Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Notice Regarding Forward-Looking Statements

Jade Art Group Inc. (referred to in this Quarterly Report on Form 10-Q as "we" or the "Company") desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. This report contains a number of forward-looking statements that reflect management's current views and expectations with respect to our business, strategies, future results and events and financial performance. All statements made in this report, other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to future cash flows, revenues, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words "believe," "expect," "intend," "anticipate," "estimate," "may," "plan," "will," variations of such words and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.

Forward-looking statements are subject to certain known and unknown risks and uncertainties, which may cause our actual results, performance or achievements to differ materially from historical results as well as those expressed in, anticipated or implied by these forward-looking statements. We do not undertake any obligation to revise forward-looking statements to reflect any future events or circumstances. Factors that could cause or contribute to such differences include, but are not limited to, those set forth in our Annual Report on Form 10-K for the year ended December 31, 2008, and in our quarterly reports to be filed with the Securities and Exchange Commission, together with the risks discussed in our press releases and other communications to shareholders issued by us from time to time, which attempt to advise interested parties of the risks and factors that may affect our business. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, but are not limited to, our ability to raise capital as and when required, the availability of raw products and other supplies, competition, environmental risks, the prices of goods and services, government regulations, and political and economic factors in the People's Republic of China ("China" or the "PRC") in which our operating subsidiary operates.

Overview

The Company is a seller and distributor in China of raw jade, ranging in uses from decorative construction material for both the commercial and residential markets to high-end jewelry. For more than 30 years, the Company's business consisted of manufacturing and selling hand and machine-carved wood products, such as furniture, architectural accents and Buddhist figurines in China. Commencing in 2007, we experienced a reduction of revenue from our woodcarving business, which largely resulted from increased competition. As a result, we decided to dispose of our wood products business and to enter the business of raw jade sales and distribution, which management believed presented a better long-term growth potential. On January 11, 2008, we formed a new wholly owned Chinese subsidiary, JiangXi SheTai Jade Industrial Company Limited ("STJ"), to engage in the sale and distribution of raw jade throughout China. Our goal is to meet China's increasing demand for jade and to eventually vertically integrate our raw jade distribution activities with jade processing, carving, polishing, and, at a later date, retail sales.

On January 17, 2008, the Company entered into an Exclusive Distribution Rights Agreement (the "Exchange Agreement") with Wulateqianqi XiKai Mining Co., Ltd. ("XiKai Mining"). Under the Exchange Agreement, XiKai Mining committed to sell to the Company 90% of the raw jade material produced from its SheTai Jade mine, located in Wulateqianqi, China, for a period of 50 years (the "Exclusive Rights"). In exchange for these Exclusive Rights, the Company agreed to pay XiKai Mining RMB 60 million (approximately $8.8 million) by March 31, 2009, and, to transfer to XiKai Mining 100% of our ownership interest in all of the Company's woodcarving operations, which were contained in Jiangxi XiDa. This transfer of Jiangxi XiDa was made on February 20, 2008.

XiKai Mining is the Company's sole source for raw jade. Under the Exchange Agreement, the price for the raw jade material has been set for the first five years at RMB 2000 (approximately $285) per metric ton, and is subsequently subject to renegotiation every five years with adjustments not to exceed 10%. This mine commenced operation in 2002, and is estimated to have an annual operating capacity of approximately 40,000 metric tons by 2009. It has one of the largest jade reserves in China. According to a survey report issued by the Inner Mongolia Geological Institution, the mine has proven and probable reserves of approximately six million metric tons. SheTai Jade is a form of jadeite found in the mountain ranges of Inner Mongolia, China. The jade from the SheTai mine is stainless, non-corrosive, non-weathering and unfadable. It has a glassy luster and a pure and an attractive green color. It is also much harder and more durable than other forms of jade. As a result of such characteristics, SheTai Jade has a broad spectrum of applications, ranging from commercial and residential construction, and decorative jade artwork to intricately carved jade jewelry.

