Summary of EROOMSYSTEM TECHNOLOGIES INC

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., 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, gross margin 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. A complete discussion of these risks and uncertainties are contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 12, 2009.

Overview

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, eRoomSafes, eRoomEnergy products, and the eRoomTray. In 2005, we commenced our diversification strategy of investing in third party emerging growth companies. To this end, we have an investment totaling $10,000 in Identica Holdings Corporation ("Identica"). In addition, we have loaned Identica $150,000 in cash. The loan is secured by a security interest in all the assets of Identica and is evidenced by a promissory note. The loan has been continuously extended and is presently due on August 20, 2009. In consideration for making the loan, Identica issued a warrant to us to purchase one million (1,000,000) shares of common stock of Identica, exercisable at $0.15 per share at any time through May 20, 2010. In consideration for an extension of the note, the warrant expiration has been extended to five years after the date the Identica shares are quoted saleable to the public. We may make additional investments in promising emerging growth companies, and potentially acquire an operating company if the opportunity arises.

On July 24, 2008, we provided a secured loan to BlackBird Corporation, a Florida corporation ("BlackBird"), an unrelated entity. The funding of the loan took place on completion of a transaction by BlackBird to acquire an unrelated company, USA Datanet Corporation. The acquisition took place on July 24, 2008. The loan is evidenced by a 10% senior secured convertible promissory note, made by BlackBird (the "Secured Note"). The Secured Note matured on June 30, 2009 and the interest rate increased to 18% annually as of January 1, 2009, with interest payable quarterly on the last business day of each quarter. An extension to the note was provided through December 31, 2009 at an interest rate of 18%.

On Jun 17, 2009, the Company purchased the assets of Kooltech SPE which had been acquired by Cardinal Pointe Capital ("CPC"). CPC sold the minibars, baskets and stock owned by Kooltech SPE to the Company. The Company has formed a subsidiary, eFridge, LLC ("eFridge") for the purposes of this purchase. The purchase price is an amount equal to thirty percent (30%) of eFridge's EBITDA and an amount equal to thirty percent (30%) of New Equipment Cash Flow. Payment of the Purchase Price shall be made by eFridge to CPC on a monthly basis within twenty days after the end of each month, based on the eFridge's EBITDA for the month then ended.

Our existing 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, Hilton Hotels and Carlson Hospitality Worldwide, in the United States and internationally.

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One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected several 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.

Description of Revenues

Historically, we have received most of our revenues from the sale or placement under a revenue-sharing program of our products in hotels. We expect that these revenues will account for a substantial majority of our revenues for the foreseeable future. In addition, we may receive revenues in the future upon the sale of securities received in consideration for our investment made in a third party company in 2005; however, the return on such investment is not assured.

We also generate revenues from maintenance and support services relating to our existing installed products. Our dependence on the lodging industry, including its guests, makes us extremely vulnerable to downturns in the lodging industry caused by the general economic environment. Such a downturn could result in fewer purchases by hotel guests of goods and services from our products installed in hotels, and accordingly lower revenues where our products are placed pursuant to a revenue sharing agreement. Time spent by individuals on travel and leisure is often discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of our operations depends, in part, upon discretionary consumer spending and economic conditions affecting disposable consumer income such as employment, wages and salaries, business conditions, interest rates, availability of credit and taxation.

Our revenue-sharing program provides us with a seven-year revenue stream under each revenue-sharing agreement. Because many of our customers in the lodging industry traditionally have limited capacity to finance the purchase of our products, we designed our revenue-sharing program accordingly. Through our revenue-sharing plan, we have installed our products at little or no upfront cost to our customers and share in the recurring revenues generated from sales of goods and services related to our products. We retain the ownership of the eRoomServ refreshment centers and eRoomSafes throughout the term of the revenue-sharing agreements and the right to re-deploy any systems returned to us upon the expiration or earlier termination of the revenue-sharing agreements. We have failed to place any products, either on a revenue sharing or sale basis in the prior five fiscal years. We do, however, intend to continue to service and maintain our existing installed product base for the remaining life of the contracts relating thereto.

Our revenues over the past years have been declining as we have focused on service and maintenance of our existing installed products and have not installed new products at hotels and as existing revenue sharing agreements conclude. Given the foregoing, in 2005 we commenced our diversification strategy to invest in emerging growth companies. To this end, we invested in Identica Holdings Corporation, a privately held distributor and integrator of next-generation biometric security solutions a company that has since filed a registration statement with the Securities and Exchange Commission, including the TechSphere hand vascular pattern biometric technology. We continue to explore opportunities and perform due diligence on third parties with respect to additional potential investments. At this time, we have not reached a definitive agreement to make further investments. In addition, we may acquire an operating company in the future if the opportunity arises. Over time, we may realize revenues from the sale of securities purchased from Identica, and other third party companies, if applicable. The timing and return on such investments, however, cannot be assured.

