PINX:CDII CD International Enterprises Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 [ ] 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]
       

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. 49,033,194 shares of common stock were issued and outstanding as of August 10, 2012.

 
 

 
 



TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION
Page No.
 
Item 1.
Financial Statements.
 
   
Consolidated Statement of Operations and Comprehensive Income (unaudited)
 Three and nine months ended June 30, 2012 and 2011
1
   
Consolidated Balance Sheets
 As of June 30, 2012 (unaudited) and September 30, 2011
2
   
Consolidated Statement of Cash Flows (unaudited)
 Nine months ended June 30, 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.
39
 
Item 3.
Defaults Upon Senior Securities.
39
 
Item 4.
Mine Safety Disclosures.
39
 
Item 5.
Other Information.
39
 
Item 6.
Exhibits.
40
 
Signatures
  44


 
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 (the “Securities Act”)  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, our subsequent filings with the Securities and Exchange Commission and in Item 1A. of this report:
 
 
 
Delisting of our common stock by The NASDAQ Stock Market.
 
 
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.
 
 
The influence of the Chinese government over the manner in which our Chinese subsidiaries must conduct our business activities.

 
ii

 
 


 
 
 
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 nine months ended
 
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
   
June 30, 2011
 
                         
Revenues
 
$
37,138,265
   
$
55,154,956
   
$
115,421,066
   
$
141,588,028
 
Revenues-related parties
   
136,377
     
1,860,644
     
707,376
     
3,465,187
 
     Total revenues
   
37,274,642
     
57,015,600
     
116,128,442
     
145,053,215
 
Cost of revenues
   
36,160,662
     
49,457,823
     
102,861,674
     
127,739,204
 
     Gross profit
   
1,113,980
     
7,557,777
     
13,266,768
     
17,314,011
 
Operating (expenses) income:
                               
   Selling, general, and administrative
 
 
(3,435,013
)
 
 
(3,006,256
)
 
 
(9,590,595
)
 
 
(9,821,167
)
   Other operating (expense) income-related party
   
-
   
 
(248,407
)
   
-
     
106,791
 
   Other operating income
   
-
     
251,146
     
-
     
354,018
 
       Total operating expenses
 
 
(3,435,013
)
 
 
(3,003,517
)
 
 
(9,590,595
)
 
 
(9,360,358
)
       Operating (loss) income
 
 
(2,321,033
)
   
4,554,260
     
3,676,173
     
7,953,653
 
Other (expenses) income:
                               
   Other income (expense)
   
325,316
   
 
(178,469
)
   
592,117
     
86,892
 
   Interest expense
 
 
(437,152
)
 
 
(119,025
)
 
 
(357,140
)
 
 
(186,069
)
   Realized loss on available-for-sale securities
 
 
(13,912
)
   
-
   
 
(30,974
)
 
 
(379,969
)
       Total other (expenses) income
 
 
(125,748
)
 
 
(297,494
)
   
204,003
   
 
(479,146
)
        (Loss) income before income taxes
 
 
(2,446,781
)
   
4,256,766
     
3,880,176
     
7,474,507
 
   Income tax (benefit) expense
   
(692,644
)
   
53,078
     
930,665
     
120,719
 
     Net (loss) income
 
 
(1,754,137
)
   
4,203,688
     
2,949,511
     
7,353,788
 
   Net loss to noncontrolling interests
   
392,205
     
102,870
     
828,851
     
424,981
 
      Net (loss) income to CD International
 
$
(1,361,932
)
 
$
4,306,558
   
$
3,778,362
   
$
7,778,769
 
                                 
Deduct dividends on Series A Preferred Stock:
                               
   Preferred stock dividend
 
 
(20,130
)
 
 
(20,130
)
 
 
(60,390
)
 
 
(60,390
)
      Net (loss) income to common stockholders
 
$
(1,382,062
 )
 
$
4,286,428
   
$
3,717,972
   
$
7,718,379
 
COMPREHENSIVE (LOSS) INCOME :
                               
