** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-QSB**
| **(Mark  One)** |                                                                                          |
|-----------------|-----------------------------------------------------------------------------------------------|
| ý          | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|            |                                                                                          |
|            | **For  the quarterly period ended:**                                                          | **March  31, 2002** |
|            |
| **OR**          |
|            |                                                                                          |
| o               | **TRANSITION REPORT PURSUANT  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |
|            |                                                                                          |
|            | **For the transition period from:**                                                           | **to** |
|            |                                                                                          |
|            | **Commission file number:**                                                                   | **000-31037** |
|                 |                                                                                               |  |  |  |  |

 

**eRoomSystemTechnologies, Inc.**

(Exactname of small business issuer as specified in its charter)

 

| **Nevada**                                                                          |   | **87-0540713**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization)                    |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |                                  |
| **390  North 3050 East, St. George, Utah 84790**                                    |
| (Address of principal  executive offices)                                           |
|                                                                                |   |                                  |
| **(800)  316-3070**                                                                 |
| (Issuer’s telephone  number)                                                   |
|                                                                                |   |                                  |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   YES  ý  NO  o

** **

**ApplicableOnly to Issuers Involved in Bankruptcy Proceedings During the Preceding FiveYears**

 

Check whether theregistrant filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Exchange Act after the distribution of securities under aplan confirmed by court    YES  o NO  o

** **

**Applicable Only to Corporate Issuers**

 

State the numberof shares outstanding of each of the issuer’s classes of common equity, as ofthe latest practicable date:

 
| 10,739,158 shares of common stock, $0.001 par value,  as of March 31, 2002 |
|----------------------------------------------------------------------------|

 

**TransitionalSmall Business Disclosure Format (check one):**    YES  o NO  ý

 

 

----

 

**FORM10-QSB**

 

**TABLE OFCONTENTS**

 
| **PART I — FINANCIAL  INFORMATION** |
|------------------------------------------|
|                                     |
|                                     | ITEM 1. | FINANCIAL STATEMENTS. |
|                                     |   |   |
|                                     |   | Condensed  Consolidated Balance Sheets (Unaudited) |
|                                     |   |   |
|                                     |   | Condensed  Consolidated Statements of Operations (Unaudited) |
|                                     |   |   |
|                                     |   | Condensed  Consolidated Statements of Cash Flows (Unaudited) |
|                                     |   |   |
|                                     |   | Notes  to Condensed Consolidated Financial Statements (Unaudited) |
|                                     |   |   |
|                                     | ITEM  2. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
|                                     |
| **PART II — OTHER INFORMATION**     |
|                                     |
|                                     | ITEM 1. | LEGAL PROCEEDINGS. |
|                                     |   |   |
|                                     | ITEM  2. | CHANGES  IN SECURITIES AND USE OF PROCEEDS. |
|                                     |   |   |
|                                     | ITEM 3. | DEFAULTS UPON  SENIOR SECURITIES. |
|                                     |   |   |
|                                     | ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
|                                     |   |   |
|                                     | ITEM 5. | OTHER INFORMATION. |
|                                     |   |   |
|                                     | ITEM 6. | EXHIBITS AND  REPORTS ON FORM 8-K. |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

 

F-2

----

 

# **PART I — FINANCIALINFORMATION**

## ** **

## **ITEM1.  FINANCIAL STATEMENTS.**

 

**eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY**

#### ** **

#### **CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

 

**ASSETS**

 
|                                                                                                                                                |   | **March 31,  2002** |       | **December 31,  2001** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                                                                                                |   |                | ** ** |                   | ** ** |
| **CURRENT  ASSETS**                                                                                                                                 |   |                | ** ** |                   | ** ** |
| Cash                                                                                                                                                |   | $                   | 1,736,750  |                   | $          | 1,031,232 |   |
| Accounts receivable, net of allowance for doubtful accounts of  $23,638 at March 31, 2002  and $23,638 at December 31, 2001, respectively           |   | 218,661             |       | 424,343                |       |
| Inventories                                                                                                                                         |   | 1,589,303           |       | 1,221,995              |       |
| Prepaid expenses                                                                                                                                    |   | 343,085             |       | 274,477                |       |
| **Total Current Assets**                                                                                                                            |   | 3,887,799           |       | 2,952,047              |       |
|                                                                                                                                                |   |                |       |                   |       |
| **REFRESHMENT CENTERS IN SERVICE**,  net of accumulated depreciation of $491,127 at March 31, 2002 and $396,258 at  December 31, 2001, respectively |   | 2,394,147           |       | 2,489,016              |       |
|                                                                                                                                                |   |                |       |                   |       |
| **PROPERTY AND EQUIPMENT**                                                                                                                          |   |                |       |                   |       |
| Production equipment                                                                                                                                |   | 276,844             |       | 276,844                |       |
| Computer equipment                                                                                                                                  |   | 239,333             |       | 237,966                |       |
| Vehicles and other                                                                                                                                  |   | 78,586              |       | 78,586                 |       |
|                                                                                                                                                |   | 594,763             |       | 593,396                |       |
| Less accumulated depreciation and amortization                                                                                                      |   | (435,725            | )          | (412,447               | )          |
| **Net Property and Equipment**                                                                                                                      |   | 159,038             |       | 180,949                |       |
|                                                                                                                                                |   |                |       |                   |       |
| **INVESTMENT IN WHOLLY OWNED,  UNCONSOLIDATED SUBSIDIARY**                                                                                          |   | 597,390             |       | 619,091                |       |
|                                                                                                                                                |   |                |       |                   |       |
| **OTHER ASSETS**                                                                                                                                    |   |                |       |                   |       |
| Patents and license rights, net of accumulated amortization of $374,582 and $357,707, respectively                                                  |   | 97,908              |       | 114,783                |       |
| Deposits                                                                                                                                            |   | 67,405              |       | 67,405                 |       |
| **Total Other Assets**                                                                                                                              |   | 165,313             |       | 182,188                |       |
|                                                                                                                                                |   |                |       |                   |       |
| **Total Assets**                                                                                                                                    |   | $                   | 7,203,687  |                   | $          | 6,423,291 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

