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EX-32.1 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3201.htm
EX-32.2 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3202.htm
EX-31.1 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3101.htm
EX-31.2 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3102.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

FOR THE YEAR ENDED DECEMBER 31, 2009

COMMISSION FILE NUMBER 000-27467

ERF WIRELESS, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
000-27467
 
76-0196431
(State or other jurisdiction of incorporation)
 
(Commission File Number)
 
(IRS Employer Identification No.)

2911 SOUTH SHORE BOULEVARD, SUITE 100, LEAGUE CITY, TEXAS 77573
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (281) 538-2101

Securities registered under Section 12(b) of the Exchange Act:

None.

Securities registered under Section 12(g) of the Exchange Act:

$.001 PAR VALUE COMMON STOCK

Check whether the issuer is not required to file report pursuant to Section 13
or 15(d) of the Exchange Act o

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes x No

Indicate by check mark that disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
 
Accelerated filer o
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ¨ No x

ERF Wireless, Inc.'s revenue for its most recent fiscal year was $5,533,000.

As of March 16, 2010 the aggregate market value of the shares of common stock held by non-affiliates (based on the closing price of $0.15 per share for the common stock as quoted on that date) was approximately $24,942,137.

As of March 16, 2010, the Company had outstanding 162,172,112 shares of its $.001 par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

None.



 
 


TABLE OF CONTENTS

ITEM
   
NUMBER
CAPTION
PAGE
     
PART I
   
     
ITEM 1.
Business
4
     
ITEM 1A.
Risk Factors
11
     
ITEM 1B.
Unresolved Staff Comments
17
     
ITEM 2.
Properties
18
     
ITEM 3.
Legal Proceedings
18
     
ITEM 4.
Submission of Matters to a Vote of Security Holders
18
     
PART II
   
     
ITEM 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
19
     
ITEM 6.
Selected Financial Data
21
     
ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
     
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
28
     
ITEM 8.
Financial Statements and Supplementary Data
29
     
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
55
     
ITEM 9A.
Controls and Procedures
56
     
ITEM 9B.
Other Information
56
     
PART III
   
     
ITEM 10.
Directors, Executive Officers and Corporate Governance
57
     
ITEM 11.
Executive Compensation
58
     
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
61
     
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
62
     
ITEM 14.
Principal Accountant Fees and Services
63
     
ITEM 15.
Exhibits and Financial Statement Schedules
64
 

 
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FORWARD LOOKING STATEMENTS

Except for the historical information and discussions contained herein, statements contained in this Annual Report on Form 10-K, may constitute forward-looking statements. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed elsewhere in the ERF Wireless, Inc ("Company" or "ERF"), filings with the U.S. Securities and Exchange Commission ("SEC"). The statements contained in this document that are not purely historical are forward-looking statements including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding our business. This Annual Report on Form 10-K includes forward-looking statements about our business including, but not limited to, the level of our expenditures and savings for various expense items and our liquidity in future periods. We may identify these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "project," "should," "will," "would" and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law. Our actual results could differ materially from those anticipated in these forward-looking statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
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ITEM 1. BUSINESS

The Company

ERF Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity wireless products and services to a broad spectrum of customers in primarily underserved, rural and suburban parts of the United States. We provide our customers with high quality broadband services and basic communications services to commercial, residential, oil and gas, and bank customers in the areas that otherwise would not be able to receive such services. We are also a comprehensive solutions provider to other enterprise customers, providing them with a wide array of communications services including high speed broadband, voice over Internet Protocol (VOIP) telephone and facsimile service, and video security.

Historically, our revenues have been generated primarily from Internet and construction services. Our Internet revenues have resulted from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues typically have consisted of revenues generated from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry.

For the fiscal year 2010, in addition to our WISP and regional banking business, we anticipate that the oil and gas industry will become an increasingly important part of the ERF Wireless business plan. In January 2009, we entered into contracts with Schlumberger, pursuant to which Schlumberger will exclusively resell wireless broadband and WiMAX terrestrial communication products and services from ERF Wireless in the North American oil and gas market. We anticipate investing significant capital to further expand our offerings to the oil and gas industry, using our wireless and WiMAX technologies to provide 1.5Mbps data communications to support drilling rig operations, supporting remote field offices, video surveillance of production facilities and pipelines, and monitoring of the highly-regulated Health, Safety and Environment (HSE) for the oil and gas industry.   We believe that our partnership with Schlumberger, along with our existing and growing network, will position us to be a provider of choice to the oil and gas industry.

Our principal executive offices are located at 2911 South Shore Blvd., Suite 100, League City, Texas 77573, and our telephone number is (281) 538-2101. We maintain web sites at www.erfwireless.com and www.erfwireless.net. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. You may access and read our SEC filings through the SEC's web site (:www.sec.gov). This site contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC.  All references to "we," "our," or "us" refer to ERF Wireless, Inc., a Nevada corporation, and our subsidiaries.

The Company offers its services through its subsidiaries. Our primary operating subsidiaries, or business segments, are Enterprise Network Services (“ENS”), Wireless Bundled Services (“WBS”),  Wireless Messaging Services (“WMS”) and Oil & Gas Division (“O&G)

Wireless Bundled Services Subsidiary

WBS provides wireless broadband products and services, including Internet, voice and data to serve private entities, cities, municipalities and the general public in rural markets. As of the year ended December 31, 2009, WBS contributed 91% of the revenues of the Company and 74% of the losses attributable to the Company's business segments.

Oil & Gas Division
 
O&G provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (MBTs). O&G provides wireless broadband products and services focusing primarily on commercial customers providing high speed bandwidth to rural North America to serve the Oil and Gas sector. All sales from external customers are located within the United States. The O&G division is a division of WBS. The revenues in the O&G segment for the twelve months ended December 31, 2009 and 2008, are $308,000 and $72,000, respectively.
Enterprise Network Services Subsidiary

ENS provides turnkey design and implementation service in the area of secure wireless broadband networks for regional banks.

 
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Wireless Messaging Services Subsidiary

WMS provides wireless broadband and fiber-to-the-home system network design and implementation, manufacture and supply high-power infrastructure equipment to the paging and mobile industry and own and operate a wide-area messaging service (paging retail). WMS contributed 3% of the Company's revenues for the year ended December 31, 2009, and 1% of the losses attributable to the Company's business segments.

Our Industries

Oil and Gas Industry

ERF Wireless will market its oil and gas products and services through its Oil & Gas Division, but will consolidate any revenue into its Wireless Bundled Services subsidiary. The demand for oil and gas continues to grow, and exploration and production consistently moves farther away from civilization and into more remote environments to meet this need. As a result, companies have been forced to change the way in how they operate. One approach is to achieve a “digital oilfield.” In a digital oilfield process digitization, real time data collection, and intelligent controls are combined to improve recovery, accelerate production, reduce downtime, and reduce the number of on-site engineers required to oversee the operation.

At the heart of a digital oilfield is a reliable, fast, and cost-effective means of communications. Oil and gas companies have historically relied on cellular and satellite communications to transmit data from the wellsite to the home office. These technologies, however, can be expensive and often suffer from high latency (a delay due to the time to send the data to the satellite and back). This latency can interrupt the fluency of voice communications and make machine to machine communications complex and unreliable.

We plan to utilize our existing and expanding wireless network to address this need by offering 1.5Mbps encrypted data communications using wireless and WiMAX technologies. We believe this will enable real-time data collaboration between remote oil field operations. We believe that our current network, with minimal equipment deployment, is able to provide wireless services to certain oil and gas areas in the South Central United States, including operations in the Permian Basin located in west Texas and eastern New Mexico, the Barnett Shale Trend in North Texas, and the Cotton Valley/ Travis Peak Formation (and correlative Hosston Formation) along the Gulf Coast of Louisiana.

Our initial strategy is to provide wireless services for Schlumberger as it contracts with oil and gas operators operating in areas that are either within our network or that we can immediately expand our network to cover. Our long term strategy is to be able to offer ongoing services to the operator of the well and to the owner of the gathering system or pipeline as we expand our offerings further downstream to the oil and gas industry.

Regional Banking Industry

ENS provides a turnkey design and implementation service in the area of secure wireless broadband networks for regional banks. ENS’ focus is on obtaining design and construction contracts with banks in conjunction with long-term maintenance and monitoring contracts. All monitoring contracts are managed by the Company's network operations services division. Additionally, once the Company has designed and constructed the wireless broadband networks for the banks, the Company may, through its WBS subsidiary, use the same network under a revenue sharing agreement with the banks to sell wireless broadband services to private entities, cities, municipalities and the general public in that region.

ENS currently has long term maintenance contracts with four banking networks. For the twelve months ended December 31, 2009 ENS contributed 6% of the revenues of the Company and 25% of the losses attributable to the Company's business segments.

