and may cause dilution to the combined company's earnings per share, which may negatively impact the price of our common stock following the completion of the transaction.

Management currently anticipates that Golden Trust and Lingshi Magnesium will make a positive contribution to our cash flow and earnings in the fiscal year ended September 30, 2013 if we are able to obtain an extension of the closing date beyond the current deadline of December 31, 2011 and obtain the required regulatory and shareholder approval to complete this transaction. This expectation is based on preliminary estimates and assumes realization of expected market demand and certain synergies expected to be realized by combining certain administrative aspects of our existing magnesium operations with those of Golden Trust and Lingshi Magnesium during such time. Such estimates and assumptions could materially change due to worldwide economic conditions, additional unanticipated operational costs, the failure to realize any or all of the benefits expected in connection with the acquisition or other factors beyond our control. All of these factors could delay, decrease or eliminate the expected accretive effect of the acquisitions and cause resulting dilution to our earnings per share or to the price of our common stock.

The number of our Shares to be issued to complete the Magnesium Acquisitions will not be adjusted for changes in the market price of the Shares.

The number of shares of our common stock to complete the **Magnesium Acquisitions is a fixed number of shares of our common stock valued at $0.946 per share. The number of shares will not be adjusted for subsequent changes in the market price of our common stock. None of the parties to the Transfer Agreements may terminate the agreements because of changes in the market price of our common stock. Consequently, the specific dollar value of our common stock to be received by the sellers of Golden Magnesium and Lingshi Magnesium will depend on the market value of our common stock at the time of closing of the Magnesium Acquisitions. We cannot assure you that the value of our common stock to be issued to complete the Magnesium Acquisitions will not decline before or after the completion of the transaction.

Some of our directors and executive officers may have interests in the Magnesium Acquisitions that may differ from the interests of our shareholders.

Some of our directors may have interests in the Magnesium Acquisitions that may be different from, or adverse to, the interests of our shareholders. Yuwei Huang, a member of our board of directors and an executive vice president, currently owns 1,169,231 shares of our common stock (approximately 2.9%).   Kong Tung, a member of our board of directors and general manager of our subsidiary Golden Magnesium, currently owns 1,315,020 shares of our common stock (approximately 3.2%). Messrs. Huang and Tung, own, control or have a significant ownership interest in Golden Trust and Lingshi Magnesium and will receive compensation under the Management Agreement.  Under the terms of the Management Agreement, Mr. Huang is entitled to an annual salary of ¥2,400,000 (approximately $375,000) and he and his management team are entitled to earn up to 960,000 Shares of our common stock. Mr. Tung is entitled to an annual salary of ¥1,200,000 (approximately $187,000) during the three year term of this agreement and he and his management team are entitled to earn up to 480,000 Shares of our common stock.  The shares of our common stock shall be awarded by our upon achievement of the performance benchmark and other performance criteria set forth in the Management Agreement.

The terms of the Transfer Agreements and Management Agreement were not arrived at as a result of arms-length negotiations and no fairness opinion in connection with the Transfer Agreement was obtained.

Messrs. Huang and Tung, together with members of their families, are the principal equity owners of Lingshi Magnesium and Golden Trust. See “Item 13. Certain Relationships and Related Transactions, and Director Independence. – List of Related Parties.” While the Transfer Agreements and the Management Agreement were approved and deemed fair and reasonable by our Audit Committee which is comprised of independent directors, the Transfer Agreements and Management Agreement were not negotiated on an arms-length basis as a result of Messrs. Huang and Tung’s interest in the Golden Trust and Lingshi Magnesium.  While the Transfer Agreements and Management Agreement have been approved by the Audit Committee consisting solely of independent directors, there are no assurances that the terms of the Transfer Agreements and Management Agreement are as favorable to us as it might have obtained in arms-length negotiations with unrelated third parties supported by a fairness opinion as to the Transfer Agreements. 

 
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 Integration of Golden Trust, Lingshi Magnesium and China Direct may be difficult and expensive to achieve.

The acquisition of Golden Trust and Lingshi Magnesium involves the integration of companies that have previously operated independently. The integration will be a complex, time consuming and expensive process and may materially harm the respective businesses of  Golden Trust, Lingshi Magnesium and our if not completed in a timely and efficient manner. We may not be able to integrate the operations, financial and accounting systems of Golden Trust and Lingshi Magnesium without encountering difficulties, including possible unanticipated costs, failure to retain key employees, the diversion of management attention or failure to implement the financial software system we are presently implementing at our other magnesium segment companies. In addition, following the acquisition, Golden Trust and Lingshi Magnesium may not realize the increased revenues and cost savings that they expect to achieve or that would justify the investment made.

Because Chinese law governs the Transfer Agreements and Management Agreement, we may not be able to enforce our rights within the PRC or elsewhere, which may limit the remedies otherwise available to us and damage our business.
 
The Transfer Agreements and Management Agreement are governed by PRC laws and regulations. The PRC legal system is a civil law system based on written statutes. Unlike common law systems, prior court decisions have limited precedential value. We cannot assure you that it will be able to enforce these agreements or that remedies will be available outside of the PRC.  The system of laws and the enforcement of existing laws and contracts in the PRC may not be as certain in implementation and interpretation as in the United States.  Although disputes under the Transfer Agreements are subject to arbitration before the China International Economic and Trade Arbitration Commission in Beijing, China, we cannot predict the outcome of any litigation with any degree of certainty. The inability to enforce or obtain a remedy under the Transfer Agreements and the Management Agreement as a result of a dispute could divert management’s time from the operation of our business, require it to expend funds attempting to settle disputes, limit the time our management would otherwise devote to the operation of our business, and, on a collective basis, have a material adverse effect on our business, financial condition and results of operations.

The value of the equity securities we accept as compensation is subject to adjustment which could result in losses to us in future periods.

In our Consulting segment, historically we have accepted equity securities of our clients as compensation for services. These securities are reflected on our balance sheet as “investment in marketable securities available for sale”. At the end of each period, we evaluate the carrying value of the marketable securities for a decrease in value. We evaluate the company underlying these marketable securities to determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline in fair value is judged to be “other- than- temporary”, the cost basis of the individual security is shall be written down to fair value as a new cost basis and the amount of the write-down is charged to earnings.  Any future impairments would adversely affect our operating results for the corresponding periods in that we would be required to reduce the carrying value of these investments. In addition, if we are unable to liquidate these securities, we will be required to write off the investments which would adversely affect our financial position.

We need additional financing to fund acquisitions and our operations which we may not be able to obtain on acceptable terms. Additional capital raising efforts in future periods may be dilutive to our then current shareholders or result in increased interest expense in future periods.

We may need to raise additional working capital to fund expected growth in our Magnesium segment and our industrial commodities business. Our future capital requirements depend on a number of factors, including our operations, the financial condition of an acquisition target and its need for capital, our ability to finance our purchases of commodities with financial instruments provided by buyers, grow revenues from other sources, and our ability to manage the growth of our business and our ability to control our expenses. Also, if we raise additional capital through the issuance of debt, this will result in increased interest expense. If we raise additional capital through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders may experience significant dilution. As we will generally not be required to obtain the consent of our shareholders before entering into acquisition transactions, shareholders are dependent upon the judgment of our management in determining the number of, and characteristics of, stock issued as consideration in an acquisition. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of our common stock. We cannot assure you that we will be able to raise the working capital as needed in the future on terms acceptable to us, if at all, as the current capital markets have been adversely affected by the severe liquidity crisis. If we do not raise capital as needed, we will be unable to operate our business or fully implement our acquisition expansion strategy.

 
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We are dependent on certain key personnel and the loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

Our success is, to a certain extent, attributable to the management, sales and marketing, and operational expertise of key personnel of our subsidiaries in the PRC who perform key functions in the operation of our business as well as our U.S. based management team. We do not exercise any substantive day to day supervision over the activities of key members of our the PRC based management team which includes Yuwei Huang, Kong Tung, Jingdong Chen, and Chen Chi. The loss of one or more of these key employees or our chief executive officer, Dr. Wang could have a material adverse effect upon our business, financial condition and results of operations.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Our management has determined that as of September 30, 2011, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework as a result of identified significant deficiencies in our internal control over financial reporting related to (i) a lack of an integrated financial accounting system; (ii) and a lack of qualified accounting personnel who have sufficient knowledge in dealing with the complex U.S. GAAP accounting and financial issues in our cross border operations. A significant deficiency weakness is a is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. For a detailed description of these significant deficiency and our remediation efforts and plans, see “Part II — Item 9A — Controls and Procedures.” If the result of our remediation of the identified significant deficiency is not successful, or if additional significant deficiencies are identified in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.

Certain agreements to which we are a party and which are material to our operations lack various legal protections which are customarily contained in similar contracts prepared in the United States.

Our subsidiaries include companies organized under the laws of the PRC and all of their business and operations are conducted in the PRC. We are a party to certain contracts related to our operations in the PRC. While these contracts contain the basic business terms of the agreements between the parties, these contracts do not contain certain clauses which are customarily contained in similar contracts prepared in the U.S., such as representations and warranties of the parties, confidentiality and non-compete clauses, provisions outlining events of defaults, and termination and jurisdictional clauses. Because our contracts in the PRC omit these customary clauses, notwithstanding the differences in PRC Chinese and U.S. laws, we may not have the same legal protections as we would if the contracts contained these additional clauses. Contractual and other disputes which may arise from this lack of legal protection and our dispute with the minority shareholders of Pan Asia Magnesium and collection efforts to recover uncollected amounts could divert management’s time from the operation of our business, require us to expend funds attempting to settle disputes, limit the time our management would otherwise devote to the operation of our business, and, on a collective basis, have a material adverse effect on our business, financial condition and results of operations.

Intercompany loans may be subject to PRC regulations.

We currently have several inter-company loans between our PRC subsidiaries and PRC based client companies totaling approximately $8.3 million and we may continue to enter into inter-company and client based financing arrangements to meet our internal capital needs and those of our client companies. PRC laws generally do not permit companies that do not possess a financial service business license to extend loans directly to other companies, including affiliates, without proceeding through a financial agency. The enforcement of these restrictions remains unpredictable, and government authorities may declare these loans void, require the forfeiture of any interest paid and levy fines or other penalties upon the parties involved, among other remedies.


 
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From time to time we engage in related party transactions. There are no assurances that these transactions are fair to our company.

From time to time our subsidiaries enter into transactions with related parties which include purchases from or sales to a related party, advancing related parties significant sums as prepayments for future goods or services and working capital and the payment of fees for consulting services, among other transactions. In December 2009 we adopted a related person transaction policy which will require the pre-approval of the board of directors pre-approval or ratification of transactions between us or one or more of our subsidiaries and any related person involving an amount in excess of $120,000. Consistent with this policy, the independent members of our Board of Directors approved our purchase of the 48% noncontrolling interest of Golden Magnesium from a company owned or controlled by Mr. Tung, a director of our company and the purchase of Golden Trust and Lingshi Magnesium, subject to shareholder approval of the issuance of our common stock as partial consideration for these acquisitions.  Golden Trust and Lingshi Magnesium are owned by entities owned or controlled by Mr. Huang, our Executive Vice President – Magnesium and a director of our company and Mr. Tung. Notwithstanding this policy, we cannot assure you that in every instance the terms of the transactions with related parties are on terms as fair as we might receive from or extend to third parties.

Yuwei Huang, our Executive Vice President – Magnesium, an officer of several of our magnesium subsidiaries and a director of our company, his daughter Lifei Huang and Kong Tung is also an owner and executive officer of several companies which directly compete with our magnesium business.

Mr. Yuwei Huang who serves as our Executive Vice President – Magnesium, an executive officer of several of our Magnesium segment subsidiaries and a director of our company and his daughter Lifei Huang who is the General Manager of International Magnesium Trading are also the principal owners and executive officers of a competitor of ours, YiWei Magnesium. YiWei Magnesium, a minority owner of two of our Magnesium segment subsidiaries, owns interests in several other PRC based magnesium factories, a magnesium alloy factory and a magnesium powder desulphurization reagent factory including Lingshi Magnesium which we agreed to acquire in August 2011. In addition, Lianling Dong is the sister of Kong Tung, a director of our company and general manager of Golden Trust. Due to Mr. Huang, Ms. Huang and Ms. Dong’s interest in our competitors and Messrs. Huang and Tung’s management position with our company, there are certain inherent conflicts of interest and there can be no assurances that our business and operations will not be adversely impacted as a result of these conflicts.

Our business will suffer if we lose our land use rights.
 
There is no private ownership of land in the PRC and all land ownership is held by the government of the PRC, its agencies, and collectives. In the case of land used for business purposes, land use rights can be obtained from the government for a period up to 50 years, and are typically renewable. Land use rights can be granted upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land granting fee, the entry into a land use agreement with a competent governmental authority and certain other ministerial procedures. We have entered into agreements to acquire land use rights for some of our occupied properties and other agreements to use the land and the buildings which house our magnesium operations from parties that we reasonably believe have proper land use rights. We cannot give, however, any assurance that our land use rights will be renewed or that the parties we have entered into agreements with will maintain their land use rights. In addition, we may not have followed all procedures required to obtain the land use certificate for the land use rights we agreed to purchase or paid all required fees. If the Chinese administrative authorities determine that we have not fully complied with all procedures and requirements needed to hold a land use certificate for any property which we occupy, we may be forced by the Chinese administrative authorities to retroactively comply with such procedures and requirements, which may be burdensome and require us to make payments, or such Chinese administrative authorities may invalidate or revoke our land use certificate entirely. If the land use right certificates needed for our operations are determined by the government of the PRC to be invalid or if they are not renewed, or if we are unable to renew the lease for our facilities when they expire, we may lose production facilities or employee accommodations that would be difficult or even impossible to replace. Should we have to relocate, our workforce may be unable or unwilling to work in the new location and our business operations will be disrupted during the relocation. The relocation or loss of facilities could cause us to lose sales and/or increase its costs of production, which would negatively impact our financial results.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 
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The Investment Company Act of 1940 will limit the value of securities we can accept as payment for our business consulting services which may limit our future revenues.

We have historically accepted securities as payment for our services and will likely continue to do so in the future, but only to the extent that it does not cause us to become classified as an investment company under the Investment Company Act 1940. To the extent that we are required to reduce the amount of securities we accept as payment for our consulting services to avoid becoming an investment company, our future revenues from our business consulting services may substantially decline if our clients cannot pay our fees in stock or securities. A reduction in the amount of our consulting fees will materially adversely effect our financial condition and results of operations in future periods. Any future change in our fee structure for our consulting services could also severely limit our ability to attract business consulting clients in the future.

The acquisition of new businesses is costly and such acquisitions may not enhance our financial condition.

A significant element of our growth strategy is to acquire controlling interests in companies that operate in the PRC and that offer services, products, technologies, industry specializations or geographic coverage that extend or complement our existing business. The process to undertake a potential acquisition is time-consuming and costly. We expect to expend significant resources to undertake business, financial and legal due diligence on our potential acquisition targets and there is no guarantee that we will acquire the company after completing due diligence. The process of identifying and consummating an acquisition could result in the use of substantial amounts of cash and exposure to undisclosed or potential liabilities of acquired companies. In addition, even if we are successful in acquiring additional companies, there are no assurances that the operations of these businesses will enhance our future financial condition. To the extent that a business we acquire does not meet the performance criteria used to establish a purchase price, some or all of the goodwill related to that acquisition or a write down of assets acquired could be charged against our future earnings, if any.

The operations of our basic materials segment will be subject to risks and hazards inherent in the mining industry.

