Summary of ULTITEK LTD - Yahoo! Finance

Item 2. Management's Discussion and Analysis or Plan of Operation

Forward-Looking Statements

This Report contains statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report regarding the prospects of our industry or our prospects, plans, financial position or business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as "may," "will," "expect," "intend," "estimate," "foresee," "project," "anticipate," "believe," "plans," "forecasts," "continue" or "could" or the negatives of these terms or variations of them or similar terms. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions 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 any forward-looking statements contained herein, which reflect management's opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Report.

Business Overview

We are engaged in the licensing and management of our multi-purpose software system, known as the Ultitek System, to airlines located in Russia and its provinces. Our software is used by airlines to manage their reservation, global distribution and operating systems. We conduct our operations through our wholly-owned subsidiary, Transport Automation Information Systems, or TAIS. We currently operate our business in Russia.

We were originally incorporated in Delaware on January 11, 2005. On March 11, 2005, we changed our state of incorporation to Nevada. Also on March 11, 2005, we entered into a share exchange agreement with Transport Automation Information Systems (TAIS) pursuant to which we exchanged 15 million (15,000,000) shares of our common stock for all of the issued and outstanding TAIS shares, making TAIS our wholly-owned subsidiary.

Through TAIS, we own and operate the Ultitek System consisting of a Computerized Reservation System, a Global Distribution System, and operation systems for the airlines, to be marketed worldwide. Prior to our merger with TAIS, we were a non-operating "shell" corporation.

Our Principal Products and Services

We license and manage the Ultitek System which is a completely independent reservation, global distribution, and airline operation system. Historically, airline computer reservation systems and global travel distribution systems have been partly or completely owned and hosted by a few large airlines. The remaining smaller airlines are guests using these systems and have their information stored on the system hosted by a competitor who charges significant user fees while accumulating proprietary and confidential information of the guest airline. Currently, there are approximately ten large airlines with their own systems which host approximately 990 regional, mid-size and smaller airlines. Our system provides these airlines a state-of-the-art system which we believe is efficient, less costly and which allows such airlines to retain their respective proprietary information databases.

The Ultitek System consists of the following systems:

· Computerized Reservation System ("CRS"). The Computer Reservations System is the module primarily designed to maintain an airline's seat inventory and to assist travel agencies in booking seats and other travel. Our Computerized Reservation System has a wide range of travel agency solutions with an easy graphical interface including tools to run a travel agency productively.

· Global Distribution System ("GDS"). The Global Distribution System is designed to disseminate flight schedules, seating availability, and pricing information electronically to customers. Modules provide solutions that meet the booking needs of travel agencies or in-house corporate travel departments.

· Airline Operations System ("AOS"). The Airline Operations System allows a subscriber airline to manage every aspect of the airline's operations, which makes the Ultitek System a complete solution.

· Departure Control System ("DCS"). The Departure Control System controls passenger registration and identification, boarding passes and seating assignments.

The Ultitek System also includes:

(a) a complete accounting system, including revenue management, yield management, accounts payable, accounts receivable, general ledger and cost accounting;

(b) inventory control for the number of seats available on a flight;

(d) maintenance;

(e) fixed assets;

(f) purchasing;

(g) airport departure control (including control of boarding passes);

(h) inter-airline clearing facility with electronic funds transfer;

(i) aircraft dispatching;

(j) crew management/scheduling;

(k) airplane equipment inventory;

(l) miscellaneous supplies and logistics;

(m) inter-city long haul bus station/scheduling/reservation system;

(n) reservations via Internet;

(o) theater tickets sales;

(p) multilingual features;

(q) access to hotel reservations;

(r) access to car rental reservations;

(s) access to other tour operators;

(t) frequent flyer programs; and

(u) charter airline management modules.

The Ultitek System is currently accredited by International Air Transport Association ("IATA") defined as a Computerized Reservation System and has an IATA designated code. The Ultitek System communicates with most distribution systems worldwide. The Ultitek System is currently available in English and Russian.

The Ultitek System also offers (i) compatibility with standard technologies to facilitate integration into any agency environment; (ii) travel documents, ranging from a single ticket for multi airline bookings to boarding passes, car vouchers, itinerary information, invoices and tickets; and (iii) a state-of-the-art, real time approach to distributed data-bases.

