<PAGE>
U.S. 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: June 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
---------------------------------------------------------
eRoomSystem Technologies, Inc.
--------------------------------------------------------------------------------
(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, (800) 316-3070
--------------------------------------------------------------------------------
(Address of principal executive offices)
(800) 316-3070
--------------------------------------------------------------------------------
(Issuer's telephone number)
N/A
--------------------------------------------------------------------------------
(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 NO X
--------- --------
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:
7,039,091 shares of common stock, $0.001 par value, as of August 9, 2000
--------------------------------------------------------------------------------
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
YES NO X
--------- --------
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION........................................................................................3
ITEM 1. FINANCIAL STATEMENTS..............................................................................3
CONDENSED CONSOLIDATED BALANCE SHEETS............................................................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 OPERATION.............18
PART II - OTHER INFORMATION..........................................................................................25
ITEM 1. LEGAL PROCEEDINGS................................................................................25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................................25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................25
ITEM 5. OTHER INFORMATION................................................................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................25
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PROFORMA
DECEMBER 31, JUNE 30, JUNE 30, 2000
1999 2000 (NOTE 7)
-------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash ...........................................................$ 113,252 $ 949,750 $ 7,638,971
Accounts receivable, net of allowance for doubtful
accounts of $15,000........................................... 40,213 112,352 112,352
Inventories...................................................... 697,033 833,396 833,396
Prepaid expenses and other....................................... 6,250 47,941 47,941
-------------- ---------------- ---------------
TOTAL CURRENT ASSETS....................................... 856,748 1,943,439 8,632,660
-------------- ---------------- ---------------
REFRESHMENT CENTERS IN SERVICE, net of accumulated
depreciation of $3,858 and $5,660, respectively...................... 169,791 131,949 873,501
-------------- ---------------- ---------------
PROPERTY AND EQUIPMENT
Production equipment............................................. 138,908 167,384 167,384
Computer equipment............................................... 171,666 170,162 170,162
Vehicles and other............................................... 76,857 46,380 46,380
-------------- ---------------- ---------------
387,431 383,926 383,926
Less accumulated depreciation and amortization................... (264,946) (286,095) (286,095)
-------------- ---------------- ---------------
NET PROPERTY AND EQUIPMENT................................. 122,485 97,831 97,831
-------------- ---------------- ---------------
INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATED SUBSIDIARY................... 2,535,976 2,648,913 1,907,361
-------------- ---------------- ---------------
OTHER ASSETS
Patents and license rights, net of accumulated amortization
of $222,710 and $256,459...................................... 249,780 216,031 216,031
Deferred offering and financing costs............................ 88,000 1,057,927 --
Deposits and other............................................... 327,851 179,874 179,874
-------------- ---------------- ---------------
TOTAL OTHER ASSETS......................................... 665,631 1,453,832 395,905
-------------- ---------------- ---------------
TOTAL ASSETS............................................................$ 4,350,631 $ 6,275,964 $ 11,907,258
============== ================ ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- ----------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable and current portion of long-term debt, net
of discount of $0, and $299,898, respectively............................. $ 1,560,458 $ 3,053,116
Current portion of capital lease obligations................................. 22,061 25,647
Accounts payable............................................................. 987,013 982,355
Accrued liabilities.......................................................... 332,835 384,914
Accrued interest............................................................. 290,117 559,336
Customer deposits............................................................ 93,470 292,110
Deferred revenue............................................................. 58,868 28,597
Preferred stock dividends payable............................................ 162,542 244,470
-------------- ----------------
TOTAL CURRENT LIABILITIES............................................... 3,507,364 5,570,545
--------------- -----------------
LONG-TERM DEBT, net of current portion............................................. 812,022 809,970
--------------- -----------------
CAPITAL LEASE OBLIGATIONS, net of current portion.................................. 55,097 40,341
--------------- -----------------
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, $0.001 par value; 500,000 shares
authorized; 360,000 shares outstanding at December 31, 1999 and June
30, 2000 and none proforma, respectively; liquidation preference
$3,798,443 at December 31, 1999 and June 30, 2000......................... 1,332,953 1,332,953
Series B convertible preferred stock, $0.001 par value;
2,500,000 shares authorized, 2,081,680 shares outstanding at December
31, 1999 and June 30, 2000 and none proforma; liquidation preference of
$20,816,800 at December 31, 1999 and June 30, 2000........................ 6,171,196 8,048,324
Series C convertible preferred stock, $0.001 par value;
2,000,000 shares authorized, 196,150 shares outstanding at June 30,
2000 and none proforma; liquidation preference of $1,961,500 at
June 30, 2000............................................................. -- 535,986
Undesignated preferred stock, $0.001 par value; 5,000,000
shares authorized; no shares outstanding................................. -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 2,217,291 and 2,352,977 shares outstanding,
respectively, and 7,020,197 shares proforma............................... 2,218 2,353
Additional paid-in capital................................................... 6,265,284 6,540,145
Warrants and options outstanding............................................. 728,538 1,542,730
Notes receivable from stockholders........................................... (840,000) (390,000)
Accumulated deficit.......................................................... (13,684,041) (17,757,383)
-------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................................... (23,852) (144,892)
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)...............................$ 4,350,631 $ 6,275,964
============== ================
<CAPTION>
PROFORMA
JUNE 30, 2000
(NOTE 7)
--------------
(UNAUDITED)
<S> <C>
CURRENT LIABILITIES
Notes payable and current portion of long-term debt, net
of discount of $0, and $299,898, respectively.............................$ 107,635
Current portion of capital lease obligations................................. 25,647
Accounts payable............................................................. 982,355
