Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As used in this Form 10-Q, references to the "Company," "we," “our” or "us" refer to eRoomSystem Technologies, Inc. and subsidiaries, unless the context otherwise indicates.
This Management’s Discussion and Analysis or Plan of Operations (“MD&A”) section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and financial condition, and certain factors that may affect our future results. You should read this MD&A in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report.
Forward-Looking Statements
This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.
Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues, and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, the continued growth of the lodging industry, the success of our product-development, marketing and sales activities, vigorous competition in the lodging industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.
Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
Overview
The Company introduced to the lodging industry an amenity management platform, or the AMENITIES MANAGER™. The platform’s core is proprietary software that provides a cloud-based system to assist a hotel in enhancing its image and theme through distinctive products and managing its amenities with optimized efficiency.
The AMENITIES MANAGER™ deliver solutions in order to reduce operating costs, enhance hotel guest satisfaction and provide higher operating profits to our customers. The solutions offered by our AMENITIES MANAGER™ and related products have allowed us to establish relationships with many premier hotel chains. In addition to providing our customers with valuable amenity management solutions that pay for itself, our revenue-sharing program has allowed us to partner with our customers and provide our solutions at little or no up-front cost. Our customers share in revenues generated from the sale of goods and services related to our platform. As an alternative solution, we offer a turnkey arrangement which provides both products and restockers to hotels.
We continue to deploy our Amenities Manager™ at all hotels that we service. Additionally, to date, we have deployed over 12,000 refreshment centers at many hotel properties.
The solutions offered by our eRoomSystem and related products have allowed us to install our products and services in several premier hotel chains, including Marriott International, Hilton Hotels, Carlson Hospitality Worldwide, as well as in other boutique hotels in the United States and internationally.
Results of Operations
Revenue Recognition
We generate revenues from the sale of products in hotel in-room refreshment centers, from maintenance services and the lease of equipment. Revenue from the sale of refreshments from the refreshment centers is recognized upon removal of the item from the refreshment center by the hotel guest. Maintenance revenue is recognized as the services are performed. Lease revenue is recognized over the term of the lease.
Description of Expenses
Cost of revenue consists primarily of cost of goods sold, as well as customer support and maintenance.
Selling, general and administrative expenses primarily consist of general and administrative expenses including professional fees, salaries and related costs for accounting, administration, finance, human resources, information systems and legal personnel.
Research and development expenses consist of payroll and related costs for hardware and software engineers, quality assurance specialists, management personnel, and the costs of materials used by our consultants in research and development for new products. Research and development expenses in the nine months ended September 30, 2016 and 2015 were $39,657 and $35,672, respectively.
In accordance with ASC Codification Topic 730, “Accounting for Research and Development Costs”, development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our condensed consolidated statements of operations.
Comparison of Three Months Ended September 30, 2016 and 2015
Revenue
Revenue from product sales and maintenance was $214,413 for the three months ended September 30, 2016, compared to $229,873 for the three months ended September 30, 2015, representing a decrease of $15,460, or 7%. The decrease in revenues related to decreased sales in 2016.
Cost of Revenue
Our cost of product sales and maintenance revenue for the three months ended September 30, 2016 was $137,022, compared to $137,596 for the three months ended September 30, 2015, a decrease of $574, or 0.42%. The gross margin percentage on revenue from product sales revenue was 36% in 2016 and 40% in 2015.
The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended September 30, 2016 and 2015 are summarized as follows:
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For the three months ended September 30,
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2016
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2015
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Change
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Percent
Change
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REVENUE
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$
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214,413
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$
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229,873
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$
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(15,460
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)
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-7
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%
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COST OF REVENUE
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$
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137,022
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$
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137,596
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$
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(574
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)
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0.42
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%
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Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the three months ended September 30, 2016 and 2015, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.
Operating Expenses
Selling, General and Administrative — Selling, general and administrative expenses, including non-cash compensation expense, were $110,331 for the three months ended September 30, 2016, compared to $95,114 for the three months ended September 30, 2015, representing an increase of $15,217, or 16% due to higher administrative costs.
Research and Development—Research and development expenses were $15,550 for the three months ended September 30, 2016, compared to $13,103 for the three months ended September 30, 2015 representing an increase of $2,447 or 19%.