Net (loss) income
 
$
(1,754,137
)
 
$
4,203,688
   
$
2,949,511
   
$
7,353,788
 
   Foreign currency translation adjustments
   
361,053
   
 
(100,000
)
   
476,683
     
1,743,945
 
   Unrealized (loss) gains on available-for-sale securities
 
 
(3,113,830
)
   
6,444,495
   
 
(1,877,459
 )
   
10,770,761
 
   
                               
Comprehensive (Loss) income
 
$
(4,506,914
)
 
$
10,548,183
   
$
1,548,735
   
$
19,868,494
 
   Net loss to noncontrolling interests
   
392,205
     
102,870
     
828,851
     
424,981
 
   Foreign currency translation adjustments - noncontrolling interests
 
 
(105,199
 )
 
 
(87,504
)
 
 
(15,655
 )
 
 
(394,943
)
Comprehensive (loss) income to CD International
 
$
(4,219,908
)
 
$
10,563,549
   
$
2,361,931
   
$
19,898,532
 
   Preferred stock dividend
 
 
(20,130
)
 
 
(20,130
)
 
 
(60,390
)
 
 
(60,390
)
Comprehensive (loss) income to common stockholders
 
$
(4,240,038
)
 
$
10,543,419
   
$
2,301,541
   
$
19,838,142
 
                                 
Basic and diluted (loss) income per common share:
                               
   Basic
 
$
(0.03
)
 
$
0.11
   
$
0.09
   
$
0.22
 
   Diluted
 
$
(0.03
)
 
$
0.11
   
$
0.08
   
$
0.22
 
   Basic weighted average common shares outstanding
   
48,111,759
     
37,567,331
     
43,380,118
     
34,694,215
 
   Diluted weighted average common shares outstanding
   
48,111,759
     
38,250,045
     
47,383,843
     
34,818,040
 

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

 
- 1 -

 
 


CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
June 30,
2012
   
September 30,
2011
 
ASSETS
 
(Unaudited)
       
Current Assets:
           
    Cash and cash equivalents
 
$
4,137,934
   
$
12,563,126
 
    Available-for-sale Marketable securities (Note 5)
   
13,103,813
     
8,292,837
 
    Available- for- sale-Marketable securities-related parties (Note 5)
   
212,238
     
542,386
 
    Accounts and notes receivables, net of allowance of $267,910 and $276,069, respectively (Note 6)
   
20,350,307
     
20,428,217
 
    Accounts, loans and other receivables, and prepaid expenses - related parties (Note 11)
   
1,682,013
     
9,598,583
 
    Inventories, net (Note 7)
   
19,382,493
     
9,625,774
 
    Prepaid expenses and other current assets, net (Note 8)
   
21,233,429
     
14,389,065
 
    Restricted cash, current
   
2,132,840
     
1,547,159
 
       Total current assets
   
82,235,067
     
76,987,147
 
    Property, plant and equipment, net (Note 9)
   
62,543,351
     
36,873,988
 
    Intangible assets
   
138,134
     
163,447
 
    Property use rights, net
   
4,219,871
     
2,252,445
 
    Other long-term assets
   
427,593
     
58,192
 
       Total assets
 
$
149,564,016
   
$
116,335,219
 
LIABILITIES AND EQUITY
               
Current Liabilities:
               
    Loans payable-short term (Note 10)
 
$
3,523,172
   
$
2,657,091
 
    Accounts payable and accrued expenses
   
12,906,885
     
15,468,902
 
    Accounts and other payables-related parties (Note11)
   
19,085,323
     
4,590,045
 
    Advances from customers and deferred revenue
   
2,999,786
     
3,821,208
 
    Other liabilities (Note 12)
   
