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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 Form 10-K

(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2014
 
 
OR
 
o
ANNUAL REPORT PURSUANT TO 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
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Title of each class
 
Name of each exchange on which registered
     
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $0.0001 per share
(Title of each Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  Yes  o     No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  No  x
 
Indicate by check mark whether the registrant (1) has 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  o
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o
  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   
 
 
Large accelerated filer o
Accelerated filer o
  
  
  
  
  
  
Non-accelerated filer   o (Do not check if a smaller reporting company)
Smaller reporting company x
  
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).  Yes  o    No  x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,099,802.
 
As of March 18, 2015 there were 24,167,865 shares of common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
TABLE OF CONTENTS
 
PART I
 
1
1
4
4
4
PART II
 
5
5
6
10
24
24
25
PART III
 
26
26
27
28
29
29
PART IV
 
31
31
 

 
PART I
 
ITEM 1.      BUSINESS
 
As used in this Annual Report on Form 10-K (this “Report”), references to the “Company,” the “Registrant,” “we,” “our” or “us” refer to eRoomSystem Technologies, Inc., and includes our subsidiaries, unless the context otherwise indicates.
 
Forward-Looking Statements
 
This Report contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash, which are explained below under “Liquidity and Capital Resources”. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable laws.

Historical Summary
 
We were originally incorporated under the laws of the State of North Carolina on March 17, 1993 as InnSyst! Corporation. On September 28, 1993, the operations of InnSyst! were transferred to RoomSystems, Inc., a Virginia corporation, incorporated on August 12, 1993, or RoomSystems Virginia. On April 29, 1996, the operations of RoomSystems Virginia were transferred to RoomSystems, Inc., a Nevada corporation, or RoomSystems. Through an agreement and plan of reorganization approved by a majority of our stockholders dated December 31, 1999, RoomSystems became the wholly owned subsidiary of RoomSystems International Corporation. Pursuant to this agreement and plan of reorganization, all shares of RoomSystems common stock, including all shares of common stock underlying outstanding options and warrants, Series A convertible preferred stock and Series B convertible preferred stock were exchanged for the identical number and in the same form of securities of RoomSystems International Corporation. On February 1, 2000, we changed our name from RoomSystems International Corporation to RoomSystems Technologies, Inc. Subsequently, on March 29, 2000, with the approval of our stockholders, we changed our name to eRoomSystem Technologies, Inc. Thereafter, we changed the name of RoomSystems, Inc. to eRoomSystem Services, Inc.
  
We have four wholly owned subsidiaries, eRoomSystem Services, Inc. (“eRoomSystem Services”) (formerly RoomSystems), eFridge, LLC (“eFridge”), eOneCapital, Inc (“eOneCapital”) and eOne Group, LLC (“eOne Group”). eRoomSystem Services provides customer service and maintenance for refreshment centers owned by hotels and instructs hotel personnel on the use and maintenance of our products. eFridge provides a turnkey solution to various hotels. eFridge manages the process of providing product and restockers to the hotels.  eOneCapital and eOne Group provide asset based loans and other investments.
 
Overview
  
In January 2014, 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.

Summary of Our Diversification Initiatives

We are continuously performing due diligence for the purpose of making investments in privately-held or publicly traded emerging growth stage companies. In the future, we may acquire an existing operating company if the opportunity arises. At this time, we have no agreements with any such companies.

If the Company is presented with an opportunity to lend funds, it sometimes does so. To date, the Company loaned $1,100,000 in amounts ranging from $150,000 to $450,000 to various parties for a one year term.

Our Products and Services

Amenities Manager

Since our inception, it has been our objective to provide innovative in-room amenities solutions to the lodging industry. Our new amenity management platform brings together the hotel’s amenities on a cloud-based server. Our proprietary software, AMENITIES MANAGER™ operates as a multi-tasking data collection and retrieval system. Our software provides an interactive environment that allows the input and retrieval of information in the form of user-friendly, customized reports and:

• Is a friendly, easy-to-learn interactive, graphical environment;
• Helps the hotel maximize personnel efficiencies with regard to amenity delivery and restocking;
• Tracks inventory daily to ensure rooms are fully stocked and contain no expired items;
 Provides real-time, user-friendly reports that track on a daily basis restocking requirements, daily, monthly and annual product sales statistics, overnight audits, inventory control and a variety of customized reports; and
• Allows for special amenity requests

Turnkey Amenities Manager

We also offer a turnkey arrangement which provides and manages both amenity products and attendants to hotels in conjunction with the AMENITIES MANAGER™ at no cost to the hotel. The hotels share in the recurring revenues generated.

Amenities Optimizer
 
One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected millions of room-nights of data. The eRoomSystem file server collects information regarding the usage of hotel refreshment centers on a real-time basis. We use this information to help our customers increase their operational efficiencies. The information we obtain enables us to categorize the information according to specific consumer buying patterns and demographics.
 
The information we collect is currently offered to our customers as part of our Amenities Manager™ software. Our hotel clients benefit in various ways from the information we provide. The hotels that are responsible for restocking the goods sold from our refreshment centers can utilize the real-time sales data generated by the Amenities Manager™ to help the hotel maximize personnel efficiencies with regard to amenity delivery and restocking. The timely transfer of sales data to the hotel prevents guest pilferage and minimizes disputes over refreshment center usage, both of which are prevalent in the lodging industry. Finally, the ability to track product sales performance, including specific information about their guests' buying patterns and non-confidential information about other hotels in similar geographic regions, allows the hotel to stock the refreshment centers with more popular items, which may lead to increased sales of product from the refreshment centers.
 
Research and Development

At the core of our products and services is our proprietary software and hardware. In 2014, we continued to step up our research and development projects for the purpose of creating new products and software. We are continuing to work on the AMENITIES MANAGER™, a cloud based hotel amenity management platform. There is no assurance that the products we are working on will be successfully completed or deployed. We spent $43,896 and $160,357 on research and research and development activities in 2014 and 2013, respectively, none of which expenses were borne directly by customers.
 
 
Sales and Marketing
 
We have deployed over 12,000 refreshment centers at many hotel properties. We have renewed our sales and marketing efforts with respect to our new amenity platform for hotels. There is no assurance that we will be successful.

Manufacturing

We do not currently manufacture our products and do not anticipate doing so in the future. We utilize outside manufacturing companies as necessary.
 
Competition

The market for in-room amenities platforms in the lodging industry is quite competitive, and the competition has further intensified in recent years. Management is focused on expanding our existing client base. Our renewal of sales and marketing will be subject to significant competition from competitors. Competitors include Amenity Services, a company that provides economical and custom products for hotel guest rooms. We provide a full service turnkey solution for hotel minibars in addition to the economical and custom products for the hotel guest rooms.

Customers

During the year ended December 31, 2014, revenues from two customers accounted for 62% of our total revenues. During the year ended December 31, 2013, revenues from one customer accounted for 40% of our total revenues.
 
Intellectual Property

We rely upon a combination of trademark and copyright law, trade secret protection and confidentiality with our employees, customers and business partners to protect our proprietary rights in our products, services, know-how and information.

We have pending applications for the following trademarks and service marks: Amenities Manager™ and eRoomSystem Technologies. We have also registered our logo.

Our proprietary software consists of two modules and provides the backbone of the Amenities Manager™. The first module is the web-based, locally hosted or cloud software that is the core of the Amenities Manager™. It collects data inputted by hotel and office staff and produces a wide-variety of management and operational reports. Our existing hotel clients utilize our version 1.8 software that provides users with a friendly, easy-to-learn graphic environment which generally expands the report generating capabilities of the property. The second module is a Windows(R) based program that provides a communication link between our Amenities Manager™ software, and the hotel's property management system.

We currently do not have any patents for our software. We do not know if future patent applications, if any, will be issued with the full scope of claims we seek, if at all, or whether any patents we receive will be challenged or invalidated. Our means of protecting our proprietary rights in the United States, and abroad, may not be adequate and competitors may independently develop similar technology. We cannot be certain that our services do not infringe on patents or other intellectual property rights that may relate to our services. Like other technology-based businesses, we face the risk that we will be unable to protect our intellectual property and other proprietary rights, and the risk that we will be found to have infringed on the proprietary rights of others.
 
