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, 2009 | |
OR | |
o | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number: 000-31037
eRoomSystem Technologies, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 87-0540713 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1072 Madison Ave., Lakewood, NJ | 08701 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (732) 730-0116 |
Securities registered pursuant to Section 12(b) of the Act:
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 o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o 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 R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | ||
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o No x
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.
$3,336,601 based upon $0.14 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 24, 2010 was 23,832,865 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I | 1 | |
ITEM 1. | 1 | |
ITEM 2. | 5 | |
ITEM 3. | 5 | |
PART II | 6 | |
ITEM 5. | 6 | |
ITEM 7. | 7 | |
ITEM 8. | 12 | |
ITEM 9. | 26 | |
ITEM 9A(T). | 26 | |
ITEM 9B. | 26 | |
PART III | 27 | |
ITEM 11. | 28 | |
ITEM 12. | 29 | |
ITEM 13. | 30 | |
ITEM 14. | 31 | |
ITEM 15. | 32 | |
SIGNATURES | 34 |
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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. In addition to the eRoomSystem in the fiscal year 2009 we have purchased Kooltech refreshment centers that were installed in various hotels.
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.
On July 24, 2008, we provided a secured loan to BlackBird Corporation, a Florida corporation (“BlackBird”), an unrelated entity. The funding of the loan took place on completion of a transaction by BlackBird to acquire an unrelated company, USA Datanet Corporation. The acquisition took place on July 24, 2008. The loan is evidenced by a 10% senior secured convertible promissory note, made by BlackBird (the “Secured Note”). The Secured Note was extended to June 30, 2010 and the interest rate increased to 18% annually on January 1, 2009, with interest payable quarterly on the last business day of each quarter.
On June 17, 2009, the Company purchased the assets of Kooltech SPE which had been acquired by Cardinal Pointe Capital (“CPC”). CPC sold the minibars, baskets and stock owned by Kooltech SPE to the Company. The Company has formed a subsidiary, eFridge, LLC (“eFridge”) for the purposes of this purchase. The purchase price is an amount equal to thirty percent (30%) of eFridge’s EBITDA and an amount equal to thirty percent (30%) of New Equipment Cash Flow. Payment of the Purchase Price shall be made by eFridge to CPC on a monthly basis within twenty days after the end of each month, based on the eFridge’s EBITDA for the month then ended.
We have deployed over 10,000 eRoomServ refreshment centers, and over 6,000 eRoomSafes at over 30 hotel properties. In addition we operate approximately 2,000 KoolTech refreshment centers purchased from CPC.
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Summary of Our Diversification Initiatives
We are continuously performing due diligence on third party companies for the purpose of making investments in privately-held or publicly traded emerging growth stage companies. In the future, we may acquire an existing operating company if the opportunity arises. At this time, we have 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. |
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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 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.
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Sales and Marketing
We have deployed more than 10,000 refreshment centers, and over 6,000 eRoomSafes at over 30 hotel properties. Our sales and marketing efforts have been eliminated with respect to new product placements for the refreshment centers.
Manufacturing
We do not anticipate manufacturing new refreshment centers in the future. 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 is focusing 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.
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 so ftware 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 four wholly owned subsidiaries, eRoomSystem Services, Inc. (formerly RoomSystems), eRoomSystem SPE, Inc. eFridge, LLC and eLiftLLC, LLC. RSi BRE, Inc., or RSi BRE, a former wholly-owned subsidiary, was liquidated into eRoomSystem Technologies, Inc. in 2004.
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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.
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.
eFridge, LLC was formed as a new subsidiary in June 2009. eFridge purchased the KoolTech minibars and baskets from CPC and operates them in the Hotels in which they were installed.
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-ca sino 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 approximately eight full-time employees and eight part-time employees in addition to one consultant. None of our employees are subject to a collective bargaining agreement.
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, 2010.
In addition, we currently utilize storage space in Salt Lake City, Utah, Jersey City, NJ, Staten Island, NY and Jackson, NJ. We maintain inventory and replacement parts at these facilities. We pay approximately $2,450 per month for these facilities, which have a month to month arrangement.
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.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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 24, 2010, there were 23,832,865 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, 2008 through December 31, 2009:
Calendar Quarter Ended | Low | High | ||||||
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 | $ | 0.11 | $ | 0.19 | ||||
June 30, 2009 | $ | 0.09 | $ | 0.15 | ||||
September 30, 2009 | $ | 0.09 | $ | 0.17 | ||||
December 31, 2009 | $ | 0.14 | $ | 0.26 | ||||
March 31, 2010 (through February 24, 2010) | $ | 0.18 | $ | 0.23 |
The last reported price of our common stock on the Over-The-Counter Bulletin Board on February 24, 2009 was $0.22 per share. We are not aware of any public market for our options or warrants.
Holders
As of February 24, 2009, there were approximately 350 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, 2009.
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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 | - | |||||||||||
Nov-08 | 10,300 | $ | 0.1576 | 10,300 | - | |||||||||||
Dec-08 | 250,000 | $ | 0.1300 | 250,000 | - |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
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. We may make 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, Helmsley 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. More recently we have purchased minibars and baskets already placed in Hotels and setup turnkey solution at these Hotels. In these hotels we receive most of the revenues for the product sold in the minibars and baskets. We provide 3-5%of revenues to the some of the Hotels. We expect that these revenues will account for a substantial majority of our revenues for the foreseeable future. We also receive limited 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 turnkey or 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.
