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, 2008 | |
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.
(Name of small business issuer in its charter)
Nevada | 87-0540713 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
1072 Madison Ave., Lakewood, NJ | 08701 | ||
(Address and telephone number of principal executive offices) | (Zip Code) | ||
Issuer’s telephone number: (732) 730-0116 |
Securities registered pursuant to Section 12(b) of the Act:
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 | |
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 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 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. (Check one):
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
State 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, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently computed second fiscal quarter. $5,531,078 based upon $0.23 per share which was the last price at which the common equity purchased by non-affiliates was last sold, since there is no public bid or ask price.
The number of shares of the issuer’s common stock issued and outstanding as of February 4, 2009 was 23,757,865 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PAGE | ||
PART I. | ||
Item 1. | 1 | |
Item 1A. | 6 | |
Item 1B. | 10 | |
Item 2. | 10 | |
Item 3. | 10 | |
Item 4. | 10 | |
PART II. | ||
Item 5. | 10 | |
Item 6. | 12 | |
Item 7. | 12 | |
Item 8. | 17 | |
Item 9. | 32 | |
Item 9A(T). | 32 | |
Item 9B. | 32 | |
PART III. | ||
Item 10. | 33 | |
Item 11. | 35 | |
Item 12. | 36 | |
Item 13. | 38 | |
Item 14. | 39 | |
Item 15. | 40 | |
43 |
PART I
ITEM 1. DESCRIPTION OF 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 federal securities laws.
Overview
eRoomSystem Technologies has developed and introduced to the lodging industry an intelligent, in-room computerized platform and communications network, or the eRoomSystem. The eRoomSystem is a computerized platform and processor-based system that is installed within our eRoomServ refreshment centers and is designed to collect and control data. The eRoomSystem also supports our: (i) eRoomSafe, an electronic in-room safe, (ii) eRoomTray, an in-room ambient tray that can sell a wide variety of products at room temperature, and, (iii) eRoomEnergy, an in-room digital thermostat that is designed to control virtually any fan coil unit or packaged-terminal air conditioner found in hotel rooms.
Our eRoomSystem and related products deliver in-room solutions that reduce operating costs, enhance hotel guest satisfaction and provide higher operating profits to our customers. The solutions offered by our eRoomSystem and related products have allowed us to establish relationships with many premier hotel chains. In addition to providing our customers with valuable in-room solutions, our revenue-sharing program has allowed us to partner with our customers. Through our revenue-sharing program, we have been able to install our products at little upfront cost to hotels, and share in the recurring revenues generated from the sale of goods and services related to our products.
Currently, we have deployed over 10,000 eRoomServ refreshment centers, and over 6,000 eRoomSafes installed at over 30 hotel properties. Of this amount, approximately 1,600 refreshment centers and 1,000 eRoomSafes are installed pursuant to revenue sharing or fixed-payment agreements. At the present time, we do not intend to install new products at hotels, but will continue to maintain our existing product placements on revenue sharing contracts through the end of such contracts. We anticipate that future placements of eRoomServ refreshment centers and eRoom Safes in new hotels, if any, will be limited to the continued deployment of such products at hotels following the maturity of their respective revenue sharing agreements.
Summary of Our Diversification Initiatives
In addition to our core competencies noted above, in May 2005 we commenced our diversification plan by investing in Identica Holdings Corporation, or Identica, a company that has since filed a registration statement with the Securities and Exchange Commission, and which is a distributor and integrator of next-generation biometric security solutions, including the TechSphere hand vascular pattern biometric technology. Specifically, we invested $10,000 in Identica by purchasing 1,666,667 shares of common stock, or $0.006 per share. Our $10,000 investment in Identica represented 10% of Identica's then issued and outstanding capital stock on a fully-diluted basis. In addition, we provided a loan to Identica in the amount of $150,000. The loan is secured by a security interest in all the assets of Identica and is evidenced by a promissory note. In consideration for making the loan, we were issued a warrant to purchase 1,000,000 shares of common stock of Identica, exercisable at $0.15 per share at any time through May 20, 2010.
On September 7, 2005, Identica purchased certain assets of our wholly owned subsidiary, eRoomSystem Services, Inc., a Nevada corporation, or eRoomServices, pursuant to an Asset Purchase Agreement, or the Purchase Agreement. Specifically, the assets sold consisted of furniture and computer equipment held by eRoomServices, as well as a perpetual license to our web technologies package utilized by our personnel in the maintenance of automated refreshment centers, electronic safes and energy management products, or the equipment, installed at hotels. The Purchase Agreement provided that Identica pay us $60,000 for the assets, which amount was evidenced by a one-year note bearing interest at the rate of 8% per annum, compounded monthly. Under the terms of the note, Identica would make 7 principal and interest payments in the amount of $9,098 per month, commencing on the six-month anniversary of the note. The note was fully paid in May 2007.
In addition, on September 7, 2005, the Company and Identica entered into a Professional Services and Support Agreement whereby Identica employed the technical personnel of eRoomServices. In conjunction therewith, eRoomServices continued to be responsible, for a period of 6 months from the date of the agreement, for all expenses less $7,000 per month related to such technical personnel. Commencing on the six-month anniversary of the agreement, Identica became solely responsible for all fixed and variable expenses associated with the technical personnel and the Salt Lake City facility, including the lease of the existing premises. However, we have retained the rights to part of the offices located at the facility. The terms of the Services Agreement provide that Identica shall, at all times, ensure that the Company receives first priority with respect to the ongoing maintenance of the Company’s equipment by the technical personnel. eRoomServices will continue to exist as a wholly owned subsidiary of the Company and all existing contracts by and between eRoomServices and its hotel clients shall remain outstanding.
In March 2006, we invested the sum of $50,000 in a private placement of Aprecia, LLC, or Aprecia, prior to its registration statement which became effective in January, 2007, a provider of applied artificial intelligence solutions for gaming and homeland security applications. In consideration for our investment, we received 2,083,333 shares of common stock of Aprecia, which at the time of issuance constituted 12% of Aprecia's issued and outstanding common stock. Upon evaluation of the Company’s investments in the third quarter of 2007, the Company determined that the investment in Aprecia was impaired based on their most recent filing which shows them as a company with no revenue and negative stockholders equity. Therefore, the Company has recorded an unrealized loss in the amount of $50,000 as accumulated balance of comprehensive net loss in the year ended December 31, 2007.
We are continuously performing due diligence on third party companies for the purpose of making additional 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 not reached a definitive agreement with any such third party companies.
Our Products and Services
eRoomSystem
Since our inception, it has been our objective to provide innovative in-room amenities to the lodging industry. Our technologies provide an intelligent, in-room computerized platform and communications network that comprises the eRoomSystem. At the core of the eRoomSystem is our proprietary hardware and software that operate as a multi-tasking imbedded operating system. Our hardware and software can operate multiple devices and provide an interactive environment that allows the hotel guest to input and receive information.
Installed as part of our eRoomServ refreshment center, the eRoomSystem provides the communication link between the hotel guest, our products, our file server located at the hotel (the eRoomSystem file server), the hotel's property management system, and the file server located at our headquarters (the eRoomSystem master file server). Our software is remotely upgradeable from our Salt Lake City facility, which reduces the need for costly on-site visits. We can also remotely adjust pricing, change messages on the liquid crystal display, lock and unlock our units and change the input touchpad layout. From our facility, we can also determine whether our products are active and working properly and, in the event a participating hotel fails to pay outstanding invoices or otherwise violates the terms of its agreement with us, control the use of our products by remotely locking the units.
The eRoomSystem consists of a microprocessor, memory, input/output ports, communications transceiver, liquid crystal display, touchpad, power supply and our proprietary software. The proprietary architecture of our circuit boards has been designed to minimize the need for hardware upgrades. The eRoomSystem includes an embedded system processor that handles simple instructions and routes all billing functions and processor-intensive instructions to the eRoomSystem file server.
eRoomServ Refreshment Centers
Our eRoomServ refreshment centers consist of the eRoomSystem, a small refrigeration unit, electronic controls, LCD display and vending racks. Our newest models utilize an upright multi-vending rack. The upright multi-vending rack offers greater flexibility for the snack and beverage products offered by hotels, and is viewed more favorably by our hotel clients than our prior side-vend rack design.
The upright multi-vending rack displays up to 30 different beverages and/or snacks and provides an environment similar to that of a convenience store beverage cooler. Upon removal of a product, the gravity-based design uses the weight of the remaining products to cause the products to roll or slide forward. In addition to the upright multi-vending rack in the refreshment center, the eRoomTray allows hotel properties to separately vend a variety of products at room temperature within the eRoomSystem environment, including snacks, wine, disposable cameras, film, souvenirs, maps and other sundries.
Our eRoomServ refreshment center and eRoomTray communicate through the eRoomSystem, which uses the hotel property's existing telephone lines, network cabling or cable television lines. Our eRoomServ refreshment centers and eRoomTray operate as follows:
· | A hotel guest selects a beverage or snack from our eRoomServ refreshment center or eRoomTray; |
· | The purchase is either immediately confirmed on the liquid crystal display and acknowledged with an audible beep or subject to a countdown of a predetermined (by the hotel) number of seconds prior to purchase confirmation; |
· | Upon confirmation, the transaction information, such as product type, price and time of purchase, is simultaneously transferred to the eRoomSystem file server; |
· | The eRoomSystem file server communicates on a real-time basis with the hotel's property management system and periodically with our eRoomSystem master file server located at our Salt Lake City facility; and |
· | The hotel's property management system posts the purchase to the hotel guest's room account. |
The sales data from the eRoomSystem is transmitted to the eRoomSystem file server from which hotel employees can access real-time sales reports, inventory levels for restocking purposes and demographic data. As for the maintenance of our refreshment centers, the repair or replacement of any component of our refreshment center is relatively simple and is typically provided at no additional charge to the property pursuant to the terms of our service and maintenance agreement.
eRoomSafe
Our eRoomSafes are electronic in-room safes offered in conjunction with our eRoomSystem. The eRoomSafes have storage space large enough for laptop computers, video cameras and briefcases and include an encrypted electronic combination that can be changed by the hotel guest. The eRoomSafes utilize the eRoomSystem to interface with the eRoomSystem file server that communicates with the hotel's property management system.
The following diagram represents the structure and communications network of our eRoomSystem, the eRoomSystem file server, the hotel property management system, and the eRoomSystem master file server:
Our eRoomTray is an ambient tray for dry goods. The eRoomTray has a terraced design and can hold three, to more than twenty, different products. The eRoomTray utilizes cross-sensing technology that provides significant flexibility in product selection for hotels. The eRoomTray uses the visible countdown timer located on the liquid crystal display of the eRoomServ Refreshment Center. This solution allows the hotel to sell music CD's souvenirs, disposable cameras, maps, snacks and other profitable items. The eRoomTray is unique in that it can generally be located anywhere in a guestroom.
eRoomEnergy Management
In 2001, we announced our agreement with INNCOM International, Inc., a leader in hotel guest-room control systems, through which INNCOM private-labels its e4 Smart Digital Thermostat for us as eRoomEnergy and provides assistance in the installation and maintenance of the units. The e4 Smart Digital Thermostat is designed to control virtually any fan coil unit or packaged terminal air conditioner found in hotel rooms and comes standard with an illuminated digital display, a Fahrenheit/Celsius button, one-touch temperature selection, an off/auto button, fan and display buttons. In addition to these user-friendly features, the e4 Smart Digital Thermostat includes five relays, an optional on-board infrared transceiver, a passive infrared occupancy sensor, and is expandable to include functions such as humidity control, outside temperature display, refreshment center access reporting, occupancy reporting to housekeeping and automatic lighting control.
eRoomData Management
One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected several million room-nights of data. The eRoomSystem file server collects information regarding the usage of our eRoomServ refreshment centers on a real-time basis. We use this information to help our customers increase their operational efficiencies. The information we obtain is unique because we are able 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 service and maintenance agreement, including specific information about their guests' buying patterns and non-confidential information about other hotels in similar geographic regions. To this end, our hotel clients benefit in various ways from the information we provide. The hotels are responsible for restocking the goods sold from our refreshment centers and the real-time sales data generated by our refreshment centers helps the hotel maximize personnel efficiencies. The 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, particularly with non-automated units. Finally, the ability to track product sales performance allows the hotel to stock the refreshment centers with more popular items, which generally leads to increased sales of product from the refreshment centers. Our system can provide reports on daily restocking requirements, daily, monthly and annual product sales statistics, overnight audits, inventory control and a variety of customized reports.
Research and Development
At the core of our products and services is our proprietary software and hardware that make up our eRoomSystem. In 2008, we have initiated some research and development projects for the purpose of creating a new product line. There is no assurance that the products we are working on will be successfully completed or deployed.
