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EX-32.2 - EXHIBIT 32.2 - UNIVERSAL TRAVEL GROUPv230103_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - UNIVERSAL TRAVEL GROUPv230103_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - UNIVERSAL TRAVEL GROUPv230103_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - UNIVERSAL TRAVEL GROUPv230103_ex31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________ to _____________

Commission file number: 001-34284

UNIVERSAL TRAVEL GROUP
(Exact name of registrant as specified in its charter)

Nevada
 
90-0296536
(State or other jurisdiction of incorporation or
 
(I.R.S. Employer Identification No.)
organization)
   

9F, Building A, Rongchao Marina Bay Center
 
 
NO. 2021 Haixiu Road, Bao’an District, Shenzhen
   
People’s Republic of China
 
518133
(Address of principal executive offices)
 
(Zip Code)

86 755 836 68489
(Registrant’s telephone number, including area code)

                                                                                                                     
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes ¨    No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of August 15, 2011, there were 19,898,235 shares of $0.001 par value common stock issued and outstanding.
 
 
 

 
 
FORM 10-Q
UNIVERSAL TRAVEL GROUP
INDEX

       
Page
         
PART I.
 
Financial Information
 
 
         
   
Item 1.  Financial Statements (Unaudited).
 
 
         
   
Report of Independent Registered Public Accounting Firm
 
 
         
   
Condensed Consolidated  Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
 
1
         
   
Unaudited Condensed Consolidated Statements of Income  and Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010
 
2
         
   
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010
 
3
         
   
Notes to Unaudited Condensed Consolidated Financial Statements as of June 30, 2011
 
4
         
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
18
         
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
30
         
   
Item 4.  Controls and Procedures.
 
30
         
PART II.
 
Other Information
 
30
         
   
Item 1.  Legal Proceedings.
 
30
         
   
Item 1A. Risk Factors.
 
31
         
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
31
         
   
Item 3.  Defaults Upon Senior Securities.
 
31
         
   
Item 4.  (Removed and Reserved).
 
31
         
   
Item 5.  Other Information.
 
31
         
   
Item 6.  Exhibits.
 
31
 
 
 

 
 
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
 
  
UNIVERSAL TRAVEL GROUP

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

 
 
 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and
Stockholders of Universal Travel Group

We have reviewed the accompanying consolidated balance sheet of Universal Travel Group as of June 30, 2011, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2011 and 2010 and cash flows for the six-month periods ended June 30, 2011 and 2010. These consolidated financial statements are the responsibility of the company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


/s/ EFP Rotenberg, LLP

EFP Rotenberg, LLP
Rochester, New York
August 15, 2011
 
 
 

 
 
TABLE OF CONTENTS

Consolidated Condensed Balance Sheets
 
1
     
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
 
2
     
Unaudited Condensed Consolidated Statements of Cash Flows
 
3
     
Notes to the Unaudited Condensed Consolidated Financial Statements
 
4- 17
 
 
 

 
 
UNIVERSAL TRAVEL GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
Unaudited
       
ASSETS
           
Cash and cash equivalents
  $ 41,807,581     $ 39,618,988  
Restricted Cash
    987,158       307,027  
Short term investments
    38,991,181       19,681,308  
Accounts receivable, net
    30,191,899       38,658,011  
Other receivables and deposits, net
    659,165       780,400  
Trade deposit
    8,415,816       8,173,426  
Prepayments
    1,698,726       1,216,857  
Note receivable
    -       2,314,259  
Total Current Assets
    122,751,526       110,750,276  
                 
Property & equipment, net
    1,518,857       1,692,595  
Intangible assets, net
    2,766,580       3,110,882  
Goodwill
    24,508,909       24,508,909  
Total Noncurrent Assets
    28,794,346       29,312,386  
Total Assets
  $ 151,545,872     $ 140,062,662  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
Accounts payable and accrued expenses
  $ 5,464,925     $ 5,045,674  
Customer deposits
    2,067,956       2,203,487  
Income tax payable
    1,944,629       3,189,965  
Total Current Liabilities
    9,477,510       10,439,126  
                 
Warrants - derivative liability
    365,713       810,929  
Deferred tax liability
    477,397       477,397  
Long-term income tax payable
    30,804       30,804  
Total  Liabilities
    10,351,424       11,758,256  
                 
Stockholders' Equity
               
Common stock, $.001 par value, 70,000,000 shares authorized, 19,898,235 issued and outstanding at June 30, 2011 and December 31,  2010, respectively
    19,898       19,898  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively.
    -       -  
Additional paid in capital
    65,825,734       64,171,555  
Statutory reserve
    1,062,741       1,062,741  
Retained earnings
    68,521,489       59,624,186  
Accumulated other comprehensive income
    5,764,586       3,426,026  
Total Stockholders' Equity
    141,194,448       128,304,406  
Total Liabilities and Stockholders' Equity
  $ 151,545,872     $ 140,062,662  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
1

 
 
UNIVERSAL TRAVEL GROUP
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,

   
For the six months ended June 30,
   
For the three months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
         
Restated
         
Restated
 
Revenues
                       
Air ticketing, net
  $ 10,280,773     $ 8,702,488     $ 5,020,345     $ 4,796,513  
Hotel reservation, net
    6,389,731       6,462,123       2,695,778       3,432,017  
Packaged tours, gross
    49,986,767       37,127,291       25,145,655       23,637,593  
      66,657,271       52,291,902       32,861,778       31,866,123  
Cost of services
                               
Air ticketing, net
    3,773,987       2,833,290       1,857,664       1,465,419  
Hotel reservation, net
    1,537,696       1,979,573       163,312       981,156  
Packaged tours, gross
    43,721,220       32,491,924       22,091,650       20,688,727  
      49,032,903       37,304,787       24,112,626       23,135,302  
                                 
Gross Profit
    17,624,368       14,987,115       8,749,152       8,730,821  
                                 
Selling, general and administrative expenses
    (5,571,512 )     (3,643,184 )     (2,573,414 )     (2,077,197 )
Income from operations
    12,052,856       11,343,931       6,175,738       6,653,624  
                                 
Other income (expense)
                               
Other income (expense)
    (17,502 )     6,917       (3,112 )     3,363  
Gain on change of fair value of derivative liabilities
    445,216       949,004       95,404       839,553  
Interest income
    234,821       38,711       117,287       16,522  
Total other income
    662,535       994,632       209,579       859,438  
                                 
Income before income taxes
    12,715,391       12,338,563       6,385,317       7,513,062  
                                 
Provision for income taxes
    3,818,088       3,061,550       1,943,544       1,782,484  
Net Income
  $ 8,897,303     $ 9,277,013     $ 4,441,773     $ 5,730,578  
                                 
Comprehensive Income
                               
Net income
  $ 8,897,303     $ 9,277,013     $ 4,441,773     $ 5,730,578  
Foreign currency translation adjustments
    2,338,560       (454,079 )     1,417,639       49,825  
Total Comprehensive income
  $ 11,235,863     $ 8,822,934     $ 5,859,412     $ 5,780,403  
                                 
Net income per common share
                               
Basic
  $ 0.45     $ 0.54     $ 0.22     $ 0.33  
Diluted
  $ 0.44     $ 0.52     $ 0.22     $ 0.31  
                                 
Weighted average common shares outstanding
                               
Basic
    19,898,235       17,066,154       19,898,235       17,404,834  
Diluted
    20,142,816       17,935,313       19,940,736       18,219,639  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
2

 
 
UNIVERSAL TRAVEL GROUP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,

   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 8,897,303     $ 9,277,013  
Add:
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    616,591       763,707  
Provision for doubtful accounts
    -       56,824  
Stock based compensation
    1,654,180       677,004  
(Gain)/Loss on change in fair value of derivative liabilities
    (445,216 )     (949,004 )
(Increase) / decrease in assets:
               
Restricted cash
    (665,993 )     (542 )
Accounts receivable
    9,257,884       (2,068,457 )
Other receivable
    137,740       (726,410 )
Due from related parties
    -       (6,986,717 )
Advances
    -       440,063  
Prepayments
    (449,086 )     (1,676,062 )
Trade deposits
    (53,641 )     2,077,455  
Escrow deposits
    -       -  
Increase / (decrease) in current liabilities:
               
