EROOMSYSTEM TECHNOLOGIES INC - FORM 10-Q

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EX-32.1 - EROOMSYSTEM TECHNOLOGIES INC	ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ To __________

Commission file number 000-31037

eRoomSystem Technologies, Inc.

(Name of small business issuer in its charter)

Nevada	87-0540713
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1072 Madison Ave., Lakewood, NJ	08701
(Address and telephone number of principal executive offices)	(Zip Code)

Issuer’s telephone number: (732) 730-0116

Indicate by check mark whether the registrant (1) filed all 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 proceeding 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer ¨

Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

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

The number of shares of the issuer’s common stock issued and outstanding as of May 14, 2012 was 23,982,865 shares.

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EROOMSYSTEM TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		1

Item 1.	Financial Statement	1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	8

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12

Item 4.	Controls and Procedures	12

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	13

Item 1A.	Risk Factors	13

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13

Item 3.	Defaults Upon Senior Securities	13

Item 4.	Removed and Reserved	13

Item 5.	Other Information	13

Item 6.	Exhibits	13

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31,			December 31,
	2012			2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,096,634		$	2,191,396
Investment in equity securities available for sale		2,267			1,700
Investment in real property tax liens		26,877			29,027
Accounts receivable, net of allowance for doubtful accounts of $10,852 at March 31, 2012 and $10,260 at December 31, 2011		61,493			58,143
Inventory		161,202			170,423
Prepaid expenses		27,461			7,855
Total Current Assets		2,375,934			2,458,544
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation of $53,544 at March 31, 2012 and $47,267 at December 31, 2011		133,079			132,835
NOTE RECEIVABLE		487,397			500,000
DEPOSITS		3,183			3,183
Total Assets	$	2,999,593		$	3,094,562

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	23,862		$	15,502
Accrued liabilities		59,834			100,378
Customer deposits		2,004			2,004
Total Current Liabilities		85,700			117,884
Total Liabilities		85,700			117,884
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none outstanding		-			-
Common stock, $0.001 par value; 50,000,000 shares authorized; shares outstanding 23,982,865 at March 31, 2012 and 23,982,865 at December 31, 2011		23,983			23,983
Additional paid-in capital		34,171,722			34,169,735
Accumulated deficit		(31,284,079	)		(31,218,740	)
Accumulated other comprehensive gain		2,267			1,700
Total Stockholders' Equity		2,913,893			2,976,678

Total Liabilities and Stockholders' Equity	$	2,999,593		$	3,094,562

See accompanying notes to condensed consolidated financial statements

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Three Months Ended March 31,	2012			2011

REVENUE AND INVESTMENT INCOME
Product sales	$	124,091		$	146,114
Maintenance fees		36,512			44,381
Interest income		3,593			27,743
Total Revenue and Investment Income		164,196			218,238
COST OF REVENUE
Product sales		78,145			81,509
Maintenance		7,171			2,740
Total Cost of Revenue		85,316			84,249
GROSS MARGIN		78,880			133,989

OPERATING EXPENSES
Selling, general and administrative expense, including non-cash compensation of $1,987 and $0, respectively		113,872			97,428
Research and development expense		30,347			25,753
Net Operating Expenses		144,219			123,181
Net Income (Loss)		(65,339	)		10,808
OTHER COMPREHENSIVE GAIN (LOSS)
Unrealized gain (loss) on investment		567			(18,700	)
Comprehensive Loss	$	(64,772	)	$	(7,892	)
Basic Earnings Per Common Share	$	0.00		$	0.00
Diluted Earnings Per Common Share	$	0.00		$	0.00

See accompanying notes to condensed consolidated financial statements

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Three Months Ended March 31,	2012			2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(65,339	)	$	10,808
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		6,277			6,937
Non-cash compensation expense		1,987			-
Changes in operating assets and liabilities:
Accounts receivable		(3,350	)		44,893
Inventory		6,686			10,542
Advance to supplier		-			48,678
Prepaid expenses		(19,606	)		(12,214	)
Accounts payable		8,360			(7,765	)
Accrued liabilities		(40,544	)		(34,267	)
Other payable		-			5,613
Net Cash Provided By (Used In) Operating Activities		(105,529	)		73,225

