Cathay Merchant 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

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

For the quarterly period ended September 30, 2007

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____ to _____

Commission File Number:000-16283

CATHAY MERCHANT GROUP, INC.
(Exact name of small business issuer as specified in its charter)

DELAWARE	04-2608713
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Unit 803, Dina House, Ruttonjee Centre, 11 Duddell Street, Central, Hong Kong SAR, China
(Address of principal executive offices)

Issuer's telephone number:
(852) 2840-1230

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. [X] YES [ ] NO

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] YES [X] NO

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the issuer's common stock as at November 5, 2007 was 18,890,579.

Transitional Small Business Disclosure Format (check one): [ ] YES [X] NO

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

QUARTERLY REPORT - FORM 10-QSB

NINE MONTHS ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

Forward Looking Statements

Certain statements contained in this quarterly report and other written material and oral statements made from time to time by us do not relate strictly to historical or current facts. As such, they are considered forward-looking statements that provide current expectations or forecasts of future events. Such statements are typically characterized by terminology such as "believe", "anticipate", "should", "intend", "plan", "expect", "estimate", "project", "strategy" and similar expressions. Our forward-looking statements generally relate to the prospects for our ability to identify new business opportunities, develop new business strategies and execute such business strategies. These statements are based upon assumptions and assessments made by our management in light of their experiences and their perception of historical trends, current conditions, expected future developments and other factors our management believes to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including the following: our ability to identify and evaluate business opportunities that will achieve profitable operations while maintaining sufficient cash to operate our business and meet our liquidity requirements; our ability to obtain financing, if required, on terms acceptable to us, if at all; our ability to successfully attract strategic partners and to market both new and existing products and services domestically and internationally; exposure to lawsuits and regulatory proceedings; governmental laws and regulations affecting domestic and foreign operations; our ability to identify and complete diversification opportunities; and the impact of acquisitions, divestitures, restructurings, product withdrawals and other unusual items. Except as required by applicable law, our company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

		SEPTEMBER 30,			DECEMBER 31,
		2007			2006
		(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents	$	3,797		$	4,610
Restricted cash		75			73
Receivables		784			1,060
Due from affiliates		1,614			632
Inventories		12,146			15,212
Prepaid expenses and other		45			90
Total current assets		18,461			21,677
Non-current Assets:
Deferred credit facility costs		-			183
Property, plant and equipment		1,693			1,566
Purchase option agreements		17,460			16,204
Goodwill		3,243			3,243
Deferred tax benefits		570			811
Total non-current assets		22,966			22,007
Total assets	$	41,427		$	43,684

LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	17,535		$	13,694
Due to affiliates		997			9,248
Debt		12,320			-
Total current liabilities		30,852			22,942
Long-term Liabilities:
Debt		-			11,434
Other liabilities		8			26
Total long-term liabilities		8			11,460
Total liabilities		30,860			34,402
Stockholders' Equity:
Common stock		2,038			2,038
Additional paid-in capital		28,031			28,031
Accumulated deficit		(16,431	)		(16,613	)
Treasury stock, at cost		(5,313	)		(5,313	)
Accumulated other comprehensive income		2,242			1,139
Total stockholders' equity		10,567			9,282
Total liabilities and stockholders' equity	$	41,427		$	43,684

See accompanying notes.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2007			2006
					(UNAUDITED)
Product sales, net	$	84,629		$	72,997
Cost of goods sold		79,954			69,482
		4,675			3,515

General and administrative expenses		4,262			3,837
Depreciation and amortization		25			29
		4,287			3,866

Operating income (loss)		388			(351	)
Other income (expense):
Interest and financing charges, net		(474	)		(455	)
Gain on sale of marketable securities		51			-
Miscellaneous		483			147
		60			(308	)
Income (loss) before income tax		448			(659	)
Income tax - current		(1	)		(6	)
Income tax – deferred		(265	)		-
Net income (loss)	$	182		$	(665	)
Earning (loss) per common share, basic and diluted	$	0.01		$	(0.04	)

