<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
-------------------------------------
OR
/ / TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: to
------------------ ---------------------
Commission file number: 000-31037
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eRoomSystem Technologies, Inc.
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(Exact name of small business issuer as
specified in its charter)
Nevada 87-0540713
-------------------- -----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109
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(Address of principal executive offices)
(800) 316-3070
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(Issuer's telephone number)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES /X/ NO / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. YES / / NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
7,050,965 shares of common stock, $0.001 par value, as of November 13, 2000
--------------------------------------------------------------------------------
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES / / NO /X/
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION....................................................................................3
ITEM 1. FINANCIAL STATEMENTS............................................................................3
Condensed Consolidated Balance Sheets (Unaudited)...............................................3
Condensed Consolidated Statements of Operations (Unaudited).....................................5
Condensed Consolidated Statements of Cash Flows (Unaudited).....................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.....................................................................................20
PART II - OTHER INFORMATION......................................................................................28
ITEM 1. LEGAL PROCEEDINGS..............................................................................28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................29
ITEM 5. OTHER INFORMATION..............................................................................29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................29
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
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<S> <C> <C>
CURRENT ASSETS
Cash............................................................ $ 113,252 $ 5,427,460
Accounts receivable, net of allowance for doubtful accounts of
$15,000....................................................... 40,213 233,016
Inventories..................................................... 697,033 864,942
Prepaid expenses and other...................................... 6,250 188,915
------------------- -------------------
TOTAL CURRENT ASSETS............................................ 856,748 6,714,333
------------------- -------------------
REFRESHMENT CENTERS IN SERVICE, net of accumulated depreciation of
$3,858 and $75,966, respectively................................ 169,791 1,559,306
------------------- -------------------
PROPERTY AND EQUIPMENT
Production equipment............................................ 138,908 201,165
Computer equipment.............................................. 171,666 198,648
Vehicles and other.............................................. 76,857 60,777
------------------- -------------------
387,431 460,590
Less accumulated depreciation and amortization.................. (264,946) (302,368)
------------------- -------------------
NET PROPERTY AND EQUIPMENT...................................... 122,485 158,222
------------------- -------------------
INVESTMENT IN WHOLLY-OWNED, UNCONSOLIDATED SUBSIDIARY.............. 2,535,976 894,858
------------------- -------------------
OTHER ASSETS
Patents and license rights, net of accumulated amortization of
$222,710 and $273,334, respectively........................... 249,780 199,156
Deferred offering and financing costs........................... 88,000 --
Deposits and other.............................................. 327,851 164,888
------------------- -------------------
TOTAL OTHER ASSETS.............................................. 665,631 364,044
------------------- -------------------
TOTAL ASSETS....................................................... $ 4,350,631 $ 9,690,763
=================== ===================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- -------------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable and current portion of long-term debt, net of
discount of $0 and $13,581, respectively...................... $ 1,560,458 $ 425,464
Current portion of capital lease obligations.................... 22,061 26,841
Accounts payable................................................ 987,013 752,555
Accrued liabilities............................................. 332,835 406,852
Accrued interest................................................ 290,117 109,469
Customer deposits............................................... 93,470 94,258
Deferred maintenance revenue.................................... 58,868 73,467
Preferred stock dividends payable............................... 162,542 112,608
------------------- -------------------
TOTAL CURRENT LIABILITIES....................................... 3,507,364 2,001,514
------------------- -------------------
LONG-TERM DEBT, net of current portion............................. 812,022 3,361
------------------- -------------------
CAPITAL LEASE OBLIGATIONS, net of current portion.................. 55,097 33,166
------------------- -------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, $0.001 par value; 500,000
shares authorized; 360,000 shares and no shares outstanding
at December 31, 1999 and September 30, 2000, respectively..... 1,332,953 --
Series B convertible preferred stock, $0.001 par value;
2,500,000 shares authorized, 2,081,680 shares and no shares
outstanding at December 31, 1999 and September 30, 2000,
respectively.................................................. 6,171,196 --
Series C convertible preferred stock, $0.001 par value;
2,000,000 shares authorized, as shares outstanding at
September 30, 2000............................................ -- --
Undesignated preferred stock, $0.001 par value; 5,000,000
shares authorized; no shares outstanding...................... -- --
Common stock, $0.001 par value; 50,000,000 shares authorized;
2,217,291 and 7,050,965 shares outstanding at December 31,
1999 and September 30, 2000, respectively..................... 2,218 7,051
Additional paid-in capital...................................... 6,265,284 28,554,445
Warrants and options outstanding................................ 728,538 2,029,518
Notes receivable from stockholders.............................. (840,000) --
Accumulated deficit............................................. (13,684,041) (22,938,292)
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)............................ (23,852) 7,652,722
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)............... $ 4,350,631 $ 9,690,763
=================== ===================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
1999 2000 1999 2000
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE
Product sales................................. $ 32,374 $ 346,501 $ 32,374 $ 2,012,788
Revenues sharing arrangements................. 110,587 92,521 260,422 155,156
Maintenance fees.............................. 60,288 21,543 222,303 110,400
---------------- --------------- --------------- ---------------
TOTAL REVENUE............................. 203,249 460,565 515,099 2,278,344
---------------- --------------- --------------- ---------------
COST OF REVENUE
Product sales................................. 26,479 202,835 26,479 1,468,891
Revenue sharing arrangements.................. 52,662 27,799 143,245 36,136
Maintenance................................... 59,428 66,861 95,590 74,762
---------------- --------------- --------------- ---------------
TOTAL COST OF REVENUE..................... 138,569 297,495 265,314 1,579,789
---------------- --------------- --------------- ---------------
GROSS MARGIN..................................... 64,680 163,070 249,785 698,555
---------------- --------------- --------------- ---------------
OPERATING EXPENSES
Selling, general and administrative (exclusive
of non-cash compensation expense)........... 487,909 901,183 1,252,404 2,066,595
Research and development...................... 69,314 83,544 206,530 187,932
Non-cash compensation expense................. -- 9,366 -- 503,676
---------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES.................. 557,223 994,093 1,458,934 2,758,203
---------------- --------------- --------------- ---------------
LOSS FROM OPERATIONS............................. (492,543) (831,023) (1,209,149) (2,059,648)
---------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Interest expense.............................. (371,653) (435,577) (1,157,823) (1,313,011)
Write-off of note receivable from
stockholder........................... -- (390,000) -- (390,000)
Equity in income (loss) of unconsolidated,
wholly-owned subsidiary..................... -- (131,636) -- 29,998
Interest and other income..................... 67,188 65,307 200,930 82,340
---------------- --------------- --------------- ---------------
OTHER EXPENSE, NET........................ (304,465) (891,906) (956,893) (1,590,673)
---------------- --------------- --------------- ---------------
NET LOSS......................................... (797,008) (1,722,929) (2,166,042) (3,650,321)
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK. (82,961) (3,457,981) (153,975) (5,603,931)
---------------- --------------- --------------- ---------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS......... $ (879,969) $ (5,180,910) $ (2,320,017) $ (9,254,252)
================ =============== =============== ===============
BASIC AND DILUTED LOSS PER COMMON SHARE.......... $ (0.24) $ (1.04) $ (0.65) $ (2.93)
================ =============== =============== ===============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................... 3,635,170 5,002,013 3,587,563 3,159,200
================ =============== =============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1999 2000
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $ (2,166,042) $ (3,650,321)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 241,279 140,748
Amortization of deferred financing costs and accretion of
debt discount............................................... 12,534 500,530
Interest accrued on notes receivable from stockholders........ (198,186) --
Write-off of note receivable from stockholder................. -- 390,000
Non-cash compensation expense................................. 5,954 503,676
Interest expense paid by issuance of preferred and common
stock, warrants, and stock options.......................... 403,484 221,186
Distributions in excess of equity in income from
unconsolidated subsidiary................................... -- 169,507