11,865,251
     
4,315,858
 
    Taxes payable
   
1,305,006
     
1,349,611
 
       Total current liabilities
   
51,685,423
     
32,202,715
 
    Long-term liabilities
   
13,990
     
107,231
 
      Total Liabilities
   
51,699,413
     
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 issued and outstanding at June 30, 2012 and September 30, 2011 (Note 13)
   
1,006,250
     
1,006,250
 
Common Stock: $.0001 par value;  1,000,000,000 authorized; 48,218,090 and 40,353,828 issued and outstanding as of June 30, 2012  and September 30, 2011, respectively. (Note 13)
   
4,821
     
4,035
 
Additional paid-in capital
   
83,177,643
     
75,279,087
 
Accumulated other comprehensive income (Note 14)
 
 
(1,287,489
)
   
128,943
 
Accumulated deficit
 
 
(4,391,590
)
   
(8,111,323
)
       Total CD International stockholders' equity
   
78,509,635
     
68,306,992
 
    Non-controlling interests (Note 15)
   
19,354,968
     
15,718,281
 
       Total equity
   
97,864,603
     
84,025,273
 
       Total liabilities and equity
 
$
149,564,016
   
$
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 nine months ended
 
   
June 30, 2012
   
June 30, 2011
 
OPERATING ACTIVITIES:
           
Net income
 
$
2,949,511
   
$
7,353,788
 
Adjustments to reconcile net income to net cash used in operating activities:
               
   Depreciation and amortization
   
2,197,073
     
2,934,788
 
   Allowance for bad debt
   
8,159
     
25,868
 
   Stock based compensation
   
813,930
     
410,267
 
   Realized loss on investments in marketable securities
   
   30,974
     
379,969
 
   Gain on derivative liabilities revaluation
 
 
(93,241
)
 
 
(159,467
)
   Fair value of marketable securities received for services
 
 
(10,737,043
)
 
 
(18,157,734
)
   Fair value of marketable securities paid for services
   
338,976
     
6,370,148
 
Changes in operating assets and liabilities:
               
   Prepaid expenses and other assets
 
 
(4,850,908
)
 
 
(3,978,520
)
   Accounts receivable and other assets-related parties
   
10,174,416
   
 
(1,369,314
)
   Inventories
 
 
(3,617,562
)
 
 
(5,764,814
)
   Accounts receivable
   
2,170,191
     
897,777
 
   Accounts payable and accrued expenses
 
 
(4,853,956
)
   
3,216,591
 
   Accounts and other payable - related parties
 
 
(3,422,962
)
   
1,108,942
 
   Advances from customers
 
 
(1,230,771
)
 
 
(120,011
)
   Other payables
   
2,983,348
     
1,022,466
 
NET CASH USED IN OPERATING ACTIVITIES
 
 
(7,139,865
)
 
 
(5,829,256
)
                 
 INVESTING ACTIVITIES:
               
  Cash acquired from acquisition
   
1,808,881
     
-
 
   Cash paid for acquisition
 
 
(4,454,487
)
   
-
 
   Gross Proceeds from the sale of marketable securities available for sale
   
893,176
     
818,456
 
   Purchases of property, plant and equipment
 
 
(1,506,124
)
 
 
(2,501,259
)
NET CASH USED IN INVESTING ACTIVITIES
 
 
(3,258,554
)
 
 
(1,682,803
)
                 
FINANCING ACTIVITIES:
               
   (Increase) decrease in restricted cash
 
 
(585,681
)
   
3,961,441
 
   Loans payable
   
866,081
   
 
(2,931,883
)
   Gross proceeds from sale of stock and exercise of warrants/options
   
-
     
3,874,702
 
   Cash dividend payment to preferred stockholders
 
 
(20,130
)
   
-
 
   Capital contribution from noncontrolling interest owners
   
214,348
     
1,710,909
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
474,618
     
6,615,169
 
                 
EFFECT OF EXCHANGE RATE ON CASH
   
1,498,609
     
1,049,859
 
Net (decrease) increase in cash
 
 
(8,425,192
)
   