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(3,986	)		-
Purchase of investments in real property tax liens		-			(709	)
Proceeds from collections of real property tax liens		2,150			7,392
Proceeds from collection of note receivable		12,603			-
Net Cash Provided by Investing Activities		10,767			6,683

CASH FLOWS FROM FINANCING ACTIVITIES		-			-

Net Increase (Decrease) in Cash		(94,762	)		79,908

Cash and cash equivalents at Beginning of Period		2,191,396			2,145,709

Cash and cash equivalents at End of Period	$	2,096,634		$	2,225,617

See accompanying notes to condensed consolidated financial statements

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Condensed Financial Statements - The accompanying unaudited condensed consolidated financial statements include the accounts of eRoomSystem Technologies, Inc. and its wholly-owned subsidiaries (the "Company"). Intercompany accounts and transactions have been eliminated in consolidation. These financial statements are condensed and, therefore, do not include all disclosures normally required by generally accepted accounting principles. These statements should be read in conjunction with the Company's annual financial statements for the fiscal year ended December 31, 2011 included in the Company's Annual Report on Form 10-K. In particular, the Company's organization, nature of operations and significant accounting principles were presented in Note 1 to the consolidated financial statements in that annual report. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements and consist of only normal recurring adjustments. The results of operations presented in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.

Cash and Cash Equivalents – Cash and cash equivalents include highly-liquid debt investments with original maturities of three months or less, readily convertible to known amounts of cash.

Inventory - The Company maintains an inventory of product that is sold in the refreshment centers in a number of hotels. The inventory is purchased as finished goods and is valued using the first in, first out method.

Net Earnings (Loss) per Common Share - Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings (loss) per common share is computed by dividing net income (loss), adjusted to add back interest associated with convertible debt, by the weighted-average number of common shares and dilutive potential common share equivalents outstanding. When dilutive, the incremental potential common shares issuable upon exercise of stock options are determined by the treasury stock method.

The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted weighted-average common shares outstanding for the three months ended March 31, 2012 and 2011:

For the Three Months Ended March 31,	2012			2011
Basic net income	$	(65,339	)	$	10,808
Diluted net income	$	(65,339	)	$	10,808
Basic weighted-average common shares outstanding		23,982,865			23,907,865
Effect of dilutive securities
Stock options and warrants		-			19,093
Diluted weighted-average common shares outstanding		23,982,865			23,926,958
Basic earnings/(loss) per share	$	0.00		$	0.00
Diluted earnings/(loss) per share	$	0.00		$	0.00

During the three months ended March 31, 2012 and 2011, there were 1,868,751 and 2,130,344 respectively of potential common stock equivalents from options and warrants that were not included in the computation of diluted loss per share because their effect would have been anti-dilutive.

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NOTE 2 – INVESTMENTS

Investment in Equity Securities Available for Sale – As discussed further in Note 3, the Company was issued 50,000 shares of stock in Blackbird Corporation in July 2008. On June 7, 2010, Blackbird entered into a share exchange with RPID later renamed Spot Mobile International Ltd (“Spot Mobile”). The 50,000 shares of common stock of Blackbird were exchanged for 1,700,000 restricted shares of common stock of Spot Mobile. The Spot Mobile shares were reverse split in October 2010 to 56,667 shares. The Company recorded a $18,700 unrealized loss on the investment in Spot Mobile during the three months ended March 31, 2011. The Company recorded a $567 unrealized gain on the investment in Spot Mobile during the three months ended March 31, 2012, which is included in other comprehensive gain (loss).

Investments in equity securities as of March 31, 2012 are summarized below:

Equity Securities		Cost Basis				Unrealized Gains				Unrealized Losses				Fair Value
Spot Mobile		$	-			$	2,267			$	-			$	2,267

At March 31, 2012, accumulated other comprehensive loss consisted solely of the unrealized holding loss from the investment in Spot Mobile.

Investment in Real Property Tax Liens –Total purchases of real property tax liens through March 31, 2012 were $127,902. Through March 31, 2012, the Company collected $100,775 in tax lien settlements. The New Jersey municipal tax liens are receivable from the real property owners and are secured by a first priority lien on the related real property. Upon foreclosure, the Company would obtain ownership of the real property. The tax lien receivables accrue interest up to 18% per annum, accrue penalties at 2% to 6% per annum and are also increased by the amount of any collection expenses incurred. The investment in the real property tax liens are accounted for as an investment in troubled debts and are carried at cost. Collection of interest, penalties and expense reimbursements is not certain and is recognized upon being realized.