F-3

----

**LIABILITIESAND STOCKHOLDERS' EQUITY (UNAUDITED)**

 
|                                                                                                                                                                    |   | **March 31,  2002** |       | **December 31,  2001** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                                                                                                                    |   |                |       |                   |       |
| **CURRENT LIABILITIES**                                                                                                                                                 |   |                |       |                   |       |
| Notes payable and current portion of long-term  debt                                                                                                                    |   | $                   | 158,220    |                   | $          | 153,006 |   |
| Current portion of capital lease obligations                                                                                                                            |   | 14,936              |       | 12,875                 |       |
| Accounts payable                                                                                                                                                        |   | 549,617             |       | 705,370                |       |
| Accrued liabilities                                                                                                                                                     |   | 534,279             |       | 506,939                |       |
| Accrued interest                                                                                                                                                        |   | 21,540              |       | 21,941                 |       |
| Customer deposits                                                                                                                                                       |   | 306,303             |       | 292,481                |       |
| Deferred maintenance revenue                                                                                                                                            |   | 91,106              |       | 58,467                 |       |
| **Total Current Liabilities**                                                                                                                                           |   | 1,676,001           |       | 1,751,079              |       |
|                                                                                                                                                                    |   |                | ** ** |                   | ** ** |
| **Long-Term  Liabilities**                                                                                                                                              |   |                | ** ** |                   | ** ** |
| Long-term debt, net of current portion                                                                                                                                  |   | 1,323,520           |       | 1,356,415              |       |
| Capital lease obligations, net of current portion                                                                                                                       |   | —              |       | 6,075                  |       |
| **Total Long-Term Liabilities**                                                                                                                                         |   | 1,323,520           |       | 1,362,490              |       |
|                                                                                                                                                                    |   |                |       |                   |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                       |   |                |       |                   |       |
|                                                                                                                                                                    |   |                |       |                   |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                           |   |                |       |                   |       |
| Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares outstanding                                                                                   |   | —              |       | —                 |       |
| Common stock, $0.001 par value; 50,000,000 shares authorized;  10,739,158 shares and 8,016,019 shares outstanding at March 31, 2002 and December 31, 2001, respectively |   | 10,739              |       | 8,016                  |       |
| Additional paid-in capital                                                                                                                                              |   | 30,721,641          |       | 29,098,351             |       |
| Warrants and options outstanding                                                                                                                                        |   | 1,719,738           |       | 1,885,102              |       |
| Notes receivable from stockholders                                                                                                                                      |   | (223,725            | )          | (247,000               | )          |
| Accumulated deficit                                                                                                                                                     |   | (28,024,227         | )          | (27,434,747            | )          |
| **Total Stockholder’s Equity**                                                                                                                                     |   | 4,204,166           |       | 3,309,722              |       |
|                                                                                                                                                                    |   |                |       |                   |       |
| **Total Liabilities and Stockholders’  Equity**                                                                                                                    |   | $                   | 7,203,687  |                   | $          | 6,423,291 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

F-4

----

 

**eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS****(UNAUDITED)**

 
|                                                                             |   | **For the Three Months Ended  March 31,** |     |
|----------------------------------------------------------------------------------|--------|-------------------------------------------|----------|
|                                                                             |   | **2002**                                  |     | **2001** |   |
| **REVENUE**                                                                      |   |                                      |     |   |   |
| Product sales                                                                    |   | $                                         | 10,239   |   | $ | 27,265 |   |
| Revenue-sharing arrangements                                                     |   | 188,383                                   |     | 134,067 |   |
| Maintenance fees                                                                 |   | 54,989                                    |     | 56,403 |   |
| **Total Revenue**                                                                |   | 253,611                                   |     | 217,735 |   |
|                                                                             |   |                                      |     |   |   |
| **COST OF REVENUE**                                                              |   |                                      |     |   |   |
| Product sales                                                                    |   | 1,226                                     |     | 15,650 |   |
| Revenue-sharing arrangements                                                     |   | 94,868                                    |     | 58,909 |   |
| Maintenance                                                                      |   | 112,497                                   |     | 140,329 |   |
| **Total Cost of Revenue**                                                        |   | 208,591                                   |     | 214,888 |   |
|                                                                             |   |                                      |     |   |   |
| **GROSS MARGIN**                                                                 |   | 45,020                                    |     | 2,847 |   |
|                                                                             |   |                                      |     |   |   |
| **OPERATING EXPENSES**                                                           |   |                                      |     |   |   |
| Selling general and administrative (exclusive of  non-cash compensation expense) |   | 408,230                                   |     | 917,871 |   |
| Research and development                                                         |   | 64,032                                    |     | 113,020 |   |
| Non-cash compensation                                                            |   | 96,616                                    |     | — |   |
| **Total Operating Expenses**                                                     |   | 568,878                                   |     | 1,030,891 |   |
| **LOSS FROM OPERATIONS**                                                         |   | (523,858                                  | )        | (1,028,044 | ) |
|                                                                             |   |                                      |     |   |   |
| **OTHER INCOME (EXPENSE)**                                                       |   |                                      |     |   |   |
| Interest expense                                                                 |   | (49,122                                   | )        | (7,077 | ) |
| Equity in loss from unconsolidated, wholly owned  subsidiary                     |   | (21,701                                   | )        | (62,398 | ) |
| Interest and other income                                                        |   | 5,201                                     |     | 63,416 |   |
| **Other Expense, Net**                                                           |   | (65,622                                   | )        | (6,059 | ) |
| **Net Loss**                                                                     |   | $                                         | (589,480 | ) | $ | (1,034,103 | ) |
|                                                                             |   |                                      |     |   |   |
| **Basic and Diluted Loss Per Common  Share**                                     |   | $                                         | (0.07    | ) | $ | (0.15 | ) |
| **Basic and Diluted Weighted-Average  Common Share Outstanding**                 |   | 8,212,476                                 |     | 7,054,186 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements

 

5

----

 

**eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

 
|                                                                                         |   | **For the Three Months Ended  March 31,** |      |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------------|-----------|
|                                                                                         |   | **2002**                                  |      | **2001** |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                    |   |                                      |      |   |   |
| Net loss                                                                                     |   | $                                         | (589,480  | ) | $ | (1,034,103 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                 |   |                                      |      |   |   |
| Depreciation and  amortization                                                               |   | 135,022                                   |      | 98,431 |   |
| Interest income from  stockholder receivables                                                |   | (2,725                                    | )         | — |   |
| Shares and options issued  for lawsuit settlement                                            |   | —                                    |      | 15,900 |   |
| Non-cash compensation expense                                                                |   | 96,615                                    |      | — |   |
| Distributions in excess of  (undistributed) equity in income from unconsolidated subsidiary  |   | 21,701                                    |      | 171,676 |   |
| Changes in operating  assets and liabilities, net of transfers to unconsolidated subsidiary: |   |                                      |      |   |   |
| Accounts receivable                                                                          |   | 205,682                                   |      | 510,731 |   |
| Inventories                                                                                  |   | (367,308                                  | )         | (595,256 | ) |
| Prepaid expenses                                                                             |   | (68,608                                   | )         | (74,091 | ) |
| Accounts payable                                                                             |   | (89,324                                   | )         | (143,649 | ) |
| Accrued liabilities                                                                          |   | 26,939                                    |      | (203,435 | ) |
| Customer deposits and  deferred maintenance revenue                                          |   | 46,461                                    |      | 581,243 |   |
| **Net Cash Used  In Operating Activities**                                                   |   | (585,025                                  | )         | (672,553 | ) |
|                                                                                         |   |                                      |      |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                    |   |                                      |      |   |   |
| Proceeds from payments on  notes receivable from stockholders                                |   | 26,000                                    |      | — |   |
| Additions to refreshment  centers in service                                                 |   | —                                    |      | (90,016 | ) |
| Purchase of property and  equipment                                                          |   | (1,367                                    | )         | (37,318 | ) |
| **Net Cash  Provided by (Used In) Investing Activities**                                     |   | 24,633                                    |      | (127,334 | ) |
|                                                                                         |   |                                      |      |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                    |   |                                      |      |   |   |
| Proceeds from issuance of  common stock and warrants                                         |   | 1,297,605                                 |      | — |   |
| Proceeds from borrowings                                                                     |   | —                                    |      | 268,065 |   |
| Principal payments on  notes payable                                                         |   | (27,681                                   | )         | (58,979 | ) |
| Principal payments on  capital lease obligations                                             |   | (4,014                                    | )         | (43,090 | ) |
| Payment of dividends                                                                         |   | —                                    |      | (14,152 | ) |
| **Net Cash  Provided by Financing Activities**                                               |   | 1,265,910                                 |      | 151,844 |   |
|                                                                                         |   |                                      |      |   |   |
| **Net  Increase (Decrease) in Cash**                                                         |   | 705,518                                   |      | (648,043 | ) |
|                                                                                         |   |                                      |      |   |   |
| **Cash at  Beginning of Period**                                                             |   | 1,031,232                                 |      | 2,811,023 |   |
|                                                                                         |   |                                      |      |   |   |
| **Cash at  End of Period**                                                                   |   | $                                         | 1,736,750 |   | $ | 2,162,980 |   |
|                                                                                         |   |                                      |      |   |   |
| **Supplemental  Cash Flows Information**                                                     |   |                                      |      |   |   |
| Cash paid for interest                                                                       |   | $                                         | 49,523    |   | $ | 13,493 |   |
|                                                                                         |   |                                      |      |   |   |
| **NON-CASH  INVESTING AND FINANCING ACTIVITIES**                                             |   |                                      |      |   |   |
| Stock exchanged for forgiveness of debt                                                      |   | $                                         | 66,429    |   | $ | — |   |
| Property and equipment acquired by capital lease                                             |   | —                                    |      | 16,998 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements

 

6

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**eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE1 — ORGANIZATION AND NATURE OF OPERATIONS**

 

**Condensed Financial Statements**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of eRoomSystem Technologies, Inc. and its subsidiaries (the“Company”). These financial statements are condensed and, therefore, do notinclude all disclosures normally required by generally accepted accountingprinciples.  These statements should be read in conjunction with theCompany’s annual financial statements included in the Company’s December 31,2001 Annual Report on Form 10-KSB.  In particular, the Company’ssignificant accounting principles were presented as Note 2 to the consolidatedfinancial statements in that report. In the opinion of management, alladjustments necessary for a fair presentation have been included in the accompanyingcondensed consolidated financial statements and consist of only normalrecurring adjustments.  The results of operations presented in theaccompanying condensed consolidated financial statements for the three monthsended March 31, 2002 are not necessarily indicative of the results that may beexpected for the full year ending December 31, 2002.

 

**Net Loss per Common Share**

 

Basicloss per common share is computed by dividing net loss attributable to commonstockholders by the weighted average number of common shares outstanding.  Unvested common shares are considered to bestock options for purposes of computing loss per share and are not included inthe weighted-average number of common shares outstanding.  Diluted loss per common share is computed bydividing net loss attributable to common stockholders by the weighted averagenumber of common shares and dilutive potential common share equivalentsoutstanding. Potential common share equivalents consist of shares issuable uponthe exercise of stock options and warrants.

 

As ofMarch 31, 2002, there were options and warrants outstanding to purchase1,925,403 shares of common stock and 400,000 unvested shares of common stockthat were not included in the computation of diluted loss per common share as theireffect would have been anti–dilutive, thereby decreasing the loss percommon share.

 

**NOTE 2 — BUSINESS CONDITION**

 

Sinceinception, the Company has suffered recurring losses. During the year endedDecember 31, 2001 and the three months ended March 31, 2002, the Company hadlosses of  $2,444,411 and $589,480, respectively. During the year endedDecember 31, 2001 and the three months ended March 31, 2002, the Company’soperations used $1,725,729 and $585,025 of cash, respectively. These matters raisesubstantial doubt about the Company’s ability to continue as a going concern.Management is attempting to raise debt and equity financing for use inoperations. In February 2002, the Company completed a private placementoffering by issuing 2,723,139 shares of common stock for net proceeds of$1,364,034.  Although the Companypresently intends to conduct a private placement of common stock towards theend of the second quarter of 2002, if market conditions permit, the realizationof additional financing is not assured.

 

Theaccompanying financial statements do not include any adjustments relating tothe recoverability and classification of asset carrying amounts or the amountand classification of liabilities that might result should the Company beunable to continue as a going concern.

 

7

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**NOTE3 — INVESTMENT IN RSi BRE, INC.**

 

RSiBRE, Inc. (“RSi BRE”) is a wholly-owned, bankrupt-remote subsidiary of theCompany that holds and operates 2,050 Refreshment Center Units and has anobligation to RSG Investments LLC (“RSG”) as a result of a troubled debtrestructuring under the terms of an Equipment Transfer Agreement with RSG. TheRefreshment Center Units are subject to seven-year revenue sharing agreementsheld by RSi BRE.  Under the terms of theEquipment Transfer Agreement, RSG receives $0.57 per unit per day of therevenue from the revenue sharing agreements, if earned, which is applied to theobligation to RSG.  The obligation toRSG is being amortized over the remaining life of the revenue sharingagreements using an estimated effective interest rate of approximately41%.  This rate could fluctuate in thefuture depending upon the level and timing of revenues generated from theRefreshment Center Units.

 

Theboard of directors of RSi BRE is comprised of one appointee from the Company,one appointee from RSG and one independent appointee. All operating decisions,including disbursements, of RSi BRE require unanimous consent of RSi BRE’sboard of directors. As a result, the Company does not control RSi BRE. Inaccordance with EITF 96-16, “Investor’s Accounting for an Investee When theInvestor has a Majority of the Voting Interest But the Minority Shareholder orShareholders Have Certain Approval or Veto Rights,” the Company has determinedthat RSi BRE does not qualify for consolidation in the Company’s financialstatements. Rather, the Company’s investment in RSi BRE is reflected as an“Investment in Wholly Owned, Unconsolidated Subsidiary” in the accompanyingconsolidated balance sheet and is being accounted for under the equity methodof accounting.

