UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C. 20549Form
      10-Q
 
 [√]
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended March 31, 2009
 
 or
 [  ]
              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, 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)954-363-7333(Registrant’s
      telephone number, including area code)Not
      Applicable(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90
days.                 Yes
[√] 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).  Yes
[  ]No [ ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer
              [  ]
              Accelerated
      filer
              [ √]Non-accelerated
      filer
              [  ]
              Smaller
      reporting company
              [ 
      ](Do
      not check if smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [  ] No [√]
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.  23,540,204 shares of common
stock were issued and outstanding as of May 8, 2009.
 
  
 TABLE
OF CONTENTS
 
 Page
      No.PART
      I. - FINANCIAL INFORMATIONItem
      1.
              Financial Statements.
              4Item
      2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
              25Item
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk.
              37Item
      4
              Controls and Procedures.
              37PART
      II - OTHER INFORMATIONItem
      1.
              Legal Proceedings.
              39Item
      1A.
              Risk Factors.
              39Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds.
              39Item
      3.
              Defaults Upon Senior Securities.
              40Item
      4.
              Submission of Matters to a Vote of Security
      Holders.
              40Item
      5.
              Other Information.
              40Item
      6.
              Exhibits.
              40Signatures
              42
 
 
   
  
 
 INDEX
OF CERTAIN DEFINED TERMS USED IN THIS REPORT
 
 We
operate our company in two primary divisions. Our Management Services division
acquires controlling interests of Chinese business entities which we consolidate
as either our wholly or majority owned subsidiaries. Our Advisory Services
division provides consulting services to Chinese entities seeking access to the
U.S. capital markets. The following list reflects our primary business entities
and operating segments within our two divisions.
 
 When used
in this report the terms:
 
 •
              "China
      Direct”, "we”, "us” or “our” refers to China Direct, 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% majority 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 51%
      owned subsidiary of Capital One Resources;•
              “Asia
      Magnesium”, refers to Asia Magnesium Co. Ltd., 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 52% 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 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.
 
 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 Recycling”, refers to Shanghai CDI Metal Recycling Co., Ltd., a
      company organized under the laws of the PRC and an 83% 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.
 
 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.
 
  - 3
-
 
 PART 1 - FINANCIAL INFORMATION
 Item 1.
              Financial
      Statements.
 CHINA
DIRECT, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 March
      31,
                                                
                                                
                                                December
      31,2009
                                                
                                                
                                                2008ASSETS
                                                
                                                Unaudited
                                                
                                                
                                                AuditedCurrent
      Assets:Cash
      and cash equivalents
                                                
                                                $
                                                11,589,372
                                                
                                                
                                                $
                                                14,205,229Investment
      in marketable securities available for sale
                                                
                                                
                                                5,138,731
                                                
                                                
                                                
                                                7,569,333Investment
      in marketable securities available for sale - related
party
                                                
                                                
                                                208,691
                                                
                                                
                                                
                                                160,459Investment
      in subsidiaries - cost method
                                                
                                                
                                                290,864
                                                
                                                
                                                
                                                290,864Accounts
      receivable, net
                                                
                                                
                                                3,959,121
                                                
                                                
                                                
                                                9,457,306Accounts
      receivable - related parties
                                                
                                                
                                                4,343,463
                                                
                                                
                                                
                                                1,676,191Inventories,
      net
                                                
                                                
                                                9,659,615
                                                
                                                
                                                
                                                8,559,593Prepaid
      expenses and other current assets
                                                
                                                
                                                5,356,477
                                                
                                                
                                                
                                                8,127,300Prepaid
      expenses - related parties
                                                
                                                
                                                4,619,809
                                                
                                                
                                                
                                                8,007,111Loans
      receivable - related parties
                                                
                                                
                                                1,347,082
                                                
                                                
                                                
                                                1,652,728Due
      from related parties
                                                
                                                
                                                409,329
                                                
                                                
                                                
                                                35,710Total
      current assets
                                                
                                                
                                                46,922,554
                                                
                                                
                                                
                                                59,741,824Restricted
      cash
                                                
                                                
                                                1,808,687
                                                
                                                
                                                
                                                846,197Property,
      plant and equipment, net
                                                
                                                
                                                43,000,157
                                                
                                                
                                                
                                                43,455,683Prepaid
      expenses and other assets
                                                
                                                
                                                2,524,660
                                                
                                                
                                                
                                                2,744,427Property
      use rights, net
                                                
                                                
                                                591,899
                                                
                                                
                                                
                                                591,277Total
      assets
                                                
                                                $
                                                94,847,957
                                                
                                                
                                                $
                                                107,379,408LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Loans
      payable-short term
                                                
                                                
                                                2,183,885
                                                
                                                
                                                
                                                933,735Accounts
      payable and accrued expenses
                                                
                                                
                                                5,009,646
                                                
                                                
                                                
                                                8,590,010Accounts
      payable-related parties
                                                
                                                
                                                2,737,380
                                                
                                                
                                                
                                                7,516,728Advances
      from customers
                                                
                                                
                                                404,577
                                                
                                                
                                                
                                                1,545,273Other
      payables
                                                
                                                
                                                2,130,748
                                                
                                                
                                                
                                                1,624,370Income
      taxes payable
                                                
                                                
                                                1,058,559
                                                
                                                
                                                
                                                1,039,112Due
      to related parties
                                                
                                                
                                                2,209
                                                
                                                
                                                
                                                978,739Total
      current liabilities
                                                
                                                
                                                13,527,004
                                                
                                                
                                                
                                                22,227,967Loans
      payable-long term
                                                
                                                
                                                173,834
                                                
                                                
                                                
                                                186,018Minority
      interest
                                                
                                                
                                                27,395,328
                                                
                                                
                                                
                                                26,940,141Stockholders'
      Equity:Preferred
      Stock: $.0001 par value, stated value $1,000 per share; 10,000,000
      authorized, 1,006 sharesand
      0 shares issued and outstanding at March 31, 2009 and December 31, 2008,
      respectively
                                                
                                                
                                                1,006,250
                                                
                                                
                                                
                                                1,006,250Common
      Stock: $.0001 par value, 1,000,000,000 authorized, 23,203,272
      and23,545,236
      issued and outstanding at March 31, 2009 and December 31, 2008,
      respectively
                                                
                                                
                                                2,320
                                                
                                                
                                                
                                                2,353Additional
      paid-in capital
                                                
                                                
                                                50,606,583
                                                
                                                
                                                
                                                51,701,293Deferred
      compensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (11,000
                                                )Accumulated
      comprehensive income
                                                
                                                
                                                (13,411,582
                                                )
                                                
                                                
                                                (11,711,021
                                                )Retained
      earnings
                                                
                                                
                                                15,548,220
                                                
                                                
                                                
                                                17,037,407Total
      stockholders’ equity
                                                
                                                
                                                53,751,791
                                                
                                                
                                                
                                                58,025,282Total
      liabilities and stockholders’ equity
                                                
                                                $
                                                94,847,957
                                                
                                                
                                                $
                                                107,379,408
 See notes
to unaudited consolidated financial statements
 - 4
-
  CHINA
DIRECT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 For
      the QuarterEnded March 31,2009
                              
                              
                              2008Revenues
                              
                              $
                              16,056,677
                              
                              
                              $
                              58,660,225Revenues-related
      parties
                              
                              
                              4,629,432
                              
                              
                              
                              733,921Total
      revenues
                              
                              
                              20,686,109
                              
                              
                              
                              59,394,146Cost
      of revenues
                              
                              
                              19,317,293
                              
                              
                              
                              49,414,002Gross
      profit
                              
                              
                              1,368,816
                              
                              
                              
                              9,980,144Operating
      expenses:Selling,
      general, and administrative
                              
                              
                              3,099,130
                              
                              
                              
                              1,610,993Operating
      (loss) income
                              
                              
                              (1,730,314
                              )
                              
                              
                              8,369,151Other
      income (expense):Other
      income
                              
                              
                              71,585
                              
                              
                              
                              193,618Interest
      income
                              
                              
                              46,114
                              
                              
                              
                              96,859Realized
      loss on sale of marketable securities
                              
                              
                              (232,711
                              )
                              
                              
                              (39,461
                              )Total
      other (expense) income
                              
                              
                              (115,012
                              )
                              
                              
                              251,016Net
      (loss) income before income taxes
                              
                              
                              (1,845,326
                              )
                              
                              
                              8,620,167Income
      tax benefit (expense)
                              
                              
                              71,579
                              
                              
                              
                              (323,633
                              )(Loss)
      income from continuing operations before minority interest
                              
                              
                              (1,773,747
                              )
                              
                              
                              8,296,534Minority
      interest
                              
                              
                              318,216
                              
                              
                              
                              (3,687,166
                              )Income
      from discontinued operation
                              
                              
                              -
                              
                              
                              
                              143,508Net
      (loss) income
                              
                              
                              (1,455,531
                              )
                              
                              
                              4,752,876Deduct
      dividends on Series A Preferred Stock:Preferred
      stock dividend
                              
                              
                              (20,235
                              )
                              
                              
                              (141,530
                              )Relative
      fair value of detachable warrants issued
                              
                              
                              -
                              
                              
                              
                              (2,765,946
                              )Preferred
      stock beneficial conversion feature
                              
                              
                              -
                              
                              
                              
                              (2,451,446
                              )Loss
      applicable to common stockholders
                              
                              $
                              (1,475,766
                              )
                              
                              $
                              (606,046
                              )Basic
      and diluted loss per common share after deductionin
      the first quarter of 2008 of noncash deemed dividendsattributable
      to Series A Preferred Stock as describedBasic
                              
                              $
                              (0.06
                              )
                              
                              $
                              (0.03
                              )Diluted
                              
                              $
                              (0.06
                              )
                              
                              $
                              (0.03
                              )Basic
      weighted average common shares outstanding
                              
                              
                              23,414,500
                              
                              
                              
                              21,003,439Diluted
      weighted average common shares outstanding
                              
                              
                              23,414,500
                              
                              
                              
                              21,003,439
  See notes
to unaudited consolidated financial statements  - 5
-
 CHINA
DIRECT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 For
      the Three Months EndedMarch
      31,2009
                                  
                                  
                                  2008Cash
      flows from operating activities:Net
      (loss) income from continuing operations
                                  
                                  $
                                  (1,455,531
                                  )
                                  
                                  $
                                  4,609,368Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
                                  
                                  
                                  725,071
                                  
                                  
                                  
                                  410,544Allowance
      for bad debt
                                  
                                  
                                  (290,643
                                  )
                                  
                                  
                                  3,999Stock
      based compensation
                                  
                                  
                                  522,671
                                  
                                  
                                  
                                  207,273Realized
      loss on investment in marketable securities
                                  
                                  
                                  232,711
                                  
                                  
                                  
                                  39,461Fair
      value of securities received for services
                                  
                                  
                                  (145,108
                                  )
                                  
                                  
                                  (94,286
                                  )Minority
      interest
                                  
                                  
                                  (318,216
                                  )
                                  
                                  
                                  4,384,952Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
                                  
                                  
                                  2,767,606
                                  
                                  
                                  
                                  (639,308
                                  )Prepaid
      expenses - related parties
                                  
                                  
                                  3,387,302
                                  
                                  
                                  
                                  (3,104,661
                                  )Inventories
                                  
                                  
                                  (1,100,022
                                  )
                                  
                                  
                                  (6,484,792
                                  )Accounts
      receivable
                                  
                                  
                                  5,788,829
                                  
                                  
                                  
                                  (4,434,523
                                  )Accounts
      receivable - related parties
                                  
                                  
                                  (2,667,272
                                  )
                                  
                                  
                                  1,284,250Accounts
      payable and accrued expenses
                                  
                                  
                                  (3,593,781
                                  )
                                  
                                  
                                  (1,842,356
                                  )Accounts
      payable - related parties
                                  
                                  
                                  (4,779,350
                                  )
                                  
                                  
                                  (530,228
                                  )Advances
      from customers
                                  
                                  
                                  (1,140,696
                                  )
                                  
                                  
                                  2,022,992Other
      payables
                                  
                                  
                                  506,378
                                  
                                  
                                  
                                  1,925,295Income
      taxes payable
                                  
                                  
                                  19,447
                                  
                                  
                                  
                                  257,562Net
      cash provided by (used in) continuing activities
                                  
                                  
                                  (1,540,604
                                  )
                                  
                                  
                                  (1,984,458
                                  )Net
      cash provided by discontinued operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  750,815Net
      cash used in operating activities
                                  
                                  
                                  (1,540,604
                                  )
                                  
                                  
                                  (1,233,643
                                  )Cash
      flows from investing activities:Decrease
      (increase) in notes receivable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  167,741Increase
      (decrease) in loans receivable
                                  
                                  
                                  305,646
                                  
                                  
                                  
                                  (2,138,931
                                  )Proceeds
      from the sale of marketable securities available for sale
                                  
                                  
                                  292,974
                                  
                                  
                                  
                                  239,579Purchases
      of property, plant and equipment
                                  
                                  
                                  (46,561
                                  )
                                  
                                  
                                  (2,300,528
                                  )Net
      cash provided by (used in) investing activities
                                  
                                  
                                  552,059
                                  
                                  
                                  
                                  (4,032,139
                                  )Cash
      flows from financing activities:Decrease
      (increase) in restricted cash
                                  
                                  
                                  (962,489
                                  )
                                  
                                  
                                  644,160Proceeds
      from loans payable
                                  
                                  
                                  1,250,150
                                  
                                  
                                  
                                  2,082,912Payment
      of loans payable
                                  
                                  
                                  (12,184
                                  )
                                  
                                  
                                  (1,859,423
                                  )Payment
      of notes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (592,007
                                  )Payment
      of notes payable-related party
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (410,167
                                  )Due
      from related parties
                                  
                                  
                                  (373,620
                                  )
                                  
                                  
                                  1,043,185Due
      to related parties
                                  
                                  
                                  (976,530
                                  )
                                  
                                  
                                  (1,653,274
                                  )Gross
      proceeds from sale of preferred stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12,950,000Proceeds
      from exercise of warrants/options
                                  
                                  
                                  7,791
                                  
                                  
                                  
                                  -Cash
      payment for stock repurchase
                                  
                                  
                                  (1,650,000
                                  )
                                  
                                  
                                  -Capital
      contribution from minority interest owners
                                  
                                  
                                  715,788
                                  
                                  
                                  
                                  -Offering
      expenses
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,504,345
                                  )Net
      cash (used in) provided by financing activities
                                  
                                  
                                  (2,001,094
                                  )
                                  
                                  
                                  10,701,041Effects
      of exchange rate changes on cash
                                  
                                  
                                  373,782
                                  
                                  
                                  
                                  1,000,269Net
      (decrease) increase in cash
                                  
                                  
                                  (2,615,857
                                  )
                                  
                                  
                                  6,435,528Cash,
      beginning of year
                                  
                                  
                                  14,205,229
                                  
                                  
                                  
                                  20,394,931Cash,
      end of period
                                  
                                  $
                                  11,589,372
                                  
                                  
                                  $
                                  26,830,459Supplemental
      disclosures of cash flow information:Cash
      paid for taxes
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  6,166Cash
      paid for interest
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  27,156Dividend
      payment in stock to preferred stock shareholders
                                  
                                  $
                                  20,235
                                  
                                  
                                  $
                                  -Non-cash
      preferred stock deemed dividend
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  5,217,392
 
 - 6
-
  NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 Business
and Organization
 
 China
Direct, Inc., a Florida corporation and its subsidiaries are referred to in this
report as the “Company”, “we”, “us”, “our”, or “China Direct”.
 
 We are a
U.S. company that manages a portfolio of Chinese entities.  We also
provide consulting services to Chinese businesses. We operate in three
identifiable segments, Magnesium, Basic Materials and Consulting, in accordance
with SFAS No. 131, “Disclosure
about segments of an Enterprise and Related Information”. 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 this ownership control, we provide management advice as
well as investment capital to expand their businesses. We hold a controlling
interest in twelve subsidiaries operating in China, five of which comprise our
Magnesium segment and five comprise our Basic Materials segment. As of the date
of this report, we have a total of 1,287 full-time employees, the majority of
which, 1,269, work in the PRC.
 
 In our
largest segment, Magnesium, we operate five entities which produce, sell and
distribute pure magnesium ingots, magnesium powders and magnesium
scraps.
 
 In our
Basic Materials segment, we operate five entities which sell and distribute a
variety of products including (i) industrial grade synthetic chemicals, (ii)
steel products, (iii) non ferrous metals, and (iv) recycled materials. This
segment also includes our zinc mining property which has not commenced
operations.
 
 In our
Consulting segment, we provide a suite of consulting services to U.S. public
companies that operate primarily in China. The consulting and transactional fees
we charge vary based upon the scope of the services to be rendered.
 
 In 2007
we launched a Clean Technology segment. We discontinued this segment in the
third quarter of 2008 when we completed the sale in October 2008 of an 81%
interest in CDI Clean Technology and its 51% interest in CDI Wanda and its 52%
interest in Yantai CDI Wanda to PE Brothers Corp. for $1,240,000, paid in
form of a promissory note.  We plan to maintain our 19% ownership
interest in CDI Clean Technology we retained. In February, 2009 we have
received the first installment payment of approximately $240,000.  See Note
6 - Prepaid Expenses and Other Current Assets.
 
 NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 Basis
of Presentation
 
 Our
unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and pursuant to the requirements for reporting on Form 10-Q.
Accordingly, they do not include all the information and footnotes required by
U.S. generally accepted accounting principles for annual financial statements.
However, the information included in these interim financial statements
reflects all adjustments (consisting solely of normal recurring adjustments)
which are, in the opinion of management, necessary for the fair presentation of
the consolidated financial position and the consolidated results of operations.
Results shown for interim periods are not necessarily indicative of the results
to be obtained for a full year. The consolidated balance sheet information as of
December 31, 2008 was derived from the audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2008. These interim financial statements should be read in
conjunction with our Form 10-K for the year ended December 31, 2008. Certain
reclassifications have been made to prior year amounts to conform to the current
year presentation and to disclose our reclassification of discontinued
operations.
 
 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 include the allowance for
doubtful accounts receivable, certain assumptions underlying the calculation of
stock-based compensation, investments in marketable securities available for
sale, assets and liabilities held for sale and the useful life of property,
plant and equipment.
 
  - 7
-
  Cash
and Cash Equivalents
 
 For
purposes of the consolidated statements of cash flows, we consider all highly
liquid investments with original maturities of three months or less to be cash
equivalents. The carrying values of these investments approximate their fair
value.
 
 Concentration
of Credit Risks
 
 Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of cash and trade accounts receivable. We deposit our cash
with high credit quality financial institutions in the United States and China.
As of March 31, 2009, bank deposits in the United States exceeded federally
insured limits by $130,068. At March 31, 2009, we had deposits of $6,972,516 in
banks in China. In China, there is no equivalent federal deposit insurance as in
the United States, so the amounts held in banks in China are not insured.
We have not experienced any losses in such bank accounts through March 31,
2009.
 
 At March
31, 2009 and December 31, 2008, bank deposits, (reclassified to reflect
discontinued operations), by geographic area were as follows:
 
 
 Country
                                      
                                      March
      31, 2009
                                      
                                      
                                      December
      31, 2008United
      States
                                      
                                      $
                                      4,616,856
                                      
                                      
                                      
                                      40
                                      %
                                      
                                      $
                                      6,640,672
                                      
                                      
                                      
                                      47
                                      %China
                                      
                                      
                                      6,972,516
                                      
                                      
                                      
                                      60
                                      %
                                      
                                      
                                      7,564,557
                                      
                                      
                                      
                                      53
                                      %Total
      cash and cash equivalents
                                      
                                      $
                                      11,589,372
                                      
                                      
                                      
                                      100
                                      %
                                      
                                      $
                                      14,205,229
                                      
                                      
                                      
                                      100
                                      %
 
 
 In an
effort to mitigate any potential risk, we periodically evaluate the credit
quality of the financial institutions at which we hold deposits, both in the
United States and China.
 
 Accounts
Receivable
 
 Accounts
receivable are reported at net realizable value. We have established an
allowance for doubtful accounts based upon factors pertaining to the credit
risks of specific customers, historical trends, age of the receivable and other
information. Delinquent accounts are written off when it is determined that the
amounts are uncollectible. At March 31, 2009 and December 31, 2008, allowances
for doubtful accounts were approximately $85,000 and $500,000,
respectively.
 
 Inventories
 
 Inventories,
consisting of raw materials and finished goods, are stated at the lower of cost
or market utilizing the weighted average method. Inventories as of March 31,
2009 and December 31, 2008 were $9,659,615 and $8,559,593, respectively.
Due to the nature of our business and the short duration of the manufacturing
process of our products, there was no work-in-process inventory at March 31,
2009 and December 31, 2008.
 
 Accounts
Payable-Related Parties
 
 At March
31, 2009 our consolidated balance sheet reflects accounts payable-related party
of $2,737,380. At December 31, 2008, our consolidated balance sheet
reflects accounts payable-related party of $7,516,728, comprised of $4,497,180
and $3,019,548 due Chang Magnesium in repayment of customer advances by Pine
Capital and Wheaton Group, respectively.
 
   - 8
-
  Fair
Value of Financial Instruments
 
 As of
January 1, 2008, we adopted on a prospective basis certain required provisions
of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, as amended by Financial Accounting Standards Board (FASB)
Financial Staff Position (FSP) No. 157-2, on the effective date of FASB
Statement No. 157. Those provisions relate to our financial assets and
liabilities carried at fair value and our fair value disclosures related to
financial assets and liabilities. SFAS 157 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. 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. Observable
market data should be used when available.
 
 Most, but
not all, of our financial instruments are carried at fair value, including, all
of our cash equivalents, investments classified as available for sale securities
and assets held for sale and are carried at fair value, with unrealized gains
and losses, net of tax. Virtually all of our valuation measurements are Level 1
measurements. The adoption of SFAS 157 did not have a significant impact on our
consolidated financial statements.
 
 Marketable
Securities
 
 Marketable
securities held for sale and marketable securities held for sale-related
party at March 31, 2009 and December 31, 2008 consists of the
following:
  Company
                      
                      March
      31, 2009
                      
                      
                      
                      
                      
                      December
      31, 2008%
                      
                      
                      
                      
                      
                      %China
      America Holdings, Inc.
                      
                      $
                      360,557
                      
                      
                      
                      7
                      %
                      
                      $
                      272,200
                      
                      
                      
                      4
                      %China
      Logistics Group, Inc.
                      
                      
                      760,999
                      
                      
                      
                      14
                      %
                      
                      
                      1,807,357
                      
                      
                      
                      23
                      %Dragon
      International Group Corp.
                      
                      
                      804,552
                      
                      
                      
                      15
                      %
                      
                      
                      704,656
                      
                      
                      
                      9
                      %China
      Armco Metals, Inc.
                      
                      
                      2,995,971
                      
                      
                      
                      56
                      %
                      
                      
                      4,045,002
                      
                      
                      
                      52
                      %Sunwin
      International Neutraceuticals, Inc.
                      
                      
                      214,572
                      
                      
                      
                      4
                      %
                      
                      
                      649,337
                      
                      
                      
                      8
                      %Other
                      
                      
                      210,771
                      
                      
                      
                      4
                      %
                      
                      
                      251,240
                      
                      
                      
                      3
                      %Marketable
      securities held for sale
                      
                      $
                      5,347,422
                      
                      
                      
                      100
                      %
                      
                      $
                      7,729,792
                      
                      
                      
                      100
                      %
  Through
our Consulting segment, we receive securities which include preferred stock,
common stock and common stock purchase warrants from clients. We classify these
securities as investments in marketable securities available for sale or
investment in marketable securities available for sale-related party. These
securities are stated at their fair value in accordance with SFAS No.
115“Accounting for Certain Investments
in Debt and Equity Securities ”, and EITF 00-8 Accounting by a Grantee for an
Equity Instrument to be Received in Conjunction with Providing Goods or
Services”.Unrealized gains or losses
in investments in marketable securities available for sale are recognized as an
element of other comprehensive income on a monthly basis based on fluctuations
in the fair value of the security as quoted on an exchange or an inter-dealer
quotation system. Realized gains or losses are recognized in the consolidated
statements of operations when the securities are liquidated.
 
 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 which include preferred stock, common stock and
common stock purchase warrants. We categorize securities as investment in
marketable securities available for sale and investment in marketable securities
available for sale-related party. Some of the securities of China Logistics we
own are restricted securities and cannot be readily resold by us absent a
registration of those securities under the Securities Act of 1933 (the
“Securities Act”) or the availability of an exemption from the registration
requirements under the Securities Act.
 
 The
securities of one client, Dragon Capital Group Corp. (“Dragon Capital”),
accounted for all of the investment in marketable securities available for
sale-related party and totaled $160,459 at December 31, 2008. Dragon
Capital is a related party. Mr. Lisheng (Lawrence) Wang, the CEO and Chairman of
the Board of Dragon Capital, is the brother of Dr. James Wang, CEO and Chairman
of China Direct. These securities were issued by Dragon Capital as compensation
for consulting services. Dragon Capital is a non-reporting company whose
securities are quoted on the Pink Sheets, and as such, under Federal securities
laws, securities of Dragon Capital cannot be readily resold by us,
generally, absent a registration of those securities under the Securities Act.
Dragon Capital does not intend to register the securities.
  - 9
-
   Other-than-temporary
impairment of securities is evaluated periodically to determine whether a
decline in their value is other than temporary. Management utilizes criteria
such as the magnitude and duration of the decline, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than
temporary. The term “other-than-temporary” is not intended to indicate that the
decline is permanent. It indicates that the prospects for a near term recovery
of value are not necessarily favorable, or that there is a lack of evidence to
support fair values equal to, or greater than, the carrying value of the
investment. Once a decline in value is determined to be other than temporary,
the value of the security is reduced and a corresponding impairment charge to
earnings is recognized.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1 to amend the impairment
guidance in EITF Issue No. 99-20 in order to achieve more consistent
determination of whether other-than-temporary impairment (“OTTI”) has
occurred. This FSP amended EITF 99-20 to more closely align the OTTI guidanceto
the guidance in Statement No. 115. Retrospective application to a prior
interim or annual period is prohibited. The guidance in this FSP was considered
in the assessment of OTTI for various securities at March 31, 2009.
 
 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 on a monthly basis based on changes in the fair value of the security as
quoted on an exchange or an inter-dealer quotation system. Once liquidated,
realized gains or losses on the sale of marketable securities available for sale
and marketable securities available for sale-related party are reflected in
our net income for the period in which the security was liquidated.
 
 The
unrealized loss on marketable securities available for sale, net of the effect
of taxes, for the first quarter of 2009 and 2008 was $14,382,854 and
$1,590,347, respectively. The realized loss on investments in marketable
securities available for sale for the first quarter of 2009 and 2008 was
$232,711 and $39,461, respectively.
 
 Prepaid
Expenses and Other Current Assets
 
 Prepaid
expenses and other current assets consist of (i) prepayments to vendors for
merchandise that had not yet been shipped, (ii) the fair value of securities
received from client companies associated with our Consulting segment assigned
to our executive officers and employees as compensation, (iii) value added tax
refunds available from the Chinese government, (iv) loans receivable and (v)
other receivables.
 At March 31, 2009 and December 31, 2008, our consolidated balance sheets
include prepaid expenses and other current assets of $5,356,477 and
$8,127,300, respectively.
 
 Prepaid
expenses-related parties were $4,619,809 and $8,007,111 at March 31, 2009
and December 31, 2008, respectively. This item is discussed in further detail in
Note 10, Related Party Transactions.
 
 Non-current
prepaid expenses and other assets consist of (i) the fair value of the
securities of our client companies assigned to executive officers and employees
as compensation for services to be rendered over the term of the respective
consulting agreement which will be amortized beyond the twelve month period, and
(ii) other assets acquired in connection with the acquisition of Pan Asia
Magnesium.  This item is discussed in further detail in Note 6-
Prepaid Expenses and other current assets.  Accordingly, non-current
prepaid expenses totaled $2,024,660 and $2,744,427 at March 31, 2009 and
December 31, 2008, respectively.
 
 Property,
Plant and Equipment
 
 Property,
plant and equipment are recorded at cost and depreciated on a straight line
basis over their estimated useful lives of three to forty years. Maintenance and
repairs are charged to expense as incurred. Significant renewals and
improvements are capitalized.
 
 Acquisitions
 
 We
account for acquisitions using the purchase method of accounting in accordance
with the provisions of SFAS No. 141. In each of our acquisitions for the periods
presented, we determined that fair values were equivalent to the acquired
historical carrying costs. Acquisitions to be made after December 15, 2008 will
be accounted for under the provisions of SFAS 141R.
  - 10
-
  
 Advances
from Customers and Deferred Revenues
 
 Advances
from customers represent (i) prepayments to us for merchandise that had not yet
been shipped to customers, and (ii) the fair value of securities received as
compensation which will be amortized over the term of the respective consulting
agreement. We will recognize these advances as revenues as customers take
delivery of the goods or when the services have been rendered, in compliance
with our revenue recognition policy. Advances from customers totaled $404,577
and $1,545,273 at March 31, 2009 and December 31, 2008 (reclassified to
reflect discontinued operation), respectively.
 
 Comprehensive
Income
 
 We follow
Statement of Financial Accounting Standards No. 130 (SFAS 130) “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
the first quarter of 2009 and 2008 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.
 
 Foreign
Currency Translation
 
 The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of our Chinese subsidiaries is the Renminbi,
the official currency of the People’s Republic of China, (“RMB”). Capital
accounts of the consolidated financial statements are translated into United
States dollars from RMB at their historical exchange rates when the capital
transactions occurred. Assets and liabilities are translated at the exchange
rates as of the balance sheet date. Income and expenditures are translated at
the average exchange rates for the first quarter of 2009 and 2008. A summary of
the conversion rates for the periods presented is as follows:
 
 March
      31,2009
                          
                          
                          2008Quarter
      end RMB : U.S. Dollar exchange rate
                          
                          
                          6.8456
                          
                          
                          
                          7.0222Average
      year-to-date RMB : U.S. Dollar exchange rate
                          
                          
                          6.8466
                          
                          
                          
                          7.1757
 
 The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through PRC authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into United States dollars at the rates applied in the
translation.
  Impairment
of Long-Lived Assets
 
 In
accordance with SFAS No. 144, “Accounting for the 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 difference between the estimated fair value and the book value of the
underlying asset. We did not record any impairment charges during first quarter
of 2009 and 2008.
 
 Subsidiaries
Held for Sale
 
 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.
 
  - 11
-
  Minority
Interest
 
 Under
generally accepted accounting principles when losses applicable to the minority
interest in a subsidiary exceed the minority interest in the equity capital of
the subsidiary, the excess is not charged to the majority interest since there
is no obligation of the minority interest to make good on such losses. We,
therefore, absorbed all losses applicable to a minority interest where
applicable. If future earnings do materialize, we shall be credited to the
extent of such losses previously absorbed.
 
 Income
Taxes
 
 We
accounted for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”.
SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in our financial statements or tax returns. Measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between the financial reporting and tax basis of our
assets and liabilities result in a deferred tax asset, SFAS No. 109
requires an evaluation of the probability of our being able to realize the
future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some or the
entire deferred tax asset will not be realized.
 
 Basic
and Diluted Earnings per Share
 
 Basic
income per common share is computed by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding for the periods presented. Diluted income per share reflects the
potential dilution that could occur if securities were exercised or converted
into common stock or other contracts to issue common stock resulted in the
issuance of common stock that would then share in our income, subject to
anti-dilution limitations.
 
 Revenue
Recognition
 
 We follow
the guidance of 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.
 
 Stock-based
Compensation
 
 We
account for the grant of stock options and restricted stock awards in accordance
with SFAS 123R, “Share-Based
Payment, an Amendment of FASB Statement No. 123” (“SFAS 123R”). SFAS 123R
requires companies to recognize in the statement of operations the grant-date
fair value of stock options and other equity based compensation.
 
 Recent
Pronouncements
 
 In April
2009, the FASB issued three final Staff Positions “FSPs” intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, provides
guidelines for making fair value measurements more consistent with the
principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed
to create greater clarity and consistency in accounting for and presenting
impairment losses on securities. We are currently evaluating the requirements of
these FSPs, as well as the impact of the adoption on our consolidated financial
statements, if any.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1 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 (“OTTI”) has
occurred. This FSP amended EITF 99-20 to more closely align the OTTI guidance
therein to the guidance in Statement No. 115. Retrospective application to
a prior interim or annual period is prohibited. The guidance in this FSP was
considered in the assessment of OTTI for various securities at March 31,
2009.
 
  - 12
-
  In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities ” (“SFAS 161”). SFAS 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. We have evaluated the requirements of SFAS 161 and
it had no impact on the preparation of our consolidated financial statements as
of March 31, 2009.
 
 In May
2008, the FASB issued FSP APB 14-1,Accounting for Convertible Debt
Instruments That MayBe
Settled in Cash upon Conversion (Including Partial Cash Settlement)(“FSP APB 14-1) . FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
either mandatory or optional conversion (including partial cash settlement) are
not addressed by paragraph 12 of APB Opinion No. 14,Accounting for Convertible
Debt and Debt issued with Stock Purchase Warrants . Additionally, FSP APB
14-1 specifies that issuers of such instruments should separately account for
the liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We will adopt FSP APB 14-1 beginning in the first
quarter of fiscal 2009,
and this standard must be applied on a retrospective basis. We have evaluated
the requirements of APB 14-1 and it had no impact on the preparation of our
consolidated financial statements as of March 31, 2009.
 
 In May
2008, the FASB SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles. This standard
is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with generally
accepted accounting principles in the United States for non-governmental
entities. SFAS No. 162 is effective 60 days following approval by the U.S.
Securities and Exchange Commission  of the Public Company Accounting
Oversight Board’s amendments to AU Section 411,The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles . We do not
expect SFAS No. 162 to have a material impact on the preparation of our
consolidated financial statements.
 
 On
September 16, 2008, the FASB issued final FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities ,??to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
We have evaluated the requirements of EITF 03-6-1 and it had no impact on the
preparation of our consolidated financial statements as of March 31,
2009.
 
 On
October 10, 2008, the FASB issued SFP No. 157-3,Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.  This FSPclarifies the application of FASB Statement
No. 157, Fair Value Measurements, in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active. FASB Statement No. 157 was issued in September 2006, and is
effective for financial assets and financial liabilities for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We have adopted SFAS 157-3
and determined that it had no impact as of March 31, 2009, and we will continue
to evaluate the impact, if any, of SFAS 157-3 on our financial
statements.
 
