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CDII > SEC Filings for CDII > Form 10-Q on 3-Sep-2013All Recent SEC Filings

Show all filings for CD INTERNATIONAL ENTERPRISES, INC.

Form 10-Q for CD INTERNATIONAL ENTERPRISES, INC.


3-Sep-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 nine months ended June 30, 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 December 28, 2012 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.

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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. According to the latest data provided by China Customs Center, the exports and imports kept a slow increasing trend in the first half year of 2013. In June 2013, the export fell 3.1% from a year earlier, while imports fell 0.7% from a year ago. The external market demand continues to slump, which inhibited the further expansion of China's exports. In the latest "Global Economic Prospects" the World Bank Expected the 2013 global economic growth is going to decrease from the previous 2.4% to 2.2%, with growth in developed countries fell to 1.2% from 1.3% in developing country's growth rate from 5.5% to 5.1%. Weakness in external demand led directly to the decreasing of China export.

Currency exchange rates, labor cost, and other costs of exports continued to rise, which increased the difficulty of exporting. According to Bank for International Settlements, by the end of July 2013 the RMB real effective exchange rate of 112.83, has appreciated by approximately 15% in the past two years. The People's Bank data show that as of June 28, the RMB against the U.S. dollar, euro and Yen appreciated 1.7%, 3.3% and 16.7% respectively in the past year. Meanwhile, domestic labor costs In China continue to increase in the first half of year. Several provinces have raised their minimum wage. According to the survey prepared by China Customs Center there are 70.5% and 59.8% of companies reflects the labor cost rate and foreign currency exchange rate increased in the past quarter.

In order to boost the economic growth, China's Central Bank has cut the nation's commercial banks' reserve requirement ratio by 1.5 percentage point since November 2011, 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.

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 to May 2013 (latest available data) China's domestic magnesium exports totaled approximately 175,100 metric tons, up by 6.33% compared to the same period in 2012. 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.

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Our average magnesium sales price over the third 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 third 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. However, sale price of magnesium also pulled back by approximately 10%, therefore, we were not able to make higher profit. We believe demand from European market will gradually rise and believe magnesium revenues will slightly increase in fiscal 2014.

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 nine months ended June 30, 2013 and 2012, 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. In the third quarter of 2013, we developed a new market in Ecuador and exported 3,430 metric tons iron to China and generated revenue of $422,726.

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 do not see any potential of increase of demand for our consulting services in fiscal 2013. In fiscal 2013, we continue our marketing initiative for our One-Stop China Value™ program in an effort to attract new consulting clients. 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 possible sponsoring trade symposiums, investment forums, and forming strategic alliances with industry and trade associations.

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 consolidated financial statements for the year ended September 30, 2012 contained a qualification as to our ability to continue as a going concern. For the nine months ended June, 2013, we reported a loss from continuing operations of $6.1 million, a net loss of approximately $4.86 million and cash used in operating activities of $4.99 million.

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At June 30, 2013 we had a working capital deficit of $2.3 million and our cash has declined 71% from September 30, 2012. In addition, our revenues for the third quarter of fiscal 2013 and the nine months ended June 30, 2013 declined approximately 30.2% and 36%, respectively, from the comparable periods in fiscal 2012. These, among other issues, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

                             RESULTS OF OPERATIONS

Summary of Selected Consolidated Financial Information

                                                        Three months ended June 30,
                                                      2013                         2012
                                                               % of                        % of
                                               Amount         Revenues      Amount        Revenues
Magnesium segment                          $    18,055,598         97%   $  26,539,758        100%
Basic Materials segment                            457,995          3%             174         <1%
Consulting segment                                  68,305         <1%          85,784         <1%
Consolidated Revenues                           18,581,898        100%      26,625,716        100%
Cost of revenues                                17,812,263         96%      25,980,164         98%
Gross profit                                       769,635          4%         645,552          2%
Total operating expenses                         2,526,581         14%       2,950,356         11%
Operating (loss) income                        (1,756,946)        (9%)     (2,304,804)        (9%)
(Loss) income from continuing operations       (1,858,467)       (10%)     (1,633,457)        (6%)
Gain (loss) from discontinued operations           964,724          5%       (120.681)        (1%)
Net (loss) income                          $     (893,743)        (5%)   $ (1,754,138)        (7%)

