UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2016

☐ 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.

(Exact name of registrant as specified in its charter)

Nevada	87-0540713
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

150 Airport Road, Suite 1200, Lakewood, NJ	08701
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (732) 730-0116

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 ☒ No ☐

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 preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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 ☐	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☒
(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 ☐ No ☒

The number of shares of the issuer’s common stock issued and outstanding as of ~~August~~November 414, 2016 was 24,217,865 shares.

Table Of Contents

EROOMSYSTEM TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12

Item 4.	Controls and Procedures	12

PART II - OTHER INFORMATION		13

Item 1.	Legal Proceedings	13

Item 1A.	Risk Factors	13

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13

Item 3.	Defaults Upon Senior Securities	13

Item 4.	Mine Safety Disclosures	13

Item 5.	Other Information	13

Item 6.	Exhibits	13

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30,			December 31,
	September 30,			December 31,
	2016			2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,~~286~~638,~~160~~990		$	1,247,739
Investment in available for sale securities		2524,~~172~~886			23,640
Notes receivable		~~425~~573,~~407~~324			1,075,020
Accounts receivable, net of allowance for doubtful accounts of $4,464 and $5,044		59,320			67,008
Accounts receivable, net of allowance for doubtful accounts of $7,005 and $5,044		93,070			67,008
Inventory		~~102~~101,~~586~~244			101,928
Advance to hotels		8380,~~027~~998			78,473
Prepaid expenses		~~580~~23,~~282~~479			3,369
Total Current Assets		2,~~561~~535,~~954~~991			2,597,177
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation of $28,686 and $23,524		38,442			39,810
Property and equipment, net of accumulated depreciation of $31,287 and $23,524		31,482			39,810
INVESTMENT IN REAL PROPERTY TAX LIENS		3,143			3,143
DEPOSITS		2,933			2,933
DEPOSITS AND OTHER ASSETS		2,933			2,933
Total Assets	$	2,~~606~~573,~~472~~549		$	2,643,063
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	2125,~~140~~760		$	12,485
Accrued liabilities		2324,~~590~~303			80,195
Total Current Liabilities		4450,~~730~~063			92,680
Total Liabilities		4450,~~730~~063			92,680
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none outstanding		-			-
Common stock, $0.001 par value; 50,000,000 shares authorized; shares outstanding 24,217,865 and 24,217,865		24,218			24,218
Additional paid-in capital		34,218,040			34,211,957
Accumulated deficit		(31,~~682~~720,~~954~~924	)		(31,686,698	)
Accumulated other comprehensive income		2,~~438~~152			906
Total Stockholders' Equity		2,~~561~~523,~~742~~486			2,550,383
Total Liabilities and Stockholders' Equity	$	2,~~606~~573,~~472~~549		$	2,643,063

See accompanying notes to condensed consolidated financial statements.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

	For the three months ended June 30,						For the six months ended June 30,
	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
REVENUE	$	~~234~~214,~~362~~413		$	~~214~~229,~~496~~873		$	~~463~~677,~~421~~834		$	~~414~~644,~~290~~163
COST OF REVENUE		137,~~051~~022			~~123~~137,~~675~~596			~~285~~422,~~122~~144			~~234~~371,~~367~~963
GROSS MARGIN		9777,~~311~~391			9092,~~821~~277			~~178~~255,~~299~~690			~~179~~272,~~923~~200
OPERATING EXPENSES
Selling, general and administrative expense, including non-cash compensation of $2,434, $6,436, $6,084 and $6,436		101,324			101,479			192,405			195,268
Selling, general and administrative expense, including non-cash compensation of $0, $1,619, $6,084 and $8,054		110,331			95,114			302,736			290,382
Research and development expense		915,~~413~~550			1013,~~066~~103			2439,~~107~~657			2235,~~569~~672
Net Operating Expenses		~~110~~125,~~737~~881			~~111~~108,~~545~~217			~~216~~342,~~512~~393			~~217~~326,~~837~~054
OTHER INCOME
Investment Income		1610,~~749~~520			5223,~~696~~464			4152,~~957~~477			80104,~~943~~407
Net Income		3,323			31,972			3,744			43,029
Net Income (Loss)		(37,970	)		7,524			(34,226	)		50,553
Other Comprehensive Income
Other Comprehensive Income (Loss)
Unrealized holding gain (loss)		~~1,154~~(286	)		(~~114~~801	)		1,~~532~~246			~~364~~(437	)
Comprehensive Income	$	4,477		$	31,858		$	5,276		$	43,393
Comprehensive Income (Loss)	$	(38,256	)	$	6,723		$	(32,980	)	$	50,116
Basic Income Per Common Share	$	0.00		$	0.00		$	0.00		$	0.00
Basic Income (Loss) Per Common Share	$	(0.00	)	$	0.00		$	(0.00	)	$	0.00
Diluted Income Per Common Share	$	0.00		$	0.00		$	0.00		$	0.00
Diluted Income (Loss) Per Common Share	$	(0.00	)	$	0.00		$	(0.00	)	$	0.00

