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| JADA.OB > SEC Filings for JADA.OB > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-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 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, and in our annual 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.
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 "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 $8.7 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.
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 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. The contracts require the customers to purchase specified amounts of jaw 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 (a requirement which the Company has waived in a few instances), 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 of 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 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 get much of the raw jade cut, and prepared for pick-up by the Company's customers at the warehouse; however due to the larger tonnage requirements, the 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. As a result of the interruption in the shipment 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 $7,609,684 during the third quarter ended September 30, 2008. These sales resulted from orders for raw jade received by the Company from existing customers prior to the interruption of shipping caused by the earthquake. Commencing immediately upon the opening of the aforementioned road on September 23, approximately 2,300 metric tons were shipped out of the mine by the end of the month. Subsequently, as of November 14, 2008 the Company had received payment in full for all of the raw jade sold in the Company's quarter ended September 30, 2008.
Results of Operations
The following table presents certain information derived from the consolidated
statements of operations of the Company for the nine months ended September 30,
2008.
Three months ended Nine months ended
September 30, 2008 September 30,2008
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REVENUES $7,609,684 $24,995,461
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COST OF SALES 1,360,228 4,160,214
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GROSS PROFIT 6,249,456 20,835,247
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 629,184 2,185,771
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INCOME FROM OPERATIONS 5,620,272 18,649,476
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INTEREST EXPENSE (126,027) (336,712)
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INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 5,626,332 18,444,851
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INCOME TAX EXPENSE (1,664,686) (5,486,689)
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NET INCOME FROM CONTINUING OPERATIONS 3,961,646 12,958,162
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NET INCOME $3,961,646 $68,377,528
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REVENUE
The Company's sales revenue is derived solely from the sale of raw jade. The revenue from the sale of raw jade was $7,609,684 during the third quarter ended September 30, 2008, compared to $6,722,753 for the three months ended June 30, 2008. As noted above, the supply of Jade from XiKai Mining was interrupted on June 10, 2008, as a result of damage caused by an earthquake to the sole road on which raw jade is transported from the SheTai Jade mine. The road was subsequently repaired and the shipment of raw jade by the Company's customers from Xikai Mining's warehouse commenced again on September 23, 2008. Despite the inability to ship for most of the quarter, revenue increased from the quarter ended June 30, 2008. This was made possible because Xikai Mining had prepared much of the previously-ordered raw jade for pick up by the Company's customers at its warehouse. This allowed the customers to quickly obtain the raw jade they had ordered prior to the earthquake. Approximately 2300 metric tons of raw jade were transported by the Company's customers from Xikai Mining's warehouse in the last week of the third quarter.
COST OF SALES
The reported cost of sales was $1,360,228 during the three months ended September 30, 2008, compared to $1,225,155 during the three months ended June 30, 2008, which resulted from the sale of raw jade materials from SheTai mine and the amortization of the intangible assets pertaining to the exclusive distribution rights of the SheTai mine's jade. The cost of sales for the nine months ended September 30, 2008 was $4,160,214.
GROSS PROFIT
The resulting gross profit for the three months ended September 30, 2008 was $6,249,456, which represented approximately 82% of revenue, compared to $5,497,598 for the three months ended June 30, 2008, which represented approximately 82% of revenue. The gross profit for the nine months ended September 30, 2008 was $20,835,247, which represented approximately 83% of revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses (SG&A) were $629,184 for the three months ended September 30, 2008, compared to $817,598 for the three months ended June 30, 2008. SG&A was approximately 8.2% of revenue for the three months ended September 30, 2008, compared to 12% of revenue for the three months ended June 30, 2008. The decrease in SG&A was mainly due to the decrease in the Company's normal operational activities during the period commencing late in the Company's second quarter and extending through late in the Company's third quarter, when shipments of raw jade were interrupted, as described above. The SG&A for the nine months ended September 30, 2008 was $2,185,771, which represented approximately 8.7% of revenue.
INCOME BEFORE TAXES FROM CONTINUING OPERATIONS
Income before taxes from continuing operations was $5,626,332 for the three months ended September 30, 2008, compared to $4,469,315 for the three months ended June 30, 2008, which resulted primarily from the sale of raw jade from SheTai mine by the Company. Income before taxes from continuing operations for the nine months ended September 30, 2008 was $18,444,851.
INCOME TAX EXPENSE
The income tax expense pertaining to continuing operations for the three months ended September 30, 2008 was $1,664,686, compared to $1,491,443 for the three months ended June 30, 2008. The income tax expense for the nine months ended September 30, 2008 was $5,486,689.