See accompanying notes.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		THREE MONTHS ENDED
		SEPTEMBER 30,
		2007			2006
		(UNAUDITED)
Product sales, net	$	27,678		$	27,407
Cost of goods sold		26,283			25,928
		1,395			1,479
General and administrative expenses		1,353			1,045
Depreciation and amortization		9			16
		1,362			1,061

Operating income		33			418
Other income (expense):
Interest and financing charges, net		(108	)		(138	)
Gain on sale of marketable securities		51			-
Miscellaneous		76			49
		19			(89	)
Income before income tax		52			329
Income tax – current		2			4
Income tax – deferred		(59	)		-
Net income (loss)	$	(5	)	$	333
Earning (loss) per common share, basic and diluted	$	0.00		$	0.02

See accompanying notes.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(DOLLARS IN THOUSANDS)

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2007		2006
		(UNAUDITED)

Net income (loss)	$	182	$	(665	)
Other comprehensive income,
foreign currency translation adjustment		1,103		974

Comprehensive income	$	1,285	$	309

See accompanying notes.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(DOLLARS IN THOUSANDS)

		THREE MONTHS ENDED
		SEPTEMBER 30,
		2007			2006
		(UNAUDITED)

Net income (loss)	$	(5	)	$	333
Other comprehensive income,
foreign currency translation adjustment		759			(103	)

Comprehensive income	$	754		$	230

See accompanying notes.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2007			2006
		(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)	$	182		$	(665	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization		435			274
Foreign exchange		662			599
Changes in operating assets and liabilities:
Restricted cash		4			-
Receivables		336			(538	)
Due from affiliates		(898	)		(1,241	)
Inventories		4,013			(2,527	)
Prepaid expenses and other current assets		49			(18	)
Deferred tax		191			-
Accounts payable and accrued expenses		2,677			(2,020	)
Due to affiliates		(8,404	)		7,745
Net cash provided by operating activities		(753	)		1,609

INVESTING ACTIVITIES:
Purchase of fixed assets		(308	)		(421	)
Net cash used in investing activities		(308	)		(421	)

FINANCING ACTIVITIES:
Proceeds from exercise of stock options		-			32
Investment subsidies and grants		162			56
Net cash provided by financing activities		162			88

Effects of foreign exchange on cash and cash equivalents		86			92
Changes in cash and cash equivalents		(813	)		1,368
Cash and cash equivalents, beginning of period		4,610			3,843
Cash and cash equivalents, end of period	$	3,797		$	5,211
				��
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid	$	--		$	--
Interest expenses paid	$	421		$	392

See accompanying notes.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The notes to these consolidated financial statements are presented in United States Dollars (unless otherwise indicated), as rounded to the nearest thousands (except per share amounts).

Description of Business

Cathay Merchant Group, Inc. (the “Company” or “Cathay) is primarily an aluminium manufacturing company.

On June 30, 2005, the Company, acting through its wholly-owned subsidiary, Cathay Merchant Group Limited (“CMG”), acquired all of the shares of AWP Aluminium Walzprodukte GmbH (“AWP”) and AFM Aluminiumfolie Merseburg GmbH (“AFM”). AWP and AFM are incorporated under the laws of Germany.

Basis of Presentation

The unaudited interim period consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-KSB for the year ended December 31, 2006. In the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments (which are of a normal recurring nature) necessary to present a fair statement of the results of the interim periods presented. The results for the periods presented herein may not be indicative of the results for any subsequent period or the entire year.

2. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is determined by dividing net income applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is determined using the same method as basic earnings per share except that the weighted average number of common shares outstanding includes potential dilutive effect of stock options.