We anticipate that we will receive more than 50% of the recurring revenues from the sale of goods and services generated by our currently installed eRoomServ refreshment centers, eRoomSafes and eRoomTray solutions under revenue-sharing agreements. Our customers receive the remainder of the recurring revenues.

Revenue Recognition

Sales revenue from our products is recognized upon completion of installation and acceptance by the customer. We do not, however, expect to generate meaningful sales revenue as such revenues are limited to the sales of used equipment as well as replacement equipment and parts to hotel clients who previously purchased our products. Sales revenue from the placement of our eRoomServ refreshment centers and eRoomSafes under our revenue-sharing program are accounted for similar to an operating lease, with the revenues recognized as earned over the term of the agreement. In some instances, our revenue-sharing agreements provide for a guaranteed minimum daily payment by the hotel. We negotiated our portion of the revenues generated under our revenue-sharing program based upon the cost of the equipment installed and the estimated daily sales per unit for the specific customer.

We have entered into installation, maintenance and license agreements with most of our existing hotel customers. Installation, maintenance and license revenues are recognized as the services are performed, or pro rata over the service period. We defer all revenue paid in advance relating to future services and products not yet installed and accepted by our customers.

Our installation, maintenance and license agreements stipulate that we collect a maintenance fee per eRoomServ refreshment center per day, payable on a monthly basis. Our objective is to generate gross profit margins of approximately 40% from our maintenance-related revenues. We base this expectation on our historical cost of maintenance of approximately $0.04 per unit per day and, pursuant to our maintenance agreements, our projected receipt of generally not less than $0.08 per unit per day.

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Description of Expenses

Cost of product sales consists primarily of production, shipping and installation costs. Cost of revenue-sharing arrangements consists primarily of depreciation of capitalized costs for the products placed in service. We capitalize the production, shipping, installation and sales commissions related to the eRoomServ refreshment centers, eRoomSafes, eRoomTrays and eRoomEnergy management products placed under revenue-sharing agreements. Cost of maintenance fee revenues primarily consists of expenses related to customer support and maintenance.

Selling, general and administrative expenses primarily consist of general and administrative expenses including professional fees, salaries and related costs for accounting, administration, finance, 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 the maintenance of our existing installed products as well as research and development for new products. Research and development expenses in the six months ended June 30, 2009 were $5,085.

In accordance with Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our consolidated statements of operations.

Results of Operations

Comparison of Three Months Ended June 30, 2009 and 2008

Revenues

Revenue Sharing Arrangements - Our revenue from revenue sharing arrangements was $67,199 for the three months ended June 30, 2009, compared to $148,324 for the three months ended June 30, 2008, representing a decrease of $81,125, or 54.7%. The decrease in revenue sharing revenue was due to the completion of a number of revenue sharing contracts in 2008.

Maintenance Fee Revenues - Maintenance fee revenues were $33,372 for the three months ended June 30, 2009, compared to $56,193 for the three months ended June 30, 2008, representing a decrease of $22,821, or 40.6%. The decrease in maintenance fee revenue was due to the completion of a number of revenue sharing and maintenance contracts in 2008.

Product Sales - Revenue from product sales was $23,073 for the three months ended June 30, 2009, compared to $79,920 for the three months ended June 30, 2008, representing a decrease of $56,847, or 71.1%. The decrease in product sales revenues was primarily due to the decrease in sales of refreshment centers to hotels in the three months ended June 30, 2009.

Cost of Revenue

Cost of Revenue Sharing Revenue - Cost of revenue sharing revenue was $21,449 for the three months ended June 30, 2009, compared to $65,162 for the three months ended June 30, 2008 representing a decrease of $43,713 or 67.1%. The gross margin percentage on revenue sharing revenue was 68.1% for the three months ended June 30, 2009, compared to 56.1% for the three months ended June 30, 2008. The increase in gross margin relating to revenue sharing revenue is due to the completion of some revenue sharing contracts in 2008.

Loss on Impairment of Refreshment Centers - During 2008, the Company assessed the carrying value of certain refreshment centers that had been used by a Hotel and taken out of service and recorded a loss due to impairment of $64,835.

Cost of Maintenance Fee Revenue - Our cost of maintenance fee revenue was $0 for the three months ended June 30, 2009, compared to $25,502 for the three months ended June 30, 2008, representing an decrease of $25,502, or 100%. The gross margin percentage on maintenance fee revenues was 100% for the three months ended June 30, 2009, compared to 54.6% for the three months ended June 30, 2008. The decrease in our cost of maintenance fee revenue was due to the decrease in the equipment being serviced.

