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| JADA.OB > SEC Filings for JADA.OB > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
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 annual 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 reports 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, 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.
Introduction
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, 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 "Agreement") with Wulateqianqi XiKai Mining Co., Ltd. ("XiKai Mining"). Under the 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 $8.7 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.
Under the Agreement, the price for the raw jade material has been set for the first five years at RMB 2000 (approximately $291) 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 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 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 is a pure and exquisite 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 estimated to be $42 million. Under these contracts, we are 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.
Results of Operations
The following table presents certain information derived from the consolidated
statements of operations of the Company for the three months ended June 30,
2008.
Three months ended
June 30, 2008
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REVENUES $6,722,753
COST OF SALES 1,225,155
GROSS PROFIT 5,497,598
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 817,598
INCOME FROM OPERATIONS 4,680,000
INTEREST EXPENSE 210,685
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 4,469,315
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INCOME TAX EXPENSE 1,491,443
NET INCOME FROM CONTINUING OPERATIONS 2,977,872
NET INCOME $2,977,872
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REVENUE
As discussed in the Notes to the Consolidated Financials Statements, in the first quarter of 2008, the Company transitioned its business from woodcarving to the sale of raw jade.
The revenue from the sale of raw jade was $6,722,753 during the 2nd quarter ending June 30, 2008, compared to $10,663,024 for the three months ended March 31, 2008. The revenue for the six months ended June 30, 2008 was $17,385,777. The reason for the decrease in revenue is predominantly due to an earthquake that occurred in Inner Mongolia, the location of the mine, on June 10th, 2008. As a result of the earthquake, the road leading from the mine was destroyed to such a degree that no transportation has been possible and, since that time, customers have been unable to transport jade materials, which greatly affected the revenue of 2nd quarter.
Additionally, due to the fact that the government has recently raised the safety standards on roads , there are additional governmental inspections required before the road can be opened and operational. We anticipate that the road will not be fully repaired and operational until the middle of September or later.. In addition to delays related to compliance with the heightened safety standards from the government, during the period when the Olympic games are held in China, there have been restrictions on blasting, which has also affected the normal operation of the mine.
Accordingly, the Company may have little or no revenue from the sale of jade for 3rd quarter of this year. Due to the foregoing uncertainties regarding revenue prospects for the Company, the Company has withdrawn the guidance it previously announced regarding its revenue and earnings for fiscal year 2008.
COST OF SALES
The reported cost of sales was $1,225,155 during the three months ended June 30, 2008, compared to $1,574,831 during the three months ended March 31, 2008, which resulted from the purchase of raw jade materials from SheTai mine and the amortization ($714,430) of the Intangible Assets pertaining to the exclusive distribution rights of the SheTai mine's jade. Under the Exclusive Distribution Agreement signed with Xi Kai Mining Company, the purchase price for raw jade is RMB 2,000 (approximately $291) per metric ton. The cost of sales for the six months ended June 30, 2008 was $2,799,986.
GROSS PROFIT
The resulting gross profit for the three months ended June 30, 2008 was $5,497,598, which represented approximately 82% of the revenue, compared to $9,088,193 for the three months ended March 31, 2008, which represented around 85% of revenue. The gross profit for the six months ended June 30, 2008 was $14,585,791.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses (SG&A) were $817,598 for the three months ended June 30, 2008, compared to $718,715 for the three months ended March 31, 2008. SG&A was approximately 12% of revenue for the three months ended June 30, 2008, compared to 7% of revenue for the three months ended March 31, 2008. Selling, General and Administrative Expenses for the six months ended June 30, 2008 was $1,556,587. The increase in SG&A was mainly due to the options and warrants during the 2nd quarter.
INCOME BEFORE TAXES FROM CONTINUING OPERATIONS
Income before taxes from continuing operations was $4,469,315 for the three months ended June 30, 2008, compared to $8,349,204 for the three months ended March 31, 2008. Income before taxes from continuing operations for the six months ended June 30, 2008 was $12,818,519.
