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CDII > SEC Filings for CDII > Form 10-Q on 21-May-2013All Recent SEC Filings

Show all filings for CD INTERNATIONAL ENTERPRISES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CD INTERNATIONAL ENTERPRISES, INC.


21-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussion and analysis of our consolidated financial condition and results of operations for the three months and six months ended March 31, 2013 and 2012 should be read in conjunction with the consolidated financial statements and other information presented in our Annual Report on Form 10-K for the year ended September 30, 2012 as filed with the Securities and Exchange Commission on March 31, 2013 and with the consolidated financial statements and other information presented in this Quarterly Report on Form 10-Q.

OVERVIEW OF OUR OPERATIONS
Our Business

We are a U.S. company that manages a portfolio of entities in China and the Americas. We also provide business and financial consulting services to public and private American and Chinese businesses. We operate in three identifiable segments: Magnesium, Basic Materials, and Consulting.

Historically, our Magnesium segment has represented our largest segment by assets and revenues. We manufacture and sell pure magnesium and related by-products sourced and produced in China. We also purchase and resell magnesium products sourced and produced in China by third parties. Magnesium is the lightest and strongest of the structural metals; it is one fourth the weight of steel, two fifths the weight of titanium and two thirds the weight of aluminum. Magnesium is used in a variety of markets and applications due to the physical and mechanical properties of the element and its alloys. Magnesium ingots are the feedstock for the manufacturing process of titanium and aluminum alloying. Magnesium powder and granules are used as a desulphurizer that removes sulfur in the production process of steel. Additionally, various types of magnesium alloys which are produced from the pure magnesium ingots are used in aircraft, automobile parts, and in electronic equipment such as computers, cameras and cellular phones. As described elsewhere herein, in February 2012, we completed the acquisition of 100% of Golden Trust and 80% of Lingshi Magnesium. Golden Trust and Lingshi Magnesium are both engaged in the production of pure magnesium ingots. We have added approximately 20,000 metric tons of annual production capacity from Golden Trust and approximately 12,000 metric tons of annual production capacity from Lingshi Magnesium, bringing our total magnesium production capacity to approximately 90,000 metric tons. Additionally, and as discussed elsewhere herein, in September 2012 we impaired two magnesium facilities, Baotou Changxin Magnesium and Chang Magnesium due to continuous operating stoppages resulting from high cost of production and poor market economic conditions.

Our Basic Materials segment engages in the global purchase and sale of industrial commodities in the Americas which includes mineral ores and non-ferrous metals. As described elsewhere in this report, in September 2012 we sold our majority interest in Lang Chemical and in October 2012 we sold our interest in CDI Beijing. While revenues in prior periods from CDI Beijing were not material to our operations, Lang Chemical's assets represented substantially all of the assets in this segment. This disposition is consistent with our strategy to streamline our investment and assets in China committed to this segment due to poor performance over the past fiscal year and realign our investments to our industrial commodities business in the Americas to maximize our profits and cash flow in fiscal 2013 and beyond.

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

OUR OUTLOOK

A significant portion of our business and operations are in China and, accordingly, its national economy plays a significant role in our results of operations. China's gross domestic product growth (GDP) rate grow to approximately 7.9% in the fourth quarter of calendar year 2012, up from 7.4% in the third calendar quarter of 2012, and up from 7.6% in the second quarter, as compared to the same period in calendar 2011, thanks to accommodative policy, inventory restocking, faster infrastructure investment and a heating up of the housing market. Although the full year growth of 7.8% is the weakest since 1999, evidence of a burgeoning recovery in exports, stronger than expected industrial output and retail sales, together with robust fixed asset investment, all indicated that Beijing's pro-growth policy mix has gained sufficient traction to underpin a revival without yet igniting inflationary risks. In order to boost the economic growth, China's Central Bank cut the nation's commercial banks' reserve requirement ratio by 0.5 percentage point, the first such cut since December 2008, and in June 2012 cut the interest rate twice, in order to provide additional liquidity for commercial lending. This represents a significant shift in China's economic policy signaling that China has put economic growth at the top of its agenda, rather than concerns about inflation. China's import fell 2.6% year-on-year in August 2012 while exports grew a lackluster 2.7% over the same period. The poor export growth reading in August of 2012 confirmed the weakness of the export sector in China's economy. Profits at China's major industrial enterprises fell more steeply in August 2012, extending the decline into a fifth straight month as earnings were dragged down by the continued slowdown in economic growth and rising labor costs.