Residential and Enterprise

ERF Wireless markets its residential and enterprise services through its WBS. Wireless broadband Internet systems consist of a radio transmitter that sends a signal on a combination of radio channels to receivers located at or in homes and businesses. Wireless broadband Internet networks can be roughly categorized based upon which wireless technology (e.g., standards or proprietary) they utilize and whether they utilize licensed or unlicensed spectrum.

The wireless broadband sector has begun a new stage of growth in the rural residential and enterprise market’s, fueled primarily by technology improvements and increased consumer demand. Rural areas in America, however, have experienced a lower Internet penetration rate, and substantially less access to broadband, than the more densely populated urban and suburban areas. Only 38% of those living in rural American now have broadband at home, compared with 31% who said this in 2007, or a growth rate of 23% from 2007 to 2008. By comparison, 57% of urban residents and 60% of suburban residents have high-speed connections at home.


 
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We believe the rural and suburban markets are typically avoided or overlooked by other providers due to technical limitations and the high cost of providing broadband over terrestrial-based networks in densely populated areas. Our wireless broadband Internet services are offered utilizing fixed point-to-multipoint wireless technology in the licensed and unlicensed spectrums. We offer these services to both business and residential customers within our network footprint without the use of terrestrial lines. This allows our services to cover a rural or suburban geographical area at a fraction of the cost of terrestrial based broadband provided by cable modems or DSL lines. As a result of these savings, we are able to offer broadband Internet to communities and business that would otherwise be ignored by terrestrial based providers.

Our current residential and enterprise market is focused in the South Central United States, where we have developed areas of wireless coverage through acquisitions and contracts in New Mexico, Texas and Louisiana. Our existing network allows us to provide our high capacity wireless broadband offerings to the oil and gas industry, financial institutions, and our 8,423 residential customer base. We plan to continue to expand our wireless broadband coverage through acquisitions, internal development and partnerships in specific rural areas.

ERF Wireless’ Products and Services

Wireless Services to Oil and Gas Customers

We are able to provide low latency, high speed connections to both static and mobile drilling sites. We believe that our service is specifically designed to meet the oil and gas industries environmental, operational, and safety requirements in the land-based oilfield, and the compendium of services that we provide offers a compelling solution for the mobile oil platform. Our wireless service provides a 1.5Mbps or greater VOIP, facsimile and encrypted data transmission. These are the types of services that we believe oil and gas customers demand.

Additionally, by using WiMAX-based equipment as an adjunct to its existing fixed-wireless networks, the Company intends to create a compelling service offering to the oil and gas industry, including enhanced nomadic and portable data and video services. The advantages of deploying WiMAX technology based on a global standard, include higher data speeds, greater spectral efficiency, advanced nomadic services with self-installation features, global economies of scale and forward compatibility with the mobile WiMAX (802.16 (e) standard). In addition, with the certification of network standards and profiles to standards, network equipment costs should continue to decrease. The resulting interoperability of hardware will not only accelerate downward pricing, but should also afford service providers greater vendor selection and potential roaming revenues.

As opposed to the wireless communications service in an airport or home or office internet, there are few limitations on the amount of data that can be transferred. Our data communications is non-contended, which means that every single individual site can receive the full 1.5Mbps. In addition, because our service uses a range of protocols, entire networks of data can be transported from the wellsite to the home office. We believe this will allow companies to reduce the number of personnel located at the wellsite, while providing fast, reliable, real time drilling and reservoir performance data to the home office.

We believe our services offered to the oil and gas industry are unique, and through our exclusive agreements with Schlumberger, we believe we are in a position to be a provider of choice for high-speed Internet bandwidth for managing drilling rig operations, supporting remote field offices, and video surveillance for production facilities and pipelines.

Wireless Services to Residential and Enterprise

We also provide wireless broadband products and services, including Internet, voice and data to serve private entities, cities, municipalities and the general public. We offer these services primarily in the rural markets which tend to be underserved by the major telephone and cable companies and where wireless broadband can offer a distinct cost advantage over other forms of broadband connectivity. These services are provided to both commercial and retail customers throughout the coverage area where the Company owns wireless broadband networks or operates wireless broadband networks. The Company offers these services by acquiring established rural wireless broadband companies.

Serving the Banking Industry

We provide a turnkey design and implementation in the area of secure wireless broadband networks for regional banks located primarily in areas of southern Louisiana, as well as in areas of central and west Texas.


 
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This application of wireless broadband technology provides regional financial institutions, with between ten and one hundred branches, a cost-effective way to replace all of their recurring T1 and other telephone company costs. The resulting encrypted wireless broadband network connects all of their branches to the central bank and can provide up to 300 Mbps of continuous bandwidth as compared to the typical 1.4 Mbps of a T1 connection from the telephone company. In order to satisfy the security concerns of banking regulators, we have developed a proprietary encryption device (CryptoVueTM), consisting of hardware and software, as well as an integrated security protocol and 24x7 monitoring.

Broadband System Design and Manufacturing

We provide broadband system design and implementation services, manufacture and supply high-power infrastructure equipment to the paging and mobile industry, and own and operate a wide-area messaging service (paging retail). We also implement and construct new fiber-to-the-home broadband networks for third party customers. The wireless broadband system design and implementation function is a service that we provide to other outside organizations.

Day-to-Day Monitoring Services

We provide the overall day-to-day operation and 24/7 monitoring to all wireless broadband networks that we construct, acquire, maintain and administer. In addition, we may provide monitoring for other third parties. This service function is conducted from the state-of-the-art network operations center facility located at the ERF Wireless corporate headquarters in League City, Texas.

Growth Strategy

Background

The market for rural wireless broadband products and services has grown dramatically and we believe it will continue to grow. Broadband wireless has been in use for several years, but only with the advent of industry standards has it been possible to link the many small systems that have grown up into a much more robust wide-area network that we believe will accelerate the growth of the wireless broadband industry.

Wireless broadband provides a versatile broadband communication medium that we believe is more economical than a wired solution, is faster to implement and can be configured for multiple applications. Given the wireless technology gains and the Federal Communications Commission's ("FCC") adoption of an order to restructure frequencies within one of the several bands used for wireless broadband communication, we believe that wireless broadband will become a "third pipe" as both an alternative and extension to DSL and cable modem services, the two chief means of delivering high-speed Internet and data service today. In addition, we believe wireless broadband can replace costly telephone company T1 leased lines for many point to point data and voice applications as are generally utilized in the banking and healthcare industries.

Historically, the Company’s growth strategy involved expanding its offerings to provide wireless broadband product to banks and other vertical markets where high bandwidth and secure communications are needed (such as hospitals, schools and law enforcement). Over the past year, however, the oil and gas industry has become an increasingly important part of our business plan to further utilize the extensive wireless networks we have built and acquired over the past four years. The demand for wireless broadband connectivity, bandwidth and other wireless services to support oilfield activities has increased. Today, we believe the oil and gas industry is looking for a way to move from its traditional low bandwidth, high cost satellite-based connectivity model to one where true high-speed broadband can be purchased for field operations at a reasonable cost. We believe that our wireless technology and existing network can best serve this need.

Continue to Acquire Networks

Our strategy is to focus on the acquisition of WISPs in locations that enhance our geographic and strategic plans. We believe that this acquisition strategy offers two benefits.  First, we are able to acquire operations that provide immediate revenue. Secondly, we are able to leverage the acquired network to provide services to the oil and gas market at higher rates than we offer to residential users. Our acquisition targets are typically capital constrained with underutilized network capacity. While there is no assurance that we will make additional acquisitions, we believe that there are WISPs that currently meet our acquisition criteria. As of the date of this Annual Report, we have not entered into any definitive arrangements or understandings with any potential acquisition targets.

 
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Grow our Relationship with Schlumberger

In January 2009, we entered into agreements with Schlumberger to exclusively resell our wireless broadband and WiMAX terrestrial communications products and services in the North American oil and gas market. Through this agreement with Schlumberger, our vision is to develop premiere oil and gas sales channel for our wireless broadband.

Our initial strategy is to provide wireless services for Schlumberger as it contracts with oil and gas operators operating in areas that are either within our network or that we can expand our network to cover.  In this capacity, we plan to undertake the work of installing wireless communications at each Schlumberger drill site and connecting it to the Internet or through to private corporate networks. As Schlumberger moves from site to site, we intend to provide the support required to relocate and install the wireless communications at each new drill-site location.

Our long term strategy is to be able to offer ongoing services to the operator of the well as well as the owner of the gathering system or pipeline as we expand our offerings further downstream to the oil and gas industry. Using our experience gained through our relationship with Schlumberger, we believe we can position ourselves to be a backbone of the digital oilfield. For example, once the drilling has been completed at a particular site, operators will be able to use our wireless communications already in place at the site to monitor production facilities, pipelines, and Health, Safety, and Environmental.

