SOURCE: China Direct Industries, Inc.

February 11, 2010 17:26 ET

China Direct Industries Reports Financial Results for the First Quarter of Fiscal 2010 Ended December 31, 2009

DEERFIELD BEACH, FL--(Marketwire - February 11, 2010) - China Direct Industries, Inc. ("China Direct Industries") (NASDAQ: CDII), a U.S. owned holding company operating in China in two core business segments, pure magnesium production and distribution of basic materials, announced today its financial results for the first quarter of our fiscal 2010 for the three months ended December 31, 2009.

Financial Highlights

For the first quarter of fiscal 2010 total revenues were $22.3 million. We recorded a net loss on a non-GAAP basis for the first quarter that narrowed to ($834,674) (excluding non-cash charges related to employee share based compensation, realized gain on sale of marketable securities, stock option amortization, and fair value of securities granted for services). This resulted in a non-GAAP loss of ($0.03) per diluted and basic share. The net loss on a GAAP basis was ($984,516) or a loss of ($0.04) per diluted and basic share. This compares to total revenues of $39.0 million for the comparable period in 2008 with a non-GAAP net loss of ($2.3 million) or ($0.10) per diluted and basic share. On a GAAP basis the net loss for the comparable period in 2008 was ($10.2 million) or ($0.43) per basic and diluted share.

The improvement in net operating results in the first quarter of fiscal 2010 was largely driven by our ongoing efforts to realign the cost structure for our two business segments in China with the prevailing business environment. Gross margins in our Basic Materials segment increased from 5% in the three months ended December 31, 2008, to 7% in the first quarter of 2010. In our Magnesium segment, gross margins improved to 4% in the first quarter of fiscal 2010 from negative gross margins in the nine month 2009 transition period. Overall revenue decreased as compared to the quarter ended December 31, 2008 as a result of fewer production facilities in operation in the quarter in response to the downturn in demand for magnesium coupled with lower average prices. Additionally, severe weather conditions in Tiayuan hampered our efforts to restart some magnesium operations and delayed several shipments. We intend to continue our efforts to restart some of our idled facilities in the second quarter of fiscal 2010 as worldwide magnesium demand improves.

Balance Sheet

At December 31, 2009, total assets were $77.7 million and shareholder equity was $45.2 million with 27.4 million shares outstanding. At September 30, 2009, total assets were $80.5 million and shareholder equity of $46.1 million with 24.8 million shares outstanding. At December 31, 2009 cash and cash equivalents were $9.1 million and working capital was $30.7 million. At September 30, 2009 cash and cash equivalents were $12.9 million and working capital was $31.0 million. The difference in cash is primarily attributable to an increase of approximately $3.7 million in prepaid expenses to build inventories for our magnesium subsidiaries in preparation for meeting anticipated demand in the coming quarters.

Financial Outlook and Conference Call

While the overall environment in our various businesses remained challenging in the first quarter, margins in both our Magnesium and Basic Materials segments continued to improve. We intend to continue to restart idle magnesium facilities to add to our production capacity to meet anticipated increases in demand in the coming quarters and see revenues from consulting activity improving for the remainder of fiscal 2010. We continue to see our net income ranging between $8 to $10 million on revenue ranging from between $130 and $150 million. We will further discuss our results as well as our outlook for the remainder of fiscal 2010 during the conference call today, February 11, 2010 at 4:30 PM EST.

Commenting on the first quarter, Dr. James Wang, Chairman and CEO of China Direct, Inc., stated, "Our results for the first quarter have begun to show an improving bottom line as we narrowed losses and improved profit margins in our business segments in China. We have made significant investments to begin building inventories in preparation for a reacceleration of growth in magnesium sales and have seen a marked pick up in business activity in consulting. As our margins continue to improve on higher prices and the global recovery proceeds we remain confident in our ability to continue to grow at a profitable level and build momentum throughout fiscal 2010."

China Direct Industries Conference Call to discuss the Company's financial results for the first quarter of fiscal 2010.

The conference call will take place at 4:30 p.m. EST on Thursday February 11, 2010. Anyone interested in participating should call (877) 407-9205 if calling within the United States or (201) 689-8054 if calling internationally approximately 5 to 10 minutes prior to 4:30 p.m. Participants should ask for the China Direct Industries First Quarter 2010 Financial Results conference call.

