EROOMSYSTEM TECHNOLOGIES INC - FORM 10-Q

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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 September 30, 2014

¨ 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.

(Exact name of registrant as specified in its charter)

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

150 Airport Road, Suite 1200, Lakewood, NJ	08701
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (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 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 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 November 12, 2014 was 24,167,865 shares.

Table of Contents

EROOMSYSTEM TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13

Item 4.	Controls and Procedures	13

PART II - OTHER INFORMATION		14

Item 1.	Legal Proceedings	14

Item 1A.	Risk Factors	14

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14

Item 3.	Defaults Upon Senior Securities	14

Item 4.	Mine Safety Disclosures	14

Item 5.	Other Information	14

Item 6.	Exhibits	14

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30,			December 31,
	2014			2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,829,420		$	1,376,822
Investment in available for sale securities		23,418			22,734
Notes receivable, net of loan loss allowance of $22,500 and $0		381,500			402,000
Accounts receivable, net of allowance for doubtful accounts of $6,327 and $10,100		84,062			57,233
Inventory		63,220			28,237
Advance to hotels		61,501			46,418
Prepaid expenses		16,800			13,248
Total Current Assets		2,459,921			1,946,692
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation of $13,098 and $32,076		65,598			100,480
NOTE RECEIVABLE, non-performing		-			399,863
INVESTMENT IN REAL PROPERTY TAX LIENS		22,688			13,422
DEPOSITS		2,933			2,933
Total Assets	$	2,551,140		$	2,463,390

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	24,856		$	15,012
Accrued liabilities		45,203			75,633
Customer deposits		-			4,313
Total Current Liabilities		70,059			94,958
Total Liabilities		70,059			94,958
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 24,167,865 and 24,107,865		24,168			24,108
Additional paid-in capital		34,203,953			34,195,344
Accumulated deficit		(31,747,724	)		(31,851,020	)
Accumulated other comprehensive income		684			-
Total Stockholders' Equity		2,481,081			2,368,432

Total Liabilities and Stockholders' Equity	$	2,551,140		$	2,463,390

See accompanying notes to condensed consolidated financial statements.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

	For the three months ended September 30,						For the nine months ended September 30,
	2014			2013			2014			2013
REVENUE	$	198,051		$	145,239		$	577,632		$	416,953
COST OF REVENUE		97,838			100,997			303,364			232,811
GROSS MARGIN		100,213			44,242			274,268			184,142
OPERATING EXPENSES
Selling, general and administrative expense, including non-cash compensation of $600, $6,500, 8,669 and $9,668		98,224			88,732			324,183			259,280
Research and development expense		8,633			22,559			33,073			82,712
Net Operating Expenses		106,857			111,291			357,256			341,992
OTHER INCOME
Investment Income		15,973			10,060			186,284			15,430
Net Income (Loss)		9,329			(56,989	)		103,296			(142,420	)
Other Comprehensive Income (Loss)
Unrealized holding gain (loss)		(191	)		-			15,542			-
Reclassification to realized gain (included in net income)		-			-			(14,858	)		-
Comprehensive Income (Loss)	$	9,138		$	(56,989	)	$	103,980		$	(142,420	)
Basic Income (Loss) Per Common Share	$	0.00		$	(0.00	)	$	0.00		$	(0.01	)
Diluted Income (Loss) Per Common Share	$	0.00		$	(0.00	)	$	0.00		$	(0.01	)

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 nine months ended September 30,
	2014			2013