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Our revenue-sharing program provided 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 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 i n the prior six years. However, we have added some hotels through the purchase of KoolTech’s minibars in which we provide a turnkey solution to those hotels. We 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 decreasing steadily as we have focused on service and maintenance of our existing installed products and have not installed new products at hotels. However, they have not decreased as drastically as expected this year due to the purchase of the KoolTech minibars. Over time, our revenues relating to our installed products will decline as existing agreements conclude. Given the foregoing, in 2005 we commenced our diversification strategy to invest in emerging growth companies. We continue to explore opportunities and perform due diligence on third parties with respect to potential investments. At this time, we have not reached a definitive agreement to make further investments. In addition, we may acquire an operating company in the future if the opportunity arises. The timing and return on such investments, however, cannot be assured. We may also continue to receive revenues through the parts procurement online portal we setup in December 2008 for the material handling industry.
No new products were installed during the years ended December 31, 2009 and 2008.
Revenue Recognition
Equipment sales revenue from our products is recognized upon completion of installation and acceptance by the customer. Sales revenue for product in the minibars that we sell under a turnkey solution is recognized upon completion of the sale. 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 for equipment sales and cost of goods and labor for our sale of minibar products. 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 the fiscal years 2009 and 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:
-8-
Fiscal Years ended December 31, | ||||||||
2009 | 2008 | |||||||
Statement of Operations Data: | ||||||||
Revenue: | ||||||||
Revenue-sharing arrangements | 33.2 | % | 60.9 | % | ||||
Maintenance fees | 18.2 | 24.4 | ||||||
Product sales | 48.6 | 14.7 | ||||||
Total revenue | 100.0 | % | 100.0 | |||||
Cost of revenue: | ||||||||
Revenue-sharing arrangements | 8.0 | % | 26.4 | % | ||||
Loss on impairment of refreshment centers | - | 7.1 | ||||||
Maintenance | 10.2 | 8.7 | ||||||
Product sales | 31.0 | 3.5 | ||||||
Total cost of revenue | 49.2 | 45.7 | ||||||
Gross margin | 50.8 | 54.3 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative expense | 86.1 | % | 51.4 | % | ||||
Research and development expense | 1.0 | 8.9 | ||||||
Interest and other income | (17.2 | ) | (13.9 | ) | ||||
Net operating expenses | 69.9 | 46.4 | ||||||
Income/(Loss) from operations | (19.1 | )% | 7.9 | % | ||||
Net income (loss) | (19.1 | )% | 7.9 | % | ||||
Comparison of Years Ended December 31, 2009 and 2008
Revenues
Revenue Sharing Arrangements -- Our revenue from revenue-sharing arrangements was $239,213 in 2009 as compared to $555,571 for 2008, representing a decrease of $316,358, or 56.9%. The decrease in revenue from revenue-sharing arrangements was due to the completion of additional revenue-sharing agreements as well as a downturn in the lodging industry in 2009. During the years ended December 31, 2009 and 2008, we did not place additional products on a revenue sharing basis. During the year ended December 31, 2009, revenues from one customer accounted for 18% of our total revenues.
Maintenance Fee Revenue -- Our maintenance fee revenue was $131,052 in 2009 and $222,816 for 2008, representing a decrease of $91,764, or 41.2%. 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 $349,416 in 2009, as compared to $134,368 in 2008, representing an increase of $215,048, or 160%. The increase in revenue from product sales in 2009 was a result of the sales of minibar items to customers with our turnkey minibar solution provided to certain hotels.
Cost of Revenue
Cost of Revenue-Sharing Revenue -- Our cost of revenue-sharing revenue was $57,642 for 2009 and $240,871 for 2008, representing a decrease of $183,229, or 76.1%. 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 75.9% in 2009 as compared to 56.6% in 2008.
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 $73,093 for 2009 as compared to $79,493 for 2008, representing a decrease of $6,400, or 8.1%. The decrease in the cost of maintenance revenue was immaterial. The gross margin percentage on maintenance revenues was 44.2% in 2009 as compared to 64.3% in 2008.
Cost of Product Sales Revenue -- Our cost of product sales revenue was $223,052 for 2009 as compared to $31,858 for 2008, representing an increase of $191,194, or 600.1%. The increase was primarily due to the turnkey solution that we provided to some hotels in 2009 in which we provide the product to the minibars which we did not provide in 2008. The gross margin percentage on revenue from product sales revenue was 36.2% in 2009 as compared to 76.3% in 2008.