Provides wireless broadband and fiber-to-the-home system network design and implementation, manufacture and supply high-power infrastructure equipment to the paging and mobile industry and own and operate a wide-area messaging service (paging retail). WMS contributed 3% of the Company's revenues for the year ended December 31, 2009, and 1% of the losses attributable to the Company's business segments.

Competition

The Internet services industry is extremely competitive. We compete for revenues with multiple companies providing Internet services on a nationwide basis, discount ISPs and smaller regional ISPs. We also compete with companies that provide Internet access via narrowband and broadband technologies, such as Internet access providers, cable companies and telephone companies, most of which offer the same Internet connectivity services.  While there is still significant competition, we are utilizing a strategy of focusing on marketing to underserved geographic areas (i.e. those areas were there is less competition or technically inferior services available). We believe competition in these areas is generally from locally owned wireless broadband operators who lack the operating scale and monitoring systems. These operators generally have significantly higher prices or inefficient operations.

Incumbent Local Exchange Carrier (ILECs)

We face competition from ILECs in our markets in Texas and Louisiana. In particular, the Company generally faces competition from companies such as AT&T Inc. and smaller regional or local phone companies. If the market has a significant population density, the larger ILECs have typically deployed DSL in the one central office in the market. DSL deployments by smaller regional and local phone companies vary; however, the Company believes that all providers of DSL are restricted by DSL's physical distance limitations.

Wireless Broadband Service Providers

We also face competition from other wireless broadband providers that use unlicensed or licensed spectrum. For example, there may be a locally owned "mom and pop" wireless broadband operator present in the market offering local services. The Company believes these operators lack the operating scale and thus are burdened with significant operating costs from inefficient operations.

Wireless broadband competition may also come from local governments, universities, and municipalities that provide "WiFi" networks over unlicensed spectrum. These services are occasionally characterized as public-private partnerships and may be partially subsidized. In some cases, they are offered to subscribers at no cost at all.

In addition, Sprint Nextel Corporation, which holds 2.5 GHz licenses throughout much of the United States, has announced plans to invest up to $5 billion in building out a nationwide WiMAX-based network.  Sprint Nextel Corporation intends to provide services under the "Xohm" brand. Clearwire Corporation, who has partnered with Sprint Nextel Corporation, also offers wireless high speed Internet access utilizing pre-WiMAX-based technology in 46 markets in the United States. In terms of both domestic deployments and subscribers, Clearwire Corporation is the largest company providing advanced data services. Both Sprint Nextel Corporation and Clearwire Corporation are focused on larger population centers, underscoring the significant market opportunity available to the Company in serving underserved rural markets.


 
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Satellite

Satellite providers also offer broadband data services in rural and underserved markets. Although satellite has the capability to serve a large geographic area, the service levels can be impaired by the distance the signal travels to and from the satellite. Communication delays, or latency, can significantly inhibit satellite providers' ability to offer advanced services, such as VOIP. We believe our services can be provided to target customers more efficiently and at more competitive prices than satellite broadband services and as a result, it does not compete effectively with fixed wireless broadband.

Cellular and PCS Services

Many of the major mobile wireless carriers offer higher data rate access plans, but these plans are either restricted to larger urban and suburban markets or the actual data transfer rate can be significantly less than our fixed broadband services. However, wireless carriers continue to expand their network coverage, allowing advanced data services to be offered to a broader subscriber base. Also, wireless carriers have continued to leverage data services by offering personal computer data card devices and providing customers with wireless access to the Internet. We believe that these nationwide players will continue to focus on larger metropolitan markets, and will continue to be limited in bandwidth relative to the fixed wireless providers.

Third Party Products

The Company also sells third-party licensed products and services into its customer base such as VOIP phone systems, check and deposit item imaging and bank branch capture systems, video conferencing systems, video surveillance systems, satellite systems and other high bandwidth-consuming products and services. This is a highly competitive market dominated by large, well-funded incumbent providers. These markets are also characterized by competition that includes smaller regional telecommunications providers.

New Technology

We face competition in developing technologies, and risks from potential new developments in distribution technologies and equipment in Internet access. In particular, we face competition from developments in the following types of Internet access distribution technologies or equipment: broadband distribution technologies used in cable Internet access services; advanced personal computer-based access services offered through DSL technologies and by local telecommunications companies; other advanced digital services offered by wireless companies; television-based interactive services; personal digital assistants or handheld computers; and enhanced mobile phones. We must attempt to monitor these developments and to ensure that we either have comparable and compatible technology or access to distribution technologies developed or owned by third parties.

Intellectual Property, Proprietary Rights and Licenses

With respect to our Internet services, we believe that our success is more dependent upon technical, marketing and customer service expertise than upon our proprietary rights. We do, however, file copyright and trademark applications as deemed necessary. In addition, we rely on laws protecting trade secrets, common law rights with respect to copyrights and trademarks, as well as non-disclosure and other contractual agreements to protect proprietary rights. There can be no guarantee that our intellectual property and those laws, and the procedures initiated to protect our business, will prevent misappropriation of our proprietary software and web site applications. In addition, those protections may not preclude competitors from developing products with similar features as those of ERF Wireless.

The Company has also filed five patent applications on its CryptoVue (TM) technology. The abstract of the patent application filing included the secure, triple-controlled system for data over a network, which protects against data theft or alteration by one or more ("e.g., two") corrupt insiders working together with outsiders. A combination of dual-control tamper-resistant routers, physical hardware keys and encryption keys enforces what the Company believes to be best practice security protocols with thorough auditing. A remote monitoring center provides a third level of control along with remote auditing and detailed change-control alerts. The Company can provide no assurance that it will be successful in obtaining its patents on its intellectual property.

Although we believe our products and services are unique and do not infringe upon the proprietary rights of others, there is no assurance that infringement claims will not be brought against us in the future. Any such claim could result in costly litigation or have a material adverse effect on our business, operating results and financial condition.

Governmental Regulation

Our wireless Internet access products currently operate in a combination of licensed and unlicensed spectrums.

 
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We provide Internet access, in part, using telecommunications services provided by third-party carriers. Terms, conditions and prices for telecommunications services are subject to economic regulation by state and federal agencies. As an Internet access provider, we are not currently subject to direct economic regulation by the FCC or any state regulatory body, other than the type and scope of regulation that is applicable to businesses generally. In April 1998, the FCC reaffirmed that Internet access providers should be classified as unregulated "information service providers" rather than regulated "telecommunications providers" under the terms of the 1996 Telecommunications Act (the "1996 Act"). As a result, we are not subject to federal regulations applicable to telephone companies and similar carriers merely because we provide our services using telecommunications services provided by third-party carriers. To date, no state has attempted to exercise economic regulation over Internet access providers.

Governmental regulatory approaches and policies to Internet access providers and others that use the Internet to facilitate data and communication transmissions are continuing to develop and, in the future, we could be exposed to regulation by the FCC or other federal agencies or by state regulatory agencies or bodies. In this regard, the FCC has expressed an intention to consider whether to regulate providers of voice and fax services that employ the Internet, or IP, switching as "telecommunications providers," even though Internet access itself would not be regulated. The FCC is also considering whether providers of Internet-based telephone services should be required to contribute to the universal service fund, which subsidizes telephone service for rural and low-income consumers, or should pay carrier access charges on the same basis as applicable to regulated telecommunications providers. To the extent that we engage in the provision of Internet or Internet protocol-based telephony or fax services, we may become subject to regulations promulgated by the FCC or states with respect to such activities. We cannot assure you that these regulations, if adopted, would not adversely affect our ability to offer certain enhanced business services in the future. Due to the increasing popularity and use of the Internet by broad segments of the population, it is possible that laws and regulations may be adopted with respect to the Internet pertaining to content of Web sites, privacy, pricing, encryption standards, consumer protection, electronic commerce, taxation, and copyright infringement and other intellectual property issues. No one is able to predict the effect, if any, that any future regulatory changes or developments may have on the demand for our Internet access or other Internet-related services. Changes in the regulatory environment relating to the Internet access industry, including the enactment of laws or promulgation of regulations that directly or indirectly affect the costs of telecommunications access or that increase the likelihood or scope of competition from national or regional telephone companies, could materially and adversely affect our business, operating results and financial condition.

Our future telecommunications business is subject to regulations under both state and federal telecommunications laws which are fluid and rapidly changing. On the state level, rules and policies are set by each state's Public Utility Commission or Public Service Commission (collectively, PUC). At the federal level, the Federal Communication Commission (FCC), among other agencies, dictates the rules and policies which govern interstate communications providers. The FCC is also the main agency in charge of creating rules and regulations to implement the 1996 Act. The 1996 Act opened the local telecommunications markets to competition by mandating the elimination of many legal, regulatory, economic and operational barriers to competitive entry. These changes provide us with new opportunities to provide local telephone services on a more cost-effective basis.

