UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549







FORM 10-Q








x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2011





o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _____________   To __________





Commission file number 000-31037





eRoomSystem Technologies, Inc.


(Name of small business issuer in its charter)





Nevada

87-0540713(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)1072 Madison Ave., Lakewood, NJ

08701(Address and telephone number of principal executive offices)

(Zip Code)Issuer’s telephone number: (732) 730-0116




Securities registered pursuant to Section 12(b) of the Act:Title of each class

Name of each exchange on which registered





Securities registered pursuant to Section 12(g) of the Act:


Common Stock, $.001 par value


(Title of each class)











(Title of each class)





Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x       No 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 (§232.405 of this chapter) during the proceeding 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





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





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes  o No  x





The number of shares of the issuer’s common stock issued and outstanding as of April 14, 2011 was 23,907,865 shares.


Table of Contents





TABLEOF CONTENTS


PART I - FINANCIAL INFORMATIONItem 1.
Financial Statements
1Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
8Item 3.
Quantitative and Qualitative Disclosures About Market Risk
12Item 4(T).
Controls and Procedures
12PART II - OTHER INFORMATIONItem 1.
Legal Proceedings
13Item 1A.
Risk Factors
13Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
13Item 3.
Defaults Upon Senior Securities
13Item 4.
Removed and Reserved
13Item 5.
Other Information
13Item 6.
Exhibits
13







Table of Contents




PART I - FINANCIAL INFORMATION


Item1. Financial Statements




eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


March 31,


December 31,2011


2010ASSETSCURRENT ASSETSCash and cash equivalents

$
2,225,617


$
2,145,709Investment in equity securities available for sale


23,800



42,500Investment in real property tax liens


53,616



60,299Accounts receivable, net of allowance for doubtful accounts of  $10,405 atMarch 31, 2011 and $18,240 at December 31, 2010


58,909



103,802Inventory


130,562



147,069Advance to supplier


-



48,678Note receivable


522,685



522,685Prepaid expenses


17,257



5,043Total Current Assets


3,032,446



3,075,785PROPERTY AND EQUIPMENTProperty and equipment, net of accumulated depreciation of $29,224at March 31, 2011 and $23,975 at December 31, 2010


121,423



120,707INTANGIBLE ASSETS,net of accumulated amortization of $5,064 atMarch 31, 2011 and $3,376 at December 31, 2010


-



1,688DEPOSITS


2,250



2,250Total Assets

$
3,156,119


$
3,200,430LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
13,634


$
21,399Accrued liabilities


46,742



81,009Other payable


5,613



-Customer deposits


2,004



2,004Total Current Liabilities


67,993



104,412Total Liabilities


67,993



104,412STOCKHOLDERS' 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 outstanding23,907,865 at March 31, 2011 and 23,907,865 at December 31, 2010


23,908



23,908Additional paid-in capital


34,159,310



34,159,310Accumulated deficit


(31,118,892
)


(31,129,700
)Accumulated other comprehensive gain


23,800



42,500Total Stockholders' Equity


3,088,126



3,096,018Total Liabilities and Stockholders' Equity

$
3,156,119


$
3,200,430




See accompanying notes to condensed consolidated financial statements
  -1-
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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


For the Three Months Ended March 31,

2011


2010REVENUE AND INVESTMENT INCOMEProduct sales

$
146,114


$
190,880Maintenance fees


44,381



49,884Interest income


27,743



30,414Total Revenue and Investment  Income


218,238



271,178COST OF REVENUEProduct sales


81,509



134,067Maintenance


2,740



15,757Total Cost of Revenue


84,249



149,824GROSS MARGIN


133,989



121,354OPERATING EXPENSESSelling, general and administrative expense, includingnon-cash compensation of $0 and $1,101, respectively


97,428



118,946Research and development expense


25,753



1,728Net Operating Expenses


123,181



120,674Net Income


10,808



680OTHER COMPREHENSIVE INCOMEUnrealized loss on investment


(18,700
)


-Comprehensive Income (Loss)

$
(7,892
)

$
680Basic Earnings Per Common Share

$
0.00


$
0.00Diluted Earnings Per Common Share

$
0.00


$
0.00


See accompanying notes to condensed consolidated financial statements
  -2-
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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


For the Three Months Ended March 31,

2011


2010CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
10,808


$
680Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization


6,937



1,177Non-cash compensation expense


-



1,101Changes in operating assets and liabilities:Accounts receivable


44,893



12,508Accrued interest receivable


-



493Inventory


10,542



(3,564
)Advance to supplier


48,678



-Prepaid expenses


(12,214
)


13,430Accounts payable


(7,765
)


(2,810
)Accrued liabilities


(34,267
)


(42,575
)Other payable


5,613



-Net Cash Provided By (Used In) Operating Activities


73,225



(19,560
)CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment


-



(68,351
)Purchase of investments in real property tax liens


(709
)


