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 June 30, 2011

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

For the transition period from _____________ To __________

Commission file number 000-31037

eRoomSystem Technologies, Inc.

(Name of small business issuer in its charter)

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

1072 Madison Ave., Lakewood, NJ	08701
(Address and telephone number of principal executive offices)	(Zip Code)
Issuer’s telephone number: (732) 730-0116

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

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

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

Large accelerated filer o	Accelerated filer ¨

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

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

The number of shares of the issuer’s common stock issued and outstanding as of August 12, 2011 was 23,982,865 shares.

Table of Contents

EROOMSYSTEM TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		1

Item 1.	Financial Statement	1

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	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.	Removed and Reserved	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)

	June 30,			December 31,
	2011			2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,239,330		$	2,145,709
Investment in equity securities available for sale		14,167			42,500
Investment in real property tax liens		39,096			60,299
Accounts receivable, net of allowance for doubtful accounts of $7,667 at June 30, 2011 and $18,240 at December 31, 2010		43,444			103,802
Inventory		120,194			147,069
Advance to supplier		-			48,678
Note receivable		-			522,685
Prepaid expenses		34,656			5,043
Total Current Assets		2,490,887			3,075,785
NOTE RECEIVABLE		522,439			-
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation of $34,773at June 30, 2011 and $23,975 at December 31, 2010		115,874			120,707
INTANGIBLE ASSETS, net of accumulated amortization of $5,064 at June 30, 2011 and $3,376 at December 31, 2010		-			1,688
DEPOSITS		2,250			2,250
Total Assets	$	3,131,450		$	3,200,430

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	13,541		$	21,399
Accrued liabilities		38,938			81,009
Customer deposits		2,004			2,004
Total Current Liabilities		54,483			104,412
Total Liabilities		54,483			104,412
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none outstanding		-			-
Common stock, $0.001 par value; 50,000,000 shares authorized; shares outstanding 23,982,865 at June 30, 2011 and 23,907,865 at December 31, 2010		23,983			23,908
Additional paid-in capital		34,169,735			34,159,310
Accumulated deficit		(31,130,918	)		(31,129,700	)
Accumulated other comprehensive gain		14,167			42,500
Total Stockholders' Equity		3,076,967			3,096,018

Total Liabilities and Stockholders' Equity	$	3,131,450		$	3,200,430

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 (LOSS) (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010

REVENUE AND INVESTMENT INCOME
Product sales	$	149,073		$	219,106		$	295,187		$	409,986
Maintenance fees		43,480			49,668			87,861			99,552
Interest income		28,100			22,638			55,843			53,052
Loss on other than temporary decline in marketable securities		-			(50,000	)		-			(50,000	)
Total Revenue		220,653			241,412			438,891			512,590
COST OF REVENUE
Product sales		82,351			117,703			163,860			251,770
Maintenance		4,777			7,378			7,517			23,135
Total Cost of Revenue		87,128			125,081			171,377			274,905
GROSS MARGIN		133,525			116,331			267,514			237,685

OPERATING EXPENSES
Selling, general and administrative expense, including non-cash compensation of $10,500, $11,250, $10,500 and $12,351, respectively		124,069			117,421			221,497			236,367
Research and development expense		21,482			31,295			47,235			33,023
Net Operating Expenses		145,551			148,716			268,732			269,390
Net Loss		(12,026	)		(32,385	)		(1,218	)		(31,705	)
Unrealized gain (loss) on investment in equity securities available for sale		(9,633	)		85,000			(28,333	)		85,000
Reclassification adjustment for losses included in operations		-			50,000			-			50,000
Comprehensive Income (Loss)	$	(21,659	)	$	102,615		$	(29,551	)	$	103,295
Basic Loss Per Common Share	$	-		$	-		$	-		$	-
Diluted Loss Per Common Share	$	-		$	-		$	-		$	-