-9-
The changes and percent changes with respect to our revenues and our cost of revenue for the years ended December 31, 2009 and 2008 are as follows:
December 31, | ||||||||||||||||
2009 | 2008 | Change | Percent Change | |||||||||||||
REVENUE | ||||||||||||||||
Revenue-sharing arrangements | $ | 239,213 | $ | 555,571 | $ | (316,358 | ) | -56.9 | % | |||||||
Maintenance fees | 131,052 | 222,816 | (91,764 | ) | -41.2 | % | ||||||||||
Product sales | 349,416 | 134,368 | 215,048 | 160 | % | |||||||||||
Total Revenue | 719,681 | 912,755 | (193,074 | ) | -21.2 | % | ||||||||||
COST OF REVENUE | ||||||||||||||||
Revenue-sharing arrangements | 57,642 | 240,871 | (183,229 | ) | -76.1 | % | ||||||||||
Loss on impairment of refreshment centers | - | 64,835 | (64,835 | ) | 100.0 | % | ||||||||||
Maintenance | 73,093 | 79,493 | (6,400 | ) | -8.1 | % | ||||||||||
Product sales | 223,052 | 31,858 | 191,194 | 600.1 | % | |||||||||||
Total Cost of Revenue | $ | 353,787 | $ | 417,057 | $ | (63,270 | ) | -15.2 | % | |||||||
GROSS MARGIN PERCENTAGE | ||||||||||||||||
Revenue-sharing arrangements | 75.9 | % | 56.6 | % | ||||||||||||
Maintenance | 44.2 | % | 64.3 | % | ||||||||||||
Product sales | 36.2 | % | 76.3 | % | ||||||||||||
Total Gross Margin Percentage | 50.8 | % | 54.3 | % |
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, 2009 and 2008, 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 $619,873 for 2009 and $468,700 for 2008, representing an increase of $151,173, or 32.3%. Selling, general and administrative expenses represented 86.1% of our total revenues in 2009 and 51.4% of our total revenues in 2008. The increase in our selling, general and administrative expenses reflects primarily the increased costs relating to the acquisition of the KoolTech minibars as well as the write-off of an uncollectible account among other items.
Research and Development Expenses -- Research and development expenses were $7,538 for 2009 and $81,673 for 2008, representing a decrease of $74,135, or 90.8%. The decrease in research and development expenses was due to decreased development initiated on new product lines in 2009. Research and development expenses represented 1% of our total revenue in 2009 and 8.9% of our total revenue in 2008.
Interest and other income in the amount of $123,868 was realized in 2009 as compared to $126,906 in 2008. Loss from operations for 2009 was $137,649, as compared to income from operations of $72,231 in 2008.
Net Income/(Loss) Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $137,649 in 2009, as compared to a net income of $72,231 in 2008. The $209,880 decrease in net income was primarily due to a significant decrease in gross margin due to the decreasing refreshment centers on a revenue sharing basis and an increase of refreshment centers installed as a turnkey solution in addition to the many costs involved in the initial stages of setting up the KoolTech minibar system as well as the write-off of an uncollectible account.
-10-
Liquidity and Capital Resources
At December 31, 2009, we had $2,302,620 of cash and working capital of $2,957,088, as compared to $2,135,814 of cash and working capital of $2,774,255 at December 31, 2008. In addition, our stockholders' equity was $2,970,215 at December 31, 2009 as compared to $3,081,719 at December 31, 2008, a decrease of $111,504. The increase in cash reflects primarily the redemption of a note receivable. The increase in working capital reflects the increase in cash and use of inventory. The decrease in stockholders’ equity reflects the net loss in 2009.
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 impairme nt write-downs. However, the Company successfully sold off all of these securities in 2008 at par.
Our accumulated deficit increased to $31,148,045 at December 31, 2009 as compared to $31,010,396 at December 31, 2008. The increase in accumulated deficit is a direct result of our net loss of $137,649 in the year ended December 31, 2009.
Net cash used by operating activities for the year ended December 31, 2009 was $55,616, as compared to $240,326 of net cash provided by operating activities during the year ended December 31, 2008. The $295,942 decrease in net cash provided by operating activities resulted primarily from the decrease in net income in 2009.
Net cash provided by investing activities for the year ended December 31, 2009 was $222,422, as compared to net cash provided during the year ended December 31, 2008 of $1,577,971. The change resulted primarily from the sale of marketable securities in 2008.
Net cash used in financing activities for the year ended December 31, 2009 was $0, as compared to $38,453 during the year ended December 31, 2008. 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.
-11-
ITEM 8. FINANCIAL STATEMENTS.
