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Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

   


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

 

For the quarterly period ended September 30, 2016

 

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    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     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           

Accelerated filer                    

  

  

Non-accelerated filer             

Smaller reporting company   

(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     No

 

The number of shares of the issuer’s common stock issued and outstanding as of November 14, 2016 was 24,217,865 shares.

 

 

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

8

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

12

  

  

  

Item 4.

Controls and Procedures

12

  

  

  

PART II - OTHER INFORMATION

13

  

  

  

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.

Mine Safety Disclosures

13

  

  

  

Item 5.

Other Information

13

  

  

  

Item 6.

Exhibits

13

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

ASSETS

               

CURRENT ASSETS

               

Cash and cash equivalents

  $ 1,638,990     $ 1,247,739  

Investment in available for sale securities

    24,886       23,640  

Notes receivable

    573,324       1,075,020  

Accounts receivable, net of allowance for doubtful accounts of $7,005 and $5,044

    93,070       67,008  

Inventory

    101,244       101,928  

Advance to hotels

    80,998       78,473  

Prepaid expenses

    23,479       3,369  

Total Current Assets

    2,535,991       2,597,177  

PROPERTY AND EQUIPMENT

               

Property and equipment, net of accumulated depreciation of $31,287 and $23,524

    31,482       39,810  

INVESTMENT IN REAL PROPERTY TAX LIENS

    3,143       3,143  

DEPOSITS AND OTHER ASSETS

    2,933       2,933  

Total Assets

  $ 2,573,549     $ 2,643,063  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

CURRENT LIABILITIES

               

Accounts payable

  $ 25,760     $ 12,485  

Accrued liabilities

    24,303       80,195  

Total Current Liabilities

    50,063       92,680  

Total Liabilities

    50,063       92,680  

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 24,217,865 and 24,217,865

    24,218       24,218  

Additional paid-in capital

    34,218,040       34,211,957  

Accumulated deficit

    (31,720,924 )     (31,686,698 )

Accumulated other comprehensive income

    2,152       906  

Total Stockholders' Equity

    2,523,486       2,550,383  
                 

Total Liabilities and Stockholders' Equity

  $ 2,573,549     $ 2,643,063  

 

See accompanying notes to condensed consolidated financial statements.

 

 

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,

 
   

2016

   

2015

   

2016

   

2015

 

REVENUE

  $ 214,413     $ 229,873     $ 677,834     $ 644,163  

COST OF REVENUE

    137,022       137,596       422,144       371,963  

GROSS MARGIN

    77,391       92,277       255,690       272,200  

OPERATING EXPENSES

                               
                                 

Selling, general and administrative expense, including non-cash  compensation of $0, $1,619, $6,084 and $8,054

    110,331       95,114       302,736       290,382  

Research and development expense

    15,550       13,103       39,657       35,672  

Net Operating Expenses

    125,881       108,217       342,393       326,054  

OTHER INCOME

                               

Investment Income

    10,520       23,464       52,477       104,407  

Net Income (Loss)

    (37,970 )     7,524       (34,226 )     50,553  

Other Comprehensive Income (Loss)

                               

Unrealized holding gain (loss)

    (286 )     (801 )     1,246       (437 )

Comprehensive Income (Loss)

  $ (38,256 )   $ 6,723     $ (32,980 )   $ 50,116  

Basic Income (Loss) Per Common Share

  $ (0.00 )   $ 0.00     $ (0.00 )   $ 0.00  

Diluted Income (Loss) Per Common Share

  $ (0.00 )   $ 0.00     $ (0.00 )   $ 0.00  

 

See accompanying notes to condensed consolidated financial statements.

 

 

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

   

For the nine months ended

September 30,

 
                 
   

2016

   

2015

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net Income (Loss)

  $ (34,226 )   $ 50,553  

Adjustments to reconcile net income (loss) to net cash used in operating activities:

               

Depreciation and amortization

    7,764       8,441  

Accrued interest receivable

    5,494       (2,539 )

Gain on sale of marketable securities

    -       (40,160 )

Non-cash compensation expense

    6,083       8,054  

Changes in operating assets and liabilities:

               

Restricted cash

    -       61,350  

Accounts receivable

    (26,062 )     (35,927 )

Inventory

    20,370       (17,624 )

Advance to hotels

    (2,525 )     (1,973 )