Accrued liabilities.......................................................... 384,914
Accrued interest............................................................. 164,238
Customer deposits............................................................ 292,110
Deferred revenue............................................................. 28,597
Preferred stock dividends payable............................................ --
--------------
TOTAL CURRENT LIABILITIES............................................... 1,985,496
--------------
LONG-TERM DEBT, net of current portion............................................. 654,964
--------------
CAPITAL LEASE OBLIGATIONS, net of current portion.................................. 40,341
--------------
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, $0.001 par value; 500,000 shares
authorized; 360,000 shares outstanding at December 31, 1999 and June
30, 2000 and none proforma, respectively; liquidation preference
$3,798,443 at December 31, 1999 and June 30, 2000......................... --
Series B convertible preferred stock, $0.001 par value;
2,500,000 shares authorized, 2,081,680 shares outstanding at December
31, 1999 and June 30, 2000 and none proforma; liquidation preference of
$20,816,800 at December 31, 1999 and June 30, 2000........................ --
Series C convertible preferred stock, $0.001 par value;
2,000,000 shares authorized, 196,150 shares outstanding at June 30,
2000 and none proforma; liquidation preference of $1,961,500 at
June 30, 2000............................................................. --
Undesignated preferred stock, $0.001 par value; 5,000,000
shares authorized; no shares outstanding................................. --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 2,217,291 and 2,352,977 shares outstanding,
respectively, and 7,020,197 shares proforma............................... 7,020
Additional paid-in capital................................................... 29,574,763
Warrants and options outstanding............................................. 1,542,730
Notes receivable from stockholders........................................... (390,000)
Accumulated deficit.......................................................... (21,508,056)
--------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................................... 9,226,457
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)...............................$ 11,907,258
==============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ------------------------------------
1999 2000 1999 2000
-------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUE
Product sales..............................$ -- $ 1,666,287 $ -- $ 1,666,287
Revenues sharing arrangements.............. 85,494 53,473 149,835 62,635
Maintenance fees........................... 112,448 48,920 162,015 88,857
------------------- ---------------- ---------------- ---------------
TOTAL REVENUE......................... 197,942 1,768,680 311,850 1,817,779
------------------- ---------------- ---------------- ---------------
COST OF REVENUE
Product sales.............................. -- 1,266,056 -- 1,266,056
Revenue sharing arrangements............... 51,174 1,264 90,583 8,337
Maintenance................................ 30,902 881 36,162 7,901
------------------- ---------------- ---------------- ---------------
TOTAL COST OF REVENUE................. 82,076 1,268,201 126,745 1,282,294
------------------- ---------------- ---------------- ---------------
GROSS MARGIN..................................... 115,866 500,479 185,105 535,485
OPERATING EXPENSES
Selling, general and administrative
(exclusive of non-cash compensation
expense) ............................... 342,053 645,068 764,495 1,165,412
Research and development................... 63,985 54,600 137,216 104,388
Non-cash compensation expense.............. -- 2,485 -- 494,310
------------------- ----------------- ---------------- ---------------
TOTAL OPERATING EXPENSES.............. 406,038 702,153 901,711 1,764,110
------------------- ----------------- ---------------- ---------------
LOSS FROM OPERATIONS............................. (290,172) (201,674) (716,606) (1,228,625)
------------------- ---------------- ---------------- ---------------
OTHER INCOME (EXPENSE)
Interest expense........................... (444,741) (573,784) (786,170) (877,434)
Equity in income of unconsolidated,
wholly owned subsidiary................. -- 73,338 -- 161,634
Interest and other income.................. 66,406 14,697 133,742 17,033
------------------- ---------------- ---------------- ---------------
OTHER EXPENSE, NET.................... (378,335) (485,749) (652,428) (698,767)
------------------- ---------------- ---------------- ---------------
NET LOSS ...................................... (668,507) (687,423) (1,369,034) (1,927,392)
DIVIDENDS RELATED TO CONVERTIBLE
PREFERRED STOCK............................... (35,507) (1,705,193) (71,014) (2,145,950)
------------------- ---------------- ---------------- ---------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.........$ (704,014) $ (2,392,616) $ (1,440,048) $ (4,073,342)
=================== ================ ================ -==============
BASIC AND DILUTED LOSS PER COMMON SHARE..........$ (0.20) $ (1.06) $ (0.40) $ (1.83)
=================== ================ ================ ===============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING..................... 3,576,012 2,258,048 3,556,908 2,227,669
=================== ================ ================ ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------
1999 2000
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...............................................................................$ (1,369,034) $ (1,927,392)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization..................................................... 149,268 75,475
Amortization of deferred financing costs
and accretion of debt discount................................................. 5,261 196,832
Interest accrued on notes receivable from stockholders............................ (131,881) --
Non-cash compensation expense..................................................... -- 494,310
Interest expense paid by issuance of preferred and common
stock, warrants, and stock options............................................. 422,051 194,502
Loss on sale of equipment......................................................... -- 7,638
Undistributed equity in income of unconsolidated subsidiary....................... -- 79,449
Changes in operating assets and liabilities, net of transfers to
unconsolidated subsidiary:
Accounts receivable............................................................... (82,891) (72,139)
Inventories....................................................................... 1,147,199 (128,799)
Prepaid expenses, deposits and other.............................................. (167,290) 140,074
Accounts payable.................................................................. 265,744 64,340
Accrued liabilities............................................................... 326,940 321,298
Other liabilities................................................................. 34,018 168,369
---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................... 599,385 (386,043)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to refreshment centers in service............................................ (3,453) --
Purchase of property and equipment..................................................... (1,465,802) (7,365)
Cash investment in wholly owned, unconsolidated subsidiary............................. -- (192,386)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES............................................. (1,469,255) (199,751)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings............................................................... -- 2,164,169
