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 1934For the fiscal year ended December 31, 2010ORo
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 x      No o




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





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 oNon-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.




$3,825,258 based upon $0.16 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. There was a public bid and ask price of $0.17 and $0.14, respectively, for an average price of $0.155 on June 30, 2010.





The number of shares of the issuer’s common stock issued and outstanding as of March 21, 2011 was 23,907,865 shares.





DOCUMENTS INCORPORATED BY REFERENCE





None.











TABLE OF CONTENTS





PART I

1ITEM 1.
DESCRIPTION OF BUSINESS
1ITEM 2.
DESCRIPTION OF PROPERTY.
5ITEM 3.
LEGAL PROCEEDINGS.
6ITEM 4.
(REMOVED AND RESERVED)PART II

6ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
6ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
8ITEM 8.
FINANCIAL STATEMENTS.
13ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
27ITEM 9A
CONTROLS AND PROCEDURES
27ITEM 9B.
OTHER INFORMATION
27PART III

28ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
28ITEM 11.
EXECUTIVE COMPENSATION.
29ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.
30ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
31ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
31ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
32





ii




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 March 31, 2011 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 many hotel properties. In addition we operate approximately 1,000 KoolTech refreshment centers purchased from CPC.





1





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 and New Jersey facilities, 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.





2




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.





3





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. We have stepped up our research and development in 2010. There is no assurance that the products we are working on will be successfully completed or deployed.





Sales and Marketing





We have deployed more than 10,000 refreshment centers, and over 6,000 eRoomSafes at many hotel properties. We have renewed our sales and marketing efforts with respect to new product placements for the refreshment centers. There is no assurance that we will be successful in selling or placing additional units.





Manufacturing





We do not anticipate manufacturing new refreshment centers in our own facilities in the future, however, we may utilize outside manufacturing companies to manufacture additional units as necessary. 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 software that provides users with a friendly, easy-to-learn graphical environment which generally expands the report generating capabilities of the property.





We do not know if our future patent applications will be issued with the full scope of claims we seek, if at all, or whether any patents we receive will be challenged or invalidated. Our means of protecting our proprietary rights in the United States, and abroad, may not be adequate and competitors may independently develop similar technology. We cannot be certain that our services do not infringe on patents or other intellectual property rights that may relate to our services. Like other technology-based businesses, we face the risk that we will be unable to protect our intellectual property and other proprietary rights, and the risk that we will be found to have infringed on the proprietary rights of others. Further, as previously mentioned, it is our intention to focus solely on servicing our existing hotel clients.




4





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.





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-casino has broad discretion in determining whether or not to approve a transaction with a third party, which review typically includes the character, fitness and reputation of the third party and its officers, directors and principals. If our history or operations present problems for a hotel-casino, we would either have to expend resources to address or eliminate the concerns or forego the business.





Employees





We currently employ approximately 3 full-time employees and 8 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 and lease on a month to month basis.





5





In addition, we currently utilize storage space in Salt Lake City, Utah, Jersey City, NJ, Lakewood, NJ and Jackson, NJ. We maintain inventory and replacement parts at these facilities. We pay approximately $1,600 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.





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 March 21, 2011, there were 23,907,865 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, 2009 through December 31, 2010:





Calendar Quarter Ended

Low


HighMarch 31, 2009

$
0.11


$
0.19June 30, 2009

$
0.09


$
0.15September 30, 2009

$
0.09


$
0.17December 31, 2009

$
0.14


$
0.26March 31, 2010

$
0.17


$
0.23June 30, 2010

$
0.11


$
0.20September 30, 2010

$
0.14


$
0.22December 31, 2010

$
0.11


$
0.22March 31, 2011 (through March 21, 2011)

$
0.12


$
0.23




The last reported price of our common stock on the Over-The-Counter Bulletin Board on March 21, 2011 was $0.17 per share. We are not aware of any public market for our options or warrants.





Holders





As of March 21, 2011, there were approximately 400 stockholders of record holding our outstanding common stock.





6





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, 2010 and 2009.





During the year ended December 31, 2010, the Company issued 75,000 shares of common stock valued at $11,250 ($0.15 per share based on market value on the date issued) to its Board of Directors for services rendered. This reflects the issuance of 25,000 shares of common stock to each of Mssrs. Hardt, Wein and Savas. The shares were issued under Section 4(2) of the Securities Act of 1933, as amended.





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 market value on the date issued) to its Board of Directors for services rendered. This reflects the issuance of 25,000 shares of common stock to each of Mssrs. Hardt, Wein and Savas. The shares were issued under Section 4(2) of the Securities Act of 1933, as amended.





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.





c) Total Number of Shares (or


(d) Maximum Number (or Approximatea) Total Number


(b) Average


Units) Purchased as Part of


Dollar Value) of Shares (or Units) thatof Shares (or


Price Paid per


Publicly Announced Plans or


May Yet Be Purchased Under the PlansPeriod

Units) Purchased


Share (or Unit)


Programs


or ProgramsOct-08


30,000


$
0.1443



30,000



-Nov-08


10,300


$
0.1576



10,300



-Dec-08


250,000


$
0.1300



250,000



-





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, 2010.





Weighted-averageNumber of securities to


exercise price of


Number of securitiesof outstanding options,


outstanding options,


available for futurePlan Category

warrants and rights


warrants and rights


issuance(a)


(b)


(c)Equity compensation plan approved by security holders


1,942,446


$
0.32



1,057,554Equity compensation plans not approved by security holders


305,898


$
0.26



-Total


2,248,344


$
0.31



1,057,554





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 of common stock in the aggregate, including "incentive stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986 and non-qualified stock options. As of March 21, 2011, we had options to purchase 1,942,446 shares of our common stock outstanding under the 2000 Plan.





7





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 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 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 a turnkey solution at these Hotels. In these hotels we receive most of the revenues for the product sold in the minibars and baskets. We provide 3-5%of revenues to 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 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, and availability of credit and taxation.