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 Six Months Ended June 30,	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,218	)	$	(31,705	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		12,486			7,984
Loss allowance on investment in real property tax liens		-			5,000
Loss for other than temporary decline in marketable securities		-			50,000
Non-cash compensation expense		10,500			12,351
Changes in operating assets and liabilities:
Accounts receivable		60,358			(11,843	)
Accrued interest receivable		246			247
Inventory		20,910			(10,222	)
Advance to supplier		48,678			1,986
Prepaid expenses		(29,613	)		7,312
Accounts payable		(7,858	)		(14,587	)
Accrued liabilities		(42,071	)		(30,740	)
Net Cash Provided By (Used In) Operating Activities		72,418			(14,217	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		-			(74,900	)
Purchase of investments in real property tax liens		(709	)		(107,862	)
Proceeds from collections of real property tax liens		21,912			20,582
Purchase of short-term investment		-			(104,403	)
Net Cash Provided by (Used In) Investing Activities		21,203			(266,583	)

CASH FLOWS FROM FINANCING ACTIVITIES		-			-

Net Increase (Decrease) in Cash		93,621			(280,800	)

Cash and cash equivalents at Beginning of Period		2,145,709			2,302,620

Cash and cash equivalents at End of Period	$	2,239,330		$	2,021,820

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, 2010 included in the Company's Annual Report on Form 10-K. In particular, the Company's organization, nature of operations and significant accounting principles were presented in Note 1 to the consolidated financial statements in that annual report. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements and consist of only normal recurring adjustments. The results of operations presented in the accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.

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.

Loss Per Common Share - Basic loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock and dilutive potential common stock equivalents outstanding during the period. Potential common stock equivalents consist of shares issuable upon the exercise of stock options and warrants. For the years presented, all convertible securities are anti-dilutive.

The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted weighted-average common shares outstanding for the three and six months ended June 30, 2011 and 2010:

	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2011			2010			2011			2010
Net loss	$	(12,026	)	$	(32,385	)	$	(1,218	)	$	(31,705	)
Basic weighted-average common shares outstanding		23,949,898			23,854,294			23,928,998			23,843,638
Effect of dilutive securities
Stock options and warrants		-			-			-			-
Diluted weighted-average common shares outstanding		23,949,898			23,854,294			23,928,998			23,843,638
Basic loss per share	$	-		$	-		$	-		$	-
Diluted loss per share	$	-		$	-		$	-		$	-

During the three and six months ended June 30, 2011, there were 2,175,344 potential common stock equivalents from options and warrants and during the three and six months ended June 30, 2010, there were 2,270,844 potential common stock equivalents from options and warrants that were not included in the computation of diluted loss per share because their effect would have been anti-dilutive.

Recent Accounting Pronouncements – In January 2010, the FASB issued guidance that required the Company to present separately information about purchases, sales, issuances and settlements, on a gross basis, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). This guidance became effective during the first quarter of 2011. The adoption of this guidance did not have a material effect on the financial statements.

In May 2011, the Financial Accounting Standards Board ("FASB") issued a new accounting standard on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The standard is effective for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not expect the adoption of this accounting guidance to have a material impact on its consolidated financial statements and related disclosures.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income from that of current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Upon adoption, the Company will present its consolidated financial statements under this new guidance. The Company does not expect the adoption of this accounting guidance to have a material impact on its consolidated financial statements and related disclosures.

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NOTE 2 - BUSINESS CONDITION

During the year ended December 31, 2010 and the six months ended June 30, 2011, the Company realized a net income of $18,345 and net loss of $1,218, respectively. During the year ended December 31, 2010 and the six months ended June 30, 2011, the Company's operations provided $28,597 and $72,418 of cash, respectively. The Company had a cash and cash equivalent balance of $2,239,330 as of June 30, 2011.

NOTE 3 – INVESTMENTS

Investment in Equity Securities Available for Sale – As discussed further in Note 5, the Company was issued 50,000 shares of stock in Blackbird Corporation in July 2008. On June 7, 2010, Blackbird entered into a share exchange with RPID later renamed Spot Mobile International Ltd (“Spot Mobile”). The 50,000 shares of common stock of Blackbird were exchanged for 1,700,000 restricted shares of common stock of Spot Mobile. The Spot Mobile shares were reverse split in October 2010 to 56,667 shares. Spot Mobile’s common stock is publicly traded and had a post-split market value of $0.25 per share on June 30, 2011. The Company recorded an $42,500 unrealized gain on the investment in Spot Mobile at December 31, 2010. The Company recorded a $28,333 unrealized loss on the investment in Spot Mobile during the six months ended June 30, 2011, which is included in other comprehensive loss.

