JADA Jade Art Group Inc (PK)

The components of current income tax expense for the three months ended March 31, 2010 and 2009 respectively are as follows:

The following is a reconciliation of the provision for income taxes at the prevailing PRC income tax rate to the income taxes reflected in the statement of operations:

The total income tax expense was $1,244,708 and $1,092,992 for the three months ended March 31, 2010 and 2009, respectively.

The accumulated US net operating losses available to the Company are approximately $754,100. These operating losses expire between 2028 and 2030.

(11)	Recent Accounting Pronouncements

In March 2008, the FASB issued FASB ASC 815, “ Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement 133 .” FASB ASC 815 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; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Specifically, ASC 815 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.

FASB ASC 815 is effective for fiscal years and interim periods beginning after November 15, 2008. Earlier application is encouraged. The management of Company does not expect the adoption of this pronouncement to have a material impact on its financial statements.

On May 9, 2008, the FASB issued FASB ASC 105, “ The Hiera rchy of Generally Accepted Accounting Principles. ” FASB ASC 105 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities.

Prior to the issuance of FASB ASC 105, US GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards (“SAS”) No. 69, “ The Meaning of Present Fairly in Conformity with Generally Accept Accounting Principles .”  SAS No. 69 has been criticized because it is directed to the auditor rather than the entity. ASC 105 addresses these issues by establishing that the US GAAP hierarchy should be directed to entities because it is the entity (not the auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with US GAAP.

The sources of accounting principles that are generally accepted are categorized in descending order as follows:

e.

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.

f.	FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position.

 

g.	AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts (EITF D-Topics).

h.	Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

FASB ASC 105 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to its authoritative literature. It is only effective for nongovernmental entities; therefore, the US GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities. The management of Company does not expect the adoption of this pronouncement to have a material impact on its financial statements.

On May 26, 2008, the FASB issued FASB ASC 944, “ Accounting for Financial Guarantee Insurance Contracts .” FASB ASC 944 clarifies accounting and reporting by insurance enterprises, and applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts.

The accounting and disclosure requirements of FASB ASC 944 are intended to improve the comparability and quality of information provided to users of financial statements by creating consistency. Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises. That diversity results in inconsistencies in the recognition and measurement of claim liabilities because of differing views about when a loss has been incurred. FASB ASC 944 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations and (b) the insurance enterprise’s surveillance or watch list.

FASB ASC 944 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities. Disclosures about the insurance enterprise’s risk-management activities are effective the first period beginning after issuance of FASB ASC 944. Except for those disclosures, earlier application is not permitted. The management of Company does not expect the adoption of this pronouncement to have material impact on its financial statements.

On May 22, 2009, the FASB issued FASB ASC 958, “ Not-for-Profit Entities: Mergers and Acquisi tions. ” FASB ASC 958 is intended to improve the relevance, representational faithfulness, and comparability of the information that a not-for-profit entity provides in its financial reports about a combination with one or more other not-for-profit entities, businesses, or nonprofit activities. To accomplish that, this Statement establishes principles and requirements for how a not-for-profit entity:

e.	Determines whether a combination is a merger or an acquisition.

f.	Applies the carryover method in accounting for a merger.

g.	Applies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer.

h.	Determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or an acquisition.

This Statement also improves the information a not-for-profit entity provides about goodwill and other intangible assets after an acquisition by amendment to make it fully applicable to not-for-profit entities.

FASB ASC 958 is effective for mergers occurring on or after December 15, 2009, and acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009. Early application is prohibited. The management of Company does not expect the adoption of this pronouncement to have material impact on its financial statements.

On May 28, 2009, the FASB issued FASB ASC 855, “ Subsequent Events .” FASB ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, FASB ASC 855 provides:

4.	The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements.

5.	The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements.

6.	The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the financial statements of the Company.

In June 2009, the FASB issued FASB ASC 860, “ Accounting for Tran sfers of Financial Assets .” FASB ASC 860 is a revision to an existing pronouncement and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

This statement is effective for financial asset transfers occurring after the beginning of an entity's first fiscal year that begins after November 15, 2009. The management of Company does not expect the adoption of this pronouncement to have material impact on its financial statements.