Sales and Marketing
Currently, we have deployed more than 10,000 eRoomServ refreshment centers, and over 6,000 eRoomSafes installed at over 30 hotel properties. Of this amount, approximately 1,600 refreshment centers and 1,000 eRoomSafes are installed pursuant to revenue sharing or fixed-payment agreements. Our sales and marketing efforts have been eliminated with respect to new product placements for the refreshment centers. We have commenced sales and marketing for other products. However, there is no assurance that these efforts will be successful.
Manufacturing
We do not anticipate the placement of new refreshment centers in the future and, accordingly, the manufacture of our products has become immaterial. We will continue to service our existing products placed pursuant to existing revenue sharing and maintenance agreements.
Competition
The market for in-room amenities in the lodging industry is quite competitive, and the competition has further intensified in recent years. Management has made the decision to cease placing new products in the field and focus on servicing our existing client base. If we decide to redeploy products following the maturity of certain outstanding revenue sharing agreements, we will be subject to significant competition in doing so from our historical competitors, including Bartech, MiniBar America and Dometic, among others.
Intellectual Property
We rely upon a combination of trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers and business partners to protect our proprietary rights in our products, services, know-how and information.
We have registered RoomSystems, RoomSafe, eRoomEnergy, eRoomData, eRoomSystem, and eRoomServ with the United States Patent and Trademark Office. In addition, we have pending applications for the following trademarks and service marks: eRoomSafe; eRoomManagement; and eRoomSystem Technologies. We have also registered our logo and have one pending patent application titled "Personalized Smart Room", Application No. 10/126,468.
Our proprietary software consists of three modules and provides the operating system for our eRoomSystem. The first module is an operating system that permits messages to be scrolled on the flat panel display of our eRoomSystem and allows hotel guests to interface with our products. The second module is a Windows(R) based program that provides a communication link between our eRoomSystem, our products, our eRoomSystem hotel file server and the hotel's property management system. The third module is a Windows(R) based program that collects data from our eRoomSystem hotel file server and produces a wide-variety of management and operational reports. Three years ago, we introduced our eRoomSystem version 4 software and thereafter our newest version 4.1 software. All, but one, of our existing hotel clients are utilizing our version 4.1 software that provides users with a friendly, easy-to-learn graphical environment which generally expands the report generating capabilities of the property.
We do not know if our future patent applications 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. Further, as previously mentioned, it is our intention to focus solely on servicing our existing hotel clients.
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 three wholly owned subsidiaries, eRoomSystem Services, Inc. (formerly RoomSystems), eRoomSystem SPE, Inc. and eLiftLLC, LLC. RSi BRE, Inc., or RSi BRE, a former wholly-owned subsidiary, was liquidated into eRoomSystem Technologies, Inc. in 2004.
eRoomSystem Services is our service and maintenance subsidiary that installs all of our products, provides electronic software upgrades to our customers, provides customer service and maintenance for our products and trains hotel personnel on the use and maintenance of our products. Pursuant to a series of agreements entered into with Identica in 2005, we sold furniture and computer equipment, as well as a perpetual license to our web technologies package utilized by our personnel in the maintenance of automated refreshment centers, electronic safes and energy management products installed at hotels. In addition, the technical personnel, formerly employed by us for the purpose of servicing our existing products installed at hotels, have been hired by Identica. We continue to use these individuals for our entire product servicing needs pursuant to the Professional Services Agreement between us and Identica detailed above.
RSi BRE was formed as part of the Equipment Transfer Agreement we entered into in September 1998 with RSG Investments, LLC, or RSG, a privately held company. Previously, RSi BRE held title to 1,717 eRoomServ refreshment centers and 1,304 eRoomSafes. On February 29, 2004, we entered into a Settlement Agreement and Mutual Release Agreement with RSG whereby we paid the sum of $152,823 as a full and final cancellation of the Equipment Transfer Agreement and subsequent Settlement Agreement dated September 1999. As a result, the Company immediately commenced recognizing all revenue generated from the four revenue sharing lease agreements relating to the 1,717 eRoomServ refreshment centers and 1,304 eRoomSafes. In 2004, RSi BRE was liquidated.
eRoomSystem SPE was formed as part of our long-term financing arrangement with AMRESCO Leasing Corporation, which was terminated in August 2002. eRoomSystem SPE owns all of the equipment previously funded by AMRESCO under our revenue-sharing program, consisting of nine properties comprising 2,775 eRoomServ refreshment centers and 2,622 eRoomSafes. AMRESCO had taken a senior security interest in all of the assets of eRoomSystem SPE. We control eRoomSystem SPE and its financial results are consolidated with those of eRoomSystem Technologies and eRoomSystem Services. On July 14, 2006, the Company repaid the full amount due and owing under the financing arrangement.
eLiftLLC was formed as a new subsidiary in November 2008. eLift provides online parts procurement for the material handling industry.
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 qualifying 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 three full-time employees and have one consultant. In addition, pursuant to the Professional Services Agreement with Identica, we utilize their technical support team in the service and maintenance of our existing installed products. None of our employees are subject to a collective bargaining agreement.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the following factors and other information in this annual report before deciding to invest in our company. If any of the following risks actually occur, our business, financial condition, results of operations and prospects for growth would likely suffer. As a result, you could lose all or part of your investment.
Risks Related to eRoomSystem Technologies
As management for the Company has decided to forego further placements of new products at hotels and our existing revenue sharing agreements have fixed terms, we will continue to experience declining revenues in future periods upon the conclusion of such existing revenue sharing agreements.
The revenue sharing agreements that we have entered into with our hotel customers have a seven-year term. As of December 31, 2008, the average remaining life of these agreements is 0.5 years. In 2009, all of our existing revenue sharing agreements will conclude, unless hotels elect to continue under the terms of the existing agreement, for which there are no assurances. As the revenue sharing agreements conclude, and hotels elect to not extend the term thereof, we will continue to experience an incremental decrease in revenue sharing revenue as well as maintenance revenue. We do, however, own the equipment and upon the conclusion of such agreements may decide to re-deploy such equipment at a new hotel, either on a revenue sharing basis or sale basis.
While we have realized net income for fiscal years 2008 and 2007, we have a history of significant operating losses and may experience operating losses in the future, particularly given the fixed term of our revenue sharing agreements which comprise nearly all of our revenues.
For the year ended December 31, 2008, we realized net income of $72,231, as compared to net income of $402,221 for the fiscal year ended December 31, 2007. In addition, our operations provided net cash of $240,326 for the year ended December 31, 2008, as compared to $765,270 for the year ended December 31, 2007. Our net income and net cash provided by operating activities have gone down dramatically in 2008. We have a history of significant operating losses and may realize operating losses in the future, specifically upon the conclusion of a measurable percentage of our existing revenue sharing agreements. While we are actively embarking upon our diversification strategy of investing in third party emerging growth companies and, potentially, acquiring an operating company if the opportunity arises, we have not realized any revenues to date from such activities. Further, there is no assurance that our investments in third party companies to date will result in us realizing meaningful revenues, if at all, or that we will be successful in acquiring an operating company. To the extent that we do not replace revenue sharing revenue as it decreases, our financial condition and results of operations will continue to be materially adversely affected.
Recent downturn in the economy may seriously affect our revenue sharing revenue and our ability to finance ourselves.
The recent downturn in the U.S. and Global economies may seriously impact our revenue from the revenue sharing contracts we have with Hotels. The lodging industry has seen a significant decline and our revenues have likewise been impacted. In addition, due to the tightening credit markets, it is very difficult to obtain financing and this may affect our ability to finance ourselves.
Although we commenced our diversification strategy in 2005 by making investments in third party companies, there is no assurance that we will realize a return on such investments.
The securities issued to us from our investments in Identica Holdings Corporation and Aprecia, LLC are not marketable. Although Identica has registered with SEC its stock has not started trading yet. Aprecia's stock has also not started trading yet and is currently listed on the pink sheets. It is not known when, or if, these securities will be readily marketable, if at all. Furthermore, even if such securities become readily marketable, there is no assurance that we will receive a return on our investment sufficient to offset the anticipated decline in our revenues relating to existing revenue sharing agreements which will expire. Thus, in the event we do not realize a material return on our investments in Identica and Aprecia, our future operating results will likely be materially adversely affected.
While we are exploring the possibility of acquiring an operating company to augment our historical business and recent investments in third party emerging growth companies, given our cash position, among other things, there is no assurance that we will be successful in consummating a transaction on favorable terms, if at all.
We have undertaken a significant amount of due diligence on several operating companies regarding a potential acquisition. To date, we have not been successful in reaching a definitive agreement with such companies. While we intend to continue our search for a suitable operating company, there is no assurance that we will be successful given our relatively limited cash on hand, lack of liquidity in our common stock, and our common stock not being listed on a national securities exchange, among other factors. Nevertheless, we intend to continue to explore potential acquisitions, along with additional investments in third party emerging growth companies. We view the acquisition of an operating company on favorable terms as a most important objective for 2009. Should we not achieve this objective in 2009, our financial condition and results of operation will likely be adversely affected as existing revenue sharing agreements conclude.
Based on the numerous reductions-in-force we have affected in the past several years to reduce fixed overhead expenses along with outsourcing our ongoing maintenance and service operation and given the current composition of employees the loss of additional key personnel would seriously impact our operations.
We are dependent upon the abilities and efforts of certain personnel, specifically David A. Gestetner, our sole executive officer. Our future success will depend in large part upon Mr. Gestetner. We currently do not carry key man life insurance on Mr. Gestetner, and we have no present intention of doing so in the near future. There can be no assurance that we will be able to locate and retain a suitable replacement for Mr. Gestetner in the event Mr. Gestetner is no longer employed by us.
Risks Related to Our Industry
We rely on the economic health of the lodging industry to generate revenues from our existing revenue sharing agreements, and any condition that may adversely impact the lodging industry will adversely impact the revenues we receive from revenue sharing agreements.
Nearly all of our revenue is generated from our existing revenue sharing agreements and maintenance agreements associated therewith. The economic health of the lodging industry, and, therefore, our revenues, are affected by a number of factors beyond our control, including:
· | general economic conditions; |
· | levels of disposable income of the hotel patrons; |
· | acts of terrorism and anti-terrorism efforts; |
· | increased transportation costs resulting in decreased travel by patrons and decreased hotel occupancy and RevPar; |
· | changes or proposed changes in tax laws; |
· | legal and regulatory issues affecting the development, operation and licensing of hotels; and |
· | competitive conditions in the lodging industry, including the effect of such conditions on the pricing of the merchandise sold in our products installed at hotels. |
The foregoing factors may impact our hotel clients and their guests as relates to the consumption of merchandise sold in our products installed on a revenue sharing basis.
Terrorist attacks or acts of war may seriously harm our business.
Terrorist attacks or acts of war may cause damage or disruption to our Company, our employees, our facility and our customers, which could significantly impact our revenues, costs and expenses, and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, especially to the lodging industry, some of which have materially adversely affected our business, results of operations, and financial condition and may do so again in the future. In particular, the lodging industry was materially affected by the downturn in the tourism industry as a result of the September 11 attacks. While it has since recovered, we experienced a fairly significant decrease in utilization of our revenue sharing products for a significant period following September 11, 2001 particularly in the New York metro area given the lower occupancy rates and the significant number of installations we have in this region. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.
The strength and profitability of our business depends on the overall demand for our existing installed products at hotels. Lodging industry revenues are sensitive to general economic conditions and generally rise or fall more rapidly in relation to the condition of the overall economy. Although we cannot accurately estimate the economic impact of a future terrorist attack at this time, the lodging industry was negatively affected by the reduction in air travel and tourism.
We have experienced loss of market share due to the intense competition from companies with longer operating histories, greater resources and more established brand names that market in-room amenities to the lodging industry, the conclusion of some of our revenue sharing agreements, and the lack of new product sales in the last four fiscal years.
The market for in-room amenities in the lodging industry is very competitive, and we expect competition to intensify in the future. The foregoing served as a primary reason for implementation of our diversification strategy. Our competitors vary in size and in the scope and breadth of the products and services they offer and include Bartech Systems International, Dometic Corporation and MiniBar Systems, among others. Each of our competitors have longer operating histories, larger customer bases, greater brand recognition, and substantially greater capital, research and development, manufacturing, marketing, service, support, technical and other resources than we currently do. While we do not intend to manufacture and install new products in the lodging industry, the foregoing factors directly impact our ability to the continued deployment of such products at hotels following the maturity of their respective revenue sharing agreements.