During the year ended December 31, 2007, the Company reduced the carrying value of its investment in Aprecia, Inc. to zero through a $50,000 charge to other comprehensive loss. During the six months ended June 30, 2010, the Company determined that Aprecia, Inc. was no longer an operating company, that the decline in value of this investment was other than temporary and recognized the $50,000 loss in operations.

Investments in equity securities as of June 30, 2011 are summarized below:

Equity Securities		Cost Basis				Unrealized Gains				Unrealized Losses				Fair Value
Spot Mobile		$	-			$	14,167			$	-			$	14,167

At June 30, 2011, accumulated other comprehensive loss consisted solely of the unrealized holding loss from the investment in Spot Mobile.

Investment in Real Property Tax Liens – During the six months ended June 30, 2011, the Company purchased an additional $709 in real property tax liens from a municipality in New Jersey for total purchases of $124,362. Through June 30, 2011, the Company collected $85,266 in tax lien settlements. The New Jersey municipal tax liens are receivable from the real property owners and are secured by a first priority lien on the related real property. Upon foreclosure, the Company would obtain ownership of the real property. The tax lien receivables accrue interest up to 18% per annum, accrue penalties at 2% to 6% per annum and are also increased by the amount of any collection expenses incurred. The investment in the real property tax liens are accounted for as an investment in troubled debts and are carried at cost. Collection of interest, penalties and expense reimbursements is not certain and is recognized upon being realized.

NOTE 4 - 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. In addition, the Company maintains an inventory of minibars which are purchased as finished goods and held in a warehouse until deployment in a hotel.

NOTE 5– NOTE RECEIVABLE

On July 24, 2008, the Company extended a loan in the amount $500,000 to BlackBird Corporation (“BlackBird”). The loan is evidenced by a 10% senior secured convertible promissory note made by BlackBird in favor of the Company (the “Secured Note”). In addition, BlackBird issued 50,000 shares of its common stock to the Company. On the date of issuance, the fair value of BlackBird’s common stock was not determinable and the shares were valued at zero. As further described in Note 3, the BlackBird common shares were exchanged for Spot Mobile common shares. The Secured Note was extended to June 30, 2011 and the interest rate increased to 18% after December 31, 2008, with interest payable quarterly on the last business day of each quarter. The carrying amount of the Secured Note was increased by $22,439 of accrued interest prior to 2010. BlackBird has not paid its interest payments for second quarter of 2011.

The note receivable is evaluated for impairment on a quarterly basis. If projections were to indicate that the carrying value of the promissory note was not recoverable, the carrying value would be reduced by the estimated excess of the carrying value over the projected discounted cash flows. The BlackBird promissory note was evaluated for impairment as of June 30, 2011 and although Blackbird did not meet its obligation to make payment on the note and therefore is in default of its obligations under the note, no impairment was deemed necessary. The evaluation was based on the projected discounted cash flows of Blackbird,determined by the liquidation value of the underlying collateral. The value of the collateral is in excess of the balance of the secured debt. The Company plans on foreclosing on the underlying collateral to collect on the note. The net carrying value of the note has been reclassified to non-current assets as the Company is uncertain as to time that will be required to obtain title to the collateral and liquidate it

NOTE 6 – PURCHASE OF ASSETS

On June 17, 2009, the Company purchased the assets of Kooltech SPE from Cardinal Pointe Capital (“CPC”), which assets consisted of automated minibars installed in five hotels, automated baskets and product inventory. The Company formed a subsidiary, eFridge, LLC (“eFridge”) for the purpose of this purchase. The purchase price is an amount equal to 30% of eFridge’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) and 30% of eFridge’s cash flow related to any related new equipment purchased. Payment of the purchase price is payable by eFridge to CPC on a monthly basis within twenty days after the end of each month. In addition, the Company agreed that in the event eFridge or any other subsidiary of the Company purchases any new Kooltech equipment from the manufacturers thereof or brokers the sale of new Kooltech equipment or equipment materially similar to Kooltech’s to third parties, the Company will pay to CPC an amount equal to $30 per mini-bar and $15 per automated basket so purchased or brokered. The Company paid CPC, under the agreement, $5,613 for any liability incurred through March 31, 2011.