Changes in operating assets and liabilities:
Accounts receivable........................................... (151,773) (192,803)
Inventories................................................... 1,167,475 (160,345)
Prepaid expenses, deposits and other.......................... (112,011) 14,086
Accounts payable.............................................. (203,150) (165,460)
Accrued liabilities........................................... 429,039 (3,641)
Other liabilities............................................. 44,126 15,387
------------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES......................... (527,271) (2,217,450)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to refreshment centers in service..................... (1,866,238) (722,144)
Purchase of property and equipment.............................. (2,382) (84,029)
Cash investment in wholly-owned, unconsolidated subsidiary...... -- (166,621)
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES......................... (1,868,620) (972,794)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................................ -- 2,164,169
Principal payments on notes payable............................. -- (3,393,095)
Proceeds from issuance of notes payable to officers and
stockholders.................................................. 504,806 --
Principal payments on notes payable to stockholder and officer.. (371,730) --
Principal payments on capital lease obligations................. (24,134) (17,151)
Proceeds from issuance of common stock.......................... -- (9,217,231)
Proceeds from issuance of preferred stock and warrants.......... 2,391,755 685,831
Payment of dividends............................................ -- (152,533)
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 2,500,697 8,504,452
------------------- -------------------
NET INCREASE IN CASH............................................... 104,806 5,314,208
CASH AT BEGINNING OF PERIOD........................................ 1,850 113,252
------------------- -------------------
CASH AT END OF PERIOD.............................................. $ 106,656 $ 5,427,460
=================== ===================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1999 2000
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<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.......................................... $ 200,928 $ 314,806
Accrual of preferred stock dividends............................ 153,975 102,597
Issuance of preferred stock as payment of debt obligations...... 1,500,250 --
Retirement of common stock...................................... -- 450,000
Issuance of warrants for advertising agreement.................. -- 135,512
Accrued interest, accounts payable and payable to stockholder
converted to notes payable.................................... 573,588 56,063
Beneficial conversion feature on bridge loan.................... -- 448,398
Beneficial conversion feature on Series A and B Preferred Stock. -- 5,225,654
Value of shares issued as a dividend on Series B Preferred Stock -- 275,679
Conversion of Series A, B and C Preferred Stock into common
stock......................................................... -- 13,265,789
Transfer of assets from investment in unconsolidated subsidiary
to refreshment centers in service............................. -- 737,337
Transfer of notes payable and accrued interest to
unconsolidated subsidiary..................................... -- 900,895
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
CONDENSED FINANCIAL STATEMENTS -- The accompanying unaudited condensed
consolidated financial statements include the accounts of eRoomSystem
Technologies, Inc. and its wholly owned subsidiary, RoomSystems, Inc. (the
"Company"). 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 included in the Company's registration statement on
Form SB-2, Pre-Effective Amendment No. 4 (File No. 333-34882) dated July 28,
2000 and the Company's final prospectus dated August 2, 2000, filed pursuant to
Rule 424(b)(4) of the Securities Act of 1933, as amended. In particular, the
Company's significant accounting principles were presented as Note 2 to the
consolidated financial statements contained therein. In the opinion of
management, all adjustments necessary for a fair presentation have been included
in the accompanying condensed consolidated financial statements and consist of
only normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2000.
NOTE 2 - INVESTMENT IN WHOLLY-OWNED, UNCONSOLIDATED SUBSIDIARY
On September 28, 1999, the Company and RSG Investments, LLC ("RSG")
entered into a settlement agreement in the form of an Equipment Transfer
Agreement (the "Transfer Agreement") relating to 2,270 Refreshment Centers
(the "RSG Units") financed by a repurchase obligation payable to RSG. Under
the terms of the Transfer Agreement, the Company formed a new
bankruptcy-remote entity, RSi BRE, Inc. ("RSI BRE"), as a wholly owned
subsidiary. The ownership of the RSG Units and the related revenue sharing
agreements were transferred to RSi BRE. RSG is to receive $0.57 per unit per
day of the revenue realized from the revenue sharing agreements covering the
RSG Units over the remaining life of their seven-year revenue sharing
agreements. However, the $0.57 per unit per day is paid only after $0.11 per
unit per day has been paid to the Company to cover taxes and maintenance. To
the extent that at least $0.68 per unit per day in revenue is not realized
from the RSG Units, the Company has no obligation to pay the difference to
RSG. Rather, RSG is subject to the risk that revenues generated from the RSG
Units are not at least $0.68 per unit per day. To the extent that the revenue
per unit per day exceeds $0.68, the incremental amount is paid to the Company.
The Company accounted for the Transfer Agreement transaction as a
troubled debt restructuring which resulted in a liability to RSG of
$1,555,543. The Company was amortizing the liability over the remaining life
of the underlying revenue sharing agreements using an estimated effective
interest rate of approximately 41%. Under the terms of the Transfer
Agreement, the Company paid RSG $750,000 on August 9, 2000 upon the close of
the Company's initial public offering (the "IPO"). Upon making the required
payment, $737,337 of Refreshment Centers held by RSi BRE as collateral under
the obligation to RSG was transferred to the Company. The remaining balance
of the obligation to RSG of $900,895, including $95,353 of accrued interest,
was transferred to and assumed by RSi BRE.
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<PAGE>
RSi BRE is amortizing the obligation to RSG over the remaining life of the
underlying revenue sharing agreements using an estimated effective interest rate
of approximately 41%. This estimated effective interest rate could fluctuate in
future periods depending upon the level and timing of revenues generated from
the RSG Units. The remaining distributions payable to RSG, as earned RSi BRE,
are secured by the assets of RSi BRE and the capital stock of RSi BRE and
guaranteed by the Company.
The board of directors of RSi BRE is comprised of one appointee from the
Company, one appointee from RSG and one independent appointee. All operating
decisions, including disbursements by RSi BRE, require the unanimous consent of
RSi BRE's board of directors. As a result, the Company does not control RSi BRE.
In accordance with EITF 96-16, "Investor's Accounting for an Investee When the
Investor has a Majority of the Voting Interest But the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights," the Company has determined
that RSG has rights which allow it to effectively participate in the significant
operating and capital decisions for RSi BRE in the ordinary course of business.
Therefore, RSi BRE does not qualify for consolidation in the Company's financial
statements. Rather, the Company's investment in RSi BRE is reflected as an
"Investment in Wholly-Owned, Unconsolidated Subsidiary" in the accompanying
condensed consolidated balance sheet and is being accounted for under the equity
method of accounting.
At December 31, 1999 and September 30, 2000, respectively, the assets and
liabilities of RSi BRE consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
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<S> <C> <C>
Cash......................................................... $ 189,659 $ 142,563
Accounts receivable.......................................... 66,057 107,728
Inventory.................................................... 414,860 --
Refreshment centers in service............................... 2,097,363 2,090,118
Accumulated depreciation..................................... (217,797) (422,909)
Accrued liabilities.......................................... -- (95,353)
Accrued interest............................................. (4,166) (121,747)
Customer deposits............................................ (10,000) --
Note payable................................................. -- (805,542)
------------------- -------------------
Net Assets................................................... $ 2,535,976 $ 894,858
=================== ===================
</TABLE>
For the nine months ended September 30, 2000, the revenues and expenses of
RSi BRE consisted of the following:
<TABLE>
<S> <C>
Revenue sharing agreement revenues........................... $ 474,846
Depreciation................................................. (246,984)
Other operating expenses..................................... (83,803)
Interest expense............................................. (118,010)
Interest income.............................................. 3,949
-------------------
Net Income................................................... $ 29,998
===================
</TABLE>
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<PAGE>
NOTE 3 - NOTES PAYABLE
2000 NOTE PAYABLE TO STOCKHOLDER
On February 15, 2000, the Company received a $500,000 loan from a company,
wholly owned by a stockholder and then nominee to the board of directors. The
loan was evidenced by a promissory note bearing interest at the rate of 10% per
annum, matured on August 15, 2000 and was secured by the assets of the Company.
In addition, the Company issued a warrant for the purchase of 18,750 shares of
common stock, which is exercisable at $4.80 per share from the date issued
through August 9, 2002. The warrants issued were valued at $25,938 based upon
their fair value measured using the Black-Scholes option pricing model with the
following assumptions: 6.7% risk-free interest rate, 70.45% volatility and a
2.30 year estimated life. The discount to the notes resulting from allocating a
portion of the proceeds to the warrants was immediately amortized to interest
expense. The Company repaid the note on August 9, 2000.
2000 CONVERTIBLE PROMISSORY NOTES
During March and April 2000, $212,500 of convertible promissory notes were
issued in connection with the Series C convertible preferred stock offering.