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	103,296		$	(142,420	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		8,138			12,772
Interest accrued on notes receivable		(2,000	)		-
Gain on sale of marketable securities		(14,858	)		-
Gain on sale of equipment		(850	)		-
Loss on writedown of equipment		33,645			-
Loss on writedown of note receivable		22,500			-
Loss on investment in certificate of deposit		-			2,168
Non-cash compensation expense		8,669			9,668
Changes in operating assets and liabilities:
Accounts receivable		(26,829	)		17,986
Inventory		(34,983	)		(71,490	)
Advance to hotels		(15,083	)		-
Prepaid expenses		(3,552	)		11,589
Accounts payable		9,844			(7,824	)
Accrued liabilities		(30,430	)		(33,360	)
Customer deposits		(4,313	)		-
Net Cash Provided By (Used In) Operating Activities		53,194			(200,911	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(6,901	)		(4,585	)
Purchase of investments in real property tax liens		(9,266	)		-
Purchase of marketable securites		(25,000	)		-
Proceeds from sale of equipment		850			-
Purchase of certificate of deposit		-			(25,000	)
Advances made under notes receivable		(250,000	)		(150,000	)
Proceeds from collection of note receivable		250,000			-
Proceeds from sale of marketable securities		39,858			-
Proceeds from collections of real property tax liens		-			12,845
Proceeds from collection of note receivable, non-performing		399,863			37,397
Net Cash Provided by (Used In) Investing Activities		399,404			(129,343	)

Net Increase (Decrease) in Cash		452,598			(330,254	)

Cash and cash equivalents at Beginning of Period		1,376,822			1,962,572

Cash and cash equivalents at End of Period	$	1,829,420		$	1,632,318

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, 2013 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 nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014.

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.

Investments in Debt and Equity Securities Available for Sale – Debt and equity securities available for sale include securities that can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in stockholders’ equity as accumulated other comprehensive income.

Accounts Receivable - Accounts receivable are stated at the historical carrying amount, net of write-offs and allowances. The Company has established an overall allowance based upon historical experience of 7% of the outstanding balance in addition to any specific customer collection issues identified by the Company. Uncollectible accounts receivable are written off when a settlement is reached or when the Company has determined that the balance will not be collected.

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.

Advances to Hotels – The Company makes advances to hotels for their purchases of alcoholic beverages. The hotels’ alcoholic beverages are placed in the Company’s refreshment centers and the advances are settled at the date the hotel customers purchase the beverages from the refreshment centers.

Notes Receivable - The notes receivable are stated at the historical carrying amount, less a loan loss allowance, and are evaluated for impairment. When projections indicate that the carrying value of the note is not recoverable, the carrying value will be reduced by the estimated excess of the carrying value over the projected discounted cash flows. A loan loss allowance was deemed necessary during 2014. No allowance was deemed necessary in 2013. The Company has evaluated the collectability of current notes receivable and believes the notes less the loan loss allowance are realizable as they are secured by the related real property and the estimated fair value of the real property is in excess of the carrying value of the notes and the estimated cost to foreclose and sell the real property. The Company has provided an allowance for loan losses against the carrying value of the notes receivable at September 30, 2014 in the amount of $22,500.

Investment in Real Property Tax Liens – The investments 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. The Company has evaluated the collectability of the tax liens and believes the investments are realizable over time as the first position liens are secured by the related real property and the estimated fair value of the real property is in excess of the carrying value of the tax liens and the estimated cost to foreclose and sell the real property. Therefore no impairment was recognized on the tax liens at September 30, 2014 and December 31, 2013.

Property and Equipment: Property and equipment consist primarily of eRoomServ refreshment centers and are stated at cost, less accumulated depreciation. Major additions and improvements are capitalized, while repairs and maintenance costs are expensed when incurred.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the second quarter 2014, the Company determined the need to reduce the carrying value of refreshment centers installed in hotel rooms to its estimated value. As a result, the cost of refreshment centers in the amount of $70,348 was written down in the amount of $33,645.

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), 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 loss per share for the three and nine months ended September 30, 2014 and 2013:

	For the three months ended September 30,					For the nine months ended September 30,
	2014		2013			2014		2013
Net income (loss)	$	9,329	$	(56,989	)	$	103,296	$	(142,420	)
Basic weighted-average common shares outstanding		24,164,278		24,106,235			24,146,326		24,074,165
Effect of dilutive securities
Stock options and warrants		1,471		-			1,023		-
Diluted weighted-average common shares outstanding		24,165,749		24,106,235			24,147,349		24,074,165
Basic income (loss) per share	$	0.00	$	(0.00	)	$	0.00	$	(0.01	)
Diluted income (loss) per share	$	0.00	$	(0.00	)	$	0.00	$	(0.01	)

During the three and nine months ended September 30, 2014, there were 267,500 of potential common stock equivalents from options were not included in the computation of diluted loss per share because their effect would have been anti-dilutive. During the three and nine months ended September 30, 2013, there were 542,500 respectively of potential common stock equivalents from options that were not included in the computation of diluted loss per share because their effect would have been anti-dilutive.