The following table sets forth the computation of basic and diluted earnings (loss) per share:

	NINE MONTHS ENDED		THREE MONTHS ENDED
	SEPTEMBER 30,		SEPTEMBER 30,
	2007	2006	2007	2006
	(UNAUDITED)		(UNAUDITED)

Net income (loss)	$182	$(665)	$(5)	$333
Earnings (loss) per share, basic and diluted	$0.01	$(0.04)	$0.00	$0.02
Number of weighted average shares
outstanding, basic (in thousands)	18,891	18,872	18,891	18,891
Number of weighted average shares
outstanding, diluted (in thousands)	18,918	18,873	18,909	18,895

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. INVENTORIES

Inventories consist of raw materials, work-in-process, and finished goods. Inventories are recorded at the lower of cost (specific identification and first-in first out methods) or market and consist of the following at September 30, 2007:

Raw materials	$	4,536
Work in progress		5,420
Finished goods		2,190
	$	12,146

4. BUSINESS SEGMENT INFORMATION

During the nine and three months ended September 30, 2007, the Company operated in one reportable business segment: manufacturing and trading of aluminium products, and all sales revenues were derived from Europe.

The following tables disclose the Company’s sales by product types for the nine and three months ended September 30, 2007 and 2006:

		NINE MONTHS ENDED				THREE MONTHS ENDED
		SEPTEMBER 30,		SEPTEMBER 30,		SEPTEMBER 30,		SEPTEMBER 30,
		2007		2006		2007		2006
By product types

Sheets	$	3,623	$	8,122	$	1,392	$	3,334
Strips		22,264		18,749		6,947		6,077
Blanks		14,786		10,885		5,202		4,397
Foils		32,637		32,241		10,678		11,651
Other		11,319		3,000		3,459		1,948
	$	84,629	$	72,997	$	27,678	$	27,407

As of September 30, 2007, there was no material change in total assets from December 31, 2006.

5. RELATED PARTIES TRANSACTIONS

During the nine months ended September 30, 2007, the Company had the following transactions with MFC Corporate Services AG, formerly MFC Merchant Bank S.A., (“MFC Bank”), MFC Commodities GmbH and its parent company Mass Financial Corp. (“Mass”).

	a)	Interest income from MFC Bank on the deposit was $25.

	b)	Sold $66,575 (representing 79% of total sales of products) and paid marketing cost of $1,899 to MFC Commodities GmbH.

	c)	Accrued or paid interest of $375 to Mass.

CATHAY MERCHANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes–An Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken an a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007 and the implementation of FIN 48 does not have any impact on the Company’s financial statements.

The Company recognizes interest and penalties related to an underpayment of income taxes, if any, in interest expense. During the nine months ended September 30, 2007, the Company did not recognize any penalties and interest.

The Company and/or one or more of its subsidiaries file income tax returns in the United States and Germany.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Overview

Our primary business involves the manufacturing of aluminium products. Our wholly-owned subsidiary, Cathay Merchant Group Ltd., a company incorporated under the laws of Samoa ("Cathay Ltd."), acquired all of the shares of AWP Aluminium Walzprodukte GmbH and AFM Aluminiumfolie Merseburg GmbH on June 30, 2005. The companies were acquired for a combined purchase price of $18.5 million (€15,300,000). AWP Aluminium Walzprodukte was based in Berlin, Germany, and operated an aluminium rolling mill through its wholly-owned subsidiary, MAW Mansfelder Aluminiumwerke GmbH. In 2006, AWP Aluminium Walzprodukte merged with and into MAW Mansfelder Aluminiumwerke, with MAW Mansfelder Aluminiumwerke continuing on as the surviving corporation. Its products include aluminium sheets, foils, strips and blanks for use by industrial and commercial fabricators of aluminium products. On the same date, we also acquired AFM Aluminiumfolie Merseburg, which operates an aluminium rolling mill factory in Merseburg, Germany and produces aluminium foil for flexible (food and beverage) packaging, pharmaceutical packaging and other technical applications.

We hold interests in certain land, buildings and capital property where the two aluminium mills are located pursuant to the terms of two lease agreements with Grundstuckfonds Sachsen-Anhalt GmbH, a company wholly-owned by the State of Saxony-Anhalt, Germany ("GSA").

Total combined production from the two mills during the year ended December 31, 2006 was 28,892 metric tonnes of finished products. The maximum total combined annual production from the two mills is 40,000 metric tonnes. The principal market for all of our aluminium products is primarily Europe.

