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EX-31.1 - EX-31.1 - EROOMSYSTEM TECHNOLOGIES INCex31-1.htm


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


 
FORM 10-Q 
 

 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________   To __________

Commission file number 000-31037

eRoomSystem Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
87-0540713
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
150 Airport Road, Suite 1200, Lakewood, NJ
08701
(Address of principal executive offices)
(Zip Code)
   
Registrant’s telephone number, including area code: (732) 730-0116

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

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

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

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

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

The number of shares of the issuer’s common stock issued and outstanding as of May 11, 2015 was 24,167,865 shares.
 
 
EROOMSYSTEM TECHNOLOGIES, INC.

TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
1
     
Item 1.
1
     
Item 2.
9
     
Item 3.
12
     
Item 4.
12
     
PART II - OTHER INFORMATION
13
     
Item 1.
13
     
Item 1A.
13
     
Item 2.
13
     
Item 3.
13
     
Item 4.
13
     
Item 5.
13
     
Item 6.
13
 
 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
   
March 31,
   
December 31,
 
   
2015
   
2014
 
ASSETS
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,082,472     $ 1,453,971  
Restricted cash
    -       61,350  
Investment in available for sale securities
    24,933       24,455  
Notes receivable
    1,090,512       702,500  
Accounts receivable, net of allowance for doubtful accounts of  $7,489 and $5,101
    99,503       67,771  
Inventory
    115,245       79,191  
Advance to hotels
    77,977       74,370  
Prepaid expenses
    8,347       111,064  
Total Current Assets
    2,498,989       2,574,672  
PROPERTY AND EQUIPMENT
               
Property and equipment, net of accumulated depreciation of $17,675 and $15,409
    60,760       63,287  
NOTE RECEIVABLE, non-performing
    -       -  
INVESTMENT IN REAL PROPERTY TAX LIENS
    22,688       22,688  
DEPOSITS
    2,933       2,933  
Total Assets
  $ 2,585,370     $ 2,663,580  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES
               
Accounts payable
  $ 27,956     $ 22,783  
Accrued liabilities
    54,039       87,998  
Securities borrowed
    -       60,959  
Total Current Liabilities
    81,995       171,740  
Total Liabilities
    81,995       171,740  
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 24,167,865
    24,168       24,168  
Additional paid-in capital
    34,203,953       34,203,953  
Accumulated deficit
    (31,726,945 )     (31,738,002 )
Accumulated other comprehensive income
    2,199       1,721  
Total Stockholders' Equity
    2,503,375       2,491,840  
                 
Total Liabilities and Stockholders' Equity
  $ 2,585,370     $ 2,663,580  
 
See accompanying notes to condensed consolidated financial statements.
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
 
   
For the three months ended March 31,
 
   
2015
   
2014
 
REVENUE
  $ 199,794     $ 182,559  
COST OF REVENUE
    110,692       102,312  
GROSS MARGIN
    89,102       80,247  
OPERATING EXPENSES
               
Selling, general and administrative expense, including non-cash
compensation of $0 and $3,069
    93,789       79,687  
Research and development expense
    12,503       12,365  
Net Operating Expenses
    106,292       92,052  
OTHER INCOME
               
Investment Income
    28,247       14,336  
Net Income
    11,057       2,531  
Other Comprehensive Income
               
Unrealized holding gain
    478       227  
Comprehensive Income
  $ 11,535     $ 2,758  
Basic Income Per Common Share
  $ 0.00     $ 0.00  
Diluted Income Per Common Share
  $ 0.00     $ 0.00  
 
See accompanying notes to condensed consolidated financial statements.
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
             
   
For the three months ended March 31,
 
   
2015
   
2014
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 11,057     $ 2,531  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
         
Depreciation and amortization
    2,266       3,774  
Accrued interest receivable
    (5,095 )     (2,000 )
Gain on sale of marketable securities
    (8,358 )     -  
Loss on writedown of equipment
    261       -  
Non-cash compensation expense
    -       3,069  
Changes in operating assets and liabilities:
               
Restricted cash
    61,350       -  
Accounts receivable
    (31,732 )     (28,978 )
Inventory
    (36,054 )     (9,419 )
Advance to hotels
    (3,607 )     (14,156 )
Prepaid expenses
    2,717       3,039  
Accounts payable
    5,173       17,589  
Accrued liabilities
    (33,959 )     (32,950 )
Borrowed shares
    (60,959 )     -  
Customer deposits
    -       (4,313 )
Net Cash Used In Operating Activities
    (96,940 )     (61,814 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    -       (4,127 )
Advances made under notes receivable
    (390,000 )     -  
Proceeds from collection of note receivable
    7,083       -  
Purchase of marketable securities
    (91,546 )     -  
Proceeds from sale of marketable securities
    199,904       -  
Proceeds from collection of note receivable, non-performing
    -       27,603  
Net Cash Provided by (Used In) Investing Activities
    (274,559 )     23,476  
                 