Accounts payable and accrued expenses
    299,899       3,358,139  
Customer deposits
    (184,306 )     (682,465 )
Income tax payable
    (1,304,929 )     49,711  
Net cash provided by operating activities
    17,760,426       3,610,258  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property & equipment
    (62,662 )     (1,864,774 )
Purchase of  intangibles
    -       (51,359 )
(Increase)/Decrease in short term investments
    (18,658,694 )     -  
(Increase)/Decrease in notes receivable
    2,342,675       1,484,210  
Acquisition deposits
    -       478,391  
Cash paid for acquisition – net of cash acquired
    -       (15,782,799 )
Net cash (used in) investing activities
    (16,378,681 )     (15,736,331 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds of equity financing
    -       18,768,054  
Net cash provided by financing activities
    -       18,768,054  
                 
Effect of exchange rate changes on cash and cash equivalents
    806,848       271,514  
                 
Net change in cash and cash equivalents
    2,188,593       6,913,495  
Cash and cash equivalents, beginning balance
    39,618,988       36,574,741  
Cash and cash equivalents, ending balance
  $ 41,807,581     $ 43,488,236  
                 
SUPPLEMENTAL DISCLOSURES:
               
Cash paid during the period for:
               
Interest payments
  $ -     $ -  
Income taxes
  $ 5,063,424     $ 2,380,077  
                 
Purchased goodwill
  $ -     $ (14,612,639 )
Purchased intangible assets
    -       (3,236,376 )
Fair value of assets purchased less cash acquired
    -       (767,602 )
Acquisition financed with stock issuance
    -       2,833,818  
Acquisition paid for with cash - net of acquired
  $ -     $ (15,782,799 )

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 1 - ORGANIZATION

Universal Travel Group was incorporated on January 28, 2004 under the laws of the State of Nevada. Full Power Enterprise Global Limited was incorporated under the laws of the British Virginia Islands. Shenzhen Yuzhilu Aviation Service Co., Ltd. was incorporated on March 9, 1998 under the laws of the People’s Republic of China (PRC)., Xian Golden Net Travel Serve Services was incorporated on July 25, 2001 under the laws of PRC, Shanghai Lanbao Travel Service Co., Ltd. was established in 2002 under the laws of PRC. Foshan Overseas International Travel Service Co., Ltd. was incorporated in 1990 under the laws of PRC, Chongqing Universal Travel E-Commerce Co., Ltd. and Universal Travel International Travel Agency Co., Ltd. (formerly named Shenzhen Universal Travel Agency Co., Ltd.) were both incorporated in 2009 under the laws of PRC, Hebei Tianyuan Travel Agency Co., Ltd. was incorporated in April 1999 under the laws of PRC, Huangshan Holiday Travel Service Co., Ltd. was incorporated in April 1999 under the laws of PRC, Zhengzhou Yulongkang Travel Agency Co., Ltd. was incorporated in 2000 under the laws of PRC, Kunming Business Travel Service Co., Ltd. was incorporated in 1993 under the laws of PRC, Shanxi Jinyang Travel Agency Co., Ltd. was incorporated in 1988 under the laws of PRC. Collectively these corporations are referred to herein as the Company.

Universal Travel Group owns 100% of the equity interest in Full Power Enterprise Global Limited, which in turn owns 100% of the equity interest in Shenzhen Yuzhilu Aviation Service Co., Ltd., a wholly owned foreign entity in the PRC. Universal Travel Group and Full Power Enterprise Global Limited do not conduct any substantive operations of their own. Instead, all operations of the consolidated company are conducted through its subsidiary, Shenzhen Yuzhilu Aviation Service Co., Ltd. (“YZL”). YZL and its subsidiaries, and various variable interest entities, collectively, related to herein as subsidiaries.
 
In 2007 and 2009, YZL entered into certain shareholding agreements with various related PRC residents and Shenzhen Yuzhixing Aviation Service, Co. Limited (“Party B”) to hold YZL shares of ownership of Xi’an Golden Net Travel Serve Services Co., Ltd. (“XGN”) and Universal Travel International Travel Agency Co., Ltd., formerly known as Shenzhen Universal Travel Agency Co., Ltd. (“STA”).The significant details of the agreements and other important information, among others, are outlined below:

Universal Travel Group funded the start up activities and incorporation of XGN and STA and related subsidiaries, through cash or common stock issuance;
YZL entrusted Party B as the name holder only of YZL equity interest in XGN and STA;
Party B shall neither participate in the management of operation nor shareholder meeting decisions of YZL, XGN or STA;
YZL, as the actual fund provider of XGN and STA, will enjoy all shareholder rights and profit sharing;
YZL, is entitled to all profits and is required to absorb all losses of XGN and STA and its subsidiaries;
Party B is not responsible for losses nor to benefit from any income of XGN and/or STA;
YZL will cover any capital infusion requirements of XGN and STA and related subsidiaries; and
If XGN and/or STA were to dissolve, YZL will enjoy the right to allocate and divide assets.

Based on these contractual arrangements, management believes that XGN and STA and related subsidiaries should be considered “Variable Interest Entity” (“VIE”) under ASC 810 “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, because the equity holders in XGN and STA no longer have the characteristics of a controlling financial interest, and the Company, through YZL, is the primary beneficiary of XGN and STA and its operations.

On March 17, 2011, the shareholders of XGN transferred 100% of the equity interests in XGN to STA and completed the registration of change in ownership with the PRC authorities on April 2, 2011.  As a result, XGN is no longer subject to the aforementioned VIE arrangements and is no longer considered our VIE under ASC 810.
 
Universal Travel Group and YZL are responsible to fund any capital share shortfalls for STA and its subsidiaries. In addition, Universal Travel Group funded through cash and common stock the acquisitions as discussed in Note 2.
 
 
4

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 1 - ORGANIZATION (CONTINUED)

The Company, through its subsidiaries and VIE, engaged in the travel business, including airline ticketing, hotel reservation services and domestic and international packaged tour services in the PRC.

The following diagram illustrates our corporate structure.


Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
These accompanying condensed financial statements present the Company's results of operations, financial position and cash flows on a consolidated basis. The condensed consolidated financial statements include Universal Travel Group and its wholly-owned subsidiaries and its subsidiaries owned through shareholding agreements with Chinese residents, significant intercompany transactions and accounts have been eliminated in consolidation. Our policy is to consolidate all subsidiaries in which we hold a greater than 50% voting interest or otherwise control its operating activities and financial interest. It is management's opinion that all adjustments necessary for a fair statement of the results for the interim periods have been made, and all adjustments are of a normal recurring nature. The results of operations for the six-month period ended June 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010, previously filed with the Securities and Exchange Commission (“SEC”).

The Company operates in three segments in accordance with accounting guidance FASB ASC Topic 280, “Segment Reporting.” Our Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
 
 
5

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Reclassification

Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on reported income or losses.

Acquisitions

In March and June of 2010, the Company had five acquisitions to fit its geographic expansion strategy, and in all and every acquisition, the Company negotiated in arm's length with acquisition target and got the approval from our board of directors before closing.

On June 28, 2010, the Company through its VIE structure and strategy consummated the acquisition of a 100% interest in Kunming Business Travel Agency Co., Ltd. (“KBT”) through a cash and stock transaction valued at approximately US$5.7 million in the aggregate.

The stock consideration consisted of 79,487 newly issued shares of the company's common stock, which were given to KBT’s shareholder immediately before the completion of the share exchange transaction. The cash consideration consisted of $5,163,625. The shares were valued at $572,243, which was the average fair value of the shares 15 days prior to the date of the exchange agreement. This amount is included in the cost of net assets, identified intangible assets, and goodwill purchased.

KBT is engaged in the business of Chinese domestic tourism. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholder of KBT, and approved by our board of directors.

The acquisition had been accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC810. The allocation of the purchase price is as follows:

Cash acquired
 
$
814,097
 
Other assets
   
441,494
 
Property Plant & Equipment
   
80,121
 
Identifiable Intangibles
   
892,898
 
Goodwill
   
3,977,608
 
Total assets acquired
   
6,206,218
 
Liabilities assumed
       
Accounts & Income Taxes payable
   
174,732
 
Deferred Tax Liability
   
223,224
 
Other payable
   
72,394
 
Total
 
$
5,735,868
 

The excess of purchase price over tangible assets acquired and liabilities assumed was $4,870,506 of which $3,977,608 was recorded as goodwill. At the time of the acquisition $892,898 of identifiable intangible assets and related deferred tax liability of $223,224 existed under the contractual legal or the reparability criterion as required under ASC 805 and ASC 740, respectively.

Prior to the acquisition, Kunming Business Travel Agency Co., Ltd. prepared its financial statements under accounting principles generally accepted in the United States of America.
 
 
6

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Acquisitions (Continued)

On June 28, 2010, the Company through its VIE structure and strategy consummated the acquisition of a 100% interest in Shanxi Jinyang Travel Agency Co., Ltd. (“SJT”) through a cash and stock transaction valued at approximately US$2.3 million in the aggregate.