We, through Cathay Ltd., acquired all of the outstanding shares of AFM Aluminiumfolie Merseburg, pursuant to a share purchase agreement dated June 30, 2005, from an unrelated third party for a purchase price of $8.5 million. We paid $4.8 million in cash at closing on June 30, 2005 and the balance of the purchase price is evidenced by an unsecured promissory note in the principal amount of $3.7 million (€3,020,000), maturing on June 30, 2008. The note bears interest at the rate of 4.2% per annum, payable annually, and calculated on the basis of the actual number of days elapsed and on the basis of a 365-day year. The note was issued by Cathay Ltd. and is guaranteed by us.

We acquired all of the outstanding shares of AWP Aluminium Walzprodukte pursuant to a share purchase agreement dated June 30, 2005, between Cathay Ltd. and Blake International, a former wholly-owned subsidiary of KHD Humboldt Wedag International Ltd., for a purchase price of $10.0 million. We paid $4.8 million in cash at closing on June 30, 2005 and the balance of the purchase price is evidenced by an unsecured promissory note in the principal amount of $5.2 million (€4,280,000), maturing on June 30, 2008. The note bears interest at the rate of 4.2% per annum, payable annually, and calculated on the basis of the actual number of days elapsed and on the basis of a 365-day year. The note was issued by Cathay Ltd. and is guaranteed by us. KHD Humboldt Wedag was an affiliate and significant shareholder of our company at the time of the transaction.

Our aluminium rolled products are semi-finished products including sheets, foils, strips and blanks that constitute the raw materials for the manufacture of finished goods which are completed by our customers. Our aluminium rolling mills produce products for industrial and commercial purposes. The process of producing semi-finished aluminium products requires subsequent rolling, or cold rolling, and finishing steps such as annealing, coating, leveling or slitting to achieve the desired thicknesses and metal properties.

Aluminium has several characteristics that provide value for diverse applications. Compared to substitute metals, aluminium is light-weight, has a high strength-to-weight ratio and is resistant to corrosion. Aluminium's greatest advantage, however, is that it can be recycled repeatedly without any material decline in performance or quality. Recycling of aluminium provides significant energy savings compared to the production of aluminium from other primary sources with significantly lower capital equipment costs.

We generally purchase primary aluminium at prices set on the London Metal Exchange plus a premium that varies by geographic region of delivery, form and alloy.

Industrial and commercial fabricators in the construction and automotive supply industry represent the largest customers for MAW Mansfelder Aluminiumwerke's products. Aluminium rolled products developed for this market segment are often decorative, offer insulating properties, are durable and corrosion resistant, and have a high strength-to-weight ratio. Aluminium siding, gutters, and downspouts comprise a significant amount of construction volume. Other applications include doors, windows, awnings, canopies, façades, roofing and ceilings. Most of the customers of MAW Mansfelder Aluminiumwerke receive shipments in the form of aluminium sheets, foils, strips and blanks which are later fabricated according to our customers' specifications. Demand for most of MAW Mansfelder Aluminiumwerke's products is seasonal, with higher demand occurring in the spring, summer and fall months and lower demand in the winter months. Accordingly, our aluminium mills typically generate higher revenues in the spring, summer and fall months.

The majority of our products are sold to two subsidiaries of Mass Financial Corp., which provide services and sell the products. Mass Financial currently holds 5,256,844, or 27.8%, of our common shares as of November 5, 2007.

The aluminium rolled products market is highly competitive. We face competition from a number of companies in Germany and from European companies selling their products to our markets. Our primary competitors in Europe are Norsk Hydro A.S.A., Alcan, Alcoa, Novelis and Corus. We compete based on our price, product quality, the ability to meet customers' specifications, short delivery times and range of products offered. We also use sophisticated technical equipment and focus on high-end niche markets in order to maintain our competitive advantage.

In addition to competition from within the aluminium rolled products industry, we face competition from non-aluminium materials, as fabricators and end-users have, in the past, demonstrated a willingness to substitute other materials for aluminium. Aluminium competes with plastic and steel in building products applications. Factors affecting competition with substitute materials include price, ease of manufacture, consumer preference and performance characteristics.

