ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K (this “Report”), references to the “Company,” the “Registrant,” “we,” “our” or “us” refer to eRoomSystem Technologies, Inc., and includes our subsidiaries, unless the context otherwise indicates.
Forward-Looking Statements
This Report contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash, which are explained below under “Liquidity and Capital Resources”. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable laws.
Historical Summary
We were originally incorporated under the laws of the State of North Carolina on March 17, 1993 as InnSyst! Corporation. On September 28, 1993, the operations of InnSyst! were transferred to RoomSystems, Inc., a Virginia corporation, incorporated on August 12, 1993, or RoomSystems Virginia. On April 29, 1996, the operations of RoomSystems Virginia were transferred to RoomSystems, Inc., a Nevada corporation, or RoomSystems. Through an agreement and plan of reorganization approved by a majority of our stockholders dated December 31, 1999, RoomSystems became the wholly owned subsidiary of RoomSystems International Corporation. Pursuant to this agreement and plan of reorganization, all shares of RoomSystems common stock, including all shares of common stock underlying outstanding options and warrants, Series A convertible preferred stock and Series B convertible preferred stock were exchanged for the identical number and in the same form of securities of RoomSystems International Corporation. On February 1, 2000, we changed our name from RoomSystems International Corporation to RoomSystems Technologies, Inc. Subsequently, on March 29, 2000, with the approval of our stockholders, we changed our name to eRoomSystem Technologies, Inc. Thereafter, we changed the name of RoomSystems, Inc. to eRoomSystem Services, Inc.
We have three wholly owned subsidiaries, eRoomSystem Services, Inc. (“eRoomSystem Services”) (formerly RoomSystems), eFridge, LLC (“eFridge”), and eOneCapital, Inc (“eOneCapital”).
eRoomSystem Services provides customer service and maintenance for refreshment centers owned by hotels and instructs hotel personnel on the use and maintenance of our products.
eFridge provides a turnkey solution to various hotels. eFridge manages the process of providing product and restockers to the hotels.
eOneCapital, Inc. was formed as a new subsidiary in 2010. eOneCapital invests in tax liens from municipalities in New Jersey. eOneCapital also provides asset backed loans.
Overview
In January 2014 eRoomSystem Technologies introduced to the lodging industry an amenity management platform, or the AMENITIES MANAGER™, sold under the SMARTSERV brand. The platform’s core is proprietary, unique software that provides a locally hosted or cloud-based system to assist a hotel in enhancing its image and theme through distinctive products and managing its amenities with optimized efficiency.
The AMENITIES MANAGER and related products deliver solutions in order to reduce operating costs, enhance hotel guest satisfaction and provide higher operating profits to our customers. The solutions offered by our AMENITIES MANAGER and related products have allowed us to establish relationships with many premier hotel chains. In addition to providing our customers with valuable amenity management solutions that pay for itself, our revenue-sharing program has allowed us to partner with our customers and provide our solutions at little or no up-front cost. Our customers share in revenues generated from the sale of goods and services related to our platform. As an alternative solution, we offer a turnkey arrangement which provides both products and restockers to hotels.
Since January 2014, we have deployed our Amenities Manager at six hotels that we are currently servicing.
To date, we have deployed over 12,000 refreshment centers at many hotel properties.
Summary of Our Diversification Initiatives
We are continuously performing due diligence for the purpose of making investments in privately-held or publicly traded emerging growth stage companies. In the future, we may acquire an existing operating company if the opportunity arises. At this time, we have not reached a definitive agreement with any such third party companies.
Our Products and Services
Amenities Manager
Since our inception, it has been our objective to provide innovative in-room amenities solutions to the lodging industry. Our new amenity management platform brings together the hotel’s amenities in a locally hosted or cloud-based server. At the core of SMARTSERV is our proprietary software, AMENITIES MANAGER which operates as a multi-tasking data collection and retrieval system. Our software provides an interactive environment that allows the input and retrieval of information in the form of user-friendly, customized reports and:
• Is a friendly, easy-to-learn interactive, graphical environment;
• Helps the hotel maximize personnel efficiencies with regard to amenity delivery and restocking;
• Tracks inventory daily to ensure rooms are fully stocked and contain no expired items;
• Provides real-time, user-friendly reports that track on a daily basis restocking requirements, daily, monthly and annual product sales statistics, overnight audits, inventory control and a variety of customized reports; and
• Allows for special amenity requests
Turnkey Amenities Manager
We also offer a turnkey arrangement which provides and manages both amenity products and attendants to hotels in conjunction with the AMENITIES MANAGER at no cost to the hotel. The hotels share in the recurring revenues generated.
Amenities Optimizer
One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected millions of room-nights of data. The eRoomSystem file server collects information regarding the usage of hotel refreshment centers on a real-time basis. We use this information to help our customers increase their operational efficiencies. The information we obtain enables us to categorize the information according to specific consumer buying patterns and demographics.
The information we collect is currently offered to our customers as part of our Amenities Manager software agreement/license. Our hotel clients benefit in various ways from the information we provide. The hotels that are responsible for restocking the goods sold from our refreshment centers can utilize the real-time sales data generated by the Amenities Manager™ to help the hotel maximize personnel efficiencies with regard to amenity delivery and restocking. The timely transfer of sales data to the hotel prevents guest pilferage and minimizes disputes over refreshment center usage, both of which are prevalent in the lodging industry. Finally, the ability to track product sales performance, including specific information about their guests' buying patterns and non-confidential information about other hotels in similar geographic regions, allows the hotel to stock the refreshment centers with more popular items, which may lead to increased sales of product from the refreshment centers.
SmartTray
Our SmartTray is an ambient tray for dry goods. The SmartTray can be custom designed and can hold three, to more than twenty, different products. The SmartTray utilizes cross-sensing technology that provides significant flexibility in product selection for hotels. This solution allows the hotel to sell souvenirs, snacks and other profitable items. The SmartTray uses state-of-the-art wifi technology to automatically transmit sales data to our servers and the Hotel Property Management System. The SmartTray can generally be located anywhere in a guestroom.