The stock consideration consisted of 31,387 newly issued shares of the company's common stock, which were given to SJT’s shareholder immediately before the completion of the share exchange transaction. The cash consideration consisted of $2,038,946. The shares were valued at $225,986, which was the average fair value of the shares 15 days prior to the date of the exchange agreement. This amount is included in the cost of net assets, identified intangible assets, and goodwill purchased.

SJT is engaged in the business of Chinese domestic tourism. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholder of SJT, and approved by our board of directors.

The acquisition had been accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC810. The allocation of the purchase price is as follows:

Cash acquired
 
$
7,258
 
Other assets
   
534,373
 
Property Plant & Equipment
   
20,339
 
Identifiable Intangibles
   
361,124
 
Goodwill
   
1,609,816
 
Total assets acquired
   
2,532,910
 
Liabilities assumed
       
Accounts & Income Taxes payable
   
78,574
 
Deferred Tax Liability
   
90,281
 
Other payable
   
99,123
 
Total
 
$
2,264,932
 

The excess of purchase price over tangible assets acquired and liabilities assumed was $1,970,940 of which $1,609,816 was recorded as goodwill. At the time of the acquisition $361,124 of identifiable intangible assets and related deferred tax liability of $90,281 existed under the contractual legal or the reparability criterion as required under ASC 805 and ASC 740, respectively.

Prior to the acquisition, Shanxi Jinyang Travel Agency Co., Ltd. prepared its financial statements under accounting principles generally accepted in the United States of America.

On March 29, 2010 the Company through its VIE structure and strategy consummated the acquisition of a 100% interest in Zhengzhou Yulongkang Travel agency Co. Ltd (“ZYT”) through a cash and stock transaction valued at approximately US$5.7 million in the aggregate.
 
 
7

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Acquisitions (Continued)

The stock consideration consisted of 60,633 newly issued shares of the Company’s common stock, which were given to ZYT’s shareholder immediately before the completion of the share exchange transaction. The cash consideration consisted of $5,141,764. The shares were valued at $571,172, which was the average fair value of the shares 15 days prior to the date of the exchange agreement. This amount is included in the cost of net assets, identified intangible assets, and goodwill purchased.

ZYT is engaged in the business of Chinese domestic tourism. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholder of ZYT and was approved by our board of directors.

The acquisition had been accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC 810. The allocation of the purchase price is as follows:

Cash acquired
 
$
1,513,636
 
Accounts receivable
   
29,154
 
Other assets
   
11,779
 
Property Plant & Equipment
   
29,019
 
Identifiable Intangibles
   
805,626
 
Goodwill
   
3,812,004
 
Total assets acquired
   
6,201,218
 
Liabilities assumed
       
Accounts & Income Taxes payable
   
230,107
 
Deferred Tax Liability
   
201,406
 
Other payable
   
56,769
 
Total
 
$
5,712,936
 

The excess of purchase price over tangible assets acquired and liabilities assumed was $4,617,630 of which $3,812,004 was recorded as goodwill. At the time of the acquisition $805,626 of identifiable intangible assets and related deferred tax liability of $201,406 existed under the contractual legal or the reparability criterion as required under ASC 805 and ASC 740, respectively.

Prior to the acquisition, Zhengzhou Yulongkang Travel agency Co. Ltd prepared its financial statements under accounting principles generally accepted in the United States of America.

On March 26, 2010 the Company through its VIE structure and strategy consummated the acquisition of a 100% interest in Huangshan Holiday Travel Service Co., Ltd (“HHT”) through a cash and stock transaction valued at approximately US$2.9 million in the aggregate.

The stock consideration consisted of 61,846 newly issued shares of the company’s common stock, which were given to HHT’s shareholder immediately before the completion of the share exchange transaction. The cash consideration consisted of $2,343,824. The shares were valued at $585,691, which was the average fair value of the shares 15 days prior to the date of the exchange agreement. This amount is included in the cost of net assets, identified intangible assets, and goodwill purchased.
 
 
8

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Acquisitions (Continued)

HHT is engaged in the business of Chinese domestic tourism. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholder of HHT, and approved by our board of directors.

The acquisition had been accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC 810. The allocation of the purchase price is as follows:

Cash acquired
 
$
340,174
 
Accounts receivable
   
21,450
 
Other assets
   
452,193
 
Property Plant & Equipment
   
69,682
 
Identifiable Intangibles
   
479,870
 
Goodwill
   
1,892,511
 
Total assets acquired
   
3,255,880
 
Liabilities assumed
       
Accounts & Income Taxes payable
   
176,863
 
Deferred Tax Liability
   
119,968
 
Other payable
   
29,534
 
Total
 
$
2,929,515
 

The excess of purchase price over tangible assets acquired and liabilities assumed was $2,372,381 of which $1,892,511 was recorded as goodwill. At the time of the acquisition $479,870 of identifiable intangible assets and related deferred tax liability of $119,968 existed under the contractual legal or the reparability criterion as required under ASC 805 and ASC 740, respectively.

Prior to the acquisition, Huangshan Holiday Travel Service Co., Ltd prepared its financial statements under accounting principles generally accepted in the United States of America.

On March 29, 2010 the Company through its VIE structure and strategy consummated the acquisition of a 100% interest in Hebei Tianyuan Travel Agency Co., Ltd (“HTT”) through a cash and stock transaction valued at approximately US$4.4 million in the aggregate.

The stock consideration consisted of 93,282 newly issued shares of the company’s common stock, which were given to HTT’s shareholder immediately before the completion of the share exchange transaction. The cash consideration consisted of $3,519,736. The shares were valued at $878,726, which was the average fair value of the shares prior to the date of the exchange agreement. This amount is included in the cost of net assets, identified intangible assets, and goodwill purchased.

HTT is engaged in the business of Chinese domestic tourism. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholder of HTT, and approved by our board of directors.

The acquisition had been accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC 810. The allocation of the purchase price is as follows:
 
 
9

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Acquisitions (Continued)

Cash acquired
 
$
532,349
 
Accounts receivable
   
120,152
 
Other assets
   
208,771
 
Property Plant & Equipment
   
49,637
 
Identifiable Intangibles
   
696,858
 
Goodwill
   
3,320,700
 
Total assets acquired
   
4,928,467
 
Liabilities assumed
       
Accounts & Income Taxes payable
   
232,188
 
Deferred Tax Liability
   
174,215
 
Other payable
   
123,602
 
Total
 
$
4,398,462
 

The excess of purchase price over tangible assets acquired and liabilities assumed was $4,017,558 of which $3,320,700 was recorded as goodwill. At the time of the acquisition $696,858 of identifiable intangible assets and related deferred tax liability of $174,215 existed under the contractual legal or the reparability criterion as required under ASC 805 and ASC 740, respectively.

Prior to the acquisition, Hebei Tianyuan Travel Agency Co., Ltd prepared its financial statements under accounting principles generally accepted in the United States of America.
 
On March 17, 2011, the shareholders of Xi’an Golden Net Travel Serve Services Co., Ltd. (“XGN”) transferred 100% of the equity interests in XGN to STA and completed the registration of change in ownership with the PRC authorities on April 2, 2011.  As a result, XGN became a wholly owned subsidiary of STA. The Company, though its VIE, STA, acquired a 100% interest in XGN.

Translation Adjustment

As of June 30, 2011 and December 31, 2010, the accounts of Universal Travel Group were maintained, and its condensed financial statements were expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were translated into U.S. Dollars (USD) in accordance with the Foreign Currency Matters Topic of the FASB Accounting Standards Codification (“ASC 830”) with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholders equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the FASB Accounting Standard Codification (“ASC 830”). Transaction gains and losses are reflected in the income statement and such differences may be material to the financial statements.

Use of Estimates

The preparation of condensed financial statements in conformity with U.S. generally accepted accounting principles 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. Actual results could differ from those estimates and such differences maybe material to the financial statements. The more significant estimates and assumptions made by management include among others, consolidation of VIE's, allowance for doubtful accounts, long-lived asset impairment, useful lives and residual values of fixed assets, stock based compensation, valuation of warrant derivative liability, purchase price allocation of fair market value of assets and liabilities acquired and deferred income taxes. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
 
 
10

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Universal Travel Group and its wholly owned subsidiaries and Variable Interest Entities, including Shenzhen Yuzhilu Aviation Service Co., Ltd., Shanghai Lanbao Travel Service Co., Ltd., Xi’an Golden Net Travel Serve Services Co., Ltd., Foshan Overseas International Travel Service Co. Ltd., Chongqing Universal Travel E-Commerce Co., Ltd., Universal Travel International Travel Agency Co., Ltd., Hebei Tianyuan Travel Agency Co., Ltd., Huangshan Holiday Travel Service Co., Ltd., Zhengzhou Yulongkang Travel Agency Co., Ltd., Kunming Business Travel Service Co., Ltd., Shanxi Jinyang Travel Agency Co., Ltd., and Full Power Enterprise Global Limited, collectively referred to herein as the Company. All material inter-company accounts, transactions and profits have been eliminated in consolidation.