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants | 13 |
Consolidated Balance Sheets | 14 |
Consolidated Statements of Operations | 15 |
Consolidated Statements of Stockholders' Equity | 16 |
Consolidated Statements of Cash Flows | 17 |
Notes to Consolidated Financial Statements | 18 |
-12-
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, 2009 and 2008, 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, 2009 and 2008, 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 29, 2010
-13-
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 2,302,620 | $ | 2,135,814 | ||||
Accounts receivable, net of allowance for doubtful accounts of $19,087 and $22,040 | ||||||||
at December 31, 2009 and 2008, respectively | 105,826 | 124,897 | ||||||
Inventory | 75,911 | - | ||||||
Note receivable | 522,685 | 512,603 | ||||||
Prepaid expenses | 71,727 | 114,512 | ||||||
Total Current Assets | 3,078,769 | 2,887,826 | ||||||
REFRESHMENT CENTERS IN SERVICE, net of accumulated depreciation of | ||||||||
$403,598 and $1,015,582 at December 31, 2009 and 2008, respectively | - | 98,389 | ||||||
PROPERTY AND EQUIPMENT | ||||||||
Computer and office equipment, net of accumulated depreciation of | ||||||||
$11,971 and $9,214, at December 31, 2009 and 2008, respectively | 4,801 | 4,527 | ||||||
INVESTMENT IN MARKETABLE SECURITIES | - | 14,075 | ||||||
NOTE RECEIVABLE | - | 183,159 | ||||||
INTANGIBLE ASSETS, net of accumulated amortization of $1,688 and $0 at | ||||||||
December 31, 2009 and 2008, respectively | 3,376 | 5,064 | ||||||
DEPOSITS | 4,950 | 2,250 | ||||||
Total Assets | $ | 3,091,896 | $ | 3,195,290 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 25,037 | $ | 51,687 | ||||
Accrued liabilities | 94,640 | 52,534 | ||||||
Customer deposits | 2,004 | 2,004 | ||||||
Deferred maintenance revenue | - | 7,346 | ||||||
Total Current Liabilities | 121,681 | 113,571 | ||||||
Total Liabilities | 121,681 | 113,571 | ||||||
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 23,832,865 | ||||||||
and 23,757,865 shares outstanding at December 31, 2009 and 2008, respectively | 24,123 | 24,048 | ||||||
Additional paid-in capital | 34,079,467 | 34,042,247 | ||||||
Treasury stock at cost 290,300 and 290,300 shares at December 31, 2009 and 2008 | ||||||||
respectively | (38,453 | ) | (38,453 | ) | ||||
Warrants and options outstanding | 103,123 | 114,273 | ||||||
Accumulated deficit | (31,148,045 | ) | (31,010,396 | ) | ||||
Accumulated other comprehensive loss | (50,000 | ) | (50,000 | ) | ||||
Total Stockholders' Equity | 2,970,215 | 3,081,719 | ||||||
Total Liabilities and Stockholders' Equity | $ | 3,091,896 | $ | 3,195,290 | ||||
See accompanying notes to consolidated financial statements |
-14-
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | ||||||||
For the years ended December 31, | ||||||||
2009 | 2008 | |||||||
REVENUE | ||||||||
Revenue-sharing arrangements | $ | 239,213 | $ | 555,571 | ||||
Maintenance fees | 131,052 | 222,816 | ||||||
Product sales | 349,416 | 134,368 | ||||||
Total Revenue | 719,681 | 912,755 | ||||||
COST OF REVENUE | ||||||||
Revenue-sharing arrangements | 57,642 | 240,871 | ||||||
Loss on impairment of refreshment centers | - | 64,835 | ||||||
Maintenance | 73,093 | 79,493 | ||||||
Product sales | 223,052 | 31,858 | ||||||
Total Cost of Revenue | 353,787 | 417,057 | ||||||
GROSS MARGIN | 365,894 | 495,698 | ||||||
OPERATING EXPENSES | ||||||||
Selling, general and administrative expense, including non-cash compensation | ||||||||
of $26,146 and $18,000, respectively | 619,873 | 468,700 | ||||||
Research and development expense | 7,538 | 81,673 | ||||||
Interest and other income | (123,868 | ) | (126,906 | ) | ||||
Net Operating Expenses | 503,543 | 423,467 | ||||||
Income/(Loss) from Operations | (137,649 | ) | 72,231 | |||||
Net Income/(Loss) | (137,649 | ) | 72,231 | |||||
Basic Earnings Per Common Share | $ | (0.01 | ) | $ | 0.00 | |||
Diluted Earnings Per Common Share | $ | (0.01 | ) | $ | 0.00 | |||
See accompanying notes to consolidated financial statements
-15-
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 | ||||||||||||||||
Shares | Amount | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
COMMON STOCK | ||||||||||||||||
Balance at Beginning of Year | 24,048,165 | 23,973,165 | $ | 24,048 | $ | 23,973 | ||||||||||
Issuance to directors for services | 75,000 | 75,000 | 75 | 75 | ||||||||||||
Balance at End of Year | 24,123,165 | 24,048,165 | 24,123 | 24,048 | ||||||||||||
TREASURY SHARES | ||||||||||||||||
Balance at Beginning of Year | (290,300 | ) | - | (38,453 | ) | - | ||||||||||
Buyback of common stock | - | (290,300 | ) | - | (38,453 | ) | ||||||||||
Balance at End of Year | (290,300 | ) | (290,300 | ) | (38,453 | ) | (38,453 | ) | ||||||||
ADDITIONAL PAID-IN-CAPITAL | ||||||||||||||||
Balance at Beginning of Year | 34,042,247 | 33,792,010 | ||||||||||||||
Issuance to directors for services | 11,175 | 17,925 | ||||||||||||||
Issuance of options and warrants to employees | 14,895 | - | ||||||||||||||
Expiration of warrants and options | 11,150 | 232,312 | ||||||||||||||
Balance at End of Year | 34,079,467 | 34,042,247 | ||||||||||||||
WARRANTS AND OPTIONS OUTSTANDING | ||||||||||||||||
Balance at Beginning of Year | 114,273 | 346,585 | ||||||||||||||
Expiration of warrants and options | (11,150 | ) | (232,312 | ) | ||||||||||||
Balance at End of Year | 103,123 | 114,273 | ||||||||||||||
ACCUMULATED DEFICIT | ||||||||||||||||
Balance at Beginning of Year | (31,010,396 | ) | (31,082,627 | ) | ||||||||||||
Net income/(Loss) | (137,649 | ) | 72,231 | |||||||||||||
Balance at End of Year | (31,148,045 | ) | (31,010,396 | ) | ||||||||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||||||||
Balance at Beginning of Year | (50,000 | ) | (50,000 | ) | ||||||||||||
Unrealized Loss on Marketable Securities | - | - | ||||||||||||||
Balance at End of Year | (50,000 | ) | (50,000 | ) | ||||||||||||