 A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.
  NOTE
3 - EARNINGS PER SHARE
 
 Under the
provisions of SFAS 128, “EarningsPerShare”, basic income (loss)
per common share is computed by dividing income (loss) available to common
shareholders by the weighted average number of shares of common stock
outstanding for the periods presented. Diluted income (loss) per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that would then share in the income of the
company, subject to anti-dilution limitations.
  - 13
-
  
 
 For
      the Three Months Ended March 31,2009
                        
                        
                        Per
      Share
                        
                        
                        2008
                        
                        
                        Per
      ShareNumerator:Net
      (loss) income
                        
                        $
                        (1,455,531
                        )
                        
                        
                        
                        
                        $
                        4,752,876Series
      A preferred stock:Preferred
      stock dividend
                        
                        
                        (20,235
                        )
                        
                        
                        
                        
                        
                        (141,530
                        )Relative
      fair value of detachable warrants issued
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        (2,765,946
                        )Preferred
      stock beneficial conversion feature
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        (2,451,446
                        )Numerator
      for basic EPS, loss applicable to common stock holders
                        
                        $
                        (1,475,766
                        )
                        
                        $
                        (0.06
                        )
                        
                        $
                        (606,046
                        )
                        
                        $
                        (0.03
                        )Denominator:Denominator
      for basic earnings per share - weighted average number of common shares
      outstanding
                        
                        
                        23,414,500
                        
                        
                        
                        
                        
                        
                        
                        21,003,439Stock
      Awards, Options, and Warrants
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -Denominator
      for diluted earnings per share - adjusted weighted average outstanding
      average number of common shares outstanding*
                        
                        
                        23,414,500
                        
                        
                        
                        
                        
                        
                        
                        21,003,439Basic
      and Diluted loss Per Common Share:Earnings
      per share - basic
                        
                        $
                        (0.06
                        )
                        
                        
                        
                        
                        
                        $
                        (0.03
                        )Earnings
      per share - diluted
                        
                        $
                        (0.06
                        )
                        
                        
                        
                        
                        
                        $
                        (0.03
                        )
 
 * The
denominator in diluted earnings per share in 2009 and 2008 does not include
shares that were assumed to be outstanding prior to conversion under the “if
converted” method, 122,240 shares issuable under the unconverted preferred stock
as dividends, and 352,638 of non-vested restricted shares and stock options, as
such inclusion would be anti-dilutive.
 
 EITF
Issue No. 03-6, “Participating
Securities and the Two-Class Method under FASB Statement No.
128 ” (EITF 03-6) requires companies with participating securities to
calculate earnings per share using the two-class method. Our shares of Series A
Convertible Preferred Stock are considered to be participating securities as
these securities are entitled to dividends declared on our common stock;
therefore, EITF 03-6 requires the allocation of a portion of undistributed
earnings to the Series A Convertible Preferred Stock in the calculation of basic
earnings per share.
 
 NOTE
4 - COMPREHENSIVE INCOME
 
 Comprehensive
income is comprised of net income and other comprehensive income or loss. Other
comprehensive income or loss refers to revenue, expenses, gains and losses that
under accounting principles generally accepted in the United States are included
in comprehensive income but excluded from net income as these amounts are
recorded directly as an adjustment to stockholders’ equity.
 
 Our other
comprehensive income consists of currency translation adjustments, unrealized
loss on marketable securities available for sale, net of taxes and unrealized
loss on marketable securities available for sale-related party, net of taxes.
The following table sets forth the computation of comprehensive income for the
first quarter of 2009 and 2008, respectively:
 
 
 For
      the Three Months Ended March 31,2009
                            
                            
                            2008Comprehensive
      IncomeNet
      (loss) income
                            
                            $
                            (1,455,531
                            )
                            
                            $
                            4,752,876Other
      Comprehensive Income (Loss)Foreign
      currency translation gain
                            
                            
                            316,792
                            
                            
                            
                            1,797,699Unrealized
      loss on marketable securities held for sale, net of income
      taxes
                            
                            
                            (2,065,585
                            )
                            
                            
                            (1,128,124
                            )Unrealized
      gain (loss) on marketable securities held for sale-related parties, net of
      income taxes
                            
                            
                            48,232
                            
                            
                            
                            (462,223
                            )Total
      Comprehensive (loss) Income
                            
                            $
                            (3,156,092
                            )
                            
                            $
                            4,960,228
 
  - 14
-
  NOTE
5 - INVENTORIES
 
 Inventories
March 31, 2009 and December 31, 2008consisted of the following:
  March
      31, 2009
                        
                        
                        December
      31, 2008Raw
      materials
                        
                        $
                        4,858,930
                        
                        
                        $
                        6,081,259Finished
      goods
                        
                        
                        4,800,685
                        
                        
                        
                        3,038,956Inventory
      Reserve
                        
                        
                        -
                        
                        
                        
                        (560,622
                        )$
                        9,659,615
                        
                        
                        $
                        8,559,593
  Due to
the nature of our business and the short duration of the manufacturing process
for our products, there is no work in progress inventory at March 31, 2009 and
December 31, 2008.
 
 NOTE
6 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
 At March
31, 2009 and December 31, 2008, prepaid expenses and other current
assets, (reclassified to reflect discontinued operations), consist of the
following:
  Description
                          
                          March
      31, 2009
                          
                          
                          December
      31, 2008Prepayments
      to vendors for unshipped merchandise or services that had not been
      performed
                          
                          $
                          2,245,141
                          
                          
                          $
                          2,173,989Other
      receivables
                          
                          
                          1,191,998
                          
                          
                          
                          2,434,578Fair
      value of securities received from client companies associated with our
      Consulting segment assigned to employees as compensation
                          
                          
                          -
                          
                          
                          
                          524,907Loans
      receivable
                          
                          
                          2,422,555
                          
                          
                          
                          2,987,615Other
      assets acquired in connection with acquisition, net
                          
                          
                          2,006,853
                          
                          
                          
                          2,745,525Other
                          
                          
                          14,590
                          
                          
                          
                          5,114Total
                          
                          
                          7,881,137
                          
                          
                          
                          10,871,727Less:
      Current Portion
                          
                          
                          (5,356,477
                          )
                          
                          
                          (8,127,300
                          )Prepaid
      expenses and other assets, non-current
                          
                          $
                          2,524,660
                          
                          
                          $
                          2,744,427
 
 Loans
receivable includes a promissory note in the original principal amount of
$1,240,000 we received in connection with the sale of our 81% interest in CDI
Clean Technology Group, Inc. (“CDI Clean Technology”) to PE Brothers Corp. (“PE
Brothers”). Yang Li who is the president of CDI Wanda is also the president of
PE Brothers.  This note bears interest at the rate of 1% per annum and the
principal payments are due as follows: $240,000 on December 31, 2008, $500,000
on December 31, 2009 and $500,000 on June 30, 2010. We received the $240,000
principal payment as scheduled.
 
  - 15
-
  NOTE
7 - PROPERTY, PLANT AND EQUIPMENT
 
 At March
31, 2009 and December 31, 2008, property, plant and
equipment, (reclassified to reflect discontinued operations), consisted of
the following:
 
 Description
                        
                        Useful
      Life
                        
                        
                        March
      31, 2009
                        
                        
                        December
      31, 2008Building
                        
                        10-40
      years
                        
                        
                        $
                        7,944,041
                        
                        
                        $
                        7,792,403Manufacturing
      equipment
                        
                        10
      years
                        
                        
                        
                        12,965,286
                        
                        
                        
                        12,635,161Office
      equipment and furniture
                        
                        3-5
      years
                        
                        
                        
                        656,178
                        
                        
                        
                        636,621Autos
      and trucks
                        
                        5
      years
                        
                        
                        
                        396,674
                        
                        
                        
                        334,630Construction
      in progress
                        
                        N/A
                        
                        
                        
                        25,761,032
                        
                        
                        
                        26,277,835Total
                        
                        
                        
                        
                        
                        
                        47,723,211
                        
                        
                        
                        47,676,650Less:  Accumulated
      Depreciation
                        
                        
                        
                        
                        
                        
                        (4,723,054
                        )
                        
                        
                        (4,220,967
                        )Property,
      Plant and Equipment, Net
                        
                        
                        
                        
                        
                        $
                        43,000,157
                        
                        
                        $
                        43,455,683
  For the
first quarter in 2009 and 2008 depreciation expense totaled $725,071 and
$426,320, respectively.
 
 NOTE
8 - PROPERTY USE RIGHTS
 
 Property
use rights, consisting of mining and property use rights amounted to
$591,899 and $591,277 at March 31, 2009 and December 31, 2008,
respectively.
 
 CDI
Magnesium holds property use rights valued at $96,078 for the use of magnesium
alloy manufacturing equipment located in a magnesium alloy facility in China
which is owned by Shangxi Jinyang Coal and Coke Group Co., Ltd. We will begin to
amortize the value of the property use rights over the useful life of equipment
when the magnesium refinery commences operations.
 
 In
connection with our acquisition of CDI Jixiang Metal in December 2007, we
acquired mining rights to 51 acres located in the Yongshun Kaxi Lake Mining area
of China. CDI Jixiang Metal is presently in the exploration stage of its
business operations and is engaged in the evaluation of mineral deposits or
reserves. We have not established a reserve. There is no assurance
that commercially viable mineral deposits exist on this property and
further exploration will be required before a final evaluation as to the
economic feasibility is determined.
 
 Mineral
property acquisition costs, site restoration costs and development costs on
mineral properties with proven and probable reserves are capitalized and will be
depleted using the units-of-production method over the estimated life of the
reserves. If there are insufficient reserves to use as a basis for depleting
such costs, they will be written off as mineral property or mineral interest
impairment in the period in which the determination is made. Site restoration
costs are depleted over the term of their expected life. The development
potential of mining properties is established by the existence of proven and
probable reserves, reasonable assurance that the property can be permitted as an
operating mine and evidence that there are no metallurgical or other impediments
to the production of saleable metals.
 
 Exploration
costs incurred on mineral interests, other than acquisition costs, prior to the
establishment of proven and probable reserves are charged to operations as
incurred. Development costs incurred on mineral interests with proven and
probable reserves will be capitalized as mineral properties. We regularly
evaluate our investments in mineral interests to assess the recoverability
and/or the residual value of the investments in these assets. All mineral
interests and mineral properties are reviewed for impairment whenever events or
circumstances change which indicate the carrying amount of an asset may not be
recoverable, utilizing established guidelines based upon undiscounted future net
cash flows from the asset or upon the determination that certain exploration
properties do not have sufficient potential for economic
mineralization.
 
 The
estimates of mineral prices and operating, capital and reclamation costs, when
available, are subject to certain risks and uncertainties, which may affect the
recoverability of mineral property costs. Although we make our best estimates of
these factors, it is possible that changes could occur in the near term, which
could adversely affect the future net cash flows to be generated from our
mineral properties.
 
  - 16
-
  NOTE
9 - LOANS PAYABLE
 
 Loans
payable at March 31, 2009 and December 31, 2008 consisted of the
following:
 
 Description
                        
                        March
      31, 2009
                        
                        
                        December
      31, 2008Loan
      due to China Industry Bank., an unrelated party.  Due July
      2012.  6.06375% annual interest rate
                        
                        $
                        173,834
                        
                        
                        $
                        186,018Commerical
      Bank due May 2009, related to Lang Chemica, (Lang Chemical deposited
      Principal amount to guarantee this note)
                        
                        
                        1,219,762
                        
                        
                        
                        262,613Mingsheng
      Bank Due October 2009, interest is LIBOR plus 25%
                        
                        
                        673,618
                        
                        
                        
                        671,122Shanghai
      Bank Due January 2010, interest is 5.84%
                        
                        
                        290,505
                        
                        
                        
                        -Total
                        
                        
                        2,357,719
                        
                        
                        
                        1,119,753Less:
      Current Portion
                        
                        
                        (2,183,885
                        )
                        
                        
                        (933,735
                        )Loans
      payable, long-term
                        
                        $
                        173,834
                        
                        
                        $
                        186,018
 
 
 NOTE
10 - RELATED PARTY TRANSACTIONS
 
 We have
specified the following persons and entities as related parties with ending
balances as of March 31, 2009 and December 31, 2008:
 
 List of Related
Parties
 
 •
                
                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, and chief executive officer and vice chairman of Golden
      Magnesium;•
                
                Taiyuan
      YiWei Magnesium Industry Co., Ltd., a company organized under the laws of
      the PRC (“YiWei Magnesium”), is a minority interest owner in Chang
      Magnesium;•
                
                Lifei
      Huang is the daughter of Yuwei Huang;•
                
                Huihuan
      Huang is the sister of Yuwei Huang;•
                
                Lifei
      Huang is a registered representative of Pine Capital Enterprises Inc., a
      company organized under the laws of the Cayman Islands (“Pine
      Capital”);•
                
                Lifei
      Huang is a registered representative of Wheaton Group Corp., a
      company organized under the laws of Brunei Darussalam
      (“Wheaton”);•
                
                Nippon
      Magnetic Dressing Co., Ltd., a company organized under the laws of the
      Japan (“Nippon Magnetic”), is a minority interest owner of YiWei
      Magnesium;•
                
                LuCheng
      Haixu Magnesium Co., Ltd., a company organized under the laws of the PRC
      (“Haixu Magnesium”), is legally represented by an officer of Chang
      Magnesium;•
                
                LingShi
      County Yihong Magnesium Co., Ltd., a company organized under the laws of
      the PRC (“Yihong Magnesium”), is legally represented by an officer of
      Chang Magnesium;•
                
                Shanxi
      Senrun Coal Chemistry Co., Ltd., a company organized under the laws
      of the PRC (“Senrun Coal”), is a minority interest owner in Golden
      Magnesium;•
                
                Shanxi
      Jinyang Coal and Coke Group Co., Ltd., a company organized under the laws
      of the PRC (“Jinyang Group”), is a minority interest owner of Pan
      Asia Magnesium;•
                
                Japan
      Material Industry Co., Ltd., a company organized under the laws of the
      PRC, (“Japan Material”), is a minority interest owner of YiWei
      Magnesium;•
                
                Runlian
      Tian is a director of Pan Asia Magnesium;•
                
                Hiubiao
      Zhao is the brother of an officer of Pan Asia
Magnesium;•
                
                NanTong
      Langyuan Chemical Co., Ltd., a company organized under the laws of the PRC
      (“NanTong Chemical”), is jointly owned by Jingdong Chen and Qian Zhu, the
      minority interest owners of Lang Chemical;•
                
                Jingdong
      Chen, is vice president of our Basic Materials segment and chief executive
      officer of Lang Chemical;•
                
                Qian
      Zhu is chief financial officer of Lang Chemical. Jingdong Chen and Qian
      Zhu are husband and wife;•
                
                Zhou
      Weiyi is the minority interest owner in CDI Metal
    Recycling;•
                
                Chen
      Chi is a vice president of our Basic Materials segment and minority
      interest owner of CDI Beijing; and•
                
                Lisheng
      (Lawrence) Wang is the chief executive officer and chairman of Dragon
      Capital Group Corp., a Nevada corporation, (“Dragon Capital”) and is the
      brother of Dr. Wang, CEO and Chairman of China Direct and Xiaowen Zhuang,
      a key employee.
 
  - 17
-
  Accounts
Receivable – related parties
 
 At March
31, 2009 we reflected accounts receivable – related parties of $4,343,463
comprised of the following:
 
 •
                
                $1,691,352
      due Baotou Changxin Magnesium from YiWei Magnesium, for inventory
      provided;•
                
                $1,144,861
      due Golden Magnesium from YiWei Magnesium for inventory
      provided;•
                
                $921,142
      due Chang Magnesium from Pine Capital for inventory provided;
      and,•
                
                $586,107
      due Chang Magnesium from YiWei Magnesium for inventory
      provided.
 
 At
December 31, 2008 we reflected accounts receivable – related parties of
$1,676,191 comprised of the following:
 
 •
                
                $1,628,896
      due Baotou Changxin Magnesium from YiWei Magnesium, for inventory
      provided; and,•
                
                $47,295
      due Golden Magnesium from YiWei Magnesium for inventory
      provided.
 
 Prepaid
Expenses – related parties
 
 At March
31, 2009 we reflected prepaid expenses – related parties of
$4,619,809 comprised of the following:
 
 •
                
                $2,925,054
      prepaid by Chang Magnesium to YiWei Magnesium for future delivery of
      inventory;•
                
                $824,825
      prepaid by Chang Magnesium to Yihong Magnesium to for future delivery of
      inventory;•
                
                $818,793
      prepaid by Golden Magnesium to Senrun Coal for future delivery of coke gas
      for fuel; and,•
                
                $51,137
      prepaid by Chang Magnesium to Haixi Magnesium for future delivery of
      inventory.
 
 At
December 31, 2008 we reflected prepaid expenses – related parties of
$8,007,111 comprised of the following:
 
 •
                
                $5,830,717
      prepaid by Chang Magnesium to YiWei Magnesium for future delivery of
      inventory;•
                
                $940,699
      prepaid by Golden Magnesium to Senrun Coal for future delivery of coke gas
      for fuel;•
                
                $520,397
      prepaid by Chang Magnesium to Nippon Magnetic to for future delivery of
      inventory;•
                
                $389,225
      prepaid by Pan Asia Magnesium to Jinyang Group for the future delivery of
      coke gas; and,•
                
                $326,073
      prepaid by Golden Magnesium to YiWei Magnesium for future delivery of
      inventory.
 
 Loan
Receivable ?C related parties
 
 At March
31, 2009 we reflect loan receivables – related parties of $1,347,082
comprised of the following:
 
 •
                
                $1,303,258
      due Lang Chemical from NanTong Chemical for funds advanced for working
      capital purposes, this loan is due on 9/9/2010 and carries an annual
      interest rate of 6%; and,•
                
                $43,824
      due CDI Shanghai Management from Dragon Capital for funds advanced for
      working capital purposes, this loan was due on January 4, 2009, and
      currently is in process of being extended, and carries an annual interest
      rate of 5%.
 