            Government Regulation
 
We are subject to laws and regulations applicable to businesses generally, as well as to laws and regulations directly applicable to the lodging industry and minibars in particular. These laws and regulations relate to the qualification required to do business in the various states and in foreign nations in which we currently have, or propose to have, our products.
 
Apart from laws and regulations applicable to us, some of our existing and potential customers are subject to additional laws or regulations, such as laws and regulations related to liquor and gaming, which may have an adverse effect on our operations. Due to the licensing requirements relating to the sale of alcohol in each state, the failure of any of our revenue-sharing partners to obtain or maintain its liquor license would result in the loss of revenue for our revenue-sharing partner and us. In addition, due to the heightened hotel-casino regulatory environment and our ongoing revenue-sharing agreements with hotel-casinos, our operations may be subject to review by a hotel-casino's compliance committee to verify that its involvement with us would not jeopardize its gaming license. The regulatory compliance committee of a hotel-casino has broad discretion in determining whether or not to approve a transaction with a third party, which review typically includes the character, fitness and reputation of the third party and its officers, directors and principals. If our history or operations present problems for a hotel-casino, we would either have to expend resources to address or eliminate the concerns or forego the business.
 
 
Employees
 
We currently employ fifteen employees, eight of which are full-time, in addition to four consultants.
 
ITEM 2.      PROPERTIES.
 
We lease our headquarters and principal executive offices, comprising approximately 1,600 square feet, located at 150 Airport Road, Suite 1200, Lakewood, New Jersey 08701 for $1,600 per month. We have exercised our option to renew the lease for one additional year starting March 1, 2015 at $1,750 per month.

            In addition, we currently lease approximately 80 square feet of storage space on a month-to-month basis for $65 per month in Salt Lake City, Utah. We also utilize a warehouse and distribution company with 51,500 square feet in Lakewood Township, NJ for which we pay $7 per pallet per month. We maintain inventory and replacement parts at these facilities.

ITEM 3.      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 4.      MINE SAFETY DISCLOSURES

Not applicable
 
 
 
PART II
  
ITEM 5.      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
  
Market Information
 
Prior to August 3, 2000, there was no public market for our common stock. In conjunction with our initial public offering, in August of 2000, our common stock was accepted for listing on the NASDAQ SmallCap Market under the trading symbol "ERMS". In April 2003, our common stock was delisted from the NASDAQ SmallCap market. Our common stock is currently quoted on the OTCQB under the same symbol. As of March 18, 2015, there were 24,167,865 shares of common stock outstanding.
 
High And Low Sale Prices Of Our Common Stock

The following table sets forth the high and low bid information of our common stock, as quoted on the OTCQB (which quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions) for each quarter during the period January 1, 2013 through December 31, 2014:

Calendar Quarter Ended
 
Low
   
High
 
March 31, 2013
  $ 0.08     $ 0.17  
June 30, 2013
  $ 0.08     $ 0.13  
September 30, 2013
  $ 0.07     $ 0.13  
December 31, 2013
  $ 0.05     $ 0.10  
March 31, 2014
  $ 0.05     $ 0.10  
June 30, 2014
  $ 0.05     $ 0.13  
September 30, 2014
  $ 0.05     $ 0.08  
December 31, 2014
  $ 0.05     $ 0.10  
 
The last reported price of our common stock on the OTCQB on March 18, 2015 was $0.075 per share.

Holders

As of March 18, 2015, there were approximately 360 stockholders of record of our common stock.
 
Dividends

We have never declared or paid any cash dividends on our common stock. The declaration and payment of cash dividends in the future will be at the discretion of our Board and will depend upon a number of factors, including, among others, our future earnings, operations, funding requirements, restrictions under our credit facility, our general financial condition and any other factors that our board considers important.

Recent Sales of Unregistered Securities; Use of Proceeds

There were no sales of unregistered equity securities that were not previously reported.

Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers

None
 

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information

The following table sets forth information about our equity compensation plans as of December 31, 2014.

Plan Category  
Number of securities to be issued upon exercise
of outstanding options, warrants and rights
   
Weighted-average
exercise price of
outstanding options, warrants and rights
   
Number of securities
available for future issuance
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plan
approved by security holders
    242,500     $ 0.09       2,757,500  
                         
Equity compensation plans not
approved by security holders
    -     $ -       -  
                         
Total
    242,500     $ 0.09       2,757,500  


Equity Compensation Plans Approved by Security Holders

The 2000 Stock Option and Incentive Plan, or the 2000 Plan, was adopted by our board on February 3, 2000 and approved by our stockholders on March 29, 2000. The 2000 Plan was amended by our stockholders on each of May 7, 2001, July 29, 2002 and November 15, 2004 to increase the number of shares of common stock reserved for issuance under the 2000 Plan from 2,000,000 shares to 2,360,000 shares, from 2,360,000 to 2,700,000, and from 2,700,000 to 3,000,000 shares, respectively. The 2000 Plan provides us with the vehicle to grant to employees, officers, directors and consultants stock options and bonuses in the form of stock and options including "incentive stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986 and non-qualified stock options. As of December 31, 2014, there were options to purchase 242,500 shares of our common stock outstanding under the 2000 Plan. The compensation committee has authority to determine the persons to whom awards will be granted, the nature of the awards, the number of shares to be covered by each grant, the terms of the grant and with respect to options, whether the options granted are intended to be incentive stock options, the duration and rate of exercise of each option, the option price per share, the manner of exercise and the time, manner and form of payment upon exercise of an option.
 
Equity Compensation Plans Not Approved by Security Holders

All outstanding options and warrants under equity compensation plans not approved by security holders have expired.

ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

Certain statements contained in this Annual Report, including statements regarding the anticipated development and expansion of our business, our intent, belief or current expectations, primarily with respect to the future operating performance of the Company and the services we expect to offer and other statements contained herein regarding matters that are not historical facts, are “forward-looking” statements. Because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. The following management discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, the audited financial statements and related notes elsewhere in this Annual Report.

All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
 
Plan of Operation

In January 2014, 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 locally hosted or cloud-based system that assists the hotel in enhancing its image and theme through distinctive and unique products and managing its amenities with optimized efficiency.
 
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.
 

Description of Revenues

We derive revenues primarily from the sale of products in hotel in-room refreshment centers. In these hotels, we receive most of the revenues for the product sold in the minibars and baskets. We provide a percentage of revenues over a predetermined threshold 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 makes us extremely vulnerable to downturns caused by the general economic environment. Such downturns 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 or revenue sharing agreement. Travel and leisure is often discretionary for consumers and may be 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.
  
We have a 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 no agreements to make such 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.

Revenue Recognition

We generate revenues from the sale of products in 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 product sales consists primarily of cost of goods and labor. 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, legal, human resources, and information systems.

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 we have initiated development of new product lines there were some research and development expenses in the fiscal years 2014 and 2013.
 
In accordance with FASB Accounting Standards Codification (ASC) 985, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, 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. We have charged our software development costs to research and development expense in our consolidated statements of operations.
 
Results of Operations

Comparison of Years Ended December 31, 2014 and 2013
  
Revenues
  
Revenue from product sales and other services was $794,461 in 2014, as compared to $600,563 in 2013, representing an increase of $193,898, or 32%. The increase in revenue in 2014 reflected continuous effort to improve our product sales at each hotel as well increased hotels in 2014 over 2013.

During the year ended December 31, 2014, revenues from two customers accounted for 62% of our total revenues.

Cost of Revenue
  
Our cost of product sales and service revenue was $401,907 for 2014 as compared to $330,650 for 2013, representing an increase of $71,257, or 22%. The increase was due to increased sales. The gross margin percentage on revenue from product sales revenue was 49% in 2014 as compared to 45% in 2013.
 