Risks Related to Our Common Stock
Our diversification strategy, particularly a potential acquisition of an operating company, will likely require us to obtain additional financing in the form of the sale of debt or equity securities, the result of which would have a dilutive effect on the relative ownership of our existing stockholders.
Based upon our existing cash and cash equivalents on hand, which was $2,135,814 as of December 31, 2008, we will likely require additional capital to successfully implement our diversification strategy. Funding may take the form of common stock, preferred stock or convertible debt. The issuance of additional equity or convertible debt securities will have the effect of reducing the percentage ownership of our current stockholders. In addition, such equity or convertible debt securities may have additional rights, preferences or privileges to those of our common stock, such as registration rights. There are no assurances that funding will be available to us on favorable terms, if at all.
Our executive officers and members of our board of directors beneficially own 41.2% of the outstanding shares of our common stock and could limit the ability of our other stockholders to influence the outcome of director elections and other transactions submitted to a vote of stockholders.
Our executive officers and members of our board of directors beneficially own 9,981,740 shares of common stock, or approximately 41.2% of the outstanding shares of our common stock. These stockholders may have the power to influence all matters requiring approval by our stockholders, including the election of directors and approval of mergers and other significant corporate transactions.
Our stock price may fall as a result of the 23,757,865 shares of common stock, or 100% of our outstanding common stock, that is currently eligible for resale.
Sales of a substantial number of shares of common stock in the public market could cause the market price for our common stock to decline. Of the 23,757,865 shares of common stock outstanding as of February 4, 2009, as per the transfer agent, 18,999,614 shares representing 80% of our outstanding shares of common stock are immediately available for resale.
In addition to the foregoing shares, up to 4,758,251 shares of common stock, or 20% of our outstanding shares of common stock, are available for resale in accordance with Rule 144 or 144(k) under the Securities Act. These shares represent 23,757,865 shares, or 100% of our outstanding shares of common stock.
As of December 31, 2008, we had options and warrants outstanding to purchase 2,190,846 shares of common stock at a weighted average exercise price of $0.32 per share, all of which are immediately exercisable.
The sale of a substantial number of shares of our common stock within a short period of time could cause our stock price to fall. In addition, the sale of these shares could impair our abilities to raise capital through the sale of additional common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters and principal executive offices, comprising approximately 1,100 square feet, are located at 1072 Madison Ave., Lakewood, NJ 08701. We pay $1,300 per month. This lease expires March 10, 2009.
In addition, we currently utilize office and warehouse space in Salt Lake City, Utah pursuant to our Professional Services Agreement with Identica. We maintain all inventory and replacement parts at this facility. There is no separate fee charged for these facilities.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, parties to various legal proceedings arising out of our business. Notwithstanding, 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period ending December 31, 2008, there has not been any matter which was submitted to a vote of the Company’s shareholders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our authorized capital stock consists of 50,000,000 shares of common stock, $0.001 par value; 5,000,000 shares of preferred stock, $0.001 par value including; 500,000 shares of Series A convertible preferred stock, $0.001 par value; 2,500,000 shares of Series B convertible preferred stock, $0.001 par value; 2,000,000 shares of Series C convertible preferred stock, $0.001 par value; and 2,777,778 shares of Series D convertible preferred stock, $0.001 par value. Our current authorized capital was effected through an amendment and restatement of our articles of incorporation on March 29, 2000, and the filing of a Certificate of Rights, Preferences and Privileges relating to the Series D convertible preferred stock in November 2002. There are no shares of preferred stock issued and outstanding.
Market Information
Prior to August 3, 2000, there was no public market for our common stock. In conjunction with our initial public offering, 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 Over-The-Counter Bulletin Board under the same symbol. As of February 4, 2009, there were 23,757,865 shares of common stock outstanding and no shares of any class of preferred 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 Over The Counter Bulletin Board (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, 2007 through December 31, 2008:
Calendar Quarter Ended | Low | High | |||||
March 31, 2007 | $ | 0.12 | $ | 0.18 | |||
June 30, 2007 | $ | 0.10 | $ | 0.17 | |||
September 30, 2007 | $ | 0.10 | $ | 0.25 | |||
December 31, 2007 | $ | 0.15 | $ | 0.21 | |||
March 31, 2008 | $ | 0.17 | $ | 0.22 | |||
June 30, 2008 | $ | 0.18 | $ | 0.26 | |||
September 30, 2008 | $ | 0.19 | $ | 0.25 | |||
December 31, 2008 | $ | 0.10 | $ | 0.20 | |||
March 31, 2009 (through February 4, 2009) | $ | 0.14 | $ | 0.19 |
The last reported price of our common stock on the Over-The-Counter Bulletin Board on February 4, 2009 was $0.18 per share. We are not aware of any public market for our options or warrants.
Holders
As of February 4, 2009, there were approximately 375 stockholders of record holding our outstanding common stock.
Dividends
We have never declared or paid any cash dividends on our common stock. Our Board of Directors presently, and for the foreseeable future, intends to retain all of our earnings, if any, for the purchase of securities in private or publicly traded emerging growth companies, or possibly, the acquisition of an operating company if the opportunity arises. 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. Investors should not purchase our common stock with the expectation of receiving cash dividends.
Recent Sales of Unregistered Securities; Use of Proceeds
There were no recent sales of unregistered securities in fiscal years ended December 31, 2008
Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
290,300 shares of our common stock were purchased in the fiscal year ended December 31, 2008 pursuant to the share buyback authorized by the Board of Directors on August 29, 2007.
Period | a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||||||||
Oct-08 | 30,000 | $ | 0.1443 | 30,000 | 4,970,000 | ||||||||||
Nov-08 | 10,300 | $ | 0.1576 | 10,300 | 4,959,700 | ||||||||||
Dec-08 | 250,000 | $ | 0.1300 | 250,000 | 4,709,700 |
ITEM 6. SELECTED FINANCIAL DATA
A smaller reporting company is not required to provide the information required by this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements contained in this prospectus, 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. Future filings with the Securities and Exchange Commission, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may contain forward-looking statements, because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.
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.
Overview
Our core business was the development and installation of an intelligent, in-room computer platform and communications network, or the eRoomSystem, for the lodging industry. The eRoomSystem is a computerized platform and processor-based system designed to collect and control data. The eRoomSystem supports our fully automated and interactive eRoomServ refreshment centers, eRoomSafes, eRoomEnergy products, and the eRoomTray. In 2005, we commenced our diversification strategy of investing in third party emerging growth companies. To this end, we have made investments totaling $60,000, consisting of $10,000 in Identica Holdings Corporation and $50,000 in Aprecia, LLC. The investment in Aprecia has been written off as an unrealized loss. In addition, we have loaned Identica $150,000 in cash. The loan is secured by a security interest in all the assets of Identica and is evidenced by a promissory note. In consideration for making the loan, we were issued a warrant to purchase 1,000,000 shares of common stock of Identica, exercisable at $0.15 per share, at any time through May 20, 2010. We may make additional investments in promising emerging growth companies, and potentially acquire an operating company if the opportunity arises.
Our existing products interface with the hotel's property management system through our eRoomSystem communications network. The hotel's property management system posts usage of our products directly to the hotel guest's room account. The solutions offered by our eRoomSystem and related products have allowed us to install our products and services in several premier hotel chains, including Marriott International, Hilton Hotels and Carlson Hospitality Worldwide, in the United States and internationally.
One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected several million room-nights of data. Through our eRoomSystem, we are able to collect information regarding the usage of our products on a real-time basis. We use this information to help our customers increase their operating efficiencies.
Description of Revenues
Historically, we have received most of our revenues from the sale or placement under a revenue-sharing program of our products in hotels. We expect that these revenues will account for a substantial majority of our revenues for the foreseeable future. In addition, we may receive revenues in the future upon the sale of securities received in consideration for investments made in third party companies in 2005 and 2006; however, the return on such investments is not assured. We may also receive revenues through the parts procurement online website we setup in December 2008 for the material handling industry.
We also generate revenues from maintenance and support services relating to our existing installed products. Our dependence on the lodging industry, including its guests, makes us extremely vulnerable to downturns in the lodging industry caused by the general economic environment. Such a downturn could result in fewer purchases by hotel guests of goods and services from our products installed in hotels, and accordingly lower revenues where our products are placed pursuant to a revenue sharing agreement. Time spent by individuals on travel and leisure is often discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of our operations depends, in part, upon discretionary consumer spending and economic conditions affecting disposable consumer income such as employment, wages and salaries, business conditions, interest rates, availability of credit and taxation.
Our revenue-sharing program provides us with a seven-year revenue stream under each revenue-sharing agreement. Because many of our customers in the lodging industry traditionally have limited capacity to finance the purchase of our products, we designed our revenue-sharing program accordingly. Through our revenue-sharing plan, we have installed our products at little or no upfront cost to our customers and share in the recurring revenues generated from sales of goods and services related to our products. We retain the ownership of the eRoomServ refreshment centers and eRoomSafes throughout the term of the revenue-sharing agreements and the right to re-deploy any systems returned to us upon the expiration or early termination of the revenue-sharing agreements. We have failed to place any products, either on a revenue sharing or sale basis in the prior three years, and we have no present intention of placing new products in the future. We do, however, intend to continue to service and maintain our existing installed product base for the remaining life of the contracts relating thereto.
Our revenues over the past few years have been fairly stable as we have focused on service and maintenance of our existing installed products and have not installed new products at hotels. Over time, our revenues relating to our installed products will decline as existing revenue sharing agreements conclude. Given the foregoing, in 2005 we commenced our diversification strategy to invest in emerging growth companies. To date we have invested in Identica Holdings Corporation, a company which has recently filed a registration statement with the Securities and Exchange Commission, and which is a distributor and integrator of next-generation biometric security solutions, including the TechSphere hand vascular pattern biometric technology. We continue to explore opportunities and perform due diligence on third parties with respect to additional potential investments. At this time, we have not reached a definitive agreement to make further investments. In addition, we may acquire an operating company in the future if the opportunity arises. Over time, we may realize revenues from the sale of securities purchased from Identica and other third party companies in the future, if applicable. The timing and return on such investments, however, cannot be assured. We may also receive revenues through the parts procurement online portal we setup in December 2008 for the material handling industry.
We anticipate that we will receive more than 50% of the recurring revenues from the sale of goods and services generated by our currently installed eRoomServ refreshment centers, eRoomSafes and eRoomTray solutions under revenue-sharing agreements. Our customers receive the remainder of the recurring revenues.
No new products were installed during the years ended December 31, 2008 and 2007
Revenue Recognition
Sales revenue from our products is recognized upon completion of installation and acceptance by the customer. We do not, however, expect to generate meaningful sales revenue as such revenues are limited to the sales of replacement equipment and parts to hotel clients who previously purchased our products. Sales revenue from the placement of our eRoomServ refreshment centers and eRoomSafes under our revenue-sharing program are accounted for similar to an operating lease, with the revenues recognized as earned over the term of the agreement. In some instances, our revenue-sharing agreements provide for a guaranteed minimum daily payment by the hotel. We negotiated our portion of the revenues generated under our revenue-sharing program based upon the cost of the equipment installed and the estimated daily sales per unit for the specific customer.
We have entered into installation, maintenance and license agreements with most of our existing hotel customers. Installation, maintenance and license revenues are recognized as the services are performed, or pro rata over the service period. We defer all revenue paid in advance relating to future services and products not yet installed and accepted by our customers.
Our installation, maintenance and license agreements stipulate that we collect a maintenance fee per eRoomServ refreshment center per day, payable on a monthly basis. Our objective is to generate gross profit margins of approximately 50% from our maintenance-related revenues. We base this expectation on our historical cost of maintenance of approximately $0.04 per unit per day and, pursuant to our maintenance agreements, our projected receipt of generally not less than $0.08 per unit per day.
Description of Expenses
Cost of product sales consists primarily of production, shipping and installation costs. Cost of revenue-sharing arrangements consists primarily of depreciation of capitalized costs for the products placed in service. We capitalize the production, shipping, installation and sales commissions related to the eRoomServ refreshment centers, eRoomSafes, eRoomTrays and eRoomEnergy management products placed under revenue-sharing agreements. Cost of maintenance fee revenues primarily consists of expenses related to customer support and maintenance.
Selling, general and administrative expenses primarily consist of general and administrative expenses including professional fees, salaries and related costs for accounting, administration, finance, human resources, information systems and legal personnel.
Research and development expenses consist of payroll and related costs for hardware and software engineers, quality assurance specialists, management personnel, and the costs of materials used by our consultants in the maintenance of our existing installed products. As we have initiated development of new product lines there was some research and development expenses in fiscal year 2008.
In accordance with Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 86, "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 capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our consolidated statements of operations.