Our Basic Materials segment, if and when mining operations commence, will be engaged in the mining and processing of zinc ore. These operations will be subject to risks and hazards inherent in the mining industry, including, but not limited to, ground fall, flooding, environmental hazards and the discharge of toxic chemicals, explosions and other accidents, unanticipated variations in grade and other geological problems, water conditions, surface or underground conditions, metallurgical and other processing problems, mechanical equipment performance problems, the lack of availability of materials and equipment, the occurrence of accidents, labor force disruptions, force majeure factors, unanticipated transportation costs, and weather conditions. Any of these risks could result in work stoppages, delays in production, the development of properties, production commencement dates and production quantities, increased production costs and rates, damage to or destruction of mines and other production facilities, injury or loss of life, damage to property, environmental damage, and possible legal liability for such damages. As of the date of this report, we have not established a reserve on this property. Furthermore, we are evaluating our strategic alternatives related to this business including the partial or full sale of our interest, the launch of operations in fiscal 2012 or seeking a potential joint venture partner to operate this business.

Risks Related to Doing Business in China

We may be unable to enforce our rights due to policies regarding the regulation of foreign investments in China.

The PRC’s legal system is a civil law system based on written statutes in which decided legal cases have little value as precedent, unlike the common law system prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our investment agreements with the minority shareholders and management of our subsidiaries, arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.  We are considered a foreign invested enterprise under Chinese laws, and as a result, we must comply with Chinese laws and regulations.

 
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We cannot predict what effect the interpretation of existing or new Chinese laws or regulations may have on our business. If the relevant authorities find us to be in violation of Chinese laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business and other licenses; requiring that we restructure our ownership or operations; and requiring that we discontinue any portion or all of our business. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. The PRC’s regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks which may affect our ability to achieve our stated business objectives. Also, if we are unable to enforce any legal rights we may have under our agreements or otherwise with the noncontrolling shareholders of our subsidiaries, our ability to control their operations could be limited. Any significant limitation on our ability to control the operations of our subsidiaries could result in a loss of our investment which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to environmental and safety regulations, which may increase our compliance costs and reduce our overall profitability.

We are subject to the requirements of environmental and occupational safety and health laws and regulations in the PRC. In addition, in March 2011, the MIIT announced new conditions regarding magnesium producers in an effort to, among other things, moderate the environmental impact of magnesium production. These initiatives include, but are not limited to minimum annual production capacity requirements and standards for environmental quality and discharge of pollutants in the PRC, see “Item 1. Business – Government Regulation – Environment” and potential forced shutdown of inefficient or small producers with capacity of less than 15,000 tons annually. While we believe that we are in compliance with all applicable governmental regulations, we may incur substantial costs or liabilities in connection with these requirements that could reduce our overall profitability. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a significant expense and have a material adverse effect on our business, financial condition, and results of operations.

Substantially all of our assets and operations are located in the PRC and are subject to changes resulting from the political and economic policies of the Chinese government.

Our business operations could be restricted by the political environment in the PRC. The PRC has operated as a socialist state since 1949 and is controlled by the Communist Party of the PRC. In recent years, however, the government has introduced reforms aimed at creating a socialist market economy and policies have been implemented to allow business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reform programs, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to moderate the environmental impact of manufacturing businesses, control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign investment. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC.

Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of the PRC, the future direction of these economic reforms is uncertain and the uncertainty may decrease the attractiveness of our company as an investment, which may in turn result in a decline in the trading price of our common stock.


 
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We cannot assure you that the current Chinese policies of economic reform will continue. Because of this uncertainty, there are significant economic risks associated with doing business in China.

Although the majority of productive assets in the PRC are owned by the Chinese government, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourages private economic activity. In keeping with these economic reform policies, the PRC has been openly promoting business development in order to bring more business into the PRC. Because these economic reform measures may be inconsistent or ineffective, there are no assurances that:

 
 
the Chinese government will continue its pursuit of economic reform policies;
 
 
the economic policies, even if pursued, will be successful;
 
 
economic policies will not be significantly altered from time to time; or
 
 
business operations in the PRC will not become subject to the risk of nationalization.

We cannot assure you that we will be able to capitalize on these economic reforms, assuming the reforms continue. Because our business model is dependent in large part upon the continued economic reform and growth in the PRC, any change in Chinese government policy could materially adversely affect our ability to continue to implement our business model. The PRC’s economy has experienced significant growth in the past decade, but such growth has been uneven across geographic and economic sectors and has recently been slowing. Even if the Chinese government continues its policies of economic reform, there are no assurances that economic growth in that country will continue or that we will be able to take advantage of these opportunities in a fashion that will provide financial benefit to us.

The Chinese government exerts substantial influence over the manner in which our Chinese subsidiaries must conduct our business activities.

The PRC only recently has permitted provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions of the PRC, and could require us to divest ourselves of any interest we then hold in our Chinese subsidiaries.

 We face risks related to natural disasters and health epidemics in China, which could have a material adverse effect on our business and results of operations.

Our business could be materially adversely affected by natural disasters or the outbreak of health epidemics in China. For example, in May 2008, Sichuan Province suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome, or SARS. In April 2009, an outbreak of the H1N1 virus, also commonly referred to as “swine flu,” occurred in Mexico and has spread to other countries. Cases of swine flu have been reported in Hong Kong and mainland China. The Chinese government, and certain regional governments within the PRC, have enacted regulations to address the H1N1 virus, which may have an effect on our business. If the outbreak of swine flu were to become widespread in China or increase in severity, it could have an adverse effect on economic activity in China, and could require the temporary closure of our production facilities or offices. Such events could severely disrupt our business operations and harm our results of operations. Any future natural disasters or health epidemics in the PRC could also have a material adverse effect on our business and results of operations.

New labor laws in the PRC may adversely affect our results of operations.

On June 29, 2007, the PRC government promulgated a new labor law, namely the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008. The New Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially adversely affecting our financial condition and results of operations.


 
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Restrictions on currency exchange may limit our ability to receive and use our revenues effectively. We may not have ready access to cash on deposit in banks in the PRC.

Because a substantial portion of our revenues are in the form of Renminbi (RMB), the main currency used in the PRC, any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside the PRC or to make dividend or other payments in U.S. Dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to government approval in the PRC, and companies are required to open and maintain separate foreign exchange accounts for capital account items. At September 30, 2011 our PRC subsidiaries had approximately $8.6 million on deposit in banks in the PRC, which represented approximately 69% of our cash. We cannot be certain that we could have ready access to that cash should we wish to transfer it to bank accounts outside the PRC nor can we be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions.

Fluctuations in the value of the RMB may have a material adverse effect on your investment.

The change in value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.  Recently, the People’s Bank of China has decided to proceed further with reform of the RMB exchange regime and to enhance the RMB exchange rate flexibility. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the RMB against the U.S. dollar.

Any significant revaluation of the RMB may have a material adverse effect on the value of, and any dividends payable on, our stock in foreign currency terms. More specifically, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Consequently, appreciation or depreciation in the value of the RMB relative to the U.S. dollar could materially adversely affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.
 
Risks Related to Our Common Stock

Delisting of our securities from trading by NASDAQ could adversely affect the market liquidity of our common stock, our ability to obtain financing for the continuation of our operations and harm our business.

On December 12, 2011, we received a letter, the Notification Letter, from the NASDAQ OMX Group notifying us that we no longer meet NASDAQ’s requirements for continued listing on the NASDAQ Global Market under NASDAQ Listing Rule 5450(a)(1), the Bid Price Rule, because the minimum bid price of our common stock did not equal or exceed $1.00 at least once over a period of 30 consecutive trading days prior to the date of NASDAQ’s letter. The NASDAQ’s explained that under NASDAQ Listing Rule 5810(c)(3)(A), we will be afforded 180 calendar days, or until June 11, 2012, to regain compliance with the Bid Price Rule. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least 10 consecutive business days. If we do not regain compliance by June 11, 2012, NASDAQ will provide written notification to us that our common stock will be subject to delisting from the NASDAQ Capital Market. We may, however, be eligible for an additional grace period of 180 calendar days if we satisfy the continued listing requirement for market value of publicly held shares and all other initial listing standards (with the exception of the Bid Price Rule) for listing on the NASDAQ Capital Market, and submit a timely notification to NASDAQ of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary, which would need to be approved by our stockholders.

While we believe we will be able to comply with the NASDAQ requirements in the applicable time periods, no assurances can be made that we will in fact be able to comply and that our common stock will remain listed on NASDAQ. If we are not able to comply with the NASDAQ requirements in the applicable time periods, our common stock will be delisted from NASDAQ. A delisting of our common stock would adversely affect the market liquidity of our common stock, our ability to obtain financing for the continuation of our operations and harm our business.


 
- 21 -

 
 
 

The market price for shares of our common stock has been and may continue to be highly volatile and subject to wide fluctuations.

The market price for shares of our common stock has experienced significant price and volume fluctuations in the last few years. Some specific factors that may have a significant effect on the future market price of our shares of common stock include:

 
 
actual or expected fluctuations in our operating results;
 
 
variance in our financial performance from the expectations of market analysts;
 
 
changes in general economic conditions or conditions in our industry generally;
 
 
changes in conditions in the financial markets;
 
 
announcements of significant acquisitions or contracts by us or our competitors;
 
 
our inability to raise additional capital;
 
 
changes in applicable laws or regulations, court rulings and enforcement and legal actions;
 
 
additions or departures of key management personnel;
 
 
actions by our shareholders;
 
 
changes in market prices for our products or for our raw materials; and
 
 
changes in stock market analyst research and recommendations regarding the shares of our common stock, other comparable companies or our industry generally.

In addition, the stock market in general, and the Nasdaq and the market for companies with  PRC based operations in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the affected companies. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the price you paid for such shares.
 
 ITEM 1B.
UNRESOLVED STAFF COMMENTS.

Not applicable to a smaller reporting company.

ITEM 2.
PROPERTIES.

Our principal executive offices are located in Deerfield Beach, Florida. We lease approximately 12,600 square feet of office space for an annual expense of approximately $358,000 under a lease agreement which expires in January 2019.

Chang Magnesium owns and operates a magnesium facility capable of producing 10,000 metric tons of pure magnesium per year located on approximately 250,000 square feet of land located in the Aluminum & Magnesium Industrial Park in Yangqu County, of the Shangxi Province, China. The land use rights are owned by Taiyuan Sanding Coal Gasification Co., Ltd. and Chang Magnesium has been granted the land use rights through 2020 at no cost.

Chang Trading's offices are located in approximately 2,000 square feet of office space at the Chang Magnesium plant. Chang Trading does not pay rent to Chang Magnesium.

Golden Magnesium owns and operates a magnesium facility capable of producing 12,000 metric tons of pure magnesium per year located on approximately 1,068,117 square feet of land located in Yueyang, of Gu County, in the Shanxi Province, China. The land use rights expire in January 2061.  

Baotou Changxin Magnesium owns and operates a magnesium facility capable of producing 24,000 metric tons of pure magnesium per year located on approximately 406,000 square feet of land located in the Shiguai district of Baotou city, in Inner Mongolia. Baotou Changxin Magnesium occupies this land pursuant to an asset acquisition agreement entered into with Baotou Sanhe Magnesium Co., Ltd. to acquire the land use rights for this property, among other assets. The land use rights expire in May 2045.

 
- 22 -

 
 
 


Lang Chemical owns the rights to use a storage facility consisting of a 105,000 cubic foot storage tank area and a 21,800 square foot warehouse located in the Beixin Fine Chemical Industrial Park, Qidong, Jiangsu Province of the PRC pursuant to a land use agreement which expires on April 21, 2055. Lang Chemical purchased the rights to use this land where this facility is located in April 2005 at a cost of $308,900 and owns the warehouse and storage area located on this land.

Lang Chemical owns the rights to use an approximately 4,360 square foot office space located at 58 Jinqiao Rd, Suite 21A Shanghai, China pursuant to a land use agreement which expires on November 29, 2043. Lang Chemical permits Ms. Zhu to lease this office and retain the monthly rent of approximately $3,125 she receives from that space in exchange for our right to use the 3,270 square foot office space located at No. 970, Da Liang Road., Suite 901, Shanghai, China. The Da Liang Road office is owned by Ms. Qian Zhu, a minority shareholder and CFO of Lang Chemical.

CDI Jixiang Metal holds the zinc ore mining rights to approximately 51 acres of land located in the Yongshun Kaxi Lake Mining area, obtained in 2004 from the Ministry of Land and Resources. We are in the process of renewing the lease for these mining rights as the current lease expired in October 2009. We are in the process of renewing the lease for these mining rights.  See Note 9 – Property Use Rights to our financial statements included in this report. In addition, we have a land lease agreement with a Yanjing County Government agency for approximately 96,000 square feet of land on which expires on January 12, 2016. We have paid $7,878 for 10 years rent through January 2016 under this land lease agreement. As of the date of this report, mining operations have not commenced, we have not established a reserve on this property and we do not have a timetable for when we may sell these assets.

CDI Metal operates from a 14,000 square foot manufacturing and office space located at 1258 Nangang Road, Nanhui District, Shanghai, China. The term of the lease is from January 1, 2008 to December 31, 2017 for a commitment of approximately $17,000 annually.

CDI China leases an approximately 1,350 square foot office in Taiyuan, China for an annual expense of approximately $15,700 pursuant to a lease agreement that will expire in December 2011.  We closed this office as part of our consolidation of our Magnesium segment administrative offices in Taiyuan, China with the administrative offices of YiWei Magnesium.

CDI Beijing leases an approximately 2,009 square foot office space located in Beijing, China for an annual expense of approximately $25,726 that expires in June 2014.   

CDI Shanghai Management leases approximately 2,981 square feet of office space in Shanghai for an annual expense of approximately $105,182 (RMB 686,700) per year. The lease expires on December 31, 2012.

Ruiming Magnesium owns and operates a magnesium facility capable of producing 10,000 metric tons of magnesium powder and 4,000 metric tons of pure magnesium ingot per year located on approximately a total of 414,308 square feet of land located in Shagou Village, Yangqu County of Taiyuan City Shanxi Province, China. Ruiming Magnesium occupies the land on which this facility is located pursuant to two land use rights agreements one of which is held by Ruiming Magnesium and one held by Shanxi Tongbao Investment Group Co., Ltd. The land use agreement held by Shanxi Tongbao Investment Group Co., Ltd. will be transferred to Ruiming Magnesium pursuant to the terms of the Equity Transfer Agreement dated July 13, 2010 entered into among CDI China, Inc., Pine Capital Enterprises, Inc., Taiyuan Yiwei Magnesium Industry Co., Ltd. and Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd. The land use rights agreement held by Ruiming Magnesium covers approximately 208,534 square feet of land and expires in February 2052.  The land use rights agreement held by Shanxi Tongbao Investment Group Co., Ltd. covers approximately 205,774 square feet of land and expires in February 2052.

ITEM 3.
LEGAL PROCEEDINGS.

On April 12, 2011, Sunskar Ltd. (“Sunskar”) filed a petition to compel us to Arbitration in the U.S. District Court for the Southern District of New York (Case No. 11CV2499). The petition alleges that China Direct breached an agreement for the charter of a vessel owned by Sunskar. The petition seeks an order of the Court appointing an arbitrator on our behalf and directing us to proceed to arbitration as provided for in accordance with the Federal Arbitration Act, 9 U.S.C. §1, et seq. and New York Convention, 9 U.S.C. §201, et. seq. In addition, Sunskar claims damages in excess of $1,000,000 as a result of our alleged breach of the agreement. On May 20, 2011 we filed an answer and memorandum of law in support of our answer to the petition to compel arbitration disputing the existence of any binding obligation to Sunskar. On June 6, 2011 Sunskar filed a reply and memorandum of law in opposition to our answer. On July 8, 2011, Sunskar filed an amended petition for order compelling arbitration to add our wholly owned subsidiary CDII Trading, Inc. (“CDII Trading”) as a party.  On July 29, 2011 CDII Trading filed a memorandum of law in opposition to Sunskar’s amended petition and on August 4, 2011 Sunskar filed its reply memorandum of law in support of its amended petition disputing the existence of any binding obligation to Sunskar.

 
- 23 -

 
 
 

On November 3, 2011, the Court issued an order granting Sunskar’s petition to compel arbitration against CDI Trading, denied the petition to compel arbitration against China Direct and stayed the federal court action pending completion of the arbitration. On December 5, 2011, we received confirmation that a three member arbitration panel under the Maritime Arbitration Rules has been appointed in New York.