 At
December 31, 2008 we reflected loan receivables – related parties of
$1,652,728 comprised of the following:
 
 •
                
                $1,608,959
      due Lang Chemical from NanTong Chemical for funds advanced for working
      capital purposes; and,•
                
                43,769
      due CDI Shanghai Management from Dragon Capital for funds advanced for
      working capital purposes.
 
 Due
from related parties
 
 At March
31, 2009 we reflect due from related parties of $409,329 comprised of the
following:
 
 •
                
                $215,577
      due Pan Asia Magnesium from Jinyang Group for working capital
      purposes;•
                
                $151,750
      due Golden Magnesium from Senrun Coal for working capital purposes;
      and,•
                
                $42,002
      due China Direct from a China Direct employee for the exercise price of
      exercised options and related
taxes.
 
  - 18
-
  At
December 31, 2008 we reflected due from related parties of $35,710
comprised of the following:
 
 •
                
                $21,125
      due China Direct from a China Direct employee for the exercise price of
      exercised options; and,•
                
                $14,585 due
      CDI Metal Recycling from Zhou Weiyi, for the contribution of registered
      capital related to the formation of CDI Metal
  Recycling.
 
 Accounts
Payable – related parties
 
 At March
31, 2009 we reflect accounts payable – related party of
$2,737,380 comprised of the following:
 
 •
                
                $2,150,193
      due from Chang Magnesium to Pine Capital in repayment of an advance from
      customer for the expected delivery of inventory; and,•
                
                $587,187
      due from Chang Magnesium to Wheaton Group in repayment of an advance form
      customer for the expected delivery of
inventory.
 
 At
December 31, 2008 we reflected accounts payable – related party
of $7,516,728 comprised of the following:
 
 •
                
                $4,497,180
      due from Chang Magnesium to Pine Capital in repayment of an advance from
      customer for the expected delivery of inventory; and,•
                
                $3,019,548
      due from Chang Magnesium to Wheaton Group in repayment of an advance form
      customer for the expected delivery of
inventory.
 
 Due
to related parties
 
 At March
31, 2009 we reflect due to related parties balance of $2,209 comprised
of the following:
 
 •
              $2,209
      due to James Wang, our CEO and Chairman, to return an overpayment related
      to an exercise of
options.
 
 At
December 31, 2008 we reflected due to related parties balance of
$978,739 comprised of the following:
 
 •
                
                $832,843 due
      to Chen Chi, this amount is made of up $729,257 due from Capital One
      Resource, and $103,586 from CDI Beijing for fund advances for working
      capital purposes; and•
                
                $145,896
      advanced by Huihuan Huang to Chang Magnesium for working capital
      purposes.
 
 NOTE
11 - STOCKHOLDERS’ EQUITY
 
 Preferred
Stock
 
 We have
10,000,000 shares of preferred stock, par value $.0001, authorized, of which we
designated 12,950 as our Series A Convertible Preferred Stock in February 2008.
At March 31, 2009 and December 31, 2008 there were 1,006 shares of Series A
Convertible Preferred Stock issued and outstanding.
 
 Series
A Preferred Stock and Related Dividends
 
 On
February 11, 2008, we entered into a Securities Purchase Agreement with
accredited investors to sell, in a private placement transaction, 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. 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 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. If paid in shares of common stock, the stock shall be valued at
the lower of the conversion price or the average of the weighted average price
of the 10 consecutive trading days immediately preceding the dividend
date.
 
 Upon
conversion of the Series A Preferred Stock, we are required to pay an amount
(the “Make-Whole Additional Amount”) equal to 8% of the stated value of the
shares converted or redeemed - essentially an extra year’s dividend. This amount
shall be paid in shares valued at the lower of the conversion price or 90%
of the weighted average price of our common stock for the 10 consecutive trading
days immediately preceding the date of notice.
  - 19
-
  
 A
registration statement covering the public resale of the shares of common stock
underlying the Series A Preferred Stock and the warrants was declared effective
by the Securities and Exchange Commission on April 23, 2008.
 
 As of
March 31, 2009, holders of our Series A Preferred Stock have converted 11,944
shares of the 12,950 shares of the Series A Preferred Stock. Each share of
Series A Preferred stock was convertible into 142.8541 shares of common stock.
As a result of the conversion of the Series A Preferred Stock, we have issued
1,706,250 shares of our common stock, 10,346 shares of common stock in payment
of the accrued dividends, and 136,500 shares of common stock, the
Make-Whole Additional Amount.
 
 The
1,850,000 warrants issued to purchasers of the Series A Preferred Stock,
exclusive of the 300,000 warrants issued to Roth Capital Partners, LLC (“Roth
Capital”) as a fee, were determined to have a fair value of $2.07 per warrant
with a total valuation of $3,829,500. Inputs used in making this determination
included:
 
 ·
                Value
      of $6.83 per share of common stock;·
                Expected
      volatility factor of 90%;·
                $0
      dividend rate on the common stock;·
                Warrant
      exercise price of $8.00;·
                Estimated
      time to exercise of 1 year; and·
                Risk
      free rate of 2.06%.
 
 The
relative fair value of the warrants of $2,765,946 has been recorded as a
dividend in the year ended December 31, 2008
 
 In
addition, under the provisions of EITF 98-5‘Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion
Ratios’(EITF 98-5”),and EITF 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments’"  ("EITF 00-27”), the
Series A Preferred Stock issuance carried an embedded beneficial conversion
feature at issuance. Accordingly, after first allocating the proceeds received
from the Series A Preferred Stock offering to the preferred shares and
detachable warrants on a relative fair value basis, we derived an intrinsic
value of the conversion feature of $2,451,446. As the Series A Preferred Stock
does not have a stated redemption date or finite life, the deemed dividend was
recognized immediately as a non-cash charge during 2008. This non-cash one-time
preferred stock deemed dividend was calculated as the difference between the
average of our common stock price of $6.83 per share and the calculated
effective conversion price of the Series A Preferred Stock. The effective
conversion price of the Series A Preferred Stock was determined with reference
to the relative fair value allocation of proceeds between the Series A Preferred
Stock and Warrants issued. The non-cash deemed dividend did not have an effect
on net earnings, or cash flows for the three months ended March 31, 2009. The
estimated fair market value of the Warrants of $2,765,946 has been recorded as
additional paid-in capital and a reduction to the recorded amount of the Series
A Preferred Stock.
 
 We paid
Roth Capital a fee of $1,295,000 for serving as the placement agent in the
Series A Preferred Stock Offering. Roth Capital also received 300,000 common
stock purchase warrants, exercisable at $8.00 per share for five years as part
of their fee. At February 11, 2008, the warrants granted to Roth Capital had a
fair value of $2.07 per share, totaling $621,000. The warrants issued to Roth
Capital have the same terms, and were valued in the same manner as the warrants
issued to the purchasers of the Series A Preferred Stock.
 
 Common
Stock
 
 We have
1,000,000,000 shares of common stock, par value $.0001, authorized. At March 31,
2009 there were 23,424,172 shares of common stock issued and outstanding and
there were 23,530,642 shares of common stock issued and outstanding at
December 31, 2008.
 
 For the
three months ended March 31, 2009 and 2008, amortization of stock-based
compensation amounted to $180,591 and $207,273, respectively.
 
 During
the three months ended March 31, 2009, we did not issue any shares of
common stock in connection with the exercise of common stock purchase warrants.
During the three months ended March 31, 2008, we issued 25,000 shares of common
stock in connection with the exercise of common stock warrants at an exercise
price of $4.00 per share.
 
 During
the three months ended March 31, 2009, we issued 779,100 shares of common
stock in connection with the exercise of common stock options at an exercise
price of $.01 per share.
 
  - 20
-
  Stock
Repurchase Program
 
 On
September 10, 2008, our board of directors authorized a stock repurchase program
to repurchase up to $2.5 million of our common stock through March 31, 2009. The
stock repurchase program was announced on September 12, 2008. The amount and
timing of specific repurchases were subject to market conditions, applicable
legal requirements and other factors deemed appropriate by our CEO and
President. Repurchases may be in open-market transactions or through privately
negotiated transactions, and our board of directors may discontinue the
repurchase program at any time. In January 2009, we purchased 1,500,000 shares
of our common stock at a price of $1.10 per share under this program from Marc
Siegel, our former president and director. This stock repurchase program expired
on March 31, 2009.
 
 Reverse
Split/Forward Split
 
 On
September 10, 2008, our board of directors approved a 1 for 100 shares
reverse split of our common stock (the “Reverse Split”) to be immediately
followed by a 100 for 1 forward split of our common stock (the
“Forward Split”). The Reverse Split/Forward Split was announced on September 19,
2008. Shareholders who held in the aggregate less than one share of common stock
following the Reverse Split were not included in the Forward Split. Rather, such
shares received a cash payment of $5.07 per share, the closing price of our
common stock as of September 19, 2008. Accordingly in 2008, we purchased 69,583
shares at a purchase price of $5.07 per share, which were redeemed.
These stock purchases were not part of the stock repurchase
program.
 
 Stock
Incentive Plans
 
 On August
16, 2006, our board of directors authorized the 2006 Equity Plan (the “2006
Equity Plan”) covering 10,000,000 shares of our common stock, which was approved
by a majority of our shareholders on August 16, 2006. At March 31, 2009 and
December 31, 2008 there were options outstanding to purchase an aggregate of
276,250 and 365,000 shares, respectively, of common stock outstanding under the
2006 Equity Plan at exercise prices ranging from $2.50 to $7.50 per
share.
 
 On
October 19, 2006, our board of directors authorized the 2006 Stock Compensation
Plan (the “2006 Stock Compensation Plan”) covering 2,000,000 shares of our
common stock. As the 2006 Stock Compensation Plan was not approved by our
shareholders prior to October 19, 2007, we may no longer award incentive stock
options under this plan and any incentive stock options previously awarded under
the 2006 Stock Plan were converted into non-qualified options upon terms and
conditions determined by the board of directors, as nearly as is reasonably
practicable in their sole determination, to the terms and conditions of the
incentive stock options being so converted. At March 31, 2009 and December
31, 2008, there were options outstanding to purchase an aggregate of 556,740 and
414,590 shares, respectively of common stock outstanding under the 2006 Stock
Plan at exercise prices ranging from $.01 to $5.00 per share.
 
 During
2008, we granted 240,000 options under the 2006 Equity Plan to employees with an
exercise price of $5.00 to $7.50 per share, of these options, 231,000 options
were canceled as of March 31, 2009. The options were valued on the date of grant
using the Black-Scholes option-pricing model, in accordance with SFAS
No. 123R using the following weighted-average assumptions: expected
dividend yield 0%, risk-free interest rate of 2.51%, volatility of 78% and
expected term of 1.31 years.
 
 On April
25, 2008, our board of directors adopted the 2008 Executive Stock Incentive Plan
covering 1,000,000 shares of our common stock, which was approved by a majority
vote of our shareholders on May 30, 2008. As of March 31, 2009 no awards had
been granted under this plan.
 
 On April
25, 2008, our board of directors adopted the 2008 Non-Executive Stock Incentive
Plan covering 3,000,000 shares of our common stock, which was approved by a
majority vote of our shareholders on May 30, 2008. As of March 31, 2009 we
granted 268,648 shares of restricted stock with vesting dates ranging from
August 2008 to September 2010 under this plan.
 
 The
following table sets forth our stock option activity during the three months
ended March 31, 2009:
 
 
 Shares
      underlying options
                        
                        
                        Weighted
      average exercise priceOutstanding
      at December 31, 2008
                        
                        
                        6,440,220
                        
                        
                        $
                        5.71Granted
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        779,100
                        
                        
                        
                        0.01Expired
      or cancelled
                        
                        
                        88,750
                        
                        
                        
                        5.30Outstanding
      at March 31, 2009
                        
                        
                        5,572,370
                        
                        
                        $
                        5.65
 
  - 21
-
  The
weighted average remaining contractual life and weighted average exercise price
of options outstanding at March 31, 2009, for selected exercise price ranges,
are as follows:
 
 
 Range
      of exercise prices
                              
                              
                              Number
      of options outstanding
                              
                              
                              Weighted
      average remaining contractual life (Years)
                              
                              
                              Weighted
      average exercise price
                              
                              
                              Options
      Exercisable
                              
                              
                              Weighted
      average exercise price of options exercisable$
                              0.01
                              
                              
                              
                              270,900
                              
                              
                              
                              1.40
                              
                              
                              $
                              0.01
                              
                              
                              
                              270,900
                              
                              
                              $
                              0.012.25
                              
                              
                              
                              400
                              
                              
                              
                              6.06
                              
                              
                              
                              2.25
                              
                              
                              
                              400
                              
                              
                              
                              2.252.50
                              
                              
                              
                              492,490
                              
                              
                              
                              3
                              
                              
                              
                              2.50
                              
                              
                              
                              492,490
                              
                              
                              
                              2.503.00
                              
                              
                              
                              50,000
                              
                              
                              
                              2
                              
                              
                              
                              3.00
                              
                              
                              
                              50,000
                              
                              
                              
                              3.005.00
                              
                              
                              
                              1,221,000
                              
                              
                              
                              3
                              
                              
                              
                              5.00
                              
                              
                              
                              1,221,000
                              
                              
                              
                              5.007.50
                              
                              
                              
                              1,402,000
                              
                              
                              
                              4
                              
                              
                              
                              7.50
                              
                              
                              
                              1,375,000
                              
                              
                              
                              7.5010.00
                              
                              
                              
                              1,375,000
                              
                              
                              
                              5
                              
                              
                              
                              10.00
                              
                              
                              
                              -
                              
                              
                              
                              -15.00
                              
                              
                              
                              500
                              
                              
                              
                              1.68
                              
                              
                              
                              15.00
                              
                              
                              
                              500
                              
                              
                              
                              15.0030.00
                              
                              
                              
                              760,000
                              
                              
                              
                              4
                              
                              
                              
                              30.00
                              
                              
                              
                              760,000
                              
                              
                              
                              30.0056.25
                              
                              
                              
                              80
                              
                              
                              
                              6.17
                              
                              
                              
                              56.25
                              
                              
                              
                              80
                              
                              
                              
                              56.255,572,370
                              
                              
                              
                              3.56
                              
                              
                              $
                              8.44
                              
                              
                              
                              4,170,370
                              
                              
                              $
                              8.00
 
 During
the first quarter of 2009, 779,100 options were exercised at an average
exercise price of $.01 per share with an intrinsic value of $973,875. At March
31, 2009, the aggregate intrinsic value of outstanding and exercisable options
was $338,625. As of March 31, 2009, the unrecognized expense of options that
have not vested is $77,808.
 
 Common
Stock Purchase Warrants
 
 As of
March 31, 2009, we granted 25,000 common stock purchase warrants to consultants,
exercisable immediately at an exercise price of $11.00.  These warrants
were fair valued in the first quarter of 2008 and valued on the date of grant at
$103,707 using the Black-Scholes option-pricing model, in accordance with SFAS
No. 123R using the following weighted-average assumptions: expected dividend
yield of 0%, risk-free interest rate of 3.0%, volatility factor of 100% and
expected term of 3 years. The fair value of these grants was recognized as
selling, general and administrative expenses.
 
 In
February 2008, in connection with the $12,950,000 Series A Preferred Stock
offering, we issued a total of 2,150,000 common stock purchase warrants,
including 1,850,000 warrants issued to investors and 300,000 warrants issued to
Roth Capital as the placement agent as part of their fee. The warrants are
exercisable at $8.00 per share for a period of five years and were fair valued
at $2.07 per warrant using the Black-Scholes Option-pricing model. Assumptions
used in the calculation included: expected dividend yield of 0%; risk-free
interest rate of 2.06%; volatility factor of 90% and expected term of 1
year.
 
 A summary
of the status of our outstanding common stock purchase warrants granted as of
March 31, 2009 and changes during the period is as follows:
 
 
 Shares
      underlying warrants
                        
                        
                        Weighted
      average exercise priceOutstanding
      at January 1, 2009
                        
                        
                        4,618,312
                        
                        
                        $
                        8.49Granted
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Expired
      or cancelled
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at March 31, 2009
                        
                        
                        4,618,312
                        
                        
                        $
                        8.49Exercisable
      at March 31, 2009
                        
                        
                        4,618,312
                        
                        
                        $
                        8.49
 
 
  - 22
-
  The
following information applies to all warrants outstanding at March 31,
2009.
  Average
                          
                          
                          Weighted
                          
                          
                          
                          
                          
                          WeightedRemaining
                          
                          
                          Average
                          
                          
                          
                          
                          
                          AverageRang
      of
                          
                          
                          
                          
                          
                          Contractual
                          
                          
                          Exercise
                          
                          
                          
                          
                          
                          ExerciseExercise
      prices
                          
                          
                          Shares
                          
                          
                          Life
      (Years)
                          
                          
                          Price
                          
                          
                          Shares
                          
                          
                          Price$
                          2.50
                          
                          
                          
                          50,000
                          
                          
                          
                          3.17
                          
                          
                          $
                          2.50
                          
                          
                          
                          50,000
                          
                          
                          $
                          2.50$
                          4.00
                          
                          
                          
                          473,750
                          
                          
                          
                          3.04
                          
                          
                          
                          4.00
                          
                          
                          
                          473,750
                          
                          
                          
                          4.00$
                          7.50
                          
                          
                          
                          60,000
                          
                          
                          
                          1.64
                          
                          
                          
                          7.50
                          
                          
                          
                          60,000
                          
                          
                          
                          7.50$
                          8.00
                          
                          
                          
                          2,050,000
                          
                          
                          
                          4.37
                          
                          
                          
                          8.00
                          
                          
                          
                          2,050,000
                          
                          
                          
                          8.00$
                          10.00
                          
                          
                          
                          1,869,562
                          
                          
                          
                          2.99
                          
                          
                          
                          10.00
                          
                          
                          
                          1,869,562
                          
                          
                          
                          10.00$
                          11.00
                          
                          
                          
                          25,000
                          
                          
                          
                          2.52
                          
                          
                          
                          11.00
                          
                          
                          
                          25,000
                          
                          
                          
                          11.00$
                          15.00
                          
                          
                          
                          90,000
                          
                          
                          
                          1.64
                          
                          
                          $
                          15.00
                          
                          
                          
                          90,000
                          
                          
                          $
                          15.004,618,312
                          
                          
                          
                          3.56
                          
                          
                          
                          
                          
                          
                          
                          4,618,312
  NOTE
12 - SEGMENT INFORMATION
 
 The
following information is presented in accordance with SFAS No. 131, “Disclosure about segments of an
Enterprise and Related Information”. For first quarter of 2009, we
operated in three reportable business segments as follows:
 
 Magnesium
segment:
 
 •
              Chang
      Magnesium;•
              Chang
      Trading;•
              Excel
      Rise;•
              CDI
      Magnesium;•
              Asia
      Magnesium;•
              Golden
      Magnesium;•
              Pan
      Asia Magnesium;•
              Baotou
      Changxin Magnesium; and•
              Capital
      One Resource.
 