The FCC has granted direct broadcast satellite (DBS) and multi-channel, multi-point distribution service (MMDS) operator rights on a national basis similar to the mandatory access provided to franchise cable operators in some state and local jurisdictions. The FCC has adopted rules prohibiting homeowners associations, manufactured housing parks and state and local governments from imposing any restriction on a property owner that impairs the owner's installation, maintenance or use of DBS and MMDS antennas one meter or less in diameter or diagonal measurement. We do not believe our business will be significantly impacted by these rights.

Certain wireless broadband services are subject to regulation by the FCC. At the federal level, the FCC has jurisdiction over wireless transmissions over the electromagnetic spectrum, all interstate and foreign telecommunications services, and many aspects of intrastate telecommunications. State and municipalities also may regulate many aspects of intrastate telecommunications. Broadband Internet-related regulatory policies are continuing to develop and it is possible that our services could be subject to additional regulations in the future. The extent of regulations and their impact on its business and its ability to compete are currently unknown.

Due to the increasing popularity and use of the Internet, it is possible that additional laws, regulations or legal precedent may be adopted with respect to the Internet, covering issues such as content, privacy, pricing, unsolicited email, encryption standards, consumer protection, electronic commerce, taxation, copyright infringement and other intellectual property issues. ERF Wireless cannot predict the impact, if any, that any future legal or regulatory changes or developments may have on its business, financial condition and results of operations. Changes in the legal or regulatory environment relating to the Internet access industry, including changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies, cable operators or others, could have a material adverse effect on its business, financial condition and results of operations.

 
10

 

Employees

As of March 16, 2010, we employ 73 full-time employees and 4 consultants. We have no collective bargaining agreements with our employees, and believe relationships are satisfactory.

Customers

The Company had one customer that represented approximately 4% of gross sales for the year ended December 31, 2009. During the year ended December 31, 2008, the Company had one customer that represented 11% of the Company's gross sales.

Research and Development

We provide internal research and development for our patent pending CryptoVue technology. Otherwise, we rely on the providers of the products we sell to upgrade their products through research and development. Consequently, we do not perform material research and development and we have not incurred any material research and development costs during the two previous fiscal years and do not anticipate incurring any such costs in the current fiscal year.
ITEM 1A. RISK FACTORS

Risks Related to Our Business

The following factors affect our business and the industry in which we operate. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or which we currently consider immaterial may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows, or prospects could be materially adversely affected.

A prolonged economic recession or depression will have an adverse effect on our operating results.

Continued adverse economic conditions will impact both business and residential customers that utilize our wireless services and products. It should be expected that adverse economic conditions will negatively impact our results of operations.

We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.

We have incurred annual operating losses since our inception. As a result, at December 31, 2009, we had an accumulated deficit of $39,133,000. Our gross revenues for the year ended December 31, 2009 were $5,533,000, with a loss from operations of $7,642,000. As we pursue our business plan, we expect our operating expenses to increase, especially in the areas of sales, marketing and acquisitions. As a result of these expected cost increases, we may incur losses from operations in 2010.

We have a limited cash and liquidity position and need to raise additional funds to fund operations.

As of December 31, 2009, we had cash and cash equivalents balances of $228,000 and negative working capital of $3,380,000. As of December 31, 2009, we had long-term indebtedness of approximately (i) $5.5 million on our credit facility, (ii) $1.6 million of capital leases, and (iii) $2.3 million of outstanding notes. The Company has a $10.5 million unsecured revolving credit facility, bearing interest at an annum rate of 12%, which matures in December 2011, and as of December 31, 2009, there was approximately $5,051,000 available under that facility. Additionally, we have available project and equipment financing of up to $14,562,000. We believe our cash and available credit facilities afford us adequate liquidity for 2010, although we will likely need to raise additional capital during this period to fund our anticipated growth for our oil and gas wireless business. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity funding at this time, and equity funding may not be available to us on favorable terms, if at all. As such there is no assurance that we can raise equity capital from external sources when such need arises, the failure of which could cause us to curtail operations.

We may not be successful in acquiring other existing wireless companies, which could negatively affect our offerings and sales.

Our business plan is dependent on acquiring existing companies that expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities, and we may not be able to make such acquisitions. These acquisitions are important to ensure that our products, services and technologies are compatible with third-party products and technologies, to enable us to sell or license our services and products to potential new customers and into potential new markets, and to enable us to continue with our existing customers. There can be no assurance that we will identify the best acquisitions for our business or enter into acquisitions of other companies on acceptable terms or at all. The failure to make strategic acquisitions could have a material adverse effect on our business or financial results. If we cannot make significant strategic acquisitions as our target markets and technology evolve, the sales opportunities for our services and products could deteriorate.


 
11

 

A default of the terms of our significant debt obligations may subject us to the risk of foreclosure on certain of our assets.

As of December 31, 2009, certain operating assets, inventory, furniture and accounts receivable are pledged as collateral on $2,677,000 of outstanding notes and capital leases. The occurrence of an event of default under any of our obligations might subject us to foreclosure by the lenders to the extent necessary to repay any amounts due. If a foreclosure were to happen, it would have a material adverse effect on our financial condition.

The Company's revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause its stock price to decline.

The Company's revenue and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, operating results may be below the expectations of investors, and the price of our common stock may decline. Factors that could cause quarterly fluctuations include:
 
 
·
The ability to raise the necessary capital to execute mergers, acquisitions and asset purchases, as needed to implement the Company's strategic plan;
 
 
·
The ability to keep current customers and secure new customers;
 
 
·
The ability to acquire existing rural wireless broadband networks throughout North America and the ability to secure customers in the rural regions in which the Company acquires these wireless broadband networks; and
 
 
·
The ability to secure new regional banking network customers for both the construction and design of new broadband networks and for the maintenance and monitoring of these broadband networks.
 
 
Accordingly, the failure to obtain significant future revenue, lower than expected revenue in the future, increased losses in the future, and decreased working capital could adversely affect our stock price and liquidity.

During 2009, the majority of our revenue was generated from short-term agreements.

For the year ended December 31, 2009, the majority of our revenues resulted from short-term, terminable at will, arrangements. We did not have any customers that provided revenue in excess of 10%. There is no assurance that our customers will continue to conduct business with us in the future, the failure of which could have a material adverse effect on our business operations.

We compete with many companies that are larger and better capitalized than us.

We face competition from many entities with significantly greater financial resources, well-established brand names and larger customer bases. We may become subject to price competition for our services as companies seek to enter our industry or current competitors attempt to gain market share. We expect competition to intensify in the future and expect significant competition from traditional and new telecommunications companies including, local, long distance, cable modem, Internet, digital subscriber line, microwave, mobile and satellite data providers. If we are unable to make or keep our products competitively priced and attain a larger market share in the markets in which our products compete, our levels of sales and our ability to achieve profitability may suffer.

We utilize the unlicensed spectrum, which is subject to intense competition, low barriers of entry and potential interference from multiple competing users.

We presently utilize unlicensed spectrum in connection with our broadband service offerings. While unlicensed spectrum is regulated by the FCC, it is available to multiple simultaneous users and may be subject to interference, which may reduce the quality of the service provided to subscribers. The availability of unlicensed spectrum is limited, and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum used by the Company currently or which it may in the future utilize. Accordingly, utilization of unlicensed spectrum could threaten our ability to reliably deliver services.


 
12

 

The licensing of additional spectrum in our markets by the FCC could introduce additional competition.

The FCC regulates the spectrum bands in which the companies and their competitors operate. The FCC can make additional spectrum available for use or change the way existing spectrum is used, which may result in additional competitors entering our markets and providing services that may directly compete with our offerings. In particular, in January 2008, the FCC offered several blocks of spectrum in the 700 MHz frequency range as part of Auction 73. This frequency range has been determined to be suitable for offering data, voice and video services particularly in sparsely populated rural areas. As a result, the licensing and eventual build out of this spectrum may bring additional competition to the Company’s principal markets.

A system failure could delay or interrupt our ability to provide products or services and could increase our costs and reduce our revenues.

Our operations are dependent upon our ability to support a highly complex network infrastructure. Many of our customers are particularly dependent on an uninterrupted supply of services. Any damage or failure that causes interruptions in our operations could result in loss of these customers. To date, we have not experienced any significant interruptions or delays which have affected our ability to provide services to our clients and we believe that we have satisfactory back-up systems in place. Because our headquarters and infrastructure are located in the Texas Gulf Coast area, there is likelihood that our operations may be affected by hurricanes or tropical storms, tornados, or flooding. The occurrence of a natural disaster, operational disruption or other unanticipated problem could cause interruptions in the services we provide and significantly impair our ability to generate revenue and achieve profitability.

Our industry changes rapidly due to evolving technology standards and our future success will depend on our ability to continue to meet the sophisticated needs of our customers.