On June 29, 2011, the Company reached a final settlement of any and all obligations under the original agreement with payment of $20,000 to CPC. Payment of which was accounted for as an expense during the six months ended June 30, 2011.

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NOTE 7 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at June 30, 2011.

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

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

The following tables set forth by level, within the fair value hierarchy, the estimated fair values of the Company’s financial assets measured on a recurring basis as of June 30, 2011:

	Level 1		Level 2		Level 3		Total
Investment in Equity Securities
Available for Sale	$	14,167	$	-	$	-	$	14,167

Total Assets Measured at Fair Value	$	14,167	$	-	$	-	$	14,167

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NOTE 8 - STOCKHOLDERS’ EQUITY

On June 4, 2010, the Company issued 75,000 shares of common stock to its Board of Directors in recognition of services rendered. These shares were valued at $11,250 ($0.15 per share). On May 10, 2011, the Company issued 75,000 shares of common stock to its Board of Directors and a consultant in recognition of services rendered. These shares were valued at $10,500 ($0.14 per share).

During the six months ended June 30, 2010, the Company granted options to purchase 7,500 shares of common stock to an employee for services rendered. These options, which vested immediately, have an exercise price of $0.18 per share and are exercisable through March 22, 2015. These options were valued at approximately $0.15 per share, or $1,101, using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 2.65%, dividend yield of 0.0%, volatility of 115% and expected life of 5 years. These options expired when the employee left the Company in July 2010. No options to purchase shares of common stock were issued in 2011.

Compensation expense relating to stock options of $1,101 was recognized during the six months ended June 30, 2010.

There was no unrecognized compensation related to stock options at June 30, 2011.

A summary of stock option and warrant activity for the six months ended June 30, 2011 is as follows:

	Options and Warrants			Exercise Price Range				Weighted - Average Exercise Price
Balance, December 31, 2010		2,248,344		$	0.10	-	1.55	$	0.31
Expired		(73,000	)		0.17	-	0.24		0.17
Balance, June 30, 2011		2,175,344			0.10	-	1.55		0.32

Weighted-average fair value of options granted during the six months ended June 30, 2011								$	-

A summary of options and warrants outstanding and exercisable at June 30, 2011 is as follows:

		Outstanding							Exercisable
Range of Exercise Prices		Number Outstanding		Weighted - Average Remaining Contractual Life	Weighted - Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable		Weighted - Average Exercise Price		Aggregate Intrinsic Value
$	0.10 - 0.37		2,161,701	1.35 years	$	0.32	$	12,100		2,161,701	$	0.32	$	12,100
	0.90 - 1.55		13,643	0.97 years		0.94		-		13,643		0.94		-
$	0.10 - 1.55		2,175,344	1.34 years	$	0.32	$	12,100		2,175,344	$	0.32	$	12,100

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

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

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

Forward-Looking Statements

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

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

Overview

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

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

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

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

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

Liquidity and Capital Resources

At June 30, 2011, our principal sources of liquidity consisted of $2,239,330 of cash and working capital of $2,436,404, as compared to $2,145,709 of cash and working capital of $2,971,373 at December 31, 2010. In addition, our stockholders' equity was $3,076,967 at June 30, 2011, compared to stockholders' equity of $3,096,018 at December 31, 2010, a decrease of $19,051. The increase in cash primarily reflects the decrease of accounts receivable and payment on some tax liens.

Our accumulated deficit increased from $31,129,700 at December 31, 2010 to $31,130,918 at June 30, 2011. The $1,218 increase in accumulated deficit resulted directly from the net loss realized for the six months ended June 30, 2011.

Cash flow provided in operations for the six months ended June 30, 2011 was $72,418 as compared to $14,217 used for the same period ended June 30, 2010.

Investing activities for the six months ended June 30, 2011 provided net cash of $21,203, compared to $266,583 of net cash used during the six months ended June 30, 2010.