 Basic
Materials segment:
 
 •
              Lang
      Chemical;•
              CDI
      Jingkun Zinc;•
              CDI
      Jixiang Metal; and•
              CDI
      Metal Recycling.
 
 Consulting
segment:
 
 •
              China
      Direct Investments;•
              CDI
      Shanghai Management; and•
              Capital
      One Resource*.
 
 * Capital
One Resource generated revenues in two reporting segments, Magnesium and
Consulting.
 
 Our
reportable segments are strategic business units that offer different products
and services. Each segment is managed and reported separately based on the
fundamental differences in their operations. CDI Metal Recycling was formerly in
our Clean Technology Segment, which we exited during the third quarter in 2008.
CDI Metal Recycling is in its start up phase and has no significant operations.
Condensed consolidated information with respect to these reportable segments
after giving effect to our decision to exit the clean technology segment for the
first quarter of 2009 and 2008 are as follows:
 
  - 23
-
  For the
three months ended March 31, 2009:
 
 (In
      thousands)
                    
                    Magnesium
                    
                    
                    Basic
      Materials
                    
                    
                    Consulting
                    
                    
                    ConsolidatedRevenues
                    
                    $
                    3,804
                    
                    
                    $
                    11,895
                    
                    
                    $
                    358
                    
                    
                    $
                    16,057Revenues
      – related party
                    
                    
                    4,629
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,6298,433
                    
                    
                    
                    11,895
                    
                    
                    
                    358
                    
                    
                    
                    20,686Interest
      income (expense)
                    
                    
                    25
                    
                    
                    
                    (69
                    )
                    
                    
                    90
                    
                    
                    
                    46Net
      income (loss)
                    
                    
                    2
                    
                    
                    
                    (40
                    )
                    
                    
                    (1,418
                    )
                    
                    
                    (1,456
                    )Segment
      Assets at March 31, 2009
                    
                    $
                    43,528
                    
                    
                    $
                    10,464
                    
                    
                    $
                    40,856
                    
                    
                    $
                    94,848
 
 For the
three months ended March 31, 2008:
 
 (In
      thousands)
                    
                    Magnesium
                    
                    
                    Basic
      Materials
                    
                    
                    Consulting
                    
                    
                    ConsolidatedRevenues
                    
                    $
                    43,944
                    
                    
                    $
                    12,398
                    
                    
                    $
                    2,318
                    
                    
                    $
                    58,660Revenues
      – related party
                    
                    
                    734
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    73444,678
                    
                    
                    
                    12,398
                    
                    
                    
                    2,318
                    
                    
                    
                    59,394Interest
      income (expense)
                    
                    
                    (20
                    )
                    
                    
                    6
                    
                    
                    
                    111
                    
                    
                    
                    97Net
      income
                    
                    
                    3,757
                    
                    
                    
                    252
                    
                    
                    
                    744
                    
                    
                    
                    4,753Segment
      Assets at December 31, 2008
                    
                    $
                    67,413
                    
                    
                    $
                    14,350
                    
                    
                    $
                    25,616
                    
                    
                    $
                    107,379
 
 NOTE
13 - FOREIGN OPERATIONS
 
 As of
March 31, 2009 the majority of our revenues and assets are associated with
subsidiaries located in the People’s Republic of China. Assets at
March 31, 2009 and 2008, reclassified to reflect discontinued operations, as
well as revenues for the first quarter of 2009 and 2008 were as
follows:
 
 (In
      thousands)
                        
                        March
      31, 2009 (in thousands)United
      States
                        
                        
                        People’s
      Republic of China
                        
                        
                        TotalRevenues
                        
                        $
                        358
                        
                        
                        $
                        15,699
                        
                        
                        $
                        16,057Revenues
      – related party
                        
                        
                        -
                        
                        
                        
                        4,629
                        
                        
                        
                        4,629358
                        
                        
                        
                        20,328
                        
                        
                        
                        20,686Identifiable
      assets at March 31, 2009
                        
                        $
                        40,856
                        
                        
                        $
                        53,992
                        
                        
                        $
                        94,848
  
 (In
      thousands)
                      
                      March
      31, 2008 (in thousands)United
      States
                      
                      
                      People’s
      Republic of China
                      
                      
                      TotalRevenues
                      
                      
                      2,302
                      
                      
                      
                      56,358
                      
                      
                      $
                      58,660Revenues
      – related party
                      
                      
                      —
                      
                      
                      
                      734
                      
                      
                      
                      7342,302
                      
                      
                      
                      57,672
                      
                      
                      
                      59,394Identifiable
      assets at December 31, 2008
                      
                      
                      25,616
                      
                      
                      
                      81,763
                      
                      
                      $
                      107,379
 
 
 NOTE
14 – DISCONTINUED OPERATIONS
 
 During
the third quarter of 2008, we elected to exit the alternative energy and
recycling business conducted by CDI Clean Technology. We devised a formal plan
of disposal of a majority ownership in these subsidiaries. The business of
CDI Clean Technology and its subsidiaries comprised substantially all of the
business of our Clean Technology segment. We classified the assets and
liabilities of CDI Clean Technology and its subsidiaries as “Subsidiaries held
for sale” in accordance with the provisions of FASB No. 144.
 
  - 24
-
  On
September 30, 2008, we ceased depreciating the assets of CDI Clean Technology
and its subsidiaries and as a result of the held for sale classification, we
assessed the estimated fair value of the subsidiary and no impairment charge was
recognized. The results of operations from CDI Clean Technology and its
subsidiaries are classified as discontinued operations in 2008 and previously
reported results of operations of CDI Clean Technology have been reclassified to
reflect this subsidiary as "Discontinued operations, net of tax". On October 30,
2008, we completed the sale of an 81% interest in our wholly owned subsidiary
CDI Clean Technology to PE Brothers Corp., for $1,240,000, recorded a gain of
$238,670 on the sale during the fourth quarter. We plan to maintain our 19%
ownership interest in CDI Clean Technology and recognize our investment using
the cost method.
 
 The
following table sets forth the components of discontinued operations for the
three months ended March 31, 2008.
 
 Subsidiaries
Held for Sale
 
 For
      the three months ended March 31, 2008Revenues
                      
                      $
                      580,573Cost
      of revenues
                      
                      
                      65,812Gross
      profit
                      
                      
                      514,761Selling,
      general, and administrative
                      
                      
                      88,977Operating
      income
                      
                      
                      425,784Other
      income (expenses)
                      
                      
                      (6,157
                      )Net
      (loss) income before income tax and minority interest
                      
                      
                      419,627Income
      tax expense
                      
                      
                      (128,847
                      )Net
      income (loss) before minority interest
                      
                      
                      290,780Minority
      Interest in income of subsidiary
                      
                      
                      (147,272
                      )Discontinued
      operation's net income
                      
                      $
                      143,508
 
 
 Item
2.Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
 
 The
following discussion should be read in conjunction with the information
contained in our unaudited consolidated financial statements and the notes
thereto appearing elsewhere herein and in conjunction with the Management’s
Discussion and Analysis set forth in our Annual Report on Form 10-K for the year
ended December 31, 2008.
 
 We are on
a calendar year, as such the three month period ending March 31, is our first
quarter. The year ended December 31, 2008 is referred to as “2008” and the
coming year ending December 31, 2009 is referred to as “2009”.
 
 OVERVIEW
OF OUR PERFORMANCE AND OPERATIONS
 
 Our
Business
 
 We are a
U.S. company that manages a portfolio of Chinese entities.  We also
provide consulting services to Chinese businesses. We operate in three
identifiable segments, Magnesium, Basic Materials and Consulting, in accordance
with SFAS No. 131, “Disclosure
about segments of an Enterprise and Related Information”. In the fourth
quarter of 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 this ownership control, we provide management advice
as well as investment capital to expand their businesses. We hold a controlling
interest in twelve subsidiaries operating in China, five of which comprise our
Magnesium segment and five comprise our Basic Materials segment. We have a total
of 1,286 full-time employees, of which 1,269 work in the PRC.
 
  - 25
-
  Our
Magnesium segment is currently our largest segment by revenues and assets. We
manufacture and sell pure magnesium and related by-products. We also
purchase and resell magnesium products manufactured by third parties. 
Magnesium is used in a variety of markets and applications due to the physical
and mechanical properties of the element and its alloys. Magnesium is the
lightest of the structural metals; it is one fourth the weight of steel and two
thirds the weight of aluminum. Various forms of magnesium are also used in the
manufacture of electronic equipment such as computers, cameras, and cell phones.
Magnesium powder is also used in flares, flashes and pyrotechnics. Global
production of magnesium was estimated to be approximately 805,000 metric tons.
China produced an estimated 630,000 metric tons in 2008, of which 160,000 metric
tons were consumed domestically. During the first quarter of 2009 our
Magnesium segment produced, sold or distributed approximately 2,781 metric tons
of magnesium generating revenues of $8.4 million compared to the production,
sale and distribution of 14,169 metric tons and revenues of $44.7 million in the
first quarter of 2008.
 
 Our Basic
Materials segment engages in the sale and distribution of basic resources within
Asia. Our Basic Materials segment includes the sale and distribution of a
variety of products including (i) industrial grade synthetic chemicals, (ii)
steel products (iii) non ferrous metals, and (iv) recycled materials. As
well, within this segment we hold the rights to mining properties and are
awaiting an independent valuation of the ore deposits prior to completion of
construction. Presently we do not have a timetable for when our operations will
commence. In the first quarter of 2009 this segment generated revenues of $11.9
million compared to $12.9 million in the first quarter of 2008.
 
 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. In the first quarter of 2009 this segment generated
revenues of $358,000 compared to $2.3 million in the first quarter of
2008.
 
 Our
Performance
 
 Total
revenues for the first quarter of 2009 totaled $20.7 million compared to $59.4
million during the first quarter in 2008. This decrease of 65.2% was mainly due
to the global economic slowdown which has adversely affected the demand for
magnesium and to a lesser extent affected our sales of basic materials and
revenues in our Consulting segment. Our gross profit for the first quarter of
2009 totaled $1.4 million compared to $9.9 million in the first quarter of 2008.
This decrease in our profit margin was mainly in our magnesium segment due to
the rapid decrease in the market price of magnesium, higher costs of raw
materials and the fixed costs of production and higher operating expenses
in our Consulting segment.
 
 Our
Outlook
 
 Over the
course of the last six months we have witnessed a severe downturn in the demand
for and the price of our magnesium products due to the weak global economy and
the effects of a 10% export tax on magnesium products which became effective in
January 2008. Furthermore, in 2008 domestic magnesium consumption decreased to
160,000 metric tons, the first domestic decline since 2003.  The average
price of magnesium during the first quarter of 2009 was $2,400 compared to
$4,500 during the first quarter of 2008, or a decrease of 46%. We are also faced
with other challenges in growing our business, such as the continuing
integration of our PRC based subsidiaries. While magnesium prices have shown
signs of stabilization, demand remains weak and the outlook for future growth
remains unclear. Our past investments to increase production at our magnesium
facilities has positioned us to currently have substantial excess production
capacity. As a result, we believe we have devoted a sufficient amount of capital
to our Magnesium segment until the market conditions and capacity utilization
rates improve significantly. We will seek to continue to purchase and resell
magnesium from third parties only if demand permits or opportunistic
transactions arise.
 
 We intend
to continue to explore external expansion, however, in basic materials related
businesses in an effort to further diversify our revenue base in China. We
also continue to work with the management of our subsidiaries to identify
strategies to maximize their potential within their segment and to the
consolidated group.
 
 The
worldwide economic slowdown continues to negatively impact the market price for
zinc.  At current market prices for zinc, it is not economically
feasible for us to commence operations at our zinc property or to complete
construction of a planned zinc minning facility. We believe that prices for lead
and lead concentrate will remain stable in 2009 because the uses for lead are
more widespread than zinc. We will continue to operate as a distributor of steel
and non ferrous metals and believe that demand for these materials will increase
as worldwide economic activity increases.
 
  - 26
-
  We
continue to evaluate the feasibility of the development of a proposed facility
to create aluminum powder from recycled aluminum. While the current market price
of aluminum does not support the economic viability of a recycling operation, we
believe aluminum wire recycling will become viable as natural resources continue
to be depleted.
 
 While we
have made efforts to improve the caliber of the clients within our Consulting
segment, the global economy and severe liquidity crisis in the capital markets
have created a difficult environment for smaller companies to attract interest
in the financial community. While we continue to provide services to our
existing clients, we do not anticipate this segment will grow in
2009.
 
 PRC Government
Programs. In November 2008, the Chinese government announced a $586
billion domestic economic stimulus program aimed at bolstering economic activity
in China. The two year program includes tax rebates, spending in housing,
infrastructure, agriculture, health care and social welfare, and a tax deduction
for capital spending by companies. In addition, in February 2009, China's
State Council announced support plans for the country's nonferrous metals and
logistics sectors. The support plans include subsidized loans to support
technical innovations within the nonferrous metals sector, adjustments to export
rebate rates of nonferrous products, and the establishment of a national reserve
system for the industry. These programs adopted by the PRC government are aimed
towards supporting growth in some of the sectors in which we operate. 
Furthermore, there have been signs that these programs, along with China’s
significant foreign currency reserves, have resulted in heavy accelerated
spending on building infrastructures and domestic spending on automobiles and
appliances. It is, however, difficult to predict if any of our businesses will
benefit. It remains to be seen if domestic consumption can compensate for slower
worldwide demand, and the impact this will have on our future
revenues.
 
 Presentation ofFinancial Statements. The
presentation of the statements of operations included in this Form 10-Q have
been modified to allow for the reporting of deductions from net income to arrive
at income (loss) applicable to common stockholders. Items reflected in our
comprehensive income for the periods reported are now included in our notes to
the consolidated financial statements included in this Form 10-Q. In addition, a
portion of our consolidated financial statements have been reclassified to
recognize discontinued operations treatment reflecting the sale of an 81%
interest in CDI Clean Technology.
 
 RESULTS
OF OPERATIONS
 
 Consolidated
revenues and operating expenses by segment for the first quarter of 2009 and
2008 are as follows:
 
 Consolidated
Revenues
  For
      the First Quarter of(Dollars
      in thousands)
                                                
                                                2009
                                                
                                                
                                                2008Revenues
                                                
                                                
                                                %
      of Revenues
                                                
                                                
                                                Revenues
                                                
                                                
                                                %
      of Revenues
                                                
                                                
                                                %
      increase (decrease)Magnesium
      segment
                                                
                                                $
                                                8,433
                                                
                                                
                                                
                                                41
                                                %
                                                
                                                $
                                                44,678
                                                
                                                
                                                
                                                75
                                                %
                                                
                                                
                                                -81
                                                %Basic
      Materials segment
                                                
                                                
                                                11,895
                                                
                                                
                                                
                                                58
                                                %
                                                
                                                
                                                12,398
                                                
                                                
                                                
                                                21
                                                %
                                                
                                                
                                                -4
                                                %Consulting
      segment
                                                
                                                
                                                358
                                                
                                                
                                                
                                                2
                                                %
                                                
                                                
                                                2,318
                                                
                                                
                                                
                                                4
                                                %
                                                
                                                
                                                -85
                                                %Total
      Consolidated
                                                
                                                $
                                                20,686
                                                
                                                
                                                
                                                100
                                                %
                                                
                                                $
                                                59,394
                                                
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                -65
                                                %
 
 Total
consolidated revenues for the first quarter of 2009 were $20.7 million, a
decrease of 65% compared to the first quarter of 2008. This decrease was
primarily a result of a decrease in revenues within our Magnesium segment as a
result of weak world-wide demand for magnesium, a decline in revenues in our
Lang Chemical subsidiary, the absence of one-time transaction fees in our
Consulting segment in the first quarter of 2009 that we recognized in the first
quarter of 2008 partially offset by increases in revenues from our CDI Beijing
subsidiary we acquired in June 2008.
 