Our future success will depend on our ability to address the increasingly sophisticated needs of our customers. We will have to develop and introduce enhancements to our existing services and products on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. We expect that we will have to respond quickly to rapid technological change, changing customer needs, frequent new service and product introductions and evolving industry standards that may render existing products and services obsolete. As a result, our position in existing markets or potential markets could be eroded rapidly by new services or product advances. The life cycles of products utilizing our services are difficult to estimate. Our growth and future financial performance will depend in part upon our ability to enhance existing services and applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements and respond to competitive products. We expect that our wireless service will continue to require substantial investments. We may not have sufficient resources to make the necessary investments. Any of these events could have a material adverse effect on our business, quarterly and annual operating results and financial condition.

An inability to overcome competition from alternative communication systems could adversely affect our results of operations.

We already face, and may increasingly encounter, competition from competing wireless technologies that are constantly improving. In addition, our technology competes with other high-speed solutions, such as wired DSL, cable networks, fiber optic cable and satellite technologies. Our service competes with alternative communications systems on the basis of reliability, price and functionality. For example, the performance and coverage area of our wireless systems are dependent on certain factors that are outside of our control, including features of the environment in which the systems are deployed, such as the amount of clutter (natural terrain features and man-made obstructions) and the radio frequency available. Depending on specific customer needs, these obstacles may make our technology less competitive in comparison with other technologies and make other technologies less expensive or more suitable. Our business may also compete in the future with products and services based on other wireless technologies and other technologies that have yet to be developed.

We may not be able to successfully upgrade our existing network infrastructure.

If the number of subscribers using our network and the complexity of its services increase, it will require more infrastructure, network and customer service resources to maintain the quality of its services. We may experience quality deficiencies, cost overruns and delays in implementing network improvements and expansion, in maintenance and upgrade projects, including slower than anticipated technology migrations. If we do not implement necessary developments and network upgrades successfully, or if it experiences inefficiencies, operational failures, or unforeseen costs during implementation, we may lose customers or incur additional liabilities.

If unauthorized persons gain access to our network, subscribers may perceive its network and services as not secure, which may adversely affect our ability to attract and retain subscribers and expose the Company to liability.

Although we take certain measures to guard against unauthorized access to our network, we may be unable to anticipate or implement adequate preventive measures against unauthorized access. Unauthorized parties may overcome our encryption and security systems and obtain access to data on customers’ networks, including on a device connected to such network. In addition, because we operate and control our network and our subscribers' Internet connectivity, unauthorized access of our network could result in damage to customers’ networks and to the computers or other devices used by their subscribers. An actual or perceived breach of network security, regardless of whether the breach is the Company’s fault, could harm public perception of the effectiveness of its security measures, adversely affect the ability to attract and retain subscribers, expose the Company to significant liability and adversely affect its business prospects


 
13

 

We are subject to extensive regulation that could limit or restrict our activities. If we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, and past due fees and interest, which may adversely affect our financial condition and results of operations.

Our business, including the acquisition, lease, maintenance, and use of spectrum licenses, is extensively regulated by federal, state and local governmental authorities. A number of federal, state and local privacy, security and consumer laws also apply to our business. These regulations and their application are subject to continual change as new legislation, regulations or amendments to existing regulations are adopted from time to time by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services we are able to offer and may impact the rates, terms and conditions of our services. Regulation of companies that offer competing services, such as cable and DSL providers and telecommunications carriers, also affects our business.

Certain wireless broadband services are subject to regulation by the FCC. At the federal level, the FCC has jurisdiction over wireless transmissions over the electromagnetic spectrum, all interstate and foreign telecommunications services, and many aspects of intrastate telecommunications. Wireless broadband services may become subject to greater state or federal regulation in the future. The scope of the regulations that may apply and the impact of such regulations on our competitive position are presently unknown and could be detrimental to their business and prospects.

Much of the law related to the liability of Internet service providers remains unsettled. For example, many jurisdictions have adopted laws related to unsolicited commercial email or “spam” in the last several years. Other legal issues, such as the sharing of copyrighted information, transporter data flow, universal service, and liability for software viruses could become subjects of additional legislation and legal development. We cannot predict the impact of these changes on them. Regulatory changes could have a material adverse effect on our business, financial condition or results of operations.

We depend upon our intellectual property and our failure to protect existing intellectual property or secure and enforce such rights for new proprietary technology could adversely affect our future growth and success.

The Company has filed trademark and patent applications to protect intellectual property rights for technology that it develops. The Company's future success also may depend upon its ability to obtain additional licenses for other intellectual properties. The Company may not be successful in acquiring additional intellectual property rights with significant commercial value on acceptable terms. Even if the Company is successful in acquiring such rights, it can provide no assurance that it will be successful in adapting or deploying them as to the timing or cost of such development efforts or as to the commercial success of the resulting products or services.

Our competitors may develop non-infringing products or technologies that adversely affect our future growth and revenues.

It is possible that our competitors will produce proprietary technologies similar to ours without infringing on our intellectual property rights. We also rely on unpatented proprietary technologies. It is possible that others will independently develop the same or similar technologies or otherwise obtain access to the unpatented technologies upon which we rely for future growth and revenues. Failure to meaningfully protect our trade secrets, know-how or other proprietary information could adversely affect our future growth and revenues.

We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow.

Significant litigation regarding intellectual property exists in our industry. Competitors and other third parties may infringe on our intellectual property rights. Alternatively, competitors may allege that we have infringed on their intellectual property rights, resulting in significant litigation expenses. Any claims, even those made by third parties who are without merit, could:
 
 
·
be expensive and time consuming to defend, resulting in the diversion of management's attention and resources;
 
 
·
require us to cease making, licensing or using products or systems that incorporate the challenged intellectual property; or
 
 
·
require us to spend significant time and money to redesign, re-engineer or re-brand our products or systems if feasible.
 

 
14

 


If the wireless broadband market does not evolve as we anticipate, our business may be adversely affected.

If we fail to properly assess and address the broadband wireless market or if our services fail to achieve market acceptance for any reason, our business and quarterly and annual operating results would be materially adversely affected. Since the market for our products is still evolving, it is difficult to assess the competitive environment or the size of the market that may develop. In addition, technologies, customer requirements and industry standards may change rapidly. If we cannot improve or augment our services and products as rapidly as existing technologies, customer requirements and industry standards evolve, our products or services could become obsolete. The introduction of new or technologically superior products by competitors could also make our services less competitive or obsolete. As a result of any of these factors, our position in existing markets or potential markets could be eroded.

Future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.

As part of our business strategy, we intend to acquire companies and technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities. If we fail to achieve the anticipated benefits of any acquisitions we complete, our business, operating results, financial condition and prospects may be impaired. Acquisitions and investments involve numerous risks, including:
 
 
·
difficulties in integrating operations, technologies, services, accounting and personnel;
 
 
·
inability to manage our growth;
 
 
·
difficulties in supporting and transitioning customers of our acquired companies to our technology platforms and business processes;
 
 
·
ability to maintain sufficient internal controls;
 
 
·
diversion of financial and management resources from existing operations;
 
 
·
difficulties in obtaining regulatory approval for technologies and products of acquired companies;
 
 
·
potential loss of key employees;
 
 
·
if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which dilution could adversely affect the market price of our stock;
 
 
·
inability to generate sufficient revenues to offset acquisition or investment costs; and
 
 
 
·
potential write-offs of acquired assets.
 
Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. It is also possible that at some point in the future we may decide to enter new markets, thus subjecting ourselves to new risks associated with those markets.

Risks Related to Our Securities

There is currently a limited market for our securities, and any trading market that exists in our securities may be highly illiquid and may not reflect the underlying value of our net assets or business prospects.

Although our common stock is traded on the OTC Bulletin Board, there is currently a limited market for our securities and there can be no assurance that an improved market will ever develop.  Investors are cautioned not to rely on the possibility that an active trading market may develop.


 
15

 

The market price of our common stock is very volatile and the value of your investment may be subject to sudden decreases.

The trading price for our common stock has been, and we expect it to continue to be, volatile. For example, the closing bid price of our stock has fluctuated between $.15 per share and $.27 per share since January 1, 2010. The price at which our common stock trades depends upon a number of factors, including our historical and anticipated operating results and general market and economic conditions, which are beyond our control. Factors such as fluctuations in our financial and operating results, technological innovations or new commercial products and services by us or our competitors, could also cause the market price of our common stock to fluctuate substantially. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations. These broad market fluctuations may lower the market price of our common stock. Moreover, during periods of stock market price volatility, share prices of many companies have often fluctuated in a manner not necessarily related to their operating performance. Accordingly, our common stock may be subject to greater price volatility than the stock market as a whole.

As our share price is volatile, we may be or become the target of securities litigation, which is costly and time-consuming to defend.

