PINX:CDII Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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

 
CD INTERNATIONAL ENTERPRISES, 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 [ü] 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 [ü ] 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
[ü]
(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 [ü]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 48,001,080 shares of common stock were issued and outstanding as of May 7, 2012.

 
 

 


TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION
Page No.
 
Item 1.
Financial Statements.
1
   
Consolidated Statement of Operations and Comprehensive Income (unaudited)
    Three and six months ended March 31, 2012 and 2011
1
   
Consolidated Balance Sheets
    As of March 31, 2012 (unaudited) and September 30, 2011
   
Consolidated Statement of Cash Flows (unaudited)
    Six months ended March 31, 2012 and 2011
3
   
Notes to Consolidated Financial Statements
4
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
36
 
Item 4.
Controls and Procedures.
36
PART II - OTHER INFORMATION
 
 
Item 1.
Legal Proceedings.
37
 
Item 1A.
Risk Factors.
38
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
38
 
Item 3.
Defaults Upon Senior Securities.
39
 
Item 4.
Mine Safety Disclosures.
39
 
Item 5.
Other Information.
39
 
Item 6.
Exhibits.
39
 
Signatures
  40

 
i

 



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 “Exchange Act”). 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 Quarterly Report on Form 10-Q 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 2011 Annual Report on Form 10-K and in Item 1A. of this reqport:
 
 
 
Delisting of our common stock by The Nasdaq.
 
 
Continued global economic weakness is expected to reduce demand for our products in each of our segments.
 
 
Fluctuations in the pricing and availability of magnesium and in levels of customer demand.
 
 
Changes in the prices of magnesium and magnesium-related products.
 
 
Our ability to implement our expansion plans for growing our business through increased magnesium production capacity and acquisitions and development of our commodity trading business.
 
 
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.
Adverse outcome of the bankruptcy of CDII Trading
 
 
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 the PRC.
 
 
The impact of environmental and safety regulations, which may increase our compliance costs and reduce our overall profitability.
 
 
The effect of changes resulting from the political and economic policies of the Chinese government on our assets and operations located in the PRC.
 
 
The impact of Chinese economic reform policies.

 
ii

 


 
 
The influence of the Chinese government over the manner in which our Chinese subsidiaries must conduct our business activities.
 
 
The impact on future inflation in the PRC on economic activity in the PRC.
 
 
The impact of any natural disasters and health epidemics in China.
 
 
The impact of labor laws in the PRC may adversely affect our results of operations.
 
 
The limitation on our ability to receive and use our revenues effectively as a result of restrictions on currency exchange in the PRC.
 
 
Fluctuations in the value of the RMB may have a material adverse effect on your investment.
 
 
The market price for shares of our common stock has been and may continue to be highly volatile and subject to wide fluctuations.
 
We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 
iii

 
INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

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

We used in this report the terms:

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

Magnesium Segment

 
 
“Chang Magnesium", refers to Taiyuan Changxin Magnesium Co., Ltd., a company organized under the laws of the PRC and a 51% owned subsidiary of CDI China;
 
 
“Chang Trading”, refers to Taiyuan Changxin YiWei Trading Co., Ltd., a company organized under the laws of the PRC and a wholly owned subsidiary of Chang Magnesium;
 
 
“Asia Magnesium”, refers to Asia Magnesium Corporation Limited, a company organized under the laws of Hong Kong and a wholly owned subsidiary of Capital One Resource;
 
 
“Golden Magnesium" refers to Shanxi Gu County Golden Magnesium Co., Ltd., a company organized under the laws of the PRC and a 100% owned subsidiary of 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;
 
 
“IMG” or “International Magnesium Group”, refers to International Magnesium Group, Inc., a Florida corporation and a 100% owned subsidiary of CD International Industries;
 
 
“IMTC” or “International Magnesium Trading”, refers to International Magnesium Trading Corp., a company organized under the laws of Brunei and a 100% owned subsidiary of IMG;
 
 
“Ruiming Magnesium”, refers to Taiyuan Ruiming Yiwei Magnesium Co., Ltd., a company organized under the laws of the PRC and an 80% majority owned subsidiary of CDI China;
 
 
 “Beauty East”refers to Beauty East International, Ltd., a Hong Kong company and a wholly owned subsidiary of CDI China.
 
 
 “Marvelous Honor”refers to Marvelous Honor Holdings Inc., a Brunei company and a wholly owned subsidiary of CDI China.
 
 
 “Golden Trust”refers to Golden Trust Magnesium Industry Co., Ltd.a company organized under the laws of
the PRC and a wholly owned subsidiary of CDI China; and
 
 
 “Lingshi Magnesium”refers to Lingshi Xinghai Magnesium Industry Co., Ltd.a company organized under the
laws of the PRC and a wholly  owned subsidiary of Ruiming Magnesium.

Basic Materials Segment

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

Consulting Segment

 
 
“China Direct Investments”, refers to China Direct Investments, Inc., a Florida corporation, and a wholly owned subsidiary of CD International;
 
 
“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.
 
iv

 

PART 1 – FINANCIAL INFORMATION
Item 1.  Financial Statements.

CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)

   
For three months ended
   
For six months ended
 
   
March 31, 2012
   
March 31, 2011
   
March 31, 2012
   
March 31, 2011
 
                         
Revenues
  $ 41,918,335     $ 40,670,183     $ 78,282,802     $ 86,433,072  
Revenues-related parties
    23,568       1,597,830       570,999       1,604,543  
     Total revenues
    41,941,903       42,268,013       78,853,801       88,037,615  
Cost of revenues
    35,386,469       39,042,825       66,701,012       78,281,381  
     Gross profit
    6,555,434       3,225,188       12,152,789       9,756,234  
Operating (expenses) income:
                               
   Selling, general, and administrative
    (2,735,309 )     (3,212,630 )     (6,155,582 )     (6,814,911 )
   Other operating income-related party
    -       102,872       -       102,872  
   Other operating (expense) income
    -       (19,782 )     -       355,198  
       Total operating expenses
    (2,735,309 )     (3,129,540 )     (6,155,582 )     (6,356,841 )
       Operating income
    3,820,125       95,648       5,997,207       3,399,393  
Other (expenses) income:
                               
   Other (expense) income
    (216,909 )     93,842       266,801       265,361  
   Interest income (expense)
    21,002       (59,297 )     80,012       (67,044 )
   Realized loss on available-for-sale securities
    (31,318 )     (261,557 )     (17,062 )     (379,969 )
       Total other (expenses) income
    (227,225 )     (227,012 )     329,751       (181,652 )
        Income (loss) before income taxes
    3,592,900       (131,364 )     6,326,958       3,217,741  
   Income tax expense
    (1,630,766 )     (140,925 )     (1,623,309 )     (67,641 )
     Net income (loss)
    1,962,134       (272,289 )     4,703,649       3,150,100  
   Net loss attributable to noncontrolling interests
    47,453       278,664       436,646       322,111  
      Net income attributable to CD International
  $ 2,009,587     $ 6,375     $ 5,140,295     $ 3,472,211  
                                 