The changes and percent changes with respect to our revenues and our cost of revenue for the years ended December 31, 2014 and 2013 are as follows: 

   
2014
   
2013
   
Change
   
Percent
Change
 
                         
REVENUE
  $ 794,461     $ 600,563     $ 193,898       32 %
                                 
                                 
COST OF REVENUE
  $ 401,907     $ 330,650     $ 71,257       22 %
 
Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the years ended December 31, 2014 and 2013, the trends contained therein are limited to a two-year comparison and should not be viewed as a definitive indication of our future results.

Operating Expenses

Selling, General and Administrative — Selling, general and administrative expenses were $436,021 for 2014 and $432,947 for 2013, representing an increase of $3,074, or 1%. Selling, general and administrative expenses represented 55% of our total revenues in 2014 and 72% of our total revenues in 2013.

Research and Development Expenses — Research and development expenses were $43,896 for 2014 and $160,357 for 2013, representing a decrease of $116,461, or 73%. The decrease in research and development expenses was due to decreased development on the new product lines. Research and development expenses represented 6% of our total revenue in 2014 and 27% of our total revenue in 2013.

Investment Income

Investment Income — Our income from investments was $200,381 in 2014, compared to $24,728 in 2013, representing an increase of $175,653, or 710%. The increase related for the most part to repayment of an outstanding promissory note evidencing a loan originally made in 2011 to Blackbird Corporation and recapture of the interest income on such note (the “Blackbird Note”).

Net Income/Loss Attributable to Common Stockholders

We realized a net income attributable to common stockholders of $113,018 in 2014, as compared to a net loss of $298,663 in 2013. The $411,681 difference was primarily due to an increase in revenue, a decrease in research and development expense and an increase in investment income.
 
Liquidity and Capital Resources

At December 31, 2014, we had $1,453,971 of cash and working capital of $2,402,932, as compared to $1,376,822 of cash and working capital of $1,851,734 at December 31, 2013. In addition, our stockholders' equity was $2,491,840 at December 31, 2014 as compared to $2,368,432 at December 31, 2013, an increase of $123,408. The increase in cash reflects in large part the net income in 2014. The increase in working capital reflects the increase in current assets from the payment of the non-performing Blackbird Note receivable. The increase in stockholders’ equity primarily reflects the net income in 2014.

Our accumulated deficit decreased to $31,738,002 at December 31, 2014 as compared to $31,851,020 at December 31, 2013. The decrease in accumulated deficit is a direct result of our net income of $113,018 in the year ended December 31, 2014.

Net cash used by operating activities for the year ended December 31, 2014 was $22,255, as compared to $220,382 during the year ended December 31, 2013.

Net cash provided by investing activities for the year ended December 31, 2014 was $99,404, as compared to net cash used during the year ended December 31, 2013 of $365,368. The change resulted primarily from proceeds from notes receivable in 2014.
 
           Net cash used in financing activities for the years ended December 31, 2014 and 2013 was $0.


We currently believe that our cash on hand will provide sufficient capital resources and liquidity to fund our expected operating expenditures for the next twelve months.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Upon the effective date, the ASU replaces almost all existing revenue recognition guidance, including industry specific guidance, in United States Generally Accepted Accounting Principles. This standard is effective for fiscal years and interim reporting periods beginning after December 15, 2016. The Company is currently assessing the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures upon implementation in the first quarter of fiscal year 2018.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.
 
 
 
 
ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

 
 
 
John Scrudato CPA
CERTIFIED PUBLIC ACCOUNTING FIRM
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
To the Board of Directors and Stockholders of
eRoomSystem Technologies, Inc.
 
We have audited the accompanying balance sheet of eRoomSystem Technologies, Inc. as of December 31, 2014 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of eRoomSystem Technologies, Inc. at December 31, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 

/s/ John Scrudato CPA
 
 
Califon, New Jersey
March 9, 2015
 
7 Valley View Drive Califon, New Jersey 07830

Registered Public Company Accounting Oversight Board Firm
 
 

GRAPHIC

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and the Stockholders
eRoomSystem Technologies, Inc.

We have audited the accompanying consolidated balance sheet of eRoomSystem Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eRoomSystem Technologies, Inc. and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.  
 
/s/ Eide Bailly LLP
 
 
Salt Lake City, Utah
 
April 2, 2014 
 





www.eidebailly.com
 
5 Triad Center, Ste. 750  |  Salt Lake City, UT 84180-1128  |  T 801.532.2200  |  F 801.532.7944  |  EOE
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
December 31,
   
December 31,
 
   
2014
   
2013
 
ASSETS
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,453,971     $ 1,376,822  
Restricted cash
    61,350       -  
Investment in available for sale securities
    24,455       22,734  
Notes receivable
    702,500       402,000  
Accounts receivable, net of allowance for doubtful accounts of  $5,101 and $10,100
    67,771       57,233  
Inventory
    79,191       28,237  
Advance to hotels
    74,370       46,418  
Prepaid expenses
    111,064       13,248  
Total Current Assets
    2,574,672       1,946,692  
PROPERTY AND EQUIPMENT
               
Property and equipment, net of accumulated depreciation of $15,409 and $32,076
    63,287       100,480  
NOTE RECEIVABLE, non-performing
    -       399,863  
INVESTMENT IN REAL PROPERTY TAX LIENS
    22,688       13,422  
DEPOSITS
    2,933       2,933  
                 
Total Assets
  $ 2,663,580     $ 2,463,390  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES
               
Accounts payable
  $ 22,783     $ 15,012  
Accrued liabilities
    87,998       75,633  
Securities borrowed
    60,959       -  
Customer deposits
    -       4,313  
Total Current Liabilities
    171,740       94,958  
                 
Total Liabilities
    171,740       94,958  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none outstanding
    -       -  
Common stock, $0.001 par value; 50,000,000 shares authorized; shares outstanding
    24,167,865 and 24,107,865
    24,168       24,108  
Additional paid-in capital
    34,203,953       34,195,344  
Accumulated deficit
    (31,738,002 )     (31,851,020 )
Accumulated other comprehensive income
    1,721       -  
Total Stockholders' Equity
    2,491,840       2,368,432  
                 
Total Liabilities and Stockholders' Equity
  $ 2,663,580     $ 2,463,390  
 
See accompanying notes to consolidated financial statements
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

   
For the years ended December 31,
 
   
2014
   
2013
 
REVENUE
  $ 794,461     $ 600,563  
COST OF REVENUE
    401,907       330,650  
GROSS MARGIN
    392,554       269,913  
OPERATING EXPENSES
               
Selling, general and administrative expense, including non-cash
   compensation of $8,669 and $10,886
    436,021       432,947  
Research and development expense
    43,896       160,357  
Net Operating Expenses
    479,917       593,304  
OTHER INCOME
               
Investment Income
    200,381       24,728  
                 
Net Income (Loss)
    113,018       (298,663 )
                 
Other Comprehensive Income (Loss)
               
Unrealized holding gain (loss)
    16,579       -  
Reclassification to realized gain (included in net income)
    (14,858 )     -  
                 
Comprehensive Income (Loss)
  $ 114,739     $ (298,663 )
                 
Basic Income (Loss) Per Common Share
  $ 0.00     $ (0.01 )
Diluted Income (Loss) Per Common Share
  $ 0.00     $ (0.01 )

See accompanying notes to consolidated financial statements
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
 
   
Shares
   
Amount
 
   
2014
   
2013
   
2014
   
2013
 
COMMON STOCK
                       
Balance at Beginning of Year
    24,107,865       24,057,865     $ 24,108     $ 24,058  
Issuance to directors and employee for services
    60,000       50,000       60       50  
Balance at end of year
    24,167,865       24,107,865       24,168       24,108  
                                 
ADDITIONAL PAID-IN-CAPITAL
                               
Balance at Beginning of Year
                    34,195,344       34,184,508  
Issuance to directors for services
                    4,950       6,450  
Issuance of shares and options to employees
                    3,659       4,386  
Balance at end of year
                    34,203,953       34,195,344  
                                 
ACCUMULATED DEFICIT
                               
Balance at Beginning of Year
                    (31,851,020 )     (31,552,357 )
Net income/(Loss)
                    113,018       (298,663 )
Balance at end of year
                    (31,738,002 )     (31,851,020 )
                                 