The following discussion and analysis of the results of operations and financial condition of our company for the three months ended September 30, 2007 should be read in conjunction with the consolidated financial statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-KSB for the year ended December 31, 2006 filed with the United States Securities and Exchange Commission.

Results Of Operations – Nine Months Ended September 30, 2007

Net product sales for the nine months ended September 30, 2007 were $84.6 million, compared to $73.0 million in the same period in 2006. Cost of goods for the nine months ended September 30, 2007 were $80.0 million, compared to $69.5 million in the same period in 2006.

AFM Aluminiumfolie Merseburg's products include those that utilize aluminium foil because of its light weight, recyclability and formability and because it has a wide variety of uses in packaging. Aluminium foil can be processed to create a very thin foil that can be plain or printed and is typically laminated to plastic or paper to form an internal seal for a variety of packaging applications including flexible (food and beverage) packaging, pharmaceutical packaging and other technical applications. Customers typically order coils of such foil in a range of thicknesses from 6 microns to 50 microns. AFM Aluminiumfolie Merseburg enters into annual supply agreements with a majority of its larger customers that are typically concluded during the fall and winter months to cover the customers' requirements for the following year. This makes AFM Aluminiumfolie Merseburg's revenues relatively predictable at an early time in the year.

The aluminium products of MAW Mansfelder Aluminiumwerke are sold to distributors, as well as end-users, principally for use by industrial and commercial fabricators of aluminium products whereas the aluminium products of AFM Aluminiumfolie Merseburg are sold exclusively to industrial fabricators.

General and administrative expenses for the nine months ended September 30, 2007 were $4.3 million, compared to $3.8 million in the same period in 2006.

In July 2007, the German tax authority announced a change of the Corporation tax rate, effective January 1, 2008, whereby the total tax rate will be reduced approximately from 39% to 29%. We reduced our deferred tax assets by $0.3 million partially because of this change.

We reported a net income of $0.2 million, or $0.01 per common share, for the nine months ended September 30, 2007, compared to a net loss of $0.7 million, or $0.04 per common share, in the same period in 2006.

Results of Operations – Three Months Ended September 30, 2007

Net product sales for the three months ended September 30, 2007 were $27.7 million, compared to $27.4 million in the same period in 2006. Cost of goods sold for the three months ended September 30, 2007 were $26.3 million, compared to $25.9 million in the same period in 2006.

All of our revenues during the quarter ended September 30, 2007 were generated by our two aluminium rolling mills.

General and administrative expenses were $1.4 million for the three months ended September 30, 2007, compared to $1.0 million in the same period ended September 30, 2006.

We reported a net loss of $5,000, or $0.00 per common share, for the three months ended September 30, 2007, compared to a net income of $0.3 million, or $0.02 per common share, in the same period in 2006.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2007, we had a working capital deficiency of $12.4 million, compared to a working capital deficiency of $1.3 million at December 31, 2006.

We anticipate that cash generated from our operations will not be able to cover all of our projected operating expenses and projected expenditures in the following twelve months. We may try to raise funds to meet our future cash requirements by extension of debt or equity financing or we may sell some of our investments. However, we can offer no assurance that we will be successful in raising cash in such methods.

Operating Activities

Operating activities used cash of $0.8 million for the nine months ended September 30, 2007, and provided cash of $1.6 million in the same period ended 2006.

Investing Activities

Investing activities used cash of $0.3 million for the nine months ended September 30, 2007, compared to $0.4 million in the same period ended 2006, as a result of the purchase of fixed assets.

Financing Activities

Financing activities provided cash of $0.2 million for the nine months ended September 30, 2007, compared to $88,000 in the same period ended 2006.

Foreign currency

All of our operations are conducted in Europe and our consolidated financial results are subject to foreign currency exchange rate fluctuations.