NOTE 3 - NOTE RECEIVABLE

On July 24, 2008, the Company loaned $500,000 to BlackBird Corporation (“BlackBird”) under the terms of a 10% senior secured convertible promissory note (the “Secured Note”). The Secured Note bore interest at 10% per annum, payable quarterly, and was due June 30, 2009. In addition, BlackBird issued 50,000 shares of its common stock to the Company. On the date of issuance, the fair value of BlackBird’s common stock was not determinable and the shares were valued at zero. BlackBird further agreed in July 2008, notwithstanding the terms of the note, if the loan was not repaid by January 1, 2009, interest on the note would accrue at 18% per annum starting January 1, 2009. The Secured Note was not paid by January 1, 2009 and it continued to accrue interest at 18% per annum. On April 1, 2011, the Company agreed to extend the due date of the Secured Note to June 30, 2011.

BlackBird did not pay its interest payment for the second quarter of 2011 in a timely fashion. On November 3, 2011, the Company entered into a forbearance agreement with BlackBird to reduce the interest rate on the Secured Note to 10% retroactive to April 1, 2011 and to not foreclose on BlackBird’s assets if BlackBird remains in compliance with the terms of the agreement. As part of this agreement, BlackBird agreed to pay all outstanding interest due on the loan through September 30, 2011 by November 11, 2011. BlackBird also agreed to make monthly interest payments within 10 days after the end of each month. The outstanding accrued interest of $25,069 as of September 30, 2011 was paid in full on November 10, 2011.

The concession granted to BlackBird on November 3, 2011 constituted a troubled debt restructuring under current accounting guidance. As a result, the note was classified as a long-term asset. Interest income under the terms of the Secured Note is no longer being recognized until the carrying value has been recovered, and payments received are recognized as a reduction of the carrying value of the note. After the receipt of the $12,603 payment in January 2012, the carrying value of the note receivable was $487,397 at March 31, 2012.

The note receivable was evaluated for impairment and the Company determined that it is likely that estimated future payments from BlackBird or the cash flows from BlackBird’s operations and the value of the underlying collateral is sufficient that upon foreclosure the Company would be able to realize the carrying value of the note. If BlackBird fails to comply with the terms of the agreement dated November 3, 2011, the Company plans on foreclosing on the underlying collateral to collect on the note. Therefore no impairment was recognized during the three months ended March 31, 2012.

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The note receivable is assessed for impairment on a quarterly basis. If projections were to indicate that the carrying value of the promissory note was not recoverable, the carrying value would be reduced by the estimated excess of the carrying value over the projected discounted cash flows. The evaluations are based on the estimated projected discounted cash flows from BlackBird and from the liquidation value of the underlying collateral.

Management has estimated that the fair value of the note receivable at March 31, 2012 was approximately $414,000.

NOTE 4 - FAIR VALUE MEASUREMENTS

Generally accepted accounting principles define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. Fair value is also used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values. Fair value is also used when evaluating impairment on certain assets, including goodwill, intangibles, and long-lived assets.

Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at March 31, 2012.

Investment in Equity Securities Available for Sale – The investment in equity securities available for sale is based on quoted prices in active markets for identical assets.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following tables set forth by level, within the fair value hierarchy, the estimated fair values of the Company’s financial assets measured on a recurring basis as of March 31, 2012:

	Level 1		Level 2		Level 3		Total
Investment in Equity Securities
Available for Sale	$	2,267	$	-	$	-	$	2,267

Total Assets Measured at Fair Value	$	2,267	$	-	$	-	$	2,267

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NOTE 5 - STOCKHOLDERS’ EQUITY

During the three months ended March 31, 2012, the Company granted options to purchase 25,000 shares of common stock to an employee for services rendered. These options, which vested immediately, have an exercise price of $0.10 per share and are exercisable through February 22, 2017. These options were valued at approximately $0.08 per share, or $1,987, using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 1.41%, dividend yield of 0.0%, volatility of 111% and expected life of 5 years. No options to purchase shares of common stock were issued in 2011.