Cost of Product Sales Revenue - Our cost of product sales revenue for the three months ended June 30, 2009 was $17,361, compared to $13,958 for the three months ended June 30, 2008, an increase of $3,403, or 24.4%. The gross margin percentage on revenue from product sales revenue was 24.8% for the three months ended June 30, 2009, compared to 82.5% for the three months ended June 30, 2008. The increase in cost of product sales revenue relates to the remaining basis of the refreshment centers sold as well as the basis on the parts sold in the three months ended June 30, 2009 versus the three months ended June 30, 2008.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended June 30, 2009 and 2008 are summarized as follows:

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                                             For the Three Months
                                                Ended June 30,
                                                                                         Percent
                                              2009           2008          Change        Change
REVENUE
Revenue-sharing arrangements               $    67,199     $ 148,324     $  (81,125 )       -54.7 %
Maintenance fees                                33,372        56,193        (22,821 )       -40.6 %
Product sales                                   23,073        79,920        (56,847 )       -71.1 %
Total Revenue                                  123,644       284,437       (160,793 )       -56.5 %

COST OF REVENUE
Revenue-sharing arrangements                    21,449        65,162        (43,713 )       -67.1 %
Loss on impairment of refreshment
centers in serivice                                  -        64,835        (64,835 )       100.0 %
Maintenance                                          -        25,502        (25,502 )      -100.0 %
Product sales                                   17,361        13,958          3,403          24.4 %
Total Cost of Revenue                      $    38,810     $ 169,457     $ (130,647 )       -77.1 %

GROSS MARGIN PERCENTAGE
Revenue-sharing arrangements                      68.1 %        56.1 %
Maintenance                                      100.0 %        54.6 %
Product sales                                     24.8 %        82.5 %
Total Gross Margin Percentage                     68.6 %        40.4 %

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the three months ended June 30, 2009 and 2008, 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 $114,628 for the three months ended June 30, 2009, compared to $110,532 for the three months ended June 30, 2008, representing an increase of $4,096, or 3.7%. The increase in our selling, general and administrative expenses was immaterial.

Research and Development-Research and development expenses were $5,085 for the three months ended June 30, 2009, compared to $10,112 for the three months ended June 30, 2008 representing a decrease of $5,027. The decrease in our research and development expenses for the three months ended June 30, 2009 reflects a decrease in new product development in 2009.

Interest and other income was $35,942 for the three months ended June 30, 2009 as compared to $26,355 for the three months ended June 30, 2008 representing an increase of $9,587, or 36.4%. The increase was due to the interest earned on our increasing balance of cash and cash equivalents.

Net Income Attributable to Common Stockholders

We realized net income of $1,063 for the three months ended June 30, 2009, compared to $20,691 during the three months ended June 30, 2008. The $19,628 decrease in net income was primarily due to decreasing revenue sharing agreements. We may incur losses in the future as existing revenue sharing agreements with our hotel clients continue expire.

Comparison of Six Months Ended June 30, 2009 and 2008

Revenues

Revenue Sharing Arrangements - Our revenue from revenue sharing arrangements was $148,815 for the six months ended June 30, 2009, compared to $335,805 for the six months ended June 30, 2008, representing a decrease of $186,990, or 55.7%. The decrease in revenue sharing revenue was due to the completion of a number of revenue sharing contracts in 2008.

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Maintenance Fee Revenues - Maintenance fee revenues were $75,828 for the six months ended June 30, 2009, compared to $111,498 for the six months ended June 30, 2008, representing a decrease of $35,670, or 32%. The decrease in maintenance fee revenue was due to the completion of a number of revenue sharing and maintenance contracts in 2008 and 2009.

Product Sales - Revenue from product sales was $40,106 for the six months ended June 30, 2009, compared to $96,368 for the six months ended June 30, 2008, representing a decrease of $56,262, or 58.4%. The decrease in product sales revenues was primarily due to the decrease in sales of refreshment centers to hotels in the six months ended June 30, 2009.

Cost of Revenue

Cost of Revenue Sharing Revenue - Cost of revenue sharing revenue was $46,951 for the six months ended June 30, 2009, compared to $150,763 for the six months ended June 30, 2008 representing a decrease of $103,812 or 68.9%. The gross margin percentage on revenue sharing revenue was 68.5% for the six months ended June 30, 2009, compared to 55.1% for the six months ended June 30, 2008. The increase in gross margin relating to revenue sharing revenue is due to the completion of some revenue sharing contracts in 2008.