  - 27
-
  Consolidated
Operating Income and Expenses
  For
      the First Quarter of(Dollars
      in thousands)
                                                
                                                2009
                                                
                                                
                                                2008Amount
                                                
                                                
                                                %
      of Revenues
                                                
                                                
                                                Amount
                                                
                                                
                                                %
      of Revenues
                                                
                                                
                                                %
      increase (decrease)Revenues
                                                
                                                $
                                                20,686
                                                
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                59,394
                                                
                                                
                                                
                                                -Cost
      of revenues
                                                
                                                
                                                19,317
                                                
                                                
                                                
                                                93
                                                %
                                                
                                                
                                                49,414
                                                
                                                
                                                
                                                83
                                                %
                                                
                                                
                                                -61
                                                %Gross
      profit
                                                
                                                
                                                1,369
                                                
                                                
                                                
                                                7
                                                %
                                                
                                                
                                                9,980
                                                
                                                
                                                
                                                17
                                                %
                                                
                                                
                                                -86
                                                %Total
      operating expenses
                                                
                                                
                                                3,099
                                                
                                                
                                                
                                                15
                                                %
                                                
                                                
                                                1,611
                                                
                                                
                                                
                                                3
                                                %
                                                
                                                
                                                92
                                                %Operating
      (loss) income
                                                
                                                $
                                                (1,730
                                                )
                                                
                                                
                                                -8
                                                %
                                                
                                                $
                                                8,369
                                                
                                                
                                                
                                                14
                                                %
                                                
                                                
                                                -121
                                                %
  Total
consolidated operating loss for the first quarter of 2009 was $1.7 million
compared to the operating income during the first quarter of 2008 of $8.4
million. The loss compared to the prior year income was due primarily to the 65%
decrease in revenues in the Magnesium segment, the substantial reduction in the
market price of magnesium, the relatively higher costs of magnesium production
at lower volumes and increases in our operating expenses related to increases in
non-cash stock-based compensation expenses, payroll expense and professional
fees.
 
 In the
first quarter of 2009 our cost of revenues was $19.3 million, a 61% decrease
compared to the first quarter of 2008. This decrease is a direct result of the
decreased sales volume. Our cost of revenues for the first quarter of 2009 as a
percentage of revenues increased 10% from the first quarter of 2008. Our gross
profit in the first quarter of 2009 was $1.4 million, a decrease of 85% compared
to the first quarter of 2008.  These changes are primarily a result of
a rapid decrease in selling prices of magnesium and fixed production costs
within our Magnesium segment.
 
 Operating
expenses increased $1.5 million in the first quarter of 2009 compared to
the first quarter of 2008 primarily as a result of increases in non-cash
stock-based compensation expenses, payroll expense and professional
fees.
 
 Segment
Information
 
 A summary
of our operating results, by segment, for the first quarter of 2009 and 2008 are
as follows:
 
 (Amount
in thousands)
 
 Magnesium
                    
                    
                    Basic
      Materials
                    
                    
                    Consulting
                    
                    
                    Consolidated2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenues
                    
                    $
                    3,804
                    
                    
                    $
                    43,944
                    
                    
                    $
                    11,895
                    
                    
                    $
                    12,398
                    
                    
                    $
                    358
                    
                    
                    $
                    2,318
                    
                    
                    $
                    16,057
                    
                    
                    $
                    58,660Revenues
      - Related Party
                    
                    
                    4,629
                    
                    
                    
                    734
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    4,629
                    
                    
                    
                    7348,433
                    
                    
                    
                    44,678
                    
                    
                    
                    11,895
                    
                    
                    
                    12,398
                    
                    
                    
                    358
                    
                    
                    
                    2,318
                    
                    
                    
                    20,686
                    
                    
                    
                    59,394Cost
      of Revenues
                    
                    
                    8,089
                    
                    
                    
                    37,094
                    
                    
                    
                    11,184
                    
                    
                    
                    11,907
                    
                    
                    
                    44
                    
                    
                    
                    413
                    
                    
                    
                    19,317
                    
                    
                    
                    49,414Gross
      Profit
                    
                    
                    344
                    
                    
                    
                    7,584
                    
                    
                    
                    711
                    
                    
                    
                    491
                    
                    
                    
                    314
                    
                    
                    
                    1,905
                    
                    
                    
                    1,369
                    
                    
                    
                    9,980Total
      Operatng Expenses
                    
                    
                    568
                    
                    
                    
                    306
                    
                    
                    
                    730
                    
                    
                    
                    330
                    
                    
                    
                    1,801
                    
                    
                    
                    975
                    
                    
                    
                    3,099
                    
                    
                    
                    1,611Operating
      Income (Loss)
                    
                    $
                    (224
                    )
                    
                    $
                    7,278
                    
                    
                    $
                    (19
                    )
                    
                    $
                    161
                    
                    
                    $
                    (1,487
                    )
                    
                    $
                    930
                    
                    
                    
                    (1,730
                    )
                    
                    $
                    8,369
 
 Magnesium
Segment Operating Results
 
 Revenues.
Magnesium segment revenues in the first quarter of 2009 were $8.4 million,
(inclusive of related party revenues of $4.6 million) a decrease of 81% compared
to the first quarter of 2008. This decrease was mainly due to the weak global
economy which has reduced demand and prices for magnesium.  The
average price of magnesium during the first quarter of 2009 was $2,400 compared
to $4,500 during the first quarter of 2008, or a decrease of 46%. Furthermore,
during the first quarter of 2008 we witnessed increasing demand, which, coupled
with stockpiling of inventory in expectation of production shortages and/or
transportation interruptions associated with the 2008 Beijing Olympics drove
demand and market prices higher.
 
 In the
first quarter of 2009 our Magnesium segment produced, sold and distributed
approximately 2,781 metric tons with an average price of $2,400 per metric ton.
In comparison, for the first quarter of 2008 we produced, sold and distributed
approximately 14,169 metric tons with an average price of $4,500 per metric
ton.
  - 28
-
  
 Gross
Profit. In the first quarter of 2009 gross profit for the segment
decreased $7.2 million compared to the first quarter of 2008. The gross profit
margin for this segment in the first quarter of 2009 was approximately 4% as
compared to approximately 17% in for the first quarter of 2008. This decrease
was primarily related to the decrease in market price of magnesium, customer
pricing concessions and fixed production costs.
 
 Operating
Expenses. In the first quarter of 2009 Magnesium segment operating
expenses were approximately $568,000, an increase of 46% compared to
approximately $306,000 during the first quarter of 2008. This increase was
primarily attributable to rising operating expenses partially offset by the
reversal of a bad debt expense in the first quarter of 2009 previously written
off.
 
 Basic
Materials segment
 
 Revenues.
In the first quarter of 2009 Basic Materials segment revenues were $11.9
million, a decrease of 4% compared to the first quarter of 2008. Revenues
in this segment benefited from the addition of $4.6 million in sales from CDI
Beijing and were partially offset by a $5.1 million reduction in sales at Lang
Chemical as a result of weak domestic demand for the industrial chemicals it
distributes.
 
 Gross
Profit. In the first quarter of 2009 gross profit for the segment
increased approximately $220,000. The gross profit margin in this segment was 6%
for the first quarter of 2009 as compared to 4% for the first quarter of
2008.  This margin improvement was due primarily to the contribution
of revenues from the sale of steel by CDI Beijing which generated gross margins
of 9% in the first quarter of 2009.
 
 Operating
Expenses. In the first quarter of 2009 Basic Materials segment operating
expenses were approximately $730,000, an increase of $400,000 compared to the
first quarter of 2008. This increase is primarily a result of increase in
shipping costs related to CDI Beijing’s operations and increased operating
expenses at Lang Chemical.
 
 Consulting
segment
 
 Revenues.
In the first quarter of 2009 Consulting segment revenues were $358,000 compared
to $2.3 million during the first quarter of 2008. The decrease was mainly due to
the absence of one-time transaction fees that we earned in the first quarter of
2008 and the reduction in the market price of the fixed number of securities we
received from our client companies as fees.
 
 Gross
Profit. In the first quarter of 2009, gross profit for the segment
totaled approximately $314,000 compared to $1.9 million in the first quarter of
2008 primarily as a result of a decrease in revenues. The gross profit margin in
this segment was 88% in the first quarter of 2009 as compared to 82% in the
first quarter of 2008. The increase in the margin is attributable to a decrease
in professional fees associated with this segment as we provided these services
internally.
 
 Operating
Expenses. In the first quarter of 2009 operating expenses, which include
general and administrative expenses, were $1.8 million compared to $1.0 million
during the first quarter of 2008. This increase was mainly due to increases in
non-cash stock-based compensation expenses, payroll expense and professional
fees.
 
 Total
Other (Expense) Income
 
 Total
other expense in the first quarter of 2009 was approximately $115,000 compared
to total other income of approximately $251,000 in the first quarter of 2008.
Interest income is mainly comprised of interest from short-term loans, largely
offset by a net realized loss of $233,000 associated with the sale of certain
marketable securities available for sale during the first quarter of
2009.
 
 In the
first quarter of 2008 total other income was approximately $251,000, mainly
comprised of (i) $90,702 within our Consulting segment representing interest
income generated from cash management and short-term loans to YiWei Magnesium
and Dragon Capital, both of which are related parties (ii) $96,158
generated from service income by CDI Jingkun Zinc, and (iii) $39,461 realized
loss from the sale of marketable securities within our Consulting
segment.
 
 Income
Tax Expense
 
 Income
tax benefit during the first quarter of 2009 was $71,579 compared to the income
tax expense of $323,633 during the first quarter of 2008. Income tax expense
decreased as a result of our net loss of $1.3 million in the first quarter of
2009 compared to net income of $4.8 million in the first quarter of
2008.
 
  - 29
-
  Net
(Loss) Income
 
 Net loss
during the first quarter of 2009 was $1.5 million, compared to net income of
$4.8 million in the first quarter of 2008. This was mainly due to the decrease
in our total revenues and gross profit margins.  In addition, our
operating expenses remained relatively high due to one time charges related to a
severance agreement with our former president and director and fixed costs
associated with our magnesium production.
 
 Foreign
Currency Translation Gain
 
 The
functional currency of our subsidiaries operating in the PRC is the Chinese
dollar or Renminbi (“RMB”). The financial statements of our subsidiaries are
translated to U.S. dollars using period end rates of exchange for assets and
liabilities, and average rates of exchange (for the period) for revenues, costs,
and expenses. Net gains and losses resulting from foreign exchange transactions
are included in the consolidated statements of operations. As a result of these
translations, we reported a foreign currency translation gain of $316,792 for
the first quarter of 2009 and a gain of approximately $1.8 million for the
first quarter of 2008. This non-cash gain had the effect of increasing our
reported comprehensive income.  Note 4 - Comprehensive Income included
in the Notes to our unaudited consolidated financial
statements.
  Unrealized
Loss on Marketable Securities Available for Sale, Net of Income Tax
 
 The
accumulated unrealized loss on marketable securities available for sale, net of
income taxes for the first quarter of 2009 totaled $14.4 million, compared
to $1.3 million for the first quarter of 2008. These declines reflect a
reduction in the fair value of securities received from our client companies for
consulting services. We believe the declines are due in large part to the
overall decline in global market conditions during the first quarter of
2009.
 
 Discontinued
operations
 
 During
the third quarter of 2008, we elected to exit the alternative energy and
recycling business conducted by CDI Clean Technology. We devised a formal plan
of disposal of a majority ownership in these subsidiaries. The business of
CDI Clean Technology and its subsidiaries comprised substantially all of the
business of our Clean Technology segment. We classified the assets and
liabilities of CDI Clean Technology and its subsidiaries as “Subsidiaries held
for sale” in accordance with the provisions of FASB No. 144.
 
 On
September 30, 2008, we ceased depreciating the assets of CDI Clean Technology
and its subsidiaries and as a result of the held for sale classification, we
assessed the estimated fair value of the subsidiary and no impairment charge was
recognized. The results of operations from CDI Clean Technology and its
subsidiaries are classified as discontinued operations in 2008 and previously
reported results of operations of CDI Clean Technology have been reclassified to
reflect this subsidiary as "Discontinued operations, net of tax". On October 30,
2008, we completed the sale of an 81% interest in our wholly owned subsidiary
CDI Clean Technology to PE Brothers Corp. for $1,240,000, paid in the form of a
promissory note, we recorded a gain of $238,670 on the sale during the
fourth quarter. We plan to maintain our 19% ownership interest in CDI Clean
Technology and recognize our investment using the cost method.  See Note 6
- Prepaid Expenses and Other Current Assets.
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
At March 31, 2009 our working capital was $33.4 million as compared to $37.5
million atDecember
31, 2008.
 
 Our cash
balance at March 31, 2009 totaled $11.6 million, a decrease of $2.6 million over
the balance at December 31, 2008. We have commitments of $2.2 million to
increase the registered capital of CDI Beijing which will be satisfied from
working capital.
 
  - 30
-
  The
continued implementation of our business model, which includes providing
investment capital to augment the growth of our portfolio companies and expand
our business through new accretive acquisitions, will in all likelihood require
additional capital. During 2009, we plan to use our magnesium holdings as a
basis for raising capital and expansion of our magnesium holdings. Accordingly,
we may raise additional capital through private or public financing. We have an
effective registration statement on Form S-3 which permits us  to sell
on a delayed or continuous basis shares of our common stock or other securities
along with certain selling shareholders at any time pursuant to a registration
statement that we filed pursuant to Rule 415 under the Securities Act of 1933.
The amount of our common stock which we or the selling shareholders are
permitted to sell pursuant to our prospectus dated August 1, 2008  is
limited to no more than one-third of the aggregate market value, during the
period of 12 calendar months prior to the sale, of the voting and non-voting
common equity held by non-affiliates of our company.  Based on this
limitation, as of March 31, 2009, we and the selling shareholders would be
limited to selling no more than approximately $4.7 million of our common stock
assuming there were no other sales within a 12 month period.
 
 The
following table provides certain selected balance sheet comparisons between
March 31, 2009 and December 31, 2008
 
 March
      31,
                        
                        
                        December
      31,
                        
                        
                        Increase
      /(in
      thousands)
                        
                        2009
                        
                        
                        2008
                        
                        
                        (decrease)
                        
                        
                        %Cash
                        
                        $
                        11,589
                        
                        
                        $
                        14,205
                        
                        
                        $
                        (2,616
                        )
                        
                        
                        -18
                        %Marketable
      securities
                        
                        
                        5,348
                        
                        
                        
                        7,730
                        
                        
                        
                        (2,382
                        )
                        
                        
                        -31
                        %Accounts
      receivable, net
                        
                        
                        3,959
                        
                        
                        
                        9,457
                        
                        
                        
                        (5,498
                        )
                        
                        
                        -58
                        %Inventories,
      net
                        
                        
                        9,660
                        
                        
                        
                        8,560
                        
                        
                        
                        1,100
                        
                        
                        
                        13
                        %Prepaid
      expenses and other assets
                        
                        
                        5,356
                        
                        
                        
                        8,127
                        
                        
                        
                        (2,771
                        )
                        
                        
                        -34
                        %Total
      current assets
                        
                        
                        46,923
                        
                        
                        
                        59,742
                        
                        
                        
                        (12,819
                        )
                        
                        
                        -22
                        %Property
      and equipment, net
                        
                        
                        43,000
                        
                        
                        
                        43,456
                        
                        
                        
                        (456
                        )
                        
                        
                        -1
                        %Total
      assets
                        
                        
                        94,848
                        
                        
                        
                        107,379
                        
                        
                        
                        (12,531
                        )
                        
                        
                        -12
                        %Accounts
      payable and accrued expenses
                        
                        
                        5,010
                        
                        
                        
                        8,590
                        
                        
                        
                        (3,580
                        )
                        
                        
                        -42
                        %Advances
      from customers
                        
                        
                        405
                        
                        
                        
                        1,545
                        
                        
                        
                        (1,140
                        )
                        
                        
                        -74
                        %Other
      payables
                        
                        
                        2,131
                        
                        
                        
                        1,624
                        
                        
                        
                        507
                        
                        
                        
                        31
                        %Total
      current liabilities
                        
                        $
                        13,527
                        
                        
                        $
                        22,228
                        
                        
                        $
                        (8,701
                        )
                        
                        
                        -39
                        %
 
 
 We
maintain cash balances in the United States and China. At March 31, 2009 and
December 31, 2008, bank deposits by geographic area, was as
follows:
 
 
 Country
                          
                          March
      31, 2009
                          
                          
                          December
      31, 2008United
      States
                          
                          $
                          4,616,856
                          
                          
                          
                          40
                          %
                          
                          $
                          6,640,672
                          
                          
                          
                          47
                          %China
                          
                          
                          6,972,516
                          
                          
                          
                          60
                          %
                          
                          
                          7,564,557
                          
                          
                          
                          53
                          %Total
      cash and cash equivalents
                          
                          $
                          11,589,372
                          
                          
                          
                          100
                          %
                          
                          $
                          14,205,229
                          
                          
                          
                          100
                          %
 
 
 A
substantial portion of our cash balance, approximately $7.0 million at March 31,
2009 is in the form of RMB held in bank accounts at financial institutions
located in the PRC. Cash held in banks in the PRC is not insured. The value of
cash on deposit in China at March 31, 2009 has been converted based on the
exchange rate as of March 31, 2009. 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 of the 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.
 
  - 31
-
  Current
assets as of March 31, 2009 totaled $47.0 million, a decrease of 20% compared to
December 31, 2008. This decrease was mainly due to a decrease in prepaid
expenses and other current assets including related parties of $6.2 million, a
decrease in our accounts receivables of $2.8 million, a reduction in cash
of $2.6 million, a reduction in our marketable securities held for sale of $2.4
million partially offset by an increase in inventories of $1.1 million. Current
liabilities as of March 31, 2009 totaled $13.5 million, a 39% decrease from our
December 31, 2008 balance.
 