In June 2009, the FASB issued FASB ASC 810, " Amendments to FASB Interpretation No. 46(R ).” FASB ASC 810 amends certain requirements of this pronouncement and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.

This statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. The management of Company does not expect the adoption of this pronouncement to have material impact on its financial statements.

In June 2009, the FASB issued FASB ASC 105, " The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB State ment No. 162 .” FASB ASC 105 establishes the FASB Accounting Standards Codification (the "Codification") to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles. The Codification did not change US GAAP but reorganizes the literature.

FASB ASC 105 is effective for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have a material impact on the financial statements of the Company.

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, 2009, 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 had 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 was and continues to be to develop a meaningful participation in China’s raw jade market 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 2,000 (approximately $290) 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 the annual capacity in 2009 was approximately 25,000 metric tons. 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 resists fading. Observers have stated that 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.

The supply of Jade from XiKai Mining was interrupted on June 10, 2008, when an earthquake damaged the only 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 to prepare the jade for transport by the Company's customers at XiKai Mining’s warehouse. However, due to the tonnage load, the actual shipment of raw jade from the warehouse by the Company's customers was completely halted. The road was subsequently repaired, and the shipment of raw jade from the mine commenced again on September 23, 2008.

The Company had sales revenue of $5,910,871 during the quarter ended March 31, 2010. These sales resulted from orders for raw jade received by the Company from existing customers.

Results of Operations

The following table presents certain information, derived from the consolidated statements of operations of the Company for the three month periods ended March 31, 2010 and March 31, 2009.

Revenue

Subsequent to the Company’s acquisition of the Exclusive Distribution Rights pursuant to the Exchange Agreement, the Company's sales revenue has been derived solely from the sale of raw jade. The revenue for the three months ended March 31, 2010 from the sale of raw jade was $5,910,871, compared to $4,967,029 for the three months ended March 31, 2009, an increase of $943,842, or 19.0%. This resulted from a higher volume of orders for the raw jade received by the Company from its customers due, we believe, in part to an improved economic environment. There were shipments of approximately 1,696 metric tons of jade in the first quarter of 2010 as compared to 1,494 metric tons shipped in the first quarter of 2009. The price per metric ton increased slightly to $3,480 as compared to $3,325, reflecting slightly higher size and grade of jade being shipped. After a slowing of its growth, the Chinese economy is recovering and showing improvement. This has had a positive impact on the commercial and residential construction markets and the jade jewelry market into which the Company sells the raw jade. Compared to the first quarter of 2009, the improved weather conditions in the first quarter of 2010 facilitated the customers’ ability to transport the jade.

Cost of Sales

The cost of sales was $1,142,636 during the three months ended March 31, 2010, compared to $1,090,642 during the three months ended March 31, 2009, an increase of $51,994, or 4.8%.  The increase is primarily due to the increased tonnage shipped in the first quarter of 2010.

Gross Profit

The resulting gross profit for the three months ended March 31, 2010 was $4,768,235, which represented approximately 80.7% of revenue, comparing to $3,876,387 for the three months ended March 31, 2009, which represented approximately 78.0% of revenue. The increase of the percentage of gross profit to revenue in the three months ended March 31, 2010 is primarily due to the increase in sales in the three months of 2010. The increase of 2.7 percentage points in the gross profit as a percentage of revenue reflects the benefit of the fixed cost amortization of the Exclusive Distribution Rights Agreement being spread over a higher level of revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $289,014 for the three months ended March 31, 2010, compared to $334,631 for the three months ended March 31, 2009, a decrease of $45,617, or 14%. This decrease was mainly due to the decrease in the Company's promotional expenses, since the Company’s sales in the first quarter of 2010 were solely derived from our existing customers.

Income before Taxes

Income before taxes was $4,483,819 for the three months ended March 31, 2010, compared to $3,542,037 for the three months ended March 31, 2009, an increase of $941,782, or 27%. This is primarily due to the increase in sales in the three months of 2010.

Provision for Income Tax

The income tax expense for the three months ended March 31, 2010 was $1,244,708, compared to $1,092,992 for the three months ended March 31, 2009, an increase of $151,716, or 13.9%.