See Note 17 ?C Commitments and Contingencies in our audited consolidated financial statements included in this report.

Other than as described above, we believe there are currently no litigation or legal or administrative proceedings pending against us that are likely to have, individually or in the aggregate, a material adverse effect on our business or our results of operations and, to our knowledge, none of our officers, directors or principal shareholders are party to any legal proceeding in which they have an interest adverse to us.

ITEM 4.
REMOVED AND RESERVED.

PART II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock, $.0001 par value per share, has been traded on the NASDAQ Global Market under the symbol “CDS” from May 1, 2008 until January 25, 2009 and since January 26, 2009 under the symbol “CDII”. The following table sets forth the reported high and low closing prices for our common stock as reported on the Nasdaq Global Market for the last two fiscal years. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

   
High
   
Low
 
Fiscal 2010 (12 Months):
               
October 1, 2009 to December 31, 2009
 
$
1.56
   
$
1.16
 
January 1, 2010 to March 31, 2010
   
1.87
     
1.54
 
April 1, 2010 to June 30, 2010
   
1.59
     
1.11
 
July 1, 2010 to September 30, 2010
 
$
1.34
   
$
0.92
 
                 
Fiscal 2011 (12 Months):
               
October 1, 2010 to December 31, 2010
 
$
2.22
   
$
1.10
 
January 1, 2011 to March 31, 2011
   
1.83
     
1.17
 
April 1, 2011 to June 30, 2011
   
1.42
     
0.85
 
July 1, 2011 to September 30, 2011
 
$
1.17
   
$
0.76
 
                 

As of December 16, 2011 there were approximately 19 shareholders of record of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Transfer Agent

Our transfer agent is Computershare Trust Company, Inc. which is located at 350 Indiana Street Suite 800, Golden, CO 80401. The phone number is (303) 262-0600 and its website is www.computershare.com.

Dividends

We have never paid cash dividends on our common stock. Payment of dividends will be within the sole discretion of our Board of Directors and will depend, among other factors, upon our earnings, capital requirements and our operating and financial condition. In addition, under Florida law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Florida statutes, or if there is no such surplus, out of our net profits for the year in which the dividend is declared and/or the preceding year. If, however, the capital of our company computed in accordance with the relevant Florida statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits and dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired. We intend to utilize profits earned by our Chinese based subsidiaries to expand our PRC based operations.

 
- 24 -

 
 
 


 
Recent Sales of Unregistered Securities

None.
 
ITEM 6.
SELECTED FINANCIAL DATA.

Not applicable for a smaller reporting company.

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussion and analysis of our consolidated financial condition and results of operations for the fiscal year ended September 30, 2011September 30, 2010, and for the transition period ended September 30, 2009, should be read in conjunction with the consolidated financial statements and other information presented in this Annual Report on Form 10-K.

We have defined various periods that are covered in this report as follows:
 
 
 
“fiscal 2012” — October 1, 2011 through September 30, 2012
 
 
“fiscal 2011” — October 1, 2010 through September 30, 2011
 
 
“fourth quarter of fiscal 2011” – July 1, 2011 through September 30, 2011
 
 
“fiscal 2010” — October 1, 2009 through September 30, 2010.
 
OVERVIEW OF OUR PERFORMANCE AND OPERATIONS

Our Business

We are a U.S. based company that sources, produces and distributes industrial commodities in China and the Americas. We also provide business and financial consulting services to public and private companies primarily operating in China. We operate in three identifiable segments, Magnesium, Basic Materials, and Consulting, in accordance with ASC Topic 280, “Disclosure about segments of an Enterprise and Related Information”. We established our Magnesium and Basic Materials segments in China beginning in 2006 and have grown through acquisitions of controlling interests in Chinese private companies. We consolidate these acquisitions as either our wholly or majority owned subsidiaries. Through our U.S. based industrial commodities business, established in 2009, we source, finance, manage logistics, and sell industrial commodities from North and South America for ultimate distribution in China.

As of September 30, 2011, our Magnesium segment represents our largest segment by assets and revenues. We manufacture and sell pure magnesium and related by-products sourced and produced in China. We also purchase and resell magnesium products sourced and produced in China by third parties. We do not engage in the use of “conflict minerals,” which are not necessary to the functionality or production of our magnesium products, nor do we manufacture or contract to manufacture our products from Democratic Republic of the Congo or adjoining countries. Magnesium is the lightest and strongest of the structural metals; it is one fourth the weight of steel, two fifths the weight of titanium and two thirds the weight of aluminum. Magnesium is used in a variety of markets and applications due to the physical and mechanical properties of the element and its alloys. Magnesium ingots are the feedstock for the manufacturing process of titanium and aluminum alloying. Magnesium powder and granules are used as a desulphurizer that removes sulfur in the production process of steel. Also, various types of magnesium alloys which are produced from the pure magnesium ingots we make are used in aircraft, automobile parts, and in electronic equipment such as computers, cameras and cellular phones.  

Our Basic Materials segment engages in the sale and distribution of basic resources within China and the global purchase and sale of industrial commodities which includes mineral ores and non-ferrous metals. In this segment we sell and distribute a variety of products in China including industrial grade synthetic chemicals, steel products and nonferrous metals. Additionally, within this segment we hold the rights to mining properties and are considering the acquisition of additional rights to adjacent mining sites and the partial or full sale of our interest in this business.

Our Consulting segment provides services to Chinese entities seeking access to the U.S. capital markets. These services include general business consulting, Chinese regulatory advice, translation services, formation of entities in the PRC, coordination of professional resources, strategic alliances and partnerships, advice on effective means of accessing U.S. capital markets, mergers and acquisitions, coordination of Sarbanes-Oxley compliance, and corporate asset evaluations.

 
- 25 -

 
 
 


Our Performance

We experienced significant revenue growth in fiscal 2011. Total revenues in fiscal 2011 amounted to $187.8 million, an increase of $75.1 million compared to fiscal 2010, as a result of an increase in revenues across all of our business segments, specifically an increase of $48.7 million within our Magnesium segment, $16.2 million within our Consulting segment, and $10.1 million within our Basic Materials segment. During fiscal 2011, our Magnesium segment produced, sold or distributed approximately 36,637 metric tons of magnesium products, including 3,484 metric tons of magnesium powder and 467 metric tons of magnesium alloys, generating revenues of $99.9 million compared to the production, sale and distribution of approximately 21,786 metric tons and revenues of $51.1 million in fiscal 2010. During fiscal 2011, our Basic Materials segment generated revenues of $68.9 million compared to $58.8 million in fiscal 2010. Also during fiscal 2011, our Consulting segment generated revenues of $19.0 million compared to $2.8 million in fiscal 2010.

Our gross profit in fiscal 2011 totaled $19.5 million, an increase of $12.3 million, or 171.1%, compared to fiscal 2010, primarily as a result of an increase of $10.2 million in gross profit within our Consulting segment, $1.4 million within our Magnesium segment, and $0.7 million within our Basic Materials segment, respectively. At the same time, we experienced a decline in gross margins within our business segments, specifically a margin contraction of 18.6 percentage points within our Consulting segment due to higher one-time transactional costs associated with services provided to two new client companies while gross margins remained flat within our Magnesium and Basic Materials segment, respectively, due to higher input costs, including labor, raw materials, and non-cash depreciation related costs.
 
Total net operating expenses increased $1.6 million in fiscal 2011 compared to fiscal 2010, primarily as a result of an increase of $1.4 million within our Magnesium segment, and $0.8 million within our Basic Materials segment, partially offset by a decrease of $0.6 million within our Consulting segment in selling, general and administrative expenses.

In fiscal 2011, we recognized a realized loss of $0.4 million on certain marketable securities available for sale in fiscal 2011 compared to a realized gain of $2.1 recorded in fiscal 2010. In fiscal 2011, we recognized a gain of $3.1 million on disposal of discontinued operations for an all cash sale transaction to divest our 51% ownership interest in Pan Asia Magnesium, to Bloomgain Investment Limited (“Bloomgain”), an unrelated British Virgin Islands company. This gain was partially offset by a disposal loss of $0.1 million from discontinued operations, upon the completion of our unwinding of CDI Magnesium.

Our Outlook

During fiscal 2011, the overall economic environment improved, helping us to achieve strong growth in our business. However, we still face a number of challenges in continuing the growth of our business, which is primarily tied to the overall health of the global economy. For fiscal 2012, we plan to continue adding our magnesium production capacity internally and through the planned strategic acquisition of Golden Trust and Lingshi Magnesium which have a combined production capacity of 32,000 metric tons per year. We also intend to expand the operations of our U.S. based industrial commodities business to meet current market demand and streamline our other PRC based subsidiaries. At September 30, 2011 we had $44.8 million of working capital including $12.6 million in cash and cash equivalents.

China’s growth rate slowed to approximately 9.4% in the quarter ending September 30, 2011, the lowest rate within the last two years as the European debt crisis and weaker demand has put the global economic recovery in jeopardy and pushed China’s export-driven manufacturing activities to its lowest levels in the past three years. Furthermore, China’s housing market and particularly its real estate construction market experienced a significant correction due to a tighter regulatory environment, bank lending curbs, and slower demand during the fiscal period.  In response to this slowdown, China’s Central Bank cut the nation’s commercial banks’ reserve requirement ratio by 0.5 percentage point, the first such cut since December 2008, in order to provide additional liquidity for commercial lending. This represents a significant shift in China’s economic policy signaling that China has put economic growth at the top of its agenda, rather than concerns about inflation.

Magnesium segment. According to the International Magnesium Association (IMA), an industry trade group, from January to September, 2011 China’s domestic magnesium exports totaled approximately 316,000 metric tons, up 9.7% compared to the same period of 2010. Our average magnesium sales price over fiscal 2011 was $2,703 per metric ton, which incrementally improved over the course of the year compared to an average magnesium sales price of $2,348 in fiscal 2010. The overall trend reflected an improved worldwide demand pattern, characterized by a gradual increase in prices throughout fiscal 2011, driven by an increased demand from the global aerospace, automotive and consumer electronics sectors. This was followed by a softening in overall demand beginning in October 2011 mostly due to renewed concerns over the European debt crisis and a slowdown in China’s manufacturing activities. We also began limited production at our Baotou Changxin Magnesium facility in May of 2011 after completing an upgrade to enable the facility to utilize either more energy efficient waste gas or coal to fuel its furnaces and to increase its annual production capacity to 24,000 metric tons. In October of 2011 we temporarily halted production at this facility as part of our rationalization plan to achieve more effective utilization rates based on current magnesium demand trends. In fiscal 2011 we also tested new techniques and production methods in producing magnesium alloys at Chang Magnesium, and produced 403 metric tons of magnesium alloys in fiscal 2011 including 262 metric tons completed in the fourth quarter of fiscal 2011.

 
- 26 -

 
 
 
On August 30, 2011 we entered into a series of agreements to acquire a 100% ownership interest in Golden Trust and an 80% ownership interest in Lingshi Magnesium Industry for an aggregate of $26.7 million. Additionally, on September 15, 2011 we completed $3.1 million all cash sale of our 51% ownership interest in Pan Asia Magnesium, a discontinued operation, to Bloomgain Investment Limited (“Bloomgain”), an unrelated British Virgin Islands company. The disposition of Pan Asia was part of management’s overall plan to focus its Magnesium segment operations on the management of facilities previously owned or controlled by Yuwei Huang, a member of our board of directors and Executive Vice President within our Magnesium segment.

            Based on the current trends and quoting activities, and indications from the economic activities worldwide, management believes that magnesium demand and prices are poised to further consolidate in the first half of fiscal 2012 and will begin to increase progressively beginning in the second half of fiscal 2012. In management’s view, the long term industry trends for magnesium are very favorable and we intend to continue with our plan to further streamline and consolidate our own production capacity through both internal fiscal control and the planned strategic acquisition of Golden Trust and Lingshi Magnesium, to position ourselves as the future leader in the production and distribution of magnesium products.

Basic Materials Segment. In fiscal 2011 we experienced stronger demand than in fiscal 2010 in this segment due to strength in our end markets in China. However, the overall domestic market for our products began to soften in the fourth quarter of fiscal 2011, resulting in a weaker pricing environment in both our specialty chemicals and construction steel sales. For fiscal 2011, total revenues from our specialty chemical sales increased $6.5 million largely driven by sales in the first three quarters of fiscal 2011 while related gross margins remained relatively flat compared to fiscal 2010. For fiscal 2011, total revenues from our construction steel sales and gross margins decreased $0.7 million and 0.3 of a percentage point, respectively, compared to fiscal 2010, primarily due to a tightening regulatory environment and a slowdown in China urban real estate development. Our industrial commodities business began contributing to revenues in fiscal 2011 as we began product shipments of iron ore to China from Mexico.

In fiscal 2011, we sold $4.3 million of iron ore sourced from Mexico which contributed to higher gross margins in this segment. In the fourth quarter of fiscal 2011, we experienced delays in completing additional shipments out of Mexico due a longer than expected timeframe to receive environmental permits needed to process the iron ore to meet our customer’s specifications. Subsequent to the end of fiscal 2011 we received the required environmental permits and expect revenue from iron ore shipments sourced from Mexico will ramp throughout fiscal 2012. We also entered into agreements to source iron ore in Chile and Bolivia in fiscal 2011. Our operations in Chile experienced shipping delays due to a longer than expected timeframe to receive port authority approval to export the iron ore. The required approval was received in the first quarter of fiscal 2012. In Bolivia, we established logistics and materials processing capabilities late in fiscal 2011, and additionally, we are working with several suppliers with an engineering specialist to further strengthen our sourcing capabilities. We believe revenue from iron ore shipments sourced from Chile and Bolivia will ramp throughout fiscal 2012 and that our efforts in securing new sources of supply in this business will lead to further sales increase within this segment in fiscal 2012.
 
       Consulting Segment. In fiscal 2011 total revenues from our Consulting segment increased $16.2 million, primarily due to higher fees we earned from consulting and advisory services provided to two new client companies. Management believes that demand for our services from PRC companies seeking to list, or currently trading on, U.S. equity markets will remain strong in fiscal 2012. In the fourth quarter of fiscal 2011, we launched a marketing initiative for our new One-Stop China ValueTM  program in an effort to capitalize on the current environment. This program is designed to implement a broad range of strategies to enhance and maximize shareholder value for China-based U.S. listed companies. We primarily focus our marketing efforts on companies with good corporate governance, management integrity, and the potential for growth and profitability. Other marketing plan includes sponsoring trade symposiums, investment forums, and forming strategic alliances with industry and trade associations under the auspices of the Chinese Government.

In addition to potential transaction fees, we also anticipate receiving additional client fees generated from our ongoing annual service contracts. Management expects that revenues from transactional and activity–based fees from our existing clients and our current pipeline of prospects will be sufficient to support our advisory operations in the U.S. Overall Management foresees our Consulting segment will remain an important revenue and earnings driver for our future growth in the years to come.

 
- 27 -

 
 
 
RESULTS OF OPERATIONS

Total Consolidated Revenues

Total Consolidated revenues and operating expenses by segment for fiscal 2011 and fiscal 2010 are as follows:

   
Twelve Months Ended September 30
 
   
2011
   
2010
     
                 
(Dollars in thousands)
 
Revenues
   
% of Revenues
   
Revenues
 
% of Revenues
 
% Increase (Decrease)
 
Magnesium segment
 
$
99,880
     
53
%
 
$
 51,145
 
45
95
%
Basic Materials segment
   
68,927
     
37
%
   
58,829
 
 52
17
%
Consulting segment
   
19,007
     
10
%
   
2,769
 
3
586
%
Total Consolidated Revenues
 
$
187,814
     
100
%
 
$
112,743
 
 100
67
%
 
Total consolidated revenues for fiscal 2011 amounted to $187.8 million, an increase of 66.6% compared to fiscal 2010 as a result of increases in revenues across all of our segments, particularly within our Magnesium and consulting segments.