Deduct dividends on Series A Preferred Stock:
                               
   Preferred stock dividend
    (20,130 )     (20,130 )     (40,260 )     (40,260 )
      Net income (loss) attributable to common stockholders
  $ 1,989,457     $ (13,755 )   $ 5,100,035     $ 3,431,951  
COMPREHENSIVE(LOSS) INCOME :
                               
Net income (loss)
  $ 1,962,134     $ (272,289 )   $ 4,703,649     $ 3,150,100  
   Foreign currency translation adjustments
    (399,353 )     744,548       115,630       1,536,506  
   Unrealized (loss) gains on available-for-sale securities
    (1,972,195 )     3,423,130       1,236,371       3,946,297  
   Reclassification adjustment for loss included in net income
    -       261,557               379,969  
Comprehensive (Loss) income
  $ (409,414 )   $ 4,156,946     $ 6,055,650     $ 9,012,872  
   Net loss attributable to noncontrolling interests
    47,453       278,664       436,646       322,111  
   Foreign currency translation adjustments - noncontrolling interests
    142,474       (283,373 )     89,543       (557,551 )
Comprehensive (loss) income attributable to CD International
  $ (219,487 )   $ 4,152,237     $ 6,581,839     $ 8,777,432  
   Preferred stock dividend
    (20,130 )     (20,130 )     (40,260 )     (40,260 )
Comprehensive (loss) income attributable to common stockholders
  $ (239,617 )   $ 4,132,107     $ 6,541,579     $ 8,737,172  
                                 
Basic and diluted income per common share
                               
   Basic
  $ 0.05     $ (0.00 )   $ 0.12     $ 0.10  
   Diluted
  $ 0.05     $ (0.00 )   $ 0.12     $ 0.10  
   Basic weighted average common shares outstanding
    41,493,611       34,728,413       41,027,226       33,257,657  
   Diluted weighted average common shares outstanding
    42,174,672       34,728,413       41,708,287       33,257,657  

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

 
- 1 -

 


CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
March 31,
2012
   
September 30,
2011
 
ASSETS
 
(Unaudited)
       
Current Assets:
           
    Cash and cash equivalents
  $ 12,480,503     $ 12,563,126  
    Available-for-sale Marketable securities (Note 6)
    6,987,414       8,292,837  
    Available- for- sale-Marketable securities-related parties (Note 6)
    330,148       542,386  
    Accounts and notes receivables, net of allowance of $267,803 and $276,069, respectively (Note 7)
    31,431,741       20,428,217  
    Accounts, loans and other receivables, and prepaid expenses - related parties (Note 12)
    2,109,153       9,598,583  
    Inventories, net (Note 8)
    18,716,914       9,625,774  
    Prepaid expenses and other current assets, net (Note 9)
    19,514,155       14,389,065  
    Restricted cash, current
    1,433,078       1,547,159  
       Total current assets
    93,003,106       76,987,147  
    Property, plant and equipment, net (Note 10)
    62,718,969       36,873,988  
    Intangible assets
    144,916       163,447  
    Property use rights, net
    4,223,840       2,252,445  
    Other long-term assets
    485,603       58,192  
       Total assets
  $ 160,576,434     $ 116,335,219  
LIABILITIES AND EQUITY
               
Current Liabilities:
               
    Loans payable-short term (Note 11)
  $ 2,308,134     $ 2,657,091  
    Accounts payable and accrued expenses
    17,322,903       15,468,902  
    Accounts and other payables-related parties (Note12)
    23,039,102       4,590,045  
    Advances from customers and deferred revenue
    4,856,694       3,821,208  
    Other liabilities (Note 13)
    8,687,353       4,315,858  
    Taxes payable
    2,598,201       1,349,611  
       Total current liabilities
    58,812,387       32,202,715  
    Long-term liabilities
    33,141       107,231  
      Total Liabilities
    58,845,528       32,309,946  
                 
TOTAL EQUITY
               
Series A Convertible Preferred Stock: $.0001 par value, stated value $1,000 per share; 10,000,000 authorized, 1,006 shares outstanding at March 31, 2012 and September 30, 2011. (Note 14)
    1,006,250       1,006,250  
Common Stock: $.0001 par value;  1,000,000,000 authorized; 47,975,385 and 40,353,828 issued and outstanding as of March 31, 2012  and September 30, 2011, respectively (Note 14)
    4,798       4,035  
Additional paid-in capital
    82,901,957       75,279,087  
Accumulated other comprehensive income
    1,570,487       128,943  
Accumulated deficit
    (3,016,287 )     (8,111,323 )
       Total CD International stockholders' equity
    82,467,205       68,306,992  
    Non-controlling interests (Note 15)
    19,263,701       15,718,281  
       Total equity
    101,730,905       84,025,273  
       Total liabilities and equity
  $ 160,576,434     $ 116,335,219  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
- 2 -

 


CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  

   
For six months ended
 
   
March 31, 2012
   
March 31, 2011
 
OPERATING ACTIVITIES:
           
Net income
  $ 4,703,649     $ 3,150,100  
Adjustments to reconcile net income to net cash used in operating activities:
               
   Depreciation and amortization
    1,519,445       1,910,931  
   Allowance for bad debt
    8,266       137,492  
   Stock based compensation
    412,668       368,248  
   Realized (gain) loss on investments in marketable securities
    (83,403 )     379,969  
   Gain on derivative liabilities revaluation
    (74,090 )     (159,467 )
   Fair value of marketable securities received for services
    (10,863,173 )     (6,852,529 )
   Fair value of marketable securities paid for services
    484,660       314,815  
Changes in operating assets and liabilities:
               
   Prepaid expenses and other assets
    (3,729,432 )     (2,645,447 )
   Accounts receivable and other assets-related parties
    8,920,577       (549,542 )
   Inventories
    (4,045,477 )     (3,255,488 )
   Accounts receivable
    789,867       (4,944,399 )
   Accounts payable and accrued expenses
    (609,127 )     (1,274,340 )
   Accounts and other payable - related parties
    135,797       4,061,031  
   Advances from customers
    98,157       (592,184 )
   Other payables
    1,257,846       2,312,258  
CASH USED IN OPERATING ACTIVITIES
    (1,073,770 )     (7,638,552 )
                 
INVESTING ACTIVITIES:
               