Investment Income
Our investment income was $10,520 for the three months ended September 30, 2016, compared to $23,464 for the three months ended September 30, 2015, representing a decrease of $12,944, or 55%. The change in investment income related to sales of available-for-sale securities in the three months ended September 30, 2015 and the repayment of notes receivable during 2016.
Net Income
We realized a net loss of $37,970 for the three months ended September 30, 2016, compared to net income of $7,524 for the three months ended September 30, 2015. The $45,494 change related primarily to decreased revenue and investment income as well as increased selling, general and administrative expenses during the three months ended September 30, 2016.
Comparison of Nine Months Ended September 30, 2016 and 2015
Revenue
Revenue from product sales and maintenance was $677,834 for the nine months ended September 30, 2016, compared to $644,163 for the nine months ended September 30, 2015, representing an increase of $33,671, or 5%. The increase in revenues related to improved sales in 2016.
Cost of Revenue
Our cost of product sales and maintenance revenue for the nine months ended September 30, 2016 was $422,144, compared to $371,963 for the nine months ended September 30, 2015, representing an increase of $50,181, or 13%. The increase in cost of revenue related to the increase in sales as well as increases in labor costs and cost of goods. The gross margin percentage on revenue from product sales revenue was 38% in 2016 as compared to 42% in 2015.
The changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2016 and 2015 are summarized as follows:
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For the nine months ended September 30,
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2016
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2015
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Change
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Percent
Change
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REVENUE
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$
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677,834
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$
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644,163
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$
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33,671
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5
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%
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COST OF REVENUE
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$
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422,144
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$
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371,963
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$
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50,181
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13
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%
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Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2016 and 2015, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.
Operating Expenses
Selling, General and Administrative — Selling, general and administrative expenses, including non-cash compensation expense, were $302,736 for the nine months ended September 30, 2016, compared to $290,382 for the nine months ended September 30, 2015, representing an increase of $12,354, or 4% due to higher administrative costs.
Research and Development—Research and development expenses were $39,657 for the nine months ended September 30, 2016, compared to $35,672 for the nine months ended September 30, 2015 representing an increase of $3,985 or 11%.
Investment Income
Our investment income was $52,477 for the nine months ended September 30, 2016, compared to $104,407 for the nine months ended September 30, 2015, representing a decrease of $51,930, or 50%. The change in investment income related to sales of available-for-sale securities in the nine months ended September 30, 2015 and the repayment of notes receivable during 2016.
Net Income
We realized a net loss of $34,226 for the nine months ended September 30, 2016, compared to net income of $50,553 for the nine months ended September 30, 2015. The $84,779 change related primarily to the decrease in revenue and investment income and the increase in selling, general and administrative costs during the nine months ended September 30, 2016.
Liquidity and Capital Resources
Our accumulated deficit increased from $31,686,698 at December 31, 2015 to $31,720,924 at September 30, 2016. The $34,226 increase in accumulated deficit resulted directly from the net loss realized for the nine months ended September 30, 2016.
At September 30, 2016, our principal sources of liquidity consisted of $1,638,990 of cash as compared to $1,247,739 at December 31, 2015. At September 30, 2016, we had working capital of $2,485,928, as compared to $2,504,497 at December 31, 2015. In addition, our stockholders' equity was $2,523,486 at September 30, 2016, compared to stockholders' equity of $2,550,383 at December 31, 2015, an increase of $26,897. The increase in cash reflects the repayment of notes receivable. We believe that we have sufficient funds to operate for the next twelve months.
Net cash used in operations for the nine months ended September 30, 2016 was $85,829 as compared to $59,358 used in the period ended September 30, 2015.
Investing activities for the nine months ended September 30, 2016 provided net cash of $477,080, compared to $17,086 of net cash provided during the nine months ended September 30, 2015. The change in cash used related to advances and collections under notes receivable in 2016 and 2015.
There were no financing activities in the nine months ended September 30, 2016 and 2015.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective for the Company retrospectively beginning January 1, 2017, with early adoption not permitted. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.
Contractual Cash Obligations and Commercial Commitments
There were no significant contractual cash obligations or commercial commitments either on or off balance sheet as of September 30, 2016.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.