We commenced the distribution and sale of jade in January 2008. During the quarter ended March 31, 2008, we entered into five contracts for the sale of raw jade. During the quarter ended June 30, 2008, the Company entered into one additional contract. The total value of these contracts is approximately $42 million. The contracts require the customers to purchase specified amounts raw jade over periods ranging from six months to one year at times which are at the discretion of the customer. The contracts for the sale of raw jade generally provide that the Company is to receive 30% of the contracted value of the order before shipment, with the balance to be paid within 10 days after customer's inspection and acceptance of the jade. However, the Company's customers generally have, instead, paid the balance within 45 days after shipment. Xikai Mining mines the raw jade and prepares the raw jade for pick-up by the Company's customers at a warehouse which Xikai Mining maintains near its She Tai Jade mine.

The supply of Jade from XiKai Mining was interrupted on June 10, 2008, when an earthquake damaged the sole road on which raw jade is transported from Xikai Mining's warehouse. A smaller service road was still navigable, allowing basic mining operations to continue. The mine was able to continue to mine raw jade, cut jade and prepared for pick-up by the Company's customers at the warehouse, however due to the larger tonnage requirements, the shipments of raw jade from the warehouse by the Company's customers were completely halted. The road was subsequently repaired and the shipments of raw jade from the mine commenced again on September 23, 2008. As a result of the interruption in the shipments of raw jade from the SheTai Jade mine, the Company's revenues in its second quarter ended June 30, 2008, and its third quarter ended September 30, 2008, were substantially below the levels which the Company had anticipated.

The Company had sales revenue of $1,957,997 during the quarter ended June 30, 2009. These sales resulted from orders for raw jade received by the Company from existing customers in 2008. As more fully described below, because of the downturn in the Chinese economy, the Company did not acquire any new customers or enter into any new contracts with existing customers during the first six months of 2009.

Revenue. Subsequent to the acquisition of the Exclusive Rights pursuant to the Exchange Agreement, The Company's sales revenue has been derived solely from the sale of raw jade. The revenue from the sale of raw jade was $1,957,997 and $6,925,026 for the three and six months ended June 30, 2009, respectively, compared to $6,722,753 and $17,385,777 for the three and six months ended June 30, 2008, a decrease of $4,764,759, or 71%, and $10,460,751, or 60% respectively. The decrease in revenue resulted from a decrease in orders of raw jade received by the Company from existing customers in 2008 and a lack of new customers. The Chinese economy has experienced a slowing growth rate due to a number of factors explained in more detail below. This has had a negative impact on the commercial and residential construction markets and the high-end jewelry market into which the company sells raw jade. As demand has declined, our customers have been negatively affected which, in turn, has resulted in a slowdown of customer orders and an inability of the company to obtain new customers in the second half of 2008 and first quarter of 2009.

Cost of Sales. The cost of sales was $859,428 and $1,950,070 during the three months and six months ended June 30, 2009, respectively, compared to $1,225,155 and $2,799,986 during the three and six months ended June 30, 2008, a decrease of $365,727, or 30%, and $849,916, or 30%, respectively. The decrease is primarily due to the decrease in sales in the first six months of 2009.

Gross Profit. The resulting gross profit for the three and six months ended June 30, 2009 was $1,098,569 and $4,974,956, respectively, which represented approximately 56% and 72% of revenue, respectively, compared to $5,497,598 and 14,585,791 for the three and six months ended June 30, 2008, which represented approximately 82% and 84% of revenue, respectively. The decrease of the percentage of gross profit to revenue in the three and six months ended June 30, 2009, is primarily due to the decrease in sales in the six months of 2009.

Selling, General and Administrative Expenses. Selling, General and Administrative Expenses (SG&A) were $308,238 and $642,869 for the three and six months ended June 30, 2009, respectively, compared to $817,598 and $1,556,587 for the three and six months ended June 30, 2008, a decrease of $509,360, or 62%, and $913,718, or 59%, respectively. The decrease in SG&A was mainly due to the decrease in the Company's normal operational activities.