NOTE 2 – INVESTMENTS

Investment in Real Property Tax Liens – At September 30, 2014, the Company held $22,688 of real property tax liens, carried at lower of cost or estimated net realizable value, from various municipalities in New Jersey. During the nine months ended September 30, 2014, the Company purchased $9,266 of additional tax lien products and did not collect any tax lien settlements. During the nine months ended September 30, 2013, the Company did not purchase additional tax liens. 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% 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.

Investment in Available for Sale Debt Securities

Debt Securities		Cost Basis				Unrealized Gains				Unrealized Losses				Fair Value
Corporate Debt Securities		$	22,734			$	684			$	-			$	23,418

The corporate debt securities mature on August 31, 2018 and May 29, 2020.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 – NOTES RECEIVABLE

Non-Performing Loan

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. 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 was no longer being recognized until the carrying value would be recovered, and payments received were recognized as a reduction of the carrying value of the note. During second quarter 2014, the Secured Note was paid in full and interest income of $124,451 was recognized. The carrying value of the note receivable was $399,863 at December 31, 2013.

Notes Receivable

On June 25, 2013, the Company loaned $150,000 to a New York limited liability company under the terms of a one year 12% mortgage note. Interest is due and payable monthly. The entire principal amount was due and payable on the maturity date. The mortgage is collateralized by a commercial property. The Company intends to hold this note to maturity. The note was not paid on September 30, 2014, as previously extended. An additional extension was granted for the note to December 31, 2014. A loan loss allowance in the amount of $22,500 was recorded during the nine months ended September 30, 2014. The carrying amount of the note receivable of $127,500 approximates its fair value based on the estimated discounted cash flows under the current terms of the note.

On December 26, 2013, the Company loaned $250,000 to an individual under the terms of a one year 12% mortgage note. Interest is due and payable monthly. The entire principal amount was due and payable on the maturity date. The mortgage was collateralized by a commercial property. The loan was repaid in full during third quarter 2014.

On June 11, 2014, the Company loaned $250,000 to a New York limited liability company under the terms of a one year 12% mortgage note. Interest is due and payable monthly. The entire principal amount is due and payable on the maturity date. The mortgage is collateralized by a commercial property. The Company intends to hold this note to maturity. The carrying amount of the note receivable approximates its fair value based on its short-term maturity.

Accrued interest on notes receivable was $4,000 and $2,000 at September 30, 2014 and December 31, 2013, respectively, and was included in notes receivable in the accompanying condensed consolidated balance sheets.

NOTE 4 – STOCKHOLDERS’ EQUITY

During the nine months ended September 30, 2014, the Company granted options to purchase 75,000 shares of common stock to employees for services rendered. These options, which vested immediately, have an exercise price of $0.05 per share and are exercisable through March 24, 2019. These options were valued at approximately $0.04 per share, or $3,069, using the Black-Scholes option pricing model with the following assumptions: market value of the common stock of $0.05 per share, risk free interest rate of 1.76%, dividend yield of 0.0%, volatility of 117% and expected life of 5 years. The pricing model utilized the full life of the options as the Company generally has a low turnover rate of its employees.