Travel agents and the general public have multiple communication paths with the Ultitek System, including internet access to each of the appropriate system modules all of which have security features allowing only authorized personnel to perform functions and access information based upon their security level. Seamless connectivity is a key to the Ultitek System. Currently, travel agents usually access a database that holds comprehensive information which is submitted and updated on a set schedule by travel providers. The Ultitek System enables agents to connect directly and seamlessly into a real-time system that has the most up-to-date information about availability, rates, conditions, etc.

Our Company provides a virtual private network based on the Internet. This feature allows Ultitek's Systems the ability to issue tickets for trips involving the subscriber airline or multiple airlines and act as a clearinghouse. Tickets may be issued as e-tickets, smart-card tickets, or via hard copy at a travel agency. This feature allows corporations to make their own reservations and issue tickets at the travel agency of their choice.

Communication capabilities are an important part of our product. There is a state-of-the-art virtual private network communications infrastructure for a global network. This design approach generates significant communications savings to the subscriber airline. All that is required is dual high-speed Internet connection. The Ultitek global network connections link providers and users. It is designed to support the massive, high-speed transmission of data, voice and video, with numerous back-up and security mechanisms to route data around the world. There is also a diverse array of promotional opportunities for airlines and tour operators, ranging from weather forecasts to destination city information.

Hardware sales are available and offered as a service, as requested by the subscriber.

GOING CONCERN

The financial statements included in this Quarterly Report have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business.

As shown in the accompanying financial statements, the Company incurred a net loss of $1,641,852 for the six months ended June 30, 2008 and had an accumulated deficit of $14,192,825 at June 30, 2008. Management's plans include the raising of capital through the equity markets to fund future operations, seeking additional acquisitions, and generating of revenue through its business. Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. However, the accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Recent Events

On November 9, 2007, the Company entered into a non-exclusive licensing agreement with the Ukrainian State Scientific Corporation "Kiev Institute of Automation" ("KIA"), to license to KIA its proprietary technology and to furnish to KIA a national Ukrainian reservation system. The term of the licensing agreement is five years, and is subject to automatic renewal.

Liquidity and Capital Resources

As of June 30, 2008, we had $13,319 cash on hand and had a net loss of $1,641,852 and there is substantial doubt about our ability to continue as a going concern. We have financed our operations to date from loans, the sale of equity securities and through revenues.

We do not expect to incur significant marketing or expansion expenses with respect to the sale of Ultitek Systems. Consequently, any significant increases in sales requirements will be predicated entirely upon the particular circumstances of each new agreement, and capital requirements will follow the same particular circumstance.

The level of cash flows we derive from operations will depend to a significant degree on our ability to license the Ultitek Systems. If we are unable to generate sufficient cash flows from operations, we will attempt to raise additional funds to cover the costs of operations through additional private or public offerings of debt or equity securities. There is no assurance that we will be able to raise additional funds. If we cannot, we will be forced to curtail our operations or possibly be forced to evaluate a sale or liquidation of our assets. Even if we are successful in raising additional funds, there is no assurance regarding the terms of any additional investment. Any future financing may involve substantial dilution to existing investors.

Results of Operations

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Our total revenue decreased by $3,135, or approximately 0.46%, from $686,293 for the three months ended June 30, 2007 to $683,158 for the three months ended June 30, 2008. This decrease was due to a minimal decrease in business from existing customers and a minimal decrease in attaining new licenses for difference modules over the three month period.

Our costs of revenue decreased by $31,601or approximately 4.9%, from $648,680 for the three months ended June 30, 2007 to $617,079 for the three months ended June 30, 2008. This decrease was primarily due to decreases in general overhead expenses over the three month period.

Our interest expense increased by $37,111 or approximately 190.06%, from $19,526 for the three months ended June 30, 2007 to $56,637 for the three months ended June 30, 2008. This increase was primarily due to an increase in borrowed funds.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Our total revenue increased by $222,786, or approximately 17.45%, from $1,277,044 for the six months ended June 30, 2007 to $1,499,830for the six months ended June 30, 2008. This increase was due to increased business from existing customers and attaining new licenses for different modules over the six month period.

Our costs of revenue increased by $175,161, or approximately 14.57%, from $1,202,285 for the six months ended June 30, 2007 to $1,377,446 for the six months ended June 30, 2008. This increase was primarily due to an increase in the cost of communications, an increase in salaries and general overhead expenses over the six month period.

Our selling, general and administrative expenses (SG&A) increased by $378,915, or approximately 36.64%, from $1,034,118 for the six months ended June 30, 2007 to $1,413,033 for the six months ended June 30, 2008. This increase was primarily due to stock based compensation of $782,000 for the six months ended June 30, 2007 versus $1,202,033 for the six months ended June 30, 2008.