Risks and Uncertainties

The Company's operation is located in the PRC. There can be no assurance that the Company will be able to successfully continue the operation and failure to do so would have a material adverse effect on the Company's financial position, results of operations and cash flows. Also, the success of the Company's operations is subject to numerous contingencies, some of which are beyond management's control. These contingencies include general economic conditions, competition, governmental and political conditions, and changes in regulations. Among other risks, the Company's operations will be subject to risk of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.

Contingencies

Certain conditions may exist as of the date the condensed financial statements are issued. These conditions may result in a future loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable given the current economic environment that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

On April 15, 2011, the plaintiff Albert Snellink commenced putative class action in the United States District Court, District of New Jersey against Universal Travel Group, and Jiangping Jiang, Yizhao Zhang and Jing Xie, officers of the Company. In the complaint, plaintiff alleges a claim for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against all defendants, and a claim for a violation of Section 20(a) of the Exchange Act against the individual defendants in connection with purported misrepresentations contained in the Company’s public filings and press releases. The complaint seeks unspecified compensatory damages, and his costs incurred in the action. The Company’s time to answer or move with respect to the complaint has not yet expired. The Company believes that the allegations of complaint are without merit, and intends to vigorously defend the lawsuit.
 
 
11

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Contingencies (Continued)

On May 20, 2011, the plaintiff Alex Loeb commenced a derivative action in the First Judicial District Court of the State of Nevada in and for Carson City against Universal travel Group, and Jiangping Jiang, Jing Xie, Huijie Gao, Jiduan Yuan, Lizong Wang, Wenbin An, Lawrence Lee, Yizhao Zhang and Liquan Wang, officers and directors of the Company. In the complaint, plaintiff purports to assert derivative claims against the individual defendants for alleged breaches of fiduciary duties, waste of corporate assets and unjust enrichment based upon alleged conduct of the individual defendants which damaged the Company’s reputation, goodwill and standing in the business community. The complaint also alleges that such conduct may result in liability for violations of federal law. The complaint seeks, among other relief, the amount of damages sustained by the Company as a result of the Defendants’ breach of fiduciary duties, waste of corporate assets and unjust enrichment and plaintiff’s counsel’s, accountant’s and experts’ fees. On June 17, 2011, the Company filed an answer to the compliant in which the Company denied the material allegations of the complaint. The Company intends to vigorously defend the lawsuit.

As of June 30, 2011, the Company is not involved in any another material legal dispute, other than those disclosed above and those which occur in the normal operations of a business.

Net Income (Loss) Per Share

The Company accounts for net income (loss) per share EPS in accordance with FASB Accounting Standards Codification Topic on Earning Per Share (“ASC 260”), which requires presentation of basic and diluted EPS on the face of the statement of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of potentially issuable common shares such as those related to the Company’s warrants and stock options (calculated using the treasury stock method). Diluted net income (loss) per share is calculated by including potentially dilutive share issuances in the denominator.
 
 
12

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Net Income (Loss) Per Share (Continued)

The following table sets forth the computation of basic and diluted earnings per share of common stock:

   
Six months ended June 30,
   
Three months ended June 30,
 
  
 
2011
   
2010
   
2011
   
2010
 
Basic earnings per share:
                       
Numerator:
                       
Net income used in computing basic earnings per share
  $ 8,897,303     $ 9,277,013     $ 4,441,773     $ 5,730,578  
Net income  applicable to common shareholders
  $ 8,897,303     $ 9,277,013     $ 4,441,773     $ 5,730,578  
                                 
Denominator:
                               
Weighted average common shares outstanding
    19,898,235       17,066,154       19,898,235       17,404,834  
Basic earnings per share
  $ 0.45     $ 0.54     $ 0.22     $ 0.33  
                                 
Diluted earnings per share:
                               
Numerator:
                               
Net income used in computing basic earnings per share
  $ 8,897,303     $ 9,277,013     $ 4,441,773     $ 5,730,578  
Net income applicable to common shareholders
  $ 8,897,303     $ 9,277,013     $ 4,441,773     $ 5,730,578  
                                 
Denominator:
                               
Weighted average common shares outstanding
    19,898,235       17,066,154       19,898,235       17,404,834  
Weighted average effect of dilutive securities:
                               
Stock options and warrants
    244,581       869,159       42,501       814,806  
                                 
Shares used in computing diluted net income  per share
    20,142,816       17,935,313       19,940,736       18,219,639  
Diluted earnings per share from continuing operations
  $ 0.44     $ 0.52     $ 0.22     $ 0.31  
                                 
Total net income per common share
                               
Basic
  $ 0.45     $ 0.54     $ 0.22     $ 0.33  
Diluted
  $ 0.44     $ 0.52     $ 0.22     $ 0.31  

Recent Accounting Pronouncements

In June 2011, the FASB issued guidance related to the presentation of comprehensive income in the financial statements. The new accounting guidance eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Under the new guidance, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of this standard will not have an impact on the Company's consolidated financial position results of operations or cash flows as it only requires a change in the format of the current presentation.
 
 
13

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

In May 2011, the FASB issued guidance related to fair value measurement and disclosures in the financial statements. This guidance conforms the wording to describe many of the requirements in U.S. GAAP to International Financial Reporting Standards to ensure the related standards are consistently applied. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The adoption of this standard will not materially expand the Company's consolidated financial statement footnote disclosures.

Note 3 – SHORT-TERM INVESTMENT

As of June 30, 2011, the Company has invested $38,991,181 into HappyFund of China Construction Bank with interest rate 3.10%, 3.34%, and 4.39%. These investments consist primarily of money market accounts with maturities ranging from one months to three months accordingly they are classified as short term investments in the accompanying financial statements.

Note 4 - INCOME TAXES

The Company is subject to U.S. federal income tax, and the Company’s subsidiaries incorporated in the PRC are subject to enterprise income taxes in the PRC. 

During the three months ended June 30, 2011 and 2010, the Company recorded an income tax expense of approximately $1.9 million and $1.8 million, respectively. During the six months ended June 30, 2011 and 2010, the Company recorded an income tax expense of approximately $3.8 million and $3.1 million, respectively. The increase in the Company’s income tax expense was primarily due to the increase in profits of its PRC subsidiaries and VIE.
 
The effective tax rate increased by 6% from a 24% effective rate for the three months ended June 30, 2010 to a 30% effective rate for the three months ended June 30, 2011. The effective tax rate increased by 5% from 25% for the six months ended June 30, 2010 to 30% for the six months ended June 30, 2011.

As of June 30, 2011, unrecognized tax benefits were $30,804.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $30,804 at June 30, 2011. As of June 30, 2010, unrecognized tax benefits were $0.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $0 at June 30, 2010.
  
For the three months ended June 30, 2011 and 2010, the Company recorded uncertain tax benefits of approximately $0 and $0, respectively. For the six months ended June 30, 2011 and 2010, the Company recorded uncertain tax benefits of approximately $0 and $0, respectively.

Aggregate undistributed earnings of approximately $98 million as of June 30, 2011 of the Company’s PRC subsidiaries that are available for distribution to the Company are considered to be indefinitely reinvested, and, accordingly, no provision has been made for the PRC dividend withholding taxes that would be payable upon distribution to the Company. Additionally, the PRC tax authorities have clarified that distributions made out of pre-January 1, 2008 retained earnings would not be subject to the withholding tax.

The Company's tax years from 2006 to 2010 remain open in various jurisdictions.
 
 
14

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 5 - SEGMENT INFORMATION

Pursuant to ASC 280 the Company operates and discloses three reportable segments: air ticketing, hotel reservation and packaged tours. Substantially all of the Company’s revenues and long-lived assets are in the PRC. The Company currently operates and prepares accounting and other financial reports separately to management for eleven major business organizations (Shenzhen Yuzhilu Aviation Service Co., Ltd., Shanghai Lanbao Travel Service Co., Ltd., Foshan International Travel Service Co., Ltd., Xi’an Golden Net Travel Serve Services Co., Ltd., Chongqing Travel World E-Business Co., Ltd., Universal Travel International Travel Agency Co., Ltd., Hebei Tianyuan Travel Agency Co., Ltd., Zhengzhou Yulongkang Travel Agency Co., Ltd., Huangshan Holiday Travel Service Co., Ltd., Kunming Business Travel Service Co., Ltd., and Shanxi Jinyang Travel Agency Co., Ltd.).