Principal payments on notes payable.................................................... -- (478,060)
Proceeds from issuance of notes payable to officers
and stockholders.................................................................... 402,000 --
Principal payments on notes payable to stockholder and officer......................... (12,483) --
Principal payments on capital lease obligations........................................ (6,761) (11,170)
Other offering and financing costs paid................................................ -- (938,478)
Proceeds from issuance of preferred stock and warrants................................. 566,875 685,831
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................................... 949,631 1,422,292
---------------- -----------------
NET INCREASE IN CASH......................................................................... 79,761 836,498
CASH AT BEGINNING OF PERIOD.................................................................. 1,850 113,252
---------------- ----------------
CASH AT END OF PERIOD........................................................................$ 81,611 $ 949,750
================ ================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------
1999 2000
---------------- ----------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................................................$ 4,489 $ 7,062
Accrual of preferred stock dividends................................................... 71,014 81,927
Issuance of preferred stock as payment of debt obligations............................. 286,824 --
Issuance of notes receivable for common stock.......................................... 1,590,000 --
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.............................................. 101,868 56,063
Beneficial conversion feature on bridge loan........................................... -- 448,398
Beneficial conversion feature on Series B Preferred Stock.............................. -- 1,877,128
Value of shares issued as a dividend on Series B Preferred Stock....................... -- 186,895
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<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 subsidiary (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 in that
report. 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 July 17, 1998, the Company entered into an Equipment Purchase and
Sale Agreement (the "Equipment Agreement") with RSG Investments, LLC ("RSG"), an
unrelated lender. Under the terms of the Equipment Agreement, RSG paid $1.5
million for the production of approximately 2,270 of the Company's Refreshment
Centers (the "RSG Units") to be installed in six hotel properties in the United
States under revenue sharing agreements. Pursuant to the Equipment Agreement,
title to the RSG Units transferred to RSG and the Company was to repurchase the
RSG Units within 75 days, or by September 30, 1998, subject to certain
extensions. The repurchase price was $1.5 million plus interest at 15% per
annum, and was secured by common stock of the Company, pledged by certain
officers, directors and consultants to the Company, as well as the assets of the
Company. Because of the Company's obligation to repurchase the RSG Units, this
transaction was treated as a collateralized borrowing.
On January 28, 1999, the Company was unable to meet the terms of the
repurchase obligation under the Equipment Agreement and the Equipment Agreement
was in default. RSG granted the Company several extensions to meet the terms
under the Equipment Agreement, the last of which was signed on May 19, 1999. RSG
placed certain conditions on the Company. The failure to meet any of the
conditions would result in RSG's foreclosure on the pledged common stock and the
assets of the Company. On September 28, 1999, the Company and RSG entered into a
settlement agreement. As part of the settlement agreement, the Company formed a
new bankruptcy-remote entity, RSi BRE, Inc., as a wholly owned subsidiary ("RSi
BRE"). The ownership of the RSG Units and the related revenue sharing agreements
were transferred to RSi BRE.
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, of RSi BRE require 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 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 accounted for under the equity
method of accounting.
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At December 31, 1999 and June 30, 2000, the assets and liabilities of
RSi BRE consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
--------------- -----------------
<S> <C> <C>
Cash...................................................................................$ 189,659 $ 33,080
Accounts receivable.................................................................... 66,057 175,623
Inventory.............................................................................. 414,860 --
Refreshment centers in service......................................................... 2,097,363 2,865,636
Accumulated depreciation............................................................... (217,797) (387,274)
Accrued liabilities.................................................................... (4,166) (26,394)
Customer deposits...................................................................... (10,000) (11,758)
---------------- ----------------
Net Assets.............................................................................$ 2,535,976 $ 2,648,913
=============== ================
</TABLE>
For the six months ended June 30, 2000, the revenues and expenses of
RSi BRE consisted of the following:
<TABLE>
<S> <C>
Revenue sharing agreement revenues .................................................$ 357,749
Depreciation........................................................................ (168,841)
Other operating expenses............................................................ (29,138)
Interest income..................................................................... 1,864
-----------------
Net Income..........................................................................$ 161,634
=================
</TABLE>
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 nominee to the Company's board of
directors (the "Board"). The loan is evidenced by a promissory note, bears
interest at the rate of 10% per annum, matures August 15, 2000 and is 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 for two years subsequent to the closing of the Company's initial
public offering, which closed on August 9, 2000 (the "IPO"). See Note 7,
"Subsequent Event (Proforma Balance Sheet)." 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: risk-free interest rate
of 6.7%, volatility of 70.45% and an expected life of 2.30 years. The Company
charged the value of the warrants to interest expense. This loan has been
repaid, in part, from the proceeds of the sale of Refreshment Centers and the
remaining balance will be paid from the proceeds of the IPO.
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 85% of the IPO price, or $5.53 per share,
commencing 30 days following the closing of the IPO on August 9, 2000. These
notes will be repaid from the proceeds of the IPO.
2000 BRIDGE LOAN
On April 13, 2000, the Company issued a $1,500,000, 9% secured,
subordinated promissory note and 200,000 shares of common stock in a private
placement offering. The Company received $1,472,500, net of
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
offering costs of $27,500, in net cash proceeds. This promissory note bears
interest at 9% per annum, payable semi-annually and matured on the closing of
the IPO. This promissory note has been repaid from the proceeds of the IPO.
The proceeds from this private 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 is being amortized as
interest expense through October 13, 2000, with the remaining amortization
being recognized on August 9, 2000, the closing date of the IPO. As of June
30, 2000, $191,120 of the discount had been amortized to interest expense.