Results of Operations
The following table sets forth selected statement of operations data as a percentage of total revenues for the years indicated:
Fiscal Years ended December 31, | ||||||||
2008 | 2007 | |||||||
Statement of Operations Data: | ||||||||
Revenue: | ||||||||
Revenue-sharing arrangements | 60.9 | % | 67.5 | % | ||||
Maintenance fees | 24.4 | 21.7 | ||||||
Product sales | 14.7 | 10.8 | ||||||
Total revenue | 100.0 | % | 100.0 | |||||
Cost of revenue: | ||||||||
Revenue-sharing arrangements | 26.4 | % | 32.6 | % | ||||
Loss on impairment of refreshment centers | 7.1 | - | ||||||
Maintenance | 8.7 | 5.0 | ||||||
Product sales | 3.5 | 2.4 | ||||||
Total cost of revenue | 45.7 | 40.0 | ||||||
Gross margin | 54.3 | 60.0 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative expense | 51.4 | % | 35.2 | % | ||||
Research and development expense | 8.9 | 0.7 | ||||||
Interest and other income | (13.9 | ) | (9.4 | ) | ||||
Net operating expenses | 46.4 | 26.5 | ||||||
Income from operations | 7.9 | % | 33.5 | % | ||||
Other income (expense): | ||||||||
Gain on forgiveness of liabilities and debt | - | 0.7 | % | |||||
Net income (loss) | 7.9 | % | 34.2 | % |
Comparison of Years Ended December 31, 2008 and 2007
Revenues
Revenue Sharing Arrangements -- Our revenue from revenue-sharing arrangements was $555,571 in 2008 as compared to $792,281 for 2007, representing a decrease of $236,710, or 29.9%. The decrease in revenue from revenue-sharing arrangements was due to the completion of a number of revenue-sharing agreements as well as a downturn in the lodging industry in 2008. During the years ended December 31, 2008 and 2007, we did not place additional products on a revenue sharing basis. During the year ended December 31, 2008, revenues from one customer accounted for 18.5% of our total revenues.
Maintenance Fee Revenue -- Our maintenance fee revenue was $222,816 for 2008 and $254,428 for 2007, representing a decrease of $31,612, or 12.4%. The decrease in maintenance fee revenue was due to a decreased number of products under revenue-sharing and maintenance contracts.
Product Sales -- Our revenue from product sales was $134,368 in 2008, as compared to $127,441 in 2007, representing an increase of $6,927, or 5.4%. The increase in revenue from product sales in 2008 was a result of the sales to hotels of their equipment upon completion of their revenue-sharing agreement.
Cost of Revenue
Cost of Revenue-Sharing Revenue -- Our cost of revenue-sharing revenue was $240,871 for 2008 and $382,820 for 2007, representing a decrease of $141,949, or 37.1%. The decrease in the cost of revenue-sharing revenue resulted from a decrease in depreciation expense due to the sale of equipment to customers upon completion of their revenue-sharing contract. The gross margin percentage on revenue-sharing revenue was 56.6% in 2008 as compared to 51.7% in 2007.
Loss on Impairment of Refreshment Centers -- During 2008, the Company assessed the carrying value of certain refreshment centers that had been used by a Hotel and taken out of service and recorded a loss due to impairment of $64,835.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was $79,493 for 2008 as compared to $58,349 for 2007, representing an increase of $21,144, or 36.2%. The increase in the cost of maintenance revenue was primarily due to the increasing age of the equipment. The gross margin percentage on maintenance revenues was 64.3% in 2008 as compared to 77.1% in 2007.
Cost of Product Sales Revenue -- Our cost of product sales revenue was $31,858 for 2008 as compared to $28,431 for 2007, representing an increase of $3,427, or 12.1%. The increase was due to a lower remaining basis of the equipment sold in 2008 over those sold in 2007. The gross margin percentage on revenue from product sales revenue was 76.3% in 2008 as compared to 77.7% in 2007.
The changes and percent changes with respect to our revenues and our cost of revenue for the years ended December 31, 2008 and 2007 are as follows:
For the Years Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2008 | 2007 | Change | Percent Change | |||||||||||||
REVENUE | ||||||||||||||||
Revenue-sharing arrangements | $ | 555,571 | $ | 792,281 | $ | (236,710 | ) | -29.9 | % | |||||||
Maintenance fees | 222,816 | 254,428 | (31,612 | ) | -12.4 | % | ||||||||||
Product sales | 134,368 | 127,441 | 6,927 | 5.4 | % | |||||||||||
Total Revenue | 912,755 | 1,174,150 | (261,395 | ) | -22.3 | % | ||||||||||
COST OF REVENUE | ||||||||||||||||
Revenue-sharing arrangements | 240,871 | 382,820 | (141,949 | ) | -37.1 | % | ||||||||||
Loss on impairment of refreshment centers | 64,835 | - | 64,835 | 100.0 | % | |||||||||||
Maintenance | 79,493 | 58,349 | 21,144 | 36.2 | % | |||||||||||
Product sales | 31,858 | 28,431 | 3,427 | 12.1 | % | |||||||||||
Total Cost of Revenue | $ | 417,057 | $ | 469,600 | $ | (52,543 | ) | 11.2 | % | |||||||
GROSS MARGIN PERCENTAGE | ||||||||||||||||
Revenue-sharing arrangements | 56.6 | % | 51.7 | % | ||||||||||||
Maintenance | 64.3 | % | 77.1 | % | ||||||||||||
Product sales | 76.3 | % | 77.7 | % | ||||||||||||
Total Gross Margin Percentage | 54.3 | % | 60.0 | % |
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, 2008 and 2007, 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 $468,700 for 2008 and $412,919 for 2007, representing an increase of $55,781, or 13.5%. Selling, general and administrative expenses represented 51.4% of our total revenues in 2008 and 35.2% of our total revenues in 2007. The increase in our selling, general and administrative expenses reflects primarily the write-off of an uncollectible account among other items.
Research and Development Expenses -- Research and development expenses were $81,673 for 2008 and $8,678 for 2007, representing an increase of $72,995, or 841.2%. The increase in research and development expenses was due to development initiated on new product lines. Research and development expenses represented 8.9% of our total revenue in 2008 and 0.7% of our total revenue in 2007.
Interest and other income in the amount of $126,906 was realized in 2008 as compared to $110,768 in 2007. Income from operations for 2008 was $72,231, as compared to $393,721 in 2007. The Company also realized a gain on forgiveness of liabilities and debt of $8,500 in 2007.
Net Income Attributable to Common Stockholders
We realized net income attributable to common stockholders of $72,231 in 2008, as compared to $402,221 in 2007. The $329,990 decrease in net income was primarily due to the decrease in gross margin due to the decreasing refreshment centers installed as well as the write-off of an uncollectible account and increase in research in development.
Liquidity and Capital Resources
At December 31, 2008, we had $2,135,814 of cash and working capital of $2,774,255, as compared to $355,970 of cash and working capital of $2,416,398 at December 31, 2007. In addition, our stockholders' equity was $3,081,719 at December 31, 2008 as compared to $3,029,941 at December 31, 2007, an increase of $51,778. The increase in cash reflects primarily the sale of investments in marketable securities. The increase in working capital and stockholders' equity reflects the continued decrease in cash used in our operations.
The deteriorating credit quality of assets linked to the sub-prime mortgage market, caused by a decline in general mortgage credit standards, led to a lack of liquidity and downgrades to certain mortgage backed securities and other securities in the financial marketplace. This, in turn, contributed to a broad-based liquidity shortfall in the financial system. The subsequent increase in risk aversion has contributed to a decline in credit availability in the financial and capital markets. A continuation of these credit and liquidity issues was liable to result in reduced liquidity and impairment write-downs on some of our asset holdings. The Company’s holdings included $1,575,000 of auction rate preferred securities as of April 29, 2008 that were affected by and were at most risk for possible future reduced liquidity and impairment write-downs. However, the Company successfully sold off all of these securities in 2008 at par.
Our accumulated deficit decreased to $31,010,396 at December 31, 2008 as compared to $31,082,627 at December 31, 2007. The decrease in accumulated deficit is a direct result of our net income of $72,231 in the year ended December 31, 2008.
Net cash provided by operating activities for the year ended December 31, 2008 was $240,326, as compared to $765,270 of net cash provided by operating activities during the year ended December 31, 2007. The $524,944 decrease in net cash provided by operating activities resulted primarily from the decrease in net income in 2008.
Net cash provided by investing activities for the year ended December 31, 2008 was $1,577,971, as compared to net cash used during the year ended December 31, 2007 of $489,938. The change resulted primarily from the sale of marketable securities in 2008.
Net cash used in financing activities for the year ended December 31, 2008 was $38,453, as compared to $0 during the year ended December 31, 2007. The cash used in financing activities resulted from the buyback of Company common stock.
On October 1, 2003, the Company issued AMRESCO a warrant to purchase 400,000 shares of common stock, exercisable at $0.10 per share through October 1, 2008. If at anytime until October 1, 2008, the warrant had an intrinsic value greater than $300,000 based upon the then current trading price of the Company's common stock, then AMRESCO would have had the right to "put" the warrant back to the Company in exchange for $200,000 payable in 12 equal consecutive monthly installments with the first payment to be made on the last day of the month in which the "put" occurs. However, this did not occur prior to October 1, 2008 and accordingly; the Company is not liable in this respect. The warrant for 400,000 shares of common stock expired on October 1, 2008.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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.
Qualitative and Quantitative Disclosures about Market Risk
A smaller reporting company, as defined by Rule 229.10(f)(1), is not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS.
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
HANSEN, BARNETT & MAXWELL, P.C. A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS 5 Triad Center, Suite 750 Salt Lake City, UT 84180-1128 Phone: (801) 532-2200 Fax: (801) 532-7944 www.hbmcpas.com | Registered with the Public Company Accounting Oversight Board |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors and the Stockholders
eRoomSystem Technologies, Inc.