   Cash acquired from acquisition
    1,808,881       -  
   Gross Proceeds from the sale of marketable securities available for sale
    606,393       818,456  
   Increase in property use right
    -       (270,827 )
   Purchases of property, plant and equipment
    (1,109,155 )     (1,493,649 )
CASH PROVIDED BY (USED IN) INVESTING ACTIVITES
    1,306,119       (946,020 )
                 
FINANCING ACTIVITIES:
               
   Decrease in restricted cash
    114,081       4,663,493  
  Loans payable
    (348,957 )     (3,189,897 )
  Gross proceeds from sale of stock and exercise of warrants/options
    -       3,771,502  
  Cash dividend payment to preferred stockholders
    (20,130 )     -  
  Capital contribution from noncontrolling interest owners
    214,348       1,710,909  
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    (40,658 )     6,956,007  
                 
EFFECT OF EXCHANGE RATE ON CASH
    (274,314 )     951,789  
Net decrease in cash
    (82,623 )     (676,776 )
Cash and cash equivalents, beginning of the period
    12,563,126       10,110,818  
Cash and cash equivalents, end of the period
  $ 12,480,503     $ 9,434,042  
Supplemental disclosures of cash flow information:
               
   Preferred dividend paid in our common stock
  $ 20,130     $ 40,260  

The accompanying notes are an integral part of these unaudited consolidated financial statements.


 
- 3 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 

NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Organization

CD International Enterprises, Inc., a Florida corporation and its subsidiaries are referred to in this report as “we”, “us”, “our”, or “CD International.”

We are a U.S. based company that sources, produces and distributes industrial products in Asia, Europe, Australia, 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, as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting:” Magnesium, Basic Materials and Consulting.  Beginning in 2006 we established our Magnesium and Basic Materials segments which have grown through acquisitions of controlling interests in Chinese private companies.  We consolidate these acquisitions as either wholly or majority owned subsidiaries.  Through our U.S. based industrial commodities business, established in 2009, we source, finance, manage logistics, and sell industrial commodities from North and South America for ultimate distribution in China.

In our Magnesium segment, currently our largest segment by revenues and assets, we produce, sell and distribute pure magnesium ingots, magnesium powder and magnesium alloy.  In our Basic Materials segment, we sell and distribute a variety of products, including industrial grade synthetic chemicals, steel products, non ferrous metals, recycled materials, and industrial commodities.  This segment also includes our zinc ore mining property which has not commenced operations. In our Consulting segment, we provide business and financial consulting services to U.S. public companies that operate primarily in China.  The consulting fees we charge vary based upon the scope of the services.

Name change

We changed our name from China Direct Industries, Inc. to CD International Enterprises, Inc. on January 23, 2012 to more accurately reflect our business operations and our efforts to expand our sourcing, processing, and distribution business in Mexico and South America.

Basis of Presentation

Our interim consolidated financial statements are unaudited. We prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the U.S. Securities and Exchange Commission (“SEC”) rules for interim reporting. We included all adjustments that are necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. These  adjustments are of a normal and recurring nature, with exceptions disclosed in this report. Results for the first six months of the fiscal year 2012 may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes included in our 2011 Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

Summary of Significant Accounting Policies

Foreign Currency Translation

Our reporting currency is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of our Chinese subsidiaries is the Renminbi (“RMB”), the official currency of the People’s Republic of China. 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 dates. Income and expenditures are translated at the average exchange rates for the six months ended March 31, 2012 and 2011. A summary of the conversion rates for the periods presented is as follows:

   
March 31,
2012
   
September 30,
2011
   
March 31,
2011
 
Period end RMB: U.S. dollar exchange rate
    6.3122       6.3885       6.5501  
Average fiscal-year-to-date RMB: U.S. dollar exchange rate
    6.3257       6.5287       6.6103  


 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
 
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 RMB amounts could have been, or could be, converted into United States dollars at the rates applied in the translation.

Fair Value of Financial Instruments

We adopted on a prospective basis certain required provisions of ASC Topic 820, “Fair Value Measurements.”  These provisions relate to our financial assets and liabilities carried at fair value and our fair value disclosures related to financial assets and liabilities. ASC Topic 820 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measurements. 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 of our financial instruments are carried at fair value, including, all of our cash and cash equivalents, accounts and notes receivable, prepayments and other current assets, accounts payable, taxes payable, accrued expenses and other current liabilities, investments classified as available-for-sale securities and assets held for sale, with unrealized gains or losses recognized as Other Comprehensive Income (OCI), net of tax. Virtually all of our valuation measurements are Level 1 measurements.

Marketable Securities

Marketable Securities that we receive from our clients as compensation are generally restricted for sale under Federal securities laws. Our policy is to liquidate securities received as compensation when market conditions are favorable for sale. Since these securities are often restricted, we are unable to liquidate them until the restriction is removed. We recognize revenue for the securities we receive as compensation based on the fair value at the time the securities are granted or at the time service has been rendered and for common stock purchase warrants based on the Black-Scholes valuation model. Pursuant to ASC Topic 320, “Investments –Debt and Equity Securities” our marketable securities have a readily determinable and active quoted price, such as from  the Over the Counter Bulletin Board, and the OTC Markets Group (formerly known as the Pink Sheets) and any unrealized gain or loss is recognized as an element of comprehensive income based on changes in the fair value of the security as quoted on an exchange or an inter-dealer quotation system. Once liquidated, any realized gain or loss on the sale of marketable securities is reflected in our net income for the period in which the security was liquidated.

We perform an analysis of our marketable securities at least on an annual basis to determine if any of these securities have become other than temporarily impaired. If we determine that the decline in fair value is other than temporary we recognize the amount of the impairment as a realized loss into our current period net income (loss). This determination is based on a number of factors, including but not limited to (i) the percentage of the decline, (ii) the severity of the decline in relation to the enterprise/market conditions, and (iii) the duration of the decline.

Derivative Warrant Liabilities

ASC Subtopic 815-40 , “Contracts in Entity’s Own Equity,” requires that entities recognize as derivative liabilities the derivative instruments, including certain derivative instruments embedded in other contracts that are not indexed to an entity’s’ own stock. Pursuant to the provisions of ASC Section 815-40-15, an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of ASC Subtopic 815-40 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency. In the case of any such warrants and convertible bonds, ASC Subtopic 815-40 provides that such warrants and bonds are to be treated as a liability at fair value with changes in fair value recognized in earnings.

 Accrual of Environmental Obligations
 
ASC Section 410-30-25 “Recognition” of environmental obligations requires the accrual of a liability if both of the following conditions are met:

 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
 
 
 a.              Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.
 b.              The amount of the loss can be reasonably estimated.
 
        As of December 31, 2011, we do not have any environmental remediation obligations, nor do we have any asset retirement obligations under ASC 410. Furthermore, we do not have any environmental remediation loss contingencies requiring recognition or disclosure in our financial statements.

Business Combinations

Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition.