Cost of Maintenance Fee Revenue - Our cost of maintenance fee revenue was $7,623 for the six months ended June 30, 2009, compared to $45,509 for the six months ended June 30, 2008, representing an decrease of $37,886, or 83.2%. The gross margin percentage on maintenance fee revenues was 89.9% for the six months ended June 30, 2009, compared to 59.2% for the six months ended June 30, 2008. The decrease in our cost of maintenance fee revenue was due to the decreased amount of equipment being serviced.

Cost of Product Sales Revenue - Our cost of product sales revenue for the six months ended June 30, 2009 was $32,755, compared to $26,098 for the six months ended June 30, 2008, an increase of $6,657, or 25.5%. The gross margin percentage on revenue from product sales revenue was 18.3% for the six months ended June 30, 2009, compared to 72.9% for the six months ended June 30, 2008. The increase in cost of product sales revenue relates to the increase in parts sold as well as the remaining basis of the refreshment centers sold in the six months ended June 30, 2009 versus the six months ended June 30, 2008.

The changes and percent changes with respect to our revenues and our cost of revenue for the six months ended June 30, 2009 and 2008 are summarized as follows:

                                             For the Six Months
                                               Ended June 30,
                                                                                       Percent
                                             2009          2008          Change         Change
REVENUE
Revenue-sharing arrangements               $ 148,815     $ 335,805     $ (186,990 )        -55.7 %
Maintenance fees                              75,828       111,498        (35,670 )        -32.0 %
Product sales                                 40,106        96,368        (56,262 )        -58.4 %
Total Revenue                                264,749       543,671       (278,922 )        -51.3 %

COST OF REVENUE
Revenue-sharing arrangements                  46,951       150,763       (103,812 )        -68.9 %
Loss on impairment of refreshment
centers in serivice                                -        64,835        (64,835 )        100.0 %
Maintenance                                    7,623        45,509        (37,886 )        -83.2 %
Product sales                                 32,755        26,098          6,657           25.5 %
Total Cost of Revenue                      $  87,329     $ 287,205     $ (199,876 )        -69.6 %

GROSS MARGIN PERCENTAGE
Revenue-sharing arrangements                    68.5 %        55.1 %
Maintenance                                     89.9 %        59.2 %
Product sales                                   18.3 %        72.9 %
Total Gross Margin Percentage                   67.0 %        47.2 %

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the six months ended June 30, 2009 and 2008, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

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Operating Expenses

Selling, General and Administrative - Selling, general and administrative expenses, including non-cash compensation expense, were $243,217 for the six months ended June 30, 2009, compared to $253,967 for the six months ended June 30, 2008, representing a decrease of $10,750, or 4.2%. The decrease in our selling, general and administrative expenses reflects the write-off of an uncollectible account in 2008.

Research and Development-Research and development expenses were $5,085 for the six months ended June 30, 2009, compared to $37,328 for the six months ended June 30, 2008 representing a decrease of $32,243. The decrease in our research and development expenses for the six months ended June 30, 2009 reflects the decrease in new product development in 2009.

Interest and other income was $73,735 for the six months ended June 30, 2009 as compared to $60,045 for the six months ended June 30, 2008 representing an increase of $13,690, or 22.8%. The increase was due to the interest earned on our increasing balance of cash and cash equivalents as well as the interest earned on our loan receivable.

Net Income Attributable to Common Stockholders

We realized net income of $2,853 for the six months ended June 30, 2009, compared to $25,216 during the six months ended June 30, 2008. The $22,363 decrease in net income was primarily due to decreasing revenue sharing agreements. We may incur losses in the future as existing revenue sharing agreements with our hotel clients expire.

Liquidity and Capital Resources

At June 30, 2009, our principal sources of liquidity consisted of $2,219,947 of cash and working capital of $2,839,244, as compared to $2,135,814 of cash and working capital of $2,774,255 at December 31, 2008. In addition, our stockholders' equity was $3,103,668 at June 30, 2009, compared to stockholders' equity of $3,081,719 at December 31, 2008, an increase of $21,949. The increase in cash reflects the increase in working capital, and increase in stockholders' equity.

Our accumulated deficit decreased from $31,010,396 at December 31, 2008 to $31,007,543 at June 30, 2009. The $2,853 decrease in accumulated deficit resulted directly from the net income realized for the six months ended June 30, 2009. Our accumulated deficit may increase in the future as existing revenue sharing agreements with our hotel clients expire.

Our operations provided net cash of $48,431 for the six months ended June 30, 2009, compared to $190,684 during the six months ended June 30, 2008.

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