We have audited the accompanying consolidated balance sheets of eRoomSystem Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits 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, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
March 10, 2009
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
December 31, | ||||||||
2008 | 2007 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 2,135,814 | $ | 355,970 | ||||
Marketable securities available for sale | - | 1,998,002 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $22,040 and $32,399 | ||||||||
at December 31, 2008 and 2007, respectively | 124,897 | 182,416 | ||||||
Notes receivable | 512,603 | - | ||||||
Prepaid expenses | 114,512 | 10,831 | ||||||
Total Current Assets | 2,887,826 | 2,547,219 | ||||||
REFRESHMENT CENTERS IN SERVICE, net of accumulated depreciation of | ||||||||
$1,015,582 and $2,406,453 at December 31, 2008 and 2007, respectively | 98,389 | 434,609 | ||||||
PROPERTY AND EQUIPMENT | ||||||||
Computer and office equipment, net of accumulated depreciation of | ||||||||
$9,214 and $6,657, at December 31, 2008 and 2007, respectively | 9,591 | 3,261 | ||||||
INVESTMENT IN MARKETABLE SECURITIES | 14,075 | 14,075 | ||||||
NOTE RECEIVABLE | 183,159 | 159,166 | ||||||
DEPOSITS | 2,250 | 2,432 | ||||||
Total Assets | $ | 3,195,290 | $ | 3,160,762 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 51,687 | $ | 49,070 | ||||
Accrued liabilities | 52,534 | 71,289 | ||||||
Customer deposits | 2,004 | - | ||||||
Deferred maintenance revenue | 7,346 | 10,462 | ||||||
Total Current Liabilities | 113,571 | 130,821 | ||||||
Total Liabilities | 113,571 | 130,821 | ||||||
COMMITMENTS AND CONTINGENCIES | - | - | ||||||
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 24,048,165 | ||||||||
and 23,973,165 shares outstanding at December 31, 2008 and 2007, respectively | 24,048 | 23,973 | ||||||
Additional paid-in capital | 34,042,247 | 33,792,010 | ||||||
Treasury stock at cost 290,300 and zero at December 31, 2008 and 2007 respectively | (38,453 | ) | - | |||||
Warrants and options outstanding | 114,273 | 346,585 | ||||||
Accumulated deficit | (31,010,396 | ) | (31,082,627 | ) | ||||
Accumulated other comprehensive loss | (50,000 | ) | (50,000 | ) | ||||
Total Stockholders' Equity | 3,081,719 | 3,029,941 | ||||||
Total Liabilities and Stockholders' Equity | $ | 3,195,290 | $ | 3,160,762 | ||||
See accompanying notes to consolidated financial statements |
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | ||||||||
For the years ended December 31, | ||||||||
2008 | 2007 | |||||||
REVENUE | ||||||||
Revenue-sharing arrangements | $ | 555,571 | $ | 792,281 | ||||
Maintenance fees | 222,816 | 254,428 | ||||||
Product sales | 134,368 | 127,441 | ||||||
Total Revenue | 912,755 | 1,174,150 | ||||||
COST OF REVENUE | ||||||||
Revenue-sharing arrangements | 240,871 | 382,820 | ||||||
Loss on impairment of refreshment centers | 64,835 | - | ||||||
Maintenance | 79,493 | 58,349 | ||||||
Product sales | 31,858 | 28,431 | ||||||
Total Cost of Revenue | 417,057 | 469,600 | ||||||
GROSS MARGIN | 495,698 | 704,550 | ||||||
OPERATING EXPENSES | ||||||||
Selling, general and administrative expense, including non-cash compensation | ||||||||
of $18,000 and $13,157, respectively | 468,700 | 412,919 | ||||||
Research and development expense | 81,673 | 8,678 | ||||||
Interest and other income | (126,906 | ) | (110,768 | ) | ||||
Net Operating Expenses | 423,467 | 310,829 | ||||||
Income from Operations | 72,231 | 393,721 | ||||||
Gain on forgiveness of liabilities and debt | - | 8,500 | ||||||
Net Income | 72,231 | 402,221 | ||||||
Unrealized loss on investment | - | (50,000 | ) | |||||
Comprehensive Income | $ | 72,231 | $ | 352,221 | ||||
Basic Earnings Per Common Share | $ | 0.00 | $ | 0.02 | ||||
Diluted Earnings Per Common Share | $ | 0.00 | $ | 0.02 | ||||
See accompanying notes to consolidated financial statements |
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 | ||||||||||||||||
Shares | Amount | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
COMMON STOCK | ||||||||||||||||
Balance at Beginning of Year | 23,973,165 | 23,898,165 | $ | 23,973 | $ | 23,898 | ||||||||||
Issuance to directors for services | 75,000 | 75,000 | 75 | 75 | ||||||||||||
Balance at End of Year | 24,048,165 | 23,973,165 | 24,048 | 23,973 | ||||||||||||
TREASURY SHARES | ||||||||||||||||
Balance at Beginning of Year | - | - | - | - | ||||||||||||
Buyback of common stock | (290,300 | ) | - | (38,453 | ) | - | ||||||||||
Balance at End of Year | (290,300 | ) | - | (38,453 | ) | - | ||||||||||
ADDITIONAL PAID-IN-CAPITAL | ||||||||||||||||
Balance at Beginning of Year | 33,792,010 | 33,751,605 | ||||||||||||||
Issuance to directors for services | 17,925 | 11,175 | ||||||||||||||
Expiration of warrants and options | 232,312 | 29,230 | ||||||||||||||
Balance at End of Year | 34,042,247 | 33,792,010 | ||||||||||||||
WARRANTS AND OPTIONS OUTSTANDING | ||||||||||||||||
Balance at Beginning of Year | 346,585 | 373,908 | ||||||||||||||
Expiration of warrants and options | (232,312 | ) | (29,230 | ) | ||||||||||||
Issuance of options and warrants related to consulting services and financing activities | - | 1,907 | ||||||||||||||
Balance at End of Year | 114,273 | 346,585 | ||||||||||||||
ACCUMULATED DEFICIT | ||||||||||||||||
Balance at Beginning of Year | (31,082,627 | ) | (31,484,848 | ) | ||||||||||||
Net income | 72,231 | 402,221 | ||||||||||||||
Balance at End of Year | (31,010,396 | ) | (31,082,627 | ) | ||||||||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||||||||
Balance at Beginning of Year | (50,000 | ) | - | |||||||||||||
Unrealized Loss on Marketable Securities | - | (50,000 | ) | |||||||||||||
Balance at End of Year | (50,000 | ) | (50,000 | ) | ||||||||||||
Total Stockholders' Equity at End of Year | $ | 3,081,719 | $ | 3,029,941 | ||||||||||||
See accompanying notes to consolidated financial statements | ||||||||||||||||
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
For the years ended December 31, | ||||||||
2008 | 2007 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 72,231 | $ | 402,221 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 243,428 | 384,742 | ||||||
Gain on forgiveness of debt and liabilities | - | (8,500 | ) | |||||
Gain on sale of refreshment centers | (103,854 | ) | (63,164 | ) | ||||
Loss on impairment of refreshment centers | 64,835 | |||||||
Interest income from other receivable | (28,902 | ) | (9,507 | ) | ||||
Amortization of discount on note receivable | - | (897 | ) | |||||
Non-cash compensation expense | 18,000 | 13,157 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 95,519 | 86,434 | ||||||
Prepaid expenses | (103,681 | ) | (9,034 | ) | ||||
Accounts payable | 2,617 | 58 | ||||||
Accrued liabilities | (18,755 | ) | (28,345 | ) | ||||
Customer deposits and deferred maintenance revenue | (1,112 | ) | (1,895 | ) | ||||
Net Cash Provided By Operating Activities | 240,326 | 765,270 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of fixed assets | (8,887 | ) | - | |||||
Proceeds from sale of refreshment centers | 96,368 | 86,726 | ||||||
Purchase of notes receivable | (507,694 | ) | - | |||||
Purchase of marketable securities available for sale | (926,998 | ) | (1,176,010 | ) | ||||
Sale of marketable securities availabe for sale | 2,925,000 | 578,090 | ||||||
Proceeds from note receivable | - | 17,875 | ||||||
Change in long term deposits and restricted funds | 182 | 3,381 | ||||||
Net Cash Provided by Investing Activities | 1,577,971 | (489,938 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Buyback of common stock | (38,453 | ) | - | |||||
Net Cash Used in Financing Activities | (38,453 | ) | - | |||||
Net Increase in Cash | 1,779,844 | 275,332 | ||||||
Cash at Beginning of Period | 355,970 | 80,638 | ||||||
Cash at End of Period | $ | 2,135,814 | $ | 355,970 | ||||
Supplemental Cash Flows Information | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
See accompanying notes to consolidated financial statements |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Operations and Business Condition - eRoomSystem Services, Inc. was organized under the laws of the State of Nevada in 1993. In 1999, eRoomSystem Services, Inc. was reorganized as a wholly-owned subsidiary of eRoomSystem Technologies, Inc., also a Nevada corporation. During 1999 and 2000, RSi BRE, Inc. ("RSi BRE") and eRoom System SPE, Inc. ("SPE") were formed, respectively, as wholly-owned subsidiaries of eRoomSystem Technologies, Inc. In 2004 the Company liquidated RSi BRE into eRoomSystem Technologies, Inc. In 2008, eLiftLLC, LLC was formed as a wholly-owned subsidiary of eRoomSystem Technologies, Inc. eRoomSystem Technologies, Inc. and its subsidiaries are collectively referred to as the "Company."
The Company has installed a complete line of fully-automated eRoomServ refreshment centers and eRoomSafes in hotels. The eRoomServ refreshment centers and eRoomSafes use proprietary software that integrates with a data collection computer in each hotel.
Up until the year ended December 31, 2004, the Company had suffered recurring losses. During the years ended December 31, 2008 and 2007, the Company realized net income of $72,231and $402,221, respectively. During the years ended December 31, 2008 and 2007, the Company's operations provided $240,326 and $765,270 of cash, respectively. The Company had cash of $2,135,814 as of December 31, 2008. At December 31, 2008, the Company had working capital of $2,774,255. Although the Company realized a profit in 2008 as well as in 2007, the Company is anticipating decreasing revenue as the Company's existing hotel revenue-sharing and maintenance contracts conclude in 2009. This raises substantial doubt about the Company's ability to continue as a going concern. Realization of continued profitable operations is not assured. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Management would like to acquire an existing operating company to enable the Company to grow and is continuously performing due diligence on third party companies for this purpose. The Company has also been performing research in order to invest in privately-held or publicly traded emerging growth stage companies.
Principles of Consolidation - 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 include highly liquid debt investments with original maturities of three months or less, readily convertible to known amounts of cash. The Company had no restricted cash, as of December 31, 2008 and 2007.
The carrying amounts reported in the accompanying consolidated financial statements for cash, available for sale securities, accounts receivable, notes receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The Company's notes receivable are carried at principal plus accrued interest.
Marketable 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. At December 31, 2008 and 2007, the Company had $0 and $1,998,002 invested in auction rate preferred securities (“ARPS”), respectively.
ARPS are notes that provided for an interest rate reset through a “dutch auction” process in periods spanning from 7 to 35 days. The underlying bonds have long-term maturities, but because of the auction process had heretofore been viewed as very liquid, short-term investments. The auction process resets the interest rate on the securities to current market rates, and provided a vehicle for investors to or sell the securities in what was historically a very liquid environment. All of the Company’s ARPS were rated AAA/Aaa by Standard & Poors, Moody’s or Fitch ratings services, and were collateralized.
In February 2008, a number of ARPS auctions failed to generate enough demand to successfully reset interest rates. In these circumstances, the securities generally require the issuer to pay a maximum interest rate until the next auction is held. The Company’s ARPS holdings were among those ARPS that had failed auctions. During the latter part of 2008, these securities were all redeemed at par.
The Company classifies investments in ARPS as short-term investments on the Company’s consolidated balance sheets. The Company believes that the securities were stated at fair value as of December 31, 2007 based on the existence of subsequent successful auctions in 2008. The Company has fully liquidated all of its auction rate securities.
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 15% 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.
Loan Receivable - Loan Receivables are stated at the historical carrying amount and were evaluated for impairment. When projections indicate that the carrying value of the note is not recoverable, the carrying value is reduced by the estimated excess of the carrying value over the projected discounted cash flows. No impairment was deemed necessary.
eRoomServ Refreshment Centers in Service and Property and Equipment - eRoomServ refreshment centers (including eRoomSafes, if applicable) and property and equipment are stated at cost, less accumulated depreciation and amortization. Major additions and improvements are capitalized, while minor equipment as well as repairs and maintenance costs are expensed when incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, after taking into consideration residual values for eRoomServ refreshment centers, which lives are as follows:
eRoomServ refreshment centers in service | 7 years |
Computer and office equipment | 3 - 7 years |
Vehicles and other | 7 years |
Depreciation and amortization expense related to eRoomServ refreshment centers in service and property and equipment was $243,428 and $384,742 for the years ended December 31, 2008 and 2007, respectively.
On retirement or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. In the year ended December 31, 2008, the Company sold refreshment centers with a carrying value of $30,513 for $134,368, recognizing a gain on sale of $103,855. In the year ended December 31, 2007, the Company sold refreshment centers with a carrying value of $23,562 for $94,336, recognizing a gain on sale of $70,774.
Capitalized Software Costs - In accordance with FASB Statement of Financial Accounting Standards ("SFAS") No. 86, 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 capitalizable software development costs have not been material for the years ended December 31, 2008 and 2007. The Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations.
Deferred Offering and Financing Costs - The Company capitalizes direct costs associated with the acquisition of debt financing. These costs are amortized over the life of the related debt as additional interest expense. If the underlying debt is repaid or extinguished prior to the scheduled maturity, the costs are removed from the accounts and considered in the determination of the gain or loss from extinguishment. The Company also capitalizes direct costs associated with the acquisition of equity financing which are netted against the actual equity proceeds.
Impairment of Long-Lived Assets - The carrying values of the Company's long-lived assets were reviewed for impairment. When projections indicate that the carrying value of the long-lived asset is not recoverable, the carrying value of the long-lived asset is reduced by the estimated excess of the carrying value over the projected discounted cash flows. No impairment was deemed necessary.
Revenue Recognition - The Company generates revenues from either the sale of eRoomServ refreshment centers and eRoomSafes or from leases of eRoomServ refreshment centers and eRoomSafes under revenue-sharing agreements. Under the revenue-sharing agreements, the Company receives a non-guaranteed portion of the sales generated by the units. The Company also generates revenues from maintenance services.
Revenue from the sale of eRoomServ refreshment centers and eRoomSafes is recognized upon completion of installation and acceptance by the customer. The revenue-sharing agreements are accounted for as operating leases with revenue being recognized as earned over the lease period. Maintenance revenue is recognized as the services are performed or pro rata over the service period.
With respect to the sale of products, the maintenance services are not integral to the functionality of the eRoomServ refreshment centers and are at the option of the customer. Maintenance services are mandatory for eRoomServ refreshment centers placed under revenue-sharing agreements and are incorporated into those agreements. In connection with the revenue-sharing agreements, a portion of the revenues received by the Company are classified as maintenance fee revenue based upon vendor-specific objective evidence of fair value. The Company defers customer's deposits paid in advance relating to future services and products not yet installed and accepted by the customer.
The Company generates interest income on notes receivable. Interest income is accrued to income based on the principal amount outstanding.