Total Stockholders' Equity at End of Year | $ | 2,970,215 | $ | 3,081,719 | ||||||||||||
See accompanying notes to consolidated financial statements
-16-
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
For the years ended December 31, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income/(Loss) | $ | (137,649 | ) | $ | 72,231 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 62,088 | 243,428 | ||||||
Loss on impairment of investment | 14,075 | - | ||||||
Gain on sale of refreshment centers | (4,248 | ) | (103,854 | ) | ||||
Loss on impairment of refreshment centers | - | 64,835 | ||||||
Interest income from note receivable | (10,082 | ) | (28,902 | ) | ||||
Non-cash compensation expense | 26,145 | 18,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 19,071 | 95,519 | ||||||
Inventory | (75,911 | ) | - | |||||
Prepaid expenses | 42,785 | (103,681 | ) | |||||
Accounts payable | (26,650 | ) | 2,617 | |||||
Accrued liabilities | 42,106 | (18,755 | ) | |||||
Customer deposits and deferred maintenance revenue | (7,346 | ) | (1,112 | ) | ||||
Net Cash (Used In)/Provided By Operating Activities | (55,616 | ) | 240,326 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of fixed assets | (3,032 | ) | (8,887 | ) | ||||
Proceeds from sale of refreshment centers | 44,995 | 96,368 | ||||||
Purchase of notes receivable | - | (507,694 | ) | |||||
Purchase of marketable securities available for sale | - | (926,998 | ) | |||||
Sale of marketable securities availabe for sale | - | 2,925,000 | ||||||
Proceeds from note receivable | 183,159 | - | ||||||
Change in long term deposits and restricted funds | (2,700 | ) | 182 | |||||
Net Cash Provided by Investing Activities | 222,422 | 1,577,971 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Buyback of common stock | - | (38,453 | ) | |||||
Net Cash Used in Financing Activities | - | (38,453 | ) | |||||
Net Increase in Cash | 166,806 | 1,779,844 | ||||||
Cash at Beginning of Period | 2,135,814 | 355,970 | ||||||
Cash at End of Period | $ | 2,302,620 | $ | 2,135,814 | ||||
Supplemental Cash Flows Information | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
See accompanying notes to consolidated financial statements |
-17-
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
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. In 2009, eFridge, 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, 2009 and 2008, the Company realized a net loss of $137,649 and a net income of $72,231, respectively. During the year ended December 31, 2009, the Company's operations used $55,616 and provided $240,326 of cash during the year ended December 31, 2008. The Company had cash of $2,302,620 as of December 31, 2009. At December 31, 2009, the Company had working capital of $2,957,088. The Company is not anticipating increasing revenue. The Company suffered a net loss in 2009 there is no assurance that the Company will be profitable in 2010. This raises substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverabi lity 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, 2009 and 2008.
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.
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:
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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 $62,088 and $243,428 for the years ended December 31, 2009 and 2008, 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, 2009, the Company sold refreshment centers with a carrying value of $40,747 for $44,995, recognizing a gain on sale of $4,248. 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.
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, 2009 and 2008. 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, eRoomSafes and sale of products from the refreshment centers 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. Revenue from the sale of refreshments from the refreshment centers is recognized upon removal of the item from the minibar by the guest. 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 refreshment centers, 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 2009 and 2008 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.
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Net Earnings/(Loss) per Common Share - Basic earnings/(loss) per common share is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding. Diluted earnings/(loss) per common share is computed by dividing net income/(loss), 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, 2009 and 2008:
2009 | 2008 | |||||||
Basic net income/(loss) | $ | (137,649 | ) | $ | 72,231 | |||
Diluted net income/(loss) | $ | (137,649 | ) | $ | 72,231 | |||
Basic weighted-average common shares outstanding | 23,809,646 | 23,998,357 | ||||||
Effect of dilutive securities | ||||||||
Stock options and warrants | - | 41,920 | ||||||
Diluted weighted-average common shares outstanding | 23,809,646 | 24,040,277 | ||||||
Basic earnings/(loss) per share | $ | (0.01 | ) | $ | 0.00 | |||
Diluted earnings/(loss) per share | $ | (0.01 | ) | $ | 0.00 | |||
As of December 31, 2009 and 2008, there were potential common stock equivalents from options and warrants of 2,263,344 and 2,148,926, 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 March 2008, the Financial Accounting Standards Board or “FASB” issued guidance on "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. The adoption of which did not have a material effect on our consolidated financial statements.
In April 2008, the FASB issued guidance on the "Determination of the Useful Life of Intangible Assets" which 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". This amendment also requires expanded disclosure regarding the determination of intangible asset useful lives. This amendment is effective for our fiscal year beginning November 1, 2009. The adoption of which did not have a material effect on our consolidated financial statements.