Goodwill and Intangibles

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Goodwill is reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the carrying amount. Goodwill is allocated into two reporting units. Fair value for each reporting unit is estimated using stock price multiples or revenue multiples. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing. All of our other intangible assets have finite lives and are amortized on a straight-line basis over varying periods not exceeding eight years.
 
Recent Accounting Pronouncements
 
Comprehensive Income

Accounting Standards Update (“ASU”) No. 2011-05 amends FASB Codification Topic 220 on comprehensive income (1) to eliminate the current option to present the components of other comprehensive income in the statement of changes in equity, and (2) to require presentation of net income and other comprehensive income (and their respective components) either in a single continuous statement or in two separate but consecutive statements. These amendments do not alter any current recognition or measurement requirements in respect of items of other comprehensive income.

The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. We adopted this guidance in our first quarter of fiscal 2012.

Business Combinations

In January 2011, ASU No. 2010-29 clarified that pro forma revenue and earnings for a business combination occurring in the current year should be presented as though the business combination occurred as of the beginning of the year or, if comparative statements are presented, as though the business combination took place as of the beginning of the comparative year.

The new and amended disclosures should be applied prospectively to business combinations consummated on or after the start of the first annual reporting period beginning on or after December 15, 2010, with earlier application permitted. We have adopted this guidance.

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. 


 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 

NOTE 2 - EARNINGS PER SHARE

Under the provisions of ASC 260, “Earnings Per Share,” basic earnings per common share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted earnings per common share is computed assuming that all potentially dilutive securities, including convertible preferred stock, unvested restricted stock and  “in-the-money” stock options, were converted into common shares at the beginning of each period. A reconciliation of the amounts included in the computation of basic earnings per common share, and diluted earnings per common share is as follows (unaudited):

   
For three months ended March 31,
   
For six months ended March 31,
   
   
2012
   
2011
   
2012
   
2011
   
                           
Net Income (loss) to common stockholders
  $ 1,989,457     $ (13,755 )   $ 5,100,035     $ 3,431,951    
 Plus: preferred stock dividends
    20,130       20,130       40,260       40,260    
Net Income to common stockholders plus assumed conversions
  $ 2,009,587     $ 6,375     $ 5,140,295     $ 3,472,211    
                                   
Basic weighted average common shares outstanding
    41,493,611       34,728,413       41,027,226       33,257,657    
Plus: incremental shares from assumed conversions (1)
                                 
    Convertible preferred stock
    558,889       -       558,889       -    
    Unvested stock-based compensation
    122,172       -       122,172       -    
Dilutive potential common shares
    681,061       -       681,061       -    
Diluted weighted-average common shares outstanding
    42,174,672       34,728,413       41,708,287       33,257,657    
                                   
Net income per common share – basic :
  $ 0.05     $ (0.00 )   $ 0.12     $ 0.10   (2)
Net income per common share – diluted:
  $ 0.05     $ 0.00     $ 0.12     $ 0.10   (2)

(1 ) Securities are not included in the denominator in periods when anti-dilutive. We excluded 2,142,980 and 2,292,980 shares of our common stock issuable upon exercise of stock options and 4,179,130 and 6,264,942 shares of our common stock issuable upon exercise of warrants as of March 31, 2012 and 2011, respectively, as their effect was anti-dilutive.

(2) The increase in the earnings per share for the six months ended March 31, 2011 resulted from a correction of prior year accounting errors related to the conversion price change of the preferred stock and the exercise price change of the remaining warrants (See Note 14 – CAPITAL STOCK in Form 10-K for the fiscal year ended September 30, 2011).

NOTE 3 –CHANGE IN ACCOUNTING PRINCIPLE AND METHOD OF DEPRECIATION

In the second quarter of fiscal 2012, we changed our depreciation method applied to our Magnesium Segment production from the straight line method to the units of production method of depreciation.

The straight line method of depreciation for our magnesium segment did not reflect the economics of our magnesium production operations and the proper allocation of cost to the production cycle. The units of production method of depreciation is a preferable accounting method, in accordance with ASC 250-10-45, for fixed assets related to the magnesium production cycle, under which periodic depreciation expenses are calculated based on the actual production as a percentage of the total capacity.


 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
 
The unaudited comparative effect of the change in accounting method and its impact on key components of our statement of operations is described below for the three and six months ended March 31, 2012 and 2011:

   
For three months ended
 March 31, 2012
   
For six months ended
 March 31, 2012
 
   
As reported
   
Straight- line
   
As reported
   
Straight- line
 
Revenues
  $ 41,941,903     $ 41,941,903     $ 78,853,801     $ 78,853,801  
Cost of revenues
    35,386,469       36,138,320       66,701,012       67,452,863  
Gross profit
  $ 6,555,434     $ 5,803,583     $ 12,152,789     $ 11,400,938  
Operating income
  $ 3,820,125     $ 3,068,274     $ 5,997,207     $ 5,245,356  
Net income
  $ 1,962,134     $ 1,210,283     $ 4,703,649     $ 3,951,798  
Net income to common stockholders
  $ 1,989,457     $ 1,237,606     $ 5,100,035     $ 4,348,184  
                                 
Basic and diluted income per common share:
                               
Basic
  $ 0.05     $ 0.03     $ 0.12     $ 0.11  
Diluted
  $ 0.05     $ 0.03     $ 0.12     $ 0.10  
Basic weighted average common shares outstanding
    41,493,611       41,493,611       41,027,226       41,027,226  
Diluted weighted average common shares outstanding
    42,174,672       42,174,672       41,708,287       41,708,287  

   
For three months ended
March 31, 2011
   
For six months ended 
March 31, 2011
 
   
Units of production
   
As reported
(straight-line)
   
Units of production
   
As reported
(straight-line)
 
Revenues
  $ 42,268,013     $ 42,268,013     $ 88,037,615     $ 88,037,615  
Cost of revenues
    38,625,177       39,042,825       77,428,362       78,281,381  
Gross profit
  $ 3,642,836     $ 3,225,188     $ 10,609,253     $ 9,756,234  
Operating income
  $ 495,296     $ 95,648     $ 4,252,412     $ 3,399,393  
Net income (loss)
  $ 127,359     $ (272,289 )   $ 4,003,119     $ 3,150,100  
Net income (loss) to common stockholders
  $ 385,893     $ (13,755 )   $ 4,284,970     $ 3,431,951  
                                 
Basic and diluted income per common share:
                               
Basic
  $ 0.01     $ (0.00 )   $ 0.13     $ 0.10  
Diluted
  $ 0.01     $ (0.00 )   $ 0.13     $ 0.10  
Basic weighted average common shares outstanding
    34,728,413       34,728,413       33,257,657       33,257,657  
Diluted weighted average common shares outstanding
    34,728,413       34,728,413       33,257,657       33,257,657  