8





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 in the prior seven 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 increased this year due to the purchase of the KoolTech minibars in 2009. 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.





No new products were installed during the years ended December 31, 2010 and 2009. However, we have replaced a large number of the KoolTech minibars with a newer model.





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 provided 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 2010 and 2009.





9





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.





Comparison of Years Ended December 31, 2010 and 2009


Revenues


Product Sales — Our revenue from product sales was $873,606 in 2010, as compared to $349,416 in 2009, representing an increase of $524,190, or 150%. The increase in revenue from product sales in 2010 was a result of the sales of minibar items to customers with our turnkey minibar solution provided to certain hotels. This service was initiated in mid-2009 and therefore the increase is reflected in the full year results for 2010





Maintenance Fee Revenue — Our maintenance fee revenue was $195,346 in 2010 and $131,052 for 2009, representing an increase of $64,294, or 49.1%. The increase in maintenance fee revenue was due a hotel that was added in third quarter of 2009.





Revenue Sharing Arrangements — We had no revenue from revenue-sharing arrangements in 2010 as compared to $239,213 for 2009, representing a decrease of $239,213, or 100%. The decrease in revenue from revenue-sharing arrangements was due to the completion of revenue-sharing agreements in 2009. During the years ended December 31, 2010 and 2009, we did not place additional products on a revenue sharing basis.





During the year ended December 31, 2010, revenues from three customers accounted for 65% of our total revenues.





Interest — Our income from interest was $116,767 in 2010, compared to $123,868 in 2009, representing a decrease of $7,101, or 5.7%. The decrease related to lower interest rates. Revenue from interest was reclassified from operating expenses to demonstrate that it is presently an integral part of our core business plan.





Cost of Revenue


Cost of Product Sales Revenue — Our cost of product sales revenue was $513,345 for 2010 as compared to $223,052 for 2009, representing an increase of $290,293, or 130.1%. The increase was primarily due to the increased product sales revenue from the turnkey solution that we provided to hotels in 2010. The gross margin percentage on revenue from product sales revenue was 41.2% in 2010 as compared to 36.2% in 2009.





Cost of Maintenance Revenue — Our cost of maintenance revenue was $31,889 for 2010 as compared to $73,093 for 2009, representing a decrease of $41,204, or 56.4%. The decrease in the cost of maintenance revenue was due to increased operating efficiencies in 2010. The gross margin percentage on maintenance revenues was 83.7% in 2010 as compared to 44.2% in 2009.





Cost of Revenue-Sharing Revenue — Our cost of revenue-sharing revenue was $57,642 for 2009. The gross margin percentage on revenue-sharing revenue was 75.9% in 2009.





The changes and percent changes with respect to our revenues and our cost of revenue for the years ended December 31, 2010 and 2009 are as follows:





10





For the Years EndedDecember 31,Percent2010


2009


Change


ChangeREVENUEProduct sales

$
873,606


$
349,416


$
524,190



150.0
%Maintenance fees


195,346



131,052



64,294



49.1
%Revenue-sharing arrangements


-



239,213



(239,213
)


-100.0
%Interest income


116,767



123,868



(7,101
)


-5.7
%Loss on other than temporary decline in marketable securities


(50,000
)


-



(50,000
)


100.0
%Total Revenue


1,135,719



843,549



292,170



34.6
%COST OF REVENUEProduct sales


513,345



223,052



290,293



130.1
%Maintenance fees


31,889



73,093



(41,204
)


-56.4
%Revenue-sharing arrangements


-



57,642



(57,642
)


-100.0
%Total Cost of Revenue

$
545,234


$
353,787


$
191,447



54.1
%




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, 2010 and 2009, 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 $494,374 for 2010 and $619,873 for 2009, representing a decrease of $125,499, or 20.2%. Selling, general and administrative expenses represented 43.5% of our total revenues in 2010 and 73.5% of our total revenues in 2009. The decrease in our selling, general and administrative expenses reflects primarily the increased costs in 2009 relating to the acquisition of the KoolTech minibars as well as the write-off of an uncollectible account in 2009 among other items.





Research and Development Expenses — Research and development expenses were $77,766 for 2010 and $7,538 for 2009, representing an increase of $70,228, or 931.7%. The increase in research and development expenses was due to increased development initiated on new product lines in 2010. Research and development expenses represented 6.8% of our total revenue in 2010 and 1% of our total revenue in 2009.





Net Income (Loss) Attributable to Common Stockholders





We realized a net income attributable to common stockholders of $18,345 in 2010, as compared to a net loss of $137,649 in 2009. The $155,994 increase in net income was primarily due to a significant increase in product sales revenue in 2010 from the refreshment centers installed as a turnkey solution. In addition in 2009 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 increased selling, general and administrative costs.





Liquidity and Capital Resources





At December 31, 2010, we had $2,145,709 of cash and working capital of $2,971,373, as compared to $2,302,620 of cash and working capital of $2,957,088 at December 31, 2009. In addition, our stockholders' equity was $3,096,018 at December 31, 2010 as compared to $2,970,215 at December 31, 2009, an increase of $125,803. The decrease in cash reflects primarily the purchase of investments in real property tax liens and increase in inventory in 2010. The increase in working capital reflects the decrease in accrued liabilities. The increase in stockholders’ equity reflects the net income in 2010 as well as the other comprehensive gain picked up in 2010.





Our accumulated deficit decreased to $31,129,700 at December 31, 2010 as compared to $31,148,045 at December 31, 2009. The decrease in accumulated deficit is a direct result of our net income of $18,345 in the year ended December 31, 2010.





Net cash provided by operating activities for the year ended December 31, 2010 was $28,597, as compared to $55,616 of net cash used by operating activities during the year ended December 31, 2009. The $84,213 change in net cash provided by operating activities resulted primarily from the increase in net income in 2010.