Prepaid expenses

    (20,110 )     417  

Accounts payable

    7,775       4,613  

Accrued liabilities

    (50,392 )     (33,604 )

Borrowed shares

    -       (60,959 )

Net Cash Used In Operating Activities

    (85,829 )     (59,358 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchase of property and equipment

    (19,122 )     -  

Purchases of investments in real property tax liens

    -       (3,698 )

Advances made under notes receivable

    (150,000 )     (390,000 )

Proceeds from collection of note receivable

    646,202       270,624  

Purchase of marketable securities

    -       (618,107 )

Proceeds from sale of marketable securities

    -       758,267  

Net Cash Provided by Investing Activities

    477,080       17,086  
                 

Net Increase (Decrease) in Cash

    391,251       (42,272 )
                 

Cash and cash equivalents at Beginning of Period

    1,247,739       1,453,971  
                 

Cash and cash equivalents at End of Period

  $ 1,638,990     $ 1,411,699  

 

See accompanying notes to condensed consolidated financial statements.

 

 

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, 2015 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, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016.

 

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. The Company has evaluated the collectability of current notes receivable and believes the notes 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.

 

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, 2016 and December 31, 2015.

 

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.

 

 

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 per common share is computed by dividing net income, 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, 2016 and 2015: 

 

 

   

For the three months ended September 30,

   

For the nine months ended September 30,

 
 

2016

2015

2016

2015

Net income (loss)

  $ (37,970 )   $ 7,524     $ (34,226 )   $ 50,553  

Basic weighted-average common shares outstanding

    24,217,865       24,176,107       24,217,865       24,172,009  

Effect of dilutive securities

                               

Stock options and warrants

    -       44,236       -       39,306  

Diluted weighted-average common shares outstanding

    24,217,865       24,220,343       24,217,865       24,211,315  

Basic income (loss) per share

  $ (0.00 )   $ 0.00     $ (0.00 )   $ 0.00  

Diluted income (loss) per share

  $ (0.00 )   $ 0.00     $ (0.00 )   $ 0.00  

 

During the nine months ended September 30, 2015, there were 92,500 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.

 

During the nine months ended September 30, 2016, there were 400,000 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, 2016, the Company held $3,143 of real property tax liens, carried at lower of cost or estimated net realizable value, from various municipalities in New Jersey. 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 and Equity 

Securities

 

Cost Basis

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair Value

 

Corporate Debt Securities

  $ 22,734     $ 2,152     $ -     $ 24,886  

Total

  $ 22,734     $ 2,152     $ -     $ 24,886  

 

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

 

NOTE 3 – NOTES RECEIVABLE

 

To date, the Company loaned $1,642,000 in amounts ranging from $150,000 to $450,000 to various parties for a one year term with mortgage notes ranging in interest from 4.5% - 12%. Interest is due and payable monthly. The entire principal amounts are due and payable on the maturity date. The mortgages are collateralized by either commercial or residential property. Proceeds collected on these notes during the nine months ended September 30, 2016 totaled $646,202 and during the year ended December 31, 2015 totaled $272,512. The carrying amounts of loans outstanding on September 30, 2016 and December 31, 2015 were $573,324 and $1,075,020 including interest accrued. The carrying amount of the notes receivable approximates their fair values based on their short-term maturity.

 

 

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Accrued interest on notes receivable was $2,037 and $7,531 at September 30, 2016 and December 31, 2015 respectively, and was included in notes receivable in the accompanying consolidated balance sheets.

 

NOTE 4 – STOCKHOLDERS’ EQUITY

 

During the nine months ended September 30, 2016, 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 $0.06 per share and are exercisable through March 31, 2021. These options were valued at approximately $0.05 per share, or $3,650, using the Black-Scholes option pricing model with the following assumptions: market value of the common stock of $0.06 per share, risk free interest rate of 1.21%, dividend yield of 0.0%, volatility of 116% 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, 2016, the Company granted options to purchase 50,000 shares of common stock to a consultant for services rendered. These options, which vested immediately, have an exercise price of $0.06 per share and are exercisable through April 1, 2021. These options were valued at approximately $0.05 per share, or $2,434, using the Black-Scholes option pricing model with the following assumptions: market value of the common stock of $0.06 per share, risk free interest rate of 1.21%, dividend yield of 0.0%, volatility of 116% and expected life of 5 years.