ACCUMULATED OTHER COMPREHENSIVE LOSS
                               
Balance at Beginning of Year
                    -       -  
Unrealized loss on marketable securities
                    1,721       -  
Balance at end of year
                    1,721       -  
Total Stockholders' Equity at End of Year
                  $ 2,491,840     $ 2,368,432  

See accompanying notes to consolidated financial statements
 
  
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
For the years ended December 31,
 
   
2014
   
2013
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)   $ 113,018     $ (298,663 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
         
Depreciation and amortization
    10,449       16,986  
Accrued interest receivable
    (500 )     (2,000 )
Gain on sale of marketable securities
    (14,858 )     -  
Gain (loss) on sale of equipment
    (850 )     5,392  
Loss on impairment of equipment
    33,645       46,440  
Unrealized loss on investment in certificate of deposit
    -       2,266  
Non-cash compensation expense
    8,669       10,886  
Changes in operating assets and liabilities:
               
Restricted cash
    (61,350 )     -  
Accounts receivable
    (10,538 )     9,367  
Inventory
    (50,954 )     (15,001 )
Advance to hotels
    (27,952 )     -  
Prepaid expenses
    (97,816 )     9,393  
Accounts payable
    7,771       (3,670 )
Accrued liabilities
    12,365       (1,778 )
Borrowed shares
    60,959       -  
Customer deposits
    (4,313 )     -  
                 
Net Cash Used In Operating Activities
    (22,255 )     (220,382 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    (6,901 )     (3,463 )
Purchase of investments in real property tax liens
    (9,266 )     -  
Purchase of marketable securities
    (25,000 )     -  
Proceeds from sale of equipment
    850       -  
Purchase of certificate of deposit
    -       (25,000 )
Advances made under notes receivable
    (700,000 )     (400,000 )
Proceeds from collection of note receivable
    400,000       -  
Proceeds from sale of marketable securities
    39,858       -  
Proceeds from collections of real property tax liens
    -       12,845  
Return of deposit
    -       250  
Proceeds from collection of note receivable, non-performing
    399,863       50,000  
                 
Net Cash Provided by (Used In) Investing Activities
    99,404       (365,368 )
                 
Net Increase (Decrease) in Cash
    77,149       (585,750 )
                 
Cash and cash equivalents at Beginning of Period
    1,376,822       1,962,572  
                 
Cash and cash equivalents at End of Period
  $ 1,453,971     $ 1,376,822  
 
See accompanying notes to consolidated financial statements
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization, Nature of Operations and Principles of Consolidation – eRoomSystem Technologies, Inc. is a Nevada corporation.  eRoomSystem Technologies, Inc. and its subsidiaries, collectively referred to as the "Company," provide a complete line of amenity services for hotels.

The accompanying consolidated financial statements include the accounts of eRoomSystem Technologies, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

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. At December 31, 2014 and 2013, the Company held cash in excess of federally insured limits of $316,075 and $510,043, respectively.

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.

Securities Borrowed – Securities borrowed are carried at the amounts of cash collateral received in connection with the transactions and accounted for as collateralized financing transactions. In connection with trading activities, we borrow securities to cover short sales. When we borrow securities, we generally provide cash to the lender as collateral, which is reflected in our Consolidated Balance Sheet as Restricted Cash. We earn interest revenues on this cash collateral.
 
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% and 15% at December 31, 2014 and 2013 respectively, 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. In addition, the Company maintained an inventory of refreshment centers to be placed in Hotels through September 30, 2013. During fourth quarter 2013, the refreshment centers were capitalized as property and equipment. 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 remove the beverages from the refreshment centers.

Notes Receivable – The notes receivable are stated at the historical carrying amount 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. No impairment was deemed necessary during 2014 or 2013. The carrying amount of the notes receivable approximates their fair value because of their short-term maturities. However, one of the notes was classified as long term for the year ended December 31, 2013 (see Note 3).
 
Investment in Real Property Tax LiensThe investments in real property tax liens are accounted for as investments in troubled debt 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 December 31, 2014 and 2013.
 

Property and Equipment – Property and equipment consist primarily of eRoomServ refreshment centers and are stated at cost, less accumulated depreciation. Major additions and improvements are capitalized, while repairs and maintenance costs are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
 
eRoomServ refreshment centers in service
5 - 7 years
Computer and office equipment
3 - 7 years
Vehicles and other
7 years

Depreciation expense was $10,449 and $16,986 for the years ended December 31, 2014 and 2013, respectively. On retirement, trade-in or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations.
 
During the fourth quarter 2013, the Company determined that refreshment centers would no longer be sold to hotels, but would rather be used to replace existing refreshment centers used by the Company. As a result, the cost of refreshment centers in the amount of $92,880 was moved from inventory to property and equipment in fourth quarter 2013. In addition, the Company assessed the carrying value of these refreshment centers and determined, based on their projected future cash flows, that the refreshment centers were impaired. As a result, the carrying value of the refreshment centers was written down to their fair value, determined by their projected future cash flows, which resulted in the recognition of $46,440 of impairment expense during the year ended December 31, 2013. During the second quarter 2014, the Company determined the need to reduce the carrying value of refreshment centers installed in hotel rooms to its estimated value. As a result, the cost of refreshment centers in the amount of $70,348 was written down in the amount of $33,645.
 
Capitalized Software Costs – In accordance with FASB Accounting Standards Codification (ASC) 985, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, 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 software development costs were $43,896 for the year ended December 31, 2014 and were $48,168 for the year ended December 31, 2013. The Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations.
 
Valuation of Long-Lived Assets – The carrying values of long-lived assets, including notes receivable, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying values may not be recoverable. When such an event occurs the Company projects the undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections indicate that the carrying value of the asset will not be recovered, the carrying value of the asset is reduced by the estimated excess of the carrying value over the projected discounted cash flows estimated to be generated by the asset. During second quarter 2014, the Company determined the need to reduce the carrying value of refreshment centers installed in hotel rooms to its estimated value. As a result, the Company recognized an impairment loss of $33,645 during the year ended December 31, 2014. The Company reevaluated its long-lived assets at December 31, 2014 and found they represented current estimated market value. During the fourth quarter 2013, the carrying value of refreshment centers in property and equipment was impaired and the Company recognized an impairment loss of $46,440 during the year ended December 31, 2013.
 
Revenue Recognition – The Company generates revenues from the sale of products in refreshment centers, from maintenance services and the lease of equipment. In the fiscal year ended December 31, 2013 revenue from the sale of products was $525,385, and revenue from maintenance services and the lease of equipment was $75,178. Cost of maintenance services and the lease of equipment was immaterial in 2013. There was no revenue or cost of revenue in 2014 from maintenance services and the lease of equipment in 2014.
 
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
 
Stock-Based Compensation – The Company has one stock-based employee compensation plan, which is described more fully in Note 8. The Company utilizes the fair value recognition provisions of FASB ASC 718, Stock Compensation. Accordingly, the Company records expense, if applicable, for (i) the unvested portion of grants issued during 2014 and 2013 and (ii) new grant issuances, both of which will be expensed over the requisite service (i.e., vesting) periods.

Sales and Marketing – Sales and marketing expenses include the costs of advertising, promotions, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $11,908 and $0 in fiscal years 2014 and 2013, respectively.
 
Research and Development – Research and development costs are expensed as incurred.
 

Income Taxes – The Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary.

Accounting for Uncertainty in Income Taxes – The Company analyzes its filing positions in all jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions. The Company provides a liability for the potential tax, penalty and interest on uncertain tax positions that are not likely to be sustained upon audit.

Net Loss per Common Share – Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted income (loss) per common share is computed by dividing net income (loss), by the weighted-average number of common shares and dilutive potential common share equivalents outstanding. When dilutive, the incremental potential common shares issuable upon exercise of stock options are determined by the treasury stock method.
 