See accompanying notes to condensed consolidated financial statements.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the six months ended June 30,
	For the nine months ended September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,744		$	43,029
Net Income (Loss)	$	(34,226	)	$	50,553
Adjustments to reconcile net income to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		57,~~163~~764			68,~~317~~441
Accrued interest receivable		5,~~767~~494			(52,~~095~~539	)
Gain on sale of marketable securities		-			(3540,~~901~~160	)
Non-cash compensation expense		6,083			68,~~435~~054
Changes in operating assets and liabilities:
Restricted cash		-			61,350
Accounts receivable		7(26,~~688~~062	)		(1935,~~311~~927	)
Inventory		1420,~~056~~370			(3417,~~967~~624	)
Advance to hotels		(42,~~554~~525	)		(31,~~356~~973	)
Prepaid expenses		(~~576~~20,~~913~~110	)		~~4,271~~417
Accounts payable		87,~~655~~775			(94,~~045~~613	)
Accrued liabilities		(5650,~~605~~392	)		(4533,~~491~~604	)
Borrowed shares		-			(60,959	)
Net Cash Used In Operating Activities		(~~586~~85,~~916~~829	)		(9259,~~723~~358	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1819,~~509~~122	)		-
Purchases of investments in real property tax liens		-			(3,698	)
Advances made under notes receivable		-(150,000	)		(390,000	)
Proceeds from collection of note receivable		~~643~~646,~~846~~202			13270,~~828~~624
Purchase of marketable securities		-			(~~415~~618,~~325~~107	)
Proceeds from sale of marketable securities		-			~~518~~758,~~447~~267
Net Cash Provided by (Used in) Investing Activities		625,337			(276,748	)
Net Cash Provided by Investing Activities		477,080			17,086
Net Increase (Decrease) in Cash		38391,~~421~~251			(~~369~~42,~~471~~272	)
Cash and cash equivalents at Beginning of Period		1,247,739			1,453,971
Cash and cash equivalents at End of Period	$	1,~~286~~638,~~160~~990		$	1,~~084~~411,~~500~~699

See accompanying notes to condensed consolidated financial statements.

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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, 2015 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 ~~six~~nine months ended ~~June~~September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016.

Cash and Cash Equivalents – Cash and cash equivalents include highly-liquid debt investments with original maturities of three months or less, readily convertible to known amounts of cash.

Investments in Debt and Equity Securities Available for Sale – Debt and 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 7% of the outstanding balance in addition to any specific customer collection issues identified by the Company. Uncollectible accounts receivable are written off when a settlement is reached or when the Company has determined that the balance will not be collected.

Inventory - The Company maintains an inventory of product that is sold in the refreshment centers in a number of hotels. The inventory is purchased as finished goods and is valued using the first in, first out method.

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 purchase the beverages from the refreshment centers.

Notes Receivable - The notes receivable are stated at the historical carrying amount, less a loan loss allowance, 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. The Company has evaluated the collectability of current notes receivable and believes the notes are realizable as they are secured by the related real property and the estimated fair value of the real property is in excess of the carrying value of the notes and the estimated cost to foreclose and sell the real property.

Investment in Real Property Tax Liens – The investments 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. The Company has evaluated the collectability of the tax liens and believes the investments are realizable over time as the first position liens are secured by the related real property and the estimated fair value of the real property is in excess of the carrying value of the tax liens and the estimated cost to foreclose and sell the real property. Therefore no impairment was recognized on the tax liens at ~~June~~September 30, 2016 and December 31, 2015.