These notes bear interest at 7% per annum, payable semi-annually and mature on
December 31, 2001. These notes may be converted at the option of the holders
into common stock at $5.52, commencing September 9, 2000. These notes were
repaid on August 9, 2000 with the exception of $67,795, net of $13,581
unamortized discount, which remains outstanding.
2000 BRIDGE LOAN
On April 13, 2000, the Company issued a $1,500,000, 9% secured,
subordinated promissory note. The promissory note was repaid on August 9, 2000.
SUMMARY OF NOTES PAYABLE
The following comprises notes payable at December 31, 1999 and September
30, 2000:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- -------------------
<S> <C> <C>
1996 Notes secured by assets of the Company, in default,
interest at 15% per annum and accruing warrants to purchase
common stock on a monthly basis............................... $ 130,000 $ 120,000
1997 Notes secured by assets of the Company, in default,
interest at 15% per annum..................................... 431,750 127,500
1999 Notes secured by assets of the Company, paid August 2000... 35,115 --
Note payable to RSG, secured by assets of the Company, $750,000
paid August 9, 2000, interest imputed at 41% per annum,
transferred to RSi BRE........................................ 1,555,544 --
Note payable to a corporation for services performed, paid
August 2000................................................... 102,290 --
Note payable to an individual, secured by assets of the
Company, in default, interest at 15% per annum................ 100,000 100,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- -------------------
<S> <C> <C>
Note payable to a bank, interest at 10% per annum, due in
monthly installments through June 2002, secured by vehicle.... 11,719 7,468
Note payable to an individual, interest at 15% per annum,
unsecured..................................................... 6,062 6,062
2000 Convertible promissory notes, secured by assets of the
Company, bearing interest at 7% per annum, net of $13,581
unamortized discount (see description above).................. -- 67,795
------------------- -------------------
Total notes payable and long-term debt.......................... 2,372,480 428,825
Less: current portion.......................................... (1,560,458) (425,464)
------------------- -------------------
Long Term Debt $ 812,022 $ 3,361
=================== ===================
</TABLE>
Although none of the notes in default have been extended, holders of the
notes in default have not taken any action to foreclose on the notes. The
Company intends to pay the notes in default upon receipt of the relevant
security interest termination statements from the holders of the notes. To this
end, the Company has placed $579,553 of cash into a separate account for payment
of these notes and related accrued interest.
NOTE 4 - STOCKHOLDERS' EQUITY
On February 2, 2000, with stockholder approval, the Company filed articles
of amendment to its articles of incorporation. The amended articles of
incorporation authorize the Company to issue 500,000 shares of $0.001 par value
Series A preferred stock, 2,500,000 shares of $0.001 par value Series B
preferred stock, 2,000,000 shares of $0.001 par value Series C preferred stock
and 20,000,000 shares of $0.001 par value common stock. The Company's board of
directors is authorized, without stockholder approval, to designate and
determine the preferences, limitations and relative rights granted to or imposed
upon each share of preferred stock that are not fixed by the amended articles of
incorporation.
On March 29, 2000, and corrected on May 30, 2000, the Company filed an
amendment and restatement of its articles of incorporation. The amended and
restated articles of incorporation: (i) changed the Company's name to
"eRoomSystem Technologies, Inc."; (ii) increased the Company's authorized
capital stock to 60,000,000 shares; (iii) increased the authorized number of
shares of the Company's common stock from 20,000,000 shares to 50,000,000
shares; and (iv) authorized 5,000,000 shares of undesignated preferred stock at
$0.001 par value.
On March 29, 2000, the Company's board of directors approved a
three-for-four shares reverse stock split related to its common stock and the
common stock underlying its options and warrants. In connection with the
issuance of the Series A and B convertible preferred stock, the holders of
Series A and B convertible preferred stock were excluded from the effect of the
reverse stock split. The reverse stock split has been retroactively reflected in
the accompanying consolidated financial statements for all periods presented.
2000 COMMON STOCK INITIAL PUBLIC OFFERING
On August 2, 2000, a registration statement for 1,800,000 shares of common
stock became effective and, on August 9, 2000, the Company issued 1,800,000
shares of common stock to the public in
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<PAGE>
connection with the IPO. The shares were issued at $6.50 per share before
offering costs and commissions. In addition, the Company issued 180,000 warrants
to the underwriter in connection with the IPO. The warrants are exercisable from
August 2, 2001 through August 2, 2005 at $7.80 per share, with the exercise
price subject to reduction if the Company issues common stock to others at less
than the exercise price. The net proceeds from the IPO after offering costs and
commissions totaled $9,111,087 and were allocated to the common stock issued and
the warrants based upon their relative fair value. Accordingly, $8,640,515 was
allocated to the 1,800,000 shares of common stock, and $470,572 was allocated to
the 180,000 warrants.
Although the amount allocated to the warrants was less than their fair
value, the fair value of the warrants was $636,895 determined using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 6.0%, expected dividend yield of 0%, volatility of 62.49%, and
expected lives of 4.0 years.
1998 SERIES A CONVERTIBLE PREFERRED STOCK
In January 1998, the Company issued 360,000 shares of Series A convertible
preferred stock at a price of $5.00 per share. The Series A convertible
preferred stock was automatically converted into shares of common stock upon the
consummation of the IPO. The Series A convertible preferred stock was
convertible on a one-for-one basis if the IPO price was at least $10.00 per
share, or, if the initial public offering price was less than $10.00 per share,
the conversion rate was $10.00 divided by the IPO price. As a result of the IPO
price being $6.50 per share of common stock, the outstanding shares of the
Series A convertible preferred stock were converted into 553,846 shares of
common stock on August 9, 2000.
Dividends on the Series A convertible preferred stock accrued at 8%
annually through August 9, 2000 and were payable in cash. The annual dividends
applicable to Series A convertible preferred shares were $144,000, or $0.40 per
share. Upon closing the IPO, $250,126 of Series A convertible preferred stock
dividends were due and payable, of which $146,410 were paid through September
30, 2000. The Company is paying the Series A convertible preferred dividends
upon the receipt from stockholders of their Series A convertible preferred stock
certificates for conversion into common stock.
The conversion of the Series A preferred shares was contingent upon an
initial public offering that was outside the control of the stockholders. In
accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," a
contingent beneficial conversion feature was measured at the commitment date but
not recognized until the contingency was resolved. Accordingly, the Company
deferred recording the beneficial conversion feature until the time of the IPO.
In connection with the IPO, the Company recorded the contingent beneficial
conversion feature of $5.00 per Series A share, or $1,800,000, as a dividend to
the Series A convertible preferred stockholders.
1999 SERIES B CONVERTIBLE PREFERRED STOCK
From May through September 1999, the Company issued 2,081,680 shares of
Series B convertible preferred stock at a price of $3.00 per share. Pursuant to
the terms of the Series B convertible preferred stock, the shares were
automatically converted into shares of common stock upon the consummation of the
IPO. The conversion rate was determined by dividing $3.00 by 45% of the IPO
price per share. As a result of the IPO price being $6.50 per share of common
stock, the Series B convertible preferred stock was converted into 2,135,056
shares of common stock on August 9, 2000.
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In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
the Company determined that the holders of the Series B convertible preferred
stock had received a beneficial conversion feature on the dates the Series B
convertible preferred stock was issued. On the date of issuance, the conversion
rate was at the lower of (i) $3.00 per share or (ii) 50% of the IPO price per
share. This beneficial conversion feature was valued at $1,249,008 and was
accrued as a dividend between the date of issuance of the Series B convertible
preferred stock and August 9, 2000, of which $927,638 was recognized during
2000.
On April 12, 2000, the certificate of designation for the Series B
preferred stock was amended to modify the conversion rate to be determined by
dividing $3.00 by 45% of the IPO price per share. By modifying the terms of the
beneficial conversion feature when the value of the common stock was $3.20 per
share, the beneficial conversion feature was increased by $2,498,016. The
increase to the beneficial conversion feature was accrued as a dividend from
April 12, 2000 through August 9, 2000.
The holders of the Series B convertible preferred stock were entitled to
annual cumulative dividends of 6% of their original investment, payable in
common stock. The annual dividend requirement applicable to Series B convertible
preferred stock outstanding was $374,702, or $0.18 per share. The common shares
issued in payment of the stock dividend were valued at their fair value at the
end of each quarter or at the date of the IPO when they were issuable. From
January 1, 2000 through August 9, 2000 when the Series B convertible preferred
stock was converted, the Company accrued common stock dividends of 68,169 shares
with a value of $275,679, related to the Series B convertible preferred stock.