Income Before Taxes From Continuing Operations. Income before taxes from continuing operations was $785,219 and $4,327,256 for the three and six months ended June 30, 2009, respectively, compared to $4,469,315 and $12,818,519 for the three and six months ended June 30, 2008, a decrease of $3,684,096, or 82%, and $8,491,263, or 66%, respectively. The decrease is primarily due to the same reason that affects our revenue above. The income resulted primarily from the sale of raw jade from SheTai mine by the Company.

Income Tax Expense. The income tax expense pertaining to continuing operations for the three and six months ended June 30, 2009 was $424,941 and $1,517,933, compared to $1,491,443 and $3,822,003 for the three and six months ended June 30, 2008, respectively, a decrease of $1,066,502, or 72%, and $2,304,070, or 60%, respectively. This decrease is primarily due to the decrease in revenue.

Net Income From Continuing Operations. The Company recorded Net Income from Continuing Operations of $360,278 and $2,809,323 during the three and six months ended June 30, 2009, respectively, compared to $2,977,872 and $8,996,516 recorded during the three months ended June 30, 2008, a decrease of $2,617,594, or 87%, and $6,187,193, or 69%, respectively. This decrease is primarily due to the decrease in our revenue as explained above.

Net Income. The net income for the three and six months ended June 30, 2009 was $360,278 and $2,809,323, respectively, compared to $2,977,872and $64,415,882 for the three and six months ended June 30, 2008, a decrease of $2,617,597, or 88%, and $64,415,882, or 96%, respectively. This decrease is primarily due to the fact that net income from discontinued operations, totaling $55,419,366, was included in net income for the first quarter of 2008, which contributes 81% of the difference between the first quarter of 2009 and the first quarter of 2008.

Comprehensive Income. The comprehensive income for the three and six months ended June 30, 2009 was $386,275 and $2,835,514, respectively, compared to $3,197,826 and $65,007,350 for the three and six months ended June 30, 2008, a decrease of $2,811,551, or 88%, and $62,171,836, or 96%, respectively. This decrease is primarily due to the decrease in our revenue as explained above.

During the six months ended June 30, 2009, the Company met its working capital and capital investment requirements by using operating cash flows. The Company is obligated to pay the remaining balance of $903,074 owed to former GHL shareholders in connection with the Merger Transaction on or before March 31, 2010, together with interest at the rate of 4% per year.

Net Cash Provided by Operating Activities

During the six months ended June 30, 2009, the Company had net cash flow from operating activities of $2,170,868, compared to $12,609,620 for the six months ended June 30, 2008, a $10,438,752 decrease, or 83%, primarily attributable to the decrease in net income from continuing operation.

Net Cash Provided (Used) by Investing Activities and Financing Activities

The Company used nil in its Investing Activities during the six months ending June 30, 2009, compared to $23,020,053 used in investing activities for the six months ended June 30, 2008.

The Chinese economy has experienced a slowing growth rate due to a number of factors, including the global economic crisis, the appreciation of the RMB and economic and monetary policies adopted by the Chinese government aimed at preventing overheating of the Chinese economy and inflation. This has had a negative impact on the commercial and residential construction markets and the high-end jewelry markets into which the Company sells raw jade. As demand has declined, our customers have been negatively affected which, in turn, has resulted in a slowdown in customer orders and the inability of the Company to obtain new customers in the second half of 2008, and the first half of 2009. The Company cannot predict how long the downturn in the Chinese economy will last, the continuing impact of the downturn on its business and operating results and the timing of any subsequent recovery.

The Company has continued to receive orders from, and make sales to, its existing customers through its quarter ended June 30, 2009. However, the Company has not obtained new customers since the second quarter ended June 30, 2008. Four of the Company's six customers have fulfilled their purchase obligations under their respective contracts with the Company. Two of the Company's customers remain obligated to purchase a total of 3,750 metric tons of raw jade, for a total purchase price of $11.5 million. However, as a result of the adverse impact of the downturn in the Chinese economy on these customers, the Company has informally agreed to extend the period in which the customers must fulfill their purchase obligations to a date to be mutually agreed upon in the future.