During the nine months ended September 30, 2014 and 2013, 75,000 and 0 options to purchase shares of common stock expired, respectively.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock-based compensation expense relating to stock options of $3,069 and $3,168 was recognized during the nine months ended September 30, 2014 and 2013, respectively. There was no unrecognized compensation related to stock options at September 30, 2014. A summary of stock option and warrant activity for the nine months ended September 30, 2014 is as follows:

	Options and Warrants			Exercise Price Range					Weighted - Average Exercise Price
Balance, December 31, 2013		342,500		$	0.06	-	$	0.26	$	0.14
Granted		75,000			0.05	-		0.05		0.05
Expired		(75,000	)		0.12	-		0.14		0.13
Balance, September 30, 2014		342,500			0.05	-		0.26		0.13
Exercisable, September 30, 2014		342,500		$	0.05	-	$	0.26	$	0.13
Weighted-average fair value of options granted during the nine months ended September 30, 2014									$	0.04

All of the options and warrants were exercisable at September 30, 2014. At September 30, 2014, the intrinsic value for the options and warrants outstanding was $75.

On June 11, 2014, the Company issued 50,000 shares of common stock to its Board of Directors in recognition of services rendered. These shares were valued at $5,000 ($0.10 per share) based on the market value of the Company’s common stock on June 11, 2014. On August 28, 2014, the Company issued 10,000 shares of common stock to an employee in recognition of services rendered. These shares were valued at $600 ($0.06 per share) based on the market value of the Company’s common stock on August 28, 2014.

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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 notes receivable and long-lived assets. The following table sets forth the estimated fair values of the Company’s financial instruments that are measured at fair value on a reoccurring basis as of September 30, 2014 and December 31, 2013:

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fair Value of Financial Instruments

			Quoted Prices
			in
			Active
			Markets				Significant
			for Identical		Significant		Unobservable
			Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2014

Assets:
Debt securities available for sale	$	23,418	$	-	$	23,418	$	-

December 31, 2013

Assets:
Debt securities available for sale	$	22,734	$	-	$	22,734	$	-

Fair Value of Financial Instruments Not Required To Be Reported at Fair Value

The fair values of real property tax liens, notes receivable and notes receivable, non-performing, are based on a combination of the stated or implied interest rates at the measurement dates, approximate their carrying amounts and are considered to fall within Level 3 of the fair value hierarchy.

NOTE 6 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

The Company's historical revenues and receivables have been derived primarily from the lodging industry. The Company offers credit terms in connection with its sale of products from refreshment centers. The Company performs ongoing credit evaluations of its customers' financial condition and does not require collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon a percentage of accounts receivable at year end.

At September 30, 2014, the Company had accounts receivable from one customer which accounted for 48% of total accounts receivable and from a second customer which accounted for 23% of total accounts receivable.

During the nine months ended September 30, 2014, revenues from one customer accounted for 36% of total revenues and 27% from a second customer.

During the nine months ended September 30, 2013, revenues from one customer accounted for 42% of total revenues.

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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.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

Amenities Manager Platform

In January 2014, the Company introduced to the lodging industry an amenity management platform, or the Amenities Manager. The platform’s core is proprietary, unique software that provides a locally hosted or cloud-based system that is intended to assist a hotel in evaluating the gross profit margin of various refreshment center products, determining which products will best sell in the hotel’s particular environment, and determining which products are consistent with and could enhance the hotel’s image and theme. The Amenities Manager is intended to help hotels reduce their operating costs and enhance the hotels’ guest satisfaction, which would ultimately allow the hotels to charge more for their rooms and services. We believe that the solutions offered by our Amenities Manager will allow us to establish relationships with many premier hotel chains. It is our intention that our hotel customers will eventually share in revenues generated from the sale of products from our refreshment centers related to our platform. We have not yet determined the effect this change in our relationship with hotels will have, but we believe it will result in an increase in our revenue through an increase in the number of hotel customers. As an alternative solution, we also plan to offer a turnkey arrangement whereby we would provide both products and restocking services to hotels.

Results of Operations

Revenue Recognition

We generate revenues from the sale of products in hotel in-room refreshment centers, from maintenance services and the lease of equipment. Revenue from the sale of refreshments from the refreshment centers is recognized upon removal of the item from the refreshment center by the hotel guest. Maintenance revenue is recognized as the services are performed. Lease revenue is recognized over the term of the lease.