2000 SERIES C CONVERTIBLE PREFERRED STOCK OFFERING
The Company issued $212,500 of 7% secured, subordinated, convertible
promissory notes, 196,150 shares of 7% Series C convertible preferred stock and
warrants to purchase 42,500 shares of common stock at $6.60 per share, in a
private placement offering during March and April 2000. The Company received
$774,636 in proceeds (net of offering costs of $75,364).
The proceeds from the offering were allocated to the financial instruments
issued based upon their relative fair values and resulted in allocating $164,169
to the promissory notes before offering costs of $17,382, $31,875 to the
beneficial debt conversion feature, $535,986 to the Series C convertible
preferred stock and $59,988 to the warrants. While the allocated value of the
warrants was less than their fair value of $71,350, the fair value was measured
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 5%, expected dividend yield of 0%,
volatility of 100%, and expected lives of 3.25 years. The debt issuance costs
were amortized through August 9, 2000 and the discount on the promissory notes
of $48,331 was amortized as interest expense through August 9, 2000.
The Series C convertible preferred stock was issued at a stated value of
$3.25 per share. The outstanding shares of Series C convertible preferred stock
were automatically converted into common stock upon the close of the IPO at the
rate determined by $3.25 divided by 55% of the IPO price of $6.50 per share
which resulted in the issuance of 178,318 shares of common stock.
Dividends on the Series C convertible preferred stock accrued at 7%
annually through August 9, 2000 and were payable in cash. Upon closing the IPO,
$15,016 of Series C convertible preferred stock dividends was payable of which
$6,124 was paid through September 30, 2000. The Company is paying
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the preferred dividends upon the receipt from stockholders of their Series C
convertible preferred stock certificates for conversion into common stock.
OTHER ISSUANCES OF COMMON STOCK AND WARRANTS
On April 13, 2000, the Company issued 200,000 shares of common stock in
connection with the issuance of a 9% secured, subordinated promissory note in
the principal amount of $1,500,000. The Company received $1,472,500, net of
offering costs of $27,500, from the private placement offering.
The proceeds from the offering were allocated to the financial instruments
issued based upon their relative fair values and resulted in allocating
$1,051,769 to the promissory note before offering costs of $19,810 and $440,541
to the common stock. The Company also recorded a discount on the notes payable
of $448,398, which was amortized as interest expense through August 9, 2000.
During the nine months ended September 30, 2000, the Company issued 4,116
shares of common stock to an employee who loaned money to the Company. The
shares were issued as a payment of interest and the value of the shares issued
was $14,250 or $3.46 per share. Additionally, the Company issued 21,841 shares
of common stock to the holders of the 1999 private debt offering who are
entitled to receive shares for the payment of interest. The value of the shares
issued as an interest payment was $72,861 or $3.33 per share.
In August 2000, the Company issued a warrant to purchase 3,000 shares of
common stock to a consultant for services rendered. The warrants are exercisable
for a period of three years from the date of issue at $4.80 per share.
In June 2000, the Company issued 777 shares of common stock to an employee
for services rendered. The shares were valued at $2,485 or $3.20 per share.
During September 2000, the Company issued 12,176 shares of common stock to
stockholders who had been protected from the effects of the reverse stock splits
but who had not been previously identified.
At March 31, 2000, the Company cancelled a note receivable from a
stockholder that was used to purchase shares of common stock. The value of the
note receivable was $450,000. As consideration for the cancellation of the note
receivable, 140,625 shares of common stock were returned to the Company by the
stockholder and retired.
On September 27, 1999, an individual holding 121,875 shares of common stock
and a related promissory note with a principal amount of $390,000 filed for
bankruptcy protection. As a result of the lack of assets in the bankruptcy
estate, there is little likelihood of the Company realizing the note receivable
of $390,000. Accordingly, the note receivable was written down to zero during
the three months ended September 30, 2000. Negotiations with the bankruptcy
trustee have resulted in the understanding that the Company would have to pay
the trustee for the shares of common stock in order for the Company to reacquire
the same. The Company has been authorized by the board of directors to offer to
acquire the 121,875 shares of common stock from the bankruptcy trustee for
$180,000.
NOTE 5 - STOCK OPTIONS AND WARRANTS
STOCK-BASED COMPENSATION
The Company accounts for its stock options issued to directors, officers
and employees under Accounting Principles Board Opinion No. 25 and related
interpretations ("APB 25"). Under APB 25,
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compensation expense is recognized if an option's exercise price on the
measurement date is below the fair value of the Company's common stock. The
Company accounts for options and warrants issued to non-employees in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which
requires these options and warrants be accounted for at their fair value.
FINANCING GRANTS
During the nine months ended September 30, 2000, the Company issued
warrants to purchase 21,025 shares of common stock as payment of interest on
various promissory notes. The exercise price ranged from $1.00 to $4.80. These
options were valued in accordance with SFAS 123 (utilizing the Black-Scholes
option pricing model with the following weighted average assumptions for the
period: fair value of common stock $3.28, risk free interest rate of 6.7%,
expected dividend yield of 0%, volatility of 92.2%, expected life of 2.3 years)
at amounts ranging from $1.98 to $5.62 per share. The Company recorded interest
expense of $45,785 relating to the grant of the warrants.
In connection with the IPO, the Company issued warrants to the underwriter
to purchase up to an aggregate of 180,000 shares of common stock exercisable at
$7.80 per share for a period of four years beginning August 2, 2001. These
warrants contain anti-dilution provisions providing for adjustment of the
exercise price upon the issuance of common stock, or securities exercisable or
convertible into common stock, at a price less than the exercise price, and upon
any recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction.
OTHER GRANTS
During the nine months ended September 30, 2000, the Company issued options
to purchase 125,000 shares of common stock for creative design and preparation
of materials for the IPO. The exercise price was $4.80. These options were
valued at $135,152 in accordance with SFAS 123 (utilizing the Black-Scholes
option pricing model with the following assumptions for the period: fair value
of common stock $3.20, risk free interest rate of 6.7%, expected dividend yield
of 0%, volatility of 83.41%, expected life of 1.8 years) at $1.08 per share. The
Company charged $135,149 relating to the warrants to offering costs of the IPO.
During the nine months ended September 30, 2000, the Company issued 42,500
options in connection with the 7% Series C convertible preferred stock offering,
see Note 4. The Company also issued 180,000 warrants to the underwriter in
connection with the offering, see Note 4.
NON EMPLOYEE GRANTS
During the nine months ended September 30, 2000, the Company issued options
to purchase 333,376 shares of common stock to outside consultants for services.
The exercise prices for these options ranged from $4.00 to $9.60 per share.
These options were valued in accordance with SFAS 123 (utilizing the
Black-Scholes option pricing model with the following weighted average
assumptions: fair value of common stock $3.23, risk free interest rate of 6.7%,
expected dividend yield of 0%, volatility of 86.3%, expected life of 3.3 years)
at amounts ranging from $1.15 to $3.12 per share. The Company recorded an
expense of $589,585 relating to the grant of the options.
EMPLOYEE GRANTS
On February 3, 2000, the Company's board of directors adopted, and on March
29, 2000, a majority of the stockholders approved the creation of the 2000 Stock
Option and Incentive Plan (the
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"2000 Plan") with 2,000,000 shares of common stock reserved for issuance
thereunder. The 2000 Plan provides for the direct award and sale of shares and
for the grant of options to purchase shares. A committee, designated by the
board of directors, administers the 2000 Plan and has the discretion to
determine 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, in shares of the Company's
common stock valued at fair market value on the exercise date or through a
same-day sale program without any cash outlay by the optionee. In the event of a
change in control (as defined in the 2000 Plan), all restrictions on all awards
or sales of shares issued under the plan will lapse and vesting on all
unexercised options will accelerate to the date of the change in control.
During the nine months ended September 30, 2000, the Company issued options
for the purchase of 1,120,775 shares of common stock to certain officers and
employees of the Company pursuant to the 2000 Plan. The exercise prices range
from $3.60 to $9.60 per share. The options are exercisable through August 9,
2003.