Our air-ticketing segment relates to the segment reporting of Shenzhen Yuzhilu Aviation Service Co., Ltd. and Chongqing Travel World E-Business Co., Ltd.; Hotel reservation segment relates to Shenzhen Yuzhilu Aviation Service Co., Ltd., Shanghai Lanbao Travel Service Co., Ltd. and Huangshan Holiday Travel Service Co., Ltd.; Packaged tours segment relates to Chongqing Travel World E-Business Co., Ltd., Foshan International Travel Service Co., Ltd., Xi’an Golden Net Travel Serve Service Company Ltd., Universal Travel International Travel Agency Co., Ltd., Hebei Tianyuan Travel Agency Co., Ltd., Zhengzhou Yulongkang Travel Agency Co., Ltd., Huangshan Holiday Travel Service Co., Ltd., Kunming Business Travel Service Co., Ltd., and Shanxi Jinyang Travel Agency Co., Ltd. Management monitors these segments regularly to make decisions about resources to be allocated to the segment and assess its performance.
 
 
15

 
 
UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 5 - SEGMENT INFORMATION (CONTINUED)

The following tables present summarized information by segment:

   
Air
   
Hotel
   
Packaged
   
Other
   
Total
 
   
Ticketing
   
Reservation
   
Tours
             
 
Six Months Ended June 30, 2011
 
Revenue, net
  $ 10,280,773     $ 6,389,731     $ 49,986,767     $ -     $ 66,657,271  
Cost of services
  $ 3,773,987     $ 1,537,696     $ 43,721,220     $ -     $ 49,032,903  
Gross profit
  $ 6,506,786     $ 4,852,035     $ 6,265,547     $ -     $ 17,624,368  
Income from operations
  $ 7,189,838     $ 2,049,272     $ 5,472,579     $ (2,658,833 )   $ 12,052,856  
Income tax expenses
  $ 1,825,648     $ 514,766     $ 1,390,637     $ 87,037     $ 3,818,088  
Depreciation & Amortization
  $ 546,814     $ 4,331     $ 65,446     $ -     $ 616,591  
Asset expenditures
  $ 62,662     $ -     $ -     $ -     $ 62,662  
Goodwill
  $ -     $ 3,081,799     $ 21,427,110     $ -     $ 24,508,909  
Total assets
  $ 104,908,639     $ 478,447     $ 45,810,995     $ 347,791     $ 151,545,872  
 
Six Months Ended June 30, 2010
 
Revenue, net
  $ 8,702,488     $ 6,462,123     $ 37,127,291     $ -     $ 52,291,902  
Cost of services
  $ 2,833,290     $ 1,979,573     $ 32,491,924     $ -     $ 37,304,787  
Gross profit
  $ 5,869,198     $ 4,482,550     $ 4,635,367     $ -     $ 14,987,115  
Income from operations
  $ 4,165,082     $ 4,389,490     $ 4,130,012     $ (1,340,653 )   $ 11,343,931  
Income tax expenses
  $ 1,049,783     $ 982,799     $ 1,028,968     $ -     $ 3,061,550  
Depreciation & Amortization
  $ 740,235     $ 879     $ 22,593     $ -     $ 763,707  
Asset expenditures
  $ 1,852,357     $ -     $ 12,417     $ -     $ 1,864,774  
Goodwill
  $       $ 3,081,799     $ 21,427,110     $ -     $ 24,508,909  
Total assets
  $ 60,542,681     $ 7,435,604     $ 28,741,119     $ 23,943,549     $ 120,662,953  
 
Three Months Ended June 30, 2011
 
Revenue, net
  $ 5,020,345     $ 2,695,778     $ 25,145,655     $ -     $ 32,861,778  
Cost of services
  $ 1,857,664     $ 163,312     $ 22,091,650     $ -     $ 24,112,626  
Gross profit
  $ 3,162,681     $ 2,532,466     $ 3,054,005     $ -     $ 8,749,152  
Income from operations
  $ 4,922,641     $ 4,140     $ 2,560,760     $ (1,311,803 )   $ 6,175,738  
Income tax expenses
  $ 1,219,276     $ 3,110     $ 627,262     $ 93,896     $ 1,943,544  
Depreciation & Amortization
  $ 274,445     $ 2,171     $ 32,696     $ -     $ 309,312  
Asset expenditures
  $ 44,413     $ -     $ -     $ -     $ 44,413  
Goodwill
  $ -     $ 3,081,799     $ 21,427,110     $ -     $ 24,508,909  
 
Three Months Ended June 30, 2010
 
Revenue, net
  $ 4,796,513     $ 3,432,017     $ 23,637,593     $ -     $ 31,866,123  
Cost of services
  $ 1,465,419     $ 981,156     $ 20,688,727     $ -     $ 23,135,302  
Gross profit
  $ 3,331,094     $ 2,450,861     $ 2,948,866     $ -     $ 8,730,821  
Income from operations
  $ 2,396,956     $ 2,395,312     $ 2,594,654     $ (733,298 )   $ 6,653,624  
Income tax expenses
  $ 656,059     $ 476,671     $ 649,754     $ -     $ 1,782,484  
Depreciation & Amortization
  $ 442,389     $ 440     $ 19,774     $ -     $ 462,603  
Asset expenditures
  $ 1,244,147     $ -     $ 1,011     $ -     $ 1,245,158  
Goodwill
  $ -     $ 3,081,799     $ 21,427,110     $ -     $ 24,508,909  

 
16

 

UNIVERSAL TRAVEL GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

Note 6 - PRO FORMA FINANCIAL STATEMENTS

Pro Forma financial statements present revenue and related data of five subsidiaries acquired in 2010 as if the acquisitions were made at the earliest date presented of January 1, 2010.

For the six months ended June 30, 2010, the revenue, income from operations, net income, and net income per common share in Pro Forma financial statements are as follow:

   
For the six months ended June 30,
 
   
2010
 
Revenues
  $ 65,821,830  
Income from operations
  $ 12,926,713  
Net Income
  $ 10,431,632  
Net income per common share
       
Basic
  $ 0.61  
Dilute
  $ 0.58  

Note 7 - SUBSEQUENT EVENTS

On April 12, 2011, the Company’s stock was suspended from trading when it was unable to file its Annual Report on Form 10-K by April 15, 2011 as a result of Windes & McClaughry Accountancy Corporation resignation on April 9, 2011. On June 8, 2011, the Company filed its Annual Report on Form 10-K. On July 22, 2011, the Company filed its quarterly report on Form 10-Q for the quarter ended March 31, 2011. As of August 12, 2011, the Company's stock is still suspended from trading.

As of June 30, 2011, the Company has evaluated subsequent events for potential recognition and disclosure through the date of the financial statement issuance.
 
 
17

 

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

Forward-Looking Statements: No Assurances Intended

In addition to historical information, this quarterly report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of Universal Travel Group. Whether those beliefs become reality will depend on many factors that are not under management’s control. Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

Business Overview

We are a travel services provider in the People’s Republic of China (“PRC”) engaged in providing air ticketing and hotel booking services as well as domestic and international packaged tourism services throughout the PRC via the internet, the customer representatives and the kiosks.

Name of Entities
 
Place of
Incorporation
 
Expiration date
   
Ownership
Percentage
 
Universal Travel Group
 
Nevada, USA
  -     100 %
Full Power Enterprise Global Limited
 
British Virginia Islands
  -     100 %
Shenzhen Yuzhilu Aviation Service Co., Ltd.
 
China
  1998.3.9-2018.3.9     100 %
Xi’an Golden Net Travel Serve Services Co., Ltd.
 
China
  2001.8.1-2016.9.4    
100
%
Shanghai Lanbao Travel Service Co., Ltd.
 
China
  2002.5.29-2015.4.28     100 %
Foshan Overseas International Travel Service Co., Ltd.
 
China
 
Infinite Term
    100 %
Chongqing Universal Travel E-Commerce Co., Ltd.
 
China
 
Infinite Term
    100 %
Universal Travel International Travel Agency Co., Ltd.
(formerly named: Shenzhen Universal Travel Agency Co., Ltd.)
 
China
 
Infinite Term
   
100
%VIE
Hebei Tianyuan International Travel Agency Co., Ltd.
 
China
  1999.10.8-2019.10.7     100 %
Huangshan Holiday Travel Service Co., Ltd.
 
China
 
Infinite Term
    100 %
Zhengzhou Yulongkang Travel Agency Co., Ltd.
 