 

AtMarch 31, 2002 and December 31, 2001, the assets and liabilities of RSi BREconsisted of the following:

 
|                                                         |   | **March 31,  2002** |    | **December 31,  2001** |   |
|--------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
| Cash                                                         |   | $                   | 43,316  |                   | $      | 39,742 |   |
| Accounts  receivable, net of allowance for doubtful accounts |   | 124,919             |    | 72,276                 |   |
| Refreshment  centers in service                              |   | 2,090,118           |    | 2,090,118              |   |
| Accumulated  depreciation                                    |   | (840,515            | )       | (770,914               | )      |
| Accrued  liabilities                                         |   | (33,506             | )       | (16,803                | )      |
| Notes payable to  RSG                                        |   | (786,942            | )       | (795,328               | )      |
|                                                         |   |                |    |                   |   |
| Net Assets                                                   |   | $                   | 597,390 |                   | $      | 619,091 |   |

 

Forthe three months ended March 31, 2002 and 2001, the revenues and expenses ofRSi BRE consisted of the following:

 
|                                |   | **March 31,** |    |
|-------------------------------------|--------|---------------|---------|
|                                |   | **2002**      |    | **2001** |   |
| Revenue-sharing  agreement revenues |   | $             | 115,636 |   | $ | 87,711 |   |
| Depreciation                        |   | (69,601       | )       | (69,601 | ) |
| Other operating  expenses           |   | (16,291       | )       | (19,113 | ) |
| Interest expense                    |   | (61,273       | )       | (62,832 | ) |
| Interest income                     |   | 9,828         |    | 1,437 |   |
|                                |   |          |    |   |   |
| Net Loss                            |   | $             | (21,701 | ) | $ | (62,398 | ) |

 

Due tocurrent issues and potential changes in accounting standards regardingconsolidation of special purpose entities, the Company has determined that itis necessary to present the following proforma

 

8

----

 

financialinformation of the Company prepared as though the investment in RSi BRE hadbeen accounted for on a consolidated basis as of March 31, 2002:

 
| Current Assets         |   | $          | 4,056,034 |   |
|------------------------|--------|------------|-----------|--------|
| Long-term Assets       |   | 3,968,101  |      |
| Current  Liabilities   |   | (1,815,248 | )         |
| Long-Term  Liabilities |   | (2,004,721 | )         |

 

**NOTE 4 —****COMMITMENTS AND CONTINGENCIES**

 

**Legal Matters**

 

OnMarch 28, 2001, the Company received a letter from the Company’s formerchairman and chief executive officer, in which he claims he is due certainseverance and other payments in the aggregate amount of approximately$1,700,000 pursuant to the terms of his terminated employment agreement.  The matter has been submitted to bindingarbitration per the terms of the terminated employment agreement.  Although the resolution of the claim is notexpected to have a material effect on the Company’s financial position orfuture results of operations, there is no assurance that the results of thebinding arbitration will be favorable to the Company.  In the event that the arbitrator finds in favor of the formerchairman and chief executive officer, the Company may be exposed to a liabilityof up to approximately $1,700,000, the amount claimed by the former chairmanand chief executive officer.  Thearbitration hearing scheduled for February 2002 was postponed at the request ofthe former chairman and chief executive officer and has not been rescheduled.

 

TheCompany is also the subject of certain legal matters, which it considersincidental to its business activities. It is the opinion of management that theultimate disposition of these legal matters should not have a material impacton the consolidated financial condition or results of operations of theCompany.

 

**NOTE5 — STOCKHOLDERS’ EQUITY**

 

InFebruary 2002, the Company issued 2,723,139 shares of common stock in a privateplacement. The shares were valued at $0.52 per share before offering costs andcommissions. The net proceeds from the private placement, after offering costsand commissions totaled $1,364,034, which included the non-cash settlement of$66,429 of accounts payable.

 

Underthe terms of the private placement, the Company is obligated to include thecommon shares issued in any registration filed by the Company within one yearof the date the common shares are issued. After one year the related stockholders have the right to demand thatthe common shares be registered with the Securities and Exchange Commission,and if demanded, the cost of the registration shall be borne by the Company.

 

OnDecember 31, 2001, officers (and a related entity owned by a director to whoman officer assigned 300,000 options), directors and a non-employee consultantexercised options to purchase 950,000 shares of common stock (including 636,578variable options) at $0.26 per share under the terms of options granted onDecember 31, 2001, by payment of $26,000 in February 2002 and by issuing$221,000 of 5% full-recourse promissory notes to the Company. Principal andaccrued interest on the promissory notes is due on December 31, 2005. Inaddition to the shares purchased with the notes, the notes are secured by637,500 shares of common stock that were held by the officers or the relatedentity for more than six months at the date of exercise and by other assets.

 

9

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Theoptions exercised on December 31, 2001 included the early exercise of 400,000unvested options. Thecommon shares issued upon the early exercise are subject to contingentrepurchase call options held by the Company that will lapse at the time, and tothe extent, the options vest.  Theoptions vest through December 31, 2002. The Company may exercise the repurchasecall option on the unvested portion of the common shares if the related officerterminates employment with the Company prior to the date the related options vest.Each call option is exercisable at the lesser of the fair value of the commonstock on the date exercised or $0.26 per share. The unvested common sharesissued upon the early exercise of the options have been included in commonstock outstanding from December 31, 2001.

 

**NOTE 6 — STOCK OPTIONS AND WARRANTS**

 

**TenderOffer and Variable Options**

 

On January 7,2002, the Company offered to exchange all options held by current employees,directors, independent sales representatives and key consultants to purchaseshares of the Company’s common stock with an exercise price per share of $1.50or more for new options to be granted under the Company’s 2000 Stock Option andIncentive Plan. Under the terms of the tender offer, the new options will begranted on or promptly after the first trading day that is at least six monthsand one day after the date the tendered options were accepted for exchange andcancelled.  The exercise price of thenew options will be equal to the closing market price of the common stock onthe date of grant. Each new option will preserve the vesting schedule and thevesting commencement date of the option it replaces, if any, so that on thedate the new option is granted and on any date thereafter, the holder will bevested in the new option to the same extent they would have been vested on thatdate had they retained their tendered option. As a result of the tender offer,options to purchase 1,367,855 shares of common stock exercisable from $1.51 to$9.60 per share were cancelled during January 2002 and the Company is obligatedto grant new options in July 2002 for the purchase of 1,367,855 shares ofcommon stock exercisable at the market price on the date they are granted,subject to the continued employment of the respective option holders on suchdate. 89,961 of these exchanged options had been accounted for under FAS 123and had fair value of $152,271, which has been recorded asadditional paid-in capital.

 

In accordance withFAS Interpretation No. 44, the Company indirectly reduced the fixed exerciseprice of options to purchase 736,703 shares by canceling those options inJanuary 2002 in connection with the tender offer and by granting on December31, 2001 options to the same persons to purchase 736,703 shares at lowerexercise prices.  As a result, theoptions will be accounted for as variable options until they are exercised,forfeited or expire. On December 31, 2001, officers (and a related entity ownedby a director), exercised options to purchase 636,578 shares leaving options topurchase 100,125 shares to be accounted for as variable options.  During the three months ended March 31,2002, the Company recognized compensation expense relating to the variableoptions of $96,615.

 

**StockOptions and Warrants**

 

During the threemonths ended March 31, 2002, the Company granted options to purchase 695 sharesof common stock to certain sales employees of the Company.  These options vested immediately and areexercisable at $1.55 per share through March 2012.

 

During the threemonths ended March 31, 2002, warrants to purchase 57,522 shares of common stockexpired.