SFAS 123 requires pro forma information regarding net loss as if the
Company had accounted for its stock options granted to employees subsequent to
December 31, 1994 under the fair value method of the statement. The fair value
of the stock options was estimated at the grant date using the Black-Scholes
option pricing model. The following weighted average assumptions were used in
the Black-Scholes model for the nine months ended September 30, 2000: fair value
of common stock $3.20, risk-free interest rate of 6.7%, dividend yield of 0%,
volatility of 85.4%, and expected life of 3.3 years, respectively. Following are
the pro forma disclosures and the related impact on the net loss for the nine
months ended September 30, 2000:
<TABLE>
<S> <C>
Loss attributable to common stockholders as reported $ (9,254,252)
Loss attributable to common stockholders pro forma (10,873,996)
Basic and diluted loss per common share as reported (2.93)
Basic and diluted loss per common share pro forma (3.44)
</TABLE>
Due to the nature and timing of option grants, the resulting pro forma
compensation cost may not be indicative of future years.
OUTSTANDING STOCK OPTIONS AND WARRANTS
A summary of stock option and warrant activity for the nine months ended
September 30, 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AND AVERAGE
WARRANTS PRICE RANGE EXERCISE PRICE
-------------- ---------------- -----------------
<S> <C> <C> <C>
Balance, December 31, 1999............................... 866,508 $2.67 - 16.00 $ 4.39
Granted............................................. 1,822,676 1.00 - 9.60 6.63
--------------
Balance, September 30, 2000.............................. 2,689,184 $1.00 - 16.00 $ 5.75
==============
</TABLE>
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A summary of stock option and warrant grants with exercise prices less
than, equal to or greater than the estimated market value on the date of grant
during the nine months ended September 30, 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS AND WEIGHTED FAIR VALUE OF
WARRANTS AVERAGE OPTIONS AND
GRANTED EXERCISE PRICE WARRANTS
-------------- ---------------- -----------------
<S> <C> <C> <C>
Grants with exercise price less than estimated market
value............................................... 11,650 $ 1.07 $ 2.58
Grants with exercise price greater than estimated
market value........................................ 1,811,026 6.66 1.65
</TABLE>
A summary of the options and warrants outstanding and exercisable as of
September 30, 2000 follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
------------------ ---------------- -------------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $2.67 410,583 1.11 years $ 2.62 410,583 $ 2.62
2.68 - 5.33 1,207,057 2.40 years 4.45 1,207,057 4.45
5.34 - 16.00 1,071,544 3.09 years 8.80 864,878 9.07
---------------- ------------------
$1.00 - 16.00 2,689,184 2,482,518
================ ==================
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
In March 1999, a vendor of the Company filed a lawsuit that alleges breach
of contract and seeks payment in the amount of approximately $125,000 from the
Company related to purchases of materials from the vendor. The Company has
responded to the lawsuit, and management believes that the materials delivered
by the vendor were defective. In addition, the Company's costs resulting from
the defective materials are in excess of $120,000. Although the Company, after
consultation with legal counsel, believes that its defenses have merit, it is
unable to predict the outcome of this matter. Management is in the process of
extending a settlement offer to settle the matter with the vendor.
In January 1999, the Company received $288,620 as a loan from an officer
and a then consultant, who is no longer a consultant to the Company. The
proceeds were loaned to the officer and the former consultant by the Riggs
Family Partnership, a third party that had received the proceeds from an
unregistered offering of the Company's common stock. Collectively, the loans
from the officer and the former consultant were subsequently converted into
102,242 shares of Series B convertible preferred stock and 77,353 shares of
common stock. This unregistered offering was performed outside the Company and
without its knowledge. The Company has not been able to determine whether the
unregistered offering was conducted with the benefit of a state or federal
exemption from registration. The Company was not privy to any offering materials
that may have been used or distributed with respect to the offering, and that it
has no independent knowledge regarding the status of the investors. The Company
also maintains that it did not have any control over, or contractual
relationship with, the Riggs
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Family Partnership. In the event a successful claim is asserted against the
Riggs Family Partnership as a result of the unregistered offering, the Company
may be subject to a potential disgorgement of the proceeds received plus
interest. No amount has been reclassified from stockholders' deficit to a
liability in the accompanying financial statements for any possible payments
that may result from the outcome of this unasserted claim.
The Company is the subject of certain legal matters, which it considers
incidental to its business activities. It is the opinion of management, after
discussion with legal counsel, that the ultimate disposition of these legal
matters will not have a material impact on the consolidated financial condition
or results of operations of the Company.
REGISTRATION OF WARRANTS
Under the terms of a 1996 private placement, the Company distributed
offering documents that contained a statement that referred to the right of
holders of 328,000 warrants to join in any registration of the Company's
securities. In August 2000, the Company completed the IPO at $6.50 per share.
Subsequently, the warrant holders have made a demand for the registration of
the underlying shares of common stock. Through negotiations with the warrant
holders, the Company has tentatively agreed to register these shares. The
Company has estimated the cost of the additional registration statement to be
$60,000 with such estimate charged against operations.
The Company is currently negotiating with the warrant holders regarding an
assertion of damages incurred as a result of being excluded from the IPO.
Currently, no resolution has been reached and no estimate can be made, if any,
of damages incurred. Accordingly, no amounts have been accrued in the attached
financial statements.
ADVERTISING AGREEMENT
On March 24, 2000, the Company entered into a letter of agreement with an
advertising agency. Under the terms of the agreement, the advertising agency is
to assist the Company in the development and implementation of the Company's
creative design related to its initial public offering, advertising, marketing
and promotion. The agreement lasts for a term of one year and provides for the
agency to be compensated as follows:
MONTHS ONE THROUGH FOUR. On March 29, 2000, the Company issued
the agency a warrant to purchase 125,000 shares of common stock at
$4.80 per share that were valued at $135,152.
MONTHS FIVE THROUGH TWELVE. The Company is to pay the agency
$43,687 per month in cash. In addition, the Company also agreed to pay
all outside expenses incurred by the agency on behalf of the Company
that are estimated to be $450,000. All amounts will be charged to
operations in the period the services are rendered, except for $87,374
charged as a cost of the IPO.
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FINANCING AGREEMENT
On May 11, 2000, the Company entered into a Master Business Lease Financing
Agreement (the "Financing Agreement"), whereby the Company may receive funding
of up to 150% of the fully burdened cost of its products under the terms of an
open-ended line of credit. The receipt of such funding is subject to certain
conditions precedent, including the satisfaction of certain performance criteria
and the removal of all securities interests on the Company's assets. The Company
is obligated to repay amounts borrowed under the Financing Agreement over a
seven-year term using a formula-based variable interest rate. The products
funded by the equipment financier, and all proceeds generated and derived from
such products, will secure the financing. The Company has not borrowed any funds
under the Financing Agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our financial
statements and notes to our financial statements, included elsewhere in this
report. 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 within the meaning of Section 27A of
the Securities Act of 1933, as amended, or the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
such as statements relating to plans for future expansion, capital spending,
future operations, 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, and changes in federal or state tax laws or
the administration of such laws. A complete discussion of these risks and
uncertainties are contained in our Registration Statement on Form SB-2,
Pre-Effective Amendment No. 4, as filed with the Securities and Exchange
Commission on July 28, 2000 (Commission File No. 333-34882), and the
Company's final prospectus dated August 2, 2000, filed pursuant to Rule
424(b)(4) of the Securities Act.
OVERVIEW
eRoomSystem Technologies, Inc. is a Nevada corporation incorporated on
August 31, 1999. Our core business is the development and installation of an
intelligent, in-room computer platform and communications network, or the
eRoomSystem, for the lodging industry. The eRoomSystem is a computerized
platform and processor-based system designed to collect and control data. The
eRoomSystem supports our fully-automated and interactive eRoomServ Refreshment
Centers, or Refreshment Centers, electronic room safes, or eRoomSafes, and other
proposed applications. These other applications include, or will include,
information management services, in-room energy management capabilities, credit
card/smart card capabilities for direct billing, network access solutions, and
remote engineering and maintenance services.
Our interactive Refreshment Centers provide hotel guests with a selection
of up to 33 different beverages and snacks and offer the lodging industry an
opportunity to capture additional in-room revenues and reduce operating costs.
Our eRoomSafes have sufficient storage space for large items such as laptop
computers, video cameras and briefcases and generate additional revenue. Our
products interface with the hotel's property management system through our
eRoomSystem communications network. The hotel's property management system posts
usage of our products directly to the hotel guest's room account.