Research and Development
At the core of our products and services is our proprietary software and hardware that make up our SMARTSERV brand. In 2013, we continued to step up our research and development projects for the purpose of creating new products and software. We are developing a unique platform that incorporates cutting edge wireless technology and utilizes micro-controllers that can detect information from many different varieties of sensors, including our proprietary, product detection sensors. Data from the micro-controllers and sensors is sent to, and stored on, our secure cloud servers for aggregation, analysis and reporting. Users of our sensor platform will be able to interact with their sensors and data through user-friendly, Internet based software. This web interface can be accessed from popular web browsers anywhere in the world, at any time. Additionally, we have developed and are continuing to work on the AMENITIES MANAGER, a locally hosted or cloud based hotel amenity management platform. There is no assurance that the products we are working on will be successfully completed or deployed.
Sales and Marketing
Since January 2014, we have deployed our Amenities Manager at six hotels that we are currently servicing. We have deployed more than 12,000 refreshment centers at many hotel properties located in the Unites States as well as other countries. We are in the process of renewing our sales and marketing efforts with respect to our new amenity platform for hotels. There is no assurance that we will be successful.
Manufacturing
We do not currently manufacture our products and do not anticipate doing so in the future. We utilize outside manufacturing companies as necessary.
Competition
The market for in-room amenities platforms in the lodging industry is quite competitive, and the competition has further intensified in recent years. Management is focused on expanding our existing client base. Our renewal of sales and marketing will be subject to significant competition from competitors.
Customers
During the year ended December 31, 2013, revenues from one customer accounted for 40% of our total revenues. During the year ended December 31, 2012, revenues from 2 customers accounted for 58% of our total revenues.
Intellectual Property
We rely upon a combination of trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers and business partners to protect our proprietary rights in our products, services, know-how and information.
We have pending applications for the following trademarks and service marks: Amenities Manager and eRoomSystem Technologies. We have also registered our logo.
Our proprietary software consists of two modules and provides the backbone of the Amenities Manager. The first module is the web-based, locally hosted or cloud software that is the core of the Amenities Manager. It collects data inputted by hotel and office staff and produces a wide-variety of management and operational reports. Our existing hotel clients utilize our version 1.2 software that provides users with a friendly, easy-to-learn graphic environment which generally expands the report generating capabilities of the property. The second module is a Windows(R) based program that provides a communication link between our Amenities Manager software, and the hotel's property management system.
We currently do not have any patents for our software. We do not know if future patent applications, if any, will be issued with the full scope of claims we seek, if at all, or whether any patents we receive will be challenged or invalidated. Our means of protecting our proprietary rights in the United States, and abroad, may not be adequate and competitors may independently develop similar technology. We cannot be certain that our services do not infringe on patents or other intellectual property rights that may relate to our services. Like other technology-based businesses, we face the risk that we will be unable to protect our intellectual property and other proprietary rights, and the risk that we will be found to have infringed on the proprietary rights of others.
Government Regulation
We are subject to laws and regulations applicable to businesses generally, as well as to laws and regulations directly applicable to the lodging industry and minibars in particular. These laws and regulations relate to the qualification required to do business in the various states and in foreign nations in which we currently have, or propose to have, our products.
Apart from laws and regulations applicable to us, some of our existing and potential customers are subject to additional laws or regulations, such as laws and regulations related to liquor and gaming, which may have an adverse effect on our operations. Due to the licensing requirements relating to the sale of alcohol in each state, the failure of any of our revenue-sharing partners to obtain or maintain its liquor license would result in the loss of revenue for our revenue-sharing partner and us. In addition, due to the heightened hotel-casino regulatory environment and our ongoing revenue-sharing agreements with hotel-casinos, our operations may be subject to review by a hotel-casino's compliance committee to verify that its involvement with us would not jeopardize its gaming license. The regulatory compliance committee of a hotel-casino has broad discretion in determining whether or not to approve a transaction with a third party, which review typically includes the character, fitness and reputation of the third party and its officers, directors and principals. If our history or operations present problems for a hotel-casino, we would either have to expend resources to address or eliminate the concerns or forego the business.
Employees
We currently employ approximately fifteen employees in addition to four consultants.
ITEM 2.
ITEM 2. PROPERTIES.
We lease our headquarters and principal executive offices, comprising approximately 1,600 square feet, located at 150 Airport Road, Suite 1200, Lakewood, New Jersey 08701 for $1,600 per month. We have exercised our option to renew the lease for one additional year starting March 1, 2014 at $1,600 per month.
In addition, we currently lease approximately 80 square feet of storage space on a month-to-month basis for $65 per month in Salt Lake City, Utah, as well as warehouse space in which we have approximately 100 pallets in Lakewood Township, NJ for $9 per pallet per month. We maintain inventory and replacement parts at these facilities.
ITEM 3.
ITEM 3. 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.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Prior to August 3, 2000, there was no public market for our common stock. In conjunction with our initial public offering, in August of 2000, our common stock was accepted for listing on the NASDAQ SmallCap Market under the trading symbol "ERMS". In April 2003, our common stock was delisted from the NASDAQ SmallCap market. Our common stock is currently quoted on the Over-The-Counter Bulletin Board under the same symbol. As of March 28, 2014, there were 24,107,865 shares of common stock outstanding.
High And Low Sale Prices Of Our Common Stock
The following table sets forth the high and low bid information of our common stock, as quoted on the Over The Counter Bulletin Board (which quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions) for each quarter during the period January 1, 2012 through December 31, 2013:
The last reported price of our common stock on the Over-The-Counter Bulletin Board on March 28, 2014 was $0.075 per share.
Holders
As of March 28, 2014, there were approximately 360 stockholders of record of our common stock.
Dividends
We have never declared or paid any cash dividends on our common stock. The declaration and payment of cash dividends in the future will be at the discretion of our Board and will depend upon a number of factors, including, among others, our future earnings, operations, funding requirements, restrictions under our credit facility, our general financial condition and any other factors that our board considers important.
Recent Sales of Unregistered Securities; Use of Proceeds
There were no sales of unregistered equity securities that were not previously reported.
Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
None
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information about our equity compensation plans as of December 31, 2013.