Net cash used by investing activities for the year ended December 31, 2010 was $185,508, as compared to net cash provided during the year ended December 31, 2009 of $222,422. The change resulted primarily from the purchase of property and equipment and real property tax liens in 2010 versus the repayment of a note receivable in 2009.





11





Net cash used in financing activities for the years ended December 31, 2010 and 2009 was $0.





Recent Accounting Pronouncements





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 December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this standard did not have a material impact 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. This ASU is effective for fiscal years beginning on or after December 15, 2009. 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 are 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.





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.





12





ITEM 8.      FINANCIAL STATEMENTS.





eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





Report of Independent Registered Public Accounting Firm
14Consolidated Balance Sheets
15Consolidated Statements of Operations and Comprehensive Income
16Consolidated Statements of Stockholders' Equity
17Consolidated Statements of Cash Flows
18Notes to Consolidated Financial Statements
19




13










REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and the Stockholders


eRoomSystem Technologies, Inc.





We have audited the accompanying consolidated balance sheets of eRoomSystem Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income, 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 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 2010 and 2009, and the results of their operations and their 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, UtahMarch 22, 2011










14





eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 
 December 31,2010


2009ASSETSCURRENT ASSETSCash and cash equivalents

$
2,145,709


$
2,302,620Investment in equity securities available for sale


42,500



-Investment in real property tax liens


60,299



-Accounts receivable, net of allowance for doubtful accounts of $18,240 at December 31, 2010 and $19,087 at December 31, 2009


103,802



105,826Inventory


147,069



75,911Advance to supplier


48,678



53,011Note receivable


522,685



522,685Prepaid expenses


5,043



18,716Total Current Assets


3,075,785



3,078,769PROPERTY AND EQUIPMENTProperty and equipment, net of accumulated depreciation of $23,975 at December 31, 2010 and $11,971 at December 31, 2009


120,707



4,801INTANGIBLE ASSETS,net of accumulated amortization of $3,376 at December 31, 2010 and $1,688 at December 31, 2009


1,688



3,376DEPOSITS


2,250



4,950Total Assets

$
3,200,430


$
3,091,896LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
21,399


$
25,037Accrued liabilities


81,009



94,640Customer deposits


2,004



2,004Total Current Liabilities


104,412



121,681Total Liabilities


104,412



121,681STOCKHOLDERS' EQUITYPreferred stock, $0.001 par value; 5,000,000 shares authorized; none outstanding


-



-Common stock, $0.001 par value; 50,000,000 shares authorized; shares 23,907,865 at December 31, 2010 and 23,832,865 at December 31, 2009


23,908



24,123Additional paid-in capital


34,159,310



34,079,467Treasury stock at cost; 0 shares at December 31, 2010 and 290,300 shares at December 31, 2009


-



(38,453
)Warrants and options outstanding


-



103,123Accumulated deficit


(31,129,700
)


(31,148,045
)Accumulated other comprehensive gain/(loss)


42,500



(50,000
)Total Stockholders' Equity


3,096,018



2,970,215Total Liabilities and Stockholders' Equity

$
3,200,430


$
3,091,896
 
 See accompanying notes to consolidated financial statements





15





eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
 For the years endedDecember 31,2010


2009REVENUE AND INVESTMENT INCOME (LOSSES)Product sales

$
873,606


$
349,416Maintenance fees


195,346



131,052Revenue-sharing arrangements


-



239,213Interest income


116,767



123,868Loss on other than temporary decline in marketable securities


(50,000
)


-Total Revenue and Investment Income (Losses)


1,135,719



843,549COST OF REVENUEProduct sales


513,345



223,052Maintenance


31,889



73,093Revenue-sharing arrangements


-



57,642Total Cost of Revenue


545,234



353,787OPERATING EXPENSESSelling, general and administrative expense, including non-cash compensation of $14,958 and $26,145, respectively


494,374



619,873Research and development expense


77,766



7,538Net Operating Expenses


572,140



627,411Net Income (Loss)


18,345



(137,649
)OTHER COMPREHENSIVE INCOMEUnrealized gain on investment


42,500



-Reclassification adjustment for losses included in operations


50,000



-Comprehensive Income (Loss)

$
110,845


$
(137,649
)Basic Earnings (Loss) Per Common Share

$
0.00


$
(0.01
)Diluted Earnings (Loss) Per Common Share

$
0.00


$
(0.01
)
 
 See accompanying notes to consolidated financial statements




16





eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
 Shares


Amount2010


2009


2010


2009COMMON STOCKBalance at Beginning of Year


24,123,165



24,048,165


$
24,123


$
24,048Cancellation of shares in treasury


(290,300
)


-



(290
)


-Issuance to directors for services


75,000



75,000



75



75Balance at End of Year


23,907,865



24,123,165



23,908



24,123TREASURY SHARESBalance at Beginning of Year










(38,453
)


(38,453
)Cancellation of shares in treasury










38,453



-Balance at End of Year










-



(38,453
)ADDITIONAL PAID-IN-CAPITALBalance at Beginning of Year










34,079,467



34,042,247Issuance to directors for services










11,175



11,175Cancellation of shares in treasury










(38,161
)


-Issuance of options and warrants to employees










3,706



14,895Reclass of options and warrants










103,123



-Expiration of warrants and options










-



11,150Balance at End of Year










34,159,310



34,079,467WARRANTS AND OPTIONS OUTSTANDINGBalance at Beginning of Year










103,123



114,273Expiration of warrants and options










-



(11,150
)Reclass of options and warrants










(103,123
)


-Balance at End of Year










-



103,123ACCUMULATED DEFICITBalance at Beginning of Year










(31,148,045
)


(31,010,396
)Net income/(loss)










18,345



(137,649
)Balance at End of Year










(31,129,700
)


(31,148,045
)ACCUMULATED OTHER COMPREHENSIVE LOSSBalance at Beginning of Year










(50,000
)