The solutions offered by our eRoomSystem and related products have allowed
us to install our products and services in several premier hotel chains,
including Marriott International, Doubletree Hotels and Bass Hotels. We believe
that our hotel relationships will continue to provide us with the opportunity to
install our eRoomSystem and related products worldwide.
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One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected over
eleven million room-nights of data. Through our eRoomSystem, we are able to
collect information regarding the usage of our products on a real-time basis. We
use this information to help our customers increase their operating
efficiencies. We also intend to market this information to suppliers of goods
sold in our Refreshment Centers and to other users desiring information on the
buying patterns of hotel guests for goods and services.
We believe that our eRoomSystem and developing technologies will provide a
foundation for expansion into the healthcare and time-share industries. We will
be able to provide healthcare facilities with a comprehensive room information
and management system that will allow these facilities to provide patients with
a wide array of in-room amenities not available to them in the past. These
amenities will include Refreshment Centers, eRoomSafes, direct dial long
distance, on-demand movies, Internet access and other products and services
commonly found in a hotel room. Similar opportunities exist in the time-share
industry. By offering a direct credit card billing system, a healthcare or
time-share facility can offer similar services available in hotels.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUES
Product Sales -- Revenues from product sales were $32,374 in the three
months ended September 30, 1999 compared to $346,501 in the three months ended
September 30, 2000, representing an increase of $314,127. The increase in
revenues from product sales was due to increased orders and the fulfillment of
orders that we were previously unable to install due to our pre-initial public
offering cash constraints.
Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $110,587 for the three months ended September 30, 1999 and
$92,521 for the three months ended September 30, 2000, representing a decrease
of $18,066, or 16%. The decrease in revenue from revenue sharing arrangements
was due primarily to the transfer of Refreshment Centers to RSi BRE, Inc., an
unconsolidated, wholly owned subsidiary. Because RSi BRE is not consolidated,
the related revenues are not included in our financial statements. Rather, we
record our equity in RSi BRE's income for each respective period. The revenue
sharing revenue for these units was recognized as revenue sharing income during
the three months ended September 30, 1999, and accordingly was not recognized
for the three months ended September 30, 2000.
Maintenance Fee Revenues -- Our maintenance fee revenues were $60,288 for
the three months ended September 30, 1999 and $21,543 for the three months ended
September 30, 2000, representing a decrease of $38,745, or 64%, from the three
months ended September 30, 1999 to the three months ended September 30, 2000.
The decrease was due primarily to the expiration of maintenance contracts
representing 753 units and the transfer of Refreshment Centers to RSi BRE.
Because RSi BRE is not consolidated, the related revenues are not included in
our financial statements. Rather, we record our equity in RSi BRE's income for
each respective period.
COST OF REVENUE
Cost of Product Sales Revenue -- Our cost of product sales revenue for the
three months ended September 30, 1999 was $26,479 compared to $202,835 for the
three months ended September 30, 2000,
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an increase of $176,356, or 66%. The increase was due to the sale of 280
Refreshment Centers during the three months ended September 30, 2000. The gross
margin percentage on revenue from product sales revenue was 18% in the three
months ended September 30, 1999 and 41% in the three months ended September 30,
2000. The increase in gross margin percentage on product sales revenue resulted
from efficiencies obtained in increased production volume.
Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue was
$52,662 during the three months ended September 30, 1999 and $27,799 during the
three months ended September 30, 2000, representing a decrease of $24,863, or
47%. The decrease in the cost of revenue sharing revenue was due to the transfer
of Refreshment Centers to RSi BRE. The gross margin percentage on revenue
sharing revenue was 52% in the three months ended September 30, 1999 and 70% in
the three months ended September 30, 2000. The increase in gross margin
percentage on revenue sharing revenue from the three months ended September 30,
1999 to the three months ended September 30, 2000 resulted from the transfer to
RSi BRE of Refreshment Centers that had more extensive service requirements.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was $59,428
in the three months ended September 30, 1999 and $66,861 in the three months
ended September 30, 2000 representing an increase of $7,433, or 13%. The gross
margin percentage on maintenance revenues was 1% in the three months ended
September 30, 1999 and (210%) in the three months ended September 30, 2000. The
increase in our cost of maintenance revenue and the decrease in gross margin
percentages from the three months ended September 30, 1999 to the three months
ended September 30, 2000 was primarily due to the expense associated with the
repair of a third party manufacturing defect, which expense may be recoverable.
OPERATING EXPENSES
Selling, General and Administrative -- Selling, general and administrative
expenses, exclusive of non-cash compensation expense, were $487,909 in the three
months ended September 30, 1999 and $901,183 in the three months ended September
30, 2000, representing an increase of $413,274, or 84%. Selling, general and
administrative expenses represented 240% of our total revenues in the three
months ended September 30, 1999 and 196% of our total revenues in the three
months ended September 30, 2000. The increase in our selling, general and
administrative expenses from the three months ended September 30, 1999 to the
three months ended September 30, 2000 was primarily due to the increased payroll
and advertising expense in anticipation of increased sales activities. In
addition, we experienced an increase in legal and investor relations expenses in
the three months ended September 30, 2000.
Research and Development Expenses -- Research and development expenses were
$69,314 in the three months ended September 30, 1999 and $83,544 in the three
months ended September 30, 2000, representing an increase of $14,230, or 21%.
Research and development expenses represented 34% of our total revenue in the
three months ended September 30, 1999 and 18% of our total revenue in the three
months ended September 30, 2000. The decrease in research and development
expenses resulted from the reorganization of the research and development
department in an effort to maximize the efficiency of its operation.
Non-Cash Compensation Expense -- Non-cash compensation expense was $0 in
the three months ended September 30, 1999 and $9,366 in the three months ended
September 30, 2000. The non-cash compensation expense recorded in the nine
months ended September 30, 2000 resulted from options and warrants issued.
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OTHER EXPENSE, NET
Other expense was $304,465 in the three months ended September 30, 1999 and
$891,906 in the three months ended September 30, 2000, representing a increase
of $587,441, or 193%. The increase is due primarily to the increase in interest
due to increased borrowings and the write-off of a stockholder receivable from
$390,000 to $0. The stockholder receivable is currently a part of the bankruptcy
estate of the stockholder.
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
We incurred losses attributable to common stockholders of $879,969 and
$5,180,910 during the three months ended September 30, 1999 and 2000,
respectively. The $4,300,941 increase in the loss attributable to common
stockholders was due primarily to decreased gross profit margin, increased
selling, general and administrative expenses, increased interest expense, the
write-off of a $390,000 stockholder receivable and increased dividends related
to convertible preferred stock. We have continued to incur losses subsequent to
September 30, 2000 and, as a result, have experienced an increase in accumulated
deficit. We believe that we will continue to incur losses for a period of time.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUES
Product Sales -- Our revenue from product sales was $32,374 in revenues
from product sales in the nine months ended September 30, 1999 compared to
$2,012,788 in the nine months ended September 30, 2000, representing an increase
of 1,980,414. The increase in revenues from product sales was due to increased
orders and the fulfillment of orders that we were previously unable to install
due to our pre-initial public offering cash constraints.
Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $260,422 for the nine months ended September 30, 1999 and
$155,156 for the nine months ended September 30, 2000, representing a decrease
of $105,266, or 40%. The decrease in revenue from revenue sharing arrangements
was due primarily to the transfer of Refreshment Centers to RSi BRE. Because RSi
BRE is not consolidated, the related revenues are not included in our financial
statements. Rather, we record our equity in RSi BRE's income for each respective
period. The revenue sharing revenue for these units was recognized as revenue
sharing income during the nine months ended September 30, 1999, and accordingly
was not recognized for the nine months ended September 30, 2000.
Maintenance Fee Revenues -- Our maintenance fee revenue was $222,303 for
the nine months ended September 30, 1999 and $110,400 for the nine months ended
September 30, 2000, representing a decrease of $111,903, or 50%, from the nine
months ended September 30, 1999 to the nine months ended September 30, 2000. The
decrease from the nine months ended September 30, 1999 to the nine months ended
September 30, 2000 was due primarily to the expiration of maintenance contracts
representing 753 units and the transfer of Refreshment Centers to RSi BRE.