Equity Compensation Plans Approved by Security Holders
The 2000 Stock Option and Incentive Plan, or the 2000 Plan, was adopted by our board on February 3, 2000 and approved by our stockholders on March 29, 2000. The 2000 Plan was amended by our stockholders on each of May 7, 2001, July 29, 2002 and November 15, 2004 to increase the number of shares of common stock reserved for issuance under the 2000 Plan from 2,000,000 shares to 2,360,000 shares, from 2,360,000 to 2,700,000, and from 2,700,000 to 3,000,000 shares, respectively. The 2000 Plan provides us with the vehicle to grant to employees, officers, directors and consultants stock options and bonuses in the form of stock and options including "incentive stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986 and non-qualified stock options. As of December 31, 2013, there were options to purchase 342,500 shares of our common stock outstanding under the 2000 Plan. The compensation committee has authority to determine the persons to whom awards will be granted, the nature of the awards, the number of shares to be covered by each grant, the terms of the grant and with respect to options, whether the options granted are intended to be incentive stock options, the duration and rate of exercise of each option, the option price per share, the manner of exercise and the time, manner and form of payment upon exercise of an option.
Equity Compensation Plans Not Approved by Security Holders
All outstanding options and warrants under equity compensation plans not approved by security holders have expired.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
Certain statements contained in this Annual Report, including statements regarding the anticipated development and expansion of our business, our intent, belief or current expectations, primarily with respect to the future operating performance of the Company and the services we expect to offer and other statements contained herein regarding matters that are not historical facts, are “forward-looking” statements. Because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. The following management discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, the audited financial statements and related notes elsewhere in this Annual Report.
All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
Plan of Operation
In January 2014, the Company introduced to the lodging industry an amenity management platform, or the AMENITIES MANAGER, sold under the SMARTSERV brand. The platform’s core is proprietary, unique software that provides a locally hosted or cloud-based system that assists the hotel in enhancing its image and theme through distinctive and unique products and managing its amenities with optimized efficiency.
The solutions offered by our eRoomSystem and related products have allowed us to install our products and services in several premier hotel chains, including Marriott International, Hilton Hotels, Helmsley and Carlson Hospitality Worldwide, in the United States and internationally.
Description of Revenues
We derive revenues from the placement of products in hotel in-room refreshment centers. In these hotels, we receive most of the revenues for the product sold in the minibars and baskets. We provide a percentage of revenues over a predetermined threshold to 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 makes us extremely vulnerable to downturns caused by the general economic environment. Such downturns could result in fewer purchases by hotel guests of goods and services from our products installed in hotels, and accordingly lower revenues where our products are placed pursuant to a turnkey or revenue sharing agreement. Travel and leisure is often discretionary for consumers and may be 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.
We have a 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 no agreements to make such 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
We generate revenues from the sale of products in refreshment centers, from maintenance services and the lease of equipment. Revenue from the sale of refreshments from the refreshment centers is recognized upon removal of the item from the refreshment center by the hotel guest. Maintenance revenue is recognized as the services are performed. Lease revenue is recognized over the term of the lease.
Description of Expenses
Cost of product sales consists primarily of cost of goods and labor. 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, legal, human resources, and information systems.
Research and development expenses consist of payroll and related costs for hardware and software engineers, quality assurance specialists, management personnel, and the costs of materials used by our consultants in the maintenance of our existing installed products. As we have initiated development of new product lines there were some research and development expenses in the fiscal years 2013 and 2012.
In accordance with FASB Accounting Standards Codification (ASC) 985, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. We have charged our software development costs to research and development expense in our consolidated statements of operations.
Results of Operations
Comparison of Years Ended December 31, 2013 and 2012
Revenues
Product Sales - Our revenue from product sales was $525,385 in 2013, as compared to $530,306 in 2012, representing a decrease of $4,921, or 1%. The decrease in revenue from product sales in 2013 was immaterial.
Maintenance and Lease Revenue - Our maintenance and lease revenue was $75,178 in 2013 and $138,033 for 2012, representing a decrease of $62,855, or 45.5%. The decrease in maintenance and lease revenue was due to hotels’ whose maintenance agreements ended.
During the year ended December 31, 2013, revenues from one customers accounted for 40% of our total revenues.
Cost of Revenue
Cost of Product Sales Revenue - Our cost of product sales revenue was $325,730 for 2013 as compared to $388,349 for 2012, representing a decrease of $62,619, or 16%. The decrease was in large part due to the write-down of minibar equipment in 2012 as well as basis of the vending equipment sold in 2012. The gross margin percentage on revenue from product sales revenue was 38% in 2013 as compared to 27% in 2012.
Cost of Maintenance and Lease Revenue - Our cost of maintenance revenue was $4,920 for 2013 as compared to $15,983 for 2012, representing a decrease of $11,063, or 69%. The decrease in the cost of maintenance and lease revenue was due to decreased maintenance revenue. The gross margin percentage on maintenance and lease revenues was 93% in 2013 as compared to 88% in 2012.
The changes and percent changes with respect to our revenues and our cost of revenue for the years ended December 31, 2013 and 2012 are as follows:
Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the years ended December 31, 2013 and 2012, the trends contained therein are limited to a two-year comparison and should not be viewed as a definitive indication of our future results.
Investment Income
Investment Income - Our income from investments was $24,728 in 2013, compared to $11,903 in 2012, representing an increase of $12,825, or 108%. The increase related to interest income received on a tax lien that redeemed as well as a new note receivable outstanding.
Operating Expenses
Selling, General and Administrative - Selling, general and administrative expenses were $432,947 for 2013 and $431,849 for 2012, representing an increase of $1,098, or 0%. Selling, general and administrative expenses represented 72% of our total revenues in 2013 and 65% of our total revenues in 2012. The increase in our selling, general and administrative expenses was immaterial.
Research and Development Expenses - Research and development expenses were $160,357 for 2013 and $177,678 for 2012, representing a decrease of $17,321, or 10%. The decrease in research and development expenses was due to decreased development on the new product lines. Research and development expenses represented 27% of our total revenue in 2013 and 27% of our total revenue in 2012.