 

At March 31, 2002,the Company had 1,925,403 options and warrants outstanding, of which 1,758,742were exercisable at an average exercise price of $4.43 per share.

## ** **

## **10**

## ****

##  

## **ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

The following discussionshould be read in conjunction with our financial statements and notes to ourfinancial statements, included elsewhere in this report.  This discussion contains forward-lookingstatements that involve risks and uncertainties.  Our actual results could differ materially from those anticipatedin these forward-looking statements as a result of various factors discussedelsewhere in this report.

 

Certain informationincluded herein contains statements that may be considered forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, or the Securities Act, and Section 21E of the Securities ExchangeAct of 1934, as amended, or the Exchange Act, such as statements relating toour anticipated revenues, gross margin and operating results, futureperformance and operations, plans for future expansion, capital spending, sourcesof liquidity and financing sources. Such forward-looking information involves important risks anduncertainties that could significantly affect anticipated results in thefuture, and accordingly, such results may differ from those expressed in any forward-lookingstatements made herein.  These risks anduncertainties include, but are not limited to, those relating to our liquidityrequirements, the continued growth of the lodging industry, the success of ourproduct-development, marketing and sales activities, vigorous competition inthe lodging industry, dependence on existing management, leverage and debtservice (including sensitivity to fluctuations in interest rates), domestic orglobal economic conditions, the inherent uncertainty and costs of prolongedarbitration or litigation, and changes in federal or state tax laws or theadministration of such laws.  A completediscussion of these risks and uncertainties are contained in our Annual Reporton Form 10-KSB, as filed with the Securities and Exchange Commission on April1, 2002.

 

###### **OVERVIEW**

 

eRoomSystem Technologies,Inc. is a Nevada corporation incorporated on August 31, 1999.  We have developed and introduced to thelodging industry an intelligent, in-room computerized platform andcommunications network, or the eRoomSystem. The eRoomSystem is a computerized platform and processor-based systemthat is installed within our eRoomServ refreshment centers and designed tocollect and control data.  TheeRoomSystem also supports our eRoomSafe, an electronic in–room safe.  As part of our expanding line of products,we announced eRoomTray, an in-room ambient tray that can sell a wide variety ofproducts at room temperature, and eRoomEnergy, an in-room digital thermostatthat is designed to control virtually any fan coil unit or packaged-terminalair conditioner found in hotel rooms. We also intend to develop other applications and extensions to theeRoomSystem, including information management services and direct credit cardbilling and remote engineering and maintenance services.

 

###### **ACCOUNTINGPOLICIES**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires our management to make estimates and assumptions thataffect reported amounts and disclosures, some of which may require revision infuture periods.  The most sensitiveestimates affecting our financial statements include future volatility used invaluing equity instruments, allowance for bad debts, depreciable lives ofrefreshment centers in service and property and equipment, amortization life ofpatents, deferred maintenance revenue and accrued liabilities.  By their nature, these judgments are subjectto an inherent degree of uncertainty. Our judgments are based on our historicalexperience, terms of existing contracts, our observance of industry trends,information provided by or gathered from our customers and informationavailable from other outside sources, as appropriate. There can be no assurancethat actual results will not differ from our estimates.  The following is a summary of whatmanagement believes are the critical accounting policies related to ouroperations.  The application of

 

11

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these policies, insome cases, requires our management to make subjective judgments regarding theeffect of matters that are inherently uncertain.

 

**Description of Revenues**

 

Historically, we havereceived substantially all of our revenues from the sale or placement under arevenue-sharing program of our products in hotels.  We expect that these revenues will account for a substantialmajority of our revenues for the foreseeable future.  We also generate limited revenues from maintenance and supportservices.  Our dependence on the lodgingindustry makes us vulnerable to downturns in the lodging industry caused by thegeneral economic environment.  Such adownturn could result in some hotels delaying or declining to purchase or placeour products or failing to renew our maintenance agreements, or it could resultin fewer purchases by hotel guests of goods and services from our productsinstalled in hotels.  Time spent byindividuals on travel and leisure is typically discretionary for consumers andmay be particularly affected by adverse trends in the general economy.  The success of our operations depends, inpart, upon discretionary consumer spending and economic conditions affectingdisposable consumer income such as employment, wages and salaries, businessconditions, interest rates, availability of credit and taxation.

 

Through ourrevenue-sharing program, we install our products at little or no upfront costto our customers and share in the recurring revenues generated from sales ofgoods and services related to our products. We retain the ownership of the eRoomServ refreshment centers andeRoomSafes throughout the term of the revenue-sharing agreements and the rightto re-deploy any systems returned to us upon the expiration or earliertermination of the revenue-sharing agreements. We believe that our revenue-sharing program will increase futureplacements of our products; however, we cannot assure you that we will besuccessful in this effort.

 

We have experiencedsubstantial fluctuations in revenues from period-to-period as a result oflimited working capital to fund the development and assembly of our productsand to maintain sufficient component inventories.  In addition to limited working capital, fluctuations in revenueshave partially resulted from the transition to our revenue-sharing programunder which revenues are recognized over the seven-year life of the contractinstead of immediately upon installation of the product.  We anticipate that over the next severalyears the majority of our revenues will result from the placement of ourproducts pursuant to our revenue-sharing program, followed by sales and, to alesser extent, from maintenance agreements. We project that we will receive approximately 60% of the recurringrevenues from the sale of goods and services generated by our eRoomServrefreshment centers, eRoomSafes and eRoomTray solutions placed under therevenue-sharing agreements.  Ourcustomers receive the remainder of the recurring revenues.  AMRESCO Leasing Corporation, or AMRESCO, hasagreed to finance up to 150% of the cost of our products placed under ourrevenue-sharing program, subject to the satisfaction of funding requirements,and, as a result, will be paid from our portion of the revenues.

 

**Revenue Recognition**

 

Sales revenue from ourproducts is recognized upon completion of installation and acceptance by thecustomer.  Sales revenue from theplacement of our eRoomServ refreshment centers and eRoomSafes under ourrevenue-sharing program are accounted for similar to an operating lease, withthe revenues recognized as earned over the term of the agreement.  In some instances, our revenue-sharingagreements provide for a guaranteed minimum daily payment by the hotel.  We negotiate our portion of the revenues generatedunder our revenue-sharing program based upon the cost of the equipment installedand the estimated daily sales per unit for the specific customer.  We seek a gross profit margin of 40% on thesale and placement through our revenue-sharing program of eRoomServ refreshmentcenters and eRoomSafes.

 

We typically enter intoinstallation, maintenance and license agreements with our customers.  Installation, maintenance and licenserevenues are recognized as the services are performed, or pro rata

 

12

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over the serviceperiod.  We defer all revenue paid inadvance relating to future services and products not yet installed and acceptedby our customers.