                                                         Nine months ended June 30,
                                                      2013                         2012
                                                               % of                        % of
                                               Amount         Revenues      Amount        Revenues
Magnesium segment                          $    51,015,885         97%   $  70,388,045         87%
Basic Materials segment                            898,181          2%             844         <1%
Consulting segment                                 421,200          1%      10,866,413         13%
Consolidated Revenues                           52,335,266        100%      81,255,302        100%
Cost of revenues                                50,864,676         97%      69,372,942         85%
Gross profit                                     1,470,590          3%      11,882,360         15%
Total operating expenses                         7,344,189         14%       7,931,099         10%
Operating (loss) income                        (5,873,599)       (11%)       3,951,261          5%
(Loss) income from continuing operations       (6,058,732)       (11%)       3,735,795          5%
Gain (loss) from discontinued operations         1,202,327          2%       (786,285)        (1%)
Net (loss) income                          $   (4,856,405)        (9%)   $   2,949,510          4%

Consolidated Revenues

Revenues in the third quarter of fiscal 2013 decreased by 30.2%, as compared to the third quarter of fiscal 2012, primarily due to a decrease of 20% in revenues from the Consulting segment due to the lack of new clients, and 32% decrease in revenues from our Magnesium segment. For the nine months of fiscal 2013, our revenues decreased 35.6%, as compared to the same period in fiscal 2012, as a result of a decreased in revenues of 96.1% within our Consulting segment and 27.5% within our Magnesium segment.

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                    Analysis of Operating Results by Segment

A summary of our comparative operating results by segment for the three months
and nine months ended June 30, 2013 and 2012 is as follows:

                                         Three months ended                    Nine months ended
 Magnesium Segment                            June 30,                              June 30,
                                       2013               2012              2013                2012
Total revenues                     $   18,055,598      $ 26,539,758     $    51,015,885    $    70,388,045
Cost of revenues                       17,299,303        25,705,216          49,791,093         68,731,597
Gross profit                              756,295           834,542           1,224,792          1,656,448
Total operating expenses                1,687,371         1,404,071           3,741,434          2,955,546
Operating (loss)                   $     (931,076 )    $   (569,529 )   $    (2,516,642 )  $   (1,299,098)




                              Three months ended              Nine months ended
 Basic Materials Segment           June 30,                        June 30,
                             2013            2012            2013           2012
Total revenues             $   457,995     $       174      $ 898,181   $        844
Cost of revenues               507,442             243        507,442          1,001
Gross profit (loss)           (49,447)             (69 )      390,739          (157)
Total operating expenses       185,234         123,543        356,304        393,761
Operating income (loss)    $ (234,681)     $  (123,612 )    $  34,435   $  (393,918)




                                Three months ended                 Nine months ended
 Consulting Segment                  June 30,                          June 30,
                             2013              2012               2013             2012
Total revenues             $    68,305      $      85,784     $      421,200   $ 10,866,413
Cost of revenues                 5,517            274,705            566,149        640,344
Gross profit (loss)             62,788          (188,921)          (144,940)     10,226,069
Total operating expenses       653,976          1,422,742          3,246,451      4,581,882
Operating (loss) income    $  (591,188 )    $ (1,611,663)     $  (3,391,391)   $  5,644,187

Revenues by Segment

Our Magnesium segment sold and distributed approximately 6,598 metric tons of magnesium, including 192 metric tons of magnesium powder during the third quarter of fiscal 2013, as compared to approximately 8,894 metric tons, including 128 metric tons of magnesium powder, the third quarter of fiscal 2012. For the first nine months of fiscal 2013, our Magnesium segment sold and distributed approximately 18,483 metric tons as compared to approximately 24,568 metric tons 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 third quarter of fiscal 2013, excluding processing fees, decreased by 9.1% and volume decreased by 25.8% resulting in lower revenues for the third quarter of fiscal 2013. The average sales price of our magnesium segment for the first nine month of fiscal 2013 decreased by 8.2% and volume decreased by 24.7%, resulting in a decrease of 27.5% in sales volume. Included in the $18.1 million of Magnesium segment revenues for the third quarter of fiscal 2013 was approximately $0.8 million, and for the first nine months of fiscal 2013 was about $2.4 million in processing fees which is a new source of revenue for selling reduction tanks for the Magnesium segment.