Net Loss Attributable to Common Stockholders
We realized a net loss attributable to common stockholders of $298,663 in 2013, as compared to $333,617 in 2012. The $34,954 decrease to our net loss was primarily due to a decrease in research and development expense and an increase in investment income.
Liquidity and Capital Resources
At December 31, 2013, we had $1,376,822 of cash and working capital of $1,851,734, as compared to $1,962,572 of cash and working capital of $2,109,328 at December 31, 2012. In addition, our stockholders' equity was $2,368,432 at December 31, 2013 as compared to $2,656,209 at December 31, 2012, a decrease of $287,777. The decrease in cash reflects in large part the net loss in 2013 as well as the $400,000 loans provided in 2013. The decrease in working capital reflects the decrease in current assets. The decrease in stockholders’ equity primarily reflects the net loss in 2013.
Our accumulated deficit increased to $31,851,020 at December 31, 2013 as compared to $31,552,357 at December 31, 2012. The increase in accumulated deficit is a direct result of our net loss of $298,663 in the year ended December 31, 2013.
Net cash used by operating activities for the year ended December 31, 2013 was $220,382, as compared to $309,868 during the year ended December 31, 2012.
Net cash used by investing activities for the year ended December 31, 2013 was $365,368, as compared to net cash provided during the year ended December 31, 2012 of $81,044. The change resulted primarily from advances made under notes receivable in 2013.
Net cash used in financing activities for the years ended December 31, 2013 and 2012 was $0.
During the year ended December 31, 2013, revenues from one customer accounted for 40% of our total revenues.
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.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board ("FASB") issued a new accounting standard on intangibles - goodwill and other that reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The standard was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this accounting guidance did not have a material impact on its consolidated financial statements and related disclosures.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders
eRoomSystem Technologies, Inc.
We have audited the accompanying consolidated balance sheet of eRoomSystem Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eRoomSystem Technologies, Inc. and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Eide Bailly LLP
Salt Lake City, Utah
April 2, 2014
www.eidebailly.com
5 Triad Center, Ste. 750 | Salt Lake City, UT 84180-1128 | T 801.532.2200 | F 801.532.7944 | EOE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders
eRoomSystem Technologies, Inc.
We have audited the accompanying consolidated balance sheet of eRoomSystem Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2012, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eRoomSystem Technologies, Inc. and subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Hansen Barnett and Maxwell
Salt Lake City, Utah
March 22, 2013
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
See accompanying notes to consolidated financial statements
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
See accompanying notes to consolidated financial statements
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Operations and Principles of Consolidation - eRoomSystem Technologies, Inc. is a Nevada corporation. eRoomSystem Technologies, Inc. and its subsidiaries, collectively referred to as the "Company," provide a complete line of amenity services for hotels.
The accompanying consolidated financial statements include the accounts of eRoomSystem Technologies, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents - Cash and cash equivalents include highly liquid debt investments with original maturities of three months or less readily convertible to known amounts of cash. At December 31, 2013 and 2012, the Company held cash in excess of federally insured limits of $510,043 and $727,275, respectively.
Investments in Equity Securities Available for Sale - Equity securities available for sale include securities that can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in stockholders’ equity as accumulated other comprehensive income.
Accounts Receivable - Accounts receivable are stated at the historical carrying amount, net of write-offs and allowances. The Company has established an overall allowance based upon historical experience of 15% of the outstanding balance in addition to any specific customer collection issues identified by the Company. Uncollectible accounts receivable are written off when a settlement is reached or when the Company has determined that the balance will not be collected.
Inventory - The Company maintains an inventory of product that is sold in the refreshment centers in a number of hotels. In addition, the Company maintained an inventory of refreshment centers to be placed in Hotels through September 30, 2013. During fourth quarter 2013, the refreshment centers were capitalized as property and equipment. The inventory is purchased as finished goods and is valued using the first in, first out method.
Advances to Hotels - The Company makes advances to hotels for their purchases of alcoholic beverages. The hotels’ alcoholic beverages are placed in the Company’s refreshment centers and the advances are settled at the date the hotel customers remove the beverages from the refreshment centers.
Notes Receivable - The notes receivable are stated at the historical carrying amount and are evaluated for impairment. When projections indicate that the carrying value of the note is not recoverable, the carrying value will be reduced by the estimated excess of the carrying value over the projected discounted cash flows. No impairment was deemed necessary during 2013 or 2012. The carrying amount of the notes receivable approximates their fair value because of their short-term maturities. However, one of the notes has been classified as long term for the years ended December 31, 2013 and 2012 (see Note 3).
Property and Equipment - Property and equipment consist primarily of eRoomServ refreshment centers and are stated at cost, less accumulated depreciation. Major additions and improvements are capitalized, while repairs and maintenance costs are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
eRoomServ refreshment centers in service
5 - 7 years
Computer and office equipment
3 - 7 years
Vehicles and other
7 years
Depreciation expense was $16,986 and $46,801 for the years ended December 31, 2013 and 2012, respectively. On retirement, trade-in or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations.
During the fourth quarter 2013, the Company determined that refreshment centers would no longer be sold to hotels, but would rather be used to replace existing refreshment centers used by the Company. As a result, the cost of refreshment centers in the amount of $92,880 was moved from inventory to property and equipment in fourth quarter 2013. In addition, the Company assessed the carrying value of these refreshment centers and determined, based on their projected future cash flows, that the refreshment centers were impaired. As a result, the carrying value of the refreshment centers was written down to their fair value, determined by their projected future cash flows, which resulted in the recognition of $46,440 of impairment expense during the year ended December 31, 2013,
Capitalized Software Costs - In accordance with FASB Accounting Standards Codification (ASC) 985, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated software development costs were $48,168 for the year ended December 31, 2013 and were $10,150 for the year ended December 31, 2012. The Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations.
Valuation of Long-Lived Assets - The carrying values of long-lived assets, including notes receivable, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying values may not be recoverable. When such an event occurs the Company projects the undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections indicate that the carrying value of the asset will not be recovered, the carrying value of the asset is reduced by the estimated excess of the carrying value over the projected discounted cash flows estimated to be generated by the asset. The Company evaluated its long-lived assets at December 31, 2012 and determined that no impairment adjustment was necessary. During the fourth quarter 2013, the carrying value of refreshment centers in property and equipment was impaired and the Company recognized an impairment loss of $46,440 during the year ended December 31, 2013.