Our interest expense increased by $39,368, or approximately 102.45%, from $38,428 for the six months ended June 30, 2007 to $77,796 for the six months ended June 30, 2008. This increase was primarily due to an increase in borrowed funds.

Research and Development

For the three months ended June 30, 2008, we spent approximately $160,011 in research and development, a decrease from $190,000 for the three months ended June 30, 2007. This decrease was due to cutbacks in research and development programs due to limited funding.

For the six months ended June 30, 2008, we spent approximately $250,011in research and development, a decrease from $340,000 for the six months ended June 30, 2007. This decrease was due to cutbacks in research and development programs due to limited funding.

As we implement our business strategy and grow our business, we expect to incur significant research and development expenses with respect to our software and anticipate significant changes in research and development for our software. Any significant increases in research and development will be predicated entirely upon the particular circumstances of any acquisitions that we make, including the state of development of the technology, the complexity and the requirement for modification or integration with other solutions.

Revenue Recognition

The Company derives revenue from the following sources: (i) software, which includes the sale of the Company's software licenses and (ii) services, which includes consulting and maintenance.

The Company's records revenue pursuant to the Statement of position No. 97-2, Software Revenue recognition, issued by the American Institute of Certified Public Accountants.

For software license arrangements that do not require significant modification or customization, we recognize new software license revenue when (i) we enter into a legally binding arrangement with a customer for the license of software;
(ii) we deliver the products; (iii) customer payment is deemed fixed and determinable and free of contingencies or significant uncertainties; and (iv) collection is probably. Substantially all of our new software license revenues are recognized in this manner.

Revenues from consulting services are generally recognized as the services are performed.

In certain consulting contracts, modifications to software may be accounted for based upon contract accounting using the completed contract method. Contract accounting is applied to any arrangement: (i) that includes milestones or customer specific acceptance criteria that maybe effect collection of software license fees; (ii) where services include significant modification or customization of software; or (iii) where software license payment is tied to the performance of consulting services.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies & Estimates

The following describes critical accounting policies and estimates:

Use of Estimates

It is important to note that when preparing the financial statements in conformity with U.S. generally accepted accounting principles, management is required to make certain estimates and assumptions that affect the amounts reported and disclosed in the financial statements and related notes. Actual results could differ if those estimates and assumptions approve to be incorrect.

On an ongoing basis, we evaluate our estimates, including those related to estimated customer life, used to determine the appropriate amortization period for deferred revenue and deferred costs associated with licensing fees, the useful lives of property and equipment as well as in U.S. dollar exchange rates with the Russian ruble, among others, as well as our estimates of the value of common stock for the purpose of determining stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Work in Progress

Work in progress represents consulting projects billable in accordance with the terms of a contract at specified stages of completion and consists of accumulated costs of materials and time charges not yet billed. To the extent that the terms are altered or our performance under these contracts is delayed, our estimates will be wrong and may impact when revenue is recognized.

Stock-Based Compensation

The Company accounts for stock based compensation using the fair value method.

Software Costs

Software development costs are accounted for in accordance with SFAS No. 86 "Accounting for the Costs of Computers, Software to be Sold, Leased, or Otherwise Marketed" and SOP No. 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."

Revenue Recognition

The Company derives revenue from the following sources: (1) software, which includes the sale of software license's, and (2) services, which includes consulting and maintenance.

The Company records revenue pursuant to SOP No. 97-2, "Software Revenue Recognition", issued by the AICPA.

For software license arrangements that do not require significant modification or customization, we recognized new software license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of software;
(2) we deliver the products; (3) customer payment is deemed fixed and determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Substantially all of our new software license revenues are recognized in this manner.

Revenues from consulting services are generally recognized as the services are performed.

In certain consulting contracts, modifications to software may be accounted for based upon contract accounting using the completed contract method. Contract accounting is applied to any arrangement: (1) that includes milestones or customer specific acceptance criteria that may effect collection of software license fees; (2) where services include significant modification or customization of software; or (3) where software license payment is tied to the performance of consulting services.

Foreign Currency Translation

The Company considers the Russian ruble to be its functional currency. Assets and liabilities were translated into U.S. dollars at the period end exchange rates. Statement of Operations amounts were translated using the average rate during the year. Gains and losses resulting from translating foreign currency financial statements were accumulated in other comprehensive income (loss), a separate component of stockholder's equity (deficit). Drastic fluctuations in the exchange rate of the U.S. dollar and the Russian ruble will affect our financial statements.