The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted loss per common share:

   
For the years ended December 31,
 
   
2014
   
2013
 
Net income (loss)
  $ 113,018     $ (298,663 )
Basic weighted-average common shares outstanding
    24,139,098       24,082,660  
Effect of dilutive securities
               
Stock options and warrants
    34,154       -  
Diluted weighted-average common shares outstanding
    24,173,252       24,082,660  
Basic income (loss) per share
  $ 0.00     $ (0.01 )
Diluted income (loss) per share
  $ 0.00     $ (0.01 )

As of December 31, 2014 and 2013, there were potential common stock equivalents from options and warrants of 92,500 and 342,500 respectively that were not included in the computation of diluted loss per common share because their effect would have been anti-dilutive.
 
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Upon the effective date, the ASU replaces almost all existing revenue recognition guidance, including industry specific guidance, in United States Generally Accepted Accounting Principles. This standard is effective for fiscal years and interim reporting periods beginning after December 15, 2016. Early application is not permitted. The Standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. The Company is currently assessing the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures upon implementation in the first quarter of fiscal year 2018. 

Subsequent Events – The Company evaluates events subsequent to its balance sheet date for disclosure through the date the financial statements are issued.
 
NOTE 2 – INVESTMENTS
 
Investment in Equity Securities Available for Sale – The Company was issued 50,000 shares of stock in Blackbird Corporation in July 2008. On June 7, 2010, Blackbird entered into a share exchange with RPID later renamed Spot Mobile International Ltd (“Spot Mobile”). The 50,000 shares of common stock of Blackbird were exchanged for 1,700,000 restricted shares of common stock of Spot Mobile. The Spot Mobile shares were reverse split in October 2010 to 56,667 shares. The Company reduced the carrying value of the investment in Spot Mobile to zero by recording a $1,700 unrealized loss during the year ended December 31, 2012, which is included in other comprehensive loss. In 2013, the Company recognized the loss as a realized loss in its operations.
 
Investments in equity securities as of December 31, 2013 are summarized below:

Equity Securities
 
Cost Basis
   
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Spot Mobile
  $ -     $ -     $ -     $ -  
 
On the date of issuance, the fair value of BlackBird’s common stock was not determinable and the shares were valued at zero.
 

Investment in Available for Sale Debt Securities

Debt Securities
 
Cost Basis
   
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Corporate Debt Securities
  $ 22,734     $ 1,721     $ -     $ 24,455  
 
The corporate debt securities mature on August 31, 2018 and May 29, 2020.
 
Investment in Real Property Tax Liens – At December 31, 2014, the Company held $22,688 of real property tax liens from various municipalities in New Jersey. During the year ended December 31, 2014, the Company purchased $9,266 of additional tax lien products. During the year ended December 31, 2013, the Company did not purchase any additional tax lien products and collected $12,845 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% and are also increased by the amount of any collection expenses incurred. The investment in the real property tax liens are accounted for as an investment in troubled debts and are carried at cost. Collection of interest, penalties and expense reimbursements is not certain and is recognized upon being realized.
 
NOTE 3 – NOTES RECEIVABLE

Non-Performing Loan
On July 24, 2008, the Company loaned $500,000 to BlackBird Corporation (“BlackBird”) under the terms of a 10% senior secured convertible promissory note (the “Secured Note”). The Secured Note bore interest at 10% per annum, payable quarterly, and was due June 30, 2009. In addition, BlackBird issued 50,000 shares of its common stock to the Company. BlackBird further agreed in July 2008, notwithstanding the terms of the note, if the loan was not repaid by January 1, 2009, interest on the note would accrue at 18% per annum starting January 1, 2009. The Secured Note was not paid by January 1, 2009 and it continued to accrue interest at 18% per annum. On April 1, 2011, the Company agreed to extend the due date of the Secured Note to June 30, 2011.
 
BlackBird did not pay its interest payment for the second quarter of 2011 in a timely fashion. On November 3, 2011, the Company entered into a forbearance agreement with BlackBird to reduce the interest rate on the Secured Note to 10% retroactive to April 1, 2011 and to not foreclose on BlackBird’s assets if BlackBird remains in compliance with the terms of the agreement. As part of this agreement, BlackBird agreed to pay all outstanding interest due on the loan through September 30, 2011 by November 11, 2011. BlackBird also agreed to make monthly interest payments within 10 days after the end of each month. The outstanding accrued interest of $25,069 as of September 30, 2011 was paid in full on November 10, 2011.
 
The concession granted to BlackBird on November 3, 2011 constituted a troubled debt restructuring under current accounting guidance. As a result, the note was classified as a long-term asset. Interest income under the terms of the Secured Note was no longer being recognized until the carrying value had been recovered, and payments received were recognized as a reduction of the carrying value of the note. During second quarter 2014, the Secured Note was paid in full and interest income of $124,451 was recognized. The carrying value of the note receivable was $399,863 at December 31, 2013.

Notes Receivable
In 2013 and 2014, the Company loaned $1,100,000 in amounts ranging from $150,000 to $450,000 to various parties for a one year term with mortgage notes ranging in interest from 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 in 2014 totaled $400,000. The carrying amounts of loans outstanding on December 31, 2013 and 2014 were $402,000 and $702,500 including interest accrued. The carrying amount of the note receivable approximates its fair value based on its short-term maturity. There was no loan loss allowance at December 31, 2014 due to the repayment in full of a loan in fourth quarter.
 
Accrued interest on notes receivable was $2,500 and $2,000 at December 31, 2014 and 2013 respectively, and was included in notes receivable in the accompanying consolidated balance sheets.
 
NOTE 4 – 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 assets, all of which were determined to be Level 3 fair values, as of December 31, 2014 and 2013:

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)
 
December 31, 2014
                       
                         
Assets:
                       
Debt securities available for sale
  $ 24,455     $ -     $ 24,455     $ -  
 
   
December 31,
 
Assets:
 
2013
 
Certificate of deposit
  $ 22,734  
Equity securities available for sale
    -  
Real property tax liens
    13,422  
Notes receivable
    402,000  
Accounts receivable
    57,233  
Notes receivable, non-performing
    414,000  
Total
  $ 909,389  
 
NOTE 5 – COMMITMENTS AND CONTINGENCIES

Employment and Consulting Agreements - On March 27, 2014, the Company entered into a new employment agreement with its chief executive officer and president for a two year term with automatic two year extensions unless terminated at least thirty days earlier in writing. The agreement provides for an annual salary of $150,000. The agreement requires that the chief executive officer not compete with the Company during the term of employment and for three years subsequent to termination.

Operating Leases as Lessee - The Company leases office space in Lakewood, NJ for monthly rent payments of $1,600 through February 2015. Future lease payments through December 31, 2015 are $3,200. The lease renews on March 1, 2015 for a one year period through February 2016. Future lease payments through December 31, 2015 are $17,500 and $3,500 in 2016. The Company is renting warehouse space in Salt Lake City, Utah, and Lakewood, NJ on a month to month basis. The leases provide for monthly rent payments totaling approximately $750.

Rent expense for the years ended December 31, 2014 and 2013 was $32,415 and $29,083, respectively.

NOTE 6 – INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. As of December 31, 2014, the Company had no unrecognized tax benefits that, if recognized, would affect the Company’s effective income tax rate over the next 12 months. The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit. Therefore, the Company has no reserves for uncertain tax positions and no adjustments to such reserves were required by generally accepted accounting principles. The Company’s tax returns are subject to U.S. federal or state and local examinations by tax authorities for the years ended December 31, 2011 through 2014. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. During the years ended December 31, 2014 and 2013, the Company did not incur any tax related interest and penalties.
 
 
The significant components of the Company's deferred income tax assets as of December 31, 2014 and 2013 are as follows:

For the years ending December 31,
 
2014
   
2013
 
Deferred Income Tax Assets:
           
Net operating loss carryforwards
  $ 7,016,411     $ 7,026,743  
Reserves and accrued liabilities
    34,745       17,699  
Other assets
    (9,187 )     3,925  
Total Deferred Income Tax Assets
  $ 7,041,969     $ 7,048,367  
Valuation allowance
    (7,041,969 )     (7,048,367 )
Deferred Income Tax Liability - Depreciation and Amortization
    -       -  
Net Deferred Income Tax Asset
  $ -     $ -  
 
The amount of, and ultimate realization of, the deferred income tax assets are dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance against its deferred income tax assets. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of these deferred income tax assets to warrant the valuation allowance.
 