Revenue Recognition - The Company generates revenues from the sale of products in refreshment centers, from maintenance services and the lease of equipment.
Revenue from the sale of refreshments from the refreshment centers is recognized upon removal of the item from the refreshment center by the hotel guest. Maintenance revenue is recognized as the services are performed. Lease revenue is recognized over the term of the lease
Stock-Based Compensation - The Company has one stock-based employee compensation plan, which is described more fully in Note 8. The Company utilizes the fair value recognition provisions of FASB ASC 718, Stock Compensation. Accordingly, the Company records expense, if applicable, for (i) the unvested portion of grants issued during 2013 and 2012 and (ii) new grant issuances, both of which will be expensed over the requisite service (i.e., vesting) periods.
Advertising Costs - Advertising costs are charged to expense as incurred. Amounts expensed were immaterial to the financial statements.
Research and Development - Research and development costs are expensed as incurred.
Income Taxes - The Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary.
Accounting for Uncertainty in Income Taxes - The Company analyzes its filing positions in all jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions. The Company provides a liability for the potential tax, penalty and interest on uncertain tax positions that are not likely to be sustained upon audit.
Net Loss per Common Share - Basic loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted loss per common share is computed by dividing net loss, by the weighted-average number of common shares and dilutive potential common share equivalents outstanding. When dilutive, the incremental potential common shares issuable upon exercise of stock options are determined by the treasury stock method.
The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted loss per common share:
As of December 31, 2013 and 2012, there were potential common stock equivalents from options and warrants of 342,500 and 492,500 respectively that were not included in the computation of diluted loss per common share because their effect would have been anti-dilutive.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board ("FASB") issued a new accounting standard on intangibles - goodwill and other intangible assets that reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The standard was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Subsequent Events - The Company evaluates events subsequent to its balance sheet date for disclosure through the date the financial statements are issued.
Reclassification - Certain reclassifications have been made to the financial statements for the year ended December 31, 2012 to conform to the December 31, 2013 presentation. The reclassifications had no effect on net loss.
NOTE 2 - INVESTMENTS
Investment in Equity Securities Available for Sale - The Company was issued 50,000 shares of stock in Blackbird Corporation in July 2008. On June 7, 2010, Blackbird entered into a share exchange with RPID later renamed Spot Mobile International Ltd (“Spot Mobile”). The 50,000 shares of common stock of Blackbird were exchanged for 1,700,000 restricted shares of common stock of Spot Mobile. The Spot Mobile shares were reverse split in October 2010 to 56,667 shares. The Company reduced the carrying value of the investment in Spot Mobile to zero by recording a $1,700 unrealized loss during the year ended December 31, 2012, which is included in other comprehensive loss.
Investments in equity securities as of December 31, 2013 and 2012 are summarized below:
On the date of issuance, the fair value of BlackBird’s common stock was not determinable and the shares were valued at zero.
Investment in Real Property Tax Liens - At December 31, 2013, the Company held $13,422 of real property tax liens from various municipalities in New Jersey. During the years ended December 31, 2013 and 2012, the Company did not purchase any additional tax lien products and collected $12,845 and $5,158, respectively, 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% and are also increased by the amount of any collection expenses incurred. The investment in the real property tax liens are accounted for as an investment in troubled debts and are carried at cost. Collection of interest, penalties and expense reimbursements is not certain and is recognized upon being realized.
NOTE 3 - NOTES RECEIVABLE
Non-Performing Loan
On July 24, 2008, the Company loaned $500,000 to BlackBird Corporation (“BlackBird”) under the terms of a 10% senior secured convertible promissory note (the “Secured Note”). The Secured Note bore interest at 10% per annum, payable quarterly, and was due June 30, 2009. In addition, BlackBird issued 50,000 shares of its common stock to the Company. BlackBird further agreed in July 2008, notwithstanding the terms of the note, if the loan was not repaid by January 1, 2009, interest on the note would accrue at 18% per annum starting January 1, 2009. The Secured Note was not paid by January 1, 2009 and it continued to accrue interest at 18% per annum. On April 1, 2011, the Company agreed to extend the due date of the Secured Note to June 30, 2011.
BlackBird did not pay its interest payment for the second quarter of 2011 in a timely fashion. On November 3, 2011, the Company entered into a forbearance agreement with BlackBird to reduce the interest rate on the Secured Note to 10% retroactive to April 1, 2011 and to not foreclose on BlackBird’s assets if BlackBird remains in compliance with the terms of the agreement. As part of this agreement, BlackBird agreed to pay all outstanding interest due on the loan through September 30, 2011 by November 11, 2011. BlackBird also agreed to make monthly interest payments within 10 days after the end of each month. The outstanding accrued interest of $25,069 as of September 30, 2011 was paid in full on November 10, 2011.
The concession granted to BlackBird on November 3, 2011 constituted a troubled debt restructuring under current accounting guidance. As a result, the note was classified as a long-term asset. Interest income under the terms of the Secured Note is no longer being recognized until the carrying value has been recovered, and payments received are recognized as a reduction of the carrying value of the note. The carrying value of the note receivable was $399,863 at December 31, 2013.
The note receivable was evaluated for impairment and the Company determined that it is likely that estimated future payments from BlackBird or the cash flows from BlackBird’s operations and the value of the underlying collateral is sufficient that upon foreclosure the Company would be able to realize the carrying value of the note. If BlackBird fails to comply with the terms of the agreement dated November 3, 2011, the Company plans on foreclosing on the underlying collateral to collect on the note. Therefore no impairment was recognized during the years ended December 31, 2013 or 2012.
The note receivable is assessed 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 evaluations are based on the estimated projected discounted cash flows from BlackBird and from the liquidation value of the underlying collateral.
Management has estimated that the fair value of the note receivable at December 31, 2013 and 2012 was approximately $414,000 and $414,000, respectively.