(50,000
)Unrealized gain on marketable securities










42,500



-Reclassification adjustment for losses included in operations










50,000



-Balance at End of Year










42,500



(50,000
)Total Stockholders' Equity at End of Year









$
3,096,018


$
2,970,215
 
 See accompanying notes to consolidated financial statements





17


eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 For the Years EndedDecember 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)

$
18,345


$
(137,649
)Adjustments to reconcile net income (loss) to net cash provided by (used in)operating activities:Depreciation and amortization


13,691



62,088Gain on sale of refreshment centers


-



(4,248
)Loss from other than temporary decline in marketable securities


50,000



14,075Non-cash compensation expense


14,958



26,145Changes in operating assets and liabilities:Accounts receivable


2,024



19,071Accrued interest receivable


-



(10,082
)Inventory


(71,158
)


(75,911
)Advance to supplier


4,333



-Prepaid expenses


13,673



42,785Accounts payable


(3,638
)


(26,650
)Accrued liabilities


(13,631
)


42,106Customer deposits and deferred maintenance revenue


-



(7,346
)Net Cash Provided By (Used In) Operating Activities


28,597



(55,616
)CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment


(127,909
)


(3,032
)Proceeds from sale of refreshment centers


-



44,995Purchase of investments in real property tax liens


(123,653
)


-Proceeds from collections of real property tax liens


63,354



-Payment of note receivable


-



183,159Change in long term deposits and restricted funds


2,700



(2,700
)Net Cash Provided by (Used In) Investing Activities


(185,508
)


222,422CASH FLOWS FROM FINANCING ACTIVITIES


-



-Net Increase (Decrease) in Cash


(156,911
)


166,806Cash and cash equivalents at Beginning of Period


2,302,620



2,135,814Cash and cash equivalents at End of Period

$
2,145,709


$
2,302,620
 
 See accompanying notes to consolidated financial statements
  18
  eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 Organization, Nature of Operations and Principles of Consolidation- eRoomSystem Technologies, Inc. is a Nevada corporation.  eRoomSystem Technologies, Inc. and its subsidiaries, collectively referred to as the "Company," provide a complete line of 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. The Company also invests in real property tax liens from various municipalities in New Jersey, as further described in Note 2.
 
 The accompanying consolidated financial statements include the accounts of eRoomSystem Technologies, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
 
 Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
 Cash and Cash Equivalents –Cash and cash equivalents include highly liquid debt investments with original maturities of three months or less readily convertible to known amounts of cash.
 
 Investments in Equity Securities Available for Sale – Equity securities available for sale include securities that can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in stockholders’ equity as accumulated other comprehensive income.
 
 Accounts Receivable - Accounts receivable are stated at the historical carrying amount, net of write-offs and allowances. The Company has established an overall allowance based upon historical experience of 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.
 
 Inventory –The Company maintains an inventory of product that is sold in the refreshment centers in a number of hotels. The inventory is purchased as finished goods and is valued using the first in, first out method.
 
 Note Receivable - The note receivable is stated at the historical carrying amount and was evaluated for impairment. When projections indicate that the carrying value of the note is not recoverable, the carrying value will be reduced by the estimated excess of the carrying value over the projected discounted cash flows. No impairment was deemed necessary during 2010 or 2009. The carrying amount of the note receivable approximates its fair value because of its short-term maturity.
 
 Property and Equipment – Property and equipment consist primarily of eRoomServ refreshment centers and eRoomSafes and are stated at cost, less accumulated depreciation. Major additions and improvements are capitalized, while repairs and maintenance costs are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
 
 eRoomServ refreshment centers in service
5 - 7 yearsComputer and office equipment
3 - 7 yearsVehicles and other
7 years
 
 Depreciation expense was $13,691 and $62,088 for the years ended December 31, 2010 and 2009, respectively. On retirement, trade-in or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. 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.
 
 Capitalized Software Costs - In accordance with FASB Accounting Standards Codification (ASC) 985, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated software development costs were $29,000 for the year ended December 31, 2010 and were not material for the year ended December 31, 2009. The Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations.
 
 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 at December 31, 2010.
 
 19
 
 Revenue Recognition - The Company generates revenues either from the sale, lease or revenue-share arrangement for eRoomServ refreshment centers, and eRoomSafes as well as from the sale of products in refreshment centers. 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.
 
 During the year ended December 31, 2010, the Company’s revenue shifted from being primarily revenue sharing arrangements to one of product sales. The Company has added some customers through the purchase of KoolTech’s refreshment centers (see Note 4) through which the Company provides a turnkey solution to those hotels. The Company provides drinks as well as other refreshments in the refreshment centers and the sale of these products to the hotel guests using the auspices of the hotel is accounted for as product sales. The Company has a number of one year contracts with the hotels in this regards, all of which have expired or will expire in the next few months.
 
 Given the Company’s change in focus toward investing in third party emerging growth companies as well as loaning money to these companies, interest income for all periods presented was reclassified to revenue during the year ended December 31, 2010.
 
 Reclassifications – Certain reclassifications have been made to the 2009 consolidated financial statements to conform to the 2010 presentation. The reclassifications had no effect on net loss for the year ended December 31, 2009.
 
 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 FASB ASC 718, Stock Compensation. Accordingly, the Company records expense, if applicable, for (i) the unvested portion of grants issued during 2010 and 2009 and (ii) new grant issuances, both of which will be expensed over the requisite service (i.e., vesting) periods.
 
 Income Taxes - The Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary.
 
 Net Earnings (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. When dilutive, the incremental potential common shares issuable upon exercise of stock options are determined by the treasury stock method.
 
 The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted weighted-average common shares outstanding for the years ending December 31, 2010 and 2009:
 
 20
  2010


2009Basic net income/(loss)

$
18,345


$
(137,649
)Diluted net income/(loss)

$
18,345


$
(137,649
)Basic weighted-average common shares outstanding


23,876,016



23,809,646Effect of dilutive securitiesStock options and warrants


28,582



-Diluted weighted-average common shares outstanding


23,904,598



23,809,646Basic earnings/(loss) per share

$
0.00


$
(0.01
)Diluted earnings/(loss) per share

$
0.00


$
(0.01
)
 
 As of December 31, 2010 and 2009, there were potential common stock equivalents from options and warrants of 2,128,344 and 2,263,344, 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 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 December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this standard did not have a material impact 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. This ASU is effective for fiscal years beginning on or after December 15, 2009. 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 non-software 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 are 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.
 