Stock-Based Compensation.- The Company has one stock-based employee compensation plan, which is described more fully in Note 9. The Company utilizes the fair value recognition provisions of SFAS No. 123 (Revised 2004), Share-Based Payment, ("SFAS 123(R)") using the modified prospective transition method. Accordingly, the Company records expense, if applicable, for (i) the unvested portion of grants issued during 2008 and 2007 and (ii) new grant issuances, both of which will be expensed over the requisite service (i.e., vesting) periods.
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.
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, adjusted to add back interest associated with convertible debt, by the weighted-average number of common shares and dilutive potential common share equivalents outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options and warrants, and shares issuable upon the conversion of debt.
The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted weighted-average common shares outstanding for the years ending December 31, 2008 and 2007:
2008 | 2007 | ||||||
Basic net income | $ | 72,231 | $ | 402,221 | |||
Diluted net income | $ | 72,231 | $ | 402,221 | |||
Basic weighted-average common shares outstanding | 23,998,357 | 23,948,507 | |||||
Effect of dilutive securities | |||||||
Stock options and warrants | 41,920 | 174,953 | |||||
Diluted weighted-average common shares outstanding | 24,040,277 | 24,123,460 | |||||
Basic earnings per share | $ | 0.00 | $ | 0.02 | |||
Diluted earnings per share | $ | 0.00 | $ | 0.02 |
As of December 31, 2008 and 2007, there were potential common stock equivalents from options and warrants of 2,148,926 and 2,994,668, respectively that were not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
Recent Accounting Pronouncements - In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 allows companies to choose to measure certain financial instruments and certain other items at fair value. The statement requires that unrealized gains and losses are reported in earnings for items measured using the fair value option and establishes presentation and disclosure requirements. SFAS No. 159 is effective July 1, 2008 for the Company. The Company does not believe the adoption of SFAS No. 159 will have a material effect on our consolidated financial statements.
In June 2007, the FASB issued Emerging Issue Task Force (EITF) No. 07-03 (EITF 07-03), Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities . EITF 07-03 provides guidance on whether non-refundable advance payments for goods that will be used or services that will be performed in future research and development activities should be accounted for as research and development costs or deferred and capitalized until the goods have been delivered or the related services have been rendered. EITF 07-03 is effective for fiscal years beginning after December 15, 2007. The Company does not expect that the adoption of EITF 07-03 will have a material impact on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 151.” (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. This Statement is effective for the Company as of January 1, 2009. Earlier adoption is prohibited. The Company is currently assessing the impact, if any, of SFAS 160 on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about its business combinations and its effects. SFAS 141R establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, the goodwill acquired and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for acquisitions beginning in our fiscal year beginning December 1, 2009 and earlier application is prohibited.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133," which amends and expands the disclosure requirements of SFAS 133 to require qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement will be effective for our financial statements issued for the second quarter of fiscal year 2009. We are evaluating the impact, if any, the adoption of SFAS No. 161 will have on the disclosures in our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position SFAS 142-3, "Determination of the Useful Life of Intangible Assets" (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets". FSP 142-3 also requires expanded disclosure regarding the determination of intangible asset useful lives. FSP 142-3 is effective for our fiscal year beginning November 1, 2009. We are currently evaluating the impact, if any, that FSP 142-3 will have on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with US GAAP for non-governmental entities. SFAS No. 162 is effective November 15, 2008. The adoption of this statement will have no effect on our consolidated financial statements.
In June 2008, the FASB issued Staff Position (FSP) No. EITF 03-6-1, "Determining Whether Instruments Granted in Share- Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"), which clarified that unvested share-based payment awards that contain nonforfeitable rights to receive dividends or dividend equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing earnings per share (EPS). This FSP is effective for our fiscal year beginning November 1, 2009, and requires that all prior period EPS data be adjusted retroactively. We do not expect the adoption of this standard to have an impact on our consolidated financial statements as holders of our stock options and performance units are not entitled to any rights as a stockholder until the date as of which shares of stock are issued or the performance units become vested.
NOTE 2 - INVESTMENT IN SPECIAL PURPOSE ENTITIES
During 2000, eRoom System Technologies, Inc. formed eRoom System SPE, Inc. ("SPE"), as a wholly owned subsidiary. SPE was formed for the purposes of purchasing certain revenue-sharing agreements and related eRoomServ refreshment centers from eRoomSystem Technologies, Inc., obtaining the rights, through licensing, to certain intellectual property relating to the use of the eRoomServ refreshment centers and obtaining financing secured by pledging the revenue-sharing agreements and refreshment centers.
NOTE 3 - INVESTMENTS
The Company had investments of $0 and $1,998,002 in Auction Rate Preferred Securities as of December 31, 2008 and 2007 respectively that are classified as marketable securities available for sale.
On May 20, 2005 the Company invested $10,000 in Identica Holdings Corporation, a Nevada corporation, by purchasing 1,666,667 shares of common stock, at $0.006 per share. This investment represented 10% of Identica's then outstanding capital stock on a fully-diluted basis. Identica is a privately held company that has expressed an interest in becoming a public company in the future and has filed a registration statement with the SEC for this purpose, which has been declared effective. This investment is be carried at the lower of cost or market and is periodically evaluated for impairment.
In addition, the Company loaned Identica $150,000 in cash. The loan is secured by a security interest in all the assets of Identica and is evidenced by a promissory note. On June 20, 2007, the Company extended the loan for an additional year. The terms of the extended promissory note include interest accruing on the unpaid principal balance in the amount of 10% per annum and a maturity date of June 20, 2008. On June 20, 2008, the Company extended the loan for an additional six months, on the same terms and on December 20, 2008, the Company extended the note for an additional four months with a maturity date of April 20, 2008 on the same terms.
In consideration for making the loan, the Company was issued a warrant to purchase one million (1,000,000) shares of common stock of Identica, exercisable at $0.15 per share at any time through May 20, 2010. The warrants were valued at $4,075 using the Black-Scholes pricing model with the following assumptions: risk free interest rate 3.88%, dividend yield of 0.0%, volatility of 150% and expected life of 5 years. The discount was amortized over the twenty-five month term as interest income.
In September 2005, the Company entered into an Asset Purchase Agreement with Identica. Pursuant to the Agreement, Identica has purchased certain assets of the Company. Specifically, the assets consist of furniture and computer equipment held by the Company, as well as the Company's web technologies package utilized by the Company's technical support team to which the Company retained a perpetual license. The Agreement provided that Identica would pay the sum of $60,000 for the assets, which amount was evidenced by a one-year note bearing interest at the rate of 8% per annum, compounded monthly. Under the terms of the Note, Identica would make seven principal and interest payments in the amount of $9,098 per month, commencing on the six-month anniversary of the Note with a maturity date of September 7, 2006. In addition, at the same time, the Company entered into a Professional Services and Support Agreement whereby Identica will employ the technical personnel of the Company. In conjunction therewith, the
Company would continue to be responsible, for a period of 6 months from the date of the Agreement for all expenses less $7,000 dollars per month related to such technical personnel. Thereafter, the Company would pay Identica $0.50 per Hotel room per month to service all equipment that the Company is contractually obligated to service. The Note was paid in full in 2007.
On March 7, 2006, the Company invested $50,000 in Aprecia, Inc., a Delaware corporation, by purchasing 2,083,333 shares of common stock, at $0.024 per hare. This investment represented 12% of Aprecia's then outstanding capital stock. Aprecia's stock has not started trading on a public exchange, although it has filed a registration statement covering its securities with the SEC which has been declared effective. Upon evaluation of the Company’s investments in the third quarter of 2007, the Company determined that the investment in Aprecia was impaired based on their most recent filing which shows them as a company with no revenue and negative stockholders equity. Therefore, the Company has recorded an unrealized loss in the amount of $50,000 as accumulated other comprehensive loss in the year ended December 31, 2007.
On July 24, 2008, the Company extended a loan in the amount $500,000 to Blackbird Corporation. The loan is evidenced by a 10% senior secured convertible promissory note, made by BlackBird in favor of the Company (the “Secured Note”). The Secured Note matures on June 30, 2009 and bears interest at an annual rate of 10%, with interest payable quarterly on the last business day of each quarter. The interest rate increases to 18% if the note is unpaid after December 31, 2008.
NOTE 4 - NET INVESTMENT IN SALES-TYPE LEASE
During June 2004, the Company entered into an agreement with a hotel property owner that amended a previous revenue sharing lease agreement that had previously been non-performing.
The lease agreement terminated on December 31, 2008. At which time the hotel property owner took ownership of the refreshment centers. The property made monthly payments of $7,200. The lease agreement was classified as a sales-type capital lease. Because the property has a history of non-performance and is still under the supervision of a bankruptcy court, the net investment in the capital lease had been fully allowed against.
The Company recorded revenue-sharing and maintenance fee revenue in the amounts of $82,385 and $86,400 for the years ended December 31, 2008 and 2007, respectively.
There are no further payments due.
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
As December 31, 2008 and 2007, there were no notes payable or long-term debts.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements - On January 1, 2007, the Company entered into a new employment agreement with its chief executive officer and president for a two year term. 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 Lessor - The Company accounts for its revenue-sharing agreements as operating leases. As of December 31, 2008, the Company had no revenue-sharing agreement for which the customer is contractually obligated to pay minimum monthly payments. Agreements with all customers provide for an allocation of revenues to the Company with no minimum monthly payment. Accordingly, the Company is unable to estimate future amounts to be received under these agreements.
Operating Leases as Lessee - In March 2008, the Company rented a different office at its Lakewood, NJ facility. The Company entered into a 12 month lease agreement that will end in March 2009 with automatic one year renewals. The lease provides for monthly rent payments of $1,300. Future lease payments in 2009 are $3,019.35.
Rent expense for the years ended December 31, 2008 and 2007 was $15,831 and $7,576, respectively.
NOTE 7 - INCOME TAXES
The Company has paid no federal income taxes. The following is a schedule of state income taxes paid in 2008 and 2007:
For the years ended December 31, | 2008 | 2007 | |||||
New Jersey | $ | 2,080 | $ | 448 | |||
New York | 2,945 | 4,441 | |||||
Tennessee | 321 | - | |||||
Total income tax paid | $ | 5,346 | $ | 4,889 |
The significant components of the Company's deferred income tax assets as of December 31, 2008 and 2007 are as follows:
For the years ending December 31, | 2008 | 2007 | ||||||
Deferred Income Tax Assets: | ||||||||
Net operating loss carryforwards | $ | 7,387,500 | $ | 7,495,513 | ||||
Reserves and accrued liabilities | 13,947 | 14,430 | ||||||
Other assets | 8,360 | 11,839 | ||||||
Total Deferred Income Tax Assets | $ | 7,409,807 | $ | 7,521,782 | ||||
Valuation allowance | (7,459,554 | ) | (7,422,561 | ) | ||||
Deferred Income Tax Liability - Depreciation and | ||||||||
Amortization | 49,747 | (99,221 | ) | |||||
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.
The following is a reconciliation of the income taxes computed using the federal statutory rate to the provision for income taxes:
For the years ending December 31, | 2008 | 2007 | ||||||
Tax at statutory rate (34%) | $ | 24,558 | $ | 136,755 | ||||
Other non-deductible expenses and adjustments | (62,483 | ) | 66,688 | |||||
Change in valuation allowance | 36,993 | (208,632 | ) | |||||
State tax, net of federal tax benefit | 932 | 5,189 | ||||||
Provision for Income Taxes | $ | - | $ | - |
The following summarizes the tax net operating loss carryforwards and their respective expiration dates as of December 31, 2008:
Years ending December 31, | |||
2011 | $ | 780,106 | |
2017 | 1,082,373 | ||
2018 | 3,642,857 | ||
2019 | 3,298,047 | ||
2020 | 5,087,650 | ||
2021 | 2,378,318 | ||
2022 | 3,459,340 | ||
2023 | 1,205,001 | ||
Total net operating loss carryforwards | $ | 20,933,692 |
NOTE 8 - STOCKHOLDERS' EQUITY
During the year ended December 31, 2008, the Company issued 75,000 shares of common stock valued at $18,000 ($0.24 per share based on closing value) to its Board of Directors for services rendered.
During the year ended December 31, 2007, the Company issued 75,000 shares of common stock valued at $11,250 ($0.15 per share based on closing value) to its Board of Directors for services rendered.
During the year ended December 31, 2007, the board of directors of the Company approved a buyback of up to five million Company shares of common stock on the open market.