In the past, following periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders have often instituted class action litigation. If the market value of our securities experience adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.

Our “blank check” preferred stock could be issued to prevent a business combination not desired by management or our current majority shareholders.

Our articles of incorporation authorize the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined by our board of directors without shareholder approval. Our preferred stock could be utilized as a method of discouraging, delaying, or preventing a change in our control and as a method of preventing shareholders from receiving a premium for their shares in connection with a change of control.

Future sales of our common stock in the public market could lower our stock price.

We may sell additional shares of common stock in subsequent public or private offerings. We may also issue additional shares of common stock to finance future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

A significant number of shares of common stock may be issued during the next 12 months. The issuance of these shares will have a dilutive effect on our common stock and may lower our stock price.

We have reserved for issuance the following as of December 31, 2009:
 
 
·
5,995,000 shares of common stock are eligible to be issued pursuant to the Company's option plans;
 
 
·
6,838,000 shares of common stock underlying outstanding common stock purchase warrants at prices between $0.45 and $5.00 per share;
 
 
·
56,843,000 shares of common stock issuable upon conversion of Series A Preferred Stock  The effective purchase price per share of common stock issued upon conversion will be determined at the date of conversion.
 
Accordingly, the issuance of these shares will have a dilutive effect from both a net tangible book value per share basis and from a number of shares of common stock outstanding basis. This overhang could have a depressive effect on our common stock price.

We presently do not intend to pay cash dividends on our common stock.

We currently anticipate that no cash dividends will be paid on the common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance the future expansion of our business.

 
16

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
17

 

ITEM 2. PROPERTIES

Our principal offices are located in League City, Lubbock and Blanco Texas, pursuant to term leases believed to reflect market rates and terms, including the following:
Location
 
 
Function
 
 
 
Size (square feet)
 
 
   
Approximate
Monthly lease payment
 
 
 
League City, TX
ERF Wireless Inc. Corporate Headquarters
   
24,700
   
$
20,583
 
                   
Lubbock, TX
WBS West Texas Operational Division Headquarters
   
10,000
   
$
5,000
 
                   
Blanco, TX
WBS Central Texas Operational Division Headquarters
   
2,400
   
$
2,200
 

Our interests in our communications sites are comprised of operating leases created by long-term lease agreements at market rates. A typical tower site consists of a compound enclosing the tower site, a tower structure, and an equipment shelter that houses a variety of transmitting, receiving and switching equipment.

The Company occupies office and tower facilities under several non-cancelable operating lease agreements expiring at various dates through September 2018, and requiring payment of property taxes, insurance, maintenance and utilities.
ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 
18

 


PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price Information

Our common stock trades on the OTC Electronic Bulletin Board under the symbol ERFW. The market for our common stock is limited, sporadic, and highly volatile. The following table sets forth the approximate high and low closing sales prices for our common stock for the last two fiscal years. The quotations reflect inter-dealer prices, without retail markups, markdowns, or commissions and may not represent actual transactions.
   
High
   
Low
 
             
YEAR 2009
           
Quarter ended December 31
  $ 0.36     $ 0.21  
Quarter ended September 30
  $ 0.38     $ 0.25  
Quarter ended June 30
  $ 0.39     $ 0.25  
Quarter ended March 31
  $ 0.66     $ 0.29  
YEAR 2008
               
Quarter ended December 31
  $ 0.45     $ 0.21  
Quarter ended September 30
  $ 0.42     $ 0.19  
Quarter ended June 30
  $ 0.71     $ 0.31  
Quarter ended March 31
  $ 1.01     $ 0.49  
 
 
Stockholders

As of March 16, 2010, we believe there were approximately 446 holders of record of our common stock.

Dividends

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and do not anticipate declaring or paying any cash dividends on our common stock in the near future.
Equity Compensation Plan Information

The following table sets forth certain information, as of December 31, 2009, concerning securities authorized for issuance under our plans;

 
19

 

   
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants & Rights
   
Weighted Averaged Exercise Price of Outstanding Options, Warrants & Rights
   
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders:
       
                   
None
    -       -       -  
                         
Equity compensation plans not approved by security holders:
                 
                         
2008 Non-Qualified Stock Compensation Plan
    125,000     $ 0.43       5,995,378  
                         
                         
Total
    125,000     $ 0.43       5,995,378  

 
Recent Sales of Unregistered Securities

Set forth below is certain information concerning issuances of common stock that were not registered under the Securities Act that occurred in the fourth quarter of fiscal 2009.
 
Common Stock Issued for Cash Consideration
 
 
·
No shares were issued for cash consideration for the three months ended December 31, 2009.
 
Common Stock Issued for Debt Conversions and Services Rendered
 
 
·
In October, 2009, 236,378 shares of common stock at average price of $.32 were issued for debt conversions and services rendered.
 
 
·
In December, 2009, 628,176 shares of common stock at average price of $.26 were issued for debt conversions and services rendered.
 
Common Stock Issued Upon Conversion of Series A Preferred Stock
 
 
·
On October 2, 2009, an accredited investor acquired 1,867,634 shares of common stock pursuant to Preferred A Conversions.
 
 
·
On October 30, 2009, an accredited investor acquired 7,470,540 shares of common stock pursuant to Preferred A Conversions.
 
The issuances referenced above were completed pursuant to either Section 4(2) of the Securities Act or Regulation D of the Securities Act. With respect to issuances made pursuant to Section 4(2) of the Securities Act, the transactions did not involve any public offering and were sold to a limited group of persons. Each recipient either received adequate information about ERF Wireless or had access, through employment or other relationships, to such information, and ERF Wireless determined that each recipient had such knowledge and experience in financial and business matters that they were able to evaluate the merits and risks of an investment in the Company.
 
With respect to issuances made pursuant to Regulation D of the Securities Act, ERF Wireless determined that each purchaser was an "accredited investor" as defined in Rule 501(a) under the Securities Act, or if such investor was not an accredited investor, that such investor received the information required by Regulation D.
 
Except as otherwise noted, all sales of the Company's securities were made by officers of the Company who received no commission or other remuneration for the solicitation of any person in connection with the respective sales of securities described above. The recipients of securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions.

 
20

 

Equity Repurchases by Issuer

The Company did not affect any common stock repurchases during fiscal 2009.
ITEM 6. SELECTED FINANCIAL DATA

Not applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
21

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the other sections of this annual report on Form 10-K, including the financial statements.

Overview

Historically, our revenues have been generated primarily from Internet and construction services. Our Internet revenues result from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues result from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry. During fiscal 2009, approximately 91% of our revenues were generated from internet services and 6% of our revenues were generated from construction services. We expect that our internet services will experience the most growth during fiscal 2010, as we expect to devote significant capital resources to developing the oil and gas market utilizing wireless services.

During the 2009 fiscal year and the first quarter of fiscal 2010, the Company made significant progress with its strategic business plan as evidenced by the completion and announcement of numerous agreements. These include:

 
Ø
The entry into two exclusive reseller agreements with Schlumberger to market our wireless services and products to the oil and gas industry in the United States, Canada and the Gulf of Mexico.
 
Ø
The integration of the Centramedia asset acquisition, providing the Company access to a large geographic area in the Panhandle of Texas with active oil and gas drilling activity.
 
Ø
The acquisition and integration of two wireless companies in the oil and gas rich Barnett Shale; Frontier Internet LLC and iTexas.net.
 
Ø
The announcement of a Master Services Agreement with Platinum Communications for the provisioning and delivery of bandwidth services to mobile and static oil and gas customers throughout the Canadian Province of Alberta.
 
Ø
The announcement of a Master Services Agreement with Partnership Broadband to deliver digital oilfield solutions in north central Texas.  The network has some 160 towers and covers more than 15,000 square mile in the oil and gas rich Barnett Shale.
 
Ø
The announcement of a Master Services Agreement with The Computer Works to deliver digital oilfield solutions in north central Arkansas.  The network has some 42 towers and covers more than 3,000 square miles in the oil and gas rich Fayetteville Shale.
 
Ø
The announcement of a Master Services Agreement with Southwestern Wireless to deliver digital oilfield solutions in West Texas and New Mexico.  The network added more than 37,000 square miles in these oil and gas rich territories.
 
Ø
The Company registered and obtained FCC approval for nearly 90 WiMAX 3.665 GHz transmission locations in strategic oil and natural gas development and production areas in the United States.
 
Ø
The completion of a BranchNet encrypted enterprise-class wireless banking network for West Texas State Bank located in the oil and gas rich Permian Basin including the Midland and Odessa, Texas markets.  The network is comprised of FCC-licensed frequencies creating a 165Mbps backbone, delivering speeds in excess of 40Mbps to each branch bank location.  Additionally, the Company entered into a WiNet agreement with the bank and has begun reselling digital oilfield solutions off of this network to its oil and gas customers in this region.
 