152,969
 
Cash and cash equivalents, beginning of the period
   
12,563,126
     
10,110,818
 
Cash and cash equivalents, end of the period
 
$
4,137,934
   
$
10,263,787
 
Supplemental disclosures of cash flow information:
               
   Preferred dividend paid in our common stock
 
$
40,260
   
$
60,390
 

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
June 30, 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 February 29, 2012 to more accurately reflect our business and 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 nine 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 nine months ended June 30, 2012 and 2011. A summary of the conversion rates for the periods presented is as follows:

   
June 30,
2012
   
September 30,
2011
   
June 30,
2011
 
Period end RMB: U.S. dollar exchange rate
   
6.3089
     
6.3885
     
6.4630
 
Average fiscal-year-to-date RMB: U.S. dollar exchange rate
   
6.3197
     
6.5287
     
6.5710
 
 

 
- 4 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.


 
- 5 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 

 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:
 
 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 June 30, 2012, 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.

 
- 6 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 


A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies.  Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements. 

NOTE 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 June 30,
   
For nine months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net (Loss) income to common stockholders
 
$
(1,382,062
)
 
$
4,286,428
   
$
3,717,972
   
$
7,718,379
 
 Plus: preferred stock dividends
   
-
     
20,130
     
60,390
     
60,390
 
Net (Loss) income to common stockholders plus assumed conversions
 
$
(1,382,062
)
 
$
4,306,558
   
$
3,778,362
   
$
7,778,769
 
                                 
Basic weighted average common shares outstanding
   
48,111,759
     
37,567,331
     
43,380,118
     
34,694,215
 
Plus: incremental shares from assumed conversions (1)
                               
    Convertible preferred stock
   
-
     
558,889
     
558,889
     
-
 
    Unvested stock-based compensation
   
-
     
123,825
     
25,477
     
123,825
 
  Shares subscribed for acquisition
   
-
     
-
     
3,419,359
     
-
 
Dilutive potential common shares
   
-
     
682,714
     
4,003,725
     
123,825
 
Diluted weighted-average common shares outstanding
   
48,111,759
     
38,250,045
     
47,383,843
     
34,818,040
 
Net (Loss) income per common share – basic :
 
$
(0.03
)
 
$
0.11
   
$
0.09
   
$
0.22
 (2)
Net (Loss) income per common share – diluted:
 
$
(0.03
)
 
$
0.11
   
$
0.08
   
$
0.22
 (2)

(1 ) Securities are not included in the denominator in periods when anti-dilutive. We excluded 2,022,980 and 2,142,980 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 June 30, 2012 and 2011, respectively, as their effect was anti-dilutive.

(2) The $0.02 increase in the earnings per share for the nine months ended June 30, 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.
 

 
- 7 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 nine months ended June 30, 2012 and 2011:

   
For three months ended
 June 30, 2012
   
For nine months ended
 June 30, 2012
 
   
As reported
   
Straight- line
   
As reported
   
Straight- line
 
Revenues
 
$
37,274,642
   
$
37,274,642
   
$
116,128,442
   
$
116,128,442
 
Cost of revenues
 
$
36,160,662
   
 $
36,502,957
   
 $
102,861,674
   
 $
103,955,820
 
Gross profit
 
$
1,113,980
   
$
771,685
   
$
13,266,768
   
$
12,172,622
 
Operating (Loss) income
 
$
(2,321,033
)
 
$
(2,663,329
)
 
$
3,676,173
   
$
2,582,027
 
Net (Loss) income
 
$
(1,754,137
)
 
$
(2,663,327
)
 
$
2,949,511
   
$
1,855,366
 
Net (Loss) income to common stockholders
 
$
(1,382,062
)
 
$
(1,724,356
)
 
$
3,717,972
   
$
2,623,827
 
                                 
Basic and diluted (loss) income per common share:
                               
Basic
 
$
(0.03
)
 
$
(0.04
)
 