NOTE 4 – ACQUISITION OF LINGSHI MAGNESIUM AND GOLDEN TRUST

Following our February 29, 2012 special meeting of shareholders, we completed the acquisition of all of the issued and outstanding capital stock of Golden Trust Magnesium Industry Co., Ltd., a Chinese company (“Golden Trust”) and an 80% ownership interest in Lingshi Xinghai Magnesium Industry Co., Ltd., a Chinese company (“Lingshi Magnesium”) for an aggregate purchase price of $26,705,070 payable as follows:

 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
 
 
$6,493,047 in proceeds from repayment of our intercompany loans,
$15,515,938 in shares of our common stock, with approximately $6,652,823 paid within 15 business days following the closing of the acquisitions and the balance $8,863,115 payable within 15 business days following satisfaction of certain post closing conditions which include the delivery of technical information, financial statements and other information. The value of these shares which are payable following the satisfaction of the post-closing conditions, which had not been met at March 31, 2012, are included in other payables – related parties (See Note 12) in the amount of $8,266,058 and $597,057 included in Other Liabilities (See Note 13); and
$4,696,085 by way of assignment of our interest in our subsidiary Excel Rise.
 
Golden Trust owns and operates a pure magnesium ingot production facility located on approximately 502,000 square feet of land in Xiaoyi City, Shanxi Province, China capable of producing up to 20,000 metric tons of pure magnesium per year. Lingshi Magnesium owns and operates a pure magnesium ingot production facility located on approximately 902,000 square feet of land in Jin Zhong City, Shanxi Province, China, capable of producing up to 12,000 metric tons of pure magnesium per year.

As of March 31, 2012, the consolidated balance sheet includes the net assets at fair value of Lingshi Magnesium and Golden Trust which were acquired by us as of the closing date on February 29, 2012.

The following table summarizes the assets acquired and liabilities assumed by CD International at the acquisition date (unaudited).

   
Lingshi Xinghai
   
Golden Trust
 
             
Current assets
  $ 4,779,690     $ 6,358,048  
Property, plant and equipment and other long term assets
    16,755,467       11,833,150  
    Total identifiable assets
    21,535,157       18,191,198  
                 
Current liabilities
    3,554,969       5,511,768  
   Total identifiable liabilities
    3,554,969       5,511,768  
   Total identifiable net assets
  $ 17,980,188     $ 12,679,430  
Net assets acquired (A)
  $ 14,384,150     $ 12,679,430  
                 

(A) The fair value of non-controlling interest of Lingshi Xinghai, which represents 20% of total equity, was $3,596,038 at the acquisition date, based on the fair value appraisal provided by independent third party, which conducted the appraisal based on market prices.

The tables below provide the pro forma condensed financial statements of operations (unaudited) to give effect to the acquisition of Lingshi Magnesium and Golden Trust for the three and six months ended March 31, 2012.

 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 

For three months ended March 31, 2012:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma
(Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Total revenues
  $ 38,227,648     $ 3,163,831     $ 6,786,339     $ (1,973,134 ) A $ 46,204,684  
Cost of revenues
    31,773,667       3,110,334       6,630,125       (1,973,134 )     39,540,992  
Gross profit
  $ 6,453,981     $ 53,497     $ 156,214     $ -     $ 6,663,692  
Operating income (loss)
  $ 3,826,571     $ 2,614     $ (18,991 )   $ -     $ 3,810,194  
Net income (loss)
  $ 1,963,348     $ 7,385     $ (11,072 )   $ -     $ 1,959,661  
Net income (loss) to common stockholders
  $ 1,956,186     $ 5,908     $ (11,072 )   $ -     $ 1,951,022  
                                         
Basic and diluted income per common share:
                                 
Basic
  $ 0.05                             $ 0.04  
Diluted
  $ 0.05                             $ 0.04  
Basic weighted average common shares outstanding
    41,493,611                       9,369,043       50,862,654  
Diluted weighted average common shares outstanding
    42,174,672                       9,369,043       51,543,715  

(A) Represents elimination of inter-company sales from Lingshi and Golden Trust to CDII subsidiaries.

For six months ended March 31, 2012:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma
(Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Total revenues
  $ 75,571,915     $ 5,334,338     $ 10,785,025     $ (2,494,056 ) A $ 89,197,222  
Cost of revenues
    63,520,580       5,163,513       10,507,347       (2,494,056 )     76,697,384  
Gross profit
  $ 12,051,335     $ 170,825     $ 277,678     $ -     $ 12,499,838  
Operating income (loss)
  $ 6,003,652     $ 39,659     $ (82,738 )   $ -     $ 5,960,573  
Net income
  $ 4,702,861     $ 46,586     $ 4,095     $ -     $ 4,753,542  
Net income to common stockholders
  $ 5,134,346     $ 37,269     $ 4,095     $ -     $ 5,175,710  
                                         
Basic and diluted income per common share:
                                 
Basic
  $ 0.13                             $ 0.10  
Diluted
  $ 0.12                             $ 0.10  
Basic weighted average common shares outstanding
    41,027,226                       9,369,043       50,396,269  
Diluted weighted average common shares outstanding
    41,708,287                       9,369,043       51,077,330  

(A) Represents elimination of inter-company sales from Lingshi and Golden Trust to CDII subsidiaries.

 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
 
For three months ended March 31, 2011:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma (Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Total revenues
  $ 42,268,013     $ 2,734,503     $ 6,434,183     $ (1,375,302 )
(A)
$ 50,061,397  
Net (loss) income
  $ (272,289 )   $ 4,585     $ 55,397             $ (212,307 )

(A) Represents elimination of inter-company sales from Lingshi and Golden Trust to CDII subsidiaries.

For six months ended March 31, 2011:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma
(Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
                               
                               
Total revenues
  $ 88,037,615     $ 6,007,396     $ 12,246,470     $ (2,701,110 )
(A)
$ 103,590,371  
Net income
  $ 3,150,100     $ 67,960     $ 64,796             $ 3,282,856  

(A) Represents elimination of inter-company sales from Lingshi and Golden Trust to CDII subsidiaries.

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Our other comprehensive income consists of currency translation adjustments and unrealized gain on available-for-sale marketable securities. The following table shows the accumulated other comprehensive income balance as of March 31, 2012.