Net Decrease in Cash
    (371,499 )     (38,338 )
                 
Cash and cash equivalents at Beginning of Period
    1,453,971       1,376,822  
                 
Cash and cash equivalents at End of Period
  $ 1,082,472     $ 1,338,484  
 
See accompanying notes to condensed consolidated financial statements.
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Condensed Financial Statements - The accompanying unaudited condensed consolidated financial statements include the accounts of eRoomSystem Technologies, Inc. and its wholly-owned subsidiaries (the "Company"). Intercompany accounts and transactions have been eliminated in consolidation. These financial statements are condensed and, therefore, do not include all disclosures normally required by generally accepted accounting principles. These statements should be read in conjunction with the Company's annual financial statements for the fiscal year ended December 31, 2014 included in the Company's Annual Report on Form 10-K. In particular, the Company's organization, nature of operations and significant accounting principles were presented in Note 1 to the consolidated financial statements in that annual report. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements and consist of only normal recurring adjustments. The results of operations presented in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.

Cash and Cash Equivalents – Cash and cash equivalents include highly-liquid debt investments with original maturities of three months or less, readily convertible to known amounts of cash.
 
Investments in Debt and Equity Securities Available for Sale – Debt and equity securities available for sale include securities that can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in stockholders’ equity as accumulated other comprehensive income.

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

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

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

Notes Receivable - The notes receivable are stated at the historical carrying amount, less a loan loss allowance, and are evaluated for impairment. When projections indicate that the carrying value of the note is not recoverable, the carrying value will be reduced by the estimated excess of the carrying value over the projected discounted cash flows. The Company has evaluated the collectability of current notes receivable and believes the notes are realizable as they are secured by the related real property and the estimated fair value of the real property is in excess of the carrying value of the notes and the estimated cost to foreclose and sell the real property.

Investment in Real Property Tax Liens – The investments in the real property tax liens are accounted for as an investment in troubled debts and are carried at cost. Collection of interest, penalties and expense reimbursements is not certain and is recognized upon being realized. The Company has evaluated the collectability of the tax liens and believes the investments are realizable over time as the first position liens are secured by the related real property and the estimated fair value of the real property is in excess of the carrying value of the tax liens and the estimated cost to foreclose and sell the real property. Therefore no impairment was recognized on the tax liens at March 31, 2015 and December 31, 2014.

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

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Net Earnings per Common Share - Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income, by the weighted-average number of common shares and dilutive potential common share equivalents outstanding. When dilutive, the incremental potential common shares issuable upon exercise of stock options are determined by the treasury stock method.

The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted loss per share for the three months ended March 31, 2015 and 2014: 
 
   
For the three months ended March 31,
 
   
2015
   
2014
 
Net income
  $ 11,057     $ 2,531  
Basic weighted-average common shares outstanding
    24,167,865       24,107,865  
Effect of dilutive securities
               
Stock options and warrants
    34,375       5,238  
Diluted weighted-average common shares outstanding
    24,202,240       24,113,103  
Basic income per share
  $ 0.00     $ 0.00  
Diluted income per share
  $ 0.00     $ 0.00  

During the three months ended March 31, 2015 and 2014, there were 142,500 and 292,500, respectively, of potential common stock equivalents from options were not included in the computation of diluted loss per share because their effect would have been anti-dilutive.

NOTE 2 – INVESTMENTS
 
Investment in Real Property Tax Liens – At March 31, 2015, the Company held $22,688 of real property tax liens, carried at lower of cost or estimated net realizable value, from various municipalities in New Jersey. The New Jersey municipal tax liens are receivable from the real property owners and are secured by a first priority lien on the related real property. Upon foreclosure, the Company would obtain ownership of the real property. The tax lien receivables accrue interest up to 18% per annum, accrue penalties at 2% to 6% and are also increased by the amount of any collection expenses incurred. The investment in the real property tax liens are accounted for as an investment in troubled debts and are carried at cost. Collection of interest, penalties and expense reimbursements is not certain and is recognized upon being realized.