$
0.09
   
$
0.06
 
Diluted
 
$
(0.03
)
 
$
(0.04
)
 
$
0.08
   
$
0.06
 
Basic weighted average common shares outstanding
   
48,111,759
     
48,111,759
     
43,380,118
     
43,380,118
 
Diluted weighted average common shares outstanding
   
48,111,759
     
48,111,759
     
47,383,843
     
47,383,843
 

   
For three months ended
June 30, 2011
   
For nine months ended 
June 30, 2011
 
   
Units of production
   
As reported
(straight-line)
   
Units of production
   
As reported
(straight-line)
 
Revenues
 
$
57,015,600
   
$
57,015,600
   
$
145,053,215
   
$
145,053,215
 
Cost of revenues
 
 $
49,008,965
   
$
49,457,823
   
 $
126,434,415
   
 $
127,739,204
 
Gross profit
 
$
8,006,635
   
$
7,557,777
   
$
18,618,800
   
$
17,314,011
 
Operating income
 
$
5,003,118
   
$
4,554,260
   
$
9,258,442
   
$
7,953,653
 
Net income
 
$
4,652,546
   
$
4,203,558
   
$
8,658,577
   
$
7,353,788
 
Net income to common stockholders
 
$
4,735,286
   
$
4,286,428
   
$
9,023,168
   
$
7,718,379
 
                                 
Basic and diluted income per common share:
                               
Basic
 
$
0.13
   
$
0.11
   
$
0.26
   
$
0.22
 
Diluted
 
$
0.12
   
$
0.11
   
$
0.26
   
$
0.22
 
Basic weighted average common shares outstanding
   
37,567,331
     
37,567,331
     
34,694,215
     
34,694,215
 
Diluted weighted average common shares outstanding
   
38,250,045
     
38,250,045
     
34,818,040
     
34,818,040
 

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:
    
$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 June 30, 2012, are included in other payables – related parties (See Note 11) in the amount of $8,266,058 and $597,057 included in Other Liabilities (See Note 12); and
$4,696,085 by way of assignment of our interest in our subsidiary Excel Rise.


 
- 8 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 


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 June 30, 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 nine months ended June 30, 2012.

For three months ended June 30, 2012:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma
(Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Total revenues
 
$
28,491,925
   
$
3,015,289
   
$
6,738,804
   
$
(971,376
)
A
$
37,274,642
 
Cost of revenues
   
27,893,800
     
2,960,229
     
6,278,009
   
 
(971,376
)
   
36,160,662
 
Gross profit
 
$
598,125
   
$
55,060
   
$
460,795
   
$
-
   
$
1,113,980
 
Operating (loss) income
 
$
(2,455,629
)
 
$
(86,613
)
 
$
221,209
   
$
-
   
$
(2,321,033
)
Net (loss) income
 
$
(1,839,115
)
 
$
(90,382
)
 
$
175,361
   
$
-
   
$
(1,754,137
)
Net (loss) income to common stockholders
 
$
(1,475,826
)
 
$
(72,306
)
 
$
166,069
   
$
-
   
$
(1,382,062
)
                                         
Basic and diluted loss per common share:                                        
Basic
 
$
(0.03
)
                         
$
(0.02
)
Diluted
 
$
(0.03
)
                         
$
(0.02
)
Basic weighted average common shares outstanding
   
48,111,759
                     
9,369,043
     
57,480,802
 
Diluted weighted average common shares outstanding
   
48,111,759
                     
9,369,043
     
57,480,802
 

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

 
- 9 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 


For nine months ended June 30, 2012:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma
(Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Total revenues
 
$
103,067,795
   
$
8,349,627
   
$
17,523,829
   
$
(3,465,432
)
(A)
$
125,475,819
 
Cost of revenues
   
90,418,336
     
8,123,742
     
16,785,356
     
(3,465,432
)
(A)
 
111,862,002
 
Gross profit
 
$
12,649,459
   
$
225,885
   
$
738,473
   
$
-
   
$
13,613,817
 
Operating income (loss)
 