SUMMARY OF NOTES PAYABLE
The following comprises notes payable at December 31, 1999 and June
30, 2000:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
2000 2000
-------------------- ------------------
<S> <C> <C>
1996 Notes secured by assets of the Company, in default, interest at 15% per
annum and accruing warrants to purchase common stock
on a monthly basis..................................................................$ 130,000 $ 130,000
1997 Notes secured by assets of the Company, in default, interest at
15% per annum....................................................................... 431,750 431,750
1999 Notes secured by assets of the Company, in default, interest at
15% per annum and accruing shares of common stock on a
monthly basis....................................................................... 35,115 30,000
Note payable to RSG, secured by assets of the Company, $750,000
due August 15, 2000, interest imputed at 41% per annum.............................. 1,555,544 1,555,544
Note payable to a corporation for services performed, in default,
interest at 22% per annum, unsecured................................................ 102,290 158,354
Note payable to an individual, secured by assets of the Company, in
default, interest at 15% per annum.................................................. 100,000 100,000
Note payable to a bank, interest at 10% per annum, due in monthly
installments through June 2002, secured by vehicle.................................. 11,719 8,432
Note payable to an individual, interest at 15% per annum, unsecured....................... 6,062 6,062
2000 Bridge Loan Notes payable, secured by assets of the Company, bearing
interest at 9% per annum, net of discount of $257,279
(see description above)............................................................. -- 1,242,721
2000 Convertible promissory notes, secured by assets of the Company,
bearing interest at 7% per annum, net of $42,619 unamortized
discount (see description above).................................................... -- 169,881
2000 Note payable to a stockholder, interest at 10% per annum, matures
August 15, 2000, secured by the assets of the Company, in addition, the
Company issued a warrant for the purchase of 18,750 shares
of common stock (see description above)............................................. -- 30,342
-------------------- ------------------
Total notes payable and long-term debt.................................................... 2,372,480 3,863,086
Less: current portion..................................................................... (1,560,458) (3,053,116)
------------------- -----------------
$ 812,022 $ 809,970
=================== ==================
</TABLE>
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
None of the above-referenced notes in default have been extended.
However, holders of these notes in default have not taken any action to
foreclose on them. The Company intends to pay off the above-referenced notes
from the proceeds of the IPO.
NOTE 4 - STOCKHOLDERS' EQUITY
On February 2, 2000, with stockholder approval, the Company filed an
amendment and restatement of 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.
On March 29, 2000, and subsequently corrected on May 30, 2000, the
Company filed a second 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.
The Board 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 which are not fixed by the amended
articles of incorporation.
1998 SERIES A CONVERTIBLE PREFERRED STOCK OFFERING
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, on August 9, 2000, on a one-to-one
basis. The conversion rate for the shares of Series A convertible preferred
stock was $10.00 divided by the IPO price. On November 14, 1998, holders of
Series A convertible preferred stock commenced accruing an 8% annual dividend
payable at the rate of $3.00 per share. The stockholders were entitled to an
8% cumulative dividend through the date of conversion. As of June 30, 2000,
holders of Series A convertible preferred stock were owed dividends of
$234,343.
In accordance with EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," the Company will record a dividend to the Series A
convertible preferred stockholders of $1,800,000 upon conversion of the
Series A convertible preferred stock on August 9, 2000. This dividend
represents the contingent beneficial conversion feature of the Series A
convertible preferred stock which accrues to the Series A convertible
preferred stockholders at the date of conversion.
As a result of the closing of the IPO, the 360,000 shares of Series A
convertible preferred stock will be converted into 553,846 shares of our common
stock.
1999 SERIES B CONVERTIBLE PREFERRED STOCK OFFERING
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.
Effective January 1, 2000 and in connection with the Series B convertible
preferred stock offering, the Company agreed to pay an individual a finder's
fee of $51,250 plus interest at 10% (which was paid from proceeds of the IPO)
and issued an option to purchase 1,125 shares of
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
common stock at an exercise price of $4.80 per share. The Company has accounted
for the finders' fee and the fair value of the initial 1,125 options as a cost
of the Series B convertible preferred stock offering.
Pursuant to the terms of the certificate of designation of the
Series B convertible preferred stock, the Series B convertible preferred
stock was automatically converted into shares of common stock upon the
consummation of the IPO on August 9, 2000. Before the modification as
explained below, the Series B convertible preferred stock conversion was at
the lower of (i) $3.00 per share or (ii) 50% of the IPO price per share of
$6.50. 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. The holders of the Series B
convertible preferred stock were entitled to an annual cumulative dividend of
6%, which will be paid in the form of common stock through the date of
conversion. As of June 30, 2000, the Company had accrued common stock
dividends of 54,510 shares with a value of $181,895, related to the Series B
convertible preferred stock.
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 at
the date of issuance. This beneficial conversion feature was valued at
$1,249,008 and is being accrued as a dividend between the date of issuance of
the Series B convertible preferred stock and September 28, 2000, the date
which the Series B convertible preferred stockholders have the right to
convert their shares. 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 is being accrued as a dividend from April
12, 2000 through September 28, 2000. The remaining unaccrued beneficial
conversion feature will be accrued and recognized at August 9, 2000, the
effective date of the IPO. During the six months ended June 30, 2000, the
Company recorded dividends of $1,877,128 to the Series B convertible
preferred stockholders related to this beneficial conversion feature.
As a result of the closing of the IPO, the 2,081,680 shares of Series
B convertible preferred stock will be converted into 2,135,056 shares of our
common stock.
2000 SERIES C CONVERTIBLE PREFERRED STOCK OFFERING
During March and April 2000, 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 the private placement offering. The Company received
$774,636 in proceeds (net of offering costs of $75,364).
The 7% Series C convertible preferred stock was issued at $3.25
per share and was automatically converted into common stock upon the close of
the IPO on August 9, 2000 at the rate determined by $3.25 divided by 55% of
the IPO price per share of $6.50. The promissory notes relating to this
offering bear interest at 7% per annum, are payable semi-annually and mature
on December 31, 2001. The notes may be converted at the option of the holders
into common stock at $5.53 per share, determined based upon 85% of the IPO
price per share of $6.50, commencing 30 days following the closing of the IPO.