China
  2000.11.1-2020.11.1     100 %
Kunming Business Travel Service Co., Ltd.
 
China
  2001.10.8-2011.10.8     100 %
Shanxi Jinyang Travel Agency Co., Ltd.
 
China
  2005.5.19-2015.5.18     100 %
 
In 2007 and 2009, YZL entered into certain shareholding agreements with various related PRC residents and Shenzhen Yuzhixing Aviation Service, Co. Limited (“Party B”) to hold YZL shares of ownership of Xi’an Golden Net Travel Serve Services Co., Ltd. (“XGN”) and Universal Travel International Travel Agency Co., Ltd., formerly known as Shenzhen Universal Travel Agency Co., Ltd. (“STA”).The significant details of the agreements and other important information, among others, are outlined below:

Universal Travel Group funded the start up activities and incorporation of XGN and STA and related subsidiaries, through cash or common stock issuance;
YZL entrusted Party B as the name holder only of YZL equity interest in XGN and STA;
Party B shall neither participate in the management of operation nor shareholder meeting decisions of YZL, XGN or STA;
YZL, as the actual fund provider of XGN and STA, will enjoy all shareholder rights and profit sharing;
YZL, is entitled to all profits and is required to absorb all losses of XGN and STA and its subsidiaries;
Party B is not responsible for losses nor to benefit from any income of XGN and/or STA;
YZL will cover any capital infusion requirements of XGN and STA and related subsidiaries; and
If XGN and/or STA were to dissolve, YZL will enjoy the right to allocate and divide assets.

Based on these contractual arrangements, management believes that XGN and STA and related subsidiaries should be considered “Variable Interest Entity” (“VIE”) under ASC 810 “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, because the equity holders in XGN and STA no longer have the characteristics of a controlling financial interest, and the Company, through YZL, is the primary beneficiary of XGN and STA and its operations.

On March 17, 2011, the shareholders of XGN transferred 100% of the equity interests in XGN to STA and completed the registration of change in ownership with the PRC authorities on April 2, 2011.  As a result, XGN is no longer subject to the aforementioned VIE arrangements and is no longer considered our VIE under ASC 810.
 
 
 
18

 

Universal Travel Group and YZL are responsible to fund any capital share shortfalls for STA and its subsidiaries. In addition, Universal Travel Group funded through cash and common stock the acquisitions as discussed in Note 2.

In 2007, we completed the acquisitions of Xi'an Golden Net Travel Serve Service Co., Ltd., which specializes in domestic packaged tour services, and Shanghai Lanbao Travel Service Co., Ltd., which specializes in hotel reservations and Foshan Overseas International Travel Service Co., Ltd, which handles both domestic and international travel inquiries.

In early 2008, we successfully integrated our packaged tours, air-ticketing and hotel reservation businesses onto our newly developed on-line platform, which provides rich and comprehensive travel information to primarily leisure travelers.

In October 2008, we successfully rolled out our TRIPEASY Kiosks, an innovative self-service terminal capable of handling a full ranging of booking services including packaged tours through a secured built in payment function that accepts all major Chinese bank cards. On September 9, 2010, we sold all of 1,523 Kiosks to Shenzhen Xunbao E-commerce Co. Ltd. with a slight gain. The strategy of sales of Kiosks was to minimize our capital expenditures and related expenses. We still have the full right to use these Kiosks after the sales for two years according to the agreement.

In December 2008, we established Universal Travel International Travel Agency Co., Ltd. (formerly known as Shenzhen Universal Travel Agency Co. Ltd.), a PRC company, to meet the increasing packaged-tour demand in Shenzhen City.

In March 2009, in order to seize the opportunities arising from the economic promotion by the PRC government of the mid and western regions of the PRC, we strategically set up Chongqing Universal Travel E-Commerce Co., Ltd., a PRC company, to strengthen our presence in that region. It began generating revenues in the third quarter of 2009.

In 2009, we were selected one of the Top Ten Brands of Travel Services in the PRC. We believe our quality of services will distinguish us in our long term competitiveness.

In 2010, we acquired a total of five companies for stock and cash through our VIE structure and strategy, namely Huangshan Holiday Travel Service Co., Ltd., Hebei Tianyuan International Travel Agency Co., Ltd., Zhengzhou Yulongkang Travel Agency Co., Ltd., Kunming Business Travel Agency Co., Ltd. and Shanxi Jinyang Travel Agency Co., Ltd.

In order to finance the abovementioned acquisitions and our working capital, on December 10, 2009, we entered into a subscription agreement to sell to institutional investors an aggregate of 2,222,222 shares of our common stock at a price of $9.00 per share for net proceeds of approximately $19.0 million. The sale of the common stock closed on December 15, 2009. The offer and sale of the shares were made pursuant to an effective Registration Statement on Form S-3 (Registration No. 333-161139) initially filed with the Securities and Exchange Commission on August 7, 2009 and amended on November 2, 2009. The Registration Statement was declared effective on November 5, 2009.
 
 
19

 
 
On June 15, 2010, we entered into an underwriting agreement (the “Underwriting Agreement”) with Brean Murray, Carret & Co., LLC, as representative of the underwriters (the “Representative”), related to a public offering of 2,857,143 shares of the Company's common stock at a price of $7.00 per share less a 5% underwriting commission. Under the terms of the Underwriting Agreement, we granted the Representative an option, exercisable for 30 days, to purchase up to an additional 428,572 shares of common stock to cover over-allotments, if any. The offering was made pursuant to an effective registration statement on Form S-3, as amended and supplemented (Registration Statement No. 333-161139) filed with the Securities and Exchange Commission. On June 21, 2010, we closed the common stock offering announced on June 16, 2010. In the transaction, we issued 2,857,143 shares of common stock at $7.00 per share for an aggregate amount of $20 million.

               On December 24, 2010, we, through our subsidiary, Universal Travel International Travel Agency Co., Ltd., obtained the International Travel License issued by the National Travel Authority, granting us the right to operate and offer global package tours in mainland PRC and our subsidiary changed name to Universal Travel International Travel Agency Co., Ltd. to reflect the upgrade. In the past, we had only been able to offer such packages through agencies which possess this license. There are over 20,000 travel agencies in the PRC, of which only approximately 1,300 travel agencies have this International Travel License.

In order to leverage on our International Travel License, we have decided to franchise our license to local travel agencies.  Recently, we granted our franchise to eight local travel agencies in Shenyang, Dalian and Qingdao. They have converted their business model, adopted our franchise operating scheme, and updated their local business registration to run this franchise officially. As of June 30, 2011, we are still providing training and internal control testing for these franchisees and accordingly they have not generated any revenue yet.

We currently have three discrete lines of business and revenue, and each is carried out by a few subsidiaries of the Company and our VIE: (i) air-ticketing (Shenzhen Yuzhilu Aviation Service Co., Ltd. and Chongqing Universal Travel E-Commerce Co., Ltd.), (ii) hotel reservations (Shenzhen Yuzhilu Aviation Service Co., Ltd., Shanghai Lanbao Travel Service Co., Ltd. and Huangshan Holiday Travel Service Co., Ltd.), and (iii) packaged tours (Chongqing Universal Travel E-Commerce Co., Ltd., Xi'an Golden Net Travel Serve Service Co., Ltd., Foshan Overseas International Travel Service Co., Ltd., Universal Travel International Travel Agency Co. Ltd., Huangshan Holiday Travel Service Co., Ltd., Hebei Tianyuan International Travel Agency Co., Ltd., Zhengzhou Yulongkang Travel Agency Co., Ltd., Shanxi Jinyang Travel Agency Co., Ltd. and Kunming Business Travel Agency Co., Ltd.).

Our strategy is to further utilize our international travel license, and expand our geographic service coverage by establishing more franchise offices and set up call centers in some of these franchisee offices where there is customer demand for air-ticketing and hotel reservation services. We also plan to integrate our offline businesses with our online platform.

We aim to be the foremost leading online travel services provider in the PRC, especially in the air ticketing, hotel reservation and packaged tour service sectors.

Income Tax Expense
 
We are subject to U.S. federal income tax, and our subsidiaries incorporated in the PRC are subject to enterprise income taxes in the PRC.  We recorded an income tax expense of approximately $1.9 million and $1.8 million for the three months ended June 30, 2011 and 2010, respectively. We recorded an income tax expense of approximately $3.8 million and $3.1 million for the six months ended June 30, 2011 and 2010, respectively. The increase in income tax expense was primarily due to the increase in profits of its PRC subsidiaries.

As of June 30, 2011, unrecognized tax benefits were $30,804.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $30,804 at June 30, 2011. As of June 30, 2010, unrecognized tax benefits were $0.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $0 at June 30, 2010.