NET INCOME FROM CONTINUING OPERATIONS
The Company recorded Net Income from Continuing Operations of $3,961,646 during the three months ended September 30, 2008, compared to $2,977,872 recorded during the three months ended June 30, 2008. Net Income from Continuing Operations for the nine months ended September 30, 2008 was $12,958,162.
NET INCOME
The Net income for the three months ended September 30, 2008 was $3,961,646 or 52% of revenue, compared to $2,977,872 or 44% of revenue for the three months ended June 30, 2008. As noted above, the supply of Jade from XiKai Mining was interrupted on June 10, 2008, as a result of damage caused by an earthquake to the sole road on which raw jade is transported from the SheTai Jade mine. The road was subsequently repaired and the shipment of raw jade from the mine commenced on September 23, 2008. Despite the shipment road being out of service for most of the quarter, net income increased from the quarter ended June 30, 2008 to the quarter ended September 30, 2008 primarily because the Company's sales revenues increased from the quarter ended June 30, 2008, to the quarter ended September 30, 2008, as described above under "REVENUES." Furthermore, the increase in the ratio of net income to revenue is primarily due to a decrease in SG&A and a decrease in interest expense. The Net income for the nine months ended September 30, 2008 was $68,377,528.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, the Company's cash was $523,374 as compared to $16,084 as of September 30, 2007. The components of this $507,290 increase are reflected below.
Cash Flow
Nine Months Ended
September 30
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2008 2007
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Net cash provided (used) by operating activities $ 11,425,066 $ (374,234)
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Net cash (used by) investing activities $ (22,016,848) $ (44,595)
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Net cash provided by financing activities $ 10,000,000 $ 0
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Effect of exchange rate changes $ 813,953 $ 280,448
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Net cash inflow (outflow) $ 222,171 $ (138,381)
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For the three months ended September 30, 2008, the Company met its working capital and capital investment requirements by using operating cash flows, and borrowing through the issuance of Notes payable totaling $10,000,000, including $3,000,000 to a 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". As of September 30, 2008 these consisted of the following note payable obligations:
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 September 30, 2008 (also see Note 4 in the consolidated financial statements, "Consolidated Financial Statements and Supplemental Data"):
Year of Maturity
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2008 2009 2010
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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 nine months ended September 30, 2008, the Company had net cash flow from operating activities of $11,425,066, primarily attributable to net income from continuing operations of $12,958,162, and taxes payable of $2,397,910, partially offset by an increase of accounts receivable of $7,682,699. Net cash provided by operating activities during the nine months ended September 30, 2008 improved by $11,799,300, as compared to the nine months ended September 30, 2007. The primary source of this increase was the level of net income from continuing operations in the nine months ended September 30, 2008.
Net Cash Provided (Used) by Investing Activities and Financing Activities
The Company used $22,016,848 in its Investing Activities during the nine months ending September 30, 2008. The Company paid to XiKai Mining RMB 60 million (approximately $8.7 million) during the nine months ended September 30, 2008, which constituted the full amount owed to XiKai Mining under the Exchange Agreement.
During the second quarter 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 (largely offset by the advance of $13,208,687 to XiKai Mining). 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% and is payable by December 31, 2008. The Company may continue to provide financial support to XiKai Mining.
The Company had negative working capital as of September 30, 2008 of $6,227,442,
reflecting notes payable of $24,334,500 that are due on or before June 30, 2009.
However, we believe that our available funds and cash flows generated from the
sale of raw jade and the repayment of loans made to XiKai Mining will be
sufficient to meet our anticipated ongoing operating needs for the next twelve
(12) months. However there can be no guarantee that the funds 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.
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 nine months ended September 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, when appropriate, and recorded based on management's assessment of the credit history with customers and current relationships with them. When the customers purchase products from the vendor, the customers are required to pay value added tax, which is currently 17% in China. Accordingly, when the Company recognizes sales revenue, the Company also recognizes the appropriate tax receivable, which is included in accounts receivable. The Company also accrues a tax payable at the same time. This value added tax is due by the 10th day of the month following the month in which the sales revenue is recognized by the Company. As of September 30, 2008, and December 31, 2007, the Company considered all accounts and other receivables collectible and has not recorded a provision for doubtful accounts.
The Company has extended financial support to XiKai Mining; the indebtedness of XiKai Mining is evidenced by 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 September 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 . . .
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