No income tax provision or benefit was recognized from operations or from other comprehensive income (loss) during the years ended December 31, 2014 or 2013. The Company has paid no federal or state income taxes in 2014 and 2013:
 
The following is a reconciliation of the provision for income taxes from operations computed using the federal statutory rate to the provision for income taxes:
 
For the years ending December 31,
 
2014
   
2013
 
Tax at statutory rate (34%)
  $ 38,426     $ (101,545 )
Other non-deductible expenses and adjustments
    (15,841 )     18,286  
Change in valuation allowance
    (24,043 )     87,112  
State tax, net of federal tax benefit
    1,458       (3,853 )
Provision for Income Taxes
  $ -     $ -  
 
The following summarizes the tax net operating loss carryforwards and their respective expiration dates as of December 31, 2014:
 
Years ending December 31,
     
2018
    3,517,208  
2019
    3,032,912  
2020
    5,087,650  
2021
    2,704,379  
2022
    3,601,005  
2023
    1,169,588  
2029
    54,850  
2031
    83,846  
2032
    335,200  
2033
    295,512  
Total net operating loss carryforwards
  $ 19,882,150  
 
NOTE 7 – STOCKHOLDERS' EQUITY

During the year ended December 31, 2014, the Company issued 50,000 shares of common stock valued at $5,000 ($0.10 per share based on market value on the date issued) to its Board of Directors for services rendered. During the year ended December 31, 2014, the Company issued 10,000 shares of common stock valued at $600 ($0.06 per share based on market value on the date issued) to an employee for services rendered.

During the year ended December 31, 2013, the Company issued 50,000 shares of common stock valued at $6,500 ($0.13 per share based on market value on the date issued) to its Board of Directors for services rendered.
 

NOTE 8 – STOCK OPTIONS AND WARRANTS

Employee Grants - During 2000, the stockholders of the Company approved adoption of the 2000 Stock Option Plan (the "2000 Plan"). The Company is authorized to issue 3,000,000 common shares under the 2000 Plan, as amended.
 
The 2000 Plan, as amended, provides for both the direct award of shares and the grant of options to purchase shares. The Company's compensation committee administers the plan and has discretion in determining the employees, directors, independent contractors and advisors who receive awards, the type of awards (stock, incentive stock options or non-qualified stock options) granted, the term, vesting and exercise prices. The exercise price for the options may be paid in cash or in shares of the Company's common stock that have been outstanding for more than six months, which shares are valued at their fair value on the exercise date. In the event of a change in control (as defined in the Plan), all restrictions on awards issued under the 2000 Plan will lapse and unexercised options will become fully vested.

During the year ended December 31, 2014, the Company granted options to purchase 75,000 shares of common stock to employees for extraordinary services rendered. These options, which vested immediately, have an exercise price of $0.05 per share and are exercisable through March 24, 2019. These options were valued at $3,069 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 1.76%, dividend yield of 0.0%, volatility 117% and expected life of 5 years. The pricing model utilized the full life of the options as the Company generally has a low turnover rate of its employees.

During the year ended December 31, 2013, the Company granted options to purchase 75,000 shares of common stock to employees for extraordinary services rendered. These options, which vested immediately, have an exercise price ranging from $0.06 to $0.08 per share and are exercisable through November 27, 2018. These options were valued at $4,386 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging from 0.72% to 1.36%, dividend yield of 0.0%, volatility ranging from 112% through 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.

Compensation expense relating to stock options of $3,069 and $4,386 was recognized during the years ended December 31, 2014 and 2013, respectively. There was no unrecognized compensation related to stock options at December 31, 2014.
 
During the years ended December 31, 2014 and 2013, options to purchase 175,000 and 225,000 shares of common stock expired, respectively. During the years ended December 31, 2014 and 2013 no options were forfeited.

A summary of stock option and warrant activity for the years ended December 31, 2014 and 2013 is as follows:

   
Options and Warrants
   
Exercise Price Range
   
Weighted - Average
Exercise Price
   
Weighted-Average Life
   
Aggregate Intrinsic Value
 
Balance,  December 31, 2012
    492,500       0.10 -   0.26       0.21              
Granted
    75,000       0.06 -   0.08       0.07              
Expired
    (225,000 )     0.26 -   0.26       0.26              
Balance,  December 31, 2013
    342,500     $ 0.10 - $ 0.22     $ 0.14       5     $ 2,000  
Granted
    75,000       0.05 -   0.05       0.05                  
Expired
    (175,000 )     0.12 -   0.26       0.19                  
Balance,  December 31, 2014
    242,500       0.05 -   0.22       0.09       5.5     $ 4,250  
Exercisable, December 31, 2014
    242,500     $ 0.05 - $ 0.22     $ 0.09       5.5     $ 4,250  
Weighted-average fair value of options granted during the year ended December 31, 2013
                        $ 0.06                  
Weighted-average fair value of options granted during the year ended December 31, 2014
                        $ 0.04                  
  
NOTE 9 – 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 revenue-sharing contracts and 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 December 31, 2014, the Company had accounts receivable from two customers accounting for 56% of total accounts receivable.

During the year ended December 31, 2014, revenues from two customers accounted for 62% of total revenues.
 
During the year ended December 31, 2013, revenues from one customer accounted for 40% of total revenues.
 
 
ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The Company has had no disagreements with its independent accountants with respect to accounting practices or procedures or financial disclosure.

ITEM 9A.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2014. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, because of the material weaknesses in our internal control over financial reporting due to lack of segregation of duties and errors in financial statement presentation and disclosure discussed below, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that the Company’s disclosure and controls are designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the material weaknesses discussed below, our principal executive officer and principal financial officer have concluded that the consolidated financial statements included in this Form 10-K 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.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements and that receipts and expenditures of company assets are made in accordance with management authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on management’s assessment, including consideration of the control deficiencies discussed below, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2014 due to the fact that there was a material weakness in its internal control over financial reporting. Specifically, through the investigation discussed above, management identified a lack of segregation of duties as well as errors in financial statement presentation and disclosure.
  
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, management has decided that at this time considering the abilities of the employees 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 segregate duties do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation.


Previous Errors in Financial Statement Presentation and Disclosure

There were two errors in financial statement presentation and disclosure for the fiscal year ended December 31, 2013. There was a comment from our independent auditors that resulted in a material quantity adjustment which related to an overstatement in the amount of $7,846 of the allowance for doubtful accounts. This error related the inaccurate projection for doubtful accounts. The second comment from our independent auditors resulted in a quality adjustment related to correctly classify a loss in the amount $2,266 as unrealized and an item of comprehensive loss on the consolidated statement of operations and comprehensive income (loss).    

Attestation Report of the Registered Public Accounting Firm

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permits the Company to provide only management's report in this annual report.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
 
ITEM 9B.   OTHER INFORMATION

None.  
 

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The following information is furnished with respect to our directors and executive officer. There are no family relationships between or among any of our directors or executive officer. Each director of the Company serves for a term of one year or until such director’s successor is duly elected and is qualified.  Each officer serves, at the pleasure of the board of directors, for a term of one year and until such officer’s successor is duly elected and is qualified.

Directors and Executive Officers

Name
 
Age
 
Position
         
David A. Gestetner
  42  
President, Chief Executive Officer, Secretary and Chairman of the Board
James C. Savas
  54  
Director
Lawrence K. Wein
  72  
Director
 
Set forth below is a description of the background of each of our executive officers and directors:

David A. Gestetner has served as President, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman of the Board since October 1, 2003. Throughout his career, Mr. Gestetner has been involved in various applications of technology, both as an operator as well as a financier, including founding and operating a telecommunications business abroad. Mr. Gestetner has received awards for his innovations and advance applications of technology, including the Howard Golden Award for an intuitive scientific invention consisting of a system that enables emergency call routing in telephone systems. Mr. Gestetner possesses a Master's degree from The Aron Kotler Higher Institute of Learning in New Jersey. Mr. Gestetner has significant experience with technology companies.  We believe his background and skill set in various facets of the technology industries make Mr. Gestetner well-suited to serve as a member of our board of directors.