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 7% 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 5.0%, expected dividend
yield of 0%, volatility of 100.00%, and expected life of 3.25 years. The debt
issuance costs will be amortized through December 31, 2001. The discount on the
promissory notes of $48,331
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
will be amortized as interest expense through the closing date of the IPO. As of
June 30, 2000, $5,712 of discount had been charged to interest expense. As of
June 30, 2000, holders of Series C convertible preferred stock were owed
dividends of $10,126.
As a result of the closing of the IPO, the 196,150 shares of Series C
convertible preferred stock will be converted into 178,318 shares of our common
stock.
OTHER ISSUANCES OF COMMON STOCK AND WARRANTS
During the six months ended June 30, 2000, the Company issued 3,183
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 $10,186 or $3.20 per share. Additionally, the Company issued 17,841 shares
of common stock to the holders of the a prior private debt offering in 1999 who
are entitled to receive shares for the payment of interest. The value of the
shares was $57,091 or $3.20 per share and charged to interest expense.
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.
At March 31, 2000, the Company cancelled a note receivable from a
stockholder which 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.
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, 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 six months ended June 30, 2000, the Company issued
warrants to purchase 28,186 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 (using the Black-Scholes option
pricing model with the following weighted average assumptions for the period:
risk free interest rate of 6.7%, expected dividend yield of 0%, volatility of
97.98%, expected life of 3 years) at amounts ranging from $1.98 to $2.48. The
Company recorded interest expense of $59,398 relating to the grant of the
warrants.
OTHER GRANTS
During the six months ended June 30, 2000, the Company issued options
to purchase 125,000 shares of common stock for advertising costs. 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: 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. The
Company charged $101,364 of the value of the warrants to deferred offering costs
relating to the IPO and $33,788 were charged to prepaid expense.
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the six months ended June 30, 2000, the Company issued 42,500
options in connection with the 7% Series C convertible preferred stock offering.
See Note 4.
NON EMPLOYEE GRANTS
During the six months ended June 30, 2000, the Company issued options
to purchase 321,001 shares of common stock. The exercise price ranged from $4.00
to $9.60. These options were valued in accordance with SFAS 123 (utilizing the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 6.7%, expected dividend yield of 0%,
volatility of 86.1%, expected life of 3.3 years) at amounts ranging from $1.15
to $1.98 per share. The Company recorded an expense of $491,825 relating to the
grant of the options.
EMPLOYEE GRANTS
On February 3, 2000, the Board adopted, and on March 29, 2000, a
majority of the Company's stockholders approved the creation of the 2000 Stock
Option and Incentive Plan ("2000 Plan") with 2,000,000 shares of common stock
reserved for issuance thereunder. The 2000 Plan provides both the direct award
or sale of shares and for the grant of options to purchase shares. A committee,
designated by the Board, will administer the 2000 Plan and has the discretion to
determine the employees, directors, independent contractors and advisors who
will receive awards, the type of awards (stock, incentive stock options or
non-qualified stock options) to be 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), 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 six months ended June 30, 2000, the Company issued options
for the purchase of 1,120,770 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 the third
anniversary of the closing of the IPO.
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 minimum fair value method of the statement. The
minimum fair value of the stock options was estimated at the grant date by the
Company using the Black-Scholes option pricing model. The following weighted
average assumptions were used in the Black-Scholes model for the six months
ended June 30, 2000: risk-free interest rate of 6.7%, dividend yield of 0%,
volatility of 85.4%, and expected life of 3.3 years. Following are the pro forma
disclosures and the related impact on the net loss for the six months ended June
30, 2000:
<TABLE>
<S> <C>
Loss attributable to common stockholders as reported $ (4,073,342)
Loss attributable to common stockholders pro forma (5,656,348)
Basic and diluted loss per common share as reported (1.83)
Basic and diluted loss per common share pro forma (2.54)
</TABLE>
Due to the nature and timing of option grants, the resulting pro
forma compensation cost may not be indicative of future years.
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OUTSTANDING STOCK OPTIONS AND WARRANTS
A summary of stock option and warrant activity for the six months
ended June 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 ................................................... 1,637,457 1.00 - 9.60 6.51
----------------
Balance, June 30, 2000............................................ 2,503,965 $1.00 - 16.00 $ 5.77
================
</TABLE>
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 six months ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS WEIGHTED AVERAGE WEIGHTED AVERAGE FAIR VALUE
GRANTED EXERCISE PRICE OF OPTIONS AND WARRANTS
-------------------------- ----------------- ---------------------------
<S> <C> <C> <C>
Grants with exercise price less than estimated
market value...................................... 9,436 $ 1.09 $ 2.46
Grants with exercise price greater than estimated
market value...................................... 1,628,021 6.54 1.44
</TABLE>
A summary of the options and warrants outstanding and exercisable as
of June 30, 2000 follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF EXERCISE NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
--------------------- ------------------ --------------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$1.00 - $2.67 407,365 1.40 years $ 2.63 407,364 $ 2.63
2.68 - 5.33 1,205,056 2.63 years 4.45 1,205,056 4.45
5.34 - 16.00 891,544 2.97 years 9.01 828,690 9.06
------------------ ------------------
2,503,965 2,441,110
================== ==================
</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.
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.
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ADVERTISING AGREEMENT
On March 24, 2000, the Company entered into a letter of agreement
with an advertising agency. Under the terms of this agreement, the advertising
agency is to assist the Company in the development and implementation of the
Company's creative design related to its advertising, marketing and promotion.