This call is being webcast and can be accessed at China Direct's website at http://www.cdii.net/calendar-of-events. The webcast may also be accessed at : http://www.investorcalendar.com/IC/CEPage.asp?ID=155278. The playback of the webcast can be accessed through China Direct Industries website until February 11, 2011. To access the webcast, you will need to have the Windows Media Player on your desktop. For the free download of the Media Player, please visit: http://www.microsoft.com/windows/windowsmedia/en/download/default.asp

About China Direct Industries, Inc.

China Direct Industries, Inc. (NASDAQ: CDII), is a U.S. owned holding company operating in China in two core business segments, pure magnesium production and distribution and distribution of basic materials in China. China Direct Industries also provides advisory services to China based companies in competing in the global economy. Headquartered in Deerfield Beach, Florida, China Direct Industries operates 8 subsidiaries throughout China. This infrastructure creates a platform to expand business opportunities globally while effectively and efficiently accessing the U.S. capital markets. For more information about China Direct Industries, please visit http://www.cdii.net.

              CHINA DIRECT INDUSTRIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED BALANCE SHEET



                                                December 31,    September
                                                    2009        30, 2009
                                                ------------  ------------
ASSETS                                            Unaudited
Current Assets:
Cash and cash equivalents                       $  9,102,894  $ 12,851,310
Investment in marketable securities available
 for sale                                          4,039,703     4,984,351
Investment in marketable securities available
 for sale - related party                            585,034       604,686
Investment in subsidiaries -- cost method            290,864       290,864
Accounts receivable, net of allowance of
 $516,610 and $745,786 at December 31, 2009
 and September 30, 2009, respectively              8,761,238     8,195,916
Accounts receivable - related parties              2,611,884     2,355,059
Inventories, net                                   5,605,654     5,806,722
Prepaid expenses and other current assets          8,878,990     5,092,205
Prepaid expenses - related parties                 3,666,143     5,823,039
Loans receivable - related parties                 1,309,069     1,094,142
Current Assets in discontinued operations (see
 Note 14)                                             51,345        51,345
                                                ------------  ------------
Total current assets                              44,902,818    47,149,639
                                                ------------  ------------
Restricted cash                                      716,668       722,324
Property, plant and equipment, net                30,799,602    31,331,992
Prepaid expenses and other assets                      2,494         1,836
Property use rights, net                           1,101,779     1,113,902
Long-lived assets in discontinued operations
 (see Note 14)                                       196,078       196,077
                                                ------------  ------------
Total assets                                    $ 77,719,439  $ 80,515,770
                                                ============  ============

LIABILITIES AND EQUITY
Current Liabilities:
Loans payable-short term                        $  1,806,295  $  1,521,002
Accounts payable and accrued expenses              8,871,035     7,708,730
Accounts payable-related parties                      63,673        51,716
Advances from customers and deferred revenue         562,614     2,007,137
Other payables                                     2,014,973     3,072,238
Taxes payable                                        547,210     1,130,907
Loans payable - related parties                       53,677       399,629
Current Liabilities of discontinued operations
 (see Note 14)                                       300,000       300,000
                                                ------------  ------------
Total current liabilities                         14,219,477    16,191,359
                                                ------------  ------------
Loans payable-long term                                    -             -
                                                ------------  ------------
Total liabilities                                 14,219,477    16,191,359
                                                ------------  ------------

China Direct Industries, Inc. Stockholders'
 Equity
Preferred Stock: $.0001 par value, stated value
 $1,000 per share; 1,006 shares
 outstanding at December 31, 2009 and September
 30, 2009, respectively.                           1,006,250     1,006,250
Common Stock: $.0001 par value; 27,420,873 and
 27,189,719 outstanding at December 31,
 2009 and September 30, 2009, respectively.            2,742         2,719
Additional paid-in capital                        57,923,743    57,492,755
Accumulated other comprehensive income             1,589,967     1,902,221
Accumulated deficit                              (15,353,430)  (14,328,732)
                                                ------------  ------------
Total China Direct Industries, Inc.
 stockholders' equity                             45,169,272    46,075,213
                                                ------------  ------------
Noncontrolling interests                          18,330,690    18,249,198
Total Equity                                      63,499,962    64,324,411
                                                ------------  ------------
Total liabilities and equity                    $ 77,719,439  $ 80,515,770
                                                ============  ============

The notes to our consolidated financial statements are an integral part of
these consolidated financial statements.