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We have been experiencing declined revenue due to reduced demand from our existing clients. Also, we have been reducing our sales price by 8-10% in response to competition. Golden Trust and Lingshi Magnesium has been our main revenue stream while Gold Magnesium and Chang Magnesium have been in idling state.

Revenues from our Basic Materials segment in the third quarter and the first nine months of fiscal 2013 increased significantly from the fiscal 2012 periods principally related to the sale of iron ore within South America. In the third quarter of fiscal 2013, we further expanded our business in Ecuador and sold 3,430 metric tons of iron ore to clients in China.

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, and we receive a fixed number of shares of their marketable securities or fees from those client companies, including both recurring and one-time transaction fees for services we provide to clients. Revenue from our Consulting segment declined significantly during the fiscal 2013 periods as compared to the fiscal 2012 period due to lack of new clients.

Consolidated Gross Profit

Our consolidated gross profit margin increased to 4% in the third quarter of fiscal 2013 and decreased to 3% in the first nine months of fiscal 2013, as compared to 2% and 15%, respectively, for the same period of fiscal 2012. The increase in our gross margin for the third quarter of fiscal 2013 is primarily attributable to cut cost in our consulting segment. The decrease in gross profit margin for the nine months ended June 30, 2013 from the comparable period in fiscal 2012 was primarily due to decrease in both average sales price and sales volume 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 third quarter of fiscal 2013 for our Magnesium segment decreased by 9%, and in the first nine months of fiscal 2013 decreased by 26% compared to the same periods of fiscal 2012. The gross profit margin as a percentage of revenues was 4.2% in the third quarter of fiscal 2013 as compared to 3.1% in the third quarter of fiscal 2012, and 2.4% for both the first nine months of fiscal 2013 and fiscal 2012. The increase in gross profit for the third quarter of fiscal 2013 was primarily due to a decrease in sales revenues and cost of revenues of 32%, and a 27% decreased in revenue and cost of revenues in the first nine months of fiscal 2013.

The gross profit in our Consulting segment for the third quarter of fiscal 2013 was $62,788 as compared to a gross loss of $(188,291) for the third quarter of fiscal 2012. For the first nine months of fiscal 2013, the gross loss in our Consulting segment was $(144,940) as compared to a gross profit of $10.2 million in the same period of fiscal 2012. The 2013 period gross losses were 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, decreased by 14.4% in the third quarter of fiscal 2013 and decreased 7.4% in the first nine months of fiscal 2013, as compared to the comparable periods in fiscal 2012. The decrease was primarily due to our Consulting segment decreased of $0.77 million operating expenses in the third quarter and decreased by $1.33 million in the nine months of fiscal 2013, as compared to the same period of 2012.

Operating Expenses by Segment

Operating expenses in our Magnesium segment during the first nine months of fiscal 2013 increased by 27% 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 third quarter of fiscal 2013, operating expenses increased by 20.2% due to Golden Magnesium made a higher compensation payments of approximately $1.07 million to the previous employees for the idling state of production during last fiscal year 2012 and 2013.

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Operating expenses in our Basic Materials segment for the third quarter and the first nine months of fiscal 2013 increased by 50% and decreased by 9% as compared to the same period of fiscal 2012, primarily due to the initial set up costs of $100,000 associated with our new subsidiary in Chile in third quarter, and $18,000 and $49,000 decreases in travel expenses incurred in serving our clients based for South America in the third quarter and the first nine months of fiscal 2013.

For the third quarter of fiscal 2013, operating expenses in our Consulting segment decreased by 54% as compared to the third quarter of fiscal 2012 primarily due to an decrease of54% in insurance costs, a decrease of 90% in conference and meeting fees, a decrease of 76% in travel expenses, and a decrease of approximately 60% in employee salary with compensation and office expenses and other operational fees. For the first nine months of fiscal 2013, operating expenses in our Consulting segment decreased by 29% as compared to the first nine month of fiscal 2012 primarily due to implementation of general and administrative expenses cost cutting measures. During the first nine 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 $965,000, a decrease in office supply and expense fees of approximated $48,000, a decrease $129,000 in board expenses a decrease in public relations fees of $192,000, a decrease in insurance expense of $120,000 and a decrease in finder fees of $261,000 to offset increased by $460,000 in consulting expenses and legal fees.

Other Income (Expenses)

For the third quarter of fiscal 2013, other income was approximately $36,000 as compared to other expense of $42,000 for the third quarter of 2012, a change of . . .

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