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.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Net Earnings (Loss) per Common Share - Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income, 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 share for the three and ~~six~~nine months ended ~~June~~September 30, 2016 and 2015:

	For the three months ended June 30,					For the six months ended June 30,
	For the three months ended September 30,					For the nine months ended September 30,
	2016			2015		2016			2015
Net income	$	3,323		$	31,972	$	3,744		$	43,029
Net income (loss)	$	(37,970	)	$	7,524	$	(34,226	)	$	50,553
Basic weighted-average common shares outstanding		24,217,865			24,176,107		24,217,865			24,172,009
Effect of dilutive securities
Stock options and warrants		~~50,119~~-			44,236		~~50,000~~-			39,306
Diluted weighted-average common shares outstanding		24,~~267~~217,~~984~~865			24,220,343		24,~~267~~217,865			24,211,315
Basic income per share	$	0.00		$	0.00	$	0.00		$	0.00
Basic income (loss) per share	$	(0.00	)	$	0.00	$	(0.00	)	$	0.00
Diluted income per share	$	0.00		$	0.00	$	0.00		$	0.00
Diluted income (loss) per share	$	(0.00	)	$	0.00	$	(0.00	)	$	0.00

During the ~~six~~nine months ended ~~June~~September 30, ~~2016 and~~ 2015, there were ~~125,000 and~~ 92,500, ~~respectively,~~ of potential common stock equivalents from options that were not included in the computation of diluted loss per share because their effect would have been anti-dilutive.

During the nine months ended September 30, 2016, there were 400,000 of potential common stock equivalents from options that were not included in the computation of diluted loss per share because their effect would have been anti-dilutive.

NOTE 2 – INVESTMENTS

Investment in Real Property Tax Liens – At ~~June~~September 30, 2016, the Company held $3,143 of real property tax liens, carried at lower of cost or estimated net realizable value, from various municipalities in New Jersey. 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.

Investment in Available for Sale Debt Securities

Debt and Equity Securities	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Corporate Debt Securities	$	22,734	$	2,~~438~~152	$	-	$	2524,~~172~~886
Total	$	22,734	$	2,~~438~~152	$	-	$	2524,~~172~~886

The corporate debt securities mature on August 31, 2018 and May 29, 2020.

NOTE 3 – NOTES RECEIVABLE

To date, the Company loaned $1,~~492~~642,000 in amounts ranging from $150,000 to $450,000 to various parties for a one year term with mortgage notes ranging in interest from 4.5% - 12%. Interest is due and payable monthly. The entire principal amounts are due and payable on the maturity date. The mortgages are collateralized by either commercial or residential property. Proceeds collected on these notes during the ~~six~~nine months ended ~~June~~September 30, 2016 totaled $~~643~~646,~~846~~202 and during the year ended December 31, 2015 totaled $272,512. The carrying amounts of loans outstanding on ~~June~~September 30, 2016 and December 31, 2015 were $~~425~~573,~~407~~324 and $1,075,020 including interest accrued. The carrying amount of the notes receivable approximates their fair values based on their short-term maturity.

Accrued interest on notes receivable was $1,765 and $7,531 at June 30, 2016 and December 31, 2015 respectively, and was included in notes receivable in the accompanying consolidated balance sheets.

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accrued interest on notes receivable was $2,037 and $7,531 at September 30, 2016 and December 31, 2015 respectively, and was included in notes receivable in the accompanying consolidated balance sheets.

NOTE 4 – STOCKHOLDERS’ EQUITY

During the ~~six~~nine months ended ~~June~~September 30, 2016, the Company granted options to purchase 75,000 shares of common stock to employees for services rendered. These options, which vested immediately, have an exercise price of $0.06 per share and are exercisable through March 31, 2021. These options were valued at approximately $0.05 per share, or $3,650, using the Black-Scholes option pricing model with the following assumptions: market value of the common stock of $0.06 per share, risk free interest rate of 1.21%, dividend yield of 0.0%, volatility of 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 ~~six~~nine months ended ~~June~~September 30, 2016, the Company granted options to purchase 50,000 shares of common stock to a consultant for services rendered. These options, which vested immediately, have an exercise price of $0.06 per share and are exercisable through April 1, 2021. These options were valued at approximately $0.05 per share, or $2,434, using the Black-Scholes option pricing model with the following assumptions: market value of the common stock of $0.06 per share, risk free interest rate of 1.21%, dividend yield of 0.0%, volatility of 116% and expected life of 5 years.