For the three months ended June 30, 2011 and 2010, the Company recorded uncertain tax benefits of approximately $0 and $0, respectively. For the six months ended June 30, 2011 and 2010, the Company recorded uncertain tax benefits of approximately $0 and $0, respectively.
 
 
20

 
 
RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2011 AND 2010

The following table presents certain consolidated statement of operations information derived from the consolidated statements of income for the three months ended June 30, 2011 and 2010 respectively.

   
Three months ended
   
Three months ended
   
Increase /
       
   
June 30, 2011
   
June 30, 2010
   
(Decrease)
   
Percentage
 
Revenues
                       
Air ticketing, net
  $ 5,020,345     $ 4,796,513     $ 223,832       4.67 %
Hotel reservation, net
    2,695,778       3,432,017       (736,239 )     -21.45 %
Packaged tours, gross
    25,145,655       23,637,593       1,508,062       6.38 %
      32,861,778       31,866,123       995,655       3.12 %
Cost of services
                               
Air ticketing, net
    1,857,664       1,465,419       392,245       26.77 %
Hotel reservation, net
    163,312       981,156       (817,844 )     -83.36 %
Packaged tours, gross
    22,091,650       20,688,727       1,402,923       6.78 %
      24,112,626       23,135,302       977,324       4.22 %
                                 
Gross Profit
    8,749,152       8,730,821       18,331       0.21 %
                                 
Selling, general and administrative expenses
    (2,573,414 )     (2,077,197 )     (496,217 )     23.89 %
Income from operations
    6,175,738       6,653,624       (477,886 )     -7.18 %
                                 
Other income (expense)
                               
Other income (expense)
    (3,112 )     3,363       (6,475 )     192.54 %
Gain on change of fair value of derivative liabilities
    95,404       839,553       (744,149 )     -88.64 %
Interest income
    117,287       16,522       100,765       609.88 %
Total other income
    209,579       859,438       (649,859 )     -75.61 %
                                 
Income before income taxes
    6,385,317       7,513,062       (1,127,745 )     -15.01 %
                                 
Provision for income taxes
    1,943,544       1,782,484       161,060       9.04 %
Net Income
  $ 4,441,773     $ 5,730,578     $ (1,288,805 )     -22.49 %

For the three months ended June 30, 2011:
 
    
Air
   
(%) of
   
Hotel
   
(%) of
   
Packaged
   
(%) of
       
Revenue Segment
 
Ticketing
   
sector
   
Reservation
   
sector
   
Tours
   
sector
   
Total
 
Revenue
  $ 5,020,345       15.28 %   $ 2,695,778       8.20 %   $ 25,145,655       76.52 %   $ 32,861,778  
Cost of Services
    (1,857,664 )     7.70 %     (163,312 )     0.68 %     (22,091,650 )     91.62 %     (24,112,626 )
Gross Profit
  $ 3,162,681       36.15 %   $ 2,532,466       28.95 %   $ 3,054,005       34.91 %   $ 8,749,152  
Gross Margin
    63.00 %             93.94 %             12.15 %             26.62 %
Segment effect in Gross Margin (*)
    9.62 %             7.71 %             9.29 %             26.62 %
 
 
21

 
 
For the three months ended June 30, 2010:
 
    
Air
   
(%) of
   
Hotel
   
(%) of
   
Packaged
   
(%) of
       
Revenue Segment
 
Ticketing
   
sector
   
Reservation
   
sector
   
Tours
   
sector
   
Total
 
Revenue
  $ 4,796,513       15.05 %   $ 3,432,017       10.77 %   $ 23,637,593       74.18 %   $ 31,866,123  
Cost of Services
    (1,465,419 )     6.33 %     (981,156 )     4.24 %     (20,688,727 )     89.42 %     (23,135,302 )
Gross Profit
  $ 3,331,094       38.15 %   $ 2,450,861       28.07 %   $ 2,948,866       33.78 %   $ 8,730,821  
Gross Margin
    69.45 %             71.41 %             12.48 %             27.40 %
Segment effect in Gross Margin (*)
    10.45 %             7.69 %             9.25 %             27.40 %

(*) “Segment effect in Gross Margin” was calculated by multiplying “the percentage of the segment revenue over the total revenue” with “gross margin of the related sector”. This outlines how each segment contributes to the total gross margin.

Revenue

Our air-ticketing segment relates to the segment reporting of Shenzhen Yuzhilu Aviation Service Co., Ltd. and Chongqing Travel World E-Business Co., Ltd. Our hotel reservation segment relates to Shenzhen Yuzhilu Aviation Service Co., Ltd., Shanghai Lanbao Travel Service Co., Ltd. and Huangshan Holiday Travel Service Co., Ltd. Our packaged tours segment relates to Chongqing Travel World E-Business Co., Ltd., Foshan Overseas International Travel Service Co., Ltd., Xi’an Golden Net Travel Serve Service Co., Ltd., Universal Travel International Travel Agency Co. Ltd., Huangshan Holiday Travel Service Co., Ltd., Hebei Tianyuan International Travel Agency Co., Ltd., Zhengzhou Yulongkang Travel Agency Co., Ltd., Shanxi Jinyang Travel Agency Co., Ltd. and Kunming Business Travel Agency Co., Ltd.

Revenues for the three months ended June 30, 2011 were $32,861,778, compared to $31,866,123 for the same period in 2010, an increase of $995,655, or approximately 3.12%. The slight increase in revenue is contributed by our expanded packaged tours business and stable sales in our air ticketing business. We continue to see success in cross marketing and selling our travel related products across our business segments and increased brand awareness from online and offline sales.

Revenues from air-ticketing segment were $5,020,345 for the three months ended June 30, 2011 compared to $4,796,513 for the same period last year, an increase of $223,832, or approximately 4.67%. This slight increase is generally driven by increase in air-ticket sales volume and higher air-ticket prices than the same quarter last year. We attribute the higher air ticket sales to a booming tourism industry, general inflation in PRC economy, as well as less competition among airlines. As the PRC economy continues to grow, we believe that our growth in air-ticketing is sustainable in the foreseeable future.

Revenues from the hotel reservations segment were $2,695,778 for the three months ended June 30, 2011 compared to $3,432,017 for the same quarter in 2010, a decrease of $736,239, or approximately 21.45%. The decrease is associated with the transition period of our new strategy in this segment. In the second quarter this year, we ceased all hotel rooms wholesaling operations, which was previously conducted through the China Booking Association platform. Instead we focused our strategy on the more profitable direct sales and hotel packaged products. Accordingly, there was a slight decrease in revenue during this transition period. We believe the change in our hotel reservation strategy will enhance our competitiveness, increase our profitability and place our hotel reservation business in an advantageous position for long term success.
 
Revenues from our packaged tour segment were $25,145,655 for the three months ended June 30, 2011, compared to $23,637,593 for the same quarter in 2010, an increase of $1,508,062, or approximately 6.38%. The slight increase is a result of our efforts to expand our packaged tour business and mix and growth in domestic tours sales but offset by a drop in sales in international tours by Foshan Overseas International Travel Service Co., Ltd. after Japan's earthquake, tsunami, and radiation disaster.

Cost of Services

Costs of services for air tickets cover mainly business and revenue related expenses and commissions paid to retail agents. Costs of services for hotel reservations cover mainly commissions paid to the sales agents for selling hotel rooms in the Company’s system. Commission rates vary and are paid to these sales agents after we are paid our commissions by the hotels. Costs of services for packaged tours include meals, transportation (airline tickets, train tickets and car rental), lodging, airport transfers, tickets to local attractions and tours.
 
 
22

 

Other direct costs such as systems and related technologies used by each segment operations, and costs associated with payment processing are also included in the Company’s costs of services. In addition, the Company allocates costs of labor and facilities, depreciation, communications, and utility expenses incurred by each segment between costs of services and general administrative expenses. We do not offer any volume rebates but enjoy volume rebates from our vendors, calculated based on the vendors’ own internal rebate policy. We do not record receivables for these rebates, and we only record them as a reduction of cost when received.

Costs of services for the three months ended June 30, 2011 were $24,112,626 compared to $23,135,302 for the same quarter last year, an increase of $977,324, or approximately 4.22%. The increase is in tandem with the increase of revenue.  Our increased cost in air ticketing business is associated with higher percentage of commission cost to a major retail agency in this segment. The comparatively higher costs of services resulted from packaged tours making up a greater percentage of our total revenue and their corresponding higher cost of services. But we were able to integrate with wider geographic covered local subsidiaries as a result of acquisitions to create synergy to tightly control our packaged tour segment costs.