In May 2008, the FASB issued guidance on "The Hierarchy of Generally Accepted Accounting Principles". This 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. This statement became effective November 15, 2008. The adoption of this statement did not have an effect on our consolidated financial statements.
In June 2008, the FASB issued guidance on "Determining Whether Instruments Granted in Share- Based Payment Transactions Are Participating Securities", 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 ended December 31, 2009, and requires that all prior period EPS data be adjusted retroactively. The adoption of these provisions did not 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 un its become vested.
In January 2009, the FASB issued guidance which contains amendments to ASC 715, "Compensation—Retirement Benefits" that are intended to enhance the transparency surrounding the types of assets and associated risks in an employer's defined benefit pension or other postretirement plan. These particular amendments became effective for us beginning with this annual report and did not have a material impact on our financial position or results of operations.
In June 2009, FASB issued The FASB Accounting Standards Codification. The Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On July 1, 2009, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative.
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Under ASC 470-20, "Debt with Conversion and Other Options", or "ASC 470-20," cash settled convertible securities are separated into their debt and equity components. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount reflected as a debt liability is recorded as additional paid-in capital. As a result, the debt is recorded at a discount reflecting its below market coupon interest rate. The debt is subsequently accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected on the consolidated statements of operations. ASC 470-20 did not have a material effect on our consolidated financi al statements.
Accounting for Transfers of Financial Assets - In June 2009, the FASB issued accounting guidance which will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets, and requires additional disclosures. This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted. These provisions became effective for us on January 1, 2010, and it will not have a material impact on our financial position or results of operations.
Consolidation of Variable Interest Entities - In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity. This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted. These provisions became effective for us on January 1, 2010, and it will not have a material impact on our financial position or results of operations.
In October 2009, the FASB issued an Accounting Standards Update or “ASU” regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after Dec ember 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. We are currently evaluating the impact of this ASU on our consolidated financial statements.
On December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements Topic 820 “Improving Disclosures about Fair Value Measurements.” This ASU requires some new disclosures and clarifies some existing disclosures requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. The adoption of this ASU will not have a material impact on our consolidated financial statements.
Software Revenue Recognition - In October 2009, the FASB issued accounting guidance which changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and nonsoftware components that function together to deliver the tangible product's essential functionality are excluded from the software revenue recognition guidance given prior to this new guidance. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. These provisions ar e not expected to have a material impact on our financial position or results of operations.
Disclosures about Fair Value Measurements – In January 2010, the FASB issued guidance requires an entity to disclose the following:
· | Separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe reasons for the transfers. |
· | Present separately information about purchases, sales, issuances and settlements, on a gross basis, rather than on one net number, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). |
· | Provide fair value measurement disclosures for each class of assets and liabilities. |
· | Provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or level 3. |
This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. These provisions are not expected to have a material impact on our financial position or results of operations.
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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
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 had expressed an interest in becoming a public company in the future and had filed a registration statement with the SEC for this purpose, which has been declared effective. During the fiscal year ended December 31, 2009 this investment has been written off as Identica is insolvent and was taken over by its creditors.
In addition, the Company loaned Identica $150,000 in cash. The loan was secured by a security interest in all the assets of Identica and was evidenced by a promissory note. The note was paid back on September 28, 2009 in the amount of $196,915 including principal and accrued interest.
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. During the fiscal year ended December 31, 2009 these warrants were written off as Identica is insolvent and was taken over by its creditors.
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”). In addition, Blackbird issued 50,000 shares to the Company. On the date of issuance BlackBird was not publicly traded, the shares were valued at zero. The Secured Note was extended to June 30, 2010. The interest rate increased to 18% after December 31, 2008, with interest payable quarterly on the last business day of each quarter. Blackbird is current with their interest payments.
On March 2, 2010, Rapid Link, Incorporated (OTC.BB:RPID) announced that, as of February 24, 2010, it has consummated the initial closing under a Share Exchange Agreement among RPID, Blackbird Corporation and certain of their stockholders. Under the terms of the Share Exchange Agreement, RPID has acquired Mr. Prepaid, Inc., a former subsidiary of Blackbird, in exchange for 10,000,000 shares of Series A Convertible Preferred Stock. The shares of preferred stock represent, on an as-converted basis, 80% of the outstanding capital stock of the Company.
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 was 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 amount of $82,385 for the year ended December 31, 2008.
There are no further payments due.
NOTE 5 - 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 with automatic two year extensions unless terminated at least thirty days earlier in writing. The agreement provides for an annual salary of $150,000. The agreement requires that the chief executive officer not compete with the Company during the term of employment and for three years subsequent to termination.
Operating Leases as Lessor - The Company accounts for its revenue-sharing agreements as operating leases. As of December 31, 2009, 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.
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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 ended in March 2009 with automatic one year renewals. The lease provides for monthly rent payments of $1,300. Future lease payments through March 2010 are $3,019. The Company is renting warehouse space in Salt Lake City, Utah on a month to month basis. The lease provides for monthly rent payments of $129. The Company is renting warehouse space in Jersey City, NJ on a month to month basis. The lease provides for monthly rent payments of $500. The Company is renting warehouse space in Staten Island, NY on a month to month basis. The lease provides for monthly rent payments on one unit of $1,600 and on the second unit of $800. The Company has vacated the second unit as of February, 2010. The Company is renting additional warehouse space in Jackson, NJ on a month to month basis. The lease provides for monthly rent payments of $199.