 21
  NOTE 2 - INVESTMENTS
 
 Investment in Equity Securities Available for Sale – The Company was issued 50,000 shares of stock in BlackBird Corporation in July 2008. On June 7, 2010, BlackBird entered into a share exchange with RPID later renamed Spot Mobile International Ltd (“Spot Mobile”). The 50,000 shares of common stock of BlackBird were exchanged for 1,700,000 restricted shares of common stock of Spot Mobile. The Spot Mobile shares were reverse split in October 2010 to 56,667 shares. Spot Mobile’s common stock is publicly traded and had a post-split market value of $0.75 per share on December 31, 2010. The Company recorded a $42,500 unrealized gain on the investment in Spot Mobile at December 31, 2010, which is included in other comprehensive income.
 
 During the year ended December 31, 2007, the Company reduced the carrying value of its investment in Aprecia, Inc. to zero through a $50,000 charge to other comprehensive loss. During the year ended December 31, 2010, the Company determined that Aprecia, Inc. was no longer an operating company, that the decline in value of this investment was other than temporary and recognized the $50,000 loss in operations.
 
 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 was written off as Identica is insolvent and was taken over by its creditors.
  In consideration for making a loan to Identica (Note 3), 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 became insolvent and was taken over by its creditors.
 
 Investments in equity securities as of December 31, 2010 are summarized below:
  Unrealized


UnrealizedEquity Securities

Cost Basis


Gains


Losses


Fair ValueSpot Mobile

$
-


$
42,500


$
-


$
42,500
 At December 31, 2010, accumulated other comprehensive income consisted solely of the unrealized holding gain from the investment in Spot Mobile.
 
 Investment in Real Property Tax Liens – During the year ended December 31, 2010, the Company purchased $123,653 in real property tax liens from various municipalities in New Jersey. Through December 31, 2010, the Company had collected $63,354 in tax lien settlements. The New Jersey municipal tax liens are receivable from the real property owners and are secured by a first priority lien on the related real property. Upon foreclosure, the Company would obtain ownership of the real property. The tax lien receivables accrue interest up to 18% per annum, accrue penalties at 2% to 6% per annum and are also increased by the amount of any collection expenses incurred. The investment in the real property tax liens are accounted for as an investment in troubled debts and are carried at cost. Collection of interest, penalties and expense reimbursements is not certain and is recognized upon being realized.
 
 NOTE 3– NOTE RECEIVABLE
 
 On May 20, 2005 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.
 
 On July 24, 2008, the Company extended a loan in the amount $500,000 to BlackBird Corporation (“BlackBird”). The loan is evidenced by a 10% senior secured convertible promissory note made by BlackBird in favor of the Company (the “Secured Note”). In addition, BlackBird issued 50,000 shares of its common stock to the Company. On the date of issuance and since that date, the fair value of BlackBird’s common stock was not determinable and the shares were valued at zero. As further described in Note 2, the BlackBird common shares were exchanged for Spot Mobile common shares. The Secured Note was extended to March 31, 2011 and the interest rate increased to 18% after December 31, 2008, with interest payable quarterly on the last business day of each quarter. The carrying amount of the Secured Note was increased by $22,685 of accrued interest prior to 2010. BlackBird is current in its interest payments under the current requirements of the extended loan. Management of the Company believes that the Secured Note is collectible during 2011.
 
 The note receivable is evaluated for impairment on a quarterly basis. If projections were to indicate that the carrying value of the promissory note was not recoverable, the carrying value would be reduced by the estimated excess of the carrying value over the projected discounted cash flows. The BlackBird promissory note was evaluated for impairment as of December 31, 2010 and no impairment was deemed necessary as the collateral backing the note has a market value in excess of the amount of the note.
 
 22
 
 NOTE 4 – PURCHASE OF ASSETS
 
 On June 17, 2009, the Company purchased the assets of Kooltech SPE from Cardinal Pointe Capital (“CPC”), which consisted of automated minibars, automated baskets and product inventory. The Company formed a subsidiary, eFridge, LLC (“eFridge”) for the purposes of this purchase. The purchase price is an amount equal to 30% of eFridge’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) and 30% of eFridge’s cash flow related to any related new equipment purchased.  Payment of the purchase price is payable by eFridge to CPC on a monthly basis within twenty days after the end of each month.
 
 In addition, the Company agreed that in the event eFridge or any other subsidiary of the Company purchases any new Kooltech equipment from the manufacturers thereof or brokers the sale of new Kooltech equipment or equipment materially similar to Kooltech’s to third parties, the Company will pay to CPC an amount equal to $30 per mini-bar and $15 per automated basket so purchased or brokered. No payments have been made to CPC through December 31, 2010 as eFridge, although it has had a positive cash basis EBITDA during the eighteen months since the purchase date, needs to first repay its loan from the Company prior to making any payments to CPC.
 
 During the year ended December 31, 2010, the Company purchased vending machines for placement in a hotel in the amount of $68,351. These machines are being depreciated over a 7 year period.
 
 NOTE 5 – FAIR VALUE MEASUREMENTS
  Generally accepted accounting principles define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
 
 Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
 Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
 
 Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
 The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting.  Fair value is also used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values.  Fair value is also used when evaluating impairment on certain assets, including goodwill, intangibles, and long-lived assets.
 
 Following is a description of the valuation methodologies used for assets measured at fair value.  There have been no changes in the methodologies used at December 31, 2010.
 
 Investment in Equity Securities Available for Sale – The investment in equity securities available for sale is based on quoted prices in active markets for identical assets.
 