(42,107
)Proceeds from collections of real property tax liens


7,392



-Purchase of short-term investment


-



(104,019
)Net Cash Provided by (Used In) Investing Activities


6,683



(214,477
)CASH FLOWS FROM FINANCING ACTIVITIES


-



-Net Increase (Decrease) in Cash


79,908



(234,037
)Cash and cash equivalents at Beginning of Period


2,145,709



2,302,620Cash and cash equivalents at End of Period

$
2,225,617


$
2,068,583


See accompanying notes to condensed consolidated financial statements




-3-
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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES





Condensed Financial Statements– The accompanying unaudited condensed consolidated financial statements include the accounts of eRoomSystem Technologies, Inc. and its wholly-owned subsidiaries (the "Company"). Intercompany accounts and transactions have been eliminated in consolidation. These financial statements are condensed and, therefore, do not include all disclosures normally required by generally accepted accounting principles. These statements should be read in conjunction with the Company's annual financial statements for the fiscal year ended December 31, 2010 included in the Company's Annual Report on Form 10-K. In particular, the Company's organization, nature of operations and significant accounting principles were presented in Note 1 to the consolidated financial statements in that annual report. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements and consist of only normal recurring adjustments. The results of operations presented in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.





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.





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.





Net Earnings Per Share of Common Stock– Basic earnings per share of common stock is computed by dividing net income by the weighted-average number of shares of common stock outstanding. There were no unvested shares of common stock during the period ended March 31, 2011 and 2010. Diluted earnings per share of common stock are computed by dividing net income by the weighted-average number of shares of common stock and dilutive potential common stock equivalents outstanding. Potential common stock equivalents consist of shares issuable upon the exercise of stock options and warrants.





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 three months ended March 31, 2011 and 2010:




2011


2010Basic net income

$
10,808


$
680Diluted net income

$
10,808


$
680Basic weighted-average common shares outstanding


23,907,865



23,832,865Effect of dilutive securitiesStock options and warrants


19,093



58,684Diluted weighted-average common shares outstanding


23,926,958



23,891,549Basic earnings per share

$
0.00


$
0.00Diluted earnings per share

$
0.00


$
0.00




During the three months ended March 31, 2011 and 2010, there were potential common stock equivalents from options and warrants of  2,130,344 and 2,070,344, respectively, which were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.





Recent Accounting Pronouncements– In January 2010, the FASB issued guidance that required the Company to present separately information about purchases, sales, issuances and settlements, on a gross basis, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). This guidance became effective during the first quarter of 2011. The adoption of this guidance did not have a material effect on the financial statements.




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NOTE 2 – BUSINESS CONDITION





During the year ended December 31, 2010 and the three months ended March 31, 2011, the Company realized a net income of $18,345 and net income of $10,808, respectively. During the year ended December 31, 2010 and the three months ended March 31, 2011, the Company's operations provided $28,597 and $73,225 of cash, respectively. The Company had a cash balance of $2,225,617 as of March 31, 2011.





NOTE 3 – 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 $0.42 per share on March 31, 2011. The Company recorded an $18,700 unrealized loss on the investment in Spot Mobile at March 31, 2011, which is included in other comprehensive loss.





Investments in equity securities as of March 31, 2011 are summarized below:




Equity Securities

Cost Basis


Unrealized Gains

Unrealized Losses

Fair ValueSpot Mobile

$
-


$
23,800


$
-


$
23,800


At March 31, 2011, accumulated other comprehensive loss consisted solely of the unrealized holding loss from the investment in Spot Mobile.





Investment in Real Property Tax Liens – During the three months ended March 31, 2011, the Company purchased an additional $709 in real property tax liens from a municipality in New Jersey for total purchases of $124,362. Through March 31, 2011, the Company collected $70,746 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 4 – NOTE RECEIVABLE





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 3, the BlackBird common shares were exchanged for Spot Mobile common shares. The Secured Note was extended to June 30, 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 March 31, 2011 and no impairment was deemed necessary.





NOTE 5 – PURCHASE OF ASSETS





On June 17, 2009, the Company purchased the assets of Kooltech SPE from Cardinal Pointe Capital (“CPC”), which assets consisted of automated minibars installed in five hotels, automated baskets and product inventory. The Company formed a subsidiary, eFridge, LLC (“eFridge”) for the purpose 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.




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From the date of purchase until 2011, eFridge found that a significant amount of the Kooltech equipment was not functioning as represented by CPC, was leaking coolant and had to be replaced and disposed of under required environmental disposal standards. Although eFridge had positive EBITDA for the twenty-one month period ending March 31, 2011, which would have resulted in a $25,831 liability to CPC, the Company believes that it has sufficient claims from receiving defective equipment to offset any amounts payable under the agreement. The Company believes it can settle any remaining liability incurred to date for $5,613, which amount was accrued at March 31, 2011.