   
Foreign Currency
Translation
Adjustments
   
Unrealized Gains (Losses) on
Available for Sale
Securities
   
Accumulated Other
Comprehensive
Income
 
Balance at September 30, 2011
  $ 5,238,089     $ (5,109,146 )   $ 128,943  
Current-period change (Unaudited)
    205,173       1,236,371       1,441,544  
Balance at March 31, 2012
  $ 5,443,262     $ (3,872,775 )   $ 1,570,487  


 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
NOTE 6 - AVAILABLE-FOR-SALE MARKETABLE SECURITIES

Available-for-sale marketable securities and available-for-sale marketable securities-related party as of March 31, 2012 and September 30, 2011 consist of the following financial instruments:

Company
 
March 31,
2012
   
% of Total
   
September 30,
2011
   
% of Total
 
   
(unaudited)
                   
Ziyang Ceramics Corp. (1 )
  $ 509,103       7 %   $ 426,791       5 %
China Logistics Group, Inc.
    196,828       3 %     196,208       2 %
Dragon International Group Corp.
    22,816       0 %     22,816       0 %
Decor Products International, Inc.
    23,750       0 %     -       0 %
Sunwin Stevia International Inc. (2)
    -       0 %     361,000       4 %
Dragon Capital Group Corp.
    330,148       5 %     542,386       6 %
China Education International, Inc.
    5,828,318       80 %     7,286,022       83 %
Linkwell Corporation
    225,000       3 %     -       0 %
Others
    181,599       2 %     -       0 %
Marketable securities available for sale
  $ 7,317,562       100 %   $ 8,835,223       100 %

(1)  China American Holdings, Inc. changed its name to Ziyang Ceramics Corp. on January 27, 2012.

(2)  Sunwin International Neutraceuticals, Inc. changed its name to Sunwin Stevia International, Inc. on April 20, 2012.

Our available-for-sale marketable securities are carried at fair value. 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, quoted prices for identical instruments in active markets; Level 2, 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, unobservable inputs. All our available-for-sale marketable securities were measured using Level 1 inputs for the periods ended March 31, 2012. For the period ended September 30, 2011, all our available -for-sale marketable securities were measured using Level 1 inputs, except for the valuation of securities for China Education International where we used Level 2 inputs.

The investments in available-for-sale marketable securities-related party totaled $330,148 and $542,386 at March 31, 2012 and September 30, 2011, respectively and are comprised solely of the securities of Dragon Capital Group Corp. (“Dragon Capital”).  Mr. Lisheng (Lawrence) Wang, the CEO and Chairman of the Board of Dragon Capital, is the brother of Dr. James Wang, our CEO and Chairman of the Board of Directors. 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 OTC Pink Tier of the OTC Markets Group.  As such, under Federal securities laws, securities of Dragon Capital generally cannot be resold by us absent a registration of those securities under the Securities Act.  

NOTE 7 – ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable include a note receivable obtained in connection with the settlement of a lawsuit we filed seeking repayment of a loan from a former client. The total settlement amount was $373,902 at December 31, 2011. In January, 2012, we received a payment of $38,766. At March 31, 2012 the balance of the settlement was $337,565, $245,553 of which was classified as other long-term assets in our balance sheet for the period ended March 31, 2012. Accounts and notes receivable also include available-for-sale securities receivable. These receivables are carried at fair market value. Unrealized gains or loss on these receivables are recognized on a quarterly basis as an element of comprehensive income based on changes in the fair market value of the securities underlying the receivables. At March 31, 2012 and September 30, 2011, the fair value of available-for-sale securities receivable was $16,151,162 and $3,691,735, respectively. The table below presents the details on the accounts and notes receivable:

 
- 12 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 

Accounts and notes receivable
 
March 31,
2012
   
% of Total
   
September 30,
2011
   
% of Total
 
   
(Unaudited)
                   
Available-for-sale securities receivable
  $ 16,151,162       51 %   $ 3,691,735       18 %
Notes receivable
    635,737       2 %     364,718       2 %
Other trade receivables
    14,912,645       47 %     16,647,833       80 %
Total accounts and notes receivable
  $ 31,699,544       100 %   $ 20,704,286       100 %
Allowance for uncollectible accounts
    (267,803 )             (276,069 )        
Net accounts and notes receivable
  $ 31,431,741             $ 20,428,217          

NOTE 8 – INVENTORIES

Inventories at March 31, 2012 and September 30, 2011 consisted of the following:
 
   
March 31,
2012
   
September 30,
2011
 
   
(Unaudited)
       
Raw materials
  $ 5,628,544     $ 3,061,481  
Finished goods
    13,088,370       6,564,293  
Total Inventory
  $ 18,716,914     $ 9,625,774  

Due to the nature of our business and the short duration of the manufacturing process for our products, there is no material work in progress inventory at March 31, 2012 and September 30, 2011. 

NOTE 9 - PREPAID EXPENSES AND OTHER CURRENT ASSETS

At March 31, 2012 and September 30, 2011, prepaid expenses and other current assets, consisted of the following:
 
Description
 
March 31,
2012
   
September 30,
2011
 
   
(Unaudited)
       
Prepayments to vendors for merchandise that had not yet been shipped or services that had not been performed
  $ 10,803,314     $ 6,519,123  
Prepaid expenses
    3,617,377       2,448,248  
Other receivables
    4,607,119       3,865,525  
Loans receivable
    467,596       1,537,420  
Security deposits
    18,749       18,749  
Total
  $ 19,514,155     $ 14,389,065  
 
Prepaid expenses include prepaid cost for Baotou Changxin Magnesium’s land use rights. Baotou Changxin Magnesium owns and operates a magnesium facility capable of producing 20,000 metric tons of pure magnesium per year on approximately 406,000 square feet of land located in the Shiguai district of Baotou city, Inner Mongolia. The land use rights are valued at $1,140,011 as of March 31, 2012. Baotou Changxin Magnesium occupies this land pursuant to an asset acquisition agreement entered into with Baotou Sanhe Magnesium Co., Ltd. to acquire the land use rights for this property, among other assets.  Since the land use right is yet to be transferred from Baotou Sanhe Magnesium Co. to Baotou Changxin Magnesium, the cost of $1,140,011 is accounted for as prepaid expenses.  The company has not started amortizing the land use right prepaid as of March 31, 2012. The land use right expires in May 2045.

 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 

NOTE 10 - PROPERTY, PLANT AND EQUIPMENT
 
At March 31, 2012 and September 30, 2011, property, plant and equipment consisted of the following:

Property, Plant and Equipment
           
Description
 
Useful Life
   
March 31,
2012
   
September 30,
2011
 
         
(unaudited)
       
Building
 
10-40 years
    $ 24,341,070     $ 14,260,280  
Manufacturing equipment
 
5-10 year
      38,046,264       21,535,796  
Office equipment and furniture
 
3-5 year
      713,322       646,244  
Autos and trucks
 
5 year
      1,273,221       1,187,281  
Construction in progress
   N/A       8,789,577       8,295,743  
Total
            73,163,454       45,925,344  
Less: accumulated depreciation
            (10,444,485 )     (9,051,356 )
Property, Plant and Equipment, Net
          $ 62,718,969     $ 36,873,988  

For the six months ended March 31, 2012 and 2011, depreciation expense totaled $1,387,010 and $1,864,627, respectively. 