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During fiscal 2012 and continuing into the first six months of fiscal 2013 the overall economic environment, particularly in China, showed no improvement, and our Basic Materials segment continued to struggle with slower customer demand due to tightened credit conditions in China impacting customer financing needs to purchase our products. We face a number of challenges in continuing the growth of our business, which is primarily tied to the overall health of the global economy. During the fourth quarter of fiscal 2012, we took certain steps in an effect to realign our investments, and streamline and restructure our operations in China, in our Basic Materials segment, as we shift our business and strategic focus in the Basic Materials segment to the expansion of our industrial commodities sourcing and distribution business in the Americas. As discussed above, we sold our 51% interest in Lang Chemical for $1.2 million in late September 2012 and in October 2012 we also sold our 51% interest in CDI Beijing for $1.6 million as part of our streamline steps and restructuring strategy to redirect our investments to our industrial commodities in the Americas so as to maximize our profits and cash flow during fiscal 2013 and beyond.

Information On Trends Impacting Our Reporting Segments Follows:

Magnesium segment.

According to the International Magnesium Association (IMA), an industry trade group, from January 2012 to December 2012(most recent available data) China's domestic magnesium exports totaled approximately 371,100 metric tons, down 7% compared to the same period in 2011. However, according to statistics by the General Administration of Customs in China, as published by China Minor Metals, the global magnesium demand volume in 2012 reached 745,000 tons, increased by 7.5% over 2011, of which, the aluminum magnesium alloy's demand for magnesium reached 280,000 tons with the year-on-year growth of 14% and automobile die pressed casting demand for magnesium reached 210,000 tons with the growth of 10%. In recent months, particularly in the months of January 2013 and February 2013, China magnesium prices stabilized as supplies increased due to expanded production capacity in 2013 and increased demand due to the improved global economy system.

Our average magnesium sales price over the second quarter of fiscal 2013 was approximately $2,649 per metric ton, compared to an average magnesium sales price of approximately $2,757 per metric ton. Magnesium prices incrementally improved over the course of fiscal 2011 reflecting an improved worldwide demand pattern during the first three quarters of calendar 2011, characterized by a gradual increase in prices driven by an increased demand from the global aerospace, automotive and consumer electronics sectors. This was followed by a softening in overall demand beginning in October 2011, which has continued through the second quarter of fiscal 2013, mostly due to renewed concerns over the European debt crisis, tightening credit availability in China forcing domestic competitors to liquidate inventory to raise cash balances and a general slowdown in China manufacturing activities. As a result of the removal of the 10% export tax on magnesium by Chinese government effective January 1, 2013, we build additional inventory during the second quarter of 2013 in anticipation of an improvement in demand in later quarters of 2013 due to the positive impact of tax removal and the recovery of European car industry.

Basic Materials Segment.

As a result of the substantial economic slowdown and lack of new sales in the domestic market in China for our specialty chemicals and steel related products, we disposed of the two main subsidiaries in the fourth quarter of fiscal 2012, and have further realigned our capital investment in these businesses toward our industrial commodities and distribution business in the Americas in an effort to permit us to maximize our revenues, gross profit, and cash flow in this segment in fiscal 2013 and in future years. For the three months ended March 31, 2013 and 2011, we reflected the operations of Lang Chemical and CDI Beijing as a discontinued operation.

As previously disclosed, in fiscal 2012, our operations in Chile experienced shipping delays due to a longer than expected timeframe to receive port authority approval to export the iron ore. During the third quarter of fiscal 2012 we also worked to establish new relationships with suppliers/exporters. One of our suppliers/exporters received port authority approval for shipment during the fourth quarter of fiscal 2012. In the second quarter of fiscal 2013, we sold seven thousand metric tons of iron ore and generated revenue of $417,000. In Bolivia, we established new relationships with a supplier and are working with an engineering specialist to further strengthen our sourcing capabilities and a logistics provider to meet our inland transportation needs.

Consulting Segment.