During the three months ended March 31, 2012, 695 options to purchase shares of common stock expired.

Compensation expense relating to stock options of $1,987 was recognized during the three months ended March 31, 2012.

There was no unrecognized compensation related to stock options at March 31, 2011.

A summary of stock option and warrant activity for the three months ended March 31, 2012 is as follows:

	Options and Warrants			Exercise Price Range					Weighted - Average Exercise Price
Balance, December 31, 2011		1,844,446		$	0.10	-	$	1.55	$	0.33
Granted		25,000			0.10	-		0.10		0.10
Expired		(695	)		1.55	-		1.55		1.55
Balance, March 31, 2012		1,868,751			0.10	-		0.91		0.33

Weighted-average fair value of options granted during the three months ended March 31, 2012									$	0.08

A summary of options and warrants outstanding and exercisable at March 31, 2012 is as follows:

		Outstanding							Exercisable
Range of Exercise Prices		Number Outstanding		Weighted - Average Remaining Contractual Life	Weighted - Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable		Weighted - Average Exercise Price		Aggregate Intrinsic Value
$	0.10 - 0.37		1,855,803	0.80 years	$	0.33	$	900		1,855,803	$	0.33	$	900
	0.90 - 0.91		12,948	0.24 years		0.90		-		12,948		0.90		-
$	0.10 - 0.91		1,868,751	0.80 years	$	0.33	$	900		1,868,751	$	0.33	$	900

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

As used in this Form 10-Q, references to the "Company," "we," “our” or "us" refer to eRoomSystem Technologies, Inc. and subsidiaries, unless the context otherwise indicates.

This Management’s Discussion and Analysis or Plan of Operations (“MD&A”) section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and financial condition, and certain factors that may affect our future results. You should read this MD&A in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report.

Forward-Looking Statements

This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues, and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, the continued growth of the lodging industry, the success of our product-development, marketing and sales activities, vigorous competition in the lodging industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.

Overview

Our core business is the development and installation of an intelligent, in-room computer platform and communications network, or the eRoomSystem, for the lodging industry. The eRoomSystem is a computerized platform and processor-based system designed to collect and control data. The eRoomSystem supports our fully automated and interactive eRoomServ refreshment centers, eRoomSafes, eRoomEnergy products, and the eRoomTray. In 2005, we commenced our diversification strategy of investing in third party emerging growth companies. In 2009, we purchased Kooltech refreshment centers that were installed in various hotels from CPC. We may make additional investments in promising emerging growth companies, and potentially acquire an operating company if the opportunity arises.

On July 24, 2008, we provided a secured loan of $500,000 to BlackBird Corporation, a Florida corporation (“BlackBird”), an unrelated entity. The funding of the loan took place on completion of a transaction by BlackBird to acquire an unrelated company, USA Datanet Corporation. The acquisition took place on July 24, 2008. The loan is evidenced by a 10% senior secured convertible promissory note, made by BlackBird (the “Secured Note”). The Secured Note matured on June 30, 2009 and the interest rate increased to 18% annually as of January 1, 2009, with interest payable quarterly on the last business day of each quarter. An extension to the note was provided through June 30, 2011 at an interest rate of 18%. Blackbird is presently in default of its obligations under the note due to non-payment. In light of BlackBird’s inability to make payments as due, the Company agreed to lower the interest rate on the Secured Note to 10%. BlackBird is current with their interest payments as of May 14, 2012.

On June 17, 2009, the Company purchased the assets of Kooltech SPE which had been acquired by Cardinal Pointe Capital (“CPC”). CPC sold the minibars, baskets and stock owned by Kooltech SPE to the Company. The Company formed a subsidiary, eFridge, LLC (“eFridge”) for the purposes of this purchase. The purchase price was an amount equal to thirty percent (30%) of eFridge’s EBITDA and an amount equal to thirty percent (30%) of New Equipment Cash Flow. Payment of the Purchase Price was to be made by eFridge to CPC on a monthly basis within twenty days after the end of each month, based on the eFridge’s EBITDA for the month then ended. On June 29, 2011, the Company reached a final settlement of any and all obligations under the agreement.