 The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
 
 The following tables set forth by level, within the fair value hierarchy, the estimated fair values of the Company’s financial assets measured on a recurring basis as of December 31, 2010:
  Level 1


Level 2


Level 3


TotalInvestment in Equity SecuritiesAvailable for Sale

$
42,500


$
-


$
-


$
42,500Total Assets Measured at Fair Value

$
42,500


$
-


$
-


$
42,500
 
 23
 
 NOTE 6 - COMMITMENTS AND CONTINGENCIES
 
 Employment and Consulting Agreements - On January 1, 2007, the Company entered into a new employment agreement with its chief executive officer and president for a two year term 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. The agreement has been automatically extended as of January 1, 2011 for an additional two years.
 
 Operating Leases as Lessor - The Company accounts for its revenue-sharing agreements as operating leases. 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. As of December 31, 2010, the Company had no revenue-sharing agreement for which the customer is contractually obligated to pay minimum monthly payments.
 
 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 2011 are $3,900. The Company is renting warehouse space in Salt Lake City, Utah, Lakewood, NJ, Jersey City, NJ, Jackson, NJ and Howell, NJ on a month to month basis. The leases provide for monthly rent payments totaling approximately $1,600.
 
 Rent expense for the years ended December 31, 2010 and 2009 was $45,593 and $36,500, respectively.
 
 NOTE 7 - INCOME TAXES
 
 The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. The Company is no longer subject to U.S. federal or state and local examinations by tax authorities for years before 2008. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. During the years ended December 31, 2010 and 2009, the Company did not incur any tax related interest and penalties.
 
 The Company has paid no federal income taxes. The following is a schedule of state income taxes paid in 2010 and 2009:
 
 For the years ended December 31,

2010


2009New York

$
629


$
1,317Total income tax paid

$
629


$
1,317
  The significant components of the Company's deferred income tax assets as of December 31, 2010 and 2009 are as follows:
  For the years ending December 31,

2010


2009Deferred Income Tax Assets:Net operating loss carryforwards

$
7,615,512


$
7,613,718Reserves and accrued liabilities


18,741



23,164Other assets


7,025



7,318Total Deferred Income Tax Assets

$
7,641,278


$
7,644,200Valuation allowance


(7,641,278
)


(7,644,200
)Deferred Income Tax Liability - Depreciation andAmortization


-



-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,

2010


2009Tax at statutory rate (34%)

$
6,237


$
(46,801
)Other non-deductible expenses and adjustments


(3,553
)


(135,772
)Change in valuation allowance


(2,922
)


184,349State tax, net of federal tax benefit


238



(1,776
)Provision for Income Taxes

$
-


$
-
  24
 
 The following summarizes the tax net operating loss carryforwards and their respective expiration dates as of December 31, 2010:
  Years ending December 31,2011

$
1,204,1872017


1,082,3732018


3,642,8572019


3,032,9122020


5,087,6502021


2,704,3792022


3,601,0052023


1,169,5882029


54,850Total net operating loss carryforwards

$
21,579,801
 
 NOTE 8 - STOCKHOLDERS' EQUITY
 
 During the year ended December 31, 2010, the Company issued 75,000 shares of common stock valued at $11,250 ($0.15 per share based on market value on the date issued) to its Board of Directors for services rendered. The shares were issued under Section 4(2) of the Securities Act of 1933, as amended.
 
 During the year ended December 31, 2010, the Company constructively retired 290,300 shares of common stock from treasury stock to common stock and additional paid-in-capital. The Company had repurchased the shares in previous periods under its repurchase program.
 
 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 market value on the date issued) to its Board of Directors for services rendered. The shares were issued under Section 4(2) of the Securities Act of 1933, as amended.
 
 During the year ended December 31, 2010 no repurchases of shares were made.
 
 NOTE 9 - STOCK OPTIONS AND WARRANTS
 
 Employee Grants - During 2000, the stockholders of the Company approved adoption of the 2000 Stock Option Plan (the "2000 Plan"). During 2002, the stockholders of the Company approved an amendment to the 2000 Plan to increase the authorized number of shares of common stock reserved for issuance upon the exercise of stock options under the 2000 Plan from 2,400,000 shares to 2,700,000. During November 2004, the stockholders of the Company approved a second amendment to the 2000 Plan to increase the authorized number of shares of common stock reserved for issuance upon the exercise of stock options under the 2000 Plan from 2,700,000 shares to 3,000,000 shares.
 
 The 2000 Plan, as amended, provides for both the direct award of shares and the grant of options to purchase shares. The Company's compensation committee administers the plan and has discretion in determining the employees, directors, independent contractors and advisors who receive awards, the type of awards (stock, incentive stock options or non-qualified stock options) granted, the term, vesting and exercise prices. The exercise price for the options may be paid in cash or in shares of the Company's common stock that have been outstanding for more than six months, which shares are valued at their fair value on the exercise date. In the event of a change in control (as defined in the Plan), all restrictions on awards issued under the 2000 Plan will lapse and unexercised options will become fully vested.
 
 During the year ended December 31, 2010, the Company granted options to purchase 25,000 shares of common stock to employees and a consultant for extraordinary services rendered. These options, which vested immediately, have an exercise price ranging from $0.16 to $0.22 per share and are exercisable through November 22, 2015. These options were valued at $3,707 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging from 1.2% to 2.65%, dividend yield of 0.0%, volatility ranging from 113% through 115% and expected life of 5 years. The pricing model utilized the full life of the options as the Company generally has a low turnover rate of its employees.
 
 During the year ended December 31, 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 116% through 119% and expected life ranging from 3 - 5 years. The pricing model utilized the full life of the options as the Company generally has a low turnover rate of its employees.
 
 Compensation expense relating to stock options of $3,706 and $14,895 was recognized during the years ended December 31, 2010 and 2009, respectively. There was no unrecognized compensation related to stock options at December 31, 2010.
 