Summary of Selected Financial Information

   
Twelve Months Ended September 30, 2011
 
Twelve Months Ended September 30, 2010
     
                         
(Dollars in thousands)
 
Amount
   
%
 
Amount
 
%
 
% Increase (Decrease)
 
Total Revenues
 
$
187,814
     
100
%
$
112,743
 
100
%
67%
 
Cost of revenues
   
168,342
     
90
%
 
105,560
 
94
%
59%
 
Gross profit
   
19,472
     
10
%
 
7,183
 
6
%
171%
 
Total net operating (expenses)
   
12,944
     
7
%
 
11,374
 
10
%
14%
 
Operating income (loss)
 
$
6,527
     
3
%
$
( 4,191)
 
(4)
%
n/a
 
Net income (loss) attributable to common stockholders
 
$
9,239
     
5
%
$
(3,314)
 
(3)
%
n/a
 
 
Total revenues for fiscal 2011 increased $75.1 million or 66.6% compared to fiscal 2010 as a result of an increase of $48.7 million within our Magnesium segment, $16.2 million within our Consulting segment, and $10.1 million within our Basic Materials segment.

Cost of revenues in fiscal 2011 increased $62.8 million or 59.5% compared to fiscal 2010 as a result of a cost of revenue increase of $47.3 million or 95.8% within our Magnesium segment, $9.4 million or 16.9% within our Basic Materials segment, and $6.1 million within our Consulting segment.

Total net operating (expenses) increased $1.6 million in fiscal 2011 compared to fiscal 2010, primarily as a result of an increase of $1.4 million in operating expenses net of other operating income within our Magnesium segment, $0.8 million in selling, general and administrative expenses within our Basic Materials segment, partially offset by a decrease of $0.6 million in general and administrative expenses within our Consulting segment.

Total consolidated operating income for fiscal 2011 amounted to $6.5 million compared to total consolidated operating loss of $4.2 million for fiscal 2010 as a result of an increase in total consolidated revenues of $75.1 million, an increase in gross profit of $12.3 million and gross margins of 4.0 percentage points, partially offset by an increase of net operating expenses of $1.6 million.

Net income (loss) attributable to common stockholders in fiscal 2011 totaled $9.2 million compared to a loss of $3.3 million in fiscal 2011 primarily as a result of an increase in total consolidated operating income of $10.6 million, income from discontinued operations, net of tax related to the sale of our 51% interest in Pan Asia Magnesium for $3.1 million, partially offset by an increase in total other expenses of $1.2 million, primarily due to a lack of $2.1 million in one-time realized gain in fiscal 2010 on the sale of our marketable securities available-for-sale, and an increase in income tax expense of $0.1 million. Net income in the fourth quarter of fiscal 2011 attributable to China Direct Industries was $1.5 million. After the inclusion of accumulated accounting adjustments (see Note 12 - Capital Stock for details), net income attributable to common stockholders in the fourth quarter of fiscal 2011 was $2.2 million as compared to a loss of ($2.8 million) recorded in the fourth quarter of fiscal 2010.

 
- 28 -

 
 
Segment Information

A summary of our operating results, by segment, for fiscal 2011, and fiscal 2010, are as follows:

Magnesium Segment
 
 
Twelve Months Ended September 30,
   
Increase
(Decrease)
 
 
2011
 
2010
       
(Dollars in thousands)
             
Revenues
  $ 93,295     $ 43,789       49,506  
Revenues - related party
    6,585       7,356       (771 )
 Total revenues
    99,880       51,145       48,735  
Cost of revenues
    96,690       49,391       47,299  
Gross profit (loss)
    3,190       1,754       1,436  
Total operating expenses
    4,055       2,651       1,404  
Operating income (loss)
  $ (865 )   $ (897 )     32  
 
 
Basic Materials Segment
 
 
Twelve Months Ended September 30,
 
Increase
(Decrease)
 
(Dollars in thousands)
2011
 
2010
     
             
Total revenues
  $ 68,927     $ 58,829     $ 10,098  
Cost of revenues
    65,135       55,734       9,401  
Gross profit
    3,792       3,095       697  
Total operating expenses
    3,663       2,921       742  
Operating income (loss)
  $ 129     $ 174       (45 )
 
 
Consulting Segment
 
 
Twelve Months Ended September 30,
 
Increase
(Decrease)
 
(Dollars in thousands)
2011
 
2010
     
             
 Total revenues
  $ 19,007     $ 2,769     $ 16,238  
Cost of revenues
    6,517       435       6,082  
Gross profit
    12,490       2,334       10,156  
Total operating expenses
    5,226       5,802       576  
Operating income (loss)
  $ 7,264     $ (3,468 )     10,732  

Magnesium Segment Operating Results

Total Revenues. Magnesium segment revenues for fiscal 2011 totaled $99.9 million including related party revenues, an increase of $48.7 million or 95.3% compared to fiscal 2010, primarily as a result of an increase in international demand, with a 15.1% increase in our average magnesium sales price, and a 68.2% increase in our sales volumes.

Revenues – Related Party. Revenues – Related Party totaled $6.6 million including $5.8 million of magnesium revenues and $0.8 million of processing service revenues, in fiscal 2011, a decrease of $0.8 million or 10.5% compared to fiscal 2010, primarily as a result of our ability to place customer orders directly with supplying entities rather than through related party entities.

Gross Profit. Gross profit in fiscal 2011 totaled $3.2 million, an increase of $1.4 million or 81.9% with gross margins of 3.2% compared to 3.4% of fiscal 2010. The improvement in gross profit was primarily as a result of 68.2% increase in our total sales volume compared to fiscal 2010, with total revenues increased 95.3%, partially offset by a decrease in gross profit margins by 0.2 of a percentage point.  Gross profits were inclusive of $2.5 million in depreciation expenses in fiscal 2011 as compared to $1.3 million in fiscal 2010.  The $1.2 million increase in depreciation expenses was primarily related to the low utilization rates as we restarted production at previously idle facilities and the acquisition of Ruiming Magnesium. Prior to depreciation, our gross profit margin was 5.7% for fiscal 2011and and 6.1% for fiscal 2010.

Operating Expenses. Net operating expenses in fiscal 2011 totaled $4.1 million, an increase of $1.4 million or 53.0% compared to fiscal 2010, primarily as a result of an increase of $1.7 million in operating costs primarily as a result of a $1.2 million increase in operating costs at Ruiming Magnesium inclusive of $1.0 million of depreciation related expenses, and a $0.4 million increase in operating costs at Golden Magnesium.
 
- 29 -

 
 
Basic Materials segment

Revenues. In fiscal 2011, revenues in the Basic Materials segment totaled $68.9 million, an increase of $10.1 million or 17.2% compared to fiscal 2010, primarily as a result of an increase of $6.5 million in our industrial chemical sales and $4.3 million in our iron ore sales, partially offset by a decrease of $0.7 million in construction related steel sales due to a reduced demand in a slower China urban infrastructure expansion.

Gross Profit. In fiscal 2011 our gross profit within this segment totaled $3.8 million, an increase of $0.7 million or 22.5% while our gross margins remained relatively flat at 5.5% compared to fiscal 2010, primarily due to an increase of $10.1 million in revenues with higher gross margins from our iron ore sales while gross margins from our specialty industrial chemical and construction steel sales remained relatively flat.

Operating Expenses. In fiscal 2011 our operating expenses within this segment totaled $3.7 million, an increase of $0.7 million compared to fiscal 2010, primarily as a result of a litigation cost accrual and additional selling and commission expenses.

Consulting segment

Revenues. In fiscal 2011 the Consulting segment revenues totaled $19.0 million, an increase of $16.2 million or compared to fiscal 2010. These increases were primarily attributable to $18.1 million in fees we earned for consulting services provided to two new client companies, partially offset by a reduction in fees due to the expiration of two client service contracts. Our revenues within this segment primarily consist of consulting and advisory service fees we received from certain publicly traded U.S. companies with their primary business operations located in the PRC, and we receive a fixed number of shares of their marketable securities or fees from those client companies, including both recurring and one-time transaction fees for services we provide to them.

Gross Profit. In fiscal 2011 our gross profit within this segment totaled $12.5 million or an increase of $10.2 million compared to fiscal 2010, which was primarily due to an increase of $16.2 million in consulting service revenues. In fiscal 2011 our gross margins were 65.7%, a decrease of 19 percentage points, primarily due to $6.0 million in transactional costs associated with services provided to a new client company in the third quarter of fiscal 2011.

Operating Expenses. In fiscal 2011 our operating expenses within this segment totaled $5.2 million, a decrease of $0.6 million or 9.9% compared to fiscal 2010. Our operating expenses within this segment include general and administrative expenses for both our U.S. headquarters and China-based operations, and executive management. The decrease of operating expenses in fiscal 2011 was primarily due to a reduction of $0.4 million in stock based compensation and $0.3 million in consulting fees, partially offset by an increase in travel related expenses.

Total Other Income (Expense)

Total other expense in fiscal 2011 amounted to $0.5 million compared to total other income of $0.7 million in fiscal 2010, an increase of $1.2 million, primarily due to a realized loss of $0.4 million recognized in fiscal 2011 on sale of our marketable securities available-for-sale compared to a realized gain of $2.1 million on sale of our marketable securities available-for-sale incurred in fiscal 2010, partially offset by the absence of a $1.3 million impairment charge incurred in fiscal 2010.
 
Income Tax (Expense) Benefit

Income tax expenses for fiscal 2011totaled $0.2 million compared to an income tax expense of $0.06 million for fiscal 2010, primarily attributable to our US-sourced taxable income within our Consulting segment and China-sourced taxable income within our Basic Materials segment.

Net Income (Loss) from Continuing Operations

Net Income from continuing operations for fiscal 2011 totaled $5.8 million compared to net loss of $3.6 million in fiscal 2010. This operating improvement was primarily due to an increase of $75.1 million in total revenues, $12.3 million in gross profit, resulting in a $10.7 million increase in total operating income, partially offset by a $1.2 million increase in total other expense.
 
Discontinued Operations

Gain on disposal of discontinued operations, net of tax, totaled $3.0 million in fiscal 2011, which was primarily attributable to a one-time gain we recognized on the sale of our 51% interest in Pan Asia Magnesium for $3.0 million , including the reversal of $0.1 million in unamortized litigation costs we previously accrued, partially offset by a $0.1 impairment loss incurred in connection with the dissolution of CDI Magnesium. There was no gain or loss reported from our discontinued operations in fiscal 2010.
 
Foreign Currency Translation Gain, Net of Income Tax

Net gain or loss resulting from foreign currency translations is included in the computation of our Other Comprehensive Income (OCI). The functional currency of our subsidiaries operating in the PRC is the RMB. The financial statements of our subsidiaries are translated into U.S. dollars using the current exchange rate at the end of each reporting period for assets and liabilities, and the average rate for revenues, costs, and expenses.
 
- 30 -

 
 
As a result of these translations, we reported a foreign currency translation gain of $2.8 million in fiscal 2011 compared to $1.3 million in fiscal 2010. This non-cash gain had the effect of increasing our reported total comprehensive income. This item is discussed in further detail in Note 3 – Comprehensive Income in our notes to consolidated financial statements included in this report.

Unrealized Gain/(Loss) on Marketable Securities Available for Sale, Net of Income Tax

Unrealized loss on marketable securities available for sale net of income taxes for fiscal 2011 totaled $4.2 million compared to unrealized loss of $0.9 million in fiscal 2010 due to changes in the fair value of marketable securities available-for-sale we received from our client companies for consulting services.

We make valuations of the carrying amount of our marketable securities available for sale on a quarterly basis pursuant to ASC 320 “Investments – Debt and Equity Securities.” We record an unrealized gain/(loss) for the fair market valuation (FMV) of such securities in the equity section of our balance sheet as Other comprehensive income (OCI). We make an analysis on an annual basis to determine if and when such unrealized (loss) has become other than temporarily impaired, and reclassify it as a realized (loss) into our current period’s net income/(loss). This determination is based on a number of factors, including but not limited to (i) the percentage of the decline, (ii) the severity of the decline in relation to the enterprise/market conditions, and (iii) the duration of the decline.

Total Comprehensive Income (Loss)

Total comprehensive income in fiscal 2011 totaled $7.5 million compared to total comprehensive loss of $3.2 million in fiscal 2010, primarily as a result of $8.9 million in net income, partially offset by $1.4 million in Total Other Comprehensive Loss, including an unrealized gain of $2.8 million in foreign currency translations and an unrealized loss of $4.2 million on changes in fair value of our marketable securities available-for-sale.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate amounts of cash to meet its needs for cash. At September 30, 2011 our working capital totaled $44.8 million compared to $30.3 million at September 30, 2010.

Our cash balance at September 30, 2011 totaled $12.6 million, an increase of $2.5 million compared to September 30, 2010. During fiscal 2011 we received cash inflow of $3.8 million from the sale of 2,222,233 shares of our common stock, at a price of $1.80 per share, $3.1 million on disposal of our 51% interest in Pan Asia Magnesium, a discontinued operation, $1.7 million in contributions from our noncontrolling interest owners, and $0.9 million from net cash proceeds on sale of our marketable securities available-for-sale, before considering a $2.7 million positive effect of exchange rate on cash. The cash inflow was partially offset by cash outflow of $6.8 million used in operating activities, and $3.4 million for capital expenditures in investing activities.
       
During fiscal 2011, we executed our original plan to use our magnesium holdings as a basis to raise capital and expand our magnesium holdings by acquiring the remaining 48% noncontrolling interest in Golden Magnesium, a production facility for approximately $6.1 million, payable by way of issuance of 4,879,280 shares of our unregistered common stock, valued at $1.25 per share. Additionally, on August 30, 2011 we entered into a series of agreements to acquire a 100% ownership interest in Golden Trust and an 80% ownership interest in Lingshi Magnesium for an aggregate of $26.7 million in a combination of cash, our common stock and other assets. Completion of this acquisition is subject to our shareholders’ approval of the issuance of our common stock under the agreements to acquire these companies. Although either party may terminate these agreements if the transaction does not close by December 31, 2011, the parties are in discussions to extend the closing date while we seek the required regulatory and shareholder approval. These magnesium facilities are owned or controlled by Yuwei Huang, an executive officer and director of our company and Kong Tung, a director of our company.
 
We may need to raise additional working capital to fund expected growth in our Magnesium segment and our industrial commodities business. While we do not anticipate any difficulties in raising the additional capital as needed we do not presently have any firm commitment from any third parties and it is possible that we may not be able to raise the capital upon terms acceptable to us.  In addition, delisting of our securities from trading by NASDAQ could adversely affect the market liquidity of our common stock and our ability to obtain financing. In that event, our ability to grow may be limited until the capital markets are more readily accessible.

The use of internet technologies has substantially increased the vulnerability of information systems, including a fast growing threat on the Internet for the theft of sensitive corporate data. Inadequate cyber network security increases the opportunity for manipulation, falsification, or alteration of our sensitive corporate records, including accounting data. Unauthorized or inappropriate access to accounting information may make it difficult to ensure that valid and accurate transactions are recorded, processed, and reported. During fiscal 2011, we employed two IT service providers in the United States and China to safeguard our cyber security, including detecting system vulnerability and enhancing our cyber security, including maintaining access and password policies, digital signatures, disk locks, firewalls, digital certificates and other control measures, to prevent any potential organized cyber attack against our networks and computer systems. A cyber security attack may present an adverse effect, which may temporarily interrupt our computer networks, business operations, and delay management’s ability to record, access and report accurate and relevant financial information in a timely manner to the user groups. In fiscal 2011, we did not incur any incident of a cyber-security related breach, and believe our current cyber security expenditures to be adequate. In fiscal 2012, we plan to continue maintaining our cyber security measures and deployment, and do not anticipate cyber security-related costs will pose any adverse material impact on our liquidity and financial condition in the near future.
 