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Our existing products interface with the hotel's property management system through our eRoomSystem communications network. The hotel's property management system posts usage of our products directly to the hotel guest's room account. The solutions offered by our eRoomSystem and related products have allowed us to install our products and services in several premier hotel chains, including Marriott International, Hilton Hotels and Carlson Hospitality Worldwide, in the United States and internationally.

One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected several million room-nights of data. Through our eRoomSystem, we are able to collect information regarding the usage of our products on a real-time basis. We use this information to help our customers increase their operating efficiencies.

Liquidity and Capital Resources

At March 31, 2012, our principal sources of liquidity consisted of $2,096,634 of cash and working capital of $2,290,234, as compared to $2,191,396 of cash and working capital of $2,340,660 at December 31, 2011. In addition, our stockholders' equity was $2,913,893 at March 31, 2012, compared to stockholders' equity of $2,976,678 at December 31, 2011, a decrease of $62,785. The decrease in cash primarily reflects for the most part the net loss during the three months ended March 31, 2012.

Our accumulated deficit increased from $31,218,740 at December 31, 2011 to $31,284,079 at March 31, 2012. The $65,339 increase in accumulated deficit resulted directly from the net loss realized for the three months ended March 31, 2012.

Cash flow used in operations for the three months ended March 31, 2012 was $105,529 as compared to $73,225 provided in the same period ended March 31, 2011.

Investing activities for the three months ended March 31, 2012 provided net cash of $10,767, compared to $6,683 of net cash provided during the three months ended March 31, 2011.

There were no financing activities in the three months ended March 31, 2012 and 2011.

Results of Operations

Description of Revenues

Historically, we have received most of our revenues from the sale or placement under a revenue-sharing program of our products in hotels. More recently we have purchased minibars and baskets already placed in hotels and setup a turnkey solution at these hotels. In these hotels we receive most of the revenues for the product sold in the minibars and baskets. We provide 3-5% of revenues to some of the hotels. We expect that these revenues will account for a substantial majority of our revenues for the foreseeable future. We also generate revenues from maintenance and support services relating to our existing installed products.

Our dependence on the lodging industry, including its guests, makes us extremely vulnerable to downturns in the lodging industry caused by the general economic environment. Such a downturn could result in fewer purchases by hotel guests of goods and services from our products installed in hotels, and accordingly lower revenues where our products are placed pursuant to a turnkey agreement. Time spent by individuals on travel and leisure is often discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of our operations depends, in part, upon discretionary consumer spending and economic conditions affecting disposable consumer income such as employment, wages and salaries, business conditions, interest rates, and availability of credit and taxation.

We continuously explore opportunities and perform due diligence on third parties with respect to potential investments. At this time, we have not reached a definitive agreement to make further investments. In addition, we may acquire an operating company in the future if the opportunity arises. The timing and return on such investments, however, cannot be assured.

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Revenue Recognition

Equipment sales revenue from our products is recognized upon completion of installation and acceptance by the customer. Sales revenue for product in the minibars that we sell under a turnkey solution is recognized upon completion of the sale.

We have entered into installation, maintenance and license agreements with most of our existing hotel customers. Installation, maintenance and license revenues are recognized as the services are performed, or pro rata over the service period. We defer all revenue paid in advance relating to future services and products not yet installed and accepted by our customers.

Our installation, maintenance and license agreements stipulate that we collect a maintenance fee per eRoomServ refreshment center per day, payable on a monthly basis. Our objective is to generate gross profit margins of approximately 50% from our maintenance-related revenues. We base this objective on our historical cost of maintenance of approximately $0.04 per unit per day and, pursuant to our maintenance agreements, our projected receipt of generally not less than $0.08 per unit per day. There can be no assurance that such costs will not increase and that our objective will be met.

Description of Expenses

Cost of product sales consists primarily of cost of goods and labor as well as remaining basis on the sale of old refreshment centers. We capitalize the production, shipping, installation and sales commissions related to the eRoomServ refreshment centers, eRoomSafes, eRoomTrays and eRoomEnergy management products placed under revenue-sharing agreements. Cost of maintenance fee revenues primarily consists of expenses related to customer support and maintenance.

Selling, general and administrative expenses primarily consist of general and administrative expenses including professional fees, salaries and related costs for accounting, administration, finance, human resources, information systems and legal personnel.

