 | James M. Halley Q.C., 2 | David W. Buchanan, Q.C. | Derek J. Mullan, Q.C. | |
| R. Stuart Wells | M. Douglas Howard | W.W. Lyall D. Knott, Q.C. | ||
| William A. Ruskin, 1 | Patrick A. Williams | Alexander Petrenko | ||
| Bernard Pinsky, 4 | Roy A. Nieuwenburg | William C. Helgason | ||
| William D. Holder | Nigel P. Kent, 1 | Douglas W. Lahay | ||
| David W. Kington | Diane M. Bell | Anne L.B. Kober | ||
| R. Brock Johnston | Neil P. Melliship | Kenneth K.C. Ing, 11, 13 | ||
| Darren T. Donnelly | Mark S. Weintraub | Neo J. Tuytel | ||
| Ross D. Tunnicliffe | Kevin J. MacDonald | Don C. Sihota | ||
| James A. Speakman | Kerstin R. Tapping | Ethan P. Minsky, 6, 7, 9 | ||
| Brock H. Smith | Nicole M. Byres | John C. Fiddick | ||
| D. Lawrence Munn, 8 | R. Glen Boswall | Hannelie G. Stockenstrom, 12 | ||
| Bonnie S. Elster | Virgil Z. Hlus, 4 | Samantha Ip | ||
| Jonathan L.S. Hodes, 1, 5 | William L. Macdonald, 8 | Aaron B. Singer | ||
| L.K. Larry Yen, 10 | Peter M. Tolensky | Thea L. Koshman, 1 | ||
| Tony Fogarassy | Allyson L. Baker, 3 | Warren G. Brazier, 4 | ||
| Amy A. Mortimore | Veronica P. Franco | Krista Prockiw | ||
| Brent C. Clark | Jane Glanville | Keri T. Grenier | ||
| Sean D. Vanderfluit | Richard T. Weiland | Adam I. Zasada | ||
| Andrea M. East | Cam McTavish | Steve Veitch | ||
| Reply Attention of | Virgil Z. Hlus | Lisa D. Hobman | Valerie S. Dixon | Jonathan C. Lotz |
| Direct Tel. | 604.891.7707 | Dianne D. Rideout | Tasha L. Coulter | David J. Fenrich |
| EMail Address | vzh@cwilson.com | Kari Richardson | Vikram Dhir, 1 | Adam M. Dlin |
| Our File No. | 28340-0001 / CW1074730.2 | Sarah W. Jones | Michal Jaworski | Shauna K. Towriss |
| Associate Counsel: Michael J. Roman | |
| Certain lawyers have been admitted to practice in one or more of the following jurisdictions as indicated beside each name: | |
| Canada | United States | International | |
| 1 Alberta | 4 California | 11 Hong Kong | |
| 2 Manitoba | 5 Colorado | 12 South Africa | |
| 3 Ontario | 6 District of Columbia | 13 United Kingdom | |
| 7 Florida | |||
| 8 New York | |||
| 9 Virginia | |||
| March 6, 2007 | 10 Washington |
BY EDGAR AND COURIER
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-7010
USA
| Attention: | John P. Nolan, Accounting Branch Chief |
| Lisa Haynes, Senior Staff Accountant |
Dear Sirs:
| Re: | Cathay Merchant Group, Inc. | ||
| Form 10-K for the period ended July 31, 2005 | |||
| Form 10-Q for the quarter ended September 30, 2006 | |||
| File No. 001-16283 |
We refer to your letter of February 16, 2007 with respect to the Form 10-K for the period ended July 31, 2005 and the Form 10-Q for the quarter ended September 30, 2006 filed by our client, Cathay Merchant Group, Inc. (the "Company").
We have keyed our responses to your comments in your letter dated February 16, 2007.
Form 10-KSB for the period ended July 31, 2005
Notes to Consolidated Financial Statements
Note 1. Business Description and Summary of Significant Accounting Policies
Purchase Option Agreements, page 32
| 1. | The Company undertakes to provide an expanded discussion of the following in its future filings: |
|
| HSBC Building 800 – 885 West Georgia Street Vancouver BC V6C 3H1 Canada Tel.: 604.687.5700 Fax: 604.687.6314www.cwilson.com |
| Some lawyers at Clark Wilson LLP practice through law corporations. |
- 2 -
|
| 2. | Attached are copies of the two purchase option agreements and the corresponding lease agreements. The Company will include as exhibits on its next Form 10-KSB the two purchase option agreements and the corresponding lease agreements. |
| 3. | Paragraph 13 of SFAS 142 states "The amount of an intangible asset to be amortized shall be the amount initially assigned to that asset less any residual value." It goes on to state "(b) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that asset and that market is expected to exist at the end of the asset's useful life." The Company considered the residual value of the two purchase option agreements would be the same as their carrying value up to their expiration dates. Therefore, the amount that needed to be amortized was zero. In other words, the purchase option agreements have a finite life, but do not lose value over the life (unless the value of the related property decreased, which would indicate an impairment). |
| 4. | In order to take ownership of the land, building and equipment, the Company would need to pay €6,450,000 (€3,050,000 for one and €3,450,000 for the other) as an exercise price. Future filings will include this information. |
| 5. | The Company’s auditors are now examining its financial statements for December 31, 2006. The Company will provide the numbers once they have been audited. The Company does not anticipate an impairment to the value of the options at December 31, 2006. |
Revenue Recognition, page 33
| 6. | The Company's 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: | |
|
- 3 -
|
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.
Return Pattern
| Loss after | |||||||
| Period | No. of returns | Credit note | Scrap sales | ||||
| In USD | In USD | ||||||
| (thousands) | (thousands) | ||||||
| Year ended 7/31/2005 | 17 | 22 | 17 | ||||
| 5 months ended 12/31/2005 | 75 | 255 | 190 | ||||
| Year ended 12/31/2006 | 325 | 801 | 536 |
| 7. | KHD Humboldt Wedag International Ltd. (“KHD”) and its subsidiaries have the same rights and obligations as the ultimate end users. |
| 8. | KHD did not add any substantial value or make any substantial changes for the product the Company sells. |
Note 2. Business Combination, page 36
| 9. | No favorability or unfavorability of operating lease agreements was determined at the date of acquisition. Lease rates were not significantly different than market lease rates at the time of acquisition. |
Form 10-QSB for the period ended September 30, 2006
Management’s Discussion and Analysis
Application of Critical Accounting Policies, page 13
| 10. | The Company performed an impairment test for long-lived assets before a goodwill impairment test. |
| 11. | The Company performed the long-lived assets and goodwill impairment tests as of July 31, 2005, December 31, 2005 and 2006 for the year ended July 31, 2005, five months ended December 31, 2005 and year ended December 31, 2006, respectively. |
| 12. | The Company determined a reporting unit as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and the Company's management regularly reviews the operating results of that component. The Company's long-lived assets primarily consist of property, plant and equipment. |
| 13. | The Company compares the carrying value of the purchase option agreements with the difference between predetermined prices to purchase certain land, building and equipment in the agreements and the market price of those properties, on at least an annual basis. Any impairment would be charged to the results of operations in the period in which the impairment is determined. |
- 4 -
Should you have any questions, please do not hesitate to contact Virgil Hlus at 604.891.7707.
| Yours truly, | |
| CLARK WILSON LLP | |
| Per: /s/ Virgil Z. Hlus | |
| Virgil Z. Hlus |
VZH/cjb
Encl.
| cc: | Cathay Merchant Group, Inc. |