NOTE 11 - LOANS PAYABLE

Loans payable at March 31, 2012 and September 30, 2011 consisted of the following:

Description
 
March 31,
2012
   
September 30,
2011
 
   
(unaudited)
       
             
CDI China loan from Sunwin Tech Group, Inc. Due on December 31, 2012. 3% annual interest rate. Secured by pledge of CDI China assets.
  $ 312,000     $ 450,000  
                 
Lang Chemical loan from China Mingsheng Bank. Due on May 16, 2012. 6.941% annual interest rate.  Guaranteed by Zhu Qian and Chen Jingdong.
    728,747       720,044  
                 
Lang Chemical loan from Bank of Shanghai. Due on March 22, 2012. 6.666% annual interest rate.  Guaranteed by China Investment Guarantor Co. Ltd. and Zhu Qian.
    -       547,859  
                 
CDI Beijing loan from Bank of Hangzhou. Due on October 21, 2011.  6.672% annual interest rate. Guaranteed by Chi Chen
    -       939,188  
                 
Lang Chemical loan from China Merchants Bank. Due on October 20, 2012. 8.590% annual interest rate.  Guaranteed by Zhu Qian.
    1,267,387       -  
          Total
  $ 2,308,134     $ 2,657,091  
Less: Current Portion
    (2,308,134 )     (2,657,091 )
                 
Loans payable, long-term
  $ -     $ -  


 
- 14 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 

NOTE 12 - RELATED PARTY TRANSACTIONS

List of Related Parties

We have specified the following persons and entities as related parties with ending balances as of March 31, 2012 and September, 2011:

 
·
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;
 
· 
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”);
Shuihuan Huang, is the sister of Yuwei Huang;
Kong Tung, a member of the board of directors, and chairman of Golden Magnesium, Beauty East, and Golden Trust;
 
· 
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;
 
· 
Excel RiseTechnology Co., Ltd., a company organized under the laws of Brunei Darussalam (“Excel Rise”), is owned by Yiwei Magnesium Industry Co., Ltd. (Yiwei Magnesium”), an entity owned or controlled by Mr. Huang;
 
· 
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;
 
· 
NanTong Langyuan Chemical Co., Ltd., a company organized under the laws of the PRC (“NanTong Chemical”), is 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;
 
· 
Chi Chen is vice president of our Basic Materials Segment and minority interest owner of CDI Beijing;
 
· 
Zhongmen International Investments Co., Ltd., a company organized under the laws of the PRC (“Zhongmen International”), is legally represented by an officer of CDI Beijing;

As of March 31, 2012, accounts, loans, and other receivables and prepaid expenses- related parties were $2,109,153, consisting of accounts receivable – related party of $443,456, prepaid to suppliers – related parties of $24,818, and other receivables-related parties of $1,640,879 as set forth below:

Accounts Receivable – related parties

At March 31, 2012, accounts receivable – related parties of $443,456 were comprised of the followings:

 -
$397,205 due Baotou Changxin Magnesium from Yiwei Magnesium for inventory provided;
 -
$4,918 due Chang Magnesium from Wheaton for inventory provided; and
 -
$41,333 due Ruiming Magnesium from Yihong Magnesium for inventory provided.

At September 30, 2011, accounts receivable – related parties of $1,211,079 were comprised of the followings:

 -
$364,705 due Baotou Changxin Magnesium from Yiwei Magnesium for inventory provided;
 -
$4,860 due Chang Magnesium from Wheaton for inventory provided;
 -
$296,156 due Chang Magnesium from Yiwei Magnesium for inventory provided; and
 -
$545,358 due Ruiming Magnesium from Yiwei Magnesium for inventory provided.

Prepaid Expenses – related parties

At March 31, 2012, prepaid expenses – related parties was $24,818 by Ruiming Magnesium to YiWei Magnesium for future delivery of inventory.

At September 30, 2011, prepaid expenses – related parties of $2,687,928 were comprised of the followings:

 -
$2,654,384 prepaid by Chang Magnesium to Yiwei Magnesium for future delivery of inventory; and
 -
$33,544 prepaid by Ruiming Magnesium to Yiwei Magnesium for future delivery of inventory.

 
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CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
Loans Receivable – related parties

At March 31, 2012, we had no loan receivables – related parties.

At September 30, 2011, loan receivables – related parties of $1,320,324 were due Lang Chemical from NanTong Chemical for funds advanced for working capital purposes.

Other Receivables- related parties

At March 31, 2012, other receivables-related parties of $1,640,879 were comprised of the followings:
 
-
$112,471 due Baotou Changxi Magnesium from Yihong Magnesium for working capital purposes;
-
$220,785 due Chang Magnesium from Yiwei Magnesium for working capital purposes;
-
$12,000 due IMTC from Yuwei Huang for working capital purposes;
-
$840,753 due Xinghai Magnesium from Yiwei Magnesium for working capital purposes;
-
$272,771 due Xinghai Magnesium from Yihong Magnesium for working capital purposes;
-
$114,927 due Lang Chemical from Nantong Chemical for working capital purpose; and
-
$67,172 due CDI Beijing from Zhongmen International for working capital purposes.
 
At September 30, 2011, other receivables-related parties of $4,379,252 were comprised of the followings:
 
-
$78,266 due Baotou Changxi Magnesium from Yiwei Magnesium for working capital purposes;
-
$118,954 due Baotou Changxi Magnesium from Yihong Magnesium for working capital purposes;
-
$3,850,151 due Chang Magnesium from Yiwei Magnesium for working capital purposes;
-
$3,130 due Chang Magnesium from Shuihuan Huang for working capital purposes;
-
$12,000 due IMTC from YuWei Huang for working capital purposes;
-
$42,263 due Ruiming Magnesium from Yiwei Magnesium for working capital purposes;
-
$200,924 due Ruiming Magnesium from Yihong Magnesium for working capital purposes;
-
$10,951 due CDI Shanghai from YiWei Magnesium for working capital purpose; and
-
$62,613 due CDI Beijing from Zhongmen International for working capital purposes.

As of March 31, 2012, accounts and other payables – related parties were $23,039,102, consisting of accounts payable – related parties of $2,260,850, advance from customer – related parties of $207,933 and other payables- related parties of $20,570,319 as set forth below:

Accounts Payable – related parties

At March 31, 2012, accounts payable – related party of $2,260,850 were comprised of the followings:

-
$186,939 due from Chang Magnesium to Yihong Magnesium for purchases of goods;
-
$1,798,717 due from IMTC to Wheaton for purchases of goods;
-
$141,101 due from Golden Magnesium to Yiwei Magnesium for purchases of goods; and
-
$134,093 due from Xinghai Magnesium to Yiwei Magnesium for purchases of goods.
 
