March 16, 2006
Mail Stop 4561
By U.S. Mail
Mr. Michael J. Smith
Chief Financial Officer and Chief Executive Officer
Cathay Merchant Group, Inc.
3604 Tower 1
Kerry Everybright City
218 Tian Mu Road West
Shanghai, P.R.China, 200070
Re: Cathay Merchant Group, Inc.
Form 10-K for the period ended July 31, 2005
Form 10-Q for the quarter ended October 31, 2006
File No. 001-16283
Dear Mr. Smith:
We have reviewed your filings and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comments are inapplicable or a revision
is
unnecessary. Please be as detailed as necessary in your
explanations. In some of our comments, we may ask you to provide
us
with supplemental information so we may better understand your
disclosure. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-KSB
Item 6. Management`s Discussion and Analysis or Plan of
Operations
Results of Operations - Fiscal Year Ended July 31, 2005 Compared
to
Fiscal Year Ended July 31, 2004, page 20
1. Please tell us and revise your future filings to provide an
expanded discussion of your financial condition and results of
operations for each of the reported periods as required by Item
303(b) and (c) of Regulation S-B. We note that you simply repeat
line
item amounts from your income statement without providing a
comprehensive discussion of the reasons behind the change in each
of
the reported periods. Provide reasons for changes in significant
line items and address the key variables and other qualitative and
quantitative factors necessary to understand and evaluate your
business. Refer to the guidance provided by SEC Interpretive
Release
No. 33-8350.
Application of Critical Accounting Policies
Revenue Recognition - page 22
2. Please tell us and revise your future filings to provide an
expanded discussion of your critical accounting policies
especially
those relating to revenue recognition. Clearly describe each
accounting policy, the judgments and uncertainties affecting the
application of each policy, and the likelihood that materially
different amounts would be reported under different conditions or
using different assumptions. Specifically address why your
accounting
estimates or assumptions bear the risk of change. Refer to the
guidance provided by Financial Reporting (FR) Releases Nos. 60 and
72.
Item 7. Financial Statements
General
3. Given that your principal offices are in China and almost all
of
your business operations are in Germany, please tell us how your
independent accountants performed audit procedures necessary to
opine
on your audited financial statements. We note the independent
accounting firm is based out of Seattle, Washington. Your
discussion
should include but not be limited to the following:
* How the independent accountants audited the existence and value
of
inventory and fixed assets held at the two German mills;
* The independent accountants` expertise in valuing assets held in
Germany; and
* In the event the independent accountants relied on the work of
other auditors, how they complied with the guidance contained in
section 543 of PCAOB`s Statements of Auditing Standard No. 1.
Notes to Consolidated Financial Statements
Note 1. Business Description and Summary of Significant
Accounting
Policies
Purchase Option Agreements, page 32
4. Please tell us how you determined the purchase option
agreements
to be acquired assets and how you determined their fair value,
specifying the authoritative accounting literature upon which you
are
relying. Additionally, clarify how you would account for these
agreements if they expire unexercised.
Note 2. Business Acquisition, page 36
5. Please tell us how you determined it appropriate to apply
purchase
method of accounting for your acquisition of AWP Aluminium
Walzprodukte GmbH from Blake International, a wholly owned
subsidiary
of MFC Bancorp. Tell us the authoritative accounting literature
you
relied upon for your accounting and your consideration of
paragraph
11 of SFAS No. 141 and paragraph 3 of SFAS No. 57. We note that
MFC
Bancorp owns 27.8% of your outstanding shares. Two other
shareholders
holding 27.8% each of your outstanding shares are on the board of
directors of MFC Bancorp. Further your CEO and CFO, one of the
three
major shareholders holding 27.8% each of your outstanding shares,
is
also the President and CEO of MFC Bancorp. It appears to us that
there is common control of Cathay Merchant Group and Blake
International by MFC Bancorp.
6. Please provide us with a breakdown of current assets and
liabilities acquired from AFM and AWP and tell us how the current
presentation discloses the amounts allocated to each major asset
and
liability caption and complies with the disclosure requirement of
paragraph 51 of SFAS 141.
Note 5. Debt, page 39
7. Please tell us how you determined the annual interest rate of
4.2%
for the unsecured notes payable in the amounts of $3.6 million and
$5.2 million maturing on June 30, 2008 was the prevailing market
rate
at the time of issuance. Please refer to the guidance in
paragraphs
12-14 of APB No. 21.
Note 8. Related Party Transactions, page 41
8. Please tell us and revise future filings to provide all
disclosures required under paragraph 2 of SFAS No. 57,
specifically
part (c) and (d). Provide us with your proposed disclosure,
expanded
to include, but not limited to, the following:
* The nature of the Due from Affiliate balance of $1,464,000;
* The nature of your sales relationship with MFC Bancorp, Ltd
(MFC).
9. In the last paragraph of this footnote you state that 91% of
your
total sales came from MFC. However, on page 8 under "Customers"
you
have extensive disclosures about end-user customers. Please
clarify
if MFC is a customer or a distributor of your products and how
this
impacts your revenue recognition. Specifically explain how and
when
you recognize revenues for sales made through MFC upon meeting
each
of the four revenue recognition criteria outlined in SAB 104.
* * * * *
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. You may wish to provide us with marked copies of
the amendment to expedite our review. Please furnish a cover
letter
with your amendment that keys your responses to our comments and
provides any requested supplemental information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Paula Smith (Staff Accountant) at (202) 551-
3696
or me at (202) 551-3423 if you have any other questions.
Sincerely,
Amit Pande
Assistant Chief Accountant
Michael J. Smith, Chief Financial Officer and Chief Executive
Officer
Cathay Merchant Group, Inc.
Page 1 of 4