- 31 -

 
 
 


The following table provides certain selected balance sheet comparisons between September 30, 2011 and September 30, 2010:

(Dollars in Thousands)
 
September 30, 2011
   
September30, 2010
   
Increase /(Decrease)
 
Cash
 
 $
12,563
   
 $
10,111
   
 $
2,452
 
Marketable securities
   
8,293
     
2,221
     
6,072
 
Accounts receivable, net
   
20,428
     
15,236
     
5,192
 
Accounts and other receivable – related party
   
9,598
     
7,680
     
1,918
 
Inventories, net
   
9,626
     
6,373
     
3,253
 
Prepaid expenses and other assets
   
14,389
     
8,552
     
5,837
 
Total current assets
   
76,987
     
55,989
     
20,998
 
Property and equipment, net
   
36,874
     
37,512
     
(638)
 
Total assets
   
116,335
     
95,862
     
20,473
 
                         
Accounts payable and accrued expenses
   
15,469
     
11,251
     
4,218
 
Accounts and other payable - related party
   
4,590
     
3,974
     
616
 
Advances from customers
   
3,821
     
2,797
     
1,024
 
Other payables
   
4,316
     
1,074
     
3,242
 
Notes payable – short terms
   
2,657
     
5,614
     
(2,957)
 
Total current liabilities
 
 $
32,203
   
 $
25,667
   
 $
6,536
 

We maintain cash and cash equivalents in the United States and China. At September 30, 2011 and September 30, 2010, bank deposits by geographic area (reclassified to reflect discontinued operations), was as follows:

Country
 
September 30, 2011
   
September 30, 2010
 
United States
 
$
3,909,095
     
31
%
 
$
4,851,329
     
 48
%
China
   
8,654,031
     
69
%
   
5,259,489
     
52
%
Total cash and cash equivalents
 
$
12,563,126
     
100
%
 
$
10,110,818
     
100
%

As of September 30, 2011, a substantial portion of our cash balance, 69%, was in the form of RMB held in bank accounts at financial institutions located in the PRC as compared to 52% as of September 30, 2010, due to our current magnesium expansion plan in China. Cash held in banks in the PRC is not insured. The value of cash on deposit in China of $8.7 million at September 30, 2011 has been converted based on the exchange rate as of September 30, 2011. In 1996, the Chinese government introduced regulations, which relaxed restrictions on the conversion of the RMB; however restrictions still remain, including but not limited to restrictions on foreign invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility and outflow of RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.

Current assets as of September 30, 2011 totaled $77.0 million, an increase of 37.5% compared to September 30, 2010. Current liabilities as of September 30, 2011 totaled $32.2 million, reflecting an increase of 25.5% from our September 30, 2010 balance.


 
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A summary of total assets by segment and discontinued operations at September 30, 2011 and at September 30, 2010 is as follows:

(Dollars in thousands)
 
September 30, 2011
   
September 30, 2010
 
Magnesium segment
 
$
65,321
   
$
62,415
 
Basic Materials segment
   
31,287
     
22,988
 
Consulting segment
   
19,727
     
10,212
 
Discontinued Operations
   
-
     
247
 
Total
 
$
116,335
   
$
95,862
 

The following table provides detail of selected balance sheet items by segment as of September 30, 2011:

(Dollars in thousands)
 
Magnesium
   
Basic Materials
   
Consulting
   
Consolidated
 
Investment in marketable securities available-for-sale
  $   -     $   -     $
8,293
    $
8,293
 
Accounts receivable
 
 
2,739
   
 
13,497
   
 
4,192
   
 
20,428
 
Accounts and other receivable – related party
   
8,205
     
1,383
     
11
     
9,599
 
Inventories, net
   
5,650
     
3,976
        -      
9,626
 
Prepaid expenses and other current assets
   
6,767
     
5,401
     
2,221
     
14,389
 
Total current assets
   
29,657
     
27,880
     
19,450
     
76,987
 
                                 
Accounts payable and accrued expenses
   
4,813
     
8,187
     
2,469
     
15,469
 
Loans payable – short term
      -      
2,207
     
450
     
2,657
 
Accounts and other payable – related party
   
1,013
     
400
     
3,177
     
4,590
 
Advances from customers and deferred revenues
   
625
     
2,926
     
270
     
3,821
 
Other payables
   
61
     
4,236
     
19
     
4,316
 
Total current liabilities
 
$
7,170
   
$
18,637
   
$
6,396
   
$
32,203
 

Our marketable securities available-for-sale as of September 30, 2011 totaled $8.3 million, an increase of $6.1 million compared to September 30, 2010, primarily due to $7.3 million in shares we received from China Education International, Inc. in fiscal 2011, based on their fair market value on the measurement date, for our consulting services provided to this new client company, partially offset by a $1.2 million decrease in the carrying value of other marketable securities available- for-sale we held.

Our accounts receivable as of September 30, 2011 totaled $20.4 million, an increase of $5.2 million compared to September 30, 2010, primarily as a result of an increase of $5.3 million in accounts receivable net of allowance for doubtful accounts within our Basic Materials segment, $4.0 million in accounts receivable for consulting services provided to a new client company within our Consulting segment, partially offset by a decrease of $3.7 million and $0.4 million in net accounts receivables and notes receivable, respectively, within our Magnesium segment. Our Consulting segment generally receives a full payment in advance for consulting services to be provided, primarily in the form of our client company’s common stock. For transactions in which we advise a new client company on entering into the U.S. public market for the first time, it may take some additional time for us to receive our transaction fees due to the necessary compliance and regulatory filing process. Our Basic Materials and Magnesium segments generally offer payment terms to its customers of 90 days.

Inventories as of September 30, 2011 totaled $9.6 million, an increase of $3.3 million compared to September 30, 2010, primarily as a result of an increase of $1.7 million within our Basic Materials segment and $1.6 million within our Magnesium segment due to increased production to meet customer demand.

Prepaid expenses and other current assets consist of prepayments to vendors for inventory, other receivables, loans receivable, VAT tax refunds, and security deposits. Prepaid expenses and other current assets as of September 30, 2011 totaled $14.4 million, an increase of $5.8 million compared to September 30, 2010, primarily due to an increase of $4.9 million in prepayments to suppliers of raw materials within our Basic Material segment, and an increase of $0.9 million in advances for working capital to client companies within our Consulting segment.

 
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Accounts payable and accrued expenses represent payables associated with the general operations within each segment, including accrued payrolls. Accounts payable and accrued expenses as of September 30, 2011 totaled $15.5 million, an increase of $4.2 million compared to September 30, 2010, primarily as a result of an increase of $4.6 million within our Basic Materials segment and 2.2 million for consulting transaction related fees payable within our Consulting segment, partially offset by a decrease of $2.6 million, including $1.5 million in deferred compensation, within our Magnesium segment.

Accounts and other payable – related party represent payables owed to the related parties for transactions occurred in the ordinary course of business or other financial events. As of September 30, 2011, accounts and other payable – related party totaled $4.6 million, an increase of $0.6 million compared to September 30, 2010, primarily as a result of an increase of $0.9 million within our Magnesium segment, and $0.4 million within our Basic Materials segment, partially offset by $0.7 million within our Consulting segment.

Advances from customers and deferred revenues represent prepayments for products or services, which have not yet been shipped or provided. Advances from customers and deferred revenues as of September 30, 2011 totaled $3.8 million, an increase of $1.0 million compared to September 30, 2010, primarily as a result of an increase of $1.4 million in advance from customers within our Basic Materials segment, and $0.2 million in deferred revenues, partially offset by a decrease of $0.6 million in advance from customers within our Magnesium segment.

Consolidated Statement of Cash Flows

In fiscal 2011, our net increase in cash totaled $2.5 million, which was comprised of $6.2 million provided by financing activities, $2.7 million provided by the effect of prevailing exchange rate on our cash position, and $0.4 million provided by investing activities, partially offset by $6.8 million used in operating activities.
 
In fiscal 2010, our net decrease in cash totaled $2.7 million, which was comprised of $11.9 million used in operating activities, partially offset by $5.0 million provided by financing activities, $2.7 million provided by investing activities and the effect of prevailing exchange rate provided on our cash position of $1.4 million.

Cash Used in Operating Activities

Net cash used in operating activities during fiscal 2011 totaled $6.8 million, which primarily consisted of adjustments to reconcile non-cash items, including $18.5 million in fair value of non-cash marketable securities we received for consulting services provided to our client companies, and cash outflow of $5.9 million in prepaid expenses and other assets, $3.3 million in inventories, and a decrease of $1.9 million in accounts receivable and other assets – related party, which were partially offset by cash inflow of $8.8 million from our net income, $6.4 million in fair value of non-cash market securities we paid for services, an increase of $3.4 million in other payables, and $3.8 in depreciation and amortization costs.

Net cash used in operating activities during fiscal 2010 totaled $11.9 million, which primarily consisted of our net loss of $3.6 million, an increase in accounts receivable of $6.1 million, an increase of prepaid expenses and other assets of $3.5 million, and a decrease of other payables of $2.9 million, as well as reconciling non cash transactions of fair value of securities received for services of $2.3 million and a realized net gain on sales of marketable securities of $1.9 million. Such cash outflow activities were partially offset by an increase of accounts payable and accrued expenses of $3.1 million, and a decrease of accounts receivable and other assets-related party of $2.0 million, as well as reconciling non cash transactions of depreciation and amortization of $2.6 million and stock based compensation of $1.1 million.

Cash (Used in) Provided by Investing Activities

Net cash provided by investing activities during fiscal 2011 totaled $0.4 million, primarily as a result of cash inflow of $3.1 million on disposal of our discontinued operations, and $0.8 million on sale of our marketable securities available-for-sale, partially offset by cash outflow of $3.4 million on purchases of property, plant, and equipment from our continuing operations.
 
 
Net cash provided by investing activities during fiscal 2010 totaled $2.7 million, primarily as a result of $5.9 million in proceeds from our sales of marketable securities available for sale, partially offset by $1.5 million we paid in cash for our acquisition of an 80% interest in Ruiming Magnesium, and $1.8 million of our capital expenditures in property, plant, and equipment.

 
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Cash Provided by Financing Activities

            Net cash provided by financing activities during fiscal 2011 totaled $6.2 million, primarily as a result of cash inflow of $3.9 million in net proceeds from our sales of stock and warrant exercises, $1.7 million in cash contribution from our noncontrolling interest owners, and a decrease of $3.5 million in restricted cash, partially offset by cash outflow of $3.0 million for payment of outstanding loans.
 
            Net cash provided by financial activities during fiscal 2010 totaled $5.0 million, primarily as a result of $5.3 million in net proceeds from our sales of stock and warrant exercises and an increase in short-term loans payable of $4.1 million primarily as a result of a loan due to Beijing Mingshang Investment Guarantees Co. Ltd. for our operating cash needs at CDI Beijing within our Basic Materials segment. The cash inflows were partially offset by an increase in restricted cash of $5.1 million. Approximately $4.5 million of the restricted cash is principally comprised of the cash proceeds of the $4.5 million loan from Beijing Mingshang Investment Guarantee Co., Ltd. personally guaranteed by Mr. Chen which he used as collateral for personal purposes.
 
Series A Preferred Stock and Related Dividends

In February 2008, we completed a private placement (“Series A Preferred Stock Offer”) whereby we sold to accredited investors 12,950 shares of our Series A Convertible Preferred Stock (“Series A Preferred Stock”) together with common stock purchase warrants to purchase an aggregate of 1,850,000 shares of our common stock. At closing, we received gross proceeds of $12,950,000 with net proceeds of $11.5 million. The Series A Preferred Stock has a stated value per share of $1,000, carries an 8% per annum dividend rate payable quarterly in arrears and is convertible into our common stock at $7.00 per share. The dividends are payable in cash or shares of our common stock, at our option, subject to certain provisions.

In 2008, holders of our Series A Preferred Stock converted 11,944 shares out of the 12,950 shares of the Series A Preferred Stock. As of September 30 2011, 1,006.25 shares of Series A Preferred remained outstanding. In fiscal 2011 we paid dividends of $80,515, including $60,390 in the form of our common shares at an average of $1.24 per share and $20,125 in cash.

Noncontrolling Interest

At September 30, 2011, our consolidated balance sheet reflects a total noncontrolling interest of $15.7 million, of which $12.0 million was attributable to our Magnesium segment after giving effect to our May 2011 acquisition of a 48% interest in Golden Magnesium for $6.1 million in exchange for 4,879,280 shares of our unregistered common stock valued at approximately $6.1 million, and $3.7 million in our Basic Materials segment.

The following table provides information regarding the noncontrolling interest by segment:
 
Segment
 
September 30, 2011
   
September 30, 2010
 
Magnesium segment
 
$
12,002,000
   
$
16,741,614
 
Basic Materials segment
   
3,716,281
     
3,258,934
 
Consulting segment
   
-
     
-
 
Total
 
$
15,718,281
   
$
20,000,548
 


 
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Off Balance Sheet Items

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

 
 
Any obligation under certain guarantee contracts,
 
 
Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
 
 
Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position, and
 
 
Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A summary of significant accounting policies is included in this item are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere in this Form 10-K. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.

Revenue Recognition

We follow the guidance of ASC 605, ‘Revenue Recognition,” and the Securities and Exchange Commission's Staff Accounting Bulletin (“SAB”) No. 104 and SAB Topic 13 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.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results when ultimately realized could differ from those estimates. Significant estimates in the fiscal 2011 and fiscal 2010 include the allowance for doubtful accounts of accounts receivable, stock-based compensation, and the useful life of property, plant and equipment.
 
 

 
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Fair Value of Financial Instruments

We follow ASC 820, “Fair Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157 and related guidance. Those provisions relate to our financial assets and liabilities carried at fair value and our fair value disclosures related to financial assets and liabilities. ASC 820 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.

There are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. We use Level 1 inputs for our fair value measurements whenever there is an active market, with actual quotes, market prices, and observable inputs on the measurement date. We use Level 2 inputs for our fair value measurements whenever there are quoted prices for similar securities in an active market or quoted prices for identical securities in an inactive market. And, we use observable market data whenever available.

Marketable Securities

Our marketable securities available-for-sale are carried at fair value. We make fair value measurements for the carrying amount of the marketable securities available-for-sale quarterly pursuant to ASC 820, “Fair Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157 and related guidance. And, we record an unrealized gain/(loss) on changes in fair value of such marketable securities in the equity section of our balance sheet as Other Comprehensive Income (OCI), pursuant to ASC 320, “Investments – Debt and Equity Securities”. We make an analysis at the least on an annual basis to determine if and when such unrealized (loss) has become other than temporarily impaired, and reclassify it as a realized (loss) into our current period’s net income/(loss). This determination is based on a number of factors, including but not limited to (i) the percentage of the decline, (ii) the severity of the decline in relation to the enterprise/market conditions, and (iii) the duration of the decline. It’s further discussed in Note 2 of our financial statements included in this report.

In January 2009, the FASB issued FSP EITF 99-20-1 (ASC 325-40) to amend the impairment guidance in EITF Issue No. 99-20 in order to achieve more consistent determination of whether an other-than-temporary impairment has occurred. This FSP amended EITF 99-20 to more closely align the other-than-temporary impairment guidance therein to the guidance in ASC 320, 10-35-31. Retrospective application to a prior interim or annual period is prohibited.

All securities (exclusive of preferred stock and common stock purchase warrants) received from our clients as compensation are quoted either on the Over the Counter Bulletin Board or the Pink Sheets. The securities are typically restricted as to resale. Our policy is to liquidate securities received as compensation when market conditions are favorable for sale. As these securities are often restricted, we are unable to liquidate these securities until the restriction is removed. We recognize revenue for common stock based on the fair value at the time common stock is granted and for common stock purchase warrants based on the Black-Scholes valuation model. Unrealized gains or losses on marketable securities available-for-sale and on marketable securities available-for-sale - related party are recognized as an element of comprehensive income based on changes in the fair value of the security as quoted on an exchange or an inter-dealer quotation system. Once liquidated, a realized gain or lose on the sales of marketable securities available-for-sale and marketable securities available-for-sale - related party is reflected in our net income for the period in which the securities are liquidated.