 A summary
of total assets by segment at March 31, 2009 and at December 31, 2008 is as
follows:
 
 
 (Amounts
      in thousands)
                            
                            March
      31, 2009
                            
                            
                            December
      31, 2008Magnesium
      segment
                            
                            $
                            43,528
                            
                            
                            $
                            67,413Basic
      Materials segment
                            
                            
                            10,464
                            
                            
                            
                            14,350Consulting
      segment
                            
                            
                            40,856
                            
                            
                            
                            25,616Total
                            
                            $
                            94,848
                            
                            
                            $
                            107,379
  Our
accounts receivables, and accounts receivables related parties, net of
allowances for doubtful accounts, as of March 31, 2009 was $8.3 million,
compared to $11.2 million as of December 31, 2008. Although this amount
decreased by $2.9 million, our accounts receiable remained relatively high
compared to our current level of sales. Our Magnesium and Basic Materials
segments generally offer payment terms to its customers of 90 days. Our
Consulting segment generally receives full payment in advance for consulting
services to be provided, upon entering into a consulting agreement.
 
 Inventories
as of March 31, 2009 were $9.7 million, an increase of approximately $1.1
million compared to December 31, 2008. This increase is due primarily to higher
magnesium inventories which accounted for 82% and 86% of consolidated inventory
levels at March 31, 2009 and December 31, 2008, respectively.
 
 Prepaid
expenses and other current assets consist of prepayments to vendors for
inventory, other receivables, loans receivable, assets acquired in the
acquisition of Pan Asia Magnesium, VAT tax refunds, and security deposits.
Prepaid expenses and other current assets as of March 31, 2009 were $5.4 million
as compared to $8.1 million at December 31, 2008.
 
 Accounts
payable and accrued expenses were $5.0 million in the first quarter of 2009
compared to $8.6 million in the first quarter of 2008. Accounts payable and
accrued expenses represent payables associated with the general operation of
each segment, including accrued payrolls. Advances from customers represent
prepayments for products, which have not yet been shipped.
 
 Consolidated
Statement of Cash Flows
 
 For the
first quarter of 2009, net decrease in cash totaled $2.6 million and was
comprised of $1.5 million used in operating activities, $552,059 provided by
investing activities, $2.0 million used in financing activities, and the
effect of prevailing exchange rates on our cash position of a positive
$373,783.
 
 Cash
Used in Operating Activities
 
 Net cash
used in operating activities for the first quarter of 2009 totaled $1,540,604
which was primarily due to our net loss during the quarter of $1.5 million, a
decrease in our accounts payable and accounts payable-related parties of $8.4
million, a decrease in advances from customers of $1.1 million, and an increase
in inventories of $1.1 million. These amounts were mainly offset by a decrease
in prepaid expenses and prepaid expenses-related parties of $6.2 million, a net
decrease in accounts receivable and accounts receivable-related parties of $3.1
million, and our non-cash charges in depreciation and amortization of
$725,071 and stock-based compensation of $522,671
respectively.
 
 For the
first quarter of 2008 cash used in operations of $1.2 million included an
increase in consolidated accounts receivable-related parties of $1.3 million,
advances we received from customers of $2.1 million and an increase in other
payables of $2.0 million. These increases in cash funds provided were more
than offset by an increase in inventories of $6.4 million, an increase in
prepaid expenses-related party of $3.1 million, an increase in accounts
receivable of $4.8 million, an increase in accounts payable of $1.9 million and
an increase in prepaid expenses-related parties of $3.1 million.
 
  - 32
-
  Cash
Provided by (Used in) Investing Activities
 
 Net cash
provided by investing activities for first quarter of 2009 totaled $552,059
compared to net cash used in investing activities of $4.0 million for the
first quarter of 2008. The net cash provided by investing activities for the
first quarter of 2009 was a result of an increase in loans receivable due from
related parties of $305,646, and proceeds from the sale of marketable securities
of $292,974, these were partially offset by the purchase of property, plant
and equipment of $46,561.
 
 For the
first quarter of 2008 cash used in investing activities totaled $4.0 million and
was mainly due to the purchase of $2.3 million in property, plant and equipment
and loan payments of $2.1 million, which were offset by $239,579 from the sale
of marketable securities held for sale.
 
 Cash
Used in Financing Activities
 
 For the
first quarter of 2009 net cash used in financing activities was $2,001,094. We
used $1,650,000 as part of a stock repurchase program, $976,530 to pay amounts
due to related parties and relieved $962,489 of restricted cash.  These
items were offset by $1,250,150 proceeds provided loans and $715,788 of capital
contribution provided by minority interest owners of our
subsidiaries.
 
 For the
first quarter of 2008 cash provided by financing activities totaled $10.7
million, which was mainly comprised of net proceeds of approximately $12.95
million in cash flow from the sale of Series A Preferred Stock, $1.0 million
from related parties and $2.1 million in proceeds from loans payable. These
increases in our cash balance were partially offset by the repayment of loans
payable of $1.9 million and a $644,160 decrease in restricted cash.
 
 Series
A Preferred Stock and Related Dividends
 
 In
February 2008, we completed a private placement whereby we sold to accredited
investors 12,950 shares of our 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 approximately $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.
 
 As of
March 31, 2009, holders of our Series A Preferred Stock have converted 11,944
shares of the 12,950 shares of the Series A Preferred Stock. As a result of the
conversion of the Series A Preferred Stock, we have issued 1,706,250 shares
of our common stock, 10,346 shares of common stock in payment of the accrued
dividends and 136,500 shares of common stock pursuant to the make whole
additional amount feature of the Series A Preferred Stock.  In connection
with this offering, we recorded the relative fair value of the warrants of
$2,765,946 and an additional $2,451,446 attributable to the beneficial
conversion feature as a non-cash one-time preferred stock deemed dividend in the
first quarter of 2008. See Note 11.
 Minority
Interest
 
 At March
31, 2009, our consolidated balance sheet reflects a total minority interest of
$27.5 million which represents the equity portion of our subsidiaries held by
minority shareholders. The following table provides information regarding the
minority interest by segment:
 
 
 Segment
                        
                        Amount(in
      thousands)Magnesium
      segment
                        
                        $
                        24,552Basic
      Materials segment
                        
                        
                        2,843Consulting
      segment
                        
                        
                        -Total
                        
                        $
                        27,395
 
 
  - 33
-
  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 unaudited 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 Note 2 to the unaudited
consolidated financial statements included in this quarterly report. 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.
 
 Acquisitions
 
 We
account for acquisitions using the purchase method of accounting in accordance
with SFAS No. 141. In each of our acquisitions for the periods presented, we
determined that fair values were equivalent to the acquired historical carrying
costs.
 
 Recent
Accounting Pronouncements
 
 In April
2009, the FASB issued three final Staff Positions (FSPs) intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, provides
guidelines for making fair value measurements more consistent with the
principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed
to create greater clarity and consistency in accounting for and presenting
impairment losses on securities. We are currently evaluating the requirements of
these FSPs as well as the impact of the adoption on our consolidated financial
statements, if any.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1 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 (“OTTI”) has
occurred. This FSP amended EITF 99-20 to more closely align the OTTI guidance
therein to the guidance in Statement No. 115. Retrospective application to
a prior interim or annual period is prohibited. The guidance in this FSP was
considered in the assessment of OTTI for various securities at March 31,
2009.
 
  - 34
-
  In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities ” ("SFAS 161”). SFAS 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. We have evaluated the
requirements of SFAS 161 and it had no impact on the preparation of our
consolidated financial statements as of March 31, 2009.
 
 In May
2008, the FASB issued FSP APB 14-1,Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) . FSP APB 14-1 clarifies that convertible debt instruments
that may be settled in cash upon either mandatory or optional conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14,Accounting for Convertible Debt and Debt issued with Stock Purchase
Warrants . Additionally, FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB 14-1
is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years.
We will adopt FSP APB 14-1 beginning in the first quarter of fiscal
2009, and this standard
must be applied on a retrospective basis. We have evaluated the requirements of
APB 14-1 and it had no impact on the preparation of our consolidated financial
statements as of March 31, 2009..
 
 In May
2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted
Accounting
Principles. This standard is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with generally accepted accounting principles in the United States
for non-governmental entities. SFAS No. 162 is effective 60 days following
approval by the U.S. Securities and Exchange Commission  of the Public
Company Accounting Oversight Board’s amendments to AU Section 411,The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles . We do not
expect SFAS No. 162 to have a material impact on the preparation of our
consolidated financial statements.
 
 On
September 16, 2008, the FASB issued final FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
,” to address the question of whether instruments granted in share-based payment
transactions are participating securities prior to vesting. The FSP determines
that unvested share-based payment awards that contain rights to dividend
payments should be included in earnings per share calculations. The guidance
will be effective for fiscal years beginning after December 15, 2008. We have
evaluated the requirements of EITF 03-6-1 and it had no impact on the
preparation of our consolidated financial statements as of March 31,
2009.
 
 On
October 10, 2008, the FASB issued SFP No. 157-3,Determining the Fair Value of a
Financial AssetWhen
the Market for That Asset Is Not Active.   This FASB Staff
Position clarifies the application of FASB Statement No. 157, Fair Value
Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. Statement 157 was issued
in September 2006, and is effective for financial assets and financial
liabilities for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. We have adopted SFAS 157-3 and determined that it had no impact as
of March 31, 2009, and we will continue to evaluate the impact, if any, of SFAS
157-3 on our financial statements.
 
 A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.
 
 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” of our Annual Report
on Form 10-K for the year ended December 31, 2008:
  - 35
-
  
 •
              Continued
      global economic weakness is expected to reduce demand for our products in
      each of our segments.•
              Fluctuations
      in the availability of magnesium and in levels of customer
      demand.•
              Changes
      in the prices of magnesium and magnesium-related
  products.•
              Our
      ability to implement our business strategy of growing our business through
      increased magnesium production capacity and
  acquisitions.•
              Fluctuations
      in the cost or availability of coke gas and coal.•
              Loss
      of orders from any of our major customers.•
              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
      ability to effectively integrate our acquisitions and to manage our growth
      and our inability to fully realize any anticipated benefits of acquired
      business.•
              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.•
              Our
      ability to establish adequate management, cash, legal and financial
      controls in the PRC.•
              The
      lack of 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 is also an owner and executive
      officer of several companies which directly compete with our magnesium
      business.•
              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.•
              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 China on economic activity in
      China.•
              The
      impact of any recurrence of severe acute respiratory syndrome, or SAR’s,
      or another widespread public health problem.•
              The
      limitation on our ability to receive and use our revenues effectively as a
      result of restrictions on currency exchange in China.•
              Our
      ability to enforce our rights due to policies regarding the regulation of
      foreign investments in China.•
              Recent
      substantial declines in the market price for shares of our common stock
      and continued highly volatile and wide market price
      fluctuations.•
              The
      impact on our stock price due to sales of our stock by existing
      shareholders and stock option exercises and sales of those shares of
      stock.
 
 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.
  - 36
-
  
 Item 3.
              Quantitative
      and Qualitative Disclosures About Market
Risk.
 
 Foreign
Currency Exchange Rate Risk
 
 We
maintain our books and records in Renminbi, the functional currency of the PRC,
however, we use the U.S. dollar as the reporting currency of our financial
statements. The exchange rate between the U.S. dollar and the Renminbi is
subject to the foreign exchange quotation publicized by the People’s Bank of
China daily. Results of operations are translated at average exchange rates
during the period. Assets, liabilities, and stockholder’s equity are translated
at the unified exchange rate as quoted by the People’s Bank of China at the end
of the period.
 
 Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than Renminbi are included in the results of
operations as incurred. Gains and losses from foreign currency transactions are
included in the results of operations. There were no material transaction gains
or losses for the three months ended March 31, 2009.
 
 Although
the conversion of the Renminbi is highly regulated in China, the value of the
Renminbi against the U.S. dollar fluctuates and is affected by, among other
things, changes in China’s political and economic conditions. On July 2, 2005,
the Chinese government changed its decade-old policy of benchmarking the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate in value within a narrow band against a basket of certain
foreign currencies. There remains significant international pressure on the
Chinese government to further liberalize this currency policy, and if such
liberalization occurs, the value of the Renminbi could appreciate or depreciate
against the U.S. dollar. This floating exchange rate, and any appreciation of
the Renminbi that may result from such rate, could have various adverse effects
on our business.
 
 Our
exposure to foreign exchange risk primarily relates to cash and cash equivalents
denominated in U.S. dollars as a result of earnings in China and our obligations
to invest in our subsidiaries. For example, to the extent that we need to
convert U.S. dollars into Renminbi for our China based operations, appreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount that we receive from the conversion. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of making dividend
payments on our common stock or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar
amount available to us. In addition, fluctuations in the exchange rate would
affect our financial results reported in U.S. dollar terms without
giving effect to any underlying change in our business or results of
operations.
  We
currently do not hedge our exposure to fluctuations in the Renminbi to U.S.
dollar exchange rate. In the future, we may choose to reduce our exposures
through financial instruments (hedges) that provide offsets or limits to our
exposures when considered appropriate.
 
 Item 4.
              Controls
      and Procedures.
 
 Disclosure
Controls and Procedures
 
 Under the
supervision and with the participation of our management, including our Chief
Executive Officer who serves as our principal executive officer and our Chief
Financial Officer who serves as our principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934, as amended, as of the period ended March 31,
2009 (the “Evaluation Dates”). Based on this evaluation, and as described below
under “Changes in Internal Control over Financial Reporting, we indentified
material weaknesses in the lack of controls over the accounting for cash
receipts and disbursements and related party transactions as previously reported
and control deficiencies at one of our subsidiaries that resulted in a delay in
the preparation of its financial statements.  Because of these
material weaknesses, which are in the process of being remediated as described
below under “Changes in Internal Control over Financial Reporting”, our
management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that our disclosure controls and procedures were not
effective as of March 31, 2009, which is the end of the period covered by this
report.
 
 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.
 
  - 37
-
  Our
"disclosure controls and procedures" are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms.  Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under
the Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosure.
 
 The
certifications attached as Exhibits 31 and 32 to this report should be read in
conjunction with the disclosures set forth herein.
 
 Changes
in Internal Control over Financial Reporting
 
 The
specific material weaknesses identified by our management were as
follows:
 
 •
              The
      lack of controls over the accounting for cash receipts and disbursements.
      Specifically the lack of these controls permitted employees and vendors to
      be paid in cash. We discovered that some of these transactions took place
      without sufficient externally prepared documentation or
      approvals.•
              The
      lack of controls over the accounting for related party
      transactions.  Specifically the lack of these controls caused
      related party sales to be classified as regular sales. These sales totaled
      $16.8 million in 2008.•
              Management
      at one of our foreign majority controlled subsidiaries failed to provide
      adequate oversight to ensure the timely completion of its financial
      statements and did not engage in adequate communication with our
      management to inform them of their lack of
  progress.
 
 Although
these material weaknesses did not result in a material misstatement for the
period ended March 31, 2009 or any prior periods, the lack of controls over the
accounting for cash receipts and disbursements and related party transactions
did result in accounting adjustments in prior periods and a reasonable
probability that a material misstatement of income or expenses in our annual or
interim financial statements would not have been prevented or timely
detected.  The control deficiencies at one of our subsidiaries
resulted in a delay in the preparation of its financial statements
and limited our ability to perform a thorough review of this subsidiary’s
financial statements and supporting financial statement disclosure schedules
independent of the preparer.
  We
believe the following actions we have taken and are taking will be sufficient to
remediate the material weaknesses described above:
 
 •
              Internal
      audit activities and resources have been expanded. We added a position for
      an internal auditor who will manage an internal audit team that will test
      and monitor the implementation of our accounting and internal control
      procedures;•
              We
      are in the process of completing a review and revision of our existing
      documentation of our accounting and internal control procedures and
      policies which will include appropriate controls and procedures for cash
      management in China and related party transactions;•
              We
      are in the process of implementing an initiative to ensure the importance
      of internal controls and compliance with established policies and
      procedures are fully understood throughout the organization. These
      initiatives will be managed by our Chief Financial
  Officer;•
              Our
      board of directors is evaluating the adoption of a Related Person
      Transaction Policy to govern our accounting and internal control
      procedures and policies;•
              We
      are in the process of evaluating an appropriate financial software system
      to be implemented both in our U.S. office and in our subsidiaries to
      standardize the process and access to financial reports on a timely
      manner;•
              Provide
      training to our employees to ensure these procedures are properly
      performed; and•
              We
      will evaluate management at our majority owned subsidiary and reinforce
      the need for strict compliance with our accounting policies and
      procedures
 
 Except as
described above, there were no changes in our internal control over financial
reporting during the quarter ended March 31, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
 
 Management
believes the actions described above will remediate the material weaknesses we
have identified and strengthen our internal control over financial reporting. We
expect the material weakness will be remediated prior to December 31, 2009.
As we improve our internal control over financial reporting and implement
remediation measures, we may supplement or modify the remediation measures
described above.
  - 38
-
  
 A
company's "internal control over financial reporting" is a process designed by,
or under the supervision of, a company's principal executive and principal
financial officers, and effected by a company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
 
 Our
management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected.
 
 PART
II - OTHER INFORMATION
 
 Item 1.
              Legal
      Proceedings.
 
 None.
 
 Item 1A.
              Risk
      Factors
 
 Risk
factors describing the major risks to our business can be found under Item 1A,
“Risk Factors”, in our Annual Report on Form 10-K for the year ended December
31, 2008. There has been no material change in our risk factors from those
previously discussed in the Annual Report on Form 10-K.
 
 Item 2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
 
 (a)
Recent Sales of Unregistered Securities
 
 During
the first quarter of 2009 we issued 3,000 shares of our common stock to a
consultant as compensation for services it provided to us. The shares were
issued pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933 since the issuance by us did not involve a public
offering. The issuance was not a "public offering" as defined in Section 4(2) of
the Securities Act of 1933 due to the insubstantial number of persons involved,
size of the offering, manner of the offering and number of shares awarded. In
addition, the recipient had the necessary investment intent as required by
Section 4(2) of the Securities Act since it agreed to allow us to include a
legend on the shares issued stating that such shares are restricted pursuant to
Rule 144 of the Securities Act of 1933.  Based on an analysis of the
above factors, we have met the requirements to qualify for exemption under
Section 4(2) of the Securities Act of 1933 for this issuance.
 