Rent expense for the years ended December 31, 2009 and 2008 was $36,500 and $15,831, respectively.
NOTE 6 - INCOME TAXES
The Company has paid no federal income taxes. The following is a schedule of state income taxes paid in 2009 and 2008:
For the years ended December 31, | 2009 | 2008 | ||||||
New Jersey | $ | - | $ | 2,080 | ||||
New York | 1,317 | 2,945 | ||||||
Tennessee | - | 321 | ||||||
Total income tax paid | $ | 1,317 | $ | 5,346 | ||||
The significant components of the Company's deferred income tax assets as of December 31, 2009 and 2008 are as follows:
For the years ending December 31, | 2009 | 2008 | ||||||
Deferred Income Tax Assets: | ||||||||
Net operating loss carryforwards | $ | 7,613,718 | $ | 7,387,500 | ||||
Reserves and accrued liabilities | 23,164 | 13,947 | ||||||
Other assets | 7,318 | 8,360 | ||||||
Total Deferred Income Tax Assets | $ | 7,644,200 | $ | 7,409,807 | ||||
Valuation allowance | (7,644,200 | ) | (7,459,554 | ) | ||||
Deferred Income Tax Liability - Depreciation and | ||||||||
Amortization | - | 49,747 | ||||||
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, | 2009 | 2008 | ||||||
Tax at statutory rate (34%) | $ | (46,801 | ) | $ | 24,558 | |||
Other non-deductible expenses and adjustments | (135,772 | ) | (62,780 | ) | ||||
Change in valuation allowance | 184,349 | 37,290 | ||||||
State tax, net of federal tax benefit | (1,776 | ) | 932 | |||||
Provision for Income Taxes | $ | - | $ | - |
The following summarizes the tax net operating loss carryforwards and their respective expiration dates as of December 31, 2009:
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Years ending December 31, | ||||
2011 | $ | 999,010 | ||
2017 | 1,082,373 | |||
2018 | 3,642,857 | |||
2019 | 3,032,912 | |||
2020 | 5,087,650 | |||
2021 | 2,704,379 | |||
2022 | 3,601,005 | |||
2023 | 1,169,588 | |||
2029 | 254,944 | |||
Total net operating loss carryforwards | $ | 21,574,718 |
NOTE 7 - STOCKHOLDERS' EQUITY
During the year ended December 31, 2009, 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, 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 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, 2009 no repurchases of shares were made.
During the year ended December 31, 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 8 - STOCK OPTIONS AND WARRANTS
Employee Grants - During 2000, the stockholders of the Company approved adoption of the 2000 Stock Option Plan (the "2000 Plan"). 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, 2009, the Company granted options to purchase 132,500 shares of common stock to employees for extraordinary services rendered. These options, which vested immediately, have an exercise price ranging from $0.12 to $0.20 per share and are exercisable through December 28, 2014. These options were valued at $14,896 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging from 1.15% to 2.70%, dividend yield of 0.0%, volatility ranging from 115.97% through 119.1% and expected life ranging from 3 - 5 years.
During the years ended December 31, 2009 and 2008, options to purchase 60,002 and 978,775 shares of common stock, respectively, expired. The Company recognized the value of these options in the amounts of $11,150 and $232,312 during 2009 and 2008 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, 2009 and 2008 is as follows:
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Options and Warrants | Exercise Price Range | Weighted - Average Exercise Price | ||||||||||||||||||
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 | |||||||||||||||
Granted | 132,500 | 0.12 | 0.20 | 0.14 | ||||||||||||||||
Expired | (60,002 | ) | 0.10 | - | 0.10 | 0.10 | ||||||||||||||
Balance, December 31, 2009 | 2,263,344 | 0.10 | - | 1.55 | 0.32 | |||||||||||||||
Exercisable, December 31, 2009 | 2,263,344 | $ | 0.10 | - | 1.55 | $ | 0.32 | |||||||||||||
Weighted-average fair value of options granted during the year ended December 31, 2008 | $ | - | ||||||||||||||||||
Weighted-average fair value of options granted during the year ended December 31, 2009 | $ | 0.11 |
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, 2009: risk free interest rate ranging from 1.15% to 2.70%, dividend yield of 0.0%, volatility ranging from 115.97% through 119.1% and expected life ranging from 3 - 5 years.
A summary of the options and warrants outstanding and exercisable as of December 31, 2009 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 | 2,249,701 | 2.4 years | $ | 0.31 | $ | 17,805 | 2,249,701 | $ | 0.31 | $ | 17,805 | |||||||||||||||
0.90 - 1.55 | 13,643 | 2.5 years | 0.94 | - | 13,643 | 0.94 | - | ||||||||||||||||||||
$ | 0.10 - 1.55 | 2,263,344 | 2.4 years | $ | 0.32 | $ | 17,805 | 2,263,344 | $ | 0.32 | $ | 17,805 |
NOTE 9 - 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, 2009, the Company had cash in excess of federally insured limits of $506,155.