Ø
The announcement of energy sector expert, Douglas Gibson joining ERF Wireless as energy industry consultant.  In the mid-1990’s Gibson founded Petrosol, generating over $110 million in total sales through 2002.  Petrosol, in 2000, became a partner of Sensa, which developed fiber optic sensing technologies for use within the oil and gas industry.  Schlumberger later acquired Sensa in 2001.
 
Ø
The announcement of the immediate start of design, development and construction of a new wireless network in the oil and gas rich Haynesville Shale in northwestern Louisiana and northeastern Texas; covering hundreds of natural gas drilling rigs in one of the fastest growing gas shale developments in North America.

The Company's revenue is generated primarily from the sale of wireless communications products and services, including providing reliable enterprise-class wireless broadband services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.

The Company records revenues from its fixed-price, long-term contracts using the percentage-of-completion method. Revenues are recorded based on construction costs incurred to date as a percentage of estimated total cost at completion. The percentage-of-completion, determined by using total costs incurred to date as a percentage of estimated total costs at completion, reflects the actual physical completion of the project. This method of revenue recognition is used because management considers total cost to be the best available measure of progress on the contracts.


 
22

 

The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product warranties and reduces revenue for estimated product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold.

Service revenue is principally derived from wireless broadband services, including internet, voice, and data and monitoring service. Subscriber fees are recorded as revenues in the period during which the service is provided.
Results of Operations
Year Ended December 31, 2009, Compared to Year Ended December 31, 2008

The following table sets forth summarized consolidated financial information for the years ended December 31, 2009 and 2008:

   
Fiscal Year Ended December 31,
 
                         
($ in thousands)
 
2009
   
2008
   
$ Change
   
% Change
 
Total sales
  $ 5,533     $ 5,155     $ 378       7%  
Cost of goods sold
    3,254       3,121       133       4%  
Gross profit
    2,279       2,034       245       12%  
Percent of total sales
    41%       39%                  
Operating expenses
    9,921       9,653       268       3%  
Loss from operations
    (7,642 )     (7,619 )     (23 )     0%  
Other income/(expense)
    (1,230 )     (4,123 )     2,893       -70%  
Net loss
  $ (8,872 )   $ (11,742 )   $ 2,870       -24%  


For the year ended December 31, 2009, the Company's consolidated operations generated net sales of $5,533,000 compared to prior-year net sales of $5,155,000 for the year ended December 31, 2008. The $378,000 increase in net sales is primarily attributable to $1,164,000 increase in WBS due to increase recurring wireless broadband services growth through asset acquisitions and oil and gas revenue from deployment of our Mobile Broadband Trailers (MBTs) in the oil patch regions, offset with a $203,000 decrease in banking network installation and services due to a slowdown in the banking industry resulting in reduced network construction revenues in 2009, and a decrease of $583,000 in wireless paging service and infrastructure construction revenue For the year ended December 31, 2009, the Company had a gross profit margin of 41%, compared to a gross profit margin of 39% for the prior-year period ended December 31, 2008. The $245,000 increase in gross profit margin percentage is primarily due to net increase sales volume which attributed to margins as follows; (i) approximately $462,000 increase in gross margin attributable to the increased wireless customer base and strong margins as result of recent acquisitions (ii) an increase of $133,000  in gross margins for banking network services primarily due to efficient execution and timely completion of bank contracts, and (iii) offset by approximately $350,000 decrease in gross margin due to a reduction in paging and wireless infrastructure construction revenue.

The Company incurred a net loss of $8,872,000 for the year ended December 31, 2009. The Company's principal components of the net loss for the year ended December 31, 2009, included approximately $2,704,000 in depreciation and amortization expenses, $1,293,000 of interest expense, $50,000 of derivative income, $1,411,000 of other general and administrative expense, $4,870,000 in employment expenses and $1,832,000 in professional services.
Sales Information

Set forth below is a table presenting summarized sales information for our business segments for the years ended December 31, 2009 and 2008:

($ in thousands)
 
Fiscal Year Ended December 31,
Business Segment
   
2009
 
% of Total
   
2008
 
% of Total
   
$ Change
 
% Change
Wireless Messaging Services
 
$
           159
 
3%
 
$
           742
 
14%
 
         (583)
 
-79%
Wireless Bundled Services
   
        5,057
 
91%
   
        3,893
 
76%
   
        1,164
 
30%
Enterprise Network Services
   
           317
 
6%
   
           520
 
10%
   
         (203)
 
-39%
Total Sales
 
$
        5,533
 
100%
 
$
        5,155
 
100%
   $
378
 
7%

For the year ended December 31, 2009, net sales increased to $5,533,000 from $5,155,000 for the year ended December 31, 2008. The overall increase of 7% was primarily attributable to increase sales of WBS of $1,164,000 in recurring wireless broadband services growth through asset acquisitions and oil and gas revenue from deployment of our Mobile Broadband Trailers (MBTs) in the oil patch regions, offset with a decrease in WMS of $583,000 due to wireless paging service and infrastructure construction revenue, and a decrease in sales of ENS of $203,000 in banking network installation and services resulting in reduced network construction revenues in 2009.


 
23

 

Cost of Goods Sold

The following tables set forth summarized cost of goods sold information for the years ended December 31, 2009 and 2008:

($ in thousands)
 
Fiscal Year Ended December 31,
   
2009
 
% of Total
   
2008
 
% of Total
   
$ Change
 
% Change
Wireless Messaging Services
 
$
           207
 
6%
 
$
           440
 
14%
 
$
                 (233)
 
-53%
Wireless Bundled Services
   
        2,773
 
85%
   
        2,072
 
66%
   
                  701
 
34%
Enterprise Network Services
   
           274
 
8%
   
           609
 
20%
   
                 (335)
 
-55%
Total cost of sales
 
$
        3,254
 
100%
 
$
        3,121
 
100%
 
$
                  133
 
4%

   
Fiscal Year Ended December 31,
($ in thousands)
 
2009
   
2008
   
$ Change
   
% Change
                         
Products and integration service
  $ 1,317     $ 1,511     $ (194 )     -13 %
Rent and maintenance
    475       391       84       21 %
Salary and related cost
    23       78       (55 )     -71 %
Depreciation
    1,340       900       440       49 %
Other costs
    99       241       (142 )     -59 %
Total cost of sales
  $ 3,254     $ 3,121     $ 133       4 %
 
For the year ended December 31, 2009, cost of goods sold increased by $133,000, or 4%, to $3,254,000 from $3,121,000 as compared to the year ended December 31, 2008. The increase of $133,000 in cost of goods sold is primarily attributable to a decrease of cost of goods sold of $233,000 in WMS due to reduced revenue in wireless paging service and infrastructure construction, a decrease of cost of goods sold of $335,000 in ENS due to slowdown in banking installations and offset with an increase of $701,000 in cost of goods sold in WBS due to increased recurring wireless broadband services growth through asset acquisitions and deployment of our Mobile Broadband Trailers (MBTs) in oil and gas regions.
Operations Expenses

The following table sets forth summarized operating expense information for the years ended December 31, 2009 and 2008:

   
Fiscal Year Ended December 31,
($ in thousands)
 
2009
   
2008
   
$ Change
   
% Change
                         
Employment expenses
  $ 4,870     $ 4,735     $ 135       3 %
Professional services
    1,832       1,868       (36 )     -2 %
Rent and maintenance
    444       405       39       10 %
Research and development
    -       25       (25 )     0 %
Depreciation and amortization
    1,364       876       488       56 %
Other general and administrative
    1,411       1,744       (333 )     -19 %
Total operating expenses
  $ 9,921     $ 9,653     $ 268       3 %

For the year ended December 31, 2009, operating expenses increased by 3% to $9,921,000, as compared to $9,653,000 for the year ended December 31, 2008. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:
 
 
·
A $135,000 increase in employment expense. The increase is primarily attributable to growth of the company through recent acquisitions;
 
 
·
A $36,000 decrease in professional services. The decrease is primarily related to accounting expenses;

 
24

 

 
 
·
A $39,000 increase in rent and maintenance. The increase is primarily attributable to growth of the company through recent acquisitions;
 
 
·
A $488,000 increase in depreciation and amortization; The increase is primarily attributable to growth of the company through recent acquisitions; and
 
 
·
A $333,000 decrease in other general and administrative expense.
Other (Income) Expense, Net

For the year ended December 31, 2009, the decrease in other expense is primarily attributable to interest expense, net on debt obligations totaling $1,293,000 and offset with a net derivative income of $50,000 as compared to interest expense, net of $887,000, loss on extinguishment of related party debt of $3,580,000 and offset with derivative income of $306,000 for the year ended December 31, 2008. The derivative expense represents the net unrealized (non-cash) charge during the year ended December 31, 2009 and 2008, in the fair value of our derivative instrument liabilities related to warrants and embedded derivatives in our debt instruments that have been bifurcated and accounted for separately.