Investment in Available for Sale Debt Securities

Debt Securities
 
Cost Basis
   
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Corporate Debt Securities
  $ 22,734     $ 2,199     $ -     $ 24,933  

The corporate debt securities mature on August 31, 2018 and May 29, 2020.
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Notes Receivable
In 2015 and 2014, the Company loaned $1,090,000 in amounts ranging from $250,000 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 2015 and 2014 totaled $7,083 and $400,000, respectively. The carrying amounts of loans outstanding on March 31, 2015 and December 31, 2014 were $1,090,512 and $702,500 including interest accrued. The carrying amount of the note receivable approximates its fair value based on its short-term maturity.
 
Accrued interest on notes receivable was $7,595 and $2,500 at March 31, 2015 and December 31, 2014 respectively, and was included in notes receivable in the accompanying consolidated balance sheets.
 
NOTE 4 – STOCKHOLDERS’ EQUITY

During the three months ended March 31, 2014, the Company granted options to purchase 75,000 shares of common stock to employees for services rendered. These options, which vested immediately, have an exercise price of $0.05 per share and are exercisable through March 24, 2019. These options were valued at approximately $0.04 per share, or $3,069, using the Black-Scholes option pricing model with the following assumptions: market value of the common stock of $0.05 per share, risk free interest rate of 1.76%, dividend yield of 0.0%, volatility of 117% and expected life of 5 years. The pricing model utilized the full life of the options as the Company generally has a low turnover rate of its employees.
 
Stock-based compensation expense relating to stock options of $0 and $3,069 was recognized during the three months ended March 31, 2015 and 2014, respectively. There was no unrecognized compensation related to stock options at March 31, 2015. A summary of stock option and warrant activity for the three months ended March 31, 2015 is as follows:

   
Options and Warrants
   
Exercise Price Range
   
Weighted - Average
Exercise Price
   
Weighted-Average
Life
   
Aggregate Intrinsic Value
 
Balance,  December 31, 2014
    242,500     $ 0.05 -   $ 0.22     $ 0.09       5.5     $ 4,250  
Balance,  March 31, 2015
    242,500       0.05 -     0.22       0.09       5.5     $ 2,750  
Exercisable, March 31, 2015
    242,500     $ 0.05 -   $ 0.22     $ 0.09       5.5     $ 2,750  
 
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

All of the options and warrants were exercisable at March 31, 2015. At March 31, 2015 the intrinsic value for the options and warrants outstanding was $2,750.
 
NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. Fair value is also used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values. Fair value is also used when evaluating impairment on certain assets, including notes receivable and long-lived assets. The following table sets forth the estimated fair values of the Company’s financial instruments that are measured at fair value on a reoccurring basis as of March 31, 2014 and December 31, 2014:
 
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)
 
March 31, 2015
                       
                         
Assets:
                       
Debt securities available for sale
  $ 24,933     $ -     $ 24,933     $ -  
                                 
December 31, 2014
                               
                                 
Assets:
                               
Debt securities available for sale
  $ 24,455     $ -     $ 24,455     $ -  
 
Fair Value of Financial Instruments Not Required To Be Reported at Fair Value

The fair values of real property tax liens, notes receivable and notes receivable, non-performing, are based on a combination of the stated or implied interest rates at the measurement dates, approximate their carrying amounts and are considered to fall within Level 3 of the fair value hierarchy.
 
 
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 6 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

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

At March 31, 2015, the Company had accounts receivable from two customers which accounted for 20% of total accounts receivable and from a second customer which accounted for 39% of total accounts receivable.

During the three months ended March 31, 2015, revenues from one customer accounted for 35% of total revenues and 28% from a second customer.
 
During the three months ended March 31, 2014, revenues from one customer accounted for 35% of total revenues and 28% from a second customer. 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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

Forward-Looking Statements

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

Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues, and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, the continued growth of the lodging industry, the success of our product-development, marketing and sales activities, vigorous competition in the lodging industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.
 
Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
 
Overview

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.

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

Description of Expenses
 
Cost of revenue consists primarily of cost of goods sold, as well as customer support and maintenance.
 
 
Selling, general and administrative expenses primarily consist of general and administrative expenses including professional fees, salaries and related costs for accounting, administration, finance, human resources, information systems and legal personnel.

Research and development expenses consist of payroll and related costs for hardware and software engineers, quality assurance specialists, management personnel, and the costs of materials used by our consultants in research and development for new products. Research and development expenses in the three months ended March 31, 2015 and 2014 were $12,503 and $12,365, respectively.
 
In accordance with ASC Codification Topic 730, “Accounting for Research and Development Costs”, development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our condensed consolidated statements of operations.
 