Notes Receivable
On June 25, 2013, the Company loaned $150,000 to a New York limited liability company under the terms of a one year 12% mortgage note. Interest is due and payable monthly. The entire principal amount is due and payable on the maturity date. The mortgage is collateralized by a commercial property. The Company intends to hold this note to maturity. The carrying amount of the note receivable approximates its fair value based on its short-term maturity.
On December 26, 2013, the Company loaned $250,000 to an individual under the terms of a one year 12% mortgage note. Interest is due and payable monthly. The entire principal amount is due and payable on the maturity date. The mortgage is collateralized by a commercial property. The Company intends to hold this note to maturity. The carrying amount of the note receivable approximates its fair value based on its short-term maturity.
Accrued interest on notes receivable was $2,000 at December 31, 2013 and was included in notes receivable in the accompanying consolidated balance sheets.
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 notes receivable and long-lived assets. The following table sets forth the estimated fair values of the Company’s financial assets, all of which were determined to be Level 3 fair values, as of December 31, 2013 and 2012:
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements - On March 27, 2014, the Company entered into a new employment agreement with its chief executive officer and president for a two year term with automatic two year extensions unless terminated at least thirty days earlier in writing. The agreement provides for an annual salary of $150,000. The agreement requires that the chief executive officer not compete with the Company during the term of employment and for three years subsequent to termination.
Operating Leases as Lessee - The Company leases office space in Lakewood, NJ for monthly rent payments of $1,600 through February 2015. Future lease payments through December 31, 2014 are $19,200. Lease payments in 2015 are $3,200. The Company is renting warehouse space in Salt Lake City, Utah, and Lakewood, NJ on a month to month basis. The leases provide for monthly rent payments totaling approximately $1,100.
Rent expense for the years ended December 31, 2013 and 2012 was $29,083 and $32,421, respectively.
NOTE 6 - INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. As of December 31, 2013, the Company had no unrecognized tax benefits that, if recognized, would affect the Company’s effective income tax rate over the next 12 months. The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit. Therefore, the Company has no reserves for uncertain tax positions and no adjustments to such reserves were required by generally accepted accounting principles. The Company’s tax returns are subject to U.S. federal or state and local examinations by tax authorities for the years ended December 31, 2010 through 2013. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. During the years ended December 31, 2013 and 2012, the Company did not incur any tax related interest and penalties.
The significant components of the Company's deferred income tax assets as of December 31, 2013 and 2012 are as follows:
The amount of, and ultimate realization of, the deferred income tax assets are dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance against its deferred income tax assets. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of these deferred income tax assets to warrant the valuation allowance.
No income tax provision or benefit was recognized from operations or from other comprehensive income (loss) during the years ended December 31, 2013 or 2012. The Company has paid no federal or state income taxes in 2013 and 2012:
The following is a reconciliation of the provision for income taxes from operations computed using the federal statutory rate to the provision for income taxes:
The following summarizes the tax net operating loss carryforwards and their respective expiration dates as of December 31, 2013:
NOTE 7 - STOCKHOLDERS' EQUITY
During the year ended December 31, 2013, the Company issued 50,000 shares of common stock valued at $6,500 ($0.13 per share based on market value on the date issued) to its Board of Directors for services rendered.
During the year ended December 31, 2012, the Company issued 50,000 shares of common stock valued at $7,000 ($0.14 per share based on market value on the date issued) to its Board of Directors for services rendered. During the year ended December 31, 2012, the Company issued 25,000 shares of common stock valued at $3,500 ($0.14 per share based on market value on the date issued) to a consultant for services rendered.
NOTE 8 - STOCK OPTIONS AND WARRANTS
Employee Grants - During 2000, the stockholders of the Company approved adoption of the 2000 Stock Option Plan (the "2000 Plan"). The Company is authorized to issue 3,000,000 common shares under the 2000 Plan, as amended.
The 2000 Plan, as amended, provides for both the direct award of shares and the grant of options to purchase shares. The Company's compensation committee administers the plan and has discretion in determining the employees, directors, independent contractors and advisors who receive awards, the type of awards (stock, incentive stock options or non-qualified stock options) granted, the term, vesting and exercise prices. The exercise price for the options may be paid in cash or in shares of the Company's common stock that have been outstanding for more than six months, which shares are valued at their fair value on the exercise date. In the event of a change in control (as defined in the Plan), all restrictions on awards issued under the 2000 Plan will lapse and unexercised options will become fully vested.
During the year ended December 31, 2013, the Company granted options to purchase 75,000 shares of common stock to employees for extraordinary services rendered. These options, which vested immediately, have an exercise price ranging from $0.06 to $0.08 per share and are exercisable through November 27, 2018. These options were valued at $4,386 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging from 0.72% to 1.36%, dividend yield of 0.0%, volatility ranging from 112% through 116% and expected life of 5 years. The pricing model utilized the full life of the options as the Company generally has a low turnover rate of its employees.
During the year ended December 31, 2012, the Company granted options to purchase 50,000 shares of common stock to an employee for extraordinary services rendered. These options, which vested immediately, have an exercise price ranging from $0.10 to $0.12 per share and are exercisable through December 27, 2017. These options were valued at $4,348 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging from 0.72% to 1.41%, dividend yield of 0.0%, volatility ranging from 110% through 111% and expected life of 5 years. The pricing model utilized the full life of the options as the Company generally has a low turnover rate of its employees.
Compensation expense relating to stock options of $4,386 and $4,348 was recognized during the years ended December 31, 2013 and 2012, respectively. There was no unrecognized compensation related to stock options at December 31, 2013.
During the year ended December 31, 2013 and 2012, options to purchase 225,000 and 1,401,946 shares of common stock expired, respectively. During the years ended December 31, 2013 and 2012 no options were forfeited.
A summary of stock option and warrant activity for the years ended December 31, 2013 and 2012 is as follows:
NOTE 9 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's historical revenues and receivables have been derived primarily from the lodging industry. The Company offers credit terms in connection with its revenue-sharing contracts and sale of products from refreshment centers. The Company performs ongoing credit evaluations of its customers' financial condition and does not require collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon a percentage of accounts receivable at year end.