We translate assets and liabilities of our foreign subsidiaries whose functional currencies are other than United States dollars into United States dollars at the rate of exchange on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the period. Unrealized gains or losses from these translations, or currency translation adjustments, are recorded under the shareholders’ equity section on the balance sheet and do not affect the net earnings as reported in our consolidated statements of income. As our revenues are received in Euros, our financial position for any given period, when reported in United States dollars, can be significantly affected by the fluctuation of the exchange rates for Euros during that period.

Based upon the average exchange rates for the nine months ended September 30, 2007, the United States dollar decreased by approximately 7.5% in value against the Euro, compared to the average exchange rates for the nine months ended September 30, 2006. As at September 30, 2007, the United States dollar decreased by approximately 7.2% in value against the Euro since December 31, 2006.

For the nine months ended September 30, 2007, we reported approximately a net $1.1 million currency translation adjustment gain and, as a result, our cumulative currency translation adjustment gain at September 30, 2007 was $2.2 million, compared to a cumulative gain of $1.1 million at December 31, 2006.

Off-Balance Sheet Arrangements

Our company has no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. Our company does not engage in trading activities involving non-exchange traded contracts.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires management of our company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. We are currently in the aluminium manufacturing and trading business and have identified certain accounting policies, described below, that are the most important to the portrayal of our current financial condition and results of operations.

Revenue Recognition

Our primary business is aluminium manufacturing and trading and our revenue primarily comes from the sale of aluminium products produced and sold. We receive orders from customers, process and convert the raw materials into finished goods, and ship the finished goods at the instructions of our customers. It is a simple manufacturing and trading process. The revenue is recognized when the finished goods are delivered, the terms of the sales are known and complied with and no significant obligations remain. Management believes that the risk of misstating the revenue is very remote and the only major misstatement, if any, comes from the period-end cut-off.

Our return policy is governed by the provisions of the German Civil Code and the German Commercial Code. It stipulates that the seller has to transfer the product free from defects in materials and workmanship to the purchaser. To be deemed free from defects, the product has to be of the quality the two parties agreed on in their contract, when being transferred. If the product is not free from defects during the warranty period of two years, German law offers four possible claims to the purchaser:

Subsequent improvements or subsequent delivery to the choice of the purchaser. Other options for the purchaser only arise if the seller subsequently fails to perform his contractual duty.
After unsuccessfully requesting improvements of the product, the purchaser may withdraw from the contract, in which case a full cash refund is mandatory and the product has to be returned to the seller.
Instead of withdrawing, the purchaser may keep the product and consider a reduction of the purchase price.
The purchaser might claim compensation for the non-performance of the sale.

Once an order has been placed by the purchaser and accepted by the seller the purchaser has no legal right to withdraw from the contract, unless the seller fails to perform his duties. A mutual cancellation is subject to the acceptance of the seller and depends on the individual situation.

Goodwill Impairment

A goodwill impairment loss should be recognized when the carrying amount of the goodwill exceeds the fair value of the goodwill. An impairment loss should not be reversed if the fair value subsequently increases. We consider, but such consideration is not limited to, the following factors to determine the goodwill impairment:

a significant adverse change in legal factors or in the business climate;
an adverse action or assessment by a regulator;
unanticipated competition;
loss of key personnel;
a more-likely-than-not expectation that a significant portion or all of a reporting unit will be sold or otherwise disposed of;
the testing for write-down or impairment of a significant asset group within a reporting unit; or
the recognition of a goodwill impairment loss in its separate financial statements by a subsidiary that is a component of the reporting unit.

Impairment of Long-Lived Assets

We periodically evaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, we estimate future cash flows expected to result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require our management to make subjective judgments. In addition, the time periods for estimating future cash flows is often lengthy, which increases the sensitivity of the assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. Our management considers the likelihood of possible outcomes in determining the best estimate of future cash flows.

ITEM 3.

CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-

benefit relationship of possible controls and procedures.

As of September 30, 2007, the end of the quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no significant changes in our internal controls over financial reporting that occurred during our most recent quarter that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

In the ordinary course of conducting our business, we may become subject to litigation and claims regarding various matters. There was no outstanding litigation as of September 30, 2007.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS.