Description of Expenses

Cost of revenue consists primarily of cost of goods sold, as well as 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.

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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 research and development for new products. Research and development expenses in the nine months ended September 30, 2014 and 2013 were $33,073 and $82,712, respectively. The decrease related to a decrease in research and development in 2014 due to the research projects being significantly advanced or completed and therefore not requiring the expenditures that were required in the prior period.

In accordance with ASC Codification Topic 730, “Accounting for Research and Development Costs”, 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 September 30, 2014 and 2013

Revenue

Revenue from product sales and maintenance was $198,051 for the three months ended September 30, 2014, compared to $145,239 for the three months ended September 30, 2013, representing an increase of $52,812, or 36%. The increase in revenues related to new hotels coming on in the latter part of 2013 and in 2014.

Cost of Revenue

Our cost of product sales and maintenance revenue for the three months ended September 30, 2014 was $97,838, compared to $100,997 for the three months ended September 30, 2013, a decrease of $3,159, or 3%. The decrease in cost of revenue was immaterial. The gross margin percentage on revenue from product sales revenue was 51% in 2014 as compared to 30% in 2013. The increase related to an equipment writedown in 2013 as well as decreased depreciation expense in 2014.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended September 30, 2014 and 2013 are summarized as follows:

	For the Three Months
	Ended September 30,
	2014		2013		Change			Percent Change

REVENUE	$	198,051	$	145,239	$	52,812			36	%

COST OF REVENUE	$	97,838	$	100,997	$	(3,159	)		-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 September 30, 2014 and 2013, 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 $98,224 for the three months ended September 30, 2014, compared to $88,732 for the three months ended September 30, 2013, representing an increase of $9,492, or 11% due various items.

Research and Development—Research and development expenses were $8,633 for the three months ended September 30, 2014, compared to $22,559 for the three months ended September 30, 2013 representing a decrease of $13,926 or 62%. The decrease was primarily due to the research projects being significantly advanced or completed and therefore not requiring the expenditures that were required in the prior period. However, additional costs will be necessary for the completion of these projects.

Investment Income

Our investment income was $15,973 for the three months ended September 30, 2014, compared to $10,060 for the three months ended September 30, 2013, representing an increase of $5,913, or 59%. The increase in investment income related to the increased interest earned due to the provision of certain notes receivable.

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Net Income (Loss)

We realized a net income of $9,329 for the three months ended September 30, 2014, compared to a net loss of $56,989 for the three months ended September 30, 2013. The $66,318 change during the three months ended September 30, 2014 related primarily to the increase in sales and the related gross margin, the increase in investment income and the decrease in research and development expense during the three months ended September 30, 2014, as further discussed above.

Comparison of nine months ended September 30, 2014 and 2013

Revenue

Revenue from product sales and maintenance was $577,632 for the nine months ended September 30, 2014, compared to $416,953 for the nine months ended September 30, 2013, representing an increase of $160,679, or 39%. The increase in revenues in the first nine months of 2014 related to new hotels coming on in the latter part of 2013 and in 2014.

Cost of Revenue

Our cost of product sales and maintenance revenue for the nine months ended September 30, 2014 was $303,364, compared to $232,811 for the nine months ended September 30, 2013, an increase of $70,553, or 30%. The increase in cost of revenue relates to the increase in revenue in the nine months ended September 30, 2014. The gross margin percentage on revenue from product sales revenue was 47% in 2014 as compared to 44% in 2013. The increase related to an increase in top-line revenue.

The changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2014 and 2013 are summarized as follows:

	For the Nine Months
	Ended September 30,
	2014		2013		Change		Percent Change

REVENUE	$	577,632	$	416,953	$	160,679		39	%

COST OF REVENUE	$	303,364	$	232,811	$	70,553		30	%

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2014 and 2013, the trends 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 $324,183 for the nine months ended September 30, 2014, compared to $259,280 for the nine months ended September 30, 2013, representing an increase of $64,903, or 25% primarily due to the writedown of equipment and loan loss allowance recorded during the second quarter. The writedown of the equipment is not expected to be representative of ongoing operations.