At December 31, 2013, the Company had accounts receivable from two customers accounting for 56% of total accounts receivable.
During the year ended December 31, 2013, revenues from one customers accounted for 40% of total revenues.
During the year ended December 31, 2012, revenues from two customers accounted for 58% of total revenues.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its independent accountants with respect to accounting practices or procedures or financial disclosure.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of December 31, 2013. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, because of the material weaknesses in our internal control over financial reporting due to lack of segregation of duties and errors in financial statement presentation and disclosure discussed below, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that the Company’s disclosure and controls are designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the material weaknesses discussed below, our principal executive officer and principal financial officer has concluded that the consolidated financial statements included in this Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements and that receipts and expenditures of company assets are made in accordance with management authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on management’s assessment, including consideration of the control deficiencies discussed below, management has concluded that the company’s internal control over financial reporting was not effective as of December 31, 2013 due to the fact that there was a material weakness in its internal control over financial reporting. Specifically, through the investigation discussed above, management identified a lack of segregation of duties as well as errors in financial statement presentation and disclosure.
Lack of Segregation of Duties
Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to clearly segregate duties do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation.
Errors in Financial Statement Presentation and Disclosure
Management is aware that there are errors in financial statement presentation and disclosure at the Company due to the small number of employees dealing with financial matters. There were several comments and changes from our independent auditors resulted in a material quantity or quality adjustments. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to avoid such errors do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation.
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permits the Company to provide only management's report in this annual report.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following information is furnished with respect to our directors and executive officer. There are no family relationships between or among any of our directors or executive officer. Each director of the Company serves for a term of one year or until such director’s successor is duly elected and is qualified. Each officer serves, at the pleasure of the board of directors, for a term of one year and until such officer’s successor is duly elected and is qualified.
Directors and Executive Officers
Set forth below is a description of the background of each of our executive officers and directors:
David A. Gestetner has served as President, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman of the Board since October 1, 2003. Throughout his career, Mr. Gestetner has been involved in various applications of technology, both as an operator as well as a financier, including founding and operating a telecommunications business abroad. Mr. Gestetner has received awards for his innovations and advance applications of technology, including the Howard Golden Award for an intuitive scientific invention consisting of a system that enables emergency call routing in telephone systems. Mr. Gestetner possesses a Master's degree from The Aron Kotler Higher Institute of Learning in New Jersey. Mr. Gestetner has significant experience with technology companies. We believe his background and skill set in various facets of the technology industries make Mr. Gestetner well-suited to serve as a member of our board of directors.
James C. Savas has served as director since June 13, 2002. Mr. Savas is a managing member of Savas Greene White & Company LLC, an accounting and business consulting firm located in Salt Lake City, Utah. Since April 1999, Mr. Savas has also served as a co-manager of Providence Management, LLC, which is the manager of ASH Capital LLC, a private equity company. Mr. Savas also serves on the boards of Bullfrog Spas International LC and Express Locations, LLC, both privately held companies. Mr. Savas received his Bachelor of Science in Accounting from the University of Utah. Mr. Savas has significant experience with accounting and finance. We believe his background and skill set in accounting and business make Mr. Savas well-suited to serve as a member of our board of directors.
Lawrence K. Wein has served as director since October 2003. Mr. Wein held several key positions at AT&T for over 30 years. Mr. Wein is presently retired from his positions. Mr. Wein received his Master's in Business Administration from Harvard Business School, and his Bachelor of Science in Engineering from Columbia University. Mr. Wein has significant business experience. We believe his prior industry background and skill set make Mr. Wein well-suited to serve as a member of our board of directors.
There are no familial relationships among any of our officers or directors.
None of our directors or officers is a director in any other reporting companies. None of our directors or officers has been affiliated with any company that has filed for bankruptcy within the last ten years. We are not aware of any proceedings to which any of our officers or directors, or any associate of any such officer or director, is a party adverse to us or any of our or has a material interest adverse to us or any of our subsidiaries.
Involvement in Certain Legal Proceedings
There are no legal proceedings that have occurred within the past ten years concerning our directors, or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one's participation in the securities or banking industries, or a finding of securities or commodities law violations.
Committees of the Board of Directors
Our board has authorized two standing committees, an audit committee and a compensation committee.
Audit Committee. The audit committee, which was formed on August 18, 2000, is currently comprised of one director, Mr. Savas. The audit committee has the responsibility to:
·
recommend the firm that will serve as our independent public accountants;
·
review the scope and results of the audit and services provided by the independent public accountants;
·
meet with our financial staff to review accounting procedures and policies and internal controls; and
·
perform the other responsibilities set forth in its written charter.
Although not “independent”, Mr. Savas is not an employee of the Company and, in the opinion of our board, is free from any relationship that would interfere with the exercise of independent judgment as a committee member. Our Board of Directors has determined that Mr. Savas is an "audit committee financial expert" within the applicable definition of the Securities and Exchange Commission.
Compensation Committee
The compensation committee, which was formed on August 18, 2000, is currently comprised of Mr. Wein. In general, the compensation committee's authority and oversight extends to total compensation, including base salaries, bonuses, stock options, and other forms of compensation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our reporting directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership of common stock and other equity securities of eRoomSystem Technologies with the Securities and Exchange Commission, or the Commission. Officers, directors and stockholders holding more than 10% of the class of stock are required to furnish us with copies of all Section 16(a) forms they file with the Commission.
To our knowledge, based solely on review of the copies of such reports furnished to us and written representations, we believe that during the fiscal year ended December 31, 2013 all applicable filing requirements were complied with by our executive officers and directors, except that Messrs. Wein and Savas each failed to timely file one Form 4 to report the issuance of common stock by the Company and Mr. Gestetner failed to timely file one Form 4 to report the purchase of common stock of the Company.
Code of Ethics
Because of our relatively small size we do not currently have a Code of Ethics applicable to our principal executive, financial and accounting officers
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth summary information concerning the total remuneration paid or accrued by us, to or on behalf of our chief executive officer during the fiscal years ended December 31, 2013 and 2012.