 

**Description of Expenses**

 

Cost of product salesconsists primarily of production, shipping and installation costs.  Cost of revenue-sharing arrangementsconsists primarily of depreciation of capitalized costs for the products placedin service.  We capitalize theproduction, shipping, installation and sales commissions related to theeRoomServ refreshment centers and eRoomSafes placed under revenue-sharingagreements.  Cost of maintenance feerevenues primarily consists of expenses related to customer support andmaintenance.

 

Selling, general andadministrative expenses include selling expenses consisting primarily ofadvertising, promotional activities, trade shows, travel and personnel-relatedexpenses and general and administrative expenses consisting primarily ofprofessional fees, salaries and related costs for accounting, administration,finance, human resources, information systems and legal personnel.

 

Research and developmentexpenses consist of payroll and related costs for hardware and softwareengineers, quality assurance specialists, management personnel, and the costsof materials used by these employees in the development of new or enhancedproduct offerings.

 

In accordance withFinancial Accounting Standards Board, or FASB, Statement of FinancialAccounting Standards, or SFAS, No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased or Otherwise Marketed,” development costsincurred in the research and development of new software products to be sold,leased or otherwise marketed are expensed as incurred until technologicalfeasibility in the form of a working model has been established.  Internally generated capitalizable softwaredevelopment costs have not been material to date.  We have charged our software development costs to research anddevelopment expense in our consolidated statements of operations.

 

###### **RESULTSOF OPERATIONS**

** **

###### **COMPARISONOF THREE MONTHS ENDED MARCH 31, 2002 AND 2001**

** **

**Revenues**

 

Product Sales —  Revenues from product sales were $27,265 forthe three months ended March 31, 2001, compared to $10,239 for the three monthsended March 31, 2002, representing a decrease of $17,026, or 62.4%.   The decrease in revenues from product saleswas due to reduced sales of our products during the three months ended March31, 2002 as compared to the three months ended March 31, 2001.

 

Revenue SharingArrangements — Our revenue from revenue sharing arrangements was $134,067 forthe three months ended March 31, 2001, compared to $188,383 for the threemonths ended March 31, 2002, representing an increase of $54,316, or40.5%.  The increase in revenue fromrevenue sharing arrangements was due primarily to the placement of anadditional 1,418 eRoomServ refreshment centers pursuant to our revenue-sharingprogram during the twelve months ended March 31, 2002.

 

Maintenance Fee Revenues— Our maintenance fee revenues were $56,403 for the three months ended March31, 2001 and $54,989 for the three months ended March 31, 2002, representing adecrease of $1,414, or 2.5%.  Thedecrease was due primarily to the de-installation of our equipment from onehotel property.

 

13

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**Cost of Revenue**

 

Cost of Product SalesRevenue — Our cost of product sales revenue for the three months ended March31, 2001 was $15,650, compared to $1,226 for the three months ended March 31,2002, a decrease of $14,424, or 92.1%. The decrease in costs was due to the decrease in product sales and theavailability of inventory-on-hand during the three months ended March 31,2002.  The gross margin percentage onrevenue from product sales revenue was 42.6% for the three months ended March31, 2001, compared to 88.0% for the three months ended March 31, 2002.

 

Cost of Revenue SharingRevenue — Our cost of revenue sharing revenue was $58,909 for the three monthsended March 31, 2001 and $94,868 during the three months ended March 31, 2002,representing an increase of $35,959, or 61.0%. The increase in the cost of revenue sharing revenue was due to anincreased number of units placed pursuant to our revenue sharing program.  The gross margin percentage on revenuesharing revenue was 56.1% for the three months ended March 31, 2001 and 49.6%for the three months ended March 31, 2002. The decrease in gross margin percentage on revenue sharing revenue wasprimarily due to increased cost of product mix under our revenue sharing agreements.

 

Cost of MaintenanceRevenue — Our cost of maintenance revenue was $140,329 for the three monthsended March 31, 2001 and $112,497 for the three months ended March 31, 2002,representing a decrease of $27,832, or 19.8%. The gross margin percentage on maintenance revenues was (148.7%) for thethree months ended March 31, 2001 and (104.6%) for the three months ended March31, 2002.  The decrease in our cost ofmaintenance revenue and the reduction in the gross margin deficit percentagewere primarily due to the allocation of costs to a greater number of installedunits, offset, in part, by one-time repair costs of $35,000 associated with ahotel property.

 

The changes and percentchanges with respect to our revenues and our cost of revenue for the threemonths ended March 31, 2002 and 2001 are as follows:

 
|                              |   | **For the Three Months****Ended March 31,** |   | **Change** |   | **Percent  Change** |   |
|-----------------------------------|--------|---------------------------------------------|--------|------------|--------|---------------------|--------|
| **2002**                          |   | **2001**                                    |
| **REVENUE**                       |   |                                        |   |       |   |                |   |   |   |
| Product sales                     |   | $                                           | 10,329 |       | $      | 27,265              |   | $ | (17,026 | ) | (62.4 | )% |
| Revenue-sharing arrangements      |   | 188,383                                     |   | 134,067    |   | 54,316              |   | 40.5 | % |
| Maintenance fees                  |   | 54,989                                      |   | 56,403     |   | (1,414              | )      | (2.5 | )% |
| **Total Revenue**                 |   | 253,611                                     |   | 217,735    |   | 35,876              |   | 16.5 | % |
|                              |   |                                        |   |       |   |                |   |   |   |
| **COST OF REVENUE**               |   |                                        |   |       |   |                |   |   |   |
| Product sales                     |   | 1,226                                       |   | 15,650     |   | (14,424             | )      | (92.1 | )% |
| Revenue-sharing arrangements      |   | 94,868                                      |   | 58,909     |   | 35,959              |   | 61.0 | % |
| Maintenance                       |   | 112,497                                     |   | 140,329    |   | (27,832             | )      | (19.8 | )% |
| **Total Cost of Revenue**         |   | 208,591                                     |   | 214,888    |   | (6,297              | )      | (2.9 | )% |
|                              |   |                                        |   |       |   |                |   |   |   |
| **GROSS MARGIN PERCENTAGE**       |   |                                        |   |       |   |                |   |   |   |
| Product sales                     |   | 88.0                                        | %      | 42.6       | %      |                |   |   |   |
| Revenue-sharing arrangements      |   | 49.6                                        | %      | 56.1       | %      |                |   |   |   |
| Maintenance                       |   | (104.6                                      | )%     | (148.7     | )%     |                |   |   |   |
| **Total Gross Margin Percentage** |   | 17.8                                        | %      | 1.3        | %      |                |   |   |   |
|                                   |        |                                             |        |            |        |                     |        |  |  |  |  |  |

 

Although the precedingtable summarizes the net changes and percent changes with respect to ourrevenues and our cost of revenue for the three months ended March 31, 2002 and2001, the trends contained therein are limited and should not be viewed as adefinitive indication of our future results.