During the year ended December 31, 2007 no purchases were made. Between October 6, 2008 and November 17, 2008, we repurchased under the 2007 repurchase program, 40,300 shares of our common stock in the open market at a cost ranging from $0.128 to $0.168 per share, totaling $5,953. On December 12, 2008, we repurchased under the 2007 repurchase program, 250,000 shares of our common stock directly from a shareholder for $0.13 per share, totaling $32,500.
NOTE 9 - STOCK OPTIONS AND WARRANTS
Employee Grants - During 2000, the stockholders of the Company approved adoption of the 2000 Stock Option Plan (the "2000 Plan"). During 2002, the stockholders of the Company approved an amendment to the 2000 Plan to increase the authorized number of shares of common stock reserved for issuance upon the exercise of stock options under the 2000 Plan from 2,400,000 shares to 2,700,000. During November 2004, the stockholders of the Company approved a second amendment to the 2000 Plan to increase the authorized number of shares of common stock reserved for issuance upon the exercise of stock options under the 2000 Plan from 2,700,000 shares to 3,000,000 shares.
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, 2007, the Company granted options to purchase 20,000 shares of common stock to a consultant for services rendered. These options, which vested immediately, have an exercise price of $0.10 per share and are exercisable through July 23, 2012. These options were valued at $1,907 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 4.9%, dividend yield of 0.0%, volatility of 126% and expected life of 5 years.
During the years ended December 31, 2008 and 2007, options to purchase 978,775 and 168,000 shares of common stock, respectively, expired. The Company recognized the value of these options in the amounts of $232,312 and $29,230 during 2008 and 2007 respectively, as additional paid in capital.
Outstanding Stock Options and Warrants - A summary of stock option and warrant activity for the years ended December 31, 2008 and 2007 is as follows:
Options and Warrants | Exercise Price Range | Weighted - Average Exercise Price | ||||||||||||||||||
Balance, December 31, 2006 | 3,317,621 | 0.10 | - | 1.55 | 0.28 | |||||||||||||||
Granted | 20,000 | 0.10 | - | 0.10 | 0.10 | |||||||||||||||
Expired | (168,000 | ) | 0.17 | - | 0.30 | 0.25 | ||||||||||||||
Balance, December 31, 2007 | 3,169,621 | $ | 0.10 | - | 1.55 | $ | 0.28 | |||||||||||||
Expired | (978,775 | ) | 0.10 | - | 0.35 | 0.17 | ||||||||||||||
Balance, December 31, 2008 | 2,190,846 | 0.10 | - | 1.55 | 0.32 | |||||||||||||||
Exercisable, December 31, 2008 | 2,190,846 | $ | 0.10 | - | 1.55 | $ | 0.32 | |||||||||||||
Weighted-average fair value of options granted during the year ended December 31, 2007 | $ | 0.10 | ||||||||||||||||||
Weighted-average fair value of options granted during the year ended December 31, 2008 | $ | - |
The fair value of stock options was determined at the grant dates using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended December 31, 2007, risk-free interest rate of 4.9%, dividend yield of 0 percent, volatility of 126%, and expected life of 5 years.
A summary of the options and warrants outstanding and exercisable as of December 31, 2008 follows:
Outstanding | Exercisable | ||||||||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted - Average Remaining Contractual Life | Weighted - Average Exercise Price | Aggregate Intrinsic Value | Number Exercisable | Weighted - Average Exercise Price | Aggregate Intrinsic Value | ||||||||||||||||||||
$ | 0.10 - 0.37 | 2,177,203 | 8.5 years | $ | 0.32 | $ | 697,378 | 2,177,203 | $ | 0.32 | $ | 697,378 | |||||||||||||||
0.90 - 1.55 | 13,643 | 10.0 years | 0.94 | 12,760 | 13,643 | 0.94 | 12,760 | ||||||||||||||||||||
$ | 0.10 - 1.55 | 2,190,846 | 8.5 years | $ | 0.32 | $ | 710,138 | 2,190,846 | $ | 0.32 | $ | 710,138 |
NOTE 10 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's historical revenues and receivables have been derived solely from the lodging industry. The Company offers credit terms on the sale of its eRoomServ refreshment centers and in connection with its revenue-sharing contracts. 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, 2008, the Company had cash in excess of federally insured limits of $196,127.
At December 31, 2008, the Company had accounts receivable from two customers accounting for 77.3% of total accounts receivable.
During the year ended December 31, 2008, revenues from one customer accounted for 18.5% of total revenues.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, has concluded that our disclosure controls and procedures are effective at a reasonable assurance level based on his evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
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 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, management concluded that the company's internal control over financial reporting was effective as of December 31, 2008.
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.
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 temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
CHANGES IN INTERNAL CONTROLS
During the fiscal quarter ended December 31, 2008, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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. Our executive officer is an employee of eRoomSystem Technologies and serves at the discretion of our board.
Directors and Executive Officers
Name | Age | Position | ||
David A. Gestetner | 36 | President, Chief Executive Officer, Secretary and Chairman of the Board | ||
Herbert A. Hardt | 66 | Director | ||
James C. Savas | 48 | Director | ||
Lawrence K. Wein | 66 | 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, 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.
Herbert A. Hardt has served as director since June 13, 2002. Mr. Hardt is a co-founder and principal of Monness, Crespi, Hardt & Co., Inc. Prior to co-founding Monness, Crespi, Hardt & Co., Inc. in 1979, Mr. Hardt served as vice president of Fidelity Management and Research Bermuda from 1971 to 1978. Mr. Hardt received his Bachelor of Arts with a concentration in Engineering and Applied Physics from Harvard College in 1965 and his Master of Business Administration from Harvard University in 1971.
James C. Savas has served as director since June 13, 2002. For more than seven years, Mr. Savas has been a member of Savas Greene & Company, LLC, an accounting and business consulting firm located in Salt Lake City, Utah. From 1988 to 1995, Mr. Savas was a tax accountant for Price Waterhouse. Since April 1999, Mr. Savas has also served as co-manager of Providence Management, LLC, which is manager of Ash Capital, LLC, an investment company controlled by Dr. Alan C. Ashton, a former director and one of the largest stockholders of the Company. Mr. Savas also serves on the boards of Bullfrog Spas International and Vortex Products, both privately-held companies. Mr. Savas received his Bachelor of Science in Accounting from the University of Utah.
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 received his Master's in Business Administration from Harvard Business School, and his Bachelor of Science in Engineering from Columbia University.
Involvement in Certain Legal Proceedings
There are no legal proceedings that have occurred within the past five 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.
Auditors; Committees of the Board of Directors
Hansen, Barnett & Maxwell, P.C., or HB&M, an independent registered public accounting firm, is our auditor.
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 Messrs. Hardt and Savas. The chairman of the audit committee is Mr. Hardt. The audit committee met three times during the fiscal year ended December 31, 2008. 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. |
The audit committee is comprised exclusively of directors who are not our salaried employees and all of whom, in the opinion of our board, are 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 Messrs. Hardt and Wein. The compensation committee met once during the fiscal year ended December 31, 2008. 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, 2008 all applicable filing requirements were complied with by our executive officers and directors.
Code of Ethics
Our Board of Directors has not yet adopted a written Code of Business Conduct and Ethics.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth summary information concerning the total remuneration paid or accrued by eRoomSystem Technologies, to or on behalf of our chief executive officer and our executive officers whose total annual salary exceeded $100,000 during the fiscal years ended December 31, 2008 and 2007. In accordance with the rules of the Commission, the compensation described in this table does not include perquisites and other personal benefits received by the executive officers named in the table below which does not exceed the lesser of $10,000 or 10% of the total salary and bonus reported for the executive officers.
Summary Compensation Table | ||||||||||||||||||
Name and Principal Position | Year | Salary | Bonus | All Other Compensation | Total | |||||||||||||
David A. Gestetner, | 2008 | $ | 150,000 | $ | 20,000 | $ | 4,800 | $ | 174,800 | |||||||||
President, Chief Executive | 2007 | $ | 150,000 | $ | 20,000 | $ | 4,800 | $ | 174,800 | |||||||||
Officer, Secretary and Chairman |
David A. Gestetner commenced serving in the capacities of President, Chief Executive Officer, Secretary and Chairman of the Board on October 1, 2003. On January 1, 2007, an amendment was made to Mr. Gestetner's employment agreement in which he will be receiving an annual salary of $150,000 and a monthly car allowance of $400. Mr. Gestetner is eligible to receive a performance based bonus at the end of the fiscal year at the discretion of the compensation committee. In addition the agreement provides for one year of severance upon termination without cause with salary and benefits continuing at the same rate.
There were no equity awards granted to or held by our chief executive officer during the fiscal year ended December 31, 2008.
Compensation of Directors
The following table sets forth the equity awards made to members of our board of directors during the fiscal year ended December 31, 2008:
DIRECTOR COMPENSATION | ||||||||||||
Name | Stock Awards | Option Awards | Total | |||||||||
David Gestetner | $ | - | 2 | $ | - | $ | - | |||||
Herbert A. Hardt | $ | 6,000 | 1 | $ | - | $ | 6,000 | |||||
James C. Savas | $ | 6,000 | 1 | $ | - | $ | 6,000 | |||||
Lawrence K. Wein | $ | 6,000 | 1 | $ | - | $ | 6,000 |
(1) | Reflects the issuance of 25,000 shares of common stock to each of Mssrs. Hardt, Wein and Savas. | |||
(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 unregistered 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
The following table is a list of the beneficial ownership of common stock as of February 4, 2009 of (i) all persons who beneficially owned more than 5% of our outstanding common stock, (ii) all directors, (iii) all executive officers and (iv) all directors and executive officers as a group, according to record-ownership listings as of that date, according to the Forms 3, 4 and 5 and Schedules 13D and 13G, of which we have received copies, and according to verification as of February 4, 2009 which we have solicited and received from each director and executive officer. The beneficial ownership is calculated based on 23,757,865 shares of common stock outstanding as of February 4, 2009. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities and, accordingly, includes shares issuable upon exercise of options that are exercisable or become exercisable within 60 days of February 4, 2009.
Unless otherwise indicated, the persons identified in this table have sole voting and sole investment power with regard to the shares beneficially owned with the following address, c/o eRoomSystem Technologies, Inc., 1072 Madison Ave., Lakewood, NJ 08701.
Executive Officer, Director or Stockholders with Beneficial Ownership of 5% or More | Amount and Nature of Beneficial Ownership | Percent of Class | ||||||||
Ash Capital, LLC | 3,830,762 | 5 | 16.0 | % | ||||||
David A. Gestetner | 5,157,644 | 1 | 21.7 | % | ||||||
James C. Savas | 4,043,275 | 2 | 16.8 | % | ||||||
Herbert A. Hardt | 650,821 | 3 | 2.7 | % | ||||||
Lawrence K. Wein | 130,000 | 4 | 0.5 | % | ||||||
Executive Officers and Directors, as a group (4 individuals) | 9,981,740 | 41.2 | % |
(1) Reflects the direct ownership of 4,000 shares of common stock. In addition, also includes the beneficial ownership of 5,153,644 shares of common stock held by Gestetner Group, LLC.
(2) Reflects the direct ownership of 98,321 shares of common stock and options to purchase 80,000 shares of common stock, the beneficial ownership of 19,231 shares of common stock and an option to purchase 14,961 shares of common stock held by Providence Management, LLC, an entity for which Mr. Savas is co-manager and 50% owner, and the beneficial ownership of the following securities held by Ash Capital, LLC, or Ash Capital, an entity which Providence Management, LLC serves as the manager and holds a 20% profits interest, (a) 3,685,449 shares of common stock held by Ash Capital, (b) an option to purchase 145,313 shares of common stock. Mr. Savas disclaims any beneficial ownership of the shares of common stock and options to purchase shares of common stock beneficially owned as a result of his affiliation with Ash Capital, except to the extent of his pecuniary interest in such securities.
(3) Reflects the direct ownership of 470,821 shares of common stock and options to purchase 80,000 shares of common stock, and the beneficial ownership of options to purchase 100,000 shares of common stock held by Monness, Crespi & Hardt, an entity of which Mr. Hardt is a principal.
(4)Reflects the direct ownership of 105,000 shares of common stock and options to purchase 25,000 shares of common stock.
(5) Reflects the direct ownership of 3,685,449 shares of common stock and an option to purchase 145,313 shares of common stock. Ash Capital is controlled by Alan C. Ashton, a former member of our board of directors, audit and compensation committees.