This agreement lasts for a term of one year and provides for the advertising
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 which were valued at $135,152. The Company
charged $101,364 of the value of the warrants to deferred offering
costs relating to the proposed IPO and will be charged to equity when
the IPO concludes. The remaining $33,788 was charged to prepaid
expense and will be charged to operations when the services occur,
which is projected to be during the third fiscal quarter.
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 which are estimated to be $450,000. All amounts will
be charged to operations in the period the services are rendered.
FINANCING AGREEMENT
On May 11, 2000, the Company entered into a Master Business Lease
Financing Agreement (the "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 Company is obligated to repay amounts borrowed
under the Agreement over a seven-year term using a formula-based variable
interest rate. The financing under this Agreement will be secured by products
funded by the equipment financier and all proceeds generated and derived from
such products.
NOTE 7 - SUBSEQUENT EVENT (PROFORMA BALANCE SHEET)
On August 9, 2000, the Company completed a public offering of its
common stock. The Company issued 1,800,000 shares of common stock at $6.50 per
share for proceeds of $10,792,800 net of the underwriters discount of $907,200.
The Company had incurred $1,019,304 (which includes a non-cash portion of
$101,364) of other offering costs relating to the public offering. As part of
the public offering all three Series of convertible preferred stock were
converted into 2,867,220 shares of common stock computed as follows:
<TABLE>
<S> <C> <C> <C>
SERIES A 360,000 shares of Series A x $10.00 = 553,846 shares of
convertible preferred stock -------------------------------- common stock
$6.50 (IPO price)
SERIES B 2,081,680 shares of Series B x $3.00 = 2,135,056 shares of
convertible preferred stock -------------------------------- common stock
0.45 x $6.50 (IPO price)
SERIES C 196,150 shares of Series C x $3.25 = 178,318 shares of
convertible preferred stock -------------------------------- common stock
0.55 x $6.50 (IPO price)
</TABLE>
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
With the proceeds of the public offering, the Company will pay
certain notes payable, including accrued interest, and will pay all accrued
dividends associated with the Series A and Series C convertible preferred stock.
The accompanying proforma balance sheet as of June 30, 2000 reflects the
following events as if they occurred on June 30, 2000:
- The issuance of 1,800,000 shares of common stock for
$9,773,496, net of $1,926,504 in offering costs.
- Conversion of 360,000 shares of Series A convertible
preferred stock, 2,081,680 shares of Series B convertible
preferred stock and 196,150 shares of Series C convertible
preferred stock into 2,867,220 shares of common stock.
- The recognition of $3,348,526 of preferred dividends from
amortization of the beneficial conversion feature
associated with the conversion of the Series A and Series B
convertible preferred stock.
- The payment of $3,838,438 in debt obligations comprising
$3,400,385 in notes payable, $395,099 in accrued interest
and $42,954 of interest and penalties. As a result of these
debt payoffs, $338,521 of debt discounts and deferred
financing costs were immediately amortized.
- The payment of $265,142 of preferred stock dividends.
- Based on the paydown of a note payable, $775,518 of
refreshment centers were distributed from RSi BRE, a wholly
owned, unconsolidated subsidiary.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
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 gaming industry, the success
of our product-development, marketing and sales activities, vigorous competition
in the gaming industry, dependence on existing management, gaming regulations
(including actions affecting licensing and product approvals), 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).
OVERVIEW
eRoomSystem Technologies 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.
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 include Refreshment Centers,
eRoomSafes,
<PAGE>
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 JUNE 30, 2000 AND 1999
REVENUES
Product Sales -- We recognized $1,666,287 in revenues from product
sales in the three months ended June 30, 2000 compared to no revenues from
product sales in the three months ended June 30, 1999. The increase in revenues
from product sales was due to the fulfillment of orders that we were previously
unable to install due to cash constraints.
Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $85,494 for the three months ended June 30, 1999 and $53,473
for the three months ended June 30, 2000, representing a decrease of $32,021, or
37%. The decrease in revenue from revenue sharing arrangements was due primarily
to the transfer of Refreshment Centers to RSi BRE, 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
June 30, 1999.
Maintenance Fee Revenues -- Our maintenance fee revenues were
$112,448 for the three months ended June 30, 1999 and $48,920 for the three
months ended June 30, 2000, representing a decrease of $63,528, or 56%, from the
three months ended June 30, 1999 to the three months ended June 30, 2000. The
decrease from the three months ended June 30, 1999 to the three months ended
June 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 -- Although we did not realize any cost
of product sales revenue during the three months ended June 30, 1999, we
realized $1,266,056 in costs of product sales revenue during the three months
ended June 30, 2000. The increase was due to the sale of 1,346 Refreshment
Centers and 908 eRoomSafes during the three months ended June 30, 2000. The
gross margin percentage on revenue from product sales revenue was 24% in the six
months ended June 30, 2000.
Cost of Revenue Sharing Revenue -- Our cost of revenue sharing
revenue was $51,174 during the three months ended June 30, 1999 and $1,264
during the three months ended June 30, 2000, representing a decrease of $49,910,
or 98%. 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 40% in the three months ended June 30, 1999 and 98%
in the three months ended June 30, 2000. The increase in gross margin percentage
on revenue sharing revenue from the three months ended June 30, 1999 to the
three months ended June 30, 2000 resulted from the transfer to RSi BRE of
Refreshment Centers that had greater service requirements.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was
$30,902 in the three months ended June 30, 1999 and $881 in the three months
ended June 30, 2000 representing a decrease of $30,021, or 97%. The gross margin
percentage on maintenance revenues was 73% in the three months ended June 30,
1999 and 98% in the three months ended June 30, 2000. The decrease in our cost
of maintenance revenue from the three months ended June 30, 1999 to the three
months ended June 30, 2000 was mainly due to the expiration of contracts
representing 1,058 units. The increase in gross margin percentage from the three
months ended June 30, 1999 to the three months ended June 30, 2000 was mainly
due to the reduced costs associated with the cost of maintenance revenue.