Exhibits Required by Item 601 of Regulation SB

Exhibit		Filed
Number	Exhibit Title	Herewith	Form	Filing Date

(3)(i)	Articles of Incorporation

3.1.1	Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		S-1	April 13, 1981

3.1.2	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		10-Q	January 31, 1987

3.1.3	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		10-K	July 28, 1990

Exhibit		Filed
Number	Exhibit Title	Herewith	Form	Filing Date

3.1.4	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		10-KSB	July 31, 1997

3.1.5	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		8-K	June 5, 1998

3.1.6	Certificate of Designations of Series A Convertible Preferred Stock of Cathay Merchant Group, Inc., a Delaware Corporation		8-K	June 5, 1998

3.1.7	Certificate of Designations of Series B 5% Convertible Preferred Stock of Cathay Merchant Group, Inc., a Delaware Corporation		8-K	February 9, 1999

3.1.8	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		8-K	January 10, 2000

3.1.9	Certificate of Amendment to Certificate of Incorporation of Cathay Merchant Group, Inc., a Delaware corporation		8-K	October 7, 2004

3(ii)	By-laws

3.2.1	Amended Bylaws of Cathay Merchant Group, Inc., a Delaware corporation		8-K	May 17, 2000

(10)	Material contracts

10.1	Financial Advisory Agreement dated January 1, 2004, between Cathay Merchant Group, Inc. and MFC Merchant Bank S.A.		10-KSB	October 29, 2004

10.2	Promissory Note dated June 30, 2005, between Cathay Merchant Group Limited and Cathay Merchant Group, Inc.		8-K	June 30, 2005

10.3	Promissory Note dated June 30, 2005, between Cathay Merchant Group Limited and Cathay Merchant Group, Inc.		8-K	June 30, 2005

Exhibit		Filed
Number	Exhibit Title	Herewith	Form	Filing Date

10.4	Lease Agreement dated September 18, 2002, between GSA Grundstqcksfonds Sachsen-Anhalt GmbH and MAW Mansfelder Aluminiumwerk GmbH		10-KSB	April 2, 2007

10.5	Lease Agreement dated September 26, 2002, between GSA Grundstqcksfonds Sachsen-Anhalt GmbH and MFC Aluminiumfolie Merseburg GmbH		10-KSB	April 2, 2007

10.6	Purchase Option Agreement dated September 26, 2002, between GSA Grundstqcksfonds Sachsen-Anhalt GmbH and MFC Aluminiumfolie Merseburg GmbH		10-KSB	April 2, 2007

10.7	Agreement dated October 26, 2004, between GSA Grundstqcksfonds Sachsen-Anhalt GmbH and MAW Mansfelder Aluminiumwerk GmbH		10-KSB	April 2, 2007

10.8	Service Agreement dated August 22, 2005, between our company and Stefan Feuerstein		10-KSB	April 2, 2007

10.9	Amendment to Service Agreement effective August 1, 2006, between our company and Stefan Feuerstein		10-KSB	April 2, 2007

10.10	Document of Notary dated March 19, 2007		10-QSB	May 15, 2007

10.11	Amendment to Lease Agreement dated April 11, 2007		10-QSB	May 15, 2007

10.12	Amendment to Lease Agreement dated April 11, 2007		10-QSB	May 15, 2007

10.13	Amendment to Lease Agreement dated April 11, 2007		10-QSB	May 15, 2007

(31)	Section 302 Certifications

31.1	Chief Executive Officer and Chief Financial Officer	X

(32)	Section 906 Certifications

32.1	Chief Executive Officer and Chief Financial Officer	X

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2007	CATHAY MERCHANT GROUP, INC.


	By:	/s/ Michael J. Smith
		Michael J. Smith
		Chief Executive Officer, President and
		Chief Financial Officer
		(Principal Executive Officer,
		Principal Accounting Officer and
		Principal Financial Officer)

	PART I	Page

Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis or Plan of Operation	12
Item 3.	Controls and Procedures	16

PART II

Item 1.	Legal Proceedings	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
	Signatures

Cathay Merchant (MNSF) Inactive 10QSB2007 Q3 Quarterly report (small business)