 25
 
 During the years ended December 31, 2010 and 2009, options to purchase 25,000 and 60,002 shares of common stock,   respectively, expired and 15,000 and zero options, respectively, were forfeited.
 
 Based on guidance issued by the Financial Accounting Standards Board, options and warrants outstanding were reclassified to additional paid-in-capital on January 1, 2010.
 
 A summary of stock option and warrant activity for the years ended December 31, 2010 and 2009 is as follows:
 
 Weighted -Options and











Average ExerciseWarrants


Exercise Price Range


PriceBalance, December 31, 2008


2,190,846


$
0.10



-



1.55


$
0.28Granted


132,500



0.12



-



0.20



0.14Expired


(60,002
)


0.10



-



0.10



0.10Balance, December 31, 2009


2,263,344



0.10



-



1.55



0.32Granted


25,000



0.16



-



0.22



0.18Forfeited


(15,000
)


0.18



-



0.20



0.19Expired


(25,000
)


0.35



-



0.35



0.35Balance, December 31, 2010


2,248,344



0.10



-



1.55



0.32Exercisable, December 31, 2010


2,248,344


$
0.10



-



1.55


$
0.32Weighted-average fair value of options granted during the year ended December 31, 2009

















$
0.11Weighted-average fair value of options granted during the year ended December 31, 2010

















$
0.18
 
 A summary of the options and warrants outstanding and exercisable as of December 31, 2010 follows:
  Outstanding


ExercisableWeighted - Average

Weighted -


Aggregate





Weighted -


AggregateRange of

Number

Remaining

Average


Intrinsic


Number


Average


IntrinsicExercise Prices

Outstanding

Contractual Life

Exercise Price


Value


Exercisable


Exercise Price


Value$ 0.10 - 0.37


2,234,701

1.8 years

$
0.31


$
470



2,234,701


$
0.31


$
4700.90 - 1.55


13,643

1.47 years


0.94



-



13,643



0.94



-$ 0.10 - 1.55


2,248,344

1.8 years

$
0.32


$
470



2,248,344


$
0.32


$
470
 
 NOTE 10 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
 
 The Company's historical revenues and receivables have been derived primarily from the lodging industry. The Company offers credit terms 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, 2010, the Company had accounts receivable from three customers accounting for 74% of total accounts receivable.
 
 During the year ended December 31, 2010, revenues from three customers accounted for 65% of total revenues. One of these customers has temporarily closed the hotel for purposes of performing renovations starting first quarter 2011; therefore they have terminated their services as of January 1, 2011. This customer accounted for approximately 25% of total revenues during 2010. This may cause the Company to experience losses in 2011.
 
 26
 
 ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 The Company has had no disagreements with its certified public accountants with respect to accounting practices or procedures or financial disclosure.
 
 ITEM 9A.        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 inInternal 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, 2010.
 
 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 year ended December 31, 2010, 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
 
 There are no further disclosures. All information that was required to be disclosed in a Form 8-K during the fourth quarter 2010 has been disclosed.
 
 27
 
 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

PositionDavid A. Gestetner

38

President, Chief Executive Officer, Secretary and Chairman of the BoardJames C. Savas

50

DirectorLawrence K. Wein

68

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.
 
 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.
 
 On December 21, 2010, Mr. Herbert Hardt resigned from his position as director of eRoomSystem Technologies, Inc. (the "Company"), effective as of such date. Mr. Hardt's resignation is not in connection with any known disagreement with the Company on any matter.
 
 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 Mr. Savas. Mr. Hardt who was originally part of the committee is no longer on the board. The chairman of the audit committee is Mr. Savas. The audit committee met one time during the fiscal year ended December 31, 2010. 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.
 
 28
 
 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 Mr. Wein. The compensation committee met once during the fiscal year ended December 31, 2010. 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, 2010 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, 2010 and 2009. 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 TABLEName

and

principal

position

(a)

Year

(b)

Salary

($)

(c)


Bonus

($)

(d)


Stock

Awards

($)

(e)


Option

Awards

($)

(f)


Non-Equity

Incentive

Plan

Compensation

($)

(g)


Nonqualified

Deferred

Compensation

Earnings

($)

(h)


All Other

Compensation

($)

(i)


Total ($)

(j)David A. Gestetner,

2010

$
150,000


$
35,000


$
-


$
-


$
-


$
-


$
-


$
185,000President, Chief Executive

2009

$
150,000


$
35,000


$
-


$
-


$
-


$
-


$
-


$
185,000Officer, Secretary and Chairman
 
 David A. Gestetner commenced serving in the capacities of President, Chief Executive Officer, Secretary and Chairman of the Board on October 1, 2003. On January 1, 2007, an amendment was made to Mr. Gestetner's employment agreement in which he will be receiving an annual salary of $150,000. 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, 2010.
 
 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, 2010:
 
 29
 
 DIRECTOR COMPENSATIONName

(a)

Fees

Earned or

Paid in

Cash

($)

(b)


Stock

Awards

($)

(c)


Option

Awards

($)

(d)


Non-Equity

Incentive

Plan

Compensation

($)

(e)


Change in

Pension

Value and

Nonqualified

Deferred

Compensation

Earnings

($)

(f)


All

Other

Compensation

($)

(g)


Total

($)

(h)David Gestetner


-



-
2


-



-



-



-



-Herbert A. Hardt3


-



3,750
1


-



-



-



-



3,750James C. Savas


-



3,750
1


-



-



-



-



3,750Lawrence K. Wein


-



3,750
1


-



-



-



-



3,750
  (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.
 
 (3)
Mr. Hardt is a former director and received the compensation while serving on the board.
 
 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 March 21, 2011 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 March 21, 2011 which we have solicited and received from each director and executive officer. The beneficial ownership is calculated based on 23,907,865 shares of common stock outstanding as of March 21, 2011. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities and, accordingly, includes shares issuable upon exercise of options that are exercisable or become exercisable within 60 days of March 21, 2011.
 
