19-Nov-2009

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 $10,667,585 during the quarter ended September 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 nine 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 $10,667,585 and $17,592,611 for the three and nine months ended September 30, 2009, respectively, compared to $7,609,684 and $24,995,461 for the three and nine months ended September 30, 2008, an increase of $3,057,901, or 40%, and a decrease of $7,402,850, or 30% respectively. The increase in revenue resulted from an increase in orders of raw jade received by the Company from our customers due to better economic environment and the new sales policy of our company. Having experienced a slowing growth rate, Chinese economy is recovering and showing great improvement. This has a positive impact on the commercial and residential construction markets and the high-end jewelry market into which the company sells raw jade. The new sales policy, reduction on the rate of sales advances on new orders from 30% to 10%, is another factor that contributes improving the revenue.

Cost of Sales. The cost of sales was $1,486,437 and $3,436,507 during the three months and nine months ended September 30, 2009, respectively, compared to $1,360,228 and $4,160,214 during the three and nine months ended September 30, 2008, an increase of $126,209, or 9%, and a decrease of $723,707, or 17%, respectively. The increase is primarily due to the increase in sales in the third quarter of 2009.

Gross Profit. The resulting gross profit for the three and nine months ended September 30, 2009 was $9,181,148 and $14,156,104, respectively, which represented approximately 86% and 81% of revenue, respectively, compared to $6,249,456 and $20,835,247 for

the three and nine months ended September 30, 2008, which represented approximately 82% and 83% of revenue, respectively. The increase of the percentage of gross profit to revenue in the three months ended September 30, 2009 is primarily due to the increase in sales in the nine months of 2009.

Selling, General and Administrative Expenses. Selling, General and Administrative Expenses (SG&A) were $531,484 and $1,174,353 for the three and nine months ended September 30, 2009, respectively, compared to $629,184 and $2,185,771 for the three and nine months ended September 30, 2008, a decrease of $97,700, or 16%, and $1,011,418, or 46%, respectively. The decrease in SG&A was mainly due to the decrease in the Company's normal operational activities, especially the US operation.

Income Before Taxes From Continuing Operations. Income before taxes from continuing operations was $8,653,242 and $12,980,498 for the three and nine months ended September 30, 2009, respectively, compared to $5,626,332 and $18,444,851 for the three and nine months ended September 30, 2008, an increase of $3,026,910, or 54%, and a decrease of $5,464,353, or 30%, respectively. The increase of the third quarter ended September 30, 2009 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 nine months ended September 30, 2009 was $2,359,012 and $3,876,945, compared to $1,664,686 and $5,486,689 for the three and nine months ended September 30, 2008, respectively, an increase of $694,326, or 42%, and a decrease of $1,639,744, or 30%, respectively. The increase of the third quarter ended September 30, 2009 is primarily due to the increase in revenue.

Net Income From Continuing Operations. The Company recorded Net Income from Continuing Operations of $6,294,230 and $9,103,553 during the three and nine months ended September 30, 2009, respectively, compared to $3,961,646 and $12,958,162 recorded during the three months ended September 30, 2008, an increase of $2,332,584, or 59%, and a decrease of $3,854,609, or 30%, respectively. This increase of the third quarter ended September 30, 2009 is primarily due to the increase in our revenue as explained above.

Net Income. The net income for the three and nine months ended September 30, 2009 was $6,294,230 and $9,103,553, respectively, compared to $3,961,646 and $68,377,528 for the three and nine months ended September 30, 2008, an increase of $2,332,584, or 59%, and a decrease of $59,273,975, or 96%, respectively. This increase of the third quarter ended September 30, 2009 is primarily due to the increase in our revenue as explained above; and the huge discrepancy for the nine months ended September 30, 2009 is 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 93% of the difference.