There were no financing activities in the six months ended June 30, 2011 and 2010.

Results of Operations

Description of Revenues

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

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

Our revenues this year have decreased as our largest hotel customer is undergoing renovations and is no longer using our minibars or services.

In 2005 we commenced our diversification strategy to invest in emerging growth companies. We continue to explore opportunities and perform due diligence on third parties with respect to potential investments. At this time, we have not reached a definitive agreement to make further investments. In addition, we may acquire an operating company in the future if the opportunity arises. The timing and return on such investments, however, cannot be assured.

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Revenue Recognition

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

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

Our installation, maintenance and license agreements stipulate that we collect a maintenance fee per eRoomServ refreshment center per day, payable on a monthly basis. Our objective is to generate gross profit margins of approximately 50% from our maintenance-related revenues. We base this expectation on our historical cost of maintenance of approximately $0.04 per unit per day and, pursuant to our maintenance agreements, our projected receipt of generally not less than $0.08 per unit per day.

Description of Expenses

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

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

Research and development expenses consist of payroll and related costs for hardware and software engineers, quality assurance specialists, management personnel, and the costs of materials used by our consultants in the maintenance of our existing installed products as well as research and development for new products. Research and development expenses in the six months ended June 30, 2011 and 2010 were $47,235 and $33,023, respectively.

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

Comparison of Three Months Ended June 30, 2011 and 2010

Revenues

Product Sales — Revenue from product sales was $149,073 for the three months ended June 30, 2011, compared to $219,106 for the three months ended June 30, 2010, representing a decrease of $70,033, or 32%. The decrease in product sales revenues was primarily due to the loss of one our biggest customers in the January, 2011 due to a renovation project they are undergoing.

Maintenance Fees— Maintenance fees were $43,480 for the three months ended June 30, 2011, compared to $49,668 for the three months ended June 30, 2010, representing a decrease of $6,188, or 12.5%. The decrease in maintenance fee revenue related to the termination of a hotel’s maintenance services.

Interest — Our income from interest was $28,100 for the three months ended June 30, 2011, compared to $22,638 for the three months ended June 30, 2010, representing an increase of $5,462, or 24.1%.

Loss on other than temporary decline in marketable securities — The loss represented the write-off in 2010 of an investment made in 2005 in Aprecia, Inc. in the amount of $50,000. Aprecia is no longer an operating company and therefore, a loss was recognized during the six months ended June 30, 2010.

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Cost of Revenue

Cost of Product Sales Revenue — Our cost of product sales revenue for the three months ended June 30, 2011 was $82,351, compared to $117,703 for the three months ended June 30, 2010, a decrease of $35,352, or 30%. The decrease in cost of product sales revenue relates to the decrease in product sales since June 30, 2010.

Cost of Maintenance Revenue — Our cost of maintenance revenue was $4,777 for the three months ended June 30, 2011, compared to $7,378 for the three months ended June 30, 2010, representing a decrease of $2,601, or 35.3%. The decrease in our cost of maintenance fee revenue related to the decrease in maintenance fees.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended June 30, 2011 and 2010 are summarized as follows:

	For the Three Months
	Ended June 30,
	2011		2010			Change			Percent Change
REVENUE
Product sales	$	149,073	$	219,106		$	(70,033	)		-32.0	%
Maintenance fees		43,480		49,668			(6,188	)		-12.5	%
Interest income		28,100		22,638			5,462			24.1	%
Loss on other than temporary decline in marketable securities		-		(50,000	)		50,000			-100.0	%
Total Revenue		220,653		241,412			(20,759	)		-8.6	%

COST OF REVENUE
Product sales		82,351		117,703			(35,352	)		-30.0	%
Maintenance		4,777		7,378			(2,601	)		-35.3	%
Total Cost of Revenue	$	87,128	$	125,081		$	(37,953	)		-30.3	%

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 June 30, 2011 and 2010, 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 $124,069 for the three months ended June 30, 2011, compared to $117,421 for the three months ended June 30, 2010, representing an increase of $6,648, or 5.7%. The increase in our selling, general and administrative expenses relates to the payout of CardinalPointe Capital in the amount of $20,000.