Net Loss

For the year ended December 31, 2009, our net loss was $8,872,000 compared to a loss of $11,742,000 for the year ended December 31, 2008. The deceased in the loss for the year ended December 31, 2009, as compared to the year ended December 31, 2008 is primarily attributable to prior year loss on extinguishment of related party debt of $3,580,000 and offset with an increase in employment and depreciation and amortization expense.
Cash Flows

The Company's operating activities increased net cash used by operating activities to $2,959,000 in the year ended December 31, 2009, compared to net cash used of $4,048,000 in the year ended December 31, 2008. The increase in net cash used by operating activities was primarily attributable to  an increase in the Company's net operating loss of $8,872,000, net of $5,494,000 non-cash charges combined with derivative income $50,000 to equal net non-cash charge of $5,444,000, combined together with $469,000 of cash provided by fluctuations in working capital requirements consisting of the combination of accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses, cost and profit in excess of billings, deferred liability lease and deferred revenue.

The Company's investing activities used net cash of $1,306,000 in the year ended December 31, 2009, compared to use of net cash of $974,000 in the year ended December 31, 2008. The increase in investing activities is primarily growing as a result wireless capabilities through asset acquisition and expansion of our infrastructure in Texas, New Mexico, Oklahoma and Louisiana.
 
The Company's financing activities provided net cash of $4,145,000 in the year ended December 31, 2009, compared to $3,159,000 of cash provided in year ended December 31, 2008. The cash provided in the year ended December 31, 2009, was primarily associated with the proceeds from equity financings, subordinated promissory financing, convertible debt financing and the line of credit, net.
Liquidity and Capital Resources

General

At December 31, 2009, the Company's current assets totaled $1,281,000 (including cash and cash equivalents of $228,000) total current liabilities were $4,661,000, resulting in negative working capital of $3,380,000. The Company has funded operations to date primarily through a combination of utilizing cash on hand, borrowings and raising additional capital through the sale of its securities. The Company’s operations for the year ended December 31, 2009, were as primarily funded by proceeds from the Company's line of credit totaling $3,618,000, subordinated promissory financing of $1,390,000, sale of restricted common stock, net to accredited investors of $334,000 and convertible debt financing of $150,000.

Current Debt Facility

At December 31, 2009, the Company had approximately $5,051,000 available on a $10.5 million unsecured revolving credit facility with Angus Capital Partners, which matures in December 2011. The terms of the two-year unsecured revolving credit facility will allow us to draw upon the facility as financing requirements dictate and provides for quarterly interest payments at an annual 12% rate. The loan may be prepaid without penalty or repaid at maturity.


 
25

 

Issuance of Common Stock
 
During the fiscal year ended December 31, 2009, we issued to various accredited investors and third parties (i) 1,918,000 shares of restricted common stock for net consideration of $334,000, (ii) 6,955,000 shares for services rendered and debt conversions, and (iii) 28,796,000 shares upon conversion of Series A Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the fiscal year ended December 31, 2009, we issued 6,023,000 shares of common stock to employees and business consultants, for aggregate consideration of $1,857,000 of services rendered, pursuant to a registration statement on form S-8.

Use of Working Capital

We believe our cash and available credit facilities afford us adequate liquidity for the balance of fiscal 2010. We anticipate that we will need additional capital in the future to continue to expand our business operations, which expenditures may include acquisitions and capital expenditures. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity funding at this time, and additional funding may not be available to us on favorable terms, if at all. As such there is no assurance that we can raise additional capital from external sources, the failure of which could cause us to curtail operations.

Contractual Obligations

The following table sets forth contractual obligations as of December 31, 2009:

   
Payments Due by Period
 
   
Total
   
Less than 1 Year
 
1-3 Years
   
3-5 Years
   
More than 5 Years
 
Contractual obligations:
                             
Long-term debt obligations
  $ 9,116     $ 3,040     $ 6,076     $ -     $ -  
Capital lease obligations
    1,984       1,053       793       138       -  
Operating lease obligations
    1,164       616       501       24       23  
Total contractual obligations
  $ 12,264     $ 4,709     $ 7,370     $ 162     $ 23  

The Company's contractual obligations consist of long-term debt of $7,772,000, derivative liabilities of $269,000, unamortized debt discount of $117,000, and interest expense of $958,000 as set forth in Note 12 to the company's financial statements, Notes Payable and Long-Term Debt. The capital lease obligations include interest as set forth in Note 12 in the future minimum lease payments schedule and certain obligations for operating leases requiring future minimal commitments under non-cancelable leases set forth in Note 14 - Commitments and Contingencies.

Off-Balance Sheet Arrangements

As of December 31, 2009 the Company did not have any significant off-balance-sheet arrangements other than certain office and tower facility operating leases requiring minimal commitments under non-cancelable leases disclosed in the table above.

Critical Accounting Policies and Estimates

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to seven years.

Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment losses have been recorded since inception.

Long-Lived Assets

We review our long-lived assets, to include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be recoverable. Such circumstances include, but are not limited to:

 
26

 


 
 
·
a significant decrease in the market price of the asset;
 
 
·
a significant change in the extent or manner in which the asset is being used;
 
 
·
a significant change in the business climate that could affect the value of the asset;
 
 
·
a current period loss combined with projection of continuing loss associated with use of the asset;
 
 
·
a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life;
 

We continually evaluate whether such events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we may incur charges for impairment in the future.

Derivative Instruments

In connection with the sale of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. Because of the limited trading history for our common stock, the Company estimates the future volatility of its common stock price based on not only the history of its stock price but also the experience of other entities considered comparable to the Company.

Recent Accounting Pronouncements

 
In July 2009, the FASB established the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States. This guidance was included in the Codification under FASB Accounting Standard Codification (“ASC”) Topic 105, Generally Accepted Accounting Principles. All prior accounting standard documents were superseded by the Codification and any accounting literature not included in the Codification is no longer authoritative. Rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. The Codification became effective for the Company beginning with the third quarter of 2009. Therefore, beginning with the third quarter of 2009, all references made by the Company in its consolidated condensed financial statements use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, did not have a material impact on the Company’s consolidated condensed financial statements.

In April 2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic 350, Intangibles Goodwill and Other. This pronouncement amends the factors to be considered in determining the useful life of intangible assets accounted for pursuant to previous topic guidance. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This pronouncement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, and its adoption had no effect on the Company’s consolidated financial statements.


 
27

 

In March 2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic 815, Derivatives and Hedging. This pronouncement requires enhanced disclosure about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of the pronouncement is to provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. This pronouncement became effective in the first quarter of 2009, and its adoption from January 1, 2009 had no effect on the Company’s consolidated financial statements.

In February 2008, the FASB issued ASC 820 — 10 (formerly “Financial Staff Position SFAS No. 157-2”), which delayed the effective date of ASC 820 - 10 (formerly “SFAS No. 157”) for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. Nonfinancial assets and liabilities that the Company measures at fair value on a non-recurring basis consist primarily of property and equipment, goodwill, and intangible assets, which are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).The adoption of the provisions of ASC 820-10 did not have a material impact on the Company’s consolidated financial position and results of operations or cash flows.

Effective June 30, 2009, the Company adopted guidance issued by the FASB and included in ASC 855-10, “Subsequent Events,” which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date through the date the financial statements are issued.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.
 
 

 
28

 

 
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
ERF Wireless, Inc.
League City, Texas

We have audited the accompanying consolidated balance sheets of ERF Wireless, Inc., as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ERF Wireless, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ LBB & ASSOCIATES LTD., LLP

LBB & ASSOCIATES LTD., LLP
Houston, Texas
March 29, 2010
 
29


ERF WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 and 2008
($ in thousands except share data)

   
December 31,
 
December 31,
 
   
2009
   
2008
 
             
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 228     $ 348  
Accounts receivable, net
    494       248  
Accounts receivable, other
    78       52  
Inventories
    222       193  
Costs and profits in excess of billings
    17       427  
Prepaid expenses and other current assets
    242       494  
Total current assets
    1,281       1,762  
                 
Property and equipment
               
Property and equipment
    9,347       7,751  
Less: accumulated depreciation
    (3,712 )     (1,649 )
Net property and equipment
    5,635       6,102  
                 
Goodwill
    1,255       436  
Intangible assets, net
    701       1,059  
Other assets
    245       264  
Total assets
  $ 9,117     $ 9,623  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
       
Current liabilities:
               
Notes payable and current portion of long-term debt
  $ 1,881     $ 702  
Capital leases and current portion of long-term capital leases
    854       861  
Accounts payable
    586     $ 981  
Accrued expenses
    486       1,269  
Derivative liabilities
    269       78  
Deferred liability and revenue
    585       237  
Total current liabilities
    4,661       4,128  
                 
Long-term debt of line of credit