Comparison of Three Months Ended March 31, 2015 and 2014

Revenue

Revenue from product sales and maintenance was $199,794 for the three months ended March 31, 2015, compared to $182,559 for the three months ended March 31, 2014, representing an increase of $17,235, or 9%. The increase in revenues related to improved sales in 2015.
 
Cost of Revenue
 
Our cost of product sales and maintenance revenue for the three months ended March 31, 2015 was $110,692, compared to $102,312 for the three months ended March 31, 2014, an increase of $8,380, or 8%. The increase in cost of revenue related to the increase in sales. The gross margin percentage on revenue from product sales revenue was 45% in 2015 as compared to 44% in 2014.
 
The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended March 31, 2015 and 2014 are summarized as follows:

   
2015
   
2014
   
Change
   
Percent
Change
 
                         
REVENUE
  $ 199,794     $ 182,559     $ 17,235       9 %
                                 
                                 
COST OF REVENUE
  $ 110,692     $ 102,312     $ 8,380       8 %

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the three months ended March 31, 2015 and 2014, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.
 
Operating Expenses

Selling, General and Administrative — Selling, general and administrative expenses, including non-cash compensation expense, were $93,789 for the three months ended March 31, 2015, compared to $79,687 for the three months ended March 31, 2014, representing an increase of $14,102, or 18% due to a combination of a lot  of small items.
 
 
Research and Development—Research and development expenses were $12,503 for the three months ended March 31, 2015, compared to $12,365 for the three months ended March 31, 2014 representing an increase of $138 or 1%.

Investment Income

Our investment income was $28,247 for the three months ended March 31, 2015, compared to $14,336 for the three months ended March 31, 2014, representing an increase of $13,911, or 97%. The increase in investment income related sales of available-for-sale securities.
 
Net Income
 
We realized a net income of $11,075 for the three months ended March 31, 2015, compared to a net income of $2,531 for the three months ended March 31, 2014. The $8,526 change during the three months ended March 31, 2015 related primarily to the increase in sales and the related gross margin during the three months ended March 31, 2015, as discussed above.

Liquidity and Capital Resources
 
Our accumulated deficit decreased from $31,738,002 at December 31, 2014 to $31,726,945 at March 31, 2015. The $11,057 decrease in accumulated deficit resulted directly from the net income realized for the three months ended March 31, 2015.  

At March 31, 2015, our principal sources of liquidity consisted of $1,082,472 of cash and working capital of $2,416,994, as compared to $1,453,971 of cash and working capital of $2,402,932 at December 31, 2014. In addition, our stockholders' equity was $2,503,375 at March 31, 2015, compared to stockholders' equity of $2,491,840 at December 31, 2014, an increase of $11,535. The decrease in cash primarily reflects advances made under notes receivable. We believe that we have sufficient funds for the next twelve months.
 
Net cash used in operations for the three months ended March 31, 2015 was $96,940 as compared to $61,814 used in the period ended March 31, 2014.
 
Investing activities for the three months ended March 31, 2015 used net cash of $274,559, compared to $23,476 of net cash used during the three months ended March 31, 2014. The increase in cash used related to the advance under a new Note Receivable.
 
There were no financing activities in the three months ended March 31, 2015 and 2014.
 
Recent Accounting Pronouncements

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

Contractual Cash Obligations and Commercial Commitments
 
There were no significant contractual cash obligations or commercial commitments either on or off balance sheet as of March 31, 2015.
 
Off Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.
 
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.
 
Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q and have concluded that because of the material weakness in our internal control over financial reporting due to lack of segregation of duties, the Company’s disclosure controls and procedures were not effective as of March 31, 2015 to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that the Company’s disclosure and controls are designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the material weakness discussed below, our principal executive officer and principal financial officer have concluded that the condensed consolidated financial statements (unaudited) included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Lack of Segregation of Duties

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

Changes in Internal Controls over Financial Reporting

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

Item 1. Legal Proceedings

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

Item 1A.  Risk Factors

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

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

None.

Item 3. Defaults Upon Senior Securities

None.
 
Item 4. Mine Safety Disclosures

Not applicable.
 
Item 5. Other Information
 
None.
 
Item 6. Exhibits
 
Exhibit No.
 
Description
31.1
 
32.1
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
eRoomSystem Technologies, Inc.
 
 
              (Registrant)
 
       
Date: May 11, 2015
     
 
By:
/s/ David A. Gestetner
 
 
Name: 
David A. Gestetner
 
 
Title:
President, Chief Executive Officer, Secretary,
   
and Chairman of the Board
   
(Principal Executive, Financial, and Accounting Officer)
       
 
 
 
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