Securities authorized for issuance under equity compensation plans
The following table sets forth information about the common stock available for issuance under compensatory plans and arrangements as of December 31, 2008.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of | Number of securities available for future issuance | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plan approved by security holders | 1,859,948 | $ | 0.33 | 1,140,052 | ||||||||
Equity compensation plans not approved by security holders | 330,898 | $ | 0.27 | - | ||||||||
Total | 2,190,846 | $ | 0.32 | 1,140,052 |
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 May 7, 2001 when the shares of common stock authorized under the 2000 Plan were increased from 2,000,000 shares to 2,400,000 shares, amended on July 29, 2002 by our stockholders effectively increasing the number of shares issuable hereunder to 2,700,000, and amended further on November 15, 2004 by our stockholders effectively increasing the number of shares issuable thereunder to 3,000,000. 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. Under the 2000 Plan, we can grant awards for the purchase of up to 3,000,000 shares of common stock in the aggregate, 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 February 4, 2009, we had options to purchase 1,859,948 shares of our common stock outstanding under the 2000 Plan.
Equity Compensation Plans Not Approved by Security Holders
Except as otherwise noted below, the options and warrants under the following compensation plans are transferable. These options and warrants are exercisable for the remainder of their stated term in the event of death of the holder or the termination of the holder's employment with the Company. None of these options or warrants have a cashless exercise provision.
The 2001 Variable Stock Option and Incentive Plan consists of 205,004 options to purchase shares of common stock of which 205,004 options were issued to employees in 2001 at an exercise price of $0.26 with a term of 10 years.
The 2001(B) Stock Option and Incentive Plan consists of 100,894 options to purchase shares of common stock of which 100,894 options were issued to consultants in 2001 at an exercise price ranging from $0.26 to $0.33 with a term of 10 years.
The 2005 Plan Stock Option and Incentive Plan consists of 25,000 warrants to purchase shares of common stock of which 25,000 warrants were issued to a member of the board at an exercise price of $0.35 with a term of 5 years.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
Except for our Chairman, David Gestetner, and James C. Savas, each of our directors, Messrs. Hebert A. Hardt and Lawrence K. Wein, qualifies as independent directors under Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASD Marketplace Rule 4200(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 NASD Marketplace Rule 4200(15). The members of our audit committee are Messrs. Hardt and Savas. While Mr. Hardt is independent for purposes of the audit committee as defined in NASD Marketplace Rule 4350(d)(2), Mr. Savas is not independent under such rule 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.
Financial Advisory Agreement with Monness, Crespi & Hardt
On December 31, 2001, we entered into a financial advisory agreement with Monness, Crespi & Hardt, or MCH. Herbert A. Hardt is a principal of MCH and has been a member of our board of directors since June 2002. The agreement provides that MCH will assist us in structuring and/or placing debt or equity securities in private or public transactions, and advise us on mergers, acquisitions and strategic partnerships. In consideration, MCH was issued a warrant to purchase 100,000 shares of common stock exercisable at $0.26 per share.
Grant and Exercise of Stock Options on December 31, 2001 and Related Matters Involving Messrs. Harkness, Hrncir and Ellis
On December 31, 2001, we issued to David S. Harkness, Gregory L. Hrncir, Derek K. Ellis (each of which are former executive officers of the Company) and Ash Capital options to purchase 300,000 shares, 225,000 shares, 75,000 shares and 250,000 shares of common stock, respectively, at $0.26 per share, which was the closing price of our common stock on December 31, 2001. As of the same date, Mr. Harkness assigned, as a gift, his options to AK Holding Company, a limited-liability company affiliated with Dr. Alan C. Ashton. In addition, as of the same date, Messrs. Hrncir and Ellis, Ash Capital and AK Holding Company exercised their options to purchase an aggregate of 950,000 shares of common stock (including 636,578 variable options) by payment of $26,000 in February 2002 and by issuing $221,000 of 5% full-recourse promissory notes to us. The principal and accrued interest on the promissory notes originally had a maturity date of December 31, 2005. In addition to the shares purchased with the notes, the notes were secured by 637,500 shares of common stock that have been held by Messrs. Hrncir and Ellis, Ash Capital and AK Holding Company for more than six months and by other assets of each of the foregoing parties.
On October 1, 2003, David S. Harkness entered into a Termination and Release Agreement that provides for the surrender by the Company of a promissory note, previously issued by Mr. Harkness in the original principal amount of $78,000, in exchange for the surrender by Mr. Harkness of 300,000 shares of common stock. In conjunction with the surrender of accrued compensation owed to Mr. Harkness for the period April 1, 2003 to October 1, 2003, the Company issued Mr. Harkness an option to purchase 300,000 shares of common stock at $0.26 per share pursuant to the 2000 Plan. Under the terms of the Termination and Release Agreement, Mr. Harkness resigned as Chief Executive Officer, President and Chairman of the Board of Directors, as well as all officer and director positions held in the Company's subsidiaries.
On October 1, 2003, Gregory L. Hrncir entered into a Termination and Release Agreement that provides for the surrender by the Company of a promissory note, previously issued by Mr. Hrncir in the original principal amount of $58,500, in exchange for the surrender by Mr. Hrncir of 225,000 shares of common stock. In conjunction with the surrender of accrued compensation owed to Mr. Hrncir for the period April 1, 2003 to October 1, 2003, the Company issued Mr. Hrncir an option to purchase 225,000 shares of common stock at $0.26 per share pursuant to the 2000 Plan. Under the terms of the Termination and Release Agreement, Mr. Hrncir resigned as Chief Operating Officer, General Counsel and Secretary of the Company, as well as all officer and director positions held in the Company's subsidiaries. In addition, on October 1, 2003, the Company entered into a consulting agreement with Mr. Hrncir that provides for the issuance of an option to purchase 100,000 shares of common stock, exercisable at $0.10 per share for a period of five years. Mr. Hrncir no longer serves as a consultant to the Company.
On October 2, 2003, Derek K. Ellis entered into a Termination and Release Agreement that provides for the surrender by the Company of a promissory note, previously issued by Mr. Ellis in the original principal amount of $19,500, in exchange for the surrender by Mr. Ellis of 75,000 shares of common stock. In conjunction with the surrender of past compensation by Mr. Ellis for the period April 1, 2003 to July 31, 2003, the Company issued Mr. Ellis an option to purchase 75,000 shares of common stock at $0.26 per share pursuant to the 2000 Plan. Previously, on July 31, 2003, Mr. Ellis had resigned as Chief Financial Officer and Treasurer of the Company. In addition, on October 2, 2003, the Company entered into a consulting agreement with Mr. Ellis that provides for the issuance of a five-year option to purchase up to 180,000 shares of common stock, which option vests upon the occurrence of certain events, at $0.10 per share and the payment of a monthly consulting fee of $10,000 for the first month and $3,120 for a minimum of five, and maximum of seven, subsequent months subject to the occurrence of certain events. Mr. Ellis no longer serves as a consultant to the Company.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is as follows:
Hansen, Barnett & Maxwell, P.C., or HB&M, has served as our independent registered public accounting firm since 2000, and specifically for the fiscal years ended December 31, 2008 and 2007. HB&M was selected by our board of directors as our independent registered public accounting firm for the fiscal year ended December 31, 2008, and by our board of directors and a majority of our common stockholders for the fiscal year ended December 31, 2004.
Our board is responsible for pre-approving all audit and permissible non-audit services provided by HB&M. Our board of directors has concluded that the non-audit services provided by HB&M are compatible with maintaining auditor independence. In 2008, no fees were paid to HB&M pursuant to the "de minimus" exception to the pre-approval policy permitted under the Exchange Act.
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, 2008 and 2007, the fees for services provided by HB&M were as follows:
2008 | 2007 | |||||||
Audit fees (1) | $ | 31,600 | $ | 30,000 | ||||
Audit-related fees (2) | - | - | ||||||
Tax fees (3) | - | - | ||||||
All other fees | - | - | ||||||
$ | 31,600 | $ | 30,000 |
(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.
ITEM 15. EXHIBITS, 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 | ||
10.08 | Promissory Note Repurchase Agreement by and between Steven L. Sunyich and RoomSystems, Inc dated September 1, 1999. | Incorporated by reference to Form SB-2 filed on April 14, 2000 | ||
10.1 | Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International Corporation, RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999 | Incorporated by reference to Form SB-2 filed on April 14, 2000 | ||
10.10A | Exhibits to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International Corporation, RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999 | Incorporated by reference to Form SB-2 filed on June 9, 2000 | ||
10.11 | Amendment to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International Corporation, RSi BRE, Inc. and RSG Investments, LLC dated November 23, 1999 | Incorporated by reference to Form SB-2 filed on April 14, 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 | ||
10.19 | Form of Executive Employment Agreement | Incorporated by reference to Form SB-2 filed on April 14, 2000 | ||
10.2 | Form of Offshore Loan Subscription Agreement dated as of April 13, 2000 | Incorporated by reference to Form SB-2 filed on April 14, 2000 | ||
10.21 | Form of Secured Subordinated Promissory Note dated as of April 13, 2000 | 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 | ||
10.23 | Master Business Lease Financing Agreement by and among AMRESCO Leasing Corporation, eRoomSystem SPE, Inc., RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated May 11, 2000 | Incorporated by reference to Pre-effective Amendment No. 3 of Form SB-2 filed on July 19, 2000 | ||
10.3 | 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 | ||
10.35 | Amended and Restated Master Business Lease Financing Agreement by and among AMRESCO Leasing Corporation, eRoomSystem SPE, Inc., RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated February 23, 2001 | Incorporated by reference to Form 10-KSB filed on April 2, 2001 | ||
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 | ||
10.41 | Amendment Agreement between eRoomSystem Technologies, Inc., eRoomSystem Services, Inc., eRoomSystem SPE, Inc., RSi BRE, Inc., AMRESCO Commercial Finance, Inc., AMRESCO Leasing Corporation and Gestetner Group, LLC dated October 1, 2003 | Incorporated by reference to Form 10-KSB filed on March 30, 2004 |
10.43 | Warrant to Purchase Shares of Common Stock issued in favor of AMRESCO Commercial Finance, Inc. dated October 1, 2003 | Incorporated by reference to Form 10-KSB filed on March 30, 2004 | ||
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 | ||
10.47 | Termination and Release Agreement between eRoomSystem Technologies, Inc. and David S. Harkness dated October 1, 2003. | Incorporated by reference to Form 10-KSB filed on March 30, 2004 | ||
10.48 | Termination and Release Agreement between eRoomSystem Technologies, Inc. and Gregory L. Hrncir dated October 1, 2003. | Incorporated by reference to Form 10-KSB filed on March 30, 2004 | ||
10.5 | Termination and Release Agreement between eRoomSystem Technologies, Inc. and Derek K. Ellis dated October 1, 2003 | Incorporated by reference to Form 10-KSB filed on March 30, 2004 | ||
10.74 | Secured Promissory Note issued in favor of eRoomSystem Technologies, Inc. by Identica Corporation dated May 23, 2005 | Incorporated by reference to Form 8-K filed on May 25, 2005 | ||
10.75 | Security Agreement by and between eRoomSystem Technologies, Inc. and Identica Corporation dated May 23, 2005. | Incorporated by reference to Form 8-K filed on May 25, 2005 | ||
10.76 | Warrant issued in favor of eRoomSystem Technologies, Inc. by Identica Corporation dated May 23, 2005. | Incorporated by reference to Form 8-K filed on May 25, 2005 | ||
10.77 | Asset Purchase Agreement between eRoomSystem Technologies, Inc. and Identica Corporation dated September 7, 2005 | Incorporated by reference to Form 8-K filed on September 13, 2005 | ||
10.78 | Professional Services Agreement between eRoomSystem Technologies, Inc. and Identica Corporation dated September 7, 2005 | Incorporated by reference to Form 8-K filed on September 13, 2005 | ||
10.79 | Settlement Agreement by and between eRoomSystem Technologies, Inc. and Hall Communications Inc. dated December 31, 2001. | Incorporated by reference to Form SB-2/A filed on August 30, 2006 | ||
10.8 | Employment Agreement of David Gestetner dated as of January 1, 2007 | Incorporated by reference to Form 10-KSB filed on March 29, 2007 | ||
21.01 | List of Subsidiaries | Incorporated by reference to Form 10-KSB filed on March 31, 2006 | ||
31 | Filed herewith | |||
32 | Filed herewith |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, 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, Chief Financial Officer Secretary and Chairman of the Board | |
Date: | March 12, 2009 |
In accordance with the Exchange Act, 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 12, 2009 | ||
David A. Gestetner | Secretary and Chairman of the Board (Principal Executive Officer and PrincipalFinancial and Accounting Officer) | |||
/s/ Herbert A. Hardt | Director | March 12, 2009 | ||
Herbert A. Hardt | ||||
/s/ James C. Savas | Director | March 12, 2009 | ||
James C. Savas | ||||
/s/ Lawrence K. Wein | Director | March 12, 2009 | ||
Lawrence K. Wein |