NOTE 6 – 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 March 31, 2011.





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 March 31, 2011:




Level 1


Level 2


Level 3


TotalInvestment in Equity SecuritiesAvailable for Sale

$
23,800


$
-


$
-


$
23,800Total Assets Measured at Fair Value

$
23,800


$
-


$
-


$
23,800
  -6-
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NOTE 7 – STOCKHOLDERS’ EQUITY





During the three months ended March 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 three months ended March 31, 2011, no options or warrants to purchase shares of common stock were granted.





During the three months ended March 31, 2010, the Company granted options to purchase 7,500 shares of common stock to an employee for services rendered. These options, which vested immediately, have an exercise price of $0.18 per share and are exercisable through March 22, 2015. These options were valued at $1,101 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging of 2.65%, dividend yield of 0.0%, volatility ranging of 115% and expected life of 5 years. Compensation expense of $1,101 was recognized during the three months ended March 31, 2010.





Outstanding Stock Options and Warrants – A summary of the stock option and warrant activity for the three months ended March 31, 2011 is as follows:




Options and Warrants


Exercise Price Range


Weighted - Average

Exercise PriceBalance,  December 31, 2010


2,248,344


$
0.10



-



1.55


$
0.31Expired


(3,000
)


0.17



-



0.17



0.17Balance, March 31, 2011


2,245,344



0.10



-



1.55



0.32Weighted-average fair value of options granted during the three months endedMarch 31, 2011

















$
-




A summary of the options and warrants outstanding and exercisable as of March 31, 2011 follows:





Outstanding


ExercisableRange of

Exercise Prices


Number Outstanding

Weighted - Average Remaining Contractual Life

Weighted - Average Exercise Price


Aggregate Intrinsic Value

Number Exercisable


Weighted - Average Exercise Price


Aggregate Intrinsic Value$
0.10 - 0.37



2,231,701

1.52 years

$
0.31


$
3,150



2,231,701


$
0.31


$
3,1500.90 - 1.55



13,643

1.22 years


0.94



-



13,643



0.94



-$
0.10 - 1.55



2,245,344

1.51 years

$
0.32


$
3,150



2,245,344


$
0.32


$
3,150





-7-
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Item2. Management's Discussion and Analysis of Financial Condition and Results of Operations.





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





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





Forward-Looking Statements





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





Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues, gross margin and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, the continued growth of the lodging industry, the success of our product-development, marketing and sales activities, vigorous competition in the lodging industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.





Overview





Our core business is 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. In 2009, we purchased Kooltech refreshment centers that were installed in various hotels from CPC. We may make additional investments in promising emerging growth companies, and potentially acquire an operating company if the opportunity arises.





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 matured on June 30, 2009 and the interest rate increased to 18% annually as of January 1, 2009, with interest payable quarterly on the last business day of each quarter. An extension to the note was provided through June 30, 2011 at an interest rate of 18%.





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.





Our existing products interface with the hotel's property management system through our eRoomSystem communications network. The hotel's property management system posts usage of our products directly to the hotel guest's room account. The solutions offered by our eRoomSystem and related products have allowed us to install our products and services in several premier hotel chains, including Marriott International, Hilton Hotels and Carlson Hospitality Worldwide, in the United States and internationally.




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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.





Liquidity and Capital Resources





At March 31, 2011, our principal sources of liquidity consisted of $2,225,617 of cash and working capital of $2,964,453, as compared to $2,145,709 of cash and working capital of $2,971,373 at December 31, 2010. In addition, our stockholders' equity was $3,088,126 at March 31, 2011, compared to stockholders' equity of $3,096,018 at December 31, 2010, a decrease of $7,892. The increase in cash primarily reflects the return of a deposit from a vendor.





Our accumulated deficit decreased from $31,129,700 at December 31, 2010 to $31,118,892 at March 31, 2011. The $10,808 decrease in accumulated deficit resulted directly from the net gain realized for the three months ended March 31, 2011.





Cash flow provided in operations for the three months ended March 31, 2011 was $73,225 as compared to $19,560 of net cash used for the same period ended March 31, 2010.





Investing activities for the three months ended March 31, 2011 provided net cash of $6,683, compared to $214,477 of net cash used during the three months ended March 31, 2010.





There were no financing activities in the three months ended March 31, 2011 and 2010.





Results of Operations





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 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.





Our revenues this year have decreased as our largest Hotel customer is undergoing renovations and is no longer using our minibars or services.





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.





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.




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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 cost of goods and labor as well as remaining basis on sale of old refreshment centers. 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 well as research and development for new products. Research and development expenses in the three months ended March 31, 2011 and 2010 were $25,753 and $1,728, respectively.





In accordance with generally accepted accounting principles 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. We have charged our software development costs to research and development expense in our condensed consolidated statements of operations.