<PAGE>
OPERATING EXPENSES
Selling, General and Administrative -- Selling, general and
administrative expenses, exclusive of non-cash compensation expense, were
$342,053 in the three months ended June 30, 1999 and $645,068 in the three
months ended June 30, 2000, representing an increase of $303,015, or 89%.
Selling, general and administrative expenses represented 173% of our total
revenues in the three months ended June 30, 1999 and 36% of our total revenues
in the three months ended June 30, 2000. The increase in our selling, general
and administrative expenses from the three months ended June 30, 1999 to the
three months ended June 30, 2000 was primarily due to the increased payroll and
advertising expense in anticipation of increased sales activities.
Research and Development Expenses -- Research and development
expenses were $63,985 in the three months ended June 30, 1999 and $54,600 in the
three months ended June 30, 2000, representing a decrease of $9,385, or 15%.
Research and development expenses represented 32% of our total revenue in the
three months ended June 30, 1999 and 3% of our total revenue in the three months
ended June 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.
Other Income (Expense), Net -- Other expense was $378,335 in the
three months ended June 30, 1999 and $485,749 in the three months ended June 30,
2000, representing a increase of $107,414, or 28%. The increase is due primarily
to the increase in interest due to increased borrowings.
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
We incurred losses attributable to common stockholders of $704,014
and $2,392,616 during the three months ended June 30, 1999 and 2000,
respectively. The $1,688,602 increase in the loss attributable to common
stockholders was due primarily to decreased gross profit margin and increased
non-cash compensation expense and interest expense associated with increased
debt. We have continued to incur losses subsequent to June 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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Product Sales -- We recognized $1,666,287 in revenues from product
sales in the six months ended June 30, 2000 compared to no revenues from product
sales in the six months ended June 30, 1999. The increase in increase in
revenues from product sales was due to the fulfillment of orders that we were
previously unable to install due to cash constraints.
Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $149,835 for the six months ended June 30, 1999 and $62,635 for
the six months ended June 30, 2000, representing a decrease of $87,200, or 58%.
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 three months ended June 30, 1999.
Maintenance Fee Revenues -- Our maintenance fee revenues were
$112,448 for the three months ended June 30, 1999 and $48,920 for the three
months ended June 30, 2000, representing a decrease of $63,528, or 56%, from the
three months ended June 30, 1999 to the three months ended June 30, 2000. The
decrease from the three months ended June 30, 1999 to the three months ended
June 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.
<PAGE>
Maintenance Fee Revenues -- Our maintenance fee revenues were
$162,015 for the six months ended June 30, 1999 and $88,857 for the six months
ended June 30, 2000, representing a decrease of $73,158, or 45%, from the six
months ended June 30, 1999 to the six months ended June 30, 2000. The decrease
from the six months ended June 30, 1999 to the six months ended June 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 -- Although we did not realize any cost
of product sales revenue during the six months ended June 30, 1999, we realized
$1,266,056 in costs of product sales revenue during the six months ended June
30, 2000. The increase was due to the sale of 1,346 Refreshment Centers and 908
eRoomSafes during the six months ended June 30, 2000. The gross margin
percentage on revenue from product sales revenue was 24% in the six months ended
June 30, 2000.
Cost of Revenue Sharing Revenue -- Our cost of revenue sharing
revenue was $90,583 during the six months ended June 30, 1999 and $8,337 during
the six months ended June 30, 2000, representing a decrease of $82,246, or 91%.
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 40% in the six months ended June 30, 1999 and 87% in the six months
ended June 30, 2000. The increase in gross margin percentage on revenue sharing
revenue from the six months ended June 30, 1999 to the six months ended June 30,
2000 resulted from the transfer to RSi BRE of Refreshment Centers that had
greater service requirements.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was
$36,162 in the six months ended June 30, 1999 and $7,901 in the six months ended
June 30, 2000 representing a decrease of $28,261, or 78%. The gross margin
percentage on maintenance revenues was 78% in the six months ended June 30, 1999
and 91% in the six months ended June 30, 2000. The decrease in our cost of
maintenance revenue from the six months ended June 30, 1999 to the six months
ended June 30, 2000 was mainly due to the expiration of contracts representing
1,058 units. The increase in gross margin percentage from the six months ended
June 30, 1999 to the six months ended June 30, 2000 was mainly due to the
reduced costs associated with the cost of maintenance revenue.
OPERATING EXPENSES
Selling, General and Administrative -- Selling, general and
administrative expenses, exclusive of non-cash compensation expense, were
$764,495 in the six months ended June 30, 1999 and $1,165,412 in the six months
ended June 30, 2000, representing an increase of $400,917, or 52%. Selling,
general and administrative expenses represented 245% of our total revenues in
the six months ended June 30, 1999 and 64% of our total revenues in the six
months ended June 30, 2000. The increase in selling, general and administrative
expenses from the six months ended June 30, 1999 to the six months ended June
30, 2000 was primarily due to the increased payroll and advertising expense in
anticipation of increased sales activities.
Research and Development Expenses -- Research and development
expenses were $137,216 in the six months ended June 30, 1999 and $104,388 in the
six months ended June 30, 2000, representing a decrease of $32,828, or 24%.
Research and development expenses represented 44% of our total revenue in the
six months ended June 30, 1999 and 6% of our total revenue in the six months
ended June 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 six months ended June 30, 1999 and $494,310 in the six months ended June
30, 2000. The non-cash compensation expense recorded in the six months ended
June 30, 2000 resulted from options and warrants issued.
<PAGE>
Other Income (Expense), Net -- Other expense was $652,428 in the six
months ended June 30, 1999 and $698,767 in the six months ended June 30, 2000,
representing an increase of $46,339, or 7%. The increase is due primarily to
interest expense.