Research and development expenses consist of payroll and related costs for hardware and software engineers, quality assurance specialists, management personnel, and the costs of materials used by our consultants in the maintenance of our existing installed products as well as research and development for new products. Research and development expenses in the three months ended March 31, 2012 and 2011 were $30,347 and $25,753, respectively.

In accordance with generally accepted accounting principles development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our condensed consolidated statements of operations.

Comparison of Three Months Ended March 31, 2012 and 2011

Revenues

Product Sales — Revenue from product sales was $124,091 for the three months ended March 31, 2012, compared to $146,114 for the three months ended March 31, 2011, representing a decrease of $22,023, or 15.1%. The decrease in product sales revenues related to fluctuations of product sales from the minibars.

Maintenance Fees— Maintenance fees were $36,512 for the three months ended March 31, 2012, compared to $44,381 for the three months ended March 31, 2011, representing a decrease of $7,869, or 17.7%. The decrease in maintenance fee revenue related to the termination of hotels’ maintenance services.

Interest — Our income from interest was $3,593 for the three months ended March 31, 2012, compared to $27,743 for the three months ended March 31, 2011, representing a decrease of $24,150, or 87%. The decrease in interest income related to accounting for the interest paid on the Secured Note from BlackBird Corporation as a payment of principal.

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Cost of Revenue

Cost of Product Sales Revenue — Our cost of product sales revenue for the three months ended March 31, 2012 was $78,145, compared to $81,509 for the three months ended March 31, 2011, a decrease of $3,364, or 4.1%. The decrease in cost of product sales revenue relates to the decrease in product sales since March 31, 2011.

Cost of Maintenance Revenue — Our cost of maintenance revenue was $7,171 for the three months ended March 31, 2012, compared to $2,740 for the three months ended March 31, 2011, representing an increase of $4,431, or 161.7%. The increase in our cost of maintenance fee revenue related to replacement of some aging equipment.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended March 31, 2012 and 2011 are summarized as follows:

	For the Three Months
	Ended March 31,
	2012		2011		Change			Percent Change
REVENUE
Product sales	$	124,091	$	146,114	$	(22,023	)		-15.1	%
Maintenance fees		36,512		44,381		(7,869	)		-17.7	%
Interest income		3,593		27,743		(24,150	)		-87.0	%
Total Revenue		164,196		218,238		(54,042	)		-24.8	%


COST OF REVENUE
Product sales		78,145		81,509		(3,364	)		-4.1	%
Maintenance fees		7,171		2,740		4,431			161.7	%
Total Cost of Revenue	$	85,316	$	84,249	$	1,067			1.3	%

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the three months ended March 31, 2012 and 2011, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Operating Expenses

Selling, General and Administrative — Selling, general and administrative expenses, including non-cash compensation expense, were $113,872 for the three months ended March 31, 2012, compared to $97,428 for the three months ended March 31, 2011, representing an increase of $16,444, or 16.9%. The difference was due in part to the increase in bad debt expense.

Research and Development—Research and development expenses were $30,347 for the three months ended March 31, 2012, compared to $25,753 for the three months ended March 31, 2011 representing an increase of $4,594 or 17.1%. The increase was due to a step-up in research and development during the three months ended March 31, 2012.

Net Income (Loss) Attributable to Common Stockholders

We realized a net loss of $65,339 for the three months ended March 31, 2012, compared to a net income of $10,808 during the three months ended March 31, 2011. The $76,147 decrease in net income during the three months ended March 31, 2012 related primarily to the decrease in revenue during the three months ended March 31, 2012.

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Contractual Cash Obligations and Commercial Commitments

There were no significant contractual cash obligations or commercial commitments either on or off balance sheet as of March 31, 2012.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer has reviewed the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q and have concluded that the disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.

Item 1A. Risk Factors

A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.

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

None

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Removed and Reserved

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit No.	Description
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

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

	eRoomSystem Technologies, Inc.
	(Registrant)

Date: May 15, 2012
	By:	/s/ David A. Gestetner
	Name:	David A. Gestetner
	Title:	President, Chief Executive Officer, Secretary,
		and Chairman of the Board
		(Principal Executive, Financial, and Accounting Officer)

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