              CHINA DIRECT INDUSTRIES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF OPERATIONS



                                              Three Months   Three months
                                                 ended          ended
                                              December 31,   December 31,
                                                  2009           2008
                                              -------------  -------------
                                                               Restated
Revenues                                      $  19,810,732  $  25,350,809
Revenues-related parties                          2,441,797     13,605,642
                                              -------------  -------------
Total revenues                                   22,252,529     38,956,451
Cost of revenues                                 20,428,311     40,022,618
                                              -------------  -------------
Gross profit                                      1,824,218     (1,066,167)
                                              -------------  -------------

Operating expense:
Selling, general, and administrative              2,793,503      3,669,840
                                              -------------  -------------
Operating loss                                     (969,285)    (4,736,007)
                                              -------------  -------------

Other (expense) income:
Other (expense) income                              (47,686)        10,659
Interest expense                                     (1,001)       (57,472)
Realized gain (loss) on sale of marketable
 securities                                          34,691        (98,818)
Realized loss on other than temporary
 impairment                                               -     (7,521,088)
Realized gain on sale of subsidiaries                     -        238,671
                                              -------------  -------------
Total other expenses                                (13,996)    (7,428,048)
                                              -------------  -------------
Net loss from continuing operations before
 income taxes                                      (983,281)   (12,164,055)
                                              -------------  -------------

Income tax benefits                                 110,373        107,891
                                              -------------  -------------
Net loss from continuing operations, net of
 income taxed                                      (872,908)   (12,056,164)
Loss from discontinued operations                         -       (916,244)
                                              -------------  -------------
Net loss                                      $    (872,908) $ (12,972,408)
                                              -------------  -------------
Net (income) loss attributable to
 noncontrolling interests-continuing
 operations                                        (111,608)     2,375,357
Net loss attributable to noncontrolling
 interests-discontinued operations                        -        448,961
                                              -------------  -------------
Net loss attributable to China Direct
 Industries, Inc.                             $    (984,516) $ (10,148,090)
                                              -------------  -------------

Deduct dividends on Series A Preferred Stock:
Preferred stock dividend                            (40,183)       (20,235)
                                              -------------  -------------
Net loss attributable to common stockholders  $  (1,024,699) $ (10,168,325)
                                              =============  =============

Basic and diluted loss per common share
Basic                                         $       (0.04) $       (0.43)
Diluted                                       $       (0.04) $       (0.43)
Basic weighted average common shares
 outstanding                                     27,381,946     23,494,180
Diluted weighted average common shares
 outstanding                                     27,381,946     23,494,180


The notes to our consolidated financial statements are an integral part of
these consolidated financial statements.

RECONCILIATION OF GAAP TO NON-GAAP NET INCOME

The following table reconciles the calculation of net income per share on a basic and fully diluted basis from the amounts reported in accordance with generally accepted accounting principles ("GAAP") to such amounts before giving effect to restricted share-based compensation expenses - employees, realized gain on sale of marketable securities, stock option amortization expense, the fair value of securities granted for services and realized loss on other-than-temporary-impairment on marketable securities. This disclosure is being provided as we believe it is meaningful to our investors and other interested parties to understand our operating performance on a consistent basis without regard to the anti-dilutive effects of the timing of these items. The presentation of the non-GAAP information titled "Non-GAAP net income" and "Non-GAAP net loss" is not meant to be considered in isolation or as a substitute for net income or diluted income per share prepared in accordance with


                                                  Three Months Ended
                                                     December 31,
                                              ----------------------------
                                                  2009           2008
                                              -------------  -------------
GAAP net income attributable to China Direct
 Industries, Inc.                             $    (984,516) $ (10,148,090)
Restricted Share-based compensation expenses
 - employees (1)                              $     149,576  $     283,413
Realized (gain) loss on sale of marketable
 securities (2)                               $     (34,691) $      98,818
Stock option amortization expense (3)         $      18,288
Realized Loss - securities  sales and
 other-than-temporary-impairment on
 marketable securities (4)                    $           -  $   7,521,088
Fair value of securities granted for services
 (5)                                                 16,668              -