Research and Development—Research and development expenses were $33,073 for the nine months ended September 30, 2014, compared to $82,712 for the nine months ended September 30, 2013 representing a decrease of $49,639 or 60%. The decrease was primarily due to the research projects being significantly advanced or completed and therefore not requiring the expenditures that were required in the prior period. However, additional costs will be necessary for the completion of these projects.

Investment Income

Our investment income was $186,284 for the nine months ended September 30, 2014, compared to $15,430 for the nine months ended September 30, 2013, representing an increase of $170,854, or 1,107%. The increase in investment income related to the payback of Blackbird’s Note Receivable in full as well as a sale of an investment in marketable securities. These transactions are not necessarily representative of ongoing operations of the Company.

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Net Income (Loss)

We realized a net income of $103,296 for the nine months ended September 30, 2014, compared to a net loss of $142,420 for the nine months ended September 30, 2013. The $245,716 change during the nine months ended September 30, 2014 related primarily to the increase in sales and the related gross margin, the increase in investment income and the decrease in research and development expense offset by the writedown of equipment and loan loss allowance recorded during the nine months ended September 30, 2014, as further discussed above.

Liquidity and Capital Resources

Our accumulated deficit decreased from $31,851,020 at December 31, 2013 to $31,747,724 at September 30, 2014. The $103,296 decrease in accumulated deficit resulted directly from the net income realized for the nine months ended September 30, 2014.

At September 30, 2014, our principal sources of liquidity consisted of $1,829,420 of cash and working capital of $2,389,862, as compared to $1,376,822 of cash and working capital of $1,851,734 at December 31, 2013. In addition, our stockholders' equity was $2,481,081 at September 30, 2014, compared to stockholders' equity of $2,368,432 at December 31, 2013, an increase of $112,649. The increase in cash primarily reflects payment of the Blackbird note. We have sufficient funds for the next twelve months.

Cash flow provided in operations for the nine months ended September 30, 2014 was $53,194 as compared to $200,911 used in the same period ended September 30, 2013.

Investing activities for the nine months ended September 30, 2014 provided net cash of $399,404, compared to $129,343 of net cash used during the nine months ended September 30, 2013.

There were no financing activities in the nine months ended September 30, 2014 and 2013.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective for the Company retrospectively beginning January 1, 2017, with early adoption not permitted. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), to provide guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective January 1, 2015 with earlier adoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. Management is currently evaluating the impact of the pending adoption of ASU 2013-11 on the Company’s consolidated financial statements.

Contractual Cash Obligations and Commercial Commitments

There were no significant contractual cash obligations or commercial commitments either on or off balance sheet as of September 30, 2014.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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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 because of the material weakness in our internal control over financial reporting due to lack of segregation of duties, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that the Company’s disclosure and controls are designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the material weakness discussed below, our principal executive officer and principal financial officer has concluded that the condensed consolidated financial statements (unaudited) included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Lack of Segregation of Duties

Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to clearly segregate duties do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation.

Errors in Financial Statement Presentation and Disclosure

Management is aware that there are errors in financial statement presentation and disclosure at the Company due to the small number of employees dealing with financial matters. There were several comments and changes from our independent auditors resulted in a material quantity or quality adjustments. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to avoid such errors do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation

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

On March 24, 2014, the Company granted immediately exercisable five-year options to purchase an aggregate of 75,000 shares of common stock at an exercise price of $0.05 per share to 2 employees for services provided to the Company.

On June 11, 2014, the Company granted shares of common stock to Lawrence K. Wein, a member of the Board of Directors, in the amount of 25,000 shares and to James Savas, a member of the Board of Directors, in the amount of 25,000 shares. The shares were issued for services provided to the Company. On August 28, 2014, the Company granted shares of common stock to Derek Merker, an employee, in the amount of 10,000 shares. The shares were issued for services provided to the Company.

We believe that the above issuances were exempt from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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: November 12, 2014
	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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EROOMSYSTEM TECHNOLOGIES INC Reports