Our Consulting segment revenues primarily consist of consulting and advisory service fees we received from certain publicly traded U.S. companies with their primary business operations located in the PRC. We receive a fixed number of shares of their marketable securities or fees from those client companies, including both recurring and one-time transaction fees for services provided to clients. Consulting segment revenues vary from period to period depending upon the timing, nature and scope of services we provide to a particular client. We don't see any potential of increase of demand for our consulting services in fiscal 2013. In fiscal 2013, we will continue our marketing initiative for our One-Stop China Value™ program in an effort to capitalize on the current environment. This program is designed to implement a broad range of strategies to enhance and maximize shareholder value for China-based U.S. public companies. Other marketing plans include sponsoring trade symposiums, investment forums, and forming strategic alliances with industry and trade associations.

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GOING CONCERN

Our consolidated financial statements have been prepared assuming we will continue as a going concern. The report of our independent registered accounting firm on our financial statements for the year ended September 30, 2012 contained a qualification as to our ability to continue as a going concern. For the six months ended March 31, 2013, we reported a net loss of approximately $3.96 million and cash used in operating activities of $4.10 million, respectively. At March 31, 2013 we had a working capital deficit of $1.17 million and our revenues for the second quarter of fiscal 2013 declined approximately 46% from the comparable period in fiscal 2012. These, among other issues, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of these uncertainties.

RESULTS OF OPERATIONS

Presentation of discontinued operations

As described elsewhere in this report, during the fourth quarter of 2012 we sold our interests in Lang Chemical and CDI Beijing and discontinued the operations of CDI Jingkun Zinc and CDI Jixiang Metal, all of which were part of our Basic Materials segment. In addition, in the fourth quarter of 2012, we discontinued the operations of Baotou Changxin Magnesium which was part of our Magnesium segment and also took an impairment charge for Chang Magnesium. The results of operations of each of these entities, and all related costs of revenues and operating expenses, for the first six months of fiscal 2013 and the first six months of fiscal 2012 are included in discontinued operations appearing on consolidated statements of operations and comprehensive income (loss) appearing later in this report. As a result, all data presented below is after adjustment for discontinued operations on a comparative basis shown separately in our statement of operations.

Summary of Selected Consolidated Financial Information

                                           Three months ended March 31,
                                          2013                        2012
                                                  % of                       % of
                                   Amount        Revenues      Amount       Revenues
Magnesium segment               $  16,390,793         97%   $ 25,870,727         82%
Basic Materials segment               416,966        2.5%            670        0.0%
Consulting segment                    164,831          1%      5,614,203         18%
Consolidated Revenues           $  16,972,590        100%   $ 31,485,600        100%
Cost of revenues                   16,327,448         96%     25,470,017         81%
Gross profit                          645,142        3.8%      6,015,583         19%

Total operating expenses            2,696,275         16%      2,395,972          8%
Total operating (loss) income   $ (2,051,133)       (12%)   $  3,619,611         11%




                                              Six months ended March 31,
                                           2013                         2012
                                                    % of                       % of
                                    Amount         Revenues      Amount       Revenues
Magnesium segment               $    32,960,287         98%   $ 43,848,287         80%
Basic Materials segment                 440,186        1.3%            670        0.0%
Consulting segment                      352,895          1%     10,780,629         20%
Consolidated Revenues           $    33,753,368        100%   $ 54,629,586        100%
Cost of revenues                     33,052,413         98%     43,392,778         79%
Gross profit                            700,955        2.1%     11,236,808         21%

Total operating expenses              4,817,608         14%      4,980,743          9%
Total operating (loss) income   $   (4,116,653)       (12%)   $  6,256,065         12%

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Consolidated Revenues

Revenues in the second quarter of fiscal 2013 decreased by 46.1%, as compared to the second quarter of fiscal 2012, primarily due to a decrease of 97% in revenues from the Consulting segment due to the lack of new clients, and 37% decrease in revenues from our Magnesium segment. For the six months of fiscal 2013, our revenues decreased 38.2%, as compared to the same period in fiscal 2012, as a result of a decreased in revenues of almost 100% within our Consulting segment and 24.8% within our Magnesium segment.