At December 31, 2009, the Company had accounts receivable from two customers accounting for 46.06% of total accounts receivable.
During the year ended December 31, 2009, revenues from two customers accounted for 33% of total revenues.
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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. The evaluation included reviewing and testing the controls and procedures in place as per the Company’s Internal Control Document. Based upon that evaluation, management concluded that the company's internal control over financial reporting was effective as of December 31, 2009.
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, 2009, 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.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following information is furnished with respect to our directors and executive officer. There are no family relationships between or among any of our directors or executive officer. 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 | 37 | President, Chief Executive Officer, Secretary and Chairman of the Board |
Herbert A. Hardt | 67 | Director |
James C. Savas | 49 | Director |
Lawrence K. Wein | 67 | 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 one time during the fiscal year ended December 31, 2009. 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. |
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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, 2009. 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, 2009 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, 2009 and 2008. 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, | 2009 | $ | 150,000 | $ | 35,000 | $ | - | $ | 185,000 | |||||||||
President, Chief Executive | 2008 | $ | 150,000 | $ | 20,000 | $ | - | $ | 170,000 | |||||||||
Officer, Secretary and Chairman |
*Certain columns from this table have been omitted as there has been no compensation awarded to, earned by, or paid to the executive named required to be reported in these columns in the fiscal years covered by the table
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. 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.
Outstanding Equity Awards at Fiscal-Year End
There were no equity awards granted to or held by our chief executive officer during the fiscal year ended December 31, 2009.
Director Compensation
The following table sets forth the equity awards made to members of our board of directors during the fiscal year ended December 31, 2009:
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Director Compensation * | ||||||||||||
Name | Stock Awards | Option Awards | Total | |||||||||
David Gestetner | $ | - | 2 | $ | - | $ | - | |||||
Herbert A. Hardt | $ | 3,750 | 1 | $ | - | $ | 3,750 | |||||
James C. Savas | $ | 3,750 | 1 | $ | - | $ | 3,750 | |||||
Lawrence K. Wein | $ | 3,750 | 1 | $ | - | $ | 3,750 | |||||
*Certain columns from this table have been omitted as there has been no compensation awarded to, earned by, or paid to any of the directors named required to be reported in these columns in the fiscal year covered by the table
(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 AND RELATED STOCKHOLDER MATTERS.
The following table is a list of the beneficial ownership of common stock as of February 24, 2010 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 24, 2010 which we have solicited and received from each director and executive officer. The beneficial ownership is calculated based on 23,832,865 shares of common stock outstanding as of February 25, 2009. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to se curities and, accordingly, includes shares issuable upon exercise of options that are exercisable or become exercisable within 60 days of February 25, 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 | 21.6 | % | ||||
James C. Savas | 4,068,275 | 2 | 16.9 | % | ||||
Herbert A. Hardt | 675,821 | 3 | 2.8 | % | ||||
Lawrence K. Wein | 155,000 | 4 | 0.6 | % | ||||
Executive Officers and Directors, as a group (4 individuals) | 10,056,740 | 41.4 | % | |||||
(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 123,321 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 495,821 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 130,000 shares of common stock and options to purchase 25,000 shares of common stock.
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(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, 2009.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities available for future issuance | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plan | ||||||||||||
approved by security holders | 1,932,446 | $ | 0.32 | 1,067,554 | ||||||||
Equity compensation plans not | ||||||||||||
approved by security holders | 330,898 | $ | 0.27 | - | ||||||||
Total | 2,263,344 | $ | 0.31 | 1,067,554 |
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 hereunder 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 o f 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 24, 2010, we had options to purchase 1,932,446 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 cashless exercise provisions.
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 indepen dent 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.
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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.
ITEM 14. PRINCIPAL ACCOUNTING 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, 2009 and 2008. HB&M was selected by our board of directors as our independent registered public accounting firm for the fiscal year ended December 31, 2009, 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 2009, 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, 2009 and 2008, the fees for services provided by HB&M were as follows:
2009 | 2008 | |||||||
Audit fees (1) | $ | 31,800 | $ | 31,600 | ||||
Audit-related fees (2) | - | |||||||
Tax fees (3) | - | - | ||||||
All other fees | - | - | ||||||
$ | 31,800 | $ | 31,600 |
(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.
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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 |
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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 | ||
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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 | ||
10.81 | Purchase and Sale Agreeement by and between CardinalPointe Capital and eRoomSystem Technologies, Inc. dated June 16, 2009 | Incorporated by reference to Form 8-K filed on June 17, 2009 | ||
21.01 | List of Subsidiaries | Incorporated by reference to Form 10-KSB filed on March 31, 2006 | ||
31 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
32 | Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
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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 29, 2010 |
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 29, 2010 | ||
David A. Gestetner | Secretary and Chairman of the Board (Principal Executive Officer and PrincipalFinancial and Accounting Officer) | |||
/s/ Herbert A. Hardt | Director | March 29, 2010 | ||
Herbert A. Hardt | ||||
/s/ James C. Savas | Director | March 29, 2010 | ||
James C. Savas | ||||
/s/ Lawrence K. Wein | Director | March 29, 2010 | ||
Lawrence K. Wein |
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