Because RSi BRE is not consolidated, the related revenues are not included in
our financial statements. Rather, we record our equity in RSi BRE's income for
each respective period.
COST OF REVENUE
Cost of Product Sales Revenue -- Our cost of product sales revenue during
the nine months ended September 30, 1999 was $26,479 compared to $1,468,891 for
the nine months ended
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September 30, 2000, an increase of $1,442,412. The increase was due to the sale
of 1,624 Refreshment Centers and 907 eRoomSafes during the nine months ended
September 30, 2000. The gross margin percentage on revenue from product sales
revenue was 27% in the nine months ended September 30, 2000 compared to 18% for
the nine months ended September 30, 1999. The increase in gross margin
percentage on product sales revenue resulted from efficiencies obtained in
increased production volume.
Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue was
$143,245 during the nine months ended September 30, 1999 and $36,136 during the
nine months ended September 30, 2000, representing a decrease of $107,109, or
75%. The decrease in the cost of revenue sharing revenue was due to the transfer
of Refreshment Centers to RSi BRE. The gross margin percentage on revenue
sharing revenue was 45% in the nine months ended September 30, 1999 and 77% in
the nine months ended September 30, 2000. The increase in gross margin
percentage on revenue sharing revenue from the nine months ended September 30,
1999 to the nine months ended September 30, 2000 resulted from the transfer to
RSi BRE of Refreshment Centers that had more extensive service requirements.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was $95,590
in the nine months ended September 30, 1999 and $74,762 in the nine months ended
September 30, 2000 representing a decrease of $20,808, or 22%. The gross margin
percentage on maintenance revenues was 57% in the nine months ended September
30, 1999 and 32% in the nine months ended September 30, 2000. The decrease in
our cost of maintenance revenue from the nine months ended September 30, 1999 to
the nine months ended September 30, 2000 was mainly due to the expiration of
contracts representing 1,058 units. The decrease in gross margin percentage from
the nine months ended September 30, 1999 to the nine months ended September 30,
2000 was primarily due to the expense associated with the repair of a third
party manufacturing defect that may be recoverable.
OPERATING EXPENSES
Selling, General and Administrative -- Selling, general and administrative
expenses, exclusive of non-cash compensation expense, were $1,252,404 in the
nine months ended September 30, 1999 and $2,066,595 in the nine months ended
September 30, 2000, representing an increase of $814,181, or 65%. Selling,
general and administrative expenses represented 243% of our total revenues in
the nine months ended September 30, 1999 and 91% of our total revenues in the
nine months ended September 30, 2000. The increase in selling, general and
administrative expenses from the nine months ended September 30, 1999 to the
nine months ended September 30, 2000 was primarily due to the increased payroll
and advertising expense in anticipation of increased sales activities. In
addition, the Company experienced an increase in legal and investor relations
expenses in the nine months ended September 30, 2000.
Research and Development Expenses -- Research and development expenses were
$206,530 in the nine months ended September 30, 1999 and $187,932 in the nine
months ended September 30, 2000, representing a decrease of $18,598, or 9%.
Research and development expenses represented 40% of our total revenue in the
nine months ended September 30, 1999 and 8% of our total revenue in the nine
months ended September 30, 2000. The decrease in research and development
expenses resulted from the reorganization of the research and development
department in an effort to maximize the efficiency of its operation.
Non-Cash Compensation Expense -- Non-cash compensation expense was $0 in
the nine months ended September 30, 1999 and $503,676 in the nine months ended
September 30, 2000. The non-cash compensation expense recorded in the nine
months ended September 30, 2000 resulted from options and warrants issued.
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OTHER EXPENSE, NET
Other expense was $956,893 in the nine months ended September 30, 1999 and
$1,590,673 in the nine months ended September 30, 2000, representing an increase
of $633,780, or 66%. The increase is due primarily to interest expense and the
write-off of a stockholder receivable from $390,000 to $0.
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
We incurred losses attributable to common stockholders of $2,320,017 and
$9,254,252 during the nine months ended September 30, 1999 and 2000,
respectively. The $6,934,235 increase in the loss attributable to common
stockholders was due primarily to increased selling, general and administrative
expenses, the non-cash compensation expense discussed above, increased interest
expense, the write-off of a $390,000 stockholder receivable and a $5,449,956
increase in dividends related to convertible preferred stock. We have continued
to incur losses subsequent to September 30, 2000 and, as a result, have
experienced an increase in accumulated deficit. We believe that we will continue
to incur losses for a period of time.
LIQUIDITY AND CAPITAL RESOURCES
On August 9, 2000, we consummated our initial public offering for 1,800,000
shares of common stock (the "IPO"). The Company received gross proceeds of $11.7
million and, after deducting the underwriting discounts and commissions and the
offering expenses, net proceeds of approximately $9.86 million. The Company has
also registered 270,000 shares of common stock pursuant to the same registration
statement as part of an over-allotment option granted to the underwriters. The
underwriters had 30 days from the effective date of the registration statement,
or until September 1, 2000, to exercise the over-allotment option, but did not
do so. The net offering proceeds have been and will be used for funding the
production and installation of our products and services, the repayment of a
substantial portion of our outstanding indebtedness and related accrued
interest, the payment of cash dividends on our Series A and Series C convertible
preferred stock, our advertising and promotional expenses, additional research
and development to improve our existing products and services and to develop our
future products and services, and general corporate purposes and working
capital.
As of September 30, 2000, we had cash of $5,427,460 and working capital of
$4,712,819 compared to cash of $113,252 and a working capital deficit of
$2,650,616 at December 31, 1999. The increases in cash and working capital were
the result of cash provided by the IPO, net of cash being used in operations,
investment in RSi BRE, increases in inventories and decreases in deferred
offering and financing costs. These uses of cash were offset, in part, by the
proceeds from our Series C convertible preferred stock offering and the proceeds
from the issuance of promissory notes. Our stockholders' equity improved from a
deficit of $23,852 at December 31, 1999 to stockholders' equity of $7,652,722 at
September 30, 2000. The improvement in stockholders' equity primarily resulted
from proceeds of the IPO, net of the net loss for the nine months ended
September 30, 2000. Our accumulated deficit increased from $13,684,041 at
December 31, 1999 to $22,938,292 at September 30, 2000. The increase in
accumulated deficit resulted primarily from the triggering of a beneficial
conversion feature at the time of the IPO and the net loss from operations. We
anticipate that our accumulated deficit will continue to increase for a period
of time.
We believe that our current cash on hand and the funds from our long-term
equipment financing arrangement will be sufficient to meet our capital
expenditures and working capital requirements, including those from our planned
expansion, for at least the next twelve months. However, we may need
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to raise additional funds to support more rapid expansion, respond to
competitive pressures, invest in our new technology offerings and other product
offerings or respond to unanticipated requirements. We cannot assure you that
additional financing will be available to us in amounts or on terms acceptable
to us. If sufficient funds are not available or are not available on acceptable
terms, our ability to fund our expansion, take advantage of additional product
development opportunities, develop or enhance our products or services, or
otherwise respond to competitive pressures could be significantly limited.
Our net cash used in operating activities for the nine months ended
September 30, 2000 was $2,217,450. Cash used in operating activities was
primarily attributable to a net loss of $3,650,321, excluding non-cash
compensation expense of $503,676. Our net cash used in operating activities for
the nine months ended September 30, 1999 was $527,271. Cash used in operating
activities was primarily attributed to increases in inventory and offset by
increases in accrued liabilities.
Our primary investing activities have historically consisted of
expenditures relating to our revenue sharing program and for property and
equipment. Net cash used in investing activities was $1,868,620 and $972,794 in
the nine months ended September 30, 1999 and 2000, respectively. Investing
activities for the nine months ended September 30, 2000 consisted of an increase
of refreshment centers placed in service, purchases of property and equipment
and additional investments in RSi BRE. Investing activities for the nine months
ended September 30, 1999 consisted of additions to refreshment centers in
service and purchases of property and equipment. We expect our investing
activity to continue to increase in the fourth quarter of 2000 due to an
increased placement of our products under our revenue sharing program.
Additionally, we anticipate that we will experience an increase in our capital
expenditures and lease commitments for property and equipment consistent with
anticipated growth in operations, infrastructure and personnel.