Comprehensive income

We follow ASC 205, “Presentation of Financial Statements,” and ASC 220, “Reporting Comprehensive Income,” to recognize the elements of comprehensive income. Comprehensive income is comprised of net income 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. Comprehensive income for fiscal 2011 and fiscal 2010 included net income, foreign currency translation adjustments, unrealized gains or losses on marketable securities available for sale, net of income taxes, and unrealized gains or losses on marketable securities available for sale-related party, net of income taxes.


 
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Impairment of long-lived assets

In accordance with ASC 360-10, “Impairment or Disposal of Long-Lived Assets”, we periodically review our long-lived 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 differences between the discounted future cash flow or estimated fair value and the book value of the underlying asset.

Subsidiaries Held for Sale

We follow ASC 360-10-45, “Long-Lived Assets Classified as Held for Sale,” and ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” Long-lived assets are classified as held for sale when certain criteria are met. These criteria include management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less cost to sell.

Acquisitions

We account for acquisitions using the purchase method of accounting in accordance with the provisions of ASC Topic 805, “Business Combinations.”  The acquisition method of accounting for acquired businesses requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.  Also, transaction costs are expensed as incurred. Any excess of the purchase price over the assigned values of the net assets acquired is recorded as goodwill.
 
Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,??“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under Item 1A – “Risk Factors” in this report:

 
 
Fluctuations in the pricing and availability of magnesium and in levels of customer demand.
 
 
Changes in the prices of magnesium and magnesium-related products.
 
 
Our ability to implement our expansion plans for growing our business through increased magnesium production capacity and acquisitions and development of our industrial commodities business.
 
 
Fluctuations in the cost or availability of coke gas and coal.
 
 
Loss of orders from any of our major customers.
 
 
Impact of proposed acquisition of Golden Trust and Lingshi Magnesium and interest of our directors and executive officers in such transaction.
 
 
Our ability to effectively integrate our acquisitions and to manage our growth and our inability to fully realize any anticipated benefits of acquired business.
 
 
The value of the equity securities we accept as compensation is subject to adjustment which could result in losses to us in future periods.
 
 
Our need for additional financing which we may not be able to obtain on acceptable terms, the dilutive effect additional capital raising efforts in future periods may have on our current shareholders and the increased interest expense in future periods related to additional debt financing.
 
 
Our dependence on certain key personnel.
 
 
Difficulties we have in establishing adequate management, cash, legal and financial controls in the PRC.
 
 
Our ability to maintain an effective system of internal control over financial reporting.

 
- 38 -

 
 
 


 
 
 
The lack various legal protections in certain agreements to which we are a party and which are material to our operations which are customarily contained in similar contracts prepared in the United States.
 
 
Potential impact of PRC regulations on our intercompany loans.
 
 
Our ability to assure that related party transactions are fair to our company.
 
 
Yuwei Huang, our executive vice president – magnesium, director and an officer of several of our magnesium subsidiaries his daughter Lifei Huang and Kong Tung is also an owner and executive officer of several companies which directly compete with our magnesium business.
 
 
The impact of a loss of our land use rights.
 
 
Our ability to comply with the United States Foreign Corrupt Practices Act which could subject us to penalties and other adverse consequences.
 
 
Limits under the Investment Company Act of 1940 on the value of securities we can accept as payment for our business consulting services.
 
 
Our acquisition efforts in future periods may be dilutive to our then current shareholders.
 
 
The risks and hazards inherent in the mining industry on the operations of our basic materials segment.
 
 
Our inability to enforce our rights due to policies regarding the regulation of foreign investments in the PRC.
 
 
The impact of environmental and safety regulations, which may increase our compliance costs and reduce our overall profitability.
 
 
The effect of changes resulting from the political and economic policies of the Chinese government on our assets and operations located in the PRC.
 
 
The impact of Chinese economic reform policies.
 
 
The influence of the Chinese government over the manner in which our Chinese subsidiaries must conduct our business activities.
 
 
The impact on future inflation in the PRC on economic activity in the PRC.
 
 
The impact of any natural disasters and health epidemics in China.
 
 
The impact of labor laws in the PRC may adversely affect our results of operations.
 
 
The limitation on our ability to receive and use our revenues effectively as a result of restrictions on currency exchange in the PRC.
 
 
Fluctuations in the value of the RMB.
 
 
Delisting of our securities from trading by NASDAQ.
 
 
The market price for shares of our common stock has been and may continue to be highly volatile and subject to wide fluctuations.

We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to a smaller reporting company.

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our financial statements are contained in pages F-1 through F- 35, which appear at the end of this report.

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

 
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ITEM 9A.
CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures
 
            We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2011. Based on that evaluation solely as a result of the significant deficiencies in our internal control over financial reporting identified in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of June 30, 2011.
 
The specific significant deficiencies identified by our management were as follows:

 
 
A lack of a fully integrated corporate-wide financial accounting system,
 
 
A lack of qualified accounting personnel who have sufficient knowledge in dealing with the complex U.S. GAAP accounting and financial issues in our cross border operations.

A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting.  And, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements would not be prevented or detected on a timely basis. We expect the significant deficiencies will be remediated by the end of fiscal 2012. Until such time, however, as these significant deficiencies in our internal control over financial reporting are remediated, we expect to have continuing weaknesses in our internal control over financial reporting, disclosure controls and related procedures.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that, due to the significant deficiencies described above, our internal control over financial reporting was not effective as of September 30, 2011.
 
Remediation of Significant Deficiencies and Material Weakness in Internal Control Over Financial Reporting
 
We believe the following actions we have taken and are taking will be sufficient to remediate the significant deficiencies described above:

 
 
Since 2009 we held annual corporate-wide accounting training sessions; and in fiscal 2011 we conducted our annual accounting training session in Sanya, China, and will continue to conduct ongoing corporate-wide accounting and internal control training for our accounting personnel.
    We have implemented an internal review process over financial reporting to review all recent accounting pronouncements and verify that the accounting treatment indentified in such report have been fully implemented and confirmed by our independent registered public accountants;
 
 
We are in the early stage of a phased corporate-wide implementation of Ufida NC Enterprise Resources Planning (ERP) system. In August, 2011, we completed our first phase implementation at Golden Magnesium. Currently we are in the process of rolling out this implementation at additional magnesium facilities starting November, 2011.  Upon its full completion within our Magnesium segment anticipated in late 2012, this system will enhance our management and reporting capabilities, standardize process and management’s access to financial reports in a timely manner; and
 
 
In fiscal 2011, we conducted a targeted internal audit within our Magnesium segment in China, and will continue to augment ongoing reviews and supervisions of our internal control over financial reporting.


 
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Through our increased awareness and remediation efforts, we have remediated a material weakness identified in our Form 10-K for the fiscal year ended September 30, 2010, and believe that our actions have resulted in an improvement in our internal control over financial reporting in fiscal 2011. Specifically, we initiated an earlier phase of corporate-wide ERP implementation, conducted ongoing US GAAP trainings, and through our internal reviews and improved control procedures, we identified certain prior accounting errors and made appropriate error corrections and disclosures, to prevent potential future material misstatements. In addition, we plan to make improvement throughout fiscal 2012 to achieve our overall remediation target and objectives. Management believes that the actions described above will remediate the remaining significant deficiencies we have identified. As we work towards improvement of our internal control over financial reporting and implement the remediation measures, we may supplement or modify these remediation measures as appropriate.
 
Our management believes that our disclosure controls and procedures provide a reasonable level of assurance of achieving their objections. Our management does not expect, however, that our disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
 
Changes in Internal Control
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.
OTHER INFORMATION.

None.

PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Set forth below are the names and ages of our directors and their principal occupations at present and for at least the past five years. Our directors are elected to serve until the next annual meeting of stockholders and until their respective successors have been duly elected and qualified. Our executive officers are appointed by our Board and serve until their successors have been duly appointed and qualified. There are, to our knowledge, no agreements or understandings by which these individuals were so selected. No family relationships exist between any directors or executive officers, as such term is defined in Item 402 of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board has adopted independence standards for directors that conform to the standards required by the Nasdaq Marketplace Rule for listed companies. Based on our independence standards, the Board has affirmatively determined that all of its directors other than Yuejian (James) Wang, Ph.D, Yuwei Huang and Kong Tung are independent.

Name
 
Age
 
Position with the Company
Yuejian (James) Wang, Ph.D
    49  
Chief Executive Officer, President and Chairman of Board
Yuwei Huang
    57  
Executive Vice President – Magnesium and Director
David M. Barnes
    68  
Director
Sheldon Steiner
    78  
Director
Philip Y. Shen, Ph.D.
    67  
Director
Adam Wasserman
    47  
Director
Kong Tung
    58  
Director


 
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Business Experience of Directors

Dr. Wang has served as our CEO and Chairman of the board since August 2006. Dr. Wang, a co-founder of China Direct Investments, has served as its CEO and Chairman of its board since its inception in January 2005. Dr. Wang has also been a member of the board of CIIC Investment Banking Services (Shanghai) Company Limited from June 2004 to 2007. From 2001 to 2004, he was President and Chairman of the board of Genesis Pharmaceuticals, Inc. (formerly Genesis Technology Group, Inc.). From 2000 until 2001, Dr. Wang was President, Chief Operating Officer and director of China Net & Technologies, Inc., a technology firm. From 2000 until 2001, Dr. Wang was Vice President, Chief Operating Officer and director of Ten Sleep Corporation, a California-based integrated Internet company that acquired and licensed technology, identified, acquired and developed development-stage technology and service entities and focused on the internet infrastructure market-PC, application-ready devices. From January 2000 until November 2000, Dr. Wang was President of Master Financial Group, Inc., a St. Paul, Minnesota-based company which was a wholly-owned subsidiary of Ten Sleep Corporation that provided consulting services for small private and public entities in the area of corporate finance, investor relations and business management. Between 1997 and 2000, Dr. Wang was a research scientist and Assistant Professor, Lab Director at the University of Minnesota, School of Medicine. Dr. Wang received a Bachelor of Science degree from the University of Science and Technology of China in He Fei, China in 1985, a Master of Science Degree from the Shanghai Second Medical University, Shanghai, China in 1988, and his Ph.D. degree from the University of Arizona in 1994.

As the founder and Chief Executive Officer of our company, Dr. Wang brings our board his considerable experience in corporate finance in the U.S. capital markets and identifying and acquiring China based companies poised for growth.   He also brings the experience of managing a company with operations in the U.S. and China.

Mr. Huang has served as our Executive Vice President – Magnesium since February 2009 and as Chief Executive Officer of our subsidiary, Chang Magnesium, since June 2006. Mr. Huang also serves as General Manager of Taiyuan YiWei Magnesium Industry Co., Ltd. (“YiWei Magnesium”) since founding the company in 1999 and serves in various positions with its affiliated entities including Vice Chairman of Shanxi Golden Trust YiWei Magnesium Industry Co., Ltd. since 2002, Vice Chairman of Taiyuan Qingcheng YiWei Magnesium Industry Co., Ltd. since 2001, Vice Chairman and General Manager of Taiyuan Minwei Magnesium Industry Co., Ltd. since 2000, General Manager of Taiyuan YiWei Magnesium Factory since 1998 and Chairman of Shangxi NiChiMen YiWei Magnesium Co., Ltd. since 1994. YiWei Magnesium, a minority owner of Chang Magnesium, owns interests in seven magnesium factories, a magnesium alloy factory and a magnesium powder desulphurization reagent factory, all located in China.

With his vast experience in developing and operating a variety of businesses engage in the production of magnesium and related products in China,  Mr. Huang provides our board with technical and operational expertise as well as the benefit of his significant knowledge of all aspects of the production and sale of magnesium and various related products.

Mr. Barnes is a certified public accountant and has been a member of our board since April 2007. Mr. Barnes is the chairman of our audit committee and serves on our compensation committee, nominating committee and corporate governance committee. Mr. Barnes brings over 45 years experience working with both public and private companies. Since December 2008, Mr. Barnes has been the President and since February 2009 has been the Chief Executive Officer and Chairman of the Board of Directors of MDwerks, Inc. (OTCBB:MDWK). Mr. Barnes had served as the audit committee chairman and a member of the compensation committee of the board of MDwerks, Inc. from November 2005 until December 2008. MDwerks, Inc. which ceased operations in January 2011 marketed digital pens and associated software and customer service. Since October 2010, Mr. Barnes has been the Chief Financial Officer of Kat Gold Holdings Corp. (OTCBB:BVIG), a natural resources exploration stage company, formed for the purpose of locating, mining and selling gold and other precious metal properties. From April 1996 through July 2006, Mr. Barnes served as Executive Vice President, Chief Financial Officer and a director of Solar Thin Films, Inc. (OTCBB:SLTZ) (formerly American United Global, Inc., (OTCBB:AUGB). From 2002 to February 2009, Mr. Barnes was a consultant to management of numerous companies.  In this role, from May 2006 to November 2007, Mr. Barnes was Chief Financial Officer and a director of Cyber Defense Systems, Inc. (OTCBB:CYDF), a designer and builder of manned and unmanned surveillance airships. From March 2006 to June 2008, Mr. Barnes was the Chief Financial Officer of Neah Power Systems, Inc. (OTCBB:NPWS), a developer of porous silicon based fuel cells. In addition, Mr. Barnes was a director of Echometrics, Inc. (formerly Searchhelp, Inc.) from April 2005 to February 2009 (OTCBB:EHMI), Thinkpath, Inc. from May 2005 to February 2009 (OTCBB:THPHF) and Medical Solutions Management, Inc. from December 2007 to December 2008 (OTCBB: MSMT). Thinkpath, Inc. filed for protection under Chapter 11 of the U.S. Bankruptcy code in March 2008. Mr. Barnes began his career as an auditor for the accounting firm of Laventhol & Horwath and is a graduate of C.W. Post College.


 
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With his prior experience in accounting and as the chief financial officer and other executive positions with both private and public companies, Mr. Barnes brings our board significant financial, accounting and business expertise.

            Mr. Steiner has been a member of our board since April 2007. Mr. Steiner is Chairman of the compensation committee and a member of the audit committee and nominating and corporate governance committee.  Mr. Steiner has over 52 years of both public and private accounting experience. From October 2008 to February 2010, Mr. Steiner served as a member of the board of directors of MDwerks, Inc. (OTCBB:MDWK).  From 2003 to 2005 Mr. Steiner served as a managing director for American Express Tax and Business Services, Inc. From 2003 to 2007 Mr. Steiner was a principal of Millward & Co. CPAs. From 2006 to 2007 Mr. Steiner was a managing director of RSM McGladrey.  Mr. Steiner currently serves as a Senior Vice President at Valley Bank in south Florida and is a member of the Fort Lauderdale Chamber of Commerce Trustees and the Broward Economic Development Council.  He is a graduate of the City College of New York.

With his prior accounting and management experience with both private and public companies, Mr. Steiner brings our board significant financial, accounting and business expertise.
 
Dr. Shen possesses over three decades of high level experience in international sales and marketing, manufacturing, mergers/acquisitions, cross border investment, combined with his cultural background and fluency in Chinese dialects.  For more than the past 20 years, Dr. Shen has held numerous positions with Leggett and Platt, Inc., a Fortune 500 Company that manufactures a broad variety of engineered components and products for customers worldwide.  Prior to his retirement at Leggett and Platt, Inc., Dr. Shen held the position of president of its Asia Pacific operations where he was responsible for business development, sales and marketing, sourcing and manufacturing, mergers and acquisitions, licensing and cross-cultural negotiations in the company’s Asia Pacific region.  Since his retirement in 2008, Dr. Shen has been engaged in international consulting representing clients in the area of cross-border investment and marketing.  In addition, since 2004, Dr. Shen has published a monthly publication, China Insights, which reports on a variety of topics important to business development and bi-directional trade.  Dr. Shen earned a Ph.D. degree in biochemistry from Western Michigan University in 1971.
 
With his vast experience in international business and cross-border investments with companies operating worldwide, particularly in Asia, Dr. Shen provides our board with significant business and executive level management expertise.