 

Stock-based compensation expense relating to stock options of $6,084 and $8,054 was recognized during the nine months ended September 30, 2016 and 2015, respectively. There was no unrecognized compensation related to stock options at September 30, 2016. A summary of stock option and warrant activity for the nine months ended September 30, 2016 is as follows:

 

 

   

Options and Warrants

   

Exercise Price Range

   

Weighted - Average

Exercise Price

   

Weighted-

Average

Life

   

Aggregate

Intrinsic

Value

 

Balance, December 31, 2015

    300,000     $0.05 - $0.17     $ 0.08       5.40     $ -  

Granted

    125,000     0.06 - 0.06       0.06                  

Expired

    (25,000 )   0.17 - 0.17       0.17                  

Balance, September 30, 2016

    400,000     0.05 - 0.12       0.06       5.00     $ 750  

Exercisable, September 30, 2016

    400,000     $0.05 - $0.12     $ 0.06       5.00     $ 750  

Weighted-average fair value of options granted during the nine months ended September 30, 2016

                                    $ 0.05  

 

All of the options and warrants were exercisable at September 30, 2016. At September 30, 2016 the intrinsic value for the options and warrants outstanding was $750.

 

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, 2016 and December 31, 2015:

 

 

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, 2016

                               
                                 

Assets:

                               

Debt securities available for sale

  $ 24,886     $ -     $ 24,886     $ -  
                                 
                                 

December 31, 2015

                               
                                 

Assets:

                               

Debt securities available for sale

  $ 23,640     $ -     $ 23,640     $ -  

 

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

 

The fair values of real property tax liens and notes receivable 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, 2016, the Company had accounts receivable from one customers which accounted for 38% of total accounts receivable and from a second customer which accounted for 21% of total accounts receivable.

 

During the nine months ended September 30, 2016, revenues from one customer accounted for 37% of total revenues and 26% from a second customer. 

 

During the nine months ended September 30, 2015, revenues from one customer accounted for 34% of total revenues and 28% from a second customer.

 

 

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.

 

Overview

 

The Company introduced to the lodging industry an amenity management platform, or the AMENITIES MANAGER™. The platform’s core is proprietary software that provides a cloud-based system to assist a hotel in enhancing its image and theme through distinctive products and managing its amenities with optimized efficiency.

 

The AMENITIES MANAGER™ deliver solutions in order to reduce operating costs, enhance hotel guest satisfaction and provide higher operating profits to our customers. The solutions offered by our AMENITIES MANAGER™ and related products have allowed us to establish relationships with many premier hotel chains. In addition to providing our customers with valuable amenity management solutions that pay for itself, our revenue-sharing program has allowed us to partner with our customers and provide our solutions at little or no up-front cost. Our customers share in revenues generated from the sale of goods and services related to our platform. As an alternative solution, we offer a turnkey arrangement which provides both products and restockers to hotels.

 

We continue to deploy our Amenities Manager™ at all hotels that we service. Additionally, to date, we have deployed over 12,000 refreshment centers at many hotel properties.

 

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, Carlson Hospitality Worldwide, as well as in other boutique hotels in the United States and internationally.

 

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.

 

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, 2016 and 2015 were $39,657 and $35,672, respectively.

 

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, 2016 and 2015

 

Revenue

 

Revenue from product sales and maintenance was $214,413 for the three months ended September 30, 2016, compared to $229,873 for the three months ended September 30, 2015, representing a decrease of $15,460, or 7%. The decrease in revenues related to decreased sales in 2016.

 

Cost of Revenue

 

Our cost of product sales and maintenance revenue for the three months ended September 30, 2016 was $137,022, compared to $137,596 for the three months ended September 30, 2015, a decrease of $574, or 0.42%. The gross margin percentage on revenue from product sales revenue was 36% in 2016 and 40% in 2015.

 

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended September 30, 2016 and 2015 are summarized as follows:

 

 

   

For the three months ended September 30,

                 
   

2016

   

2015

   

Change

   

Percent

Change

 
                                 

REVENUE

  $ 214,413     $ 229,873     $ (15,460 )     -7 %
                                 
                                 

COST OF REVENUE

  $ 137,022     $ 137,596     $ (574 )     0.42 %

 

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, 2016 and 2015, 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 $110,331 for the three months ended September 30, 2016, compared to $95,114 for the three months ended September 30, 2015, representing an increase of $15,217, or 16% due to higher administrative costs.