$
3,548,023
   
$
(46,954
)
 
$
138,470
 
 
$
-
   
$
3,639,539
 
Net income
 
$
2,865,746
   
$
(43,796
)
 
$
179,456
   
$
-
   
$
3,001,406
 
Net income (loss) to common stockholders
 
$
3,678,650
   
$
(35,037
 )
 
$
170,164
   
$
-
   
$
3,813,777
 
                                         
Basic and diluted income per common share:                                        
Basic
 
$
0.08
                           
$
0.07
 
Diluted
 
$
0.08
                           
$
0.07
 
Basic weighted average common shares outstanding
   
43,380,118
                     
9,369,043
     
52,749,161
 
Diluted weighted average common shares outstanding
   
43,964,484
                     
9,369,043
     
56,752,886
 

(A) Represents elimination of inter-company sales from Lingshi and Golden Trust to CDII subsidiaries.
 
For three months ended June 30, 2011:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Total revenues
 
$
57,015,600
   
$
4,820,986
   
$
6,987,260
   
$
(1,771,237
)
(A)
$
67,052,610
 
Net income
 
$
4,203,688
   
$
6,909
   
$
127,375
           
$
4,337,972
 

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

For nine months ended June 30, 2011:

         
Acquisition of
             
   
CD International
(excluding acquisitions)
   
Lingshi Xinghai
   
Golden Trust
   
Pro Forma Adjustments
   
Pro Forma
(Consolidated)
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Total revenues
 
$
145,053,215
   
$
10,828,382
   
$
19,233,731
   
$
(4,509,317
)
(A)
$
170,606,011
 
Net income
 
$
7,353,788
   
$
74,869
   
$
192,171
           
$
7,620,828
 

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


 
- 10 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 

NOTE 5 - AVAILABLE-FOR-SALE MARKETABLE SECURITIES

Available-for-sale marketable securities and available-for-sale marketable securities-related party as of June 30, 2012 and September 30, 2011 consisted of the following:

Company
 
June 30,
2012
   
% of Total
   
September 30,
2011
   
% of Total
 
   
(unaudited)
                   
Ziyang Ceramics Corp. (1 )
 
$
3,768,591
     
28
%
 
$
426,791
     
5
%
China Logistics Group, Inc.
   
112,610
     
1
%
   
196,208
     
2
%
Dragon International Group Corp.
   
22,816
     
0
%
   
22,816
     
0
%
Decor Products International, Inc.
   
35,625
     
0
%
   
-
     
0
%
Sunwin Stevia International Inc. (2)
   
-
     
0
%
   
361,000
     
4
%
Dragon Capital Group Corp.
   
212,238
     
2
%
   
542,386
     
6
%
China Education International, Inc.
   
8,742,479
     
66
%
   
7,286,022
     
83
%
Linkwell Corporation
   
240,000
     
2
%
   
-
     
0
%
Others
   
181,692
     
1
%
   
-
     
0
%
Marketable securities available for sale
 
$
13,316,051
     
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 June 30, 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 $212,238 and $542,386 at June 30, 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 6 – 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 June 30, 2012 the balance of the settlement was $337,565, of which $245,553 was classified as other long-term assets in our balance sheet for the period ended June 30, 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 June 30, 2012 and September 30, 2011, the fair value of available-for-sale securities receivable was $5,763,351 and $3,691,735, respectively. The table below presents the details on the accounts and notes receivable:

 
- 11 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 


Accounts and notes receivable
 
June 30,
2012
   
% of Total
   
September 30,
2011
   
% of Total
 
   
(Unaudited)
                   
Available-for-sale securities receivable
 
$
5,763,351
     
28
%
 
$
3,691,735
     
18
%
Notes receivable
   
940,413
     
4
%
   
364,718
     
2
%
Other trade receivables
   
13,914,453
     
68
%
   
16,647,833
     
80
%
Total accounts and notes receivable
 
$
20,618,217
     
100
%
 
$
20,704,286
     
100
%
Allowance for uncollectible accounts
 
 
(267,910
)
           