Mr. Wasserman has served as a member of our board since January 2010.  Since November 1999, Mr. Wasserman has been the chief executive officer of CFO Oncall, Inc. and CFO Oncall Asia, Inc. (collectively “CFO Oncall”), a Weston, Florida based provider of accounting services specializing in Securities and Exchange Commission financial reporting, budgeting and planning, mergers and acquisitions, audit preparation services, accounting, automated systems, banking relations and internal controls. Through CFO Oncall, Mr. Wasserman has served as the chief financial officer of a number of private and publicly held companies including Transax International Limited since May 2005, Gold Horse International, Inc. from July 2007 to September 2011, Oriental Dragon Corp. since July 2010 and Apps Genius Corp. since February 2011. From June 1991 to November 1999 Mr. Wasserman was a Senior Audit Manager at American Express Tax and Business Services, in Fort Lauderdale, Florida where his responsibilities included supervising, training and evaluating senior accounting staff members, work paper review, auditing, maintaining client relations, preparation of tax returns and financial statements. From September 1986 to May 1991, Mr. Wasserman was employed by Deloitte & Touche, LLP where his assignments included public and private company audits and Securities and Exchange Commission reporting, tax preparation and planning, management consulting, systems design, staff instruction and recruiting. Mr. Wasserman is a member of the American Institute of Certified Public Accountants, a director, treasurer and executive board member of the Gold Coast Venture Capital Association and is a director and audit committee member of the publicly held company Bohai Pharmaceuticals Group, Inc. since July 2010. Mr. Wasserman holds a Bachelor of Science Degree from the State University of New York at Albany.

With his prior accounting experience with both private and public companies and in particular, his experience working with companies with significant operations in China, Mr. Wasserman brings our board significant financial and accounting expertise.

Mr. Tung has served as a member of our board of since May 2011 and has been the president and a member of the board of directors of Golden Magnesium since 2008.  Since 2003, Mr. Tung has served as the president of Golden Trust which owns and operates a magnesium production facility in China.  Mr. Tung has been the president of Beauty East since 1995 and its chairman since 1999. Beauty East owns a 48% interest in Golden Magnesium. Mr. Tung graduated from Shanxi University, China in 1978 with a degree in engineering.

With his prior experience in the management and operation of a magnesium production facility in China, Mr. Huang provides our board with technical and operational expertise as well as the benefit of his significant knowledge of all aspects of the production and sale of magnesium and various related products.

 
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Executive Officers
 
Executive officers of our company, and their ages as of the date of this report, are as follows:

Name
 
Age
 
Position with the Company
Yuejian (James) Wang, Ph.D
    49  
Chairman, President and Chief Executive Officer
Yuwei Huang
    57  
Executive Vice President - Magnesium
Andrew X. Wang
    49  
Executive Vice President and Chief Financial Officer
Lazarus Rothstein
    53  
Executive Vice President, General Counsel and Secretary

            See section entitled “Item 1. Business – Employees – Executive Officers of the Company”, for a brief description of the business experience and educational background of Dr. Wang and Messrs. Huang, Wang and Rothstein.
 

Compliance with Section 16(a) of the Exchange Act
 
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934 during the fiscal year ended September 30, 2010 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended September 30, 2010, as well as any written representation from a reporting person that no Form 5 is required, we are not aware that any officer, director or 10% or greater shareholder failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year ended September 30, 2011 with the exception of one Form 4 filing by Kong Tung in connection with one acquisition of stock a Form 4 filing in connection with his appointment as a director of our company, one Form 4 filing by Lazarus Rothstein in connection with two stock compensation awards, one Form 4 filing by Yuejian (James) Wang in connection with one stock compensation award, and one Form 4 filing by Andrew X. Wang in connection with one stock compensation award. Each of these reports were inadvertently filed late. 

Board Committees
 
The board has standing audit, compensation and nominating and corporate governance committees. Information concerning the current membership and function of each committee is as follows:

Board of Directors Committee Membership
Director
 
Audit Committee Member
   
Compensation Committee Member
   
Nominating and Governance Committee Member
 
Yuejian (James) Wang, Ph.D.
                 
David Barnes
   
X(1)
     
X
     
X
 
Sheldon Steiner
   
X
     
X(1)
     
X(1)
 
Yuwei Huang
                       
Philip Y. Shen, Ph.D.
   
X
     
X
     
X
 
Adam Wasserman
   
X
                 
———————
 
(1
)
Denotes Chairman.

Audit Committee. The audit committee is responsible to the board for the areas of audit and compliance, and oversees our financial reporting process, including monitoring the integrity of the financial statements and the independence and performance of the registered public accounting firm and supervises our compliance with legal and regulatory requirements. The current members of the audit committee are Messrs. Barnes (Chairman), Steiner and Wasserman and Dr. Shen. The board has determined that each of Messrs. Barnes, Steiner and Wasserman are “audit committee financial experts” as defined under Securities and Exchange Commission rules. The board has affirmatively determined that none of the members of the audit committee have a material relationship with us that would interfere with the exercise of independent judgment and each of the members of the audit committee are “independent” as defined in Rule 5605(a)(2) of the Nasdaq Marketplace Rules. The audit committee held 14 meetings during fiscal 2011.
 
Compensation Committee. The compensation committee is responsible for establishing and reviewing our compensation and employee benefit policies.  The members of the compensation committee are Messrs. Steiner (Chairman) and Barnes and Dr. Shen, each of whom are “independent” directors within the meaning of the applicable Securities and Exchange Commission and Nasdaq Marketplace Rules.

 
- 44 -

 
 
 

The compensation committee reviews and recommends to the board for approval the compensation for our Chief Executive Officer and all of our other executive officers, including salaries, bonuses and grants of awards under, and administration of, our equity incentive plans.  The compensation committee, among other things, reviews and recommends to the board employees to whom awards will be made under our equity incentive plans, determines the number of options or shares of restricted common stock to be awarded, and the time, manner of exercise and other terms of the awards. During fiscal 2011 the compensation committee took action by written consent one time.
 
Compensation Committee Interlocks and Insider Participation. During fiscal 2011, each of Messrs. Steiner and Barnes and Dr. Shen were the members of the compensation committee; Mr. Steiner served as the Chairman of the committee.
 
Each of Messrs. Steiner and Barnes and Dr. Shen:
 
 
 
was not, during the fiscal year ended September 30, 2011, an officer or employee of our company,
 
 
was not formerly an officer or employee of our company, or
 
 
did not have any relationship requiring disclosure by us under Certain Relationships and Related Transactions appearing in Item 13 of this report.

Nominating and Governance Committee. The nominating and corporate governance committee was formed: (1) to assist the board by identifying individuals qualified to become board members, and to recommend for selection by the board the director nominees to stand for election for the next annual meeting of our shareholders; (2) to recommend to the board director nominees for each committee of the board; (3) to oversee the evaluation of the board and management, and (4) to develop and recommend to the board a set of corporate governance guidelines and enhancements to the Code of Business Conduct and Ethics.

Nasdaq Marketplace Rules require director nominees to be either selected, or recommended for the board of directors’ selection, either by a majority of our independent directors or our nominating and corporate governance committee.  The nominating and corporate governance committee is responsible for selecting those individuals to recommend to the entire board of directors for election to the board.  The committee will consider candidates for directors proposed by security holders.  The nominating and corporate governance committee has no formal procedures for submitting candidates and, until otherwise determined, accepts written submissions that include the name, address and telephone number of the proposed nominee, along with a brief statement of the candidate’s qualifications to serve as a director.  If the proposed nominee is not the security holder submitting the name of the candidate, a letter from the candidate agreeing to the submission of his or her name for consideration should be provided at the time of submission.  If the committee believes it to be appropriate, committee members may meet with the proposed nominee before making a final determination whether to recommend the individual as a nominee to the entire board of directors to stand for election to the board.
 
The nominating and corporate governance committee identifies director nominees through a combination of referrals, including by management, existing board members and security holders, and direct solicitations, where warranted.  Once a candidate has been identified the nominating and corporate governance committee reviews the individual’s experience and background, and may discuss the proposed nominee with the source of the recommendation.
 
Among the factors that the committee considers when evaluating proposed nominees are their knowledge and experience in business matters, finance, capital markets and mergers and acquisitions.  The committee may request references and additional information from the candidate prior to reaching a conclusion.  The committee is under no obligation to formally respond to recommendations, although as a matter of practice, every effort is made to do so.
 
The nominating and corporate governance committee received no security holder recommendations for nomination to the board in connection with the annual meeting of shareholders. Drs. Wang and Shen and Messrs. Barnes, Steiner, Huang, Wasserman and Tung are incumbent directors standing for reelection.  
 
During fiscal 2011 the nominating and corporate governance committee met one time.

Code of Ethics and Committee Charters
 
Our board of directors has also adopted a formal code of conduct that applies to all of our employees, officers and directors. The latest copy of our Code of Business Conduct and Ethics, as well as the charters of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee of the board are available in the “Investor Relations – Corporate Governance” section of our website at www.cdii.net.  Any person may obtain a copy of the Code of Business Conduct and Ethics, without charge, by writing to China Direct Industries, Inc., 431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441, Attn: Secretary.

 
- 45 -

 
 
 


ITEM 11.
EXECUTIVE COMPENSATION.

The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

Summary Compensation Table
 
The following table summarizes all compensation recorded by us in fiscal 2011 and fiscal 2010:
 
 
 
our principal executive officer or other individual serving in a similar capacity during fiscal 2011;
 
 
our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at September 30, 2011 whose compensation exceed $100,000; and
 
 
up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at September 30, 2011.
 
For definitional purposes these individuals are sometimes referred to as the “named executive officers” as that term is defined under Rule 3b-7 of the Securities Exchange Act of 1934. The value attributable to any stock or option awards is computed in accordance with ASC Topic 718 (formerly FAS 123R).  None of our named executive officers received compensation in the form of Non-Equity Incentive Plan Compensation, Nonqualified Deferred Compensation Earnings, or any other forms of compensation in excess of the $10,000 in the aggregate in fiscal 2011 and fiscal 2010.  The amounts reflected in columns (d) and (e) represent the dollar amount recognized for financial statement reporting purposes with respect to fiscal 2011 and fiscal 2010 for the fair value of securities granted in each respective year in accordance with ASC Topic 718. Pursuant to Securities and Exchange Commission rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.  Our methodology, including its underlying estimates and assumptions used in calculating these values, is set forth in Note 2 to our audited financial statements included in our annual report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended September 30, 2011. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that may be realized upon exercise.

Name and principal position (a)
Year (b)
 
Salary ($) (c)
   
Bonus ($) (d)
   
Stock Awards ($) (e)
   
Option Awards ($) (f)
   
Total ($) (j)
 
Yuejian (James) Wang, Ph.D. (1)
2011
   
537,500
     
-
     
40,592
     
-
     
602,286
 
 
2010
   
487,500
     
-
     
193,461
     
-
     
680,961
 
                                           
Andrew X. Wang (2)
2011
   
204,500
     
-
     
30,500
     
-
     
235,000
 
 
2010
   
161,802
     
-
     
15,556
     
-
     
177,358
 
                                           
Lazarus Rothstein (3)
2011
   
207,000
     
-
     
55,319
     
-
     
241,984
 
 
2010
   
180,000
     
-
     
50,851
     
-
     
230,851
 

Footnotes to Summary Compensation Table.
———————
 
(1
)
Dr. Wang has served as our Chief Executive Officer, President and Chairman since January 2009. From August 2006 through December 2008 Dr. Wang served as Chief Executive Officer. The amounts in column (e) represent the grant date fair value of the following awards in (i) fiscal 2011 of 26,882 shares of stock granted on December 31, 2010 and (ii) fiscal 2010: 213,700 shares of stock granted on February 26, 2010 and 31,450 shares granted on April 27, 201. All awards were made pursuant to the 2008 Executive Stock Incentive Plan.
       
 
(2
)
Mr. Wang was appointed as our Chief Financial Officer on December 23, 2009 and from August of 2009 through December 2009 was a consultant to us.  The amounts in column (e) represent the grant date fair value of 11,729 shares of stock granted during fiscal 2010.  All awards were made pursuant to the 2008 Executive Stock Incentive Plan and the 2008 Non Executive Stock Incentive Plan.
       
 
(3
)
Mr. Rothstein has served as Executive Vice President, General Counsel and Secretary since February 2009 and as Vice President, General Counsel and Secretary since April 2008. The amounts reflected in column (e) represent the grant date fair value of the following awards in (i) fiscal 2011 of 14,516 shares awarded on December 31, 2010 and 20,000 shares of restricted stock awarded on February 1, 2011 that vest, 10,000 shares on February 15, 2012, 5,000 shares on May 15, 2012 and 5,000 shares on August 15, 2012 and (ii) fiscal 2010: 16,985 shares of restricted stock awarded on April 27, 2010 which vested on May 17, 2010 and 10,000 shares of common stock awarded on May 18, 2010.  All awards were made pursuant to the 2008 Executive Stock Incentive Plan.


 
- 46 -

 
 
 

Outstanding Equity Awards at Year End
 
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding at September 30, 2010:
 
   
OPTION AWARDS
 
STOCK AWARDS
 
Name (a)
 
Number of Securities Underlying Unexercised options (#) (b)
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (c)
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d)
 
Option Exercise Price ($) (e)
 
Option Expiration Date (f)
 
Number of Shares or Units of Stock that have not Vested (#) (g)(1)
 
Market Value of Shares or Units of Stock that have not Vested ($) (h)(2)
 
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) (i)
 
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested ($) (j)
 
 Yuejian (James) Wang
   
500,000
           
7.50
 
1/1/2013
 
 -
 
-
 
-
 
-
 
     
500,000
           
10.00
 
1/1/2014
 
  -
 
  -
         
                                           
Andrew X. Wang
   
-
 
-
 
-
   
-
 
-
 
-
 
-
   
-
   
-
 
                                               
Lazarus Rothstein
   
-
 
-
 
-
   
-
 
-
 
20,0000
 
$33,400
   
-
   
-
 
                                               
 
 
(1
)
This column reflects the number of shares of our restricted common stock awarded to the respective named executive officer that had not yet vested as of September 30, 2011.
 
(2
)
Determined based on the closing market price of our common stock on February 1, 2011, the date of award. The shares will vest as follows: 10,000 on February 15, 2012, 5,000 on May 15, 2012 and 5,000 on August 15, 2012.

Executive Employment Agreements and Narrative Regarding Executive Compensation
 
Yuejian (James) Wang

On August 6, 2008 our board approved, based on the recommendation of the compensation committee, an employment agreement with Dr. Wang effective as of August 1, 2008.  Dr. Wang’s August 1, 2008 employment agreement expires on December 31, 2013 and provides for, among other things, payment of a base salary which increases annually at fixed amounts, eligibility to receive an annual incentive bonus, a discretionary bonus if approved by our board based on a recommendation of the compensation committee, participation in certain health and welfare benefit plans, an automobile allowance and an allowance for use of an email enabled mobile phone. 
 
Dr. Wang’s August 1, 2008 employment agreement provides that he will serve as our chief executive officer and a member of our board through December 31, 2013 at a base salary of $166,667 from August 1, 2008 through December 31, 2009 and an annual base salary of $450,000 in 2009, $500,000 in 2010, $550,000 in 2011, $600,000 in 2012 and $650,000 in 2013.

Under the August 1, 2008 employment agreement, if Dr. Wang’s employment is terminated as a result of his death, disability, by us without cause or he resigns within 90 days following a change of control or for “good reason”, Dr. Wang will be entitled to receive (in addition to salary and certain other benefits earned prior to termination) a single lump sum payment in an amount equal to two times the sum of his then-current annual base salary and the highest annual discretionary bonus and the highest incentive bonus that he was entitled to receive within the three (3) years preceding the date of termination. In addition, Dr. Wang will become fully vested in all outstanding stock incentive awards, will be entitled to certain health and welfare benefits for a period of two years following such termination and payment of additional amounts in the event additional taxes are imposed on the under Section 280G of the Internal Revenue Code.
 