Our financing activities provided $8,504,452 of cash for the nine months
ended September 30, 2000 compared to $2,500,697 for the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, cash provided
from financing activities consisted of $2,164,169 from borrowings, $685,831
received from the sale of preferred stock and warrants and $9,217,231 received
from the IPO. For the nine months ended September 30, 1999, cash provided from
financing activities consisted of $504,806 received from the sale of notes
payable to officers and stockholders and $2,391,755 received from the sale of
preferred stock and warrants.
As of September 30, 2000, our debt, secured by our assets, consisted of
$120,000 in notes issued in a 1996 private debt offering, $127,500 in notes
issued in a 1997 private debt/equity offering, a $100,000 note payable to an
individual and $67,795 in notes issued in a 2000 private debt/equity offering.
As of September 30, 2000, our unsecured debt consisted of $7,468 in notes
payable to a bank and secured by vehicles, a $6,062 note due to an individual
and $60,007 of capital lease obligations. As of September 30, 2000, we paid off
a significant portion of our debt obligations.
With respect to our material commitments, we have entered into operating
leases for our facilities and equipment and have entered into employment
agreements with certain officers and key employees. We operate our facilities
and equipment under non-cancelable operating leases with future minimum rental
payments of $132,886, $119,836 and $104,030 for the years ending December 31,
2000, 2001 and 2002, respectively. The future minimum lease payments on
capitalized leases are calculated to be $35,728, $35,728 and $27,776 for the
years ending December 31, 2000, 2001 and 2002, respectively. Under our current
agreements with our officers and key employees, we will pay base salaries of
$829,592, $951,500 and $192,500 for the years ending December 31, 2000, 2001 and
2002, respectively. The decrease in base salaries for the year ended December
31, 2002 relates to the expiration of a
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substantial number of our current agreements with our officers and key employees
during such period. In addition, the Company intends to hire an executive vice
president of sales and marketing at an anticipated annual base salary of
$120,000.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our products require a limited amount of assembly at our facility in the
United States. We purchase refrigerators from suppliers in Mexico, Italy and
China on a purchase order basis in U.S. Dollars. All other components for our
products are purchased from suppliers based in the United States. Our products
are primarily marketed in the United States, the Bahamas and Brazil, and we
intend to further expand our marketing to the international lodging market and
to other industries domestically and internationally. As a result, our financial
results could be affected by weak economic conditions in foreign markets.
Because all of our revenues will be denominated in U.S. Dollars, a strengthening
of the dollar could make our products less competitive in foreign markets.
As we expand operations internationally, we will continue to evaluate our
foreign currency exposures and risks and develop appropriate hedging or other
strategies to manage those risks. We have not revised our current business
practices to conform to Europe's conversion to the Euro.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 2, 1999, Willow Creek Systems, Inc., a former supplier of circuit
boards, brought an action against us that is currently pending in Salt Lake
County Third District Court, State of Utah, Civil No. 99-0902417. Willow Creek
is no longer an operating entity. In its complaint, Willow Creek alleges breach
of contract and seeks payment in the amount of approximately $125,000 from us
for materials delivered pursuant to purchase orders. In our answer to Willow
Creek's amended complaint and our Responses to Willow Creek's First Set of
Interrogatories, Requests for Admissions and Request for Production of
Documents, we allege that the materials delivered by Willow Creek were
defective, lacked quality control and were below acceptable standards in the
industry. In addition, we allege that the costs of repairing and replacing the
defective materials, the costs during down time for such repair and replacement
and other related costs are in excess of $120,000, which we believe should be
offset against Willow Creek's claim for damages. Although we believe that our
documentation on this matter is sufficient to support our claims, we are unable
at this time to predict the exact outcome of the matter. We intend to solicit
the plaintiff in the Willow Creek matter for the purpose of submitting to
alternative dispute resolution. We anticipate that this matter will be settled
in the three months ending December 31, 2000.
On September 27, 1999, Royal W. Minson II, our former president and chief
operating officer, filed for protection in the United States Bankruptcy Court
for the Northern District of California, Case No. 99-47533-TD-7, under Chapter 7
of the United States Bankruptcy Code. Prior to the filing, Mr. Minson received
121,875 shares of our common stock upon the exercise of options and executed
demand promissory notes in the aggregate original principal amount of $568,750
to pay for the shares. The bankruptcy schedules list Mr. Minson's shares as an
asset and the demand promissory notes as liabilities. On January 5, 2000, the
Bankruptcy Court entered a discharge order. We have filed a proof of claim for
the demand promissory notes executed by Mr. Minson, plus accrued interest on
such notes. We have negotiated with the bankruptcy trustee for the reacquisition
of the shares. On November 8, 2000, we submitted to the bankruptcy trustee a
final cash offer of $180,000 relating to the acquisition of the 121,875 shares
of common stock. Based on earlier conversations with the bankruptcy trustee, we
anticipate that our offer will be accepted. Assuming our offer is accepted, we
anticipate retiring the shares to treasury and canceling such shares, or selling
such shares to a third party in a private arms-length third party transaction.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 9, 2000, we completed the initial public offering of our common
stock. The managing underwriter in the offering was Donald & Co. Securities Inc.
Our shares of common stock sold in the offering were registered under the
Securities Act in a Registration Statement on Form SB-2, as amended (File No.
333-34882). The Securities and Exchange Commission declared the Registration
Statement effective on August 2, 2000.
We commenced our offering on August 3, 2000 and consummated our offering on
August 9, 2000 after we had sold 1,800,000 shares of common stock registered
under the Registration Statement. The initial public offering price was $6.50
per share for an aggregate sales price of $11.7 million. We have also registered
270,000 shares of common stock pursuant to the Registration Statement as part of
an over-allotment option granted to Donald & Co. Donald & Co. had 30 days from
the effective date of the Registration Statement, or until September 1, 2000, to
exercise the over-allotment option, but failed to do so.
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We paid underwriting discounts and commissions of $906,750 and a
non-accountable expense allowance of $117,000 to Donald & Co. and offering
expenses of approximately $820,000. None of the expenses related to the offering
were paid directly or indirectly to any of our directors, officers, general
partners or their associates, or to any persons owning 10% or more of any class
of our equity securities, or to any of our affiliates.
We received net proceeds from the offering of approximately $9.2 million
after deducting the underwriting discounts and commissions and the offering
expenses. The net offering proceeds have been and will be used for funding the
production and installation of our products and services, the repayment of a
substantial portion of our outstanding indebtedness and related accrued
interest, the payment of cash dividends on our Series A and Series C convertible
preferred stock, our advertising and promotional expenses, additional research
and development to improve our existing products and services and to develop our
future products and services, and general corporate purposes and working
capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Effective as of November 17, 2000, in an effort to strengthen the
Company's sales and marketing efforts, the Board of Directors has agreed to
change Steven L. Sunyich's duties. Mr. Sunyich has agreed to oversee the
sales and marketing division and to direct the research and development
efforts of the Company. In addition, Mr. Sunyich will continue to serve as
Chairman of the Board of Directors, but will step down as Chief Executive
Officer. Under the direction of the Compensation Committee, the Company will
commence a search for a new Chief Executive Officer. In the interim, the
Company's President and Chief Operating Officer, Stephen M. Nelson, will act
as interim Chief Executive Officer.
We intend to file a registration statement on Form SB-2 in the three months
ending December 31, 2000 for the purpose of registering the 328,800 shares of
common stock underlying certain warrants issued in the 1996 private placement of
12% promissory notes. At this time, the Company does not intend to provide
additional consideration to the holders of such warrants.
We are currently negotiating with Hilton Hotels Corporation, which
previously merged with Promus Hotels Corporation, to expand our exclusive
agreement with Promus Hotels Corporation to include the Hilton Hotels
Corporation chain. Until these negotiations have been successfully completed, we
have halted the installation of our products in Doubletree hotels,
notwithstanding the purchase and November 2000 installation of 460 refreshment
centers in the Doubletree Guest Suites New York.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See the exhibits listed on the Exhibit Index following the signature page
of this Quarterly Report on Form 10-QSB which is incorporated herein by
reference.
(b) Reports on Form 8-K.
None.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eROOMSYSTEM TECHNOLOGIES, INC.
(Registrant)
Date: November 20, 2000 By: /s/ STEPHEN M. NELSON
------------------------------------------
Stephen M. Nelson
Its: President and Chief Operating Officer
--------------------------------------
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
27.01 Financial Data Schedule 32
</TABLE>
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