Comparison of Three Months Ended March 31, 2011 and 2010





Revenues





Product Sales — Revenue from product sales was $146,114 for the three months ended March 31, 2011, compared to $190,880 for the three months ended March 31, 2010, representing a decrease of $44,766, or 23.5%. The decrease in product sales revenues was primarily due to the loss of one our biggest customers in the three months ended March 30, 2011 due to a renovation project they are undergoing.





Maintenance Fees — Maintenance fees were $44,381 for the three months ended March 31, 2011, compared to $49,884 for the three months ended March 31, 2010, representing a decrease of $5,503, or 11%.





Interest and Other Income — Our revenue from interest and other income was $27,743 for the three months ended March 31, 2011 compared to $30,414 during the three months ended March 31, 2010. The decrease was primarily due to a decrease in interest rates.





Cost of Revenue





Cost of Product Sales Revenue — Our cost of product sales revenue for the three months ended March 31, 2011 was $81,509, compared to $134,067 for the three months ended March 31, 2010, a decrease of $52,558, or 39.2%. The gross margin percentage on revenue from product sales revenue was 44.2% for the three months ended March 31, 2011, compared to 29.8% for the three months ended March 31, 2010. The decrease in cost of product sales revenue relates to the decrease in product sales revenue.




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Cost of Maintenance Revenue — Our cost of maintenance revenue was $2,740 for the three months ended March 31, 2011, compared to $15,757 for the three months ended March 31, 2010, representing a decrease of $13,017, or 82.6%. The gross margin percentage on maintenance fee revenues was 93.8% for the three months ended March 31, 2011, compared to 68.4% for the three months ended March 31, 2010. The decrease in our cost of maintenance fee revenue was due increasing efficiencies in the servicing of Kooltech equipment.





The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended March 31, 2011 and 2010 are summarized as follows:




For the Three Months Ended March 31,

2011


2010


Change


Percent

ChangeREVENUEProduct sales

$
146,114


$
190,880


$
(44,766
)


-23.5
%Maintenance fees


44,381



49,884



(5,503
)


-11.0
%Interest income


27,743



30,414



(2,671
)


-8.8
%Total Revenue


218,238



271,178



(52,940
)


-19.5
%COST OF REVENUEProduct sales


81,509



134,067



(52,558
)


-39.2
%Maintenance fees


2,740



15,757



(13,017
)


-82.6
%Total Cost of Revenue

$
84,249


$
149,824


$
(65,575
)


-43.8
%


Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the three months ended March 31, 2011 and 2010, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.





Operating Expenses





Selling, General and Administrative — Selling, general and administrative expenses, including non-cash compensation expense, were $97,428 for the three months ended March 31, 2011, compared to $118,946 for the three months ended March 31, 2010, representing a decrease of $21,518, or 18.1%. The decrease in our selling, general and administrative expenses was due to increasing efficiencies in our operations.





Research and Development — Research and development expenses were $25,753 for the three months ended March 31, 2011, compared to $1,728 for the three months ended March 31, 2010 representing an increase of $24,025. The increase in our research and development expenses for the three months ended March 31, 2011 reflects an increase in new product development in 2011.





Net Income Attributable to Common Stockholders





We realized net income of $10,808 for the three months ended March 31, 2011, compared to net income of $680 during the three months ended March 31, 2010. The $10,128 increase in net income was immaterial.




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Contractual Cash Obligations and Commercial Commitments





There were no significant contractual cash obligations or commercial commitments either on or off balance sheet as of March 31, 2011.





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.





Item3.Quantitative and Qualitative Disclosures About Market Risk.





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





Item4(T).  Controls and Procedures





Evaluation of Disclosure Controls and Procedures





Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer has reviewed the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q and have concluded that the disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.





Changes in Internal Controls over Financial Reporting





There have been no changes  in the  Company’s  internal  control  over  financial reporting identified in connection with the evaluation required by paragraph (d) of Rule  240.15d-15  that occurred during the Company’s last fiscal quarter that has  materially  affected,  or is reasonable  likely to materially  affect,  the Company internal control over financial reporting.




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PART II - OTHER INFORMATION





Item1. Legal Proceedings.





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





Item1A. Risk Factors.





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





Item2. Unregistered Sales of Equity Securities and Use of Proceeds.





None





Item3. Defaults Upon Senior Securities.





Not applicable.





Item4. Removed and Reserved.





Item5. Other Information.





Not applicable.





Item6. Exhibits.





Exhibit No.

Description31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.





eRoomSystem Technologies, Inc.(Registrant)Date: May 10, 2011By:
/s/ David A. GestetnerName:
David A. GestetnerTitle:
President, Chief Executive Officer, Secretary,and Chairman of the Board(Principal Executive, Financial, and Accounting Officer)





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