 
At September 30, 2011, accounts payable – related party of $896,878 were comprised of the followings:

-
$142,479 due from Golden Magnesium to Yiwei Magnesium for purchases of goods; and
-
$754,399 due from IMTC to Pine Capital for purchases of goods.

Advance from Customers – related parties

At March 31, 2012, advance from customers – related party was $207,933 from Pine Capital for the sales order of Chang Magnesium.

At September 30, 2011, we have no advance from customers – related parties.


 
- 16 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
 
Other Payables- related parties

At March 31, 2012, other payables- related party of $20,570,319 was comprised of the followings:

-
$2,086,835 due to Excel Rise for the working capital of Chang Magnesium;
-
$4,658,605 due to Excel Rise for the working capital of Baotou Changxi Magnesium;
-
$97,089 due to Kung Tong for the working capital of Beauty East;
-
$146,631 due to Pine Capital for the working capital of Beauty East;
-
$2,182,657 due to Pine Capital for the working capital of IMTC;
-
$1,888,311 due to Yiwei Magnesium for working capital of IMTC;
-
$31,685 due to Yiwei Magnesium for working capital of Xinghai Magnesium;
-
$400,494 due to Chi Chen for the working capital of CDI Beijing;
-
$8,266,058 due to shareholders of Golden Trust and Lingshi Magnesium for the balance of the purchase price for the acquisition of the companies; and
-
$811,954 due to Yiwei Magnesium for the balance of the purchase prices for Ruiming Magnesium.

At September 30, 2011, due to related parties balance of $3,683,482 were comprised of the following:

-
$9,953 due to Yuwei Huang for the working capital of Chang Magnesium;
-
$97,089 due to Kung Tong for the working capital of Beauty East;
-
$399,781 due to Chi Chen for the working capital of CDI Beijing; and
-
$3,176,659 due to Yiwei Magnesium for the balance of the purchase price for Ruiming Magnesium.

NOTE 13 – OTHER LIABILITIES

Other liabilities included the following as of March 31, 2012 and September 30, 2011:

Account
 
March 31,
2012
   
September 30,
2011
 
   
(unaudited)
       
Other short-term loans
  $ 5,280,689     $ 4,315,858  
Payables for acquisitions
    2,422,324       -  
Accrued salary payable
    964,210       -  
Accrued dividend payable
    20,130       -  
Total other liabilities
  $ 8,687,353     $ 4,315,858  

NOTE 14 – CAPITAL STOCK

Preferred Stock and Related Dividends

During the six months ended March 31, 2012, we paid $20,130 of ordinary dividends in cash and $20,130 in the form of 25,696 shares of our common stock. During the six months ended March 31, 2011, we paid $40,260 of ordinary dividends in the form of 26,290 shares of our common stock.

Derivative liabilities

As of March 31, 2012, the carrying amounts of the derivative liabilities for preferred stock conversion option and warrants were $30,007 and $3,134, respectively. As of September 30, 2011, the carrying amounts of the derivative liabilities for conversion option and warrants were $69,295 and $37,936, respectively. The fair value of derivative liabilities is included in other liabilities, and the net change in fair value during the period is included in operating expenses. Inputs used in making the determination are as follows:

 
- 17 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 

   
March 31,
2012
   
September 30,
2011
 
Inputs for conversion option valuation – covered call
           
Asset price on valuation date
  $ 0.76     $ 1.01  
Exercise price
    9.80     $ 9.80  
Estimated years to exercise
    5.92       6.5  
Expected volatility factor
    91 %     93 %
Risk free rate
    1.33 %     1.31 %
                 
Inputs for conversion option valuation – short call
               
Asset price on valuation date
  $ 0.76     $ 1.01  
Exercise price
  $ 1.80     $ 1.80  
Estimated years to exercise
    5.92       6.5  
Expected volatility factor
    91 %     93 %
Risk free rate
    1.33 %     1.31 %
                 
Inputs for warrant valuation
               
Asset price on valuation date
  $ 0.76     $ 1.01  
Exercise price
  $ 1.80     $ 1.80  
Estimated years to exercise
    0.87       1.5  
Expected volatility factor
    64 %     93 %
Risk free rate
    0.17 %     0.19 %

Common Stock

During the six months ended March 31, 2012, we issued a total of 7,621,557 shares of our common stock comprised of 7,032,583 shares paid as part of the consideration of Golden Trust and Lingshi Magnesium acquisition, 68,200 shares to members of our board of directors as compensation, 251,212 shares to consultants for services, and 269,562 shares to employees as compensation.

During the six months ended March 31, 2012 and 2011, stock-based compensation expense amounted to $412,668 and $368,248, respectively. During the six months ended March 31, 2012 and 2011, the fair value of securities paid for consulting services was $484,660 (including $281,688 of our available for sale marketable securities from Linkwell Corporation) and $314,815, respectively.

Common Stock Purchase Warrants

A summary of the status of our outstanding common stock purchase warrants granted as of March 31, 2012 and changes during the period was as follows:

   
Shares underlying warrants
   
Exercise price
 
Outstanding and exercisable at September 30, 2011
    4,229,130        
 Expired
    (50,000 )   $ 2.50  
Outstanding and exercisable at March 31, 2012
    4,179,130          

 The following information applies to all warrants outstanding and exercisable at March 31, 2012:

Number of Warrants outstanding and exercisable
   
Exercise Price
   
Remaining contractual life (Years)
 
  143,750     $ 1.80       0.87  
  777,778     $ 2.00       4.26  
  1,351,352     $ 2.31       2.71  
  1,906,250     $ 8.00       0.87  
  4,179,130                  


 
- 18 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 
 
NOTE 15 – NONCONTROLLING INTERESTS

As of March 31, 2012 and September 30, 2011, our consolidated balance sheets reflected total non-controlling interest of $19,263,701 and $15,718,281, respectively, which represent the equity portion of our subsidiaries held by noncontrolling interests shareholders in two of our segments, as follows:

Segment
 
March 31,
2012
   
September 30,
2011
 
   
(unaudited)
       
Magnesium Segment
  $ 15,424,803     $ 12,002,000  
Basic Materials Segment
    3,838,898       3,716,281  
Total
  $ 19,263,701     $ 15,718,281  

NOTE 16 - SEGMENT INFORMATION

Revenues by segment for the three and six months ended March 31, 2012 and 2011 were as follows (unaudited):

   
For three months ended March 31,
   
For six months ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Magnesium (1)
  $ 25,870,727     $ 24,262,795     $ 43,848,287     $ 45,551,557  
Basic Materials
    10,456,974       16,410,887       24,224,885       35,592,847  
Consulting
    5,614,202