INCOME TAX EXPENSE
The income tax expense pertaining to continuing operations for the three months ended June 30, 2008 was $1,491,443, compared to $2,330,560 for the three months ended March 31, 2008. The income tax expense for the six months ended June 30, 2008 was $3,822,003. The Company's effective tax rate of 33% was higher than the statutory rate of 25% due to certain expenses not deductible for PRC purpose.
NET INCOME FROM CONTINUING OPERATIONS
The Company recorded Net Income from Continuing Operations of $2,977,872 during the three months ended June 30, 2008, compared to $6,018,644 recorded during the three months ended March 31, 2008. Net Income from Continuing Operations for the six months ended June 30, 2008 was $8,996,516.
NET INCOME
The Net income for the three months ended June 30, 2008 was $2,977,872 or 44% of revenue, compared to $61,438,010 or 576% of revenue for the three months ended March 31, 2008. The Net income for the six months ended June 30, 2008 was $64,415,882.The decrease in net income was due to the interruptions in our shipments of jade which were caused by an earthquake as discussed above. And another reason is because of the income from discontinued operation occurred during the first quarter this year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, the company's cash and cash equivalents were $482,238 as
compared to $157,277 as of June 30, 2007. The components of this $324,961
increase are reflected below.
Cash Flow
Six Months Ended June 30
--------------------------
2008 2007
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Net cash provided (used) by operating activities $12,609,620 $ (59,955)
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Net cash (used by) investing activities $(23,020,053 $ (30,420)
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Net cash provided by financing activities $10,000,000 $ 0
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Effect of exchange rate changes $ 591,468 $ 93,187
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Net cash inflow (outflow) $ 181,035 $ 2,812
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For the six months ended June 30, 2008, the Company met its working capital and capital investment requirements by using operating cash flows, and the issuance of Notes payable totaling $10,000,000, including $3,000,000 to related party.
The Company has a number of financial obligations that are due on or before June 30, 2009, and as reflected in the consolidated financial statements in Note 4, "Consolidated Financial Statements and Supplemental Data", these consist of the following:
The Company had the following note payable obligations as of June 30, 2008:
Notes payable dividends,
Noninterest bearing and
Unsecured, due March 31, 2009 $14,334,500
Notes payable, interest of 5% per annum, and unsecured
Due December 6, 2008 3,000,000
Due December 31, 2008 1,000,000
Due April 29, 2009 1,000,000
Due May 4, 2009 600,000
Due May 7, 2009 200,000
Due May 11, 2009 200,000
Due June 1, 2009 1,000,000
Notes payable, related party
Interest of 5%, and unsecured, due December 31, 2008 3,000,000
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Total $24,334,500
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The following table sets forth the information about the Company's debt instruments as of June 30, 2008 (also see Note 4 in the consolidated financial statements, "Consolidated Financial Statements and Supplemental Data"):
Year of Maturity
-------------------------------------------
2008 2009 2010
----------- ----------- -----------
Notes payable including
Current portion $ 7,000,000 $17,334,500 0
Average Interest Rate 5% 5% n/a
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Net Cash Provided by Operating Activities
During the six months ended June 30, 2008, the Company had positive cash flow from operating activities of $12,609,620, primarily attributable to net income from continuing operations of $8,996,516, and an increase in taxes payable of $1,174,447, partially offset by an increase of accounts receivable of $269,537. Net cash provided by operating activities during the six months ended June 30, 2008 improved by $12,669,575, as compared to the six months ended June 30, 2007. The primary source of this increase was the level of net income from continuing operation in the six months ended June 30, 2008.
Net Cash Provided (Used) by Investing Activities and Financing Activities
The Company used $23,020,053 in its Investing Activities during the six months ending June 30, 2008. The entire amount of RMB 60 million (approximately $8.7 million) has been paid off during the six months ended June 30, 2008.