Non-GAAP net income attributable to China
 Direct Industries, Inc.                      $    (834,674) $  (2,244,772)

GAAP Earnings applicable to common
 stockholders                                 $  (1,024,698)   (10,168,325)
   GAAP Basic EPS                                     (0.04)         (0.43)
   GAAP Diluted EPS                                   (0.04)         (0.43)
Non-GAAP net income reconciliation
 total(1)+(2)+(3)+(4)+(5)                           149,841      7,903,319
Non-cash deducted related to Preferred Stock
 issuance:
   Relative Fair Value of warrants                        -              -
   Beneficial Conversion Feature                          -              -
NON-GAAP Earnings applicable to common
 stockholders                                      (874,857)    (2,265,007)
   NON-GAAP Basic EPS                                 (0.03)         (0.10)
   NON-GAAP Diluted EPS                       $       (0.03) $       (0.10)
Shares used in basic net income per-share
 calculation - GAAP                              27,381,946     23,494,180
Shares used in basic net income per-share
 calculation - Non-GAAP                          27,381,946     23,494,180
Shares used in diluted net income per-share
 calculation - GAAP                              27,381,946     23,494,180
Shares used in diluted net income per-share
 calculation - Non-GAAP                          27,381,946     23,494,180

DISCLOSURE NOTICE:

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, China Direct Industries, Inc., is hereby providing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in forward-looking statements (as defined in such act). Any statements that are not historical facts and that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, indicated through the use of words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "intends," "plans," "believes" and "projects") may be forward-looking and may involve estimates and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. These statements include, but are not limited to, our guidance and expectations regarding revenues, margins, net income and earnings, magnesium prices and demand and our consulting operations and performance, our expectations regarding our plans to restart magnesium production and anticipated demand for our consulting services. In addition, any such statements are qualified in their entirety by reference to, and are accompanied by, the following key factors that have a direct bearing on our results of operations:

-- Fluctuations in the pricing and availability of magnesium and in levels
   of customer demand.
-- Changes in the prices of magnesium and magnesium-related products.
-- Our ability to implement our acquisition 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.
-- Difficulties we have in establishing adequate management, cash, legal
   and financial controls in the PRC.
-- Our ability to maintain an effective system of internal control over
   financial reporting.
-- The lack various legal protections in certain agreements to which we are
   a party and which are material to our operations which are customarily
   contained in similar contracts prepared in the United States.
-- Potential impact of PRC regulations on our intercompany loans.
-- Our ability to assure that related party transactions are fair to our
   company.
-- Yuwei Huang, our executive vice president - magnesium, director and an
   officer of several of our magnesium subsidiaries and his daughter
   Lifei Huang is also an owner and executive officer of several companies
   which directly compete with our magnesium business.
-- The impact of a loss of our land use rights.
-- Our ability to comply with the United States Foreign Corrupt Practices
   Act which could subject us to penalties and other adverse consequences.
-- Limits under the Investment Company Act of 1940 on the value of
   securities we can accept as payment for our business consulting
   services.
-- Our acquisition efforts in future periods may be dilutive to our then
   current shareholders.
-- The risks and hazards inherent in the mining industry on the operations
   of our basic materials segment.
-- Our inability to enforce our rights due to policies regarding the
   regulation of foreign investments in China.
-- The impact of environmental and safety regulations, which may increase
   our compliance costs and reduce our overall profitability.
-- The effect of changes resulting from the political and economic policies
   of the Chinese government on our assets and operations located in the
   PRC.
-- The impact of Chinese economic reform policies.
-- The influence of the Chinese government over the manner in which our
   Chinese subsidiaries must conduct our business activities.
-- The impact on future inflation in 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.
-- Delisting of our securities by NASDAQ from quotation on its exchange
   could limit investors' ability to make transactions in our securities
   and subject us to additional trading restrictions.
-- Recent substantial declines in the market price for shares of our common
   stock and continued highly volatile and wide market price fluctuations.

We caution that the factors described herein could cause actual results 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. This press release is qualified in its entirety by the cautionary statements and risk factor disclosure contained in our Securities and Exchange Commission filings, including our Transition Report on Form 10-K for the fiscal year ended September 30, 2009 and our reports on Form 10-Q.

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