(276,069
)
       
Net accounts and notes receivable
 
$
20,350,307
           
$
20,428,217
         

NOTE 7 – INVENTORIES

Inventories at June 30, 2012 and September 30, 2011 consisted of the following:
 
   
June 30,
2012
   
September 30,
2011
 
   
(Unaudited)
       
Raw materials
 
$
4,827,669
   
$
3,061,481
 
Finished goods
   
14,554,824
     
6,564,293
 
Total Inventory
 
$
19,382,493
   
$
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 June 30, 2012 and September 30, 2011. 

NOTE 8 - PREPAID EXPENSES AND OTHER CURRENT ASSETS

At June 30, 2012 and September 30, 2011, prepaid expenses and other current assets, consisted of the following:
 
Description
 
June 30,
2012
   
September 30,
2011
 
   
(Unaudited)
       
Prepayments to vendors for merchandise that had not yet been shipped or services that had not been performed
 
$
10,200,682
   
$
6,519,123
 
Prepaid expenses
   
3,927,729
     
2,448,248
 
Other receivables
   
6,511,269
     
3,865,525
 
Loans receivable
   
575,000
     
1,537,420
 
Security deposits
   
18,749
     
18,749
 
Total
 
$
21,233,429
   
$
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 June 30, 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 June 30, 2012. The land use right expires in May 2045.


 
- 12 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 

NOTE 9 - PROPERTY, PLANT AND EQUIPMENT
 
At June 30, 2012 and September 30, 2011, property, plant and equipment consisted of the following:

Property, Plant and Equipment
     
Description
Useful Life
June 30,
2012
   
September 30,
2011
 
   
(unaudited)
       
Building
10-40 years
$
23,932,087
   
$
14,260,280
 
Manufacturing equipment
5-10 year
 
38,526,750
     
21,535,796
 
Office equipment and furniture
3-5 year
 
714,343
     
646,244
 
Autos and trucks
5 year
 
1,291,612
     
1,187,281
 
Construction in progress
 N/A
 
9,199,403
     
8,295,743
 
Total
   
73,664,195
     
45,925,344
 
Less: accumulated depreciation
 
 
(11,120,844
)
   
(9,051,356
)
Property, Plant and Equipment, Net
 
$
62,543,351
   
$
36,873,988
 

For the nine months ended June 30, 2012 and 2011, depreciation expense amounted to $2,063,370 and $2,850,257, respectively. 

NOTE 10 - LOANS PAYABLE

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

Description
 
June 30,
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.
 
$
194,541
   
$
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.
   
-
     
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.
   
1,268,050
     
-
 
                 
Lang Chemical loan from China Merchants Bank. Due on May 10, 2013. 8.659% annual interest rate.  Guaranteed by Zhu Qian.
   
317,012
     
-
 
                 
Lang Chemical loan from Mingsheng Bank. Due on May 07, 2013. 8.528% annual interest rate.  Guaranteed by Zhu Qian.
   
1,268,050
     
-
 
                 
Lang Chemical loan from Shanghai Bank. Due on May 20, 2013. 6.56% annual interest rate.  Guaranteed by Zhu Qian.
   
475,519
     
-
 
          Total
 
$
3,523,172
   
$
2,657,091
 
Less: Current Portion
   
(3,523,172
)
   
(2,657,091
)
                 
Loans payable, long-term
 
$
-
   
$
-
 


 
- 13 -

 
CD INTERNATIONAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 
NOTE 11 - RELATED PARTY TRANSACTIONS

List of Related Parties

We have specified the following persons and entities as related parties with ending balances as of June 30, 2012 and September, 2011:

Yuwei Huang, our executive vice president of our Magnesium segment, and a member of our board of directors, is 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 Investm