 

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**Operating Expenses**

 

Selling, General andAdministrative — Selling, general and administrative expenses, exclusive ofnon-cash compensation expense, were $917,871 for the three months ended March31, 2001 and $408,230 for the three months ended March 31, 2002, representing adecrease of $509,641, or 55.5%. Selling, general and administrative expenses represented 421.6% of ourtotal revenue for the three months ended March 31, 2001 compared to 160.9% ofour total revenue for the three months ended March 31, 2002.  The decrease in our selling, general andadministrative expenses reflects, in part, the reduced overhead related to ourrestructurings in January 2001 and October 2001.

 

Research and DevelopmentExpenses — Research and development expenses were $113,020  for the three months ended March 31, 2001and $64,032 for the three months ended March 31, 2002, representing a decreaseof $48,988, or 43.3%.  Research anddevelopment expenses represented 51.9% of our total revenue for the threemonths ended March 31, 2001 and 25.2% of our total revenue for the three monthsended March 31, 2002.  The decrease inresearch and development expenses was primarily due to the completion of theresearch and development for our new windows-based platform and other products.

 

Non-Cash CompensationExpense  — Non-cash compensation expensewas $0 for the three months ended March 31, 2001 and $96,616 for the threemonths ended March 31, 2002.  Thenon-cash compensation expense recorded for the three months ended March 31,2002 was due to the variable accounting for stock options issued on December31, 2001 to certain of our employees, of which options to purchase 100,125shares of our common stock remain unexercised and outstanding.

 

**Other Expense, Net**

 

Other expense was $6,059for the three months ended March 31, 2001 and $65,622 for the three monthsended March 31, 2002, representing an increase of $59,563.  The increase was due primarily to theincreased interest expenses related to our borrowings pursuant to our financingarrangement with AMRESCO and a decrease in our interest and other income.

 

**Loss Attributable toCommon Stockholders**

 

We incurred lossesattributable to common stockholders of $1,034,103 and $589,480 during the threemonths ended March 31, 2001 and 2002, respectively.  The $444,623 decrease in the loss attributable to commonstockholders was due primarily to increased revenue, decreased cost of revenueand decreased operating expenses, offset, in part, by increased other expense,net.  We have continued to incur lossessubsequent to March 31, 2002 and, as a result, have experienced an increase inaccumulated deficit.  We believe that wewill continue to incur losses for the foreseeable future.

 

###### **LIQUIDITYAND CAPITAL RESOURCES**

 

During the three monthsended March 31, 2002, our principal capital resources were our financial arrangementwith AMRESCO and the $1,416,029 in gross proceeds from our private placement ofcommon stock in March 2002.  During thefiscal year 2001, we received $1,427,495 in fundings from AMRESCO andanticipate future fundings of up to $250,000 during the three months ended June30, 2002.  The funds from AMRESCO andour private placement have been and will be used to fund working capital andgeneral corporate purposes.

 

At March 31, 2002,our principal sources of liquidity consisted of $1,736,750 of cash and $2,211,798of working capital compared to $1,031,232 of cash and $1,200,968 of workingcapital at December 31, 2001.  Inaddition, our stockholders’ equity was $4,204,166 at March 31, 2002,compared to stockholders’ equity of $3,309,722 at December 31, 2001, anincrease of $894,444.  The increase in

 

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cash, workingcapital and stockholders’ equity reflects the proceeds from our privateplacement of common stock in March 2002, offset, in part, by the continued useof cash by our operations and our current inability to generate sufficientrevenue to sustain our operations.

 

Our accumulated deficitincreased from $26,024,439 at March 31, 2001 to $28,024,227 at March 31,2002.  The increase in accumulated deficitresulted primarily from the net loss from operations for the nine months endedDecember 31, 2001 and for the three months ended March 31, 2002.  We anticipate that our accumulated deficitwill continue to increase for the foreseeable future.

 

We used net cash of$672,553 of net cash used by operating activities during the three months endedMarch, 2001, compared to $585,025 in operating activities during the threemonths ended March 31, 2002.  The$87,528 decrease in the use of net cash for operating activities primarilyresulted from the $444,623 decrease in net loss, offset, in part, by a $149,975decrease in distributions in excess of equity from RSi BRE, Inc., a $305,049decrease in net cash received from accounts receivable, a $224,948 decrease in inventories,a $54,325 decrease in accounts payable, a $176,496 decrease in accruedliabilities and a $534,782 decrease in customer deposits and deferredmaintenance revenue.

 

Investing activities forthe three months ended March 31, 2001 used net cash of $127,334, compared to$24,633 provided during the three months ended March 31, 2002.  The increase in net cash provided byinvesting activities resulted primarily $26,000 in  proceeds from payments on notes receivable from stockholders andthe $35,951 decrease in the purchase of property and equipment and the absenceof additions to refreshment centers in service.  Notwithstanding the increase in net cash provided by investingactivities, we expect our investing activity to increase in 2002 due to theproposed increase in the placement of our products under our revenue-sharingprogram.  Additionally, we anticipatethat we will experience a modest increase in our capital expenditures and leasecommitments for property and equipment consistent with anticipated growth inoperations, infrastructure and personnel.

 

Financing activitiesprovided $151,844 during the three months ended March 31, 2001 compared to netcash of $1,265,910 provided during the three months ended March 31, 2002.  The primary source of cash during the threemonths ended March 31, 2002 was our private placement of common stock for grossproceeds of $1,416,029.  As a result,the increase in net cash provided by financing activities resulted primarilyfrom $1,297,605 in proceeds from the issuance of common stock and warrants,offset in part by principal payments on notes payable and principal payments oncapital lease obligations.

 

The placement of productsunder revenue-sharing arrangements is capital intensive.  We estimate that we must place approximately16,000 units pursuant to our revenue-sharing program in order to becomeprofitable.  As of March 18, 2002,we had 3,435 units placed pursuant to our revenue-sharing program.  Although we received proceeds from ourfinancing arrangement with AMRESCO and, in March 2002, from our privateplacement of common stock, we will require additional cash to finance ourplanned expansion and capital expenditures. The need for additional working capital is due, in part, to the 90-dayseasoning period prior to the receipt of funding from AMRESCO.  We are exploring financing alternatives thatmay include institutional or other lending sources and private placements ofdebt or equity.  There is no assurancethat we will be able to obtain additional financing in order to fund ouroperations during the 90-day (or longer) seasoning period or that our customerswill meet the minimum performance criteria established by AMRESCO as apre-requisite to receiving any funding from AMRESCO.  If we are unsuccessful in obtaining financing to fund operationsduring the 90-day (or longer) seasoning period or if we do not receivesufficient financing from AMRESCO, we may have to shift more placements of ourunits from revenue-sharing arrangements to product sales.  No assurance can be given that we will beable to shift the placement of a sufficient number of our units fromrevenue-sharing arrangements to product sales in order to provide adequateliquidity.  Based on the foregoing, webelieve that we will have sufficient cash-on-hand and cash from future fundingswith AMRESCO to sustain our routine business operations (excluding capitalexpenditures to meet our planned expansion) through the third quarter of

 

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2002.  In addition, although we expect to raiseadditional funds for working capital through private offerings of our equity orconvertible debt securities, we have no assurance that adequate funds will beavailable on terms favorable to us, or at all. Further, although we presently intend to conduct a private placement ofcommon stock towards the end of the second quarter of 2002, if marketconditions permit, the realization of additional financing is not assured.  These matters raise substantial doubt aboutour ability to continue as a going concern.