Stock-based compensation expense relating to stock options of $6,084 and $68,~~436~~054 was recognized during the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015, respectively. There was no unrecognized compensation related to stock options at ~~June~~September 30, 2016. A summary of stock option and warrant activity for the ~~six~~nine months ended ~~June~~September 30, 2016 is as follows:

	Options and Warrants			Exercise Price Range					Weighted - Average Exercise Price		~~Weighted - Average Exercise Price~~		Weighted- Average Life		~~Weighted- Average Life~~		Aggregate Intrinsic Value		~~Aggregate Intrinsic Value~~
Balance, December 31, 2015		300,000		$0.05	~~0.05~~-	-$0.17	$	~~0.17~~	$	0.08	$	~~0.08~~		5.40		~~5.40~~	$	-	$	-
Granted		125,000		0.06	~~0.06~~-	-0.06		~~0.06~~		0.06		~~0.06~~
Expired		(25,000	)	0.17	~~0.17~~-	-0.17		~~0.17~~		0.17		~~0.17~~
Balance, June 30, 2016		400,000			0.05	-		0.12				0.06				5.00			$	3,500
Balance, September 30, 2016		400,000		0.05	-	0.12				0.06				5.00			$	750
Exercisable, June 30, 2016		400,000		$	0.05	-	$	0.12			$	0.06				5.00			$	3,500
Exercisable, September 30, 2016		400,000		$0.05	-	$0.12			$	0.06				5.00			$	750
Weighted-average fair value of options granted during the six months ended June 30, 2016																			$	0.05
Weighted-average fair value of options granted during the nine months ended September 30, 2016																	$	0.05

All of the options and warrants were exercisable at ~~June~~September 30, 2016. At ~~June~~September 30, 2016 the intrinsic value for the options and warrants outstanding was $~~3,500~~750.

NOTE 5 – 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 instruments that are measured at fair value on a reoccurring basis as of ~~June~~September 30, 2016 and December 31, 2015:

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eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fair Value of Financial Instruments

Quoted Prices

Active

Markets

Significant

for Identical

Significant

Unobservable

Assets

Observable Inputs

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

June 30, 2016

September 30, 2016

Assets:

Debt securities available for sale

2524,~~172~~886

December 31, 2015

Assets:

Debt securities available for sale

23,640

Fair Value of Financial Instruments Not Required To Be Reported at Fair Value

The fair values of real property tax liens and notes receivable are based on a combination of the stated or implied interest rates at the measurement dates, approximate their carrying amounts and are considered to fall within Level 3 of the fair value hierarchy.

NOTE 6 – 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 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 ~~June~~September 30, 2016, the Company had accounts receivable from one customers which accounted for 3638% of total accounts receivable and from a second customer which accounted for 4221% of total accounts receivable.

During the ~~six~~nine months ended ~~June~~September 30, 2016, revenues from one customer accounted for 3837% of total revenues and 26% from a second customer.

During the ~~six~~nine months ended ~~June~~September 30, 2015, revenues from one customer accounted for 34% of total revenues and 28% from a second customer.

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Item 2. 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, 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.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

Overview

The Company introduced to the lodging industry an amenity management platform, or the AMENITIES MANAGER™. The platform’s core is proprietary software that provides a 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™ 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.

We continue to deploy our Amenities Manager™ at all hotels that we service. Additionally, to date, we have deployed over 12,000 refreshment centers at many hotel properties.

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, Carlson Hospitality Worldwide, as well as in other boutique hotels in the United States and internationally.

Results of Operations

Revenue Recognition

We generate revenues from the sale of products in hotel in-room 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 revenue consists primarily of cost of goods sold, as well as customer support and maintenance.

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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 research and development for new products. Research and development expenses in the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 were $2439,~~107~~657 and $2235,~~569~~672, respectively.