 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

Amount and Nature of


Percent ofOwnership of 5% or More

Beneficial Ownership


ClassAsh Capital, LLC


3,830,762
4


15.9
%David A. Gestetner


5,162,644
1


21.6
%James C. Savas


4,093,275
2


17.0
%Lawrence K. Wein


180,000
3


0.8
%Executive Officers and Directors, as a group (4 individuals)


9,435,919



39.0
%
 (1) Reflects the direct ownership of 4,000 shares of common stock. In addition, also includes the beneficial ownership of 4,953,644 shares of common stock held by Gestetner Group, LLC, 5,000 shares of common stock held by spouse and 200,000 shares of common stock held by private operating foundation run by Mr. Gestetner as officer.
 
 (2) Reflects the direct ownership of 148,321 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.
 
 30
 
 (3) Reflects the direct ownership of 155,000 shares of common stock and options to purchase 25,000 shares of common stock.
 
 (4) 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.
 
 ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
 
 Director Independence
 
 Except for our Chairman, David Gestetner, and James C. Savas, our director, Mr. Lawrence K. Wein, qualifies as an independent director under Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASDAQ Rule 4200(15). Mr. Savas is the beneficial owner of more than 10% of our outstanding common stock and Mr. Gestetner is an employee and executive officer of our company. Aside from his beneficial ownership of more than 10% of our outstanding common stock, Mr. Savas is independent under Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASDAQ Rule 4200(15). The member of our audit committee is Mr. Savas. Mr. Savas is not independent as defined in NASDAQ Rule 4350(d)(2) because he is the beneficial owner of more than 10% of our outstanding common stock. However, in the opinion of our Board of Directors, Mr. Savas' beneficial stock ownership would not interfere with his exercise of independent judgment as an audit committee member.
 
 ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
 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, 2010 and 2009. HB&M was selected by our board of directors as our independent registered public accounting firm for the fiscal year ended December 31, 2010, 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 2010, 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, 2010 and 2009, the fees for services provided by HB&M were as follows:
 
 2010


2009Audit fees (1)

$
29,600


$
31,800Audit-related fees (2)


-Tax fees (3)


-



-All other fees


-



-$
29,600


$
31,800
 
 (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.
 
 31
 
 ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 ExhibitNumber

Document Name1.01

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, 20002.01

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, 20002.02

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, 20003.01

Amendment and Restatement of Articles of Incorporation

Incorporated by reference to Form SB-2 filed on April 14, 20003.02

Certificate of Correction dated May 30, 2000

Incorporated by reference to Pre-effective Amendment No. 1 of Form SB-2 filed on July 14, 20003.03

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, 20003.04

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, 20003.05

Certificate of Designation, Preferences, Rights and Limitation of Series C convertible preferred stock

Incorporated by reference to Form SB-2 filed on April 14, 20003.06

Amended and Restated Bylaws

Incorporated by reference to Form SB-2 filed on June 9, 20003.07

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, 20003.08

Second Amended and Restated Bylaws

Incorporated by reference to Pre-effective Amendment No. 2 of Form SB-2 filed on July 14, 20004.01

Form of Common Stock Certificate

Incorporated by reference to Form SB-2 filed on April 14, 200010.01

Amended and Restated 2000 Stock Option and Incentive Plan

Incorporated by reference to Form SB-2 filed on June 9, 200010.08

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, 200010.1

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, 200010.10A

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
 
 32
  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, 200010.13

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, 200010.13A

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, 200010.15

Form of Hotel Revenue-Sharing Lease Agreement

Incorporated by reference to Form SB-2 filed on June 9, 200010.16

Form of Noncompetition and Nondisclosure Agreement (Sales)

Incorporated by reference to Form SB-2 filed on April 14, 200010.17

Form of Consulting Agreement

Incorporated by reference to Form SB-2 filed on April 14, 200010.18

Form of Sales Representation Agreement

Incorporated by reference to Form SB-2 filed on April 14, 200010.19

Form of Executive Employment Agreement

Incorporated by reference to Form SB-2 filed on April 14, 200010.2

Form of Offshore Loan Subscription Agreement dated as of April 13, 2000

Incorporated by reference to Form SB-2 filed on April 14, 200010.21

Form of Secured Subordinated Promissory Note dated as of April 13, 2000

Incorporated by reference to Form SB-2 filed on April 14, 200010.22

Form of Installation, Co-Maintenance and Software Licensing and Upgrade Agreement

Incorporated by reference to Form SB-2 filed on June 9, 200010.23

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, 200010.3

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, 200010.35

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, 200110.38

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, 200210.39

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, 200210.41

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
 
 33
 
 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, 200410.44

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, 200410.46

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, 200410.47

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, 200410.48

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, 200410.5

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, 200410.74

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, 200510.75

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, 200510.76

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, 200510.77

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, 200510.78

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, 200510.79

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, 200610.8

Employment Agreement of David Gestetner dated as of January 1, 2007

Incorporated by reference to Form 10-KSB filed on March 29, 200710.81

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, 200910.82

Departure of Directors or Certain Officer

Incorporated by reference to Form 8-K filed on December 28, 201021.01

List of Subsidiaries

Incorporated by reference to Form 10-KSB filed on March 31, 200631

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith32

Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith
 
 34
 
 SIGNATURES
 
 Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 eRoomSystem Technologies, Inc.By:
/s/ David A. GestetnerName:
David A. GestetnerTitle:
President, Chief Executive Officer,

Chief Financial Officer Secretary

and Chairman of the Board

(Principal Executive, Financial and Accounting

Officer)Date:
March 22, 2011
 
 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 Signature

Title

Date/s/ David A. Gestetner

President, Chief Executive Officer,

March 22, 2011David A. Gestetner

Secretary and Chairman of the Board

(Principal Executive, Financial and

Accounting Officer)/s/ James C. Savas

Director

March 22, 2011James C. Savas/s/ Lawrence K. Wein

Director

March 22, 2011Lawrence K. Wein
  35