The advance of $14,211,892 to XiKai Mining occurred during the six months period. XiKai Mining is the owner of the SheTai mine, which supplies the entire jade product sold by the Company. These funds have been utilized by XiKai Mining to expand its ability to extract jade from the mine and thus increase the volume of the jade that the Company can access. This note receivable accrues interest at an annual rate of 4% commending on July 1, 2008 and is payable on December 31, 2008. The Company may continue to provide financial support to XiKai Mining.
During the six months period, the Company realized a net inflow from its Financing Activities of $10,000,000. This resulted from the proceeds from the issuance of notes payable totaling $10,000,000 received from four parties, including $3,000,000 from a related party and shareholder.
We believe that our available funds and cash flows generated from operations will be sufficient to meet our anticipated ongoing operating needs for the next twelve (12) months. However there can be no guarantee that the fund and cash flows generated from operations will be adequate to satisfy the financial obligations of the Company that are due during the next twelve months. If they are not, we would need to obtain additional funding through the issuance of debt or equity. There can be no guarantee that we would be able to obtain such additional funding on terms satisfactory to management and our board of directors. The Company had negative working capital as of June 30, 2008 of $11,392,957, reflecting notes payable of $24,334,500 that are due on or before June 30, 2009.
The Company plans to expand its current business model from the sale of raw jade to include the processing of the jade into a finished product for sale to the ultimate consumer. This expansion may include one or more acquisitions of companies involved in this processing. We may not be able to identify, successfully integrate or profitably manage any businesses or business segment we may acquire, or any expansion of our business. An expansion may involve a
number of risks, including possible adverse effects on our operating results, diversion of management attention, inability to retain key personnel, risks associated with unanticipated events and the financial statement effect of potential impairment of acquired intangible assets, any of which could have a materially adverse effect on our condition and results of operations. We may acquire a target business which may be financially unstable, under-managed, or in its early stages of development or growth. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. Our inability to implement and manage our expansion strategy successfully may have a material adverse effect on our business and future prospects. We are not currently party to any contracts or other arrangements with respect to future acquisitions.
Critical Accounting Policies and Estimates
The accompanying unaudited consolidated financial statements have been prepared by the Company. These consolidated financial statements include all adjustments (consisting only of their normal recurring adjustments) which management believes necessary for a fair presentation of the consolidated financial statements and have been prepared on a consistent basis using the accounting policies described in the Form 10-Q for the five months ended December 31, 2007 ("2007 Form 10-Q"). Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The notes to financial statements included in the 2007 Form 10-Q should be read in conjunction with the accompanying consolidated financial statements. The consolidated operating results for the six months ended June 30, 2008 may not be indicative of operating results expected for the full year.
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.
Basis of Consolidation
The consolidated financial statements have been restated for all periods prior to the Merger Transaction to include the financial position, results of operations and cash flows of the commonly controlled companies. All material intercompany transactions have been eliminated in 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 functional currency of the Company is the Chinese Yuan Renminbi ("RMB"). Transactions denominated in foreign currencies are translated into US Dollars using (a) period end exchange rates as to assets and liabilities and (b) average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. Net gains and losses resulting from foreign exchange translations are included in the statements of operations and stockholders' equity as other comprehensive income.
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. As of June 30, 2008, the Company considered all accounts and other receivables collectable and has not recorded a provision for doubtful accounts.
The Company has extended financial support to XiKai Mining, which is in the form of a Note Receivable. Management has reviewed the collectability of this Note and considers it collectable. Interest is recognized on a monthly basis.
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 have been 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. Our revenues are recorded upon acceptance and the shipment of the product from the mine site. The customer is responsible for shipping from the mine site and the related costs. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers. There were no advances from customers as of June 30, 2008. No returns are permitted after the customer accepts the product.
Basic and Diluted Earnings per Share of Common Stock
In accordance with SFAS No. 128, "Earnings per Share," basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented. Diluted earnings per share is computed using the weighted average number of common shares plus dilutive common share equivalents outstanding during the period.
Off-Balance-Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. We have no off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to any investor in our securities.
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