In accordance with ASC Codification Topic 730, “Accounting for Research and Development Costs”, development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our condensed consolidated statements of operations.

Comparison of Three Months Ended ~~June~~September 30, 2016 and 2015

Revenue

Revenue from product sales and maintenance was $~~243~~214,~~362~~413 for the three months ended ~~June~~September 30, 2016, compared to $~~214~~229,~~496~~873 for the three months ended ~~June~~September 30, 2015, representing ana ~~increase~~decrease of $1915,~~866~~460, or 97%. The ~~increase~~decrease in revenues related to ~~improved~~decreased sales in 2016.

Cost of Revenue

Our cost of product sales and maintenance revenue for the three months ended ~~June~~September 30, 2016 was $137,~~051~~022, compared to $~~123~~137,~~675~~596 for the three months ended ~~June~~September 30, 2015, ana ~~increase~~decrease of $13574,~~376,~~ or 110.42%. The ~~increase in cost of revenue related to the increase in sales as well as increases in labor costs and cost of goods. The~~ gross margin percentage on revenue from product sales revenue was 4236% in 2016 and 40% in 2015.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended ~~June~~September 30, 2016 and 2015 are summarized as follows:

	For the three months ended June 30,
	For the three months ended September 30,
	2016		2015		Change			Percent Change
REVENUE	$	~~234~~214,~~362~~413	$	~~214~~229,~~496~~873	$	19(15,~~866~~460	)		9-7	%
COST OF REVENUE	$	137,~~051~~022	$	~~123~~137,~~675~~596	$	~~13,376~~(574	)		110.42	%

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 ~~June~~September 30, 2016 and 2015, 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 $~~101~~110,~~324~~331 for the three months ended ~~June~~September 30, 2016, compared to $~~101~~95,~~479~~114 for the three months ended ~~June~~September 30, 2015, representing aan ~~decrease~~increase of $~~155~~15,217, or 016% due to higher administrative costs.

Research and Development—Research and development expenses were $915,~~413~~550 for the three months ended ~~June~~September 30, 2016, compared to $1013,~~066~~103 for the three months ended ~~June~~September 30, 2015 representing aan ~~decrease~~increase of $~~653~~2,447 or 619%.

Investment Income

Our investment income was $1610,~~749~~520 for the three months ended ~~June~~September 30, 2016, compared to $5223,~~696~~464 for the three months ended ~~June~~September 30, 2015, representing a decrease of $3512,~~947~~944, or 6855%. The change in investment income related to sales of available-for-sale securities in the three months ended ~~June~~September 30, 2015 and the repayment of notes receivable during 2016.

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Net Income

We realized a net ~~income~~loss of $337,~~323~~970 for the three months ended ~~June~~September 30, 2016, compared to a net income of $317,~~972~~524 for the three months ended ~~June~~September 30, 2015. The $2845,~~649~~494 change related primarily to ~~the~~decreased ~~decrease~~revenue and investment income as well as increased selling, general and administrative expenses during the three months ended ~~June~~September 30, 2016.

Comparison of ~~Six~~Nine Months Ended ~~June~~September 30, 2016 and 2015

Revenue

Revenue from product sales and maintenance was $~~463~~677,~~421~~834 for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to $~~414~~644,~~290~~163 for the ~~six~~nine months ended ~~June~~September 30, 2015, representing an increase of $4933,~~131~~671, or 125%. The increase in revenues related to improved sales in 2016.

Cost of Revenue

Our cost of product sales and maintenance revenue for the ~~six~~nine months ended ~~June~~September 30, 2016 was $~~285~~422,~~122~~144, compared to $~~234~~371,~~367~~963 for the ~~six~~nine months ended ~~June~~September 30, 2015, representing an increase of $50,~~755~~181, or 2213%. The increase in cost of revenue related to the increase in sales as well as increases in labor costs and cost of goods. The gross margin percentage on revenue from product sales revenue was 38% in 2016 as compared to 4342% in 2015.