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
We incurred losses attributable to common stockholders of $1,440,048
and $4,073,342 during the six months ended June 30, 1999 and 2000, respectively.
The $2,633,294 increase in the loss attributable to common stockholders was due
primarily to the non-cash compensation expense discussed above and a $2,074,936
increase in dividends related to our convertible preferred stock. We have
continued to incur losses subsequent to June 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
PROFORMA LIQUIDITY AND CAPITAL RESOURCES
On August 9, 2000, we consummated the IPO for 1,800,000 shares of
common stock. 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
have 30 days from the effective date of the registration statement, or until
September 1, 2000, to exercise the over-allotment option. The net offering
proceeds have been and will be used for the 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.
On a pro forma basis giving effect to completion of the IPO, as of
June 30, 2000, we had cash of $7,638,971 and working capital of $6,647,164
compared to cash of $113,252 and 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 increases 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. On a pro forma basis giving effect to the IPO, our
stockholders' equity improved from a deficit of $23,852 at December 31, 1999 to
stockholders' equity of $9,226,457 at June 30, 2000. The improvement in
stockholders' equity primarily resulted from proceeds of the IPO, net of the net
loss for the six months ended June 30, 2000.
We believe that our current cash on hand, after receiving
approximately $777,750 of net proceeds from the sale of units consisting of
Series C convertible preferred stock, convertible promissory notes and warrants
to purchase common stock, the $500,000 loan dated February 15, 2000 from Ash
Capital, the $1.5 million bridge loan dated April 13, 2000 from a group of
investors, together with the net proceeds of approximately $9.86 million from
our initial public offering 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 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 would be significantly limited.
<PAGE>
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had cash of $949,750 and a working capital
deficit of $3,627,106 compared to cash of $113,252 and a working capital deficit
of $2,650,616 at December 31, 1999. The decreases in working capital were the
result of cash being used in operations, investment in RSi BRE, and increases in
inventories. 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 and other borrowings. Our stockholders' deficit increased
from $23,852 at December 31, 1999 to $144,892 at June 30, 2000. The increase in
stockholders' deficit primarily resulted from the net loss for the six months
ended June 30, 2000 net of proceeds received from equity financing. We
anticipate that our accumulated deficit will continue to increase for a period
of time.
Our net cash used in operating activities for the six months ended
June 30, 2000 was $386,043. Cash used in operating activities was primarily
attributable to a net loss of $1,433,082, excluding non-cash compensation
expense of $494,825. Our net cash provided by operating activities for the six
months ended June 30, 1999 was $599,385. Cash provided by operating activities
was primarily attributed to utilization of inventory offset by increases in
accounts payable and accrued liabilities.
Our primary investing activities have historically consisted of
expenditures relating to our revenue sharing program and for property and
equipment. Cash used in investing activities was $1,469,255 and $199,751 in the
six months ended June 30, 1999 and 2000, respectively. Investing activities for
the six months ended June 30, 2000 consisted of purchases of property and
equipment and additional investments in RSi BRE and investing activities for the
six months ended June 30, 1999 consisted of additions to products in service and
purchases of property and equipment. We expect our investing activity to
increase significantly in the third and 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 $1,422,292 of cash for the six
months ended June 30, 2000. For the six months ended June 30, 2000, cash
provided from financing activities consisted of $2,164,169 from borrowings and
$685,831 received from the sale of preferred stock and warrants. Our financing
activities provided $949,631 of cash for the six months ended June 30, 1999. For
the six months ended June 30, 1999, cash provided from financing activities
consisted of $402,000 received from the sale of notes payable to officers and
stockholders and $566,875 received from the sale of preferred stock and
warrants.
As of June 30, 2000, our debt, secured by our assets, consisted of
$130,000 in notes issued in a 1996 private debt offering, $431,750 in notes
issued in a 1997 private debt/equity offering, $30,000 in notes issued in a 1999
private debt offering, a $1,555,544 obligation payable to RSG Investments,
$1,242,721 in notes issued in a 2000 private debt offering, a $100,000 note
payable to an individual and a $30,342 note payable to a company. In connection
with the restructuring of the obligation payable to RSG Investments, the
carrying amount now consists of a $750,000 promissory note and $805,544 payable
from the future cash flow stream of the units held by RSi BRE. As of June 30,
2000, our unsecured debt consisted of a $158,354 note payable to a corporation
for services performed, $8,432 in notes payable to a bank and secured by
vehicles, a $6,062 note an individual, a convertible promissory note $169,881,
as well as $65,988 of capital lease obligations. As of June 30, 2000, we had an
accumulated deficit of $17,757,383, and we were in default under a significant
portion of our debt obligations. Additionally, we were past due with several of
our accounts payable vendors which could affect our ability to procure inventory
and services for our operations. We need to obtain additional financing to fund
payment of past due and current debt obligations and to provide working capital
for operations.
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,
<PAGE>
2001 and 2002, respectively. The decrease in base salaries for the year ended
December 31, 2002 relates to the expiration of a 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 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
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. has 30
days from the effective date of the Registration Statement, or until September
1, 2000, to exercise the over-allotment option.
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 $9.86
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.
As discussed in the "Use of Proceeds" section of and the notes to the
financial statements to the Registration Statement and the notes to the
unaudited condensed consolidated financial statements contained in this
Quarterly Report on Form 10-QSB, we have been in default under a significant
portion of our indebtedness. Pursuant to the net proceeds received from our
initial public offering, we will repay a substantial portion of our indebtedness
and will no longer be in default under these obligations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
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.
<PAGE>
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: August 14, 2000 By: /s/ GREGORY L. HRNCIR
---------------------
Its: Secretary
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<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER Description
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27.01 Financial Data Schedule