On January 1, 2007, the Company entered into a two-year employment agreement with David A. Gestetner to serve as President and Chief Executive Officer. The term of such agreement will automatically be extended for successive two-year terms unless terminated at least 30 days prior to the end of the then current term. Under the agreement, Mr. Gestetner is entitled to an annual base salary of $150,000, a performance-based bonus at the end of the fiscal year at the discretion of the compensation committee, health, dental and term life insurance and a monthly car allowance. In addition, if Mr. Gestetner is terminated by the Company without cause, he is entitled to severance in the amount of one year of base salary and the continuation for one year of health, dental and car allowance benefits.
Outstanding Equity Awards at Fiscal-Year End
There were no equity awards outstanding granted to or held by our chief executive officer as of December 31, 2013.
Director Compensation
The following table sets forth the equity awards made to members of our board of directors during the fiscal year ended December 31, 2013:
(1)
Reflects the issuance of 25,000 shares of restricted common stock issued to each of Mr. Wein and Savas on July 3, 2013 for serving as directors of the Company.
(2)
As CEO and President of the Company, David Gestetner does not receive director’s compensation.
As compensation for their services, our non-employee directors receive either stock options to purchase 25,000 shares of our common stock or 25,000 shares of common stock as determined by the compensation committee. Directors who are our employees do not receive compensation for their services as directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table lists, as of March 28, 2014, the number of shares of our common stock that are beneficially owned by (i) each person or entity known to us to be the beneficial owner of more than 5% of our common stock; (ii) each executive officer and director of our company; and (iii) all executive officers and directors as a group. Information relating to beneficial ownership of common stock by our principal shareholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power.
The beneficial ownership is calculated based on 24,107,865 shares of common stock outstanding as of March 28, 2014.
Unless otherwise indicated, the address of each person or entity listed is c/o eRoomSystem Technologies, Inc., 150 Airport Road, Suite 1200, Lakewood, NJ 08701.
(1) Includes (i) 4,953,644 shares held by Gestetner Group, LLC, a New Jersey limited liability company of which Mr. Gestetner is the sole member, (ii) 5,000 shares held by Mr. Gestetner’s spouse and (iii) 200,000 shares held by a private operating foundation as to which Mr. Gestetner as an officer has sole voting and dispositive power.
(2) Includes (i) currently exercisable options to purchase 50,000 shares, (ii) 19,231 shares held by Providence Management, LLC (“Providence”) of which Mr. Savas and David Harkness are co-managers and 50% owners and share voting and dispositive power and (iii) 3,685,449 shares held by Ash Capital, LLC (“Ash”), a [wholly-owned subsidiary of Providence?] over which Providence has voting and dispositive power.
(3) Includes currently exercisable options to purchase 25,000 shares.
(4) Messrs Savas and Harkness share voting and dispositive power over the shares held by Ash.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Stock Issuance to Directors
25,000 shares of restricted common stock were issued to each of Mr. Wein and Savas on July 3, 2013 for serving as directors of the Company.
Director Independence
Our director, Mr. Lawrence K. Wein, qualifies as an independent director under Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASDAQ Rule 4200(15). Mr. Savas is the beneficial owner of more than 10% of our outstanding common stock and Mr. Gestetner is an employee and executive officer of our company. Aside from his beneficial ownership of more than 10% of our outstanding common stock, Mr. Savas is independent under Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASDAQ Rule 4200(15). The member of our audit committee is Mr. Savas. Mr. Savas is not independent as defined in NASDAQ Rule 4350(d)(2) because he is the beneficial owner of more than 10% of our outstanding common stock. However, in the opinion of our Board of Directors, Mr. Savas' beneficial stock ownership would not interfere with his exercise of independent judgment as an audit committee member.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Hansen, Barnett & Maxwell, P.C., (“HBM”), served as our independent registered public accounting firm for the fiscal year ended December 31, 2012. On September 1, 2013, HBM resigned as the Company’s independent registered public accounting firm. HBM recently entered into an agreement with Eide Bailly LLP (“Eide Bailly”), pursuant to which Eide Bailly acquired the operations of HBM. Concurrent with the resignation of HBM, the Company, through and with the approval of its Audit Committee, engaged Eide Bailly as its independent registered public accounting firm.
Our board is responsible for pre-approving all audit and permissible non-audit services provided by Eide Bailly. Our board of directors has concluded that the non-audit services provided by Eide Bailly are compatible with maintaining auditor independence. In 2013, no fees were paid to Eide Bailly pursuant to the "de minimus" exception to the pre-approval policy permitted under the Exchange Act.
Audit Committee's Pre-Approval Policies
The Audit Committee has adopted a policy that all audits, audit-related, tax and any other non-audit service to be performed by the Company's independent registered public accounting firm must be pre-approved by the Audit Committee. It is the Company's policy that all such services be pre-approved prior to commencement of the engagement. The Audit Committee is also required to pre-approve the estimated fees for such services, as well as any subsequent changes to the terms of the engagement.
For the fiscal years ended December 31, 2013 and 2012, the fees for services provided by our independent registered public accounting firm were as follows:
(1) Audit fees: Fees for the professional services rendered for the audit of our annual financial statements, review of financial statements included in our Form 10-Q filings, and services normally provided in connection with statutory and regulatory filings or engagements.
(2) Audit-related fees: Fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements.
(3) Tax fees: Fees for professional services rendered with respect to tax compliance, tax advice and tax planning. This includes preparation of tax returns, claims for refunds, payment planning and tax law interpretation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
eRoomSystem Technologies, Inc.
By:
/s/ David A. Gestetner
Name:
David A. Gestetner
Title:
President, Chief Executive Officer,
Secretary and Chairman of the Board
(Principal Executive, Financial and Accounting Officer)
Date:
April 3, 2014
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ David A. Gestetner
President, Chief Executive Officer,
April 3, 2014
David A. Gestetner
Secretary and Chairman of the Board
(Principal Executive, Financial and
Accounting Officer)
/s/ James C. Savas
Director
April. 3, 2014
James C. Savas
/s/ Lawrence K. Wein
Director
April 3, 2014
Lawrence K. Wein