 
  - 39
-
  (b) Issuer
Purchases of Equity Securities
 
 This
table provides information with respect to our purchases of shares of our common
stock, $.0001 par value per share, during the first quarter.
 
 
 Period
                      
                      Total
      Number of Shares Purchased (1)
                      
                      
                      Average
      Price Paid Per Share
                      
                      
                      Total
      Number Of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                      
                      
                      Maximum
      Approximate Dollar Value of Shares that May Yet Be Purchased Under the
      Plans or Programs (2)January
      1, 2009 through January 31, 2009
                      
                      
                      1,500,000
                      
                      
                      $
                      1.10
                      
                      
                      
                      1,589,502
                      
                      
                      
                      770,613February
      1, 2009 through February 28, 2009
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      770,613March
      1, 2009 through March 31, 2009
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      770,613Total
                      
                      
                      1,500,000
                      
                      
                      $
                      1.10
                      
                      
                      
                      1,589,502
                      
                      
                      
                      770,613
 
 
 (1)  On
September 10, 2008, our board of directors authorized a stock repurchase program
to repurchase up to $2.5 million of our common stock through March 31, 2009. The
stock repurchase program was announced on September 12, 2008. The amount and
timing of specific repurchases are subject to market conditions, applicable
legal requirements and other factors deemed appropriate by our CEO and
President. Repurchases may be in open-market transactions or through privately
negotiated transactions, and our board of directors may discontinue the
repurchase program at any time.
 
 (2)  Amounts
reflect the remaining dollar value of shares that may be purchased under the
stock repurchase program described above.  The stock repurchase
program that was approved on September 10, 2008 by our board of directors
expired on March 31, 2009.
 
 Item 3.
              Defaults
      Upon Senior Securities.
 
 None.
 
 Item 4.
              Submission
      of Matters to a Vote of Security
Holders.
 
 None.
 
 Item 5.
              Other
      Information.
 
 None.
 - 40
-
 
 Item 6.
              Exhibits
 
 Exhibit No.
                  
                  Description
      of Exhibit2.2
                  
                  Certificate
      of Ownership and Merger (incorporated herein by reference to Exhibit
      99.1.1 as part of the Company?痵 Current Report on Form 8-K filed with the
      Commission on December 83, 1999 (Commission File No.
      000-26415)).3.1
                  
                  Certificate
      of Incorporation Incorporated by reference to the Form 10-SB as filed
      on June 17, 1999 (incorporated herein by reference to Exhibit 3.1 as
      part of the Company’s Form 10-SB as filed with the Commission on
      June 17, 1999 (Commission File No.
  000-26415)).3.2
                  
                  Bylaws
      (incorporated herein by reference to Exhibit 3.2 filed as a part of the
      Company’s Form 10-Q filed with the Commission on August 8, 2008
      (Commission File No. 001-33694)).3.3
                  
                  Certificate
      of Amendment to the Certificate of Incorporation (incorporated herein by
      reference to Exhibit 3.3 as part of the Company’s Current Report on Form
      8-K filed with the Commission on August 17, 2006 (Commission File No.
      000-26415)).3.4
                  
                  Certificate
      of Domestication of China Direct, Inc. (incorporated herein by reference
      to Exhibit 3.4 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on June 27, 2007 (Commission File No.
      000-26415)).3.5
                  
                  Form
      of Certificate of Designations, Preferences and Rights of Series A
      Convertible Preferred Stock (incorporated herein by reference to Exhibit
      3.5 as part of the Company’s Current Report on Form 8-K filed with the
      Commission on February 12, 2008 (Commission File No.
      001-33694)).4.1
                  
                  Form
      of common stock purchase warrant (incorporated herein by reference to
      Exhibit 4.1 as part of the Company’s Current Report on Form 8-K filed with
      the Commission on February 12, 2008 (Commission File No.
      001-33694)).10.1
                  +
                  Employment
      Agreement dated August 16, 2006 with Dr. Yuejian (James) Wang
      (incorporated herein by reference to Exhibit 10.9 as part of the Company’s
      Current Report on Form 8-K filed with the Commission on August 17,
      2006 (Commission File No. 000-26415)).10.2
                  +
                  Employment
      Agreement dated August 16, 2006 with Mr. Marc Siegel
      (incorporated herein by reference to Exhibit 10.10 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on August
      17, 2006 (Commission File No. 000-26415)).10.3
                  +
                  Employment
      Agreement dated August 16, 2006 with Mr. David Stein
      (incorporated herein by reference to Exhibit 10.11 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on August
      17, 2006 (Commission File No. 000-26415)).10.4
                  +
                  Employment
      Agreement dated August 16, 2006 with Yi (Jenny) Liu (incorporated
      herein by reference to Exhibit 10.12 as part of the Company’s Current
      Report on Form 8-K filed with the Commission on August 17, 2006
      (Commission File No. 000-26415)).10.5
                  +
                  Evolve
      One, Inc. Stock Option Plan, as amended (incorporated herein by reference
      to Exhibit 10.1 as part of the Company’s Form S-8 filed with the
      Commission on January 11, 2005 (Commission File No.
      333-121963)).10.6
                  +
                  2005
      Equity Compensation Plan (incorporated herein by reference to Exhibit 99.1
      as part of the Company’s Registration Statement on Form S-8 filed with the
      Commission on June 16, 2005 (Commission File No.
      333-125871)).10.7
                  +
                  2006
      Equity Compensation Plan (incorporated herein by reference to Exhibit
      10.14 as part of the Company’s Current Report on Form 8-K filed with the
      Commission on August 17, 2006 (Commission File No.
      000-26415)).10.8
                  +
                  2006
      Stock Compensation Plan (incorporated herein by reference to Exhibit 10.1
      as part of the Company’s Registration Statement on Form S-8 filed with the
      Commission on October 30, 2006 (Commission File No.
      333-138297)).10.12
                  
                  CDI
      China, Inc., Jinan Alternative Energy Group Corp. and CDI Wanda New Energy
      Co., Ltd. Amended Agreement dated as of May 8, 2007 (incorporated herein
      by reference to Exhibit 10.1 as part of the Company’s Quarterly Report on
      Form 10-QSB for the period ended March 31, 2007 filed with the
      Commission on May 9, 2007 (Commission File No.
      000-26415)).10.13
                  
                  Contract
      for Sino-Foreign Equity Joint Venture between Asia Magnesium Co., Ltd.,
      Shanxi Senrun Coal Chemistry Co., Ltd. and Taiyuan YiWei Magnesium
      Industry Co., Ltd. dated December 12, 2006 (incorporated herein by
      reference to Exhibit 10.1 as part of the Company’s Quarterly Report on
      Form 10-QSB for the period ended June 30, 2007 filed with the Commission
      on August 8, 2007 (Commission File No.
  000-26415)).10.14
                  
                  Asia
      Magnesium Ownership Transfer Agreement dated July 1, 2007 between Jiang
      Dong and Capital One Resource Co., Ltd. (incorporated herein by reference
      to Exhibit 10.2 as part of the Company’s Quarterly Report on Form
      10-QSB for the period ended June 30, 2007 filed with the Commission on
      August 8, 2007 (Commission File No. 000-26415)).10.15
                  
                  Shangxi
      Gu County Golden Magnesium Co., Ltd. Investment Agreement Supplement dated
      May 30, 2007 among Taiyuan YiWei Magnesium Co., Ltd., Asia Magnesium
      Co., Ltd. and Shanxi Senrun Coal Chemistry Co. Ltd. (incorporated herein
      by reference to Exhibit 10.3 as part of the Company’s Quarterly Report on
      Form 10-QSB for the period ended June 30, 2007 filed with the Commission
      on August 8, 2007 (Commission File No.
  000-26415)).10.16
                  
                  Consulting
      and Management Agreement dated June 27, 2007 between Mr. Aihua Hu and
      Capital One Resource Co., Ltd. (incorporated herein by reference to
      Exhibit 10.4 as part of the Company’s Quarterly Report on Form 10-QSB for
      the period ended June 30, 2007 filed with the Commission on August 8, 2007
      (Commission File No. 000-26415)).10.17
                  
                  Stock
      Purchase Agreement dated August 24, 2007 between CDI China, Inc., China
      Direct, Inc. and Sense Holdings, Inc. (incorporated herein by reference to
      Exhibit 10.1 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on August 28, 2007 (Commission File No.
      000-26415)).10.18
                  
                  Joint
      Venture Agreement dated September 28, 2007 among Shanxi Jinyang Coal And
      Coke Group Co., Ltd., Runlian Tian and CDI China, Inc. (incorporated
      herein by reference to Exhibit 10.1 as part of the Company’s Quarterly
      Report on Form 10-QSB for the period ended September 30, 2007 filed with
      the Commission on November 14, 2007 (Commission File No.
      000-26415)).10.19
                  
                  Securities
      Purchase Agreement dated February 11, 2008 (incorporated herein by
      reference to Exhibit 10.19 as part of the Company’s Current Report on Form
      8-K filed with the Commission on February 12, 2008 (Commission File No.
      001-33694)).10.20
                  
                  Registration
      Rights Agreement dated February 11, 2008 (incorporated herein by reference
      to Exhibit 10.20 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on February 12, 2008 (Commission File No.
      001-33694)).10.21
                  +
                  Option
      Agreement dated August 16, 2006 between China Direct, Inc. and David Stein
      (incorporated herein by reference to Exhibit 10.3 filed as a part of the
      Company’s Form S-8 filed with the Commission on November 11, 2007
      (Commission File No. 333-147603)).10.22
                  +
                  Employment
      Agreement dated August 7, 2008 between China Direct, Inc. and Dr. Yuejian
      (James) Wang (incorporated herein by reference to Exhibit 10.22 filed as a
      part of the Company’s Form 10-Q filed with the Commission on August 8,
      2008 (Commission File No. 001-33694)).10.23
                  +
                  Employment
      Agreement dated August 7, 2008 between China Direct, Inc. and Marc Siegel
      (incorporated herein by reference to Exhibit 10.23 filed as a part of the
      Company’s Form 10-Q filed with the Commission on August 8, 2008
      (Commission File No. 001-33694)).10.24
                  +
                  Employment
      Agreement dated August 7, 2008 between China Direct, Inc. and David Stein
      (incorporated herein by reference to Exhibit 10.24 filed as a part of the
      Company’s Form 10-Q filed with the Commission on August 8, 2008
      (Commission File No. 001-33694)).10.25
                  +
                  Form
      of Restricted Stock Agreement for Executive Officer awards under the
      Company’s 2008 Executive Stock Incentive Plan (incorporated herein by
      reference to Exhibit 10.25 filed as a part of the Company’s Form 10-Q
      filed with the Commission on August 8, 2008 (Commission File No.
      001-33694)).10.26
                  +
                  Form
      of Restricted Stock Agreement for Non-Executive Officer awards under the
      Company’s 2008 Non-Executive Stock Incentive Plan (incorporated herein by
      reference to Exhibit 10.26 filed as a part of the Company’s Form 10-Q
      filed with the Commission on August 8, 2008 (Commission File No.
      001-33694)).10.27
                  +
                  Form
      of Restricted Stock Agreement for awards to Directors under the Company’s
      2008 Non-Executive Stock Incentive Plan (incorporated herein by reference
      to Exhibit10.27 filed as a part of the Company’s Form 10-Q filed with the
      Commission on August 8, 2008 (Commission File No.
      001-33694)).10.28
                  
                  Joint
      Venture Agreement entered into between CDI Shanghai Management Co., Ltd.
      and Chi Chen dated September 20, 2008 (incorporated herein by reference to
      Exhibit 10.28 filed as a part of the Company’s Form 10-Q filed with the
      Commission on August 8, 2008 (Commission File No.
      001-33694)).10.29
                  +
                  Form
      of November 13, 2008 Amendment to Employment Agreements dated August 7,
      2008 between China Direct, Inc. and Dr. Yuejian (James) Wang, Marc Siegel
      and David Stein (incorporated herein by reference to Exhibit 10.29 filed
      as a part of the Company’s Current Report on Form 10-Q for the period
      ended September 30, 2008 filed with the Commission on November 13,
      2008 (Commission File No. 001-33694)).10.30
                  +
                  Option
      Agreement dated August 16, 2006 between China Direct, Inc. and Dr. Yuejian
      (James) Wang (incorporated herein by reference to Exhibit 10.1 filed as a
      part of the Company’s Form S-8 filed with the Commission on November 11,
      2007 (Commission File No. 333-147603)).10.31
                  +
                  Option
      Agreement dated August 16, 2006 between China Direct, Inc. and Marc Siegel
      (incorporated herein by reference to Exhibit 10.2 filed as a part of the
      Company’s Form S-8 filed with the Commission on November 11, 2007
      (Commission File No. 333-147603)).10.32
                  
                  Baotou
      Changxin Magnesium Co., Ltd. Investment Agreement dated February 20, 2008
      among CDI China, Inc., Excel Rise Technology Co., Ltd. and Three Harmony
      (Australia) Pty, Ltd. (incorporated herein by reference to Exhibit 10.1 as
      part of the Company’s Current Report on Form 8-K filed with the Commission
      on February 26, 2008 (Commission File No.
    001-33694)).10.33
                  
                  Baotou
      Changxin Magnesium Co., Ltd. Articles of Association dated January 31,
      2008 (incorporated herein by reference to Exhibit 3.1 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on February
      26, 2008 (Commission File No. 001-33694)).10.34
                  
                  Investment
      Framework Agreement dated as of April 26, 2008 by and between Baotou
      Xinjin Magnesium Co., Ltd. and CDI China, Inc. (incorporated herein by
      reference to Exhibit 10.18 as part of the Company’s Current Report on Form
      8-K filed with the Commission on May 1, 2008 (Commission File No.
      001-33694)).10.35
                  +
                  Independent
      Board of Directors Compensation Plan (incorporated herein by reference to
      the Company’s Current Report on Form 8-K filed with the Commission on June
      3, 2008 (Commission File No. 001-33694)).10.36
                  +
                  Compensation
      Award to Yi (Jenny) Liu on December 3, 2008 (incorporated herein by
      reference to the Company’s Current Report on Form 8-K filed with the
      Commission on December 5, 2008 (Commission File No.
      001-33694)).10.37
                  
                  Lease
      Agreement dated August 21, 2007 between 431 Fairway Associates, LLC and
      China Direct, Inc. (incorporated herein by reference to Exhibit 10.37
      filed as a part of the Company’s Form 10-K filed with the Commission on
      March 31, 2009 (Commission File No. 001-33694)).10.38
                  +
                  Consulting
      Agreement dated January 23, 2006 between China Direct, Inc. and Marc
      Siegel (incorporated herein by reference to Exhibit 10.1 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on January
      26, 2009 (Commission File No. 001-33694)).10.39
                  +
                  Separation
      and Severance Agreement dated January 23, 2006 between China Direct, Inc.
      and Marc Siegel (incorporated herein by reference to Exhibit 10.2 as part
      of the Company’s Current Report on Form 8-K filed with the Commission on
      January 26, 2009 (Commission File No.
001-33694)).10.40
                  
                  Stock
      Purchase Agreement dated January 23, 2006 between China Direct, Inc. and
      Marc Siegel (incorporated herein by reference to Exhibit 10.3 as part of
      the Company’s Current Report on Form 8-K filed with the Commission on
      January 26, 2009 (Commission File No.
001-33694)).10.41
                  
                  Lock-Up
      Agreement dated January 23, 2006 between China Direct, Inc. and Marc
      Siegel (incorporated herein by reference to Exhibit 10.4 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on January
      26, 2009 (Commission File No. 001-33694)).10.42
                  +
                  Compensation
      Arrangements with I. Andrew Weeraratne (incorporated herein by reference
      to the Company’s Current Report on Form 8-K filed with the Commission on
      January 26, 2009 (Commission File No.
001-33694)).10.43
                  +
                  Compensation
      Arrangements with Philip Y. Shen, Ph.D. effective January 26, 2009
      (incorporated herein by reference to the Company’s Current Report on Form
      8-K filed with the Commission on January 26, 2009 (Commission File No.
      001-33694)).10.44
                  +
                  Amendment
      dated January 23, 2009 to Yuejian (James) Wang, Ph.D.’s Employment
      Agreement (incorporated herein by reference to the Company’s Current
      Report on Form 8-K filed with the Commission on January 26, 2009
      (Commission File No. 001-33694)).10.45
                  
                  Stock
      Purchase Agreement dated August 24, 2007 between Sense Holdings, Inc., CDI
      China, Inc. and China Direct, Inc. (incorporated herein by reference to
      Exhibit 10.1 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on August 28, 2007 (Commission File No.
      000-26415)).31.1
                  
                  Section 302
      Certificate of Chief Executive Officer. *31.2
                  
                  Section 302
      Certificate of Chief Financial Officer.*32.1
                  
                  Section 906
      Certificate of Chief Executive Officer and Chief Financial
      Officer.*
 
 +
              Management
      contract or compensatory plan or arrangement.*
              Filed
      herewith.
 
 * Filed
herewith
 
  - 41
-
  
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 CHINA
      DIRECT, INC.Date:
      May 15, 2009
              By:
      /s/ Yuejian (James) WangYuejian
      (James) Wang,Chairman
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      May 15, 2009
              By:
      /s/ Indrajith Andrew WeeraratneIndrajith
      Andrew Weeraratne,Chief
      Financial Officer(Principal
      Financial and Accounting Officer)
  - 42
-