 

Research and Development—Research and development expenses were $15,550 for the three months ended September 30, 2016, compared to $13,103 for the three months ended September 30, 2015 representing an increase of $2,447 or 19%.

 

Investment Income

 

Our investment income was $10,520 for the three months ended September 30, 2016, compared to $23,464 for the three months ended September 30, 2015, representing a decrease of $12,944, or 55%. The change in investment income related to sales of available-for-sale securities in the three months ended September 30, 2015 and the repayment of notes receivable during 2016.

 

 

Net Income

 

We realized a net loss of $37,970 for the three months ended September 30, 2016, compared to net income of $7,524 for the three months ended September 30, 2015. The $45,494 change related primarily to decreased revenue and investment income as well as increased selling, general and administrative expenses during the three months ended September 30, 2016.

 

Comparison of Nine Months Ended September 30, 2016 and 2015

 

Revenue

 

Revenue from product sales and maintenance was $677,834 for the nine months ended September 30, 2016, compared to $644,163 for the nine months ended September 30, 2015, representing an increase of $33,671, or 5%. The increase in revenues related to improved sales in 2016.

 

Cost of Revenue

 

Our cost of product sales and maintenance revenue for the nine months ended September 30, 2016 was $422,144, compared to $371,963 for the nine months ended September 30, 2015, representing an increase of $50,181, or 13%. The increase in cost of revenue related to the increase in sales as well as increases in labor costs and cost of goods. The gross margin percentage on revenue from product sales revenue was 38% in 2016 as compared to 42% in 2015.

 

The changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2016 and 2015 are summarized as follows:

 

   

For the nine months ended September 30,

                 
   

2016

   

2015

   

Change

   

Percent

Change

 
                                 

REVENUE

  $ 677,834     $ 644,163     $ 33,671       5 %
                                 
                                 

COST OF REVENUE

  $ 422,144     $ 371,963     $ 50,181       13 %

 

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, 2016 and 2015, 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 $302,736 for the nine months ended September 30, 2016, compared to $290,382 for the nine months ended September 30, 2015, representing an increase of $12,354, or 4% due to higher administrative costs.

 

Research and Development—Research and development expenses were $39,657 for the nine months ended September 30, 2016, compared to $35,672 for the nine months ended September 30, 2015 representing an increase of $3,985 or 11%.

 

Investment Income

 

Our investment income was $52,477 for the nine months ended September 30, 2016, compared to $104,407 for the nine months ended September 30, 2015, representing a decrease of $51,930, or 50%. The change in investment income related to sales of available-for-sale securities in the nine months ended September 30, 2015 and the repayment of notes receivable during 2016.

 

Net Income

 

We realized a net loss of $34,226 for the nine months ended September 30, 2016, compared to net income of $50,553 for the nine months ended September 30, 2015. The $84,779 change related primarily to the decrease in revenue and investment income and the increase in selling, general and administrative costs during the nine months ended September 30, 2016.

 

 

Liquidity and Capital Resources

 

Our accumulated deficit increased from $31,686,698 at December 31, 2015 to $31,720,924 at September 30, 2016. The $34,226 increase in accumulated deficit resulted directly from the net loss realized for the nine months ended September 30, 2016.  

 

At September 30, 2016, our principal sources of liquidity consisted of $1,638,990 of cash as compared to $1,247,739 at December 31, 2015. At September 30, 2016, we had working capital of $2,485,928, as compared to $2,504,497 at December 31, 2015. In addition, our stockholders' equity was $2,523,486 at September 30, 2016, compared to stockholders' equity of $2,550,383 at December 31, 2015, an increase of $26,897. The increase in cash reflects the repayment of notes receivable. We believe that we have sufficient funds to operate for the next twelve months.

 

Net cash used in operations for the nine months ended September 30, 2016 was $85,829 as compared to $59,358 used in the period ended September 30, 2015.

 

Investing activities for the nine months ended September 30, 2016 provided net cash of $477,080, compared to $17,086 of net cash provided during the nine months ended September 30, 2015. The change in cash used related to advances and collections under notes receivable in 2016 and 2015.

 

There were no financing activities in the nine months ended September 30, 2016 and 2015.

 

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.

 

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, 2016.

 

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 have 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 as of September 30, 2016 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 have 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.

 

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.

 

 

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

 

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

 

 

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 14, 2016

  

  

  

  

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)

  

  

  

  

14