 

###### **CONTRACTUALCASH OBLIGATIONS AND COMMERCIAL COMMITMENTS**

 

The following tablepresents our contractual cash obligations and commercial commitments as ofMarch 31, 2002.  We have no othersignificant contractual obligations or commercial commitments either on or offbalance sheet as of this date.

 
|                             |   | **PAYMENTS  DUE BY PERIOD** |      |
|----------------------------------|--------|-----------------------------|-----------|
| **CONTRACTUAL CASH OBLIGATIONS** |   | **TOTAL**                   |      | **< 1  YEAR** |   | **1-3 YEARS** |   | **4-5  YEARS** |   | **> 5  YEARS** |   |
| Long-term Debt                   |   | $                           | 2,390,194 |   | $ | 404,424 |   | $ | 808,848 |   | $ | 808,848 |   | $ | 368,074 |   |
| Capital Lease  Obligations       |   | 17,446                      |      | 17,446 |   | — |   | — |   | — |   |
| Operating Leases                 |   | 883,938                     |      | 179,784 |   | 359,568 |   | 344,586 |   | — |   |
| Other Long-term  Obligations*    |   | 1,514,916                   |      | 336,648 |   | 673,296 |   | 504,972 |   | — |   |
| **TOTAL**                        |   | $                           | 4,806,494 |   | $ | 938,302 |   | $ | 1,841,712 |   | $ | 1,658,406 |   | $ | 368,074 |   |

 

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*            Assumes we receive $0.57 per unit per day of therevenue from the revenue sharing agreements which is applied to the obligationincurred by RSi BRE, Inc., our wholly-owned, unconsolidated subsidiary.

###### ** **

###### **RECENTDOWNTURNS IN THE AIRLINE, TRAVEL AND LODGING INDUSTRIES**

 

Due to the weakeningeconomy and the events of September 11, 2001, the travel and lodging industrieshave experienced unprecedented downturns. More specifically, the lodging industry has experienced lower hotel occupancyrates due to reduced business and leisure travel.  Since the success of our business is directly linked to theperformance of the travel and lodging industries, the substantial layoffs inthese industries, the postponement of future hotel renovations and projects,the substantial drop-off in guest occupancy and the dramatic reduction inbusiness and leisure travel, including convention traffic, have hurt ourability to finalize contracts with hotel properties with which we have beenmeeting and negotiating.  In thisregard, there is no assurance that we will be able to close contracts with ourcurrent potential customers or that we will be successful in startingdiscussions with other hotel properties.

###### ** **

###### **QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our products require alimited amount of assembly at our facility in the United States.  We purchase refrigerators from suppliers inthe United States, Canada and China on a purchase order basis in U.S. Dollars.  All other components for our products are purchasedfrom suppliers based in the United States. Our products are primarily marketed in the United States, but weeventually intend to further expand our marketing to the international lodgingmarket and to other industries domestically and internationally.  As a result, our financial results could beaffected by weak economic conditions in foreign markets.  Because all of our revenues will bedenominated in U.S. Dollars, a strengthening of the dollar could make ourproducts less competitive in foreign markets.

 

As we expand operationsinternationally, we will continue to evaluate our foreign currency exposuresand risks and develop appropriate hedging or other strategies to manage thoserisks.  We have not revised our currentbusiness practices to conform to Europe’s conversion to the Euro.

# ** **

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# **PART II — OTHERINFORMATION**

## ** **

## **ITEM1.  LEGAL PROCEEDINGS.**

 

Not applicable.

## ** **

## **ITEM2.  CHANGES IN SECURITIES AND USE OFPROCEEDS.**

** **

**UnregisteredIssuance of Securities; Use of Proceeds.**   During thethree months ended March 31, 2002, we completed a private placement of ourcommon stock to certain accredited investors through which we issued 2,723,139shares at a price of $0.52 per share for gross proceeds of approximately $1.4million.  The private placement waspriced as of the closing price on the trading day prior to February 21,2002.  The issuance of securities wasexempt from registration in reliance on Section 4(2) of the Securities Actof 1933 and Rule 506 of Regulation D thereunder.  We did not engage any underwriters with respect to the privateplacement of our common stock.  Althoughwe have not used the proceeds from this private placement, we propose to usethe proceeds from this private placement for general corporate purposes andworking capital.

## ** **

## **ITEM 3. DEFAULTS UPON SENIOR SECURITIES.**

 

Not applicable.

## ** **

## **ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

Not applicable.

## ** **

## **ITEM5.  OTHER INFORMATION.**

** **

**ListingRequirements. **Our common stock has been publicly tradedon the Nasdaq SmallCap Market since August 3, 2000.  Since June 22, 2001, our common stock has failed to meet theminimum bid price requirement of $1.00 as required by the continued listing rulesof the Nasdaq SmallCap Market.  Underthe continued listing rules, a company whose securities fall below the minimumbid price or the minimum public float requirements for 30 consecutive businessdays is given a 90-day grace period to regain compliance.  A company may demonstrate compliance bymeeting the applicable standard for a minimum of 10 consecutive businessdays.  If a company fails to regaincompliance within the applicable timeframe, that company is subject todelisting.  On September 26, 2001, theNasdaq Board of Directors approved an across-the-board moratorium on theminimum bid and public float requirements for continued listing on Nasdaqeffective as of such date and until January 2, 2002 and extended the graceperiod to regain compliance from 90 days to 180 days.  As a result of the temporary relief provided by the new rules,our common stock remained listed on the Nasdaq SmallCap Market despite failingto meet the minimum bid price requirement for continued listing thereon ineffect prior to September 26, 2001.  OnFebruary 14, 2002, we received notice from the Nasdaq SmallCap Market that theclosing bid price of our common stock price fell below $1.00 per share duringthe previous 30 trading days. Subsequently, on April 10, 2002, we received notice from the NasdaqSmallCap Market that closing bid price of our common stock price reached $1.00per share or greater for at least 10 consecutive business days and that, as aresult, we regained compliance with respect to the minimum bid pricerequirement of the Nasdaq SmallCap Market.

## ** **

## **ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K.**

 

(a)     Exhibits.

 

None.

 

(b)    Reports on Form 8-K.

 

On March 11, 2002, wefiled a Current Report on Form 8-K dated February 21, 2001 with respect to theconsummation of a private placement of our common stock.

 

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**SIGNATURE**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   |         | **eRoomSystem  Technologies, Inc.** |
|--------|--------------|-------------------------------------|
|   |         | (Registrant)                        |
|   |         |                                |   |
| Date:  | May 14, 2002 | By:                                 | /s/ David S.  Harkness |   |
|   |         |                                | David S.  Harkness |
|   |         | Its:                                | Chief Executive  Officer and Chairman |

 

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