 
- 47 -

 
 
 

Under the August 1, 2008 employment agreement, “cause” means: (i) a final non-appealable adjudication of Dr. Wang of a felony, which would have a material or adverse effect on our business; or (ii) the determination of the board (other than the affected employee) that Dr. Wang has engaged in intentional misconduct or the gross neglect of his duties, which has a continuing material adverse effect on our business.
 
On January 23, 2009, Dr. Wang entered into an amendment to his August 1, 2008 employment agreement waiving the annual base salary provided for in the employment agreement from October 1, 2008 through December 31, 2008 and the incentive compensation including bonus, if any, due in 2008. All other terms and conditions of the employment agreement remain in full force and effect.

On February 17, 2010, based on the approval of our Compensation Committee, options to purchase 400,000 shares of our common stock at an exercise price of $5.00 per share and 27,400 shares at an exercise price of $2.50 per share owned by Dr. Wang were converted into a total of 213,700 shares of our restricted common stock which vested 53,245 shares on January 25, 2010, April 1, 2010, July 1, 2010 and October 1, 2010, respectively. On April 27, 2010, based on the approval of our Compensation Committee, Dr. Wang was awarded a bonus of 31,450 shares of our restricted common stock which vested on May 17, 2010. All shares of our restricted common stock awarded were subject to the terms and conditions of our restricted stock award agreement as approved by our compensation committee.

On December 31, 2010, based on the approval of our Compensation Committee, Dr. Wang was awarded 26,882 shares of our restricted common stock which vested on February 17, 2011.
 
Other Executive Officers

The compensation of our other executive officers and Chief Financial Officer is determined by our Chief Executive Officer and board who considered a number of factors in determining their compensation including the scope of their duties and responsibilities to our company and the time devoted to our business. Our Chief Executive Officer or board did not consult with any experts or other third parties in fixing the amount of compensation for the following individuals.

Effective December 23, 2009, Andrew Wang, was appointed as our Executive Vice President and Chief Financial Officer.  We agreed to pay Mr. Wang an annual base salary of $160,000 payable in cash plus an aggregate of $60,000 payable in quarterly payments of $15,000 in cash or our common stock at our option, on March 21, 2010, June 21, 2010, September 21, 2010 and December 21, 2010 during the term of his employment. If a quarterly payment is made in stock, the number of shares to be issued on the date of each award will be computed by dividing $15,000 by the closing price of our common stock on the date we grant the stock. In addition, Mr. Wang is entitled to participate in our health, dental and life insurance plan.

On April 27, 2010, based on the approval of our Compensation Committee, Mr. Wang was awarded a bonus of 5,035 shares of our restricted common stock which vested on May 17, 2010.

Effective January 1, 2011, we agreed to pay Mr. Wang an annual base salary of $160,000 payable in cash plus an aggregate of $80,000 payable in quarterly payments of $20,000 in cash or our common stock at our option, on March 31, 2011, June 20, 2011, September 30, 2011 and December 31, 2011. If quarterly payments are made in stock, the number of shares to be issued on the date of each award will be computed by dividing $20,000 by the closing price of our common stock on the date such payment is due. In addition, Mr. Wang is entitled to participate in our health, dental and life insurance plan.

The shares of our restricted common stock were subject to the terms and conditions of our restricted stock award agreement as approved by our compensation committee.

Pursuant to the terms of a severance agreement between us and Mr. Wang, if he terminates his employment with us for "good reason" or if he is terminated without "cause," as defined in the severance agreement he will be entitled to receive (in addition to salary and certain other benefits earned prior to termination) a single lump sum payment in an amount equal to four (4) months of his then-current annual base salary for the year in which such termination occurs.

Lazarus Rothstein has served as our Executive Vice President, General Counsel and Secretary since February 2009 and as Vice President, General Counsel and Secretary since April 2008. Effective January 1, 2009, Mr. Rothstein’s annual base salary was $180,000 per year, is entitled to certain discretionary bonuses in fiscal 2010 and fiscal 2011 and to participate in our health, dental and life insurance plan and receives a cellular telephone allowance. On April 2, 2009, Mr. Rothstein was awarded 10,000 shares of our common stock as a discretionary bonus and on April 27, 2010, was awarded a bonus of 16,985 shares of our restricted common stock which vested on May 17, 2010 and 10,000 shares were awarded on May 18, 2010. The shares of our restricted common stock were subject to the terms and conditions of our restricted stock award agreement as approved by our compensation committee.

 
- 48 -

 
 
 

On December 31, 2010, based on the approval of our Compensation Committee, Mr. Rothstein was awarded 14,516 shares of our restricted common stock which vested on February 17, 2011. Effective as of January 1, 2011, Mr. Rothstein’s annual base salary was $220,000 per year and included an award of 20,000 shares of our restricted common stock which vest 10,000 shares on February 15, 2012, 5,000 shares on May 15, 2012 and 5,000 shares on August 15, 2012, respectively.  In addition, Mr. Rothstein is entitled to certain discretionary bonuses in fiscal 2011, participation in our health, dental and life insurance plan and receives a cellular telephone allowance.

 Pursuant to the terms of a severance agreement between us and Mr. Rothstein, if he terminates his employment with us for "good reason" or if he is terminated without "cause," as defined in the severance agreement he will be entitled to receive (in addition to salary and certain other benefits earned prior to termination) a single lump sum payment in an amount equal to six (6) months of his then-current annual base salary for the year in which such termination occurs.

Director Compensation
 
The board’s general policy on director compensation is that compensation for non-employee directors should consist of both cash and equity based compensation. The following table summarizes the compensation paid by us to our directors during fiscal 2011.
 
Director Compensation Table for fiscal 2011(1)
 
   
Name
 
Fees Earned or Paid in Cash ($)
   
Stock Awards ($) (2)
   
Total ($)
 
Yuejian (James) Wang (3)
 
 
-
   
 
-
   
 
-
 
Yuwei Huang (3) (4)
 
 
-
   
 
-
   
 
-
 
Kong Tung (3) (5)
 
 
-
   
 
-
   
 
-
 
David Barnes
 
$
41,928
   
$
-
   
$
41,928
 
Sheldon Steiner
 
$
30,000
   
$
-
   
$
30,000
 
Philip Y. Shen
 
$
30,000
   
$
-
   
$
30,000
 
Adam Wasserman 
 
$
24,000
   
$
-
   
$
24,000
 
 
 
(1
)
No members of the board received compensation in the form of option awards, Non-Equity Incentive Plan Compensation, Nonqualified Deferred Compensation Earnings, or any other forms of Compensation in excess of the $10,000 in the aggregate in fiscal 2011.
       
 
(2
)
There were no stock awards to directors in fiscal 2011.
       
 
(3
)
In accordance with our board’s general policy directors who are full time employees (currently Dr. Wang and Messrs. Huang and Tung) are not paid for board service in addition to their regular employee compensation.
       
 
(4
)
Mr. Huang has served as Executive Vice President – Magnesium since February 2009 and as Chief Executive Officer of our subsidiary Chang Magnesium since June 2006.  In fiscal 2011 Mr. Huang’s base salary from our subsidiaries was $162,380. In fiscal 2010 Mr. Huang’s base salary from our subsidiaries was $306,592.
 
       
 
(5
)
Mr. Tung did not receive any compensation from us an employee during fiscal 2011.  Mr. Tung became a director of our company in May 2011.
 
Director Compensation for fiscal 2011

On June 3, 2010 the board approved the following annual compensation for non-employee directors. 

Name
 
Annual Retainer ($)
   
Restricted Stock Award (Shares)
 
David Barnes(1)
 
$
34,000
     
31,000
 
Sheldon Steiner
 
$
30,000
     
31,000
 
Philip Y. Shen
 
$
30,000
     
31,000
 
Adam Wasserman 
 
$
24,000
     
24,000
 

(1) Audit committee chairman.

 
- 49 -

 
 
 



The annual retainer covers all board meetings and includes attendance fees. The annual retainers are paid in quarterly installments in advance for the period from May 28, 2010 through May 27, 2011.  The restricted common stock vests equally over four quarters on August 28, 2010, November 28, 2010, February 28, 2011 and May 28, 2011 but only if the director is still a director of our company at the time of vesting.  The shares of restricted stock which have not vested hold voting rights and are eligible for the payment of dividends, if the board were to declare dividends on our common stock.  The grant of restricted stock is made in addition to the directors’ annual cash retainers.

Director Compensation for fiscal 2012

On November 17, 2011 the board approved the following annual compensation for non-employee directors (currently all directors other than Dr. Wang and Messrs. Huang and Tung). 

Name
 
Annual Retainer
   
Stock Award (Shares)
 
David Barnes(1)
 
$
33,000
     
45,500
 
Sheldon Steiner
 
$
29,000
     
45,500
 
Philip Y. Shen
 
$
29,000
     
45,500
 
Adam Wasserman 
 
$
29,000
     
45,500
 

(1) Audit Committee chairman.

The cash retainer will cover all board meetings and includes attendance fees for the period from December 1, 2011 through September 30, 2012 (the “Service Period”). The cash retainer may be paid no less frequently than in advance quarterly installments of $8,250 for the periods from December 1, 2011 through August 31, 2012, a payment of $2,750 on September 1, 2012 and a one-time payment of $1,500 upon adoption of this compensation plan for Messrs. Steiner and Wasserman and Dr. Shen and quarterly payments of $9,350 over the same quarterly period, a payment of $3,250 on September 1, 2012 and a one-time payment of $1,700 for Mr. Barnes who serves as the chairman of the Company’s Audit Committee.  The stock awards for all board members will be paid as follows: an aggregate of 28,450 shares of the Company’s restricted common stock will vest over the Service Period as follows: 8,525 shares on March 1, 2012, 8,525 shares on June 1, 2012, 8,525 shares on September 1, 2012 and 2,875 shares on October 1, 2012 but only if the director is still a director of our company at the time of vesting.  An additional 17,050 shares of our common stock shall be issuable to each non-employee director as compensation for the period from June 1, 2011 through November 30, 2011.  The shares of restricted stock which have not vested hold voting rights and are eligible for the payment of dividends, if the board of directors were to declare dividends on our common stock.  The grant of stock is made in addition to the directors’ cash retainers and supersedes the stock award for the period from June 1, 2011 to November 30, 2011 payable under the director compensation plan adopted by our board of directors on June 3, 2010.  We may pay the non-employee directors cash in lieu of issuing shares of our common stock if the average volume weighted average price (VWAP) of our common stock over the 10 trading days prior to the date shares are issuable by us to the non-employee director (the “10 Day VWAP”) is less than $2.00 per share.  The amount of cash payable by us in lieu of issuing shares to non-employee directors shall be computed by multiplying the number of shares issuable to the non-employee director by the 10 Day VWAP.


 
- 50 -

 
 
 


ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

Securities Authorized for Issuance under Equity Compensation Plans
 
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of September 30, 2010.
 
   
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
   
Weighted average exercise price of outstanding options, warrants and rights (b)
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)
 
Plan category(1)
                 
Plans approved by our shareholders:
                 
  2006 Equity Plan
   
      12,000
   
$
                   7.50
     
9,988,000
 
  2008 Executive Stock Incentive Plan
   
-
     
     
      628,303
 
  2008 Non-Executive Stock Incentive Plan
   
-
     
     
       1,086,161
 
Plans not approved by shareholders:
                       
  2006 Stock Plan
   
-
   
$
                 -
     
189,605
 
 
 
(1
)
For a description of each of the Plans listed in this table, see “Note 12 – Capital Stock – Stock Incentive Plans” to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission.

Principal Shareholders
 
At December 16, 2011 we had 40,614,416 shares of common stock issued and outstanding. The following table sets forth information known to us as of January 26, 2011 relating to the beneficial ownership of shares of our common stock by:
 
 
 
each person who is known by us to be the beneficial owner of more than 5% of our outstanding common stock;
 
 
each director and nominee;
 
 
each named executive officer; and
 
 
all named executive officers and directors as a group.

Name and Address of Beneficial Owner(1)
 
Amount and Nature of Beneficial Ownership (2)
   
Percentage of Class (2)
 
Yuejian (James) Wang (3)
   
5,447,032
     
13.1
%
Kong Tung (4)
   
1,315,020
     
3.2
%
Yuwei Huang (5)
   
1,169,231
     
2.9 
%
Andrew X. Wang (6)
   
48,129
     
*
 
Lazarus Rothstein (7)
   
36,501
     
*
 
David Barnes (6)
   
7,750
     
*
 
Sheldon Steiner (6)
   
87,775
     
*
 
Philip Shen (6)
   
102,080
     
*
 
Adam Wasserman (6)
   
57,717
     
*
 
All directors and executive officers as a group (nine persons)
   
8,271,235
     
20.0
%
          ———————
         *represents less than 1%

 
- 51 -

 
 
 



 
(1
)
Except as otherwise noted below, the address of each of the persons shown in the above table is c/o China Direct Industries, Inc., 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441.
       
 
(2
)
Includes, where applicable, shares of common stock issuable upon the exercise of options to acquire common stock held by such person that may be exercised within 60 days after December 16, 2011. Also includes unvested shares of restricted stock as to which such person has voting power but no dispositive power. Unless otherwise indicated, the Company believes that all persons named in the table above have sole voting power and/or investment power with respect to all shares of common stock beneficially owned by them.
       
 
(3
)
The number of shares beneficially owned by Dr. Wang includes: 422,032 shares of common stock presently outstanding; 4,000,000 shares of common stock held by Dragon Fund Management LLC ("Dragon Fund"), an entity in which Dr. Wang owns 1% of the membership interests and holds 50% of the voting control; 25,000 shares of common stock held by Wang Management, LLC, an entity in which Dr. Wang holds 50% of the voting control; options to purchase 500,000 shares of common stock at an exercise price of $7.50 expiring on January 1, 2013; options to purchase 500,000 shares of common stock at an exercise price of $10.00 expiring on January 1, 2014. Dr. Wang disclaims beneficial ownership of our common stock owned by Dragon Fund and Wang Management, LLC except to the extent of his pecuniary interest in these entities.
       
 
(4
)
The number of shares beneficially owned by Mr. Tung includes 1,315,020 shares of common stock presently outstanding and owned directly by Mr. Tung.
       
 
(5
)
The number of shares beneficially owned by Mr. Huang includes 400,000 shares of common stock presently outstanding and owned directly by Mr. Huang, 769,231 shares of common stock presently outstanding and owned by Pine Capital, a company which is owned or controlled by Mr. Huang and excludes: up to an additional 1,244,344 shares of our common stock Pine Capital may receive pursuant to an Equity Transfer Agreement CDI China entered into with Pine Capital and Yiwei Magnesium  in connection with its July 2010 purchase of an 80% interest in Ruiming Magnesium.
       
 
(6
)
The number of shares beneficially owned does not include any shares that may be issued in the future as compensation in lieu of cash, payable at our option.
       
 
(7
)
The number of shares beneficially owned by Mr. Rothstein includes 16,501 shares of our common stock presently outstanding and 20,000 shares of our restricted common stock which vests 10,000 shares on February 15, 2012 and  5,000 shares on May 15, 2012 and 5,000 shares on August 15, 2012.
       
 

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

Transactions with Related Persons
 
From time to time we engage in transactions with related parties.  The following is a summary of the related party transactions reflected on our consolidated balance sheet at September 30, 2011 and Note 11 to our consolidated financial statements for the fiscal year ended September 30, 2011.

List of Related Parties

We have specified the following persons and entities as related parties with ending balances as of September 30, 2011 and September 30, 20010:

·  
Yuwei Huang, is executive vice president of our Magnesium segment, a member of the board of directors, chief executive officer and chairman of Chang Magnesium, chairman of Baotou Changxin Magnesium, chairman of YiWei Magnesium, chief executive officer and vice chairman of Golden Magnesium, a beneficial owner of a 13.75% interest in Golden Trust that is held by Baotou Chang, as Trustee, a beneficial owner of a 100% interest in Taiyuan Y