Costs of services from the air-ticketing segment were $1,857,664 for the three months ended June 30, 2011, compared to $1,465,419 for the same quarter last year, an increase of $392,245, or approximately 26.77%. This increase is associated with the higher salaries expenses along with increased numbers of employees in this segment and increased percentage of commission paid to a major retail agency.

Costs of services from the hotel-reservation segment were $163,312 for the three months ended June 30, 2011, compared to $981,156 for the same quarter last year, a decrease of $817,844, or approximately 83.36%. The significant decrease is a result from our strategy to focus on direct sales to reduce commissions paid to second tier wholesale agents. in the second quarter this year.

Costs of services from the packaged-tour segment were $22,091,650 for the three months ended June 30, 2011, compared to $20,688,727 for the same quarter last year, an increase of $1,402,923 or approximately 6.78%. The increase is in tandem with the increase of revenue.

Gross Profit

Gross profit for the three months ended June 30, 2011 was $8,749,152 compared to $8,730,821, for the same quarter last year, an increase of $18,331, or approximately 0.21%. The stability in gross profit is due to the growth in revenue and control of cost as explained above. The growth in both our domestic air-ticketing business and hotel reservation business is a result of synergies from our packaged tour operations.

Gross profit in our air-ticketing segment was $3,162,681 for the three months ended June 30, 2011, compared to $3,331,094 for the same quarter last year, a decrease of $168,413, or approximately 5.06%. Gross profit margin for the three months ended June 30, 2011 was 63.00%, slightly lower than 69.45% for the same quarter last year. We anticipate that our gross margin in the air-ticketing segment will be stable and improve in the foreseeable future.

Gross profit in our hotel reservation segment was $2,532,466 for the quarter ended June 30, 2011 compared to $2,450,861 for the same quarter last year, an increase of $81,605, or approximately 3.33%. Gross profit margin in this segment for the three months ended June 30, 2011 was 93.94%, compared to 71.41% for the same quarter last year, an increase of 22.53%. The increase in gross profit margin is due to our new strategy to focus on more profitable direct sales in the second quarter this year.

Gross profit in our packaged tour segment was $3,054,005 for the three months ended June 30, 2011 compared to $2,948,866 for the same quarter last year, an increase of $105,139, or approximately 3.57%. Gross profit margin in this segment for the quarter ended June 30, 2011 was 12.15% compared to 12.48% for the same quarter last year, a decrease of 0.33%. The stability in gross margin for this segment was mainly attributable to improved profit margins from our 2010 acquired subsidiaries into this segment. We believe that our strong local contacts and networks established through our subsidiaries are critical in our nationwide expansion strategy.

 
23

 

Our air-ticketing and hotel reservations have much higher gross margin than our packaged tour business primarily because our revenues from air-ticketing and hotel reservation are the commissions we generated. Our costs of service are mainly costs relating to systems and related technologies used in operations, costs associated with payment processing, and allocation of costs of labor and facilities, communications, and utility expenses, which all together are not substantial, while costs of services for the packaged tours include meals, transportation (airline tickets, train tickets and car rental), lodging, airport transfers, tickets to local attractions and tours, that all together are much substantial variables and fixed overheads.

Consolidated gross margin for the three months ended June 30, 2011 came in at 26.62%, a 0.77% slight decrease from the 27.40% in the same quarter last year. The stability in gross margin is mainly due to integration among segments and as our strategy increased focus on online development.

Selling, General and Administrative Expenses

Major selling, general, and administrative expenses for the three months ended June 30, 2011 and 2010 are as follows:

  
 
For the three months ended June 30,
   
Increase /
       
  
 
2011
   
2010
   
(Decrease)
   
Percentage
 
Salary and commission
  $ 385,447     $ 401,699     $ (16,252 )     -4.05 %
Marketing
    171,176       103,815       67,361       64.89 %
Rent
    102,490       89,759       12,731       14.18 %
Depreciation and amortization
    269,146       435,821       (166,675 )     -38.24 %
Professional fees
    599,272       394,245       205,027       52.01 %
Stock-based compensation
    720,241       340,372       379,869       111.60 %
Other general and administrative expenses
    325,642       311,486       14,156       4.54 %
Total
  $ 2,573,414     $ 2,077,197     $ 496,217       23.89 %

Selling, general and administrative expenses totaled $2,573,414 for the three months ended June 30, 2011 compared to $2,077,197 for the same quarter last year, an increase of $496,217, or approximately 23.89%.

Selling, general and administrative expenses were approximately 7.83% of revenue for the three months ended June 30, 2011 as compared to 6.52% for the same quarter last year. General increase in selling, general and administrative expenses are in connection with the growth in business operations during the second quarter of 2011, as compared to the same quarter last year. During the second quarter of 2011, we incurred extra professional fees, more rent expenses, less depreciation expenses than the same quarter last year, and higher stock based compensation for 2010 incentive stock plan. To promote our businesses, especially air ticketing business, we spent $272,900 on advertisements on popular Chinese websites in the second quarter of 2011, while we did not incur so much for the same quarter last year.

Other Income (Expenses)

Gain on change in fair value of derivative liability for the three months ended June 30, 2011 was $95,404 compared to $839,553 for the same quarter last year. The Company adopted Derivative and Hedging, ASC 815-40 effective January 1, 2009. The warrants issued in connection with the Securities Purchase Agreement dated August 28, 2008 were reclassified from equity to derivative liability and marked to market. Therefore, the Company recorded a gain on change in fair value of derivative liability of $95,404 on June 30, 2011 to mark to market for the decrease in fair value of the warrants from April 1, 2011 to June 30, 2011.
 
 
24

 
 
Net Income

Net income was $4,441,773, or 13.52% of revenues for the three months ended June 30, 2011, compared to $5,730,578, or 17.98% of revenues for the same quarter last year, a decrease of $1,288,805, or 22.49%. The decrease in net income is mostly associated with increased selling, general and administrative expenses for expanding our business and decreased non-cash gain on change in fair value of derivative liability.

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

The following table presents certain consolidated statement of operations information derived from the consolidated statements of income for the six months ended June 30, 2011 and 2010 respectively.

   
Six months ended
   
Six months ended
   
Increase /
       
   
June 30, 2011
   
June 30, 2010
   
(Decrease)
   
Percentage
 
Revenues
                       
Air ticketing, net
  $ 10,280,773     $ 8,702,488     $ 1,578,285       18.14 %
Hotel reservation, net
    6,389,731       6,462,123       (72,392 )     -1.12 %
Packaged tours, gross
    49,986,767       37,127,291       12,859,476       34.64 %
      66,657,271       52,291,902       14,365,369       27.47 %
Cost of services
                               
Air ticketing, net
    3,773,987       2,833,290       940,697       33.20 %
Hotel reservation, net
    1,537,696       1,979,573       (441,877 )     -22.32 %
Packaged tours, gross
    43,721,220       32,491,924       11,229,296       34.56 %
      49,032,903       37,304,787       11,728,116       31.44 %
                                 
Gross Profit
    17,624,368       14,987,115       2,637,253       17.60 %
                                 
Selling, general and administrative expenses
    (5,571,512 )     (3,643,184 )     1,928,328       52.93 %
Income from operations
    12,052,856       11,343,931       708,925       6.25 %
                                 
Other income (expense)
                               
Other income (expense)
    (17,502 )     6,917       (24,419 )     -353.03 %
Gain on change of fair value of derivative liabilities
    445,216       949,004       (503,788 )     -53.09 %
Interest income
    234,821       38,711       196,110       506.60 %
Total other income
    662,535       994,632       (332,097 )     -33.39 %
                                 
Income before income taxes
    12,715,391       12,338,563       376,828       3.05 %
                                 
Provision for income taxes
    3,818,088       3,061,550       756,538       24.71 %
Net Income
  $ 8,897,303     $ 9,277,013     $ (379,710 )     -4.09 %

For the six months ended June 30, 2011:
 
    
Air
   
(%) of
   
Hotel
   
(%) of
   
Packaged
   
(%) of
       
Revenue Segment
 
Ticketing
   
sector
   
Reservation
   
sector
   
Tours
   
sector
   
Total
 
Revenue
  $ 10,280,773       15.42 %   $ 6,389,731       9.59 %   $ 49,986,767       74.99 %   $ 66,657,271  
Cost of Services
    (3,773,987 )     7.70 %     (1,537,696 )     3.14 %     (43,721,220 )     89.17 %     (49,032,903 )
Gross Profit
  $ 6,506,786       36.92 %   $ 4,852,035       27.53 %   $ 6,265,547       35.55 %   $