Net Income

The net income for the three months ended March 31, 2010 was $3,239,111, compared to $2,449,045 for the three months ended March 31, 2009, an increase of $790,066, or 32.3%. This increase is primarily due to the increase in our sales revenue.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2010, the Company's cash and cash equivalents were $5,713,522 as compared to and $147,392 as of December 31, 2009. This $5,566,130 increase since December 31, 2009 consists of the following:

Cash Flow

During the three months ended March 31, 2010, the Company met its working capital and capital investment requirements by using operating cash flows.

Net Cash Provided by Operating Activities

During the three months ended March 31, 2010, the Company had net cash flow from operating activities of $5,564,004, compared to $2,143,340 for the three months ended March 31, 2009, an increase of $3,420,664, or 160%, primarily attributable to a reduction in accounts receivable due to intensified collection, and an increase in net income.

Net Cash Used in Investing Activities and Financing Activities

The Company had no Investing Activities during the three months ended March 31, 2010, and none for the three months ended March 31, 2009.

During the first three months of 2009, the Company paid $1,361,777 to reduce its outstanding notes payable. There was no financing activity during the first three months of 2010.

The Company has continued to receive orders from, and make sales to, its existing customers through the quarter ended March 31, 2010. However, the Company has not obtained new customers since the second quarter ended June 30, 2008. The Company and its existing customers agreed to have future sales orders based on verbal contracts.

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 cash on hand and cash expected to be generated from operating activities will be sufficient to finance the Company's current operations through December 31, 2010.

The Company does not currently have any credit facilities with banks or other lenders.  Furthermore, obtaining such financing may be difficult and costly and potentially more dilutive to our existing investors. The failure to secure such financing, if it were to be required, on favorable terms could have a material adverse affect on our operations.

Critical Accounting Policies and Estimates

See “ Note 1. Summary of Significant Accounting Policies ” in “ Item 1. Financial Statements ” herein for a discussion of the critical accounting policies and estimates adopted in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of March 31, 2010, the Company’s Chief Executive Officer and its Chief Financial Officer have concluded that, as of that date, the Company’s controls and procedures were not effective due to some significant deficiencies in the Company’s internal controls over financial reporting. This is due to the fact that the Company lacks sufficient personnel with the appropriate level of knowledge, experience and training in the application of U.S. generally accepted accounting principals (“GAAP”) standards, especially related to complicated accounting issues. This could cause the Company to be unable to fully identify and resolve certain accounting and disclosure issues that could lead to a failure to maintain effective controls over preparation, review and approval of certain significant account reconciliation from Chinese GAAP to U.S. GAAP and necessary journal entries.

The Company has relatively small number of professionals employed by the Company in bookkeeping and accounting functions, which prevents the Company from appropriately segregating duties within its internal control systems. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.

Based on the control deficiency identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:

·

We will evaluate the roles of our existing accounting personnel in an effort to realign the reporting structure of our internal auditing staff in China that will test and monitor the implementation of our accounting and internal control procedures.

 

 

·

We are in the process of completing a review and revision of the documentation of the Company’s internal control procedures and policies.

·

We will begin implementation an initiative and training in China to ensure the importance of internal controls and compliance with established policies and procedures are fully understood throughout the organization and will provide additional U.S. GAAP training to all employees involved with the performance of or compliance with those procedures and policies.

·

We will implement a formal financial reporting process that includes review by our Chief Executive Officer and the full Board of Directors of financial statements prior to filing with the SEC.

·

We will increase our accounting and financing personnel resources, by retaining more U.S. GAAP knowledgeable financial professionals.

The remedial measures being undertaken may not be fully effectuated or may be insufficient to address the significant deficiencies we identified, and there can be no assurance that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified or occur in the future. If additional significant deficiencies (or if material weaknesses) in our internal controls are discovered or occur in the future, among other similar or related effects: (i) the Company may fail to meet future reporting obligations on a timely basis, (ii) the Company’s consolidated financial statements may contain material misstatements, (iii) the Company’s business and operating results may be harmed.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not operating effectively.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the six months ended March 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

As of the date of this filing, there have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K filed on May 17, 2010. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Other Information.

None.

Item 5. Exhibits.

(a) Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.