The changes and percent changes with respect to our revenues and our cost of revenue for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 are summarized as follows:

	For the six months ended June 30,
	For the nine months ended September 30,
	2016		2015		Change		Percent Change
REVENUE	$	~~463~~677,~~421~~834	$	~~414~~644,~~290~~163	$	4933,~~131~~671		125	%
COST OF REVENUE	$	~~285~~422,~~122~~144	$	~~234~~371,~~367~~963	$	50,~~755~~181		2213	%

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015, 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 $~~192~~302,~~405~~736 for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to $~~195~~290,~~268~~382 for the ~~six~~nine months ended ~~June~~September 30, 2015, representing aan ~~decrease~~increase of $212,~~863~~354, or 14% due to ahigher ~~combination~~administrative ~~of a lot of small items~~costs.

Research and Development—Research and development expenses were $2439,~~107~~657 for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to $2235,~~569~~672 for the ~~six~~nine months ended ~~June~~September 30, 2015 representing an increase of $13,~~538~~985 or 711%.

Investment Income

Our investment income was $4152,~~957~~477 for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to $80104,~~943~~407 for the ~~six~~nine months ended ~~June~~September 30, 2015, representing a decrease of $3851,~~986~~930, or 4850%. The change in investment income related to sales of available-for-sale securities in the ~~six~~nine months ended ~~June~~September 30, 2015 and the repayment of notes receivable during 2016.

Net Income

We realized a net ~~income~~loss of $334,~~744~~226 for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to a net income of $4350,~~029~~553 for the ~~six~~nine months ended ~~June~~September 30, 2015. The $3984,~~285~~779 change related primarily to the decrease in revenue and investment income and the increase in selling, general and administrative costs during the ~~six~~nine months ended ~~June~~September 30, 2016.

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Liquidity and Capital Resources

Our accumulated deficit ~~decreased~~increased from $31,686,698 at December 31, 2015 to $31,~~682~~720,~~954~~924 at ~~June~~September 30, 2016. The $334,~~744~~226 ~~decrease~~increase in accumulated deficit resulted directly from the net ~~income~~loss realized for the ~~six~~nine months ended ~~June~~September 30, 2016.

At ~~June~~September 30, 2016, our principal sources of liquidity consisted of $1,~~286~~638,~~160~~990 of cash as compared to $1,247,739 at December 31, 2015. At ~~June~~September 30, 2016, we had working capital of $2,~~517~~485,~~224~~928, as compared to $2,504,497 at December 31, 2015. In addition, our stockholders' equity was $2,~~561~~523,~~742~~486 at ~~June~~September 30, 2016, compared to stockholders' equity of $2,550,383 at December 31, 2015, an increase of $1126,~~359~~897. The increase in cash reflects ~~various~~the ~~items~~repayment of notes receivable. We believe that we have sufficient funds to operate for the next twelve months.

Net cash used in operations for the ~~six~~nine months ended ~~June~~September 30, 2016 was $~~586~~85,~~916~~829 as compared to $9259,~~723~~358 used in the period ended ~~June~~September 30, 2015. ~~The cash used during the six months ended June 30, 2016 primarily related directly to a prepayment for a potential investment.~~

Investing activities for the ~~six~~nine months ended ~~June~~September 30, 2016 provided net cash of $~~625~~477,~~337~~080, compared to $~~276~~17,~~748~~086 of net cash ~~used~~provided during the ~~six~~nine months ended ~~June~~September 30, 2015. The change in cash used related to ~~the~~ advances and collections under ~~Notes~~notes ~~Receivable~~receivable in 2016 and 2015.

There were no financing activities in the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective for the Company retrospectively beginning January 1, 2017, with early adoption not permitted. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.

Contractual Cash Obligations and Commercial Commitments

There were no significant contractual cash obligations or commercial commitments either on or off balance sheet as of ~~June~~September 30, 2016.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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Item 3. 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.

Item 4. 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 have 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 because of the material weakness in our internal control over financial reporting due to lack of segregation of duties, the Company’s disclosure controls and procedures were not effective as of ~~June~~September 30, 2016 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 weakness discussed below, our principal executive officer and principal financial officer have concluded that the condensed consolidated financial statements (unaudited) included in this Form 10-Q 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.

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.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. 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 1A. 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

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

	eRoomSystem Technologies, Inc.
	(Registrant)
Date: August 4, 2016
Date: November 14, 2016
	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)

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