                    Analysis of Operating Results by Segment

A summary of our comparative operating results by segment for the three months
and six months ended March 31, 2013 and 2012 is as follows:

                                           Three months ended                       Six months ended
 Magnesium Segment                              March 31,                              March 31,
                                         2013                 2012               2013               2012
Total revenues                      $      16,390,793      $ 25,870,727      $    32,960,287    $  43,848,287
Cost of revenues                           15,990,080        25,191,948           32,491,790       43,026,381
Gross profit                                  206,434           678,779              468,497          821,906
Total operating expenses                      684,382           821,945            2,054,063        1,551,475
Operating (loss)                    $        (477,948 )    $   (143,166 )    $    (1,585,566 )  $   (729,569)
)



                              Three months ended              Six months ended
Basic Materials Segment           March 31,                      March 31,
                             2013           2012            2013           2012
Total revenues             $  416,966     $       670      $ 440,186   $        670
Cost of revenues                    -             758              0            758
Gross profit                  416,966             (88 )      440,186           (88)
Total operating expenses       67,204         132,471        171,070        270,128
Operating income (loss)    $  349,762     $  (132,559 )    $ 269,116   $  (270,216)




                                Three months ended                 Six months ended
Consulting Segment                  March 31,                          March 31,
                              2013              2012              2013             2012
Total revenues             $     164,831      $ 5,614,203     $      352,895   $ 10,780,629
Cost of revenues                 337,368          277,311            560,623        365,639
Gross profit                    (172,537 )      5,336,892          (207,728)     10,414,990
Total operating expenses       1,750,410        1,441,554          2,592,475      3,159,140
Operating (loss) income    $  (1,922,947 )    $ 3,895,338     $  (2,800,203)   $  7,255,850

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Revenues by Segment

Our Magnesium segment sold and distributed approximately 5,959 metric tons of magnesium, including 221 metric tons of magnesium powder, generating revenues of $16.39 million for the second quarter of fiscal 2013 (included revenue - related party of $5,439), as compared to 9,329 metric tons, including 278 metric tons of magnesium powder, for revenues of $25.87 million for the second quarter of fiscal 2012 (including revenue - related party of $23,568). For the first six months of fiscal 2013, our Magnesium segment sold and distributed approximately 11,693 metric tons and generating revenues of $15.78 million, as compared to 15,674 metric tons on revenue of $43.8 million in the same period of fiscal 2012, after adjustment for discontinued operations on a comparative basis shown separately in our statement of operations. The average sales price of our magnesium for ingot and powder sales for the second quarter of fiscal 2013, excluding processing fees, decreased by 3.9% and volume decreased by 36.1% resulting in lower revenues for the second quarter of fiscal 2013. The average sales price of our magnesium segment for the first six month of fiscal 2013 decreased by 5.3% and volume decreased by 25.4%, resulting in a decrease of 24.8% in sales volume. Included in the $16.39 million of magnesium segment revenues for the second quarter of fiscal 2013 was approximately $0.62 million and for the first six months of fiscal 2013 was about $1.58 million in processing fees which is a new source of revenue for selling reduction tanks for the Magnesium segment. During the second quarter of fiscal 2013, our related party revenue was $5,439 and was related to an adjustment to revenue that was previously recorded in the fourth quarter of fiscal 2012. We did not have any addition revenue to related party in the first six months of fiscal 2013 to offset this adjustment.

Our Basic Materials segment generated approximately $416,966 in revenues in the second quarter and $440,186 in the six months of fiscal 2013, as compared to $670 for the second quarter and the first six months of fiscal 2012 and was related to the sale of iron ore within Chile.

Consulting segment revenues vary from period to period depending upon the timing, nature and scope of services we provide to a particular client. Our Consulting segment generated $0.16 million in revenues during the second quarter and $0.35 million in the first six months of fiscal 2013, as compared to $5.61 million in the second quarter and $10.8 million in the first six months of fiscal 2012, primarily due to lack of new clients. During the second quarter of fiscal 2012, we received marketable securities for services provided to one new client which accounted for 93% of our Consulting segment revenue.

Consolidated Gross Profit

Our consolidated gross profit in the second quarter of fiscal 2013 decreased by 89% and decreased by 94% in the first six months of fiscal 2013, as compared to the same period of fiscal 2012. Our consolidated gross profit margin decreased to 4% in the second quarter and decreased to 2% in the first six months of fiscal 2013, as compared to 19% and 20% in the same period of 2012. The decrease in gross profit was primarily due to decrease in the average sales price of our magnesium for ingot and powder sales as discussed above and an approximately 3% increase in our average costs. Additionally, we had a 100% decrease in gross profit from our Consulting segment.