James C. Savas has served as director since June 13, 2002. Mr. Savas is a managing member of Savas Greene White & Company LLC, an accounting and business consulting firm located in Salt Lake City, Utah.  Since April 1999, Mr. Savas has also served as a co-manager of Providence Management, LLC, which is the manager of ASH Capital LLC, a private equity company.  Mr. Savas also serves on the boards of Bullfrog Spas International LC and Express Locations, LLC, both privately held companies.  Mr. Savas received his Bachelor of Science in Accounting from the University of Utah. Mr. Savas has significant experience with accounting and finance.  We believe his background and skill set in accounting and business make Mr. Savas well-suited to serve as a member of our board of directors.

Lawrence K. Wein has served as director since October 2003. Mr. Wein held several key positions at AT&T for over 30 years. Mr. Wein is presently retired from his positions. Mr. Wein received his Master's in Business Administration from Harvard Business School, and his Bachelor of Science in Engineering from Columbia University. Mr. Wein has significant business experience.  We believe his prior industry background and skill set make Mr. Wein well-suited to serve as a member of our board of directors.
 
None of our directors or officers is a director in any other reporting companies.  None of our directors or officers has been affiliated with any company that has filed for bankruptcy within the last ten years.  We are not aware of any proceedings to which any of our officers or directors, or any associate of any such officer or director, is a party adverse to us or any of our or has a material interest adverse to us or any of our subsidiaries.
 
Involvement in Certain Legal Proceedings

There are no legal proceedings that have occurred within the past ten years concerning our directors, or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one's participation in the securities or banking industries, or a finding of securities or commodities law violations.
 
Committees of the Board of Directors

Our board has authorized two standing committees, an audit committee and a compensation committee.
 
 
Audit Committee. The audit committee, which was formed on August 18, 2000, is currently comprised of one director, Mr. Savas. The audit committee has the responsibility to:
 
 
·
recommend the firm that will serve as our independent public accountants;
 
 
·
review the scope and results of the audit and services provided by the independent public accountants;

 
·
meet with our financial staff to review accounting procedures and policies and internal controls; and

 
·
perform the other responsibilities set forth in its written charter.

Although not “independent”, Mr. Savas is not an employee of the Company and, in the opinion of our board, is free from any relationship that would interfere with the exercise of independent judgment as a committee member. Our Board of Directors has determined that Mr. Savas is an "audit committee financial expert" within the applicable definition of the Securities and Exchange Commission.

Compensation Committee

The compensation committee, which was formed on August 18, 2000, is currently comprised of Mr. Wein. In general, the compensation committee's authority and oversight extends to total compensation, including base salaries, bonuses, stock options, and other forms of compensation.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our reporting directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership of common stock and other equity securities of eRoomSystem Technologies with the Securities and Exchange Commission, or the Commission. Officers, directors and stockholders holding more than 10% of the class of stock are required to furnish us with copies of all Section 16(a) forms they file with the Commission.
 
To our knowledge, based solely on review of the copies of such reports furnished to us and written representations, we believe that during the fiscal year ended December 31, 2014 all applicable filing requirements were complied with by our executive officers and directors.

Code of Ethics

Because of our relatively small size we do not currently have a Code of Ethics applicable to our principal executive, financial and accounting officers
  
ITEM 11.    EXECUTIVE COMPENSATION.

Summary Compensation Table

The following table sets forth summary information concerning the total remuneration paid or accrued by us, to or on behalf of our chief executive officer during the fiscal years ended December 31, 2014 and 2013 (“named executive officer”). No other executive officer earned in excess of $100,000 during the fiscal year ended December 31, 2014
 
SUMMARY COMPENSATION TABLE
 
Name
 
Year
 
Salary
   
Bonus
   
Stock
   
Option
   
Non-Equity
   
Nonqualified
   
All Other
   
Total ($)
 
and
 
(b)
 
($)
   
($)
   
Awards
   
Awards
   
Incentive
   
Deferred
   
Compensation
   
(j)
 
principal
     
(c)
   
(d)
   
($)
   
($)
   
Plan
   
Compensation
   
($)
       
position
                 
(e)
   
(f)
   
Compensation
   
Earnings
   
(i)
       
(a)
                             
($)
   
($)
             
                               
(g)
   
(h)
             
David A. Gestetner,
 
2014
  $ 150,000     $ 40,000     $ -     $ -     $ -     $ -     $ -     $ 190,000  
President, Chief Executive Officer, Secretary and Chairman
 
2013
  $ 150,000     $ 35,000     $ -     $ -     $ -     $ -     $ -     $ 185,000  
 
 
On March 27, 2014, the Company entered into a two-year employment agreement with David A. Gestetner to serve as President and Chief Executive Officer for an initial two-year term. The term of such agreement will automatically be extended for successive two-year terms unless terminated at least 30 days prior to the end of the then current term.  Under the agreement, Mr. Gestetner is entitled to an annual base salary of $150,000, a performance-based bonus at the end of the fiscal year at the discretion of the compensation committee, health, dental and term life insurance and a monthly car allowance. In addition, if Mr. Gestetner is terminated by the Company without cause, he is entitled to severance in the amount of two years of his base salary and the continuation of health, dental and car allowance benefits for such two-year period.

Outstanding Equity Awards at Fiscal-Year End

There were no equity awards outstanding granted to or held by our named executive officer as of December 31, 2014.
 
Director Compensation

The following table sets forth the equity awards made to members of our board of directors during the fiscal year ended December 31, 2014:

DIRECTOR COMPENSATION
 
Name
 
Fees
   
Stock
   
Option
   
Non-Equity
   
Change in
   
All
   
Total
 
(a)
 
Earned or
   
Awards
   
Awards
   
Incentive
   
Pension
   
Other
   
($)
 
   
Paid in
   
($)
   
($)
   
Plan
   
Value and
   
Compensation
   
(h)
 
   
Cash
   
(c)
   
(d)
   
Compensation
   
Nonqualified
   
($)
       
   
($)
               
($)
   
Deferred
   
(g)
       
   
(b)
               
(e)
   
Compensation
             
                           
Earnings
             
                           
($)
             
                           
(f)
             
David Gestetner
    -       -     2     -       -       -       -       -  
James C. Savas
    -       2,500     1     -       -       -       -       2,500  
Lawrence K. Wein
    -       2,500     1     -       -       -       -       2,500  
  
(1)  
Reflects the issuance of 25,000 shares of restricted common stock issued to each of Mr. Wein and Savas on June 11, 2014 for serving as directors of the Company.

(2)  
As CEO and President of the Company, David Gestetner does not receive director’s compensation.

As compensation for their services, our non-employee directors receive either stock options to purchase 25,000 shares of our common stock or 25,000 shares of common stock as determined by the compensation committee. Directors who are our employees do not receive compensation for their services as directors.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table lists, as of March 18, 2015, the number of shares of our common stock that are beneficially owned by (i) each person or entity known to us to be the beneficial owner of more than 5% of our common stock; (ii) each executive officer and director of our company; and (iii) all executive officers and directors as a group. Information relating to beneficial ownership of common stock by our principal shareholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power.

The beneficial ownership is calculated based on 24,167,865 shares of common stock outstanding as of March 18, 2015.
 

Unless otherwise indicated, the address of each person or entity listed is c/o eRoomSystem Technologies, Inc., 150 Airport Road, Suite 1200, Lakewood, NJ 08701.

Name of Beneficial Owner
 
Amount and Nature of
Beneficial Ownership
   
Percent of Class
 
Ash Capital, LLC3
    3,685,449       15.2 %
David A. Gestetner
    6,262,338 1     25.9 %
James C. Savas
    3,953,001 2     16.3 %
David Harkness
    3,704,680 2     15.3 %
Lawrence K. Wein
    230,000       1.0 %
Executive Officers and Directors, as a group (3 individuals)
    10,445,339       43.2 %
 
(1) Includes (i) 4,953,644 shares held by Gestetner Group, LLC, a New Jersey limited liability company, of which Mr. Gestetner is the sole member, (ii) 5,000 shares held by Mr. Gestetner’s spouse and (iii) 200,000 shares held by a private operating foundation as to which Mr. Gestetner as an officer has sole voting and dispositive power.