Research and Development—Research and development expenses were $21,482 for the three months ended June 30, 2011, compared to $31,295 for the three months ended June 30, 2010 representing a decrease of $9,813.

Net Loss Attributable to Common Stockholders

We realized a net loss of $12,026 for the three months ended June 30, 2011, compared to a net loss of $32,385 during the three months ended June 30, 2010. The $20,359 decreased net loss during the three months ended June 30, 2011 was primarily related to the write-off of an investment during the three months ended June 30, 2010.

Comparison of six months ended June 30, 2011 and 2010

Revenues

Product Sales — Revenue from product sales was $295,187 for the six months ended June 30, 2011, compared to $409,986 for the six months ended June 30, 2010, representing a decrease of $114,799, or 28%. The decrease in product sales revenues was primarily due to the loss of one our biggest customers in January, 2011 due to a renovation project they are undergoing.

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Maintenance Fee Revenues — Maintenance fee revenues were $87,861 for the six months ended June 30, 2011, compared to $99,552 for the six months ended June 30, 2010, representing a decrease of $11,691, or 11.7%. The decrease in maintenance fee revenue was due to the termination of maintenance services at a hotel.

Interest Income - Our revenue from interest and other income was $55,843 for the six months ended June 30, 2011 as compared to $53,052 for the six months ended June 30, 2010, representing an increase of $2,791, or 5.3%.

Cost of Revenue

Cost of Product Sales Revenue — Our cost of product sales revenue for the six months ended June 30, 2011 was $163,860, compared to $251,770 for the six months ended June 30, 2010, a decrease of $87,910 or 34.9%. The decrease in cost of product sales revenue relates to the decreased minibar product sold and labor provided in the six months ended June 30, 2011.

Cost of Maintenance Fee Revenue — Our cost of maintenance fee revenue was $7,517 for the six months ended June 30, 2011, compared to $23,135 for the six months ended June 30, 2010, representing a decrease of $15,618, or 67.5%. The decrease in our cost of maintenance fee revenue was due to a decrease in Maintenance Fee Revenue and greater efficiencies put into place.

The changes and percent changes with respect to our revenues and our cost of revenue for the six months ended June 30, 2011 and 2010 are summarized as follows:

	For the Six Months
	Ended June 30,
	2011		2010			Change			Percent Change
REVENUE
Product sales	$	295,187	$	409,986		$	(114,799	)		-28.0	%
Maintenance fees		87,861		99,552			(11,691	)		-11.7	%
Interest income		55,843		53,052			2,791			5.3	%
Loss on other than temporary decline in marketable securities		-		(50,000	)		50,000			-100.0	%
Total Revenue		438,891		512,590			(73,699	)		-14.4	%

COST OF REVENUE
Product sales		163,860		251,770			(87,910	)		-34.9	%
Maintenance		7,517		23,135			(15,618	)		-67.5	%
Total Cost of Revenue	$	171,377	$	274,905		$	(103,528	)		-37.7	%

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the six months ended June 30, 2011 and 2010, 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 $221,497 for the six months ended June 30, 2011, compared to $236,367 for the six months ended June 30, 2010, representing a decrease of $14,870, or 6.3%.

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Research and Development—Research and development expenses were $47,235, for the six months ended June 30, 2011, compared to $33,023 for the six months ended June 30, 2010 representing an increase of $14,212. The increase in our research and development expenses for the six months ended June 30, 2011 reflects an increase in new product development in 2011.

Net Loss Attributable to Common Stockholders

We realized a net loss of $1,218 for the six months ended June 30, 2011, compared to a net loss of $31,705 during the six months ended June 30, 2010. The $30,487 decreased net loss was primarily related to the write-off of an investment during the six months ended June 30, 2010.

Contractual Cash Obligations and Commercial Commitments

There were no significant contractual cash obligations or commercial commitments either on or off balance sheet as of June 30, 2011.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls over Financial Reporting

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

None

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Removed and Reserved

Item 5. Other Information

Not applicable.

Item 6. Exhibits

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

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SIGNATURE

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

	eRoomSystem Technologies, Inc.
	(Registrant)

Date: August 15, 2011
	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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