Gross Profit by Segment

Gross profit in the second quarter of fiscal 2013 for our Magnesium segment decreased by 41%, and in the first six months of fiscal 2013 decreased by 43% compared to the same periods of fiscal 2012. The gross profit margin as a percentage of revenues was 2.4% in the second quarter of fiscal 2013 as compared to 1.4% in the second quarter of fiscal 2012, and 2.6% as compared to 1.9% in first six months of fiscal 2013 and fiscal 2012, respectively. The decrease in gross profit for the second quarter of fiscal 2013 was primarily due to a decrease in sales revenues and cost of revenues of 37%, and a 25% decreased in revenue and cost of revenues in the first six months of fiscal 2103.

Gross profit (loss) in our Consulting segment for the second quarter of fiscal 2013 was $(172,537) as compared to $5.34 million with a margin of 95% for the second quarter of fiscal 2012. For the first six months of fiscal 2013, gross profit (loss) in our Consulting segment was $(207,728) as compared to $10.4 million with a margin of 97% in the same period of fiscal 2012. The 2013 period gross loss was attributable to a lack of revenue to offset costs incurred as we continue to provide services to client companies in periods subsequent to the period in which the revenue is recognized.

Total Operating Expenses

Total operating expenses, net of other operating income, increased by 12.5% in the second quarter of fiscal 2013 and decreased 3% in the first six months of fiscal 2013, as compared to the comparable periods in fiscal 2012. The increase was primarily due to our Consulting segment increased of $0.31 million operating expenses in the second quarter and decreased by $0.57 million in the six months of fiscal 2013, as compared to the same period of 2012.

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Operating Expenses by Segment

Operating expenses in our Magnesium segment during the first six months of fiscal 2013 increased by 32% primarily due to the higher selling, general and administrative expenses resulting from the additions of the costs associated with Golden Trust, Lingshi Magnesium, and Beauty East, as well as higher employee benefit expenses. For the second quarter of fiscal 2013, operating expenses decreased by 17.0% due to cost cutting measures as a result of a slowdown in production.

Operating expenses in our Basic Materials segment for the second quarter and the first six months of fiscal 2013 decreased 49% and 36% as compared to the same period of fiscal 2012, primarily due to a $65,000[fix number] million and $0.09 million decrease in operational fees and a decrease in travel expenses incurred in serving our clients based for South America in the second quarter and the first six months of fiscal 2013.

For the second quarter of fiscal 2013, operating expenses in our Consulting segment increased 21% as compared to the second quarter of fiscal 2012 primarily due to an increase in compensation and consulting fees related to the distribution of matektable securities to an officer, employees, and consultants of $850,000 million. However, for the first six months of fiscal 2013, operating expenses in our Consulting segment decreased 18% as compared to the first six month of fiscal 2012 primarily due to implementation of general and administrative expenses cost cutting measures. During the first six months of fiscal 2013, as compared to the same period of fiscal 2012, we had a decrease in compensation expense to employees and directors fees of approximately $571,500, a decrease in accounting and auditing fees of approximately $80,000 related to acquisition of Golden Trust and Lingshi Xinghai Magnesium in the 2012 period, a decrease in public relations fees of $147,000, a decrease in insurance expense of $78,000 and a decrease in other operating expenses of $344,000 to offset increased by $575,700 in consulting expenses and legal fees.

Other Income (Expenses)

For the second quarter of fiscal 2013, other expense was approximately $260,000 as compared to $400 for the second quarter of 2012, a change of $259,300. For the first six months of fiscal 2013, other expense was $176,000 as compared to other income of $745,000, a change of $$921,000compared to the first six months of fiscal 2012. The decrease was primarily due to a decrease in other income related to the recovery of previously written off other receivables, and an increase in interest expense because of increased loan payables, net of interest income of $337,000 and $619,400, respectively in the second quarter and the first six month. In the first six month of fiscal 2013, realized gain on available-for sale marketable securities increased by $116,000 due to $ 515,400 gain on the recovery of previously written off marketable securities to offset $399,400 loss on sale and distribution of marketable securities.

Discontinued Operations

For the second quarter of fiscal 2013, gain from discontinued operations increased primarily due to the sale and disposition of some fixed assets for the impairment of our subsidiaries of Magnesium segment during the fourth quarter of fiscal 2012 as previously disclosed.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of March 31, 2013 we had a working capital deficit of $1.17 million as compared to a working capital deficit of . . .

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