(2) Includes (i) currently exercisable options to purchase 25,000 shares, (ii) 19,231 shares held by Providence Management, LLC (“Providence”) of which Mr. Savas and David Harkness are co-managers and 50% owners and share voting and dispositive power and (iii) 3,685,449 shares held by Ash Capital, LLC (“Ash”), over which Providence has voting and dispositive power.

(3) Messrs Savas and Harkness share voting and dispositive power over the shares held by Ash Capital, LLC.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

Stock Issuance to Directors

25,000 shares of restricted common stock were issued to each of Mr. Wein and Savas on June 11, 2014 for serving as directors of the Company.

Director Independence

Our director, Mr. Lawrence K. Wein, qualifies as an independent director under Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASDAQ Rule 4200(a)(15). Mr. Savas is the beneficial owner of more than 10% of our outstanding common stock and Mr. Gestetner is an employee and executive officer of our company. Aside from his beneficial ownership of more than 10% of our outstanding common stock, Mr. Savas is independent under Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASDAQ Rule 4200(a)(15). The member of our audit committee is Mr. Savas. Mr. Savas is not independent as defined in NASDAQ Rules because he is the beneficial owner of more than 10% of our outstanding common stock. However, in the opinion of our Board of Directors, Mr. Savas' beneficial stock ownership would not interfere with his exercise of independent judgment as an audit committee member.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES.

Eide Bailly, LLP (“Eide Bailly”), served as our independent registered public accounting firm for the fiscal years ended December 31, 2013. On February 9, 2015, Eide Bailly resigned as the Company’s independent registered public accounting firm. Concurrent with the resignation of Eide Bailly, the Company, through and with the approval of its Audit Committee, engaged John Scrudato, CPA as its independent registered public accounting firm.
 
Our board is responsible for pre-approving all audit and permissible non-audit services provided by our auditors. Our board of directors has concluded that the non-audit services provided by Eide Bailly and John Scrudato, CPA are compatible with maintaining auditor independence.
 
 
Audit Committee's Pre-Approval Policies

The Audit Committee has adopted a policy that all audits, audit-related, tax and any other non-audit service to be performed by the Company's independent registered public accounting firm must be pre-approved by the Audit Committee. It is the Company's policy that all such services be pre-approved prior to commencement of the engagement. The Audit Committee is also required to pre-approve the estimated fees for such services, as well as any subsequent changes to the terms of the engagement.

For the fiscal years ended December 31, 2014 and 2013, the fees for services provided by our independent registered public accounting firm were as follows:

   
2014
   
2013
 
Audit fees  (1)
  $ 19,000     $ 18,000  
Audit-related fees (2)
    -          
Tax fees (3)
    -       -  
All other fees
    -       -  
    $ 19,000     $ 18,000  
 
(1) Audit fees: Fees for the professional services rendered for the audit of our annual financial statements, review of financial statements included in our Form 10-Q filings, and services normally provided in connection with statutory and regulatory filings or engagements.

(2) Audit-related fees: Fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements.

(3) Tax fees: Fees for professional services rendered with respect to tax compliance, tax advice and tax planning. This includes preparation of tax returns, claims for refunds, payment planning and tax law interpretation.
 

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
Exhibit
       
Number
 
Document Name
   
1.01
 
Form of Underwriting Agreement relating to the registrant's initial public offering that closed on August 9, 2000
Incorporated by reference to Pre-effective Amendment No. 2 of Form SB-2 filed on July 14, 2000
         
2.01
 
Agreement and Plan of Reorganization by and between RoomSystems International Corporation and RoomSystems, Inc. dated December 31, 1999
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
2.02
 
Transfer Pricing Agreement by and between RoomSystems International Corporation and RoomSystems, Inc. dated December 31, 1999
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
3.01
 
Amendment and Restatement of Articles of Incorporation
 
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
3.02
 
Certificate of Correction dated May 30, 2000
 
Incorporated by reference to Pre-effective Amendment No. 1 of Form SB-2 filed on July 14, 2000
         
3.03
 
Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series A convertible preferred stock
Incorporated by reference to Form SB-2 filed on June 9, 2000
         
3.04
 
Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series B convertible preferred stock
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
3.05
 
Certificate of Designation, Preferences, Rights and Limitation of Series C convertible preferred stock
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
3.06
 
Amended and Restated Bylaws
 
Incorporated by reference to Form SB-2 filed on June 9, 2000
         
3.07
 
Second Amendment and Restatement of Articles of Incorporation
Incorporated by reference to Pre-effective Amendment No. 2 of Form SB-2 filed on July 14, 2000
         
3.08
 
Second Amended and Restated Bylaws
 
Incorporated by reference to Pre-effective Amendment No. 2 of Form SB-2 filed on July 14, 2000
         
4.01
 
Form of Common Stock Certificate
 
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
10.01
 
Amended and Restated 2000 Stock Option and Incentive Plan
 
Incorporated by reference to Form SB-2 filed on June 9, 2000
         
10.13
 
Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash Capital, LLC dated February 15, 2000
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
10.13A
 
Exhibits to Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash Capital, LLC dated February 15, 2000
Incorporated by reference to Form SB-2 filed on June 9, 2000
         
10.15
 
Form of Hotel Revenue-Sharing Lease Agreement
 
Incorporated by reference to Form SB-2 filed on June 9, 2000
         
10.16
 
Form of Noncompetition and Nondisclosure Agreement (Sales)
 
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
10.17
 
Form of Consulting Agreement
 
Incorporated by reference to Form SB-2 filed on April 14, 2000
 
 
         
10.18
 
Form of Sales Representation Agreement
 
Incorporated by reference to Form SB-2 filed on April 14, 2000
10.22
 
Form of Installation, Co-Maintenance and Software Licensing and Upgrade Agreement
Incorporated by reference to Form SB-2 filed on June 9, 2000
         
10.30
 
Shareholders' Agreement and Proxy by and among Ash Capital, LLC, RoomSystems, Inc. and certain stockholders of RoomSystems, Inc. dated August 17, 1999
Incorporated by reference to Form SB-2 filed on April 14, 2000
         
10.38
 
Stock Purchase Agreement by and between eRoomSystem Technologies, Inc. and Ash Capital, LLC dated November 8, 2002
Incorporated by reference to Form 10-QSB filed on November 14, 2002
         
10.39
 
Secured Convertible Promissory Note issued in favor of Ash Capital, LLC dated November 8, 2002.
Incorporated by reference to Form 10-QSB filed on November 14, 2002
         
10.44
 
Warrant to Purchase Shares of Common Stock issued in favor of Ash Capital, LLC dated October 1, 2003
Incorporated by reference to Form 10-KSB filed on March 30, 2004
         
10.46
 
Investors Rights Agreement between eRoomSystem Technologies, Inc., Ash Capital, LLC, and certain security holders dated October 1, 2003
Incorporated by reference to Form 10-KSB filed on March 30, 2004
         
10.80
 
Employment Agreement of David Gestetner dated as of March 27, 2014
Incorporated by reference to Form 10-K filed on April 3, 2014
         
10.81
 
Purchase and Sale Agreement by and between CardinalPointe Capital and eRoomSystem Technologies, Inc. dated June 16, 2009
Incorporated by reference to Form 8-K filed on June 17, 2009
         
21
   
Filed herewith
         
31
 
Filed herewith
         
32
 
Filed herewith
       
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
 
 
 

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
eRoomSystem Technologies, Inc.
     
 
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)
     
 
Date:
March 18, 2015

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
         
/s/ David A. Gestetner
 
President, Chief Executive Officer,
 
March 18, 2015
David A. Gestetner
 
Secretary and Chairman of the Board
(Principal Executive, Financial and
Accounting Officer)
   
         
/s/ James C. Savas
 
Director
 
March 18, 2015
James C. Savas
       
         
/s/ Lawrence K. Wein
 
Director
 
March 18, 2015
Lawrence K. Wein
       
 
 
 
33