Due to the nature of the Company's business as a reseller and distributor of raw jade, principal components of the Company's overhead, such as salaries and lease obligations, are relatively low. Management presently anticipates that the Company's present cash on hand and cash expected to be generated from operating activities will, under current conditions, be sufficient to finance the Company's planned operations until December 31, 2009. Subsequent to that time, in the event that the Company does not obtain new customers or new orders from existing customers, the Company will not be able to meet its operating expenses with cash flow from operations. Under such circumstances, the Company would need to obtain additional debt or equity financing.

The Company does not have any credit facilities with banks or other lenders. Furthermore, the economic downturn and the deterioration in equity and credit markets generally has made obtaining financing more difficult and costly and potentially more dilutive to our existing investors. The failure to secure any necessary additional financing in a timely manner and on favorable terms could have a material adverse affect on our ability to conduct our operations, satisfy our existing debt obligations and to implement our expansion plans.

Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company's significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements. Certain accounting estimates are particularly important to the understanding of the Company's financial position and results of operations and require the application of significant judgment by the Company's management or can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management. The Company's management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on historical operations, future business plans and projected financial results, the terms of existing contracts, the observance of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The following discusses the Company's critical accounting policies and estimates.

Accounting Method. The consolidated financial statements are prepared using the accrual method of accounting. The Company changed its fiscal year-end from July 31 to December 31 in fiscal year 2007.

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated on consolidation.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Foreign Currency Translation. The Company's functional currency is the Chinese Yuan Renminbi ("RMB"), and reporting currency is the United States Dollar. The financial statements of the Company are translated to United States Dollars in accordance with SFAS No.52 "Foreign Currency Translation". Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Transactions affecting the Company's revenue and expense accounts are translated using an average exchange rate during the period presented. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in RMB. Foreign Currency Translation Adjustments are included in Other Comprehensive Income and disclosed as a separate category of Stockholders' Equity.

Accounts Receivable and Notes Receivable. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on management's assessment of the credit history with the customer and current relationships with them.

The Company makes provision for bad debts based on an assessment of the recoverability of accounts receivable. Specific provisions are applied to related-party receivables and third-party receivables where events or changes in circumstances indicate that the balances may not be collectible. However, due to the Company's experience in the sale and distribution of raw jade in 2008, and the nature of the Company's business, management did not expect any uncollectible receivables. As of March 31, 2009, there was no allowance recorded for the doubtful accounts.

Inventories. During 2007, raw materials and supplies are stated at the lower of cost (computed on an average cost basis) or market. Work-in-process and finished goods are stated at the lower of average cost or market. If required, the Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. This policy only applied to the Company's woodcarving business that was discontinued in early 2008.

Revenue Recognition. The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition in Financial Statements ("SAB 104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. Sales revenue is recognized when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. The Company determines whether criteria (3) and (4) are met based on judgments regarding the nature of the price charged for products and the collectability of those fees. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.

Accounting for Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123R. Share Based Payments ("SFAS 123R."). The Company uses the Black-Scholes option-pricing model, which involves certain subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them ("expected term"), the number of options for which vesting requirements will not be completed ("forfeitures"). Changes in the subjective assumptions can materially affect estimates of fair value stock-based compensation, and the related amount recognized on the consolidated statement of operations.

Recent Accounting Pronouncements

In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement 133" ("SFAS No. 161"). SFAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"; and (c) derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Specifically, SFAS No. 161 requires:

· Disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation;

· Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format;

· Disclosure of information about credit-risk-related contingent features; and

· Cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed.

SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Earlier application is encouraged. The management of the Company does not expect the adoption of this pronouncement to have a material impact on its financial statements.

In May 2008, the FASB issued FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States of America. The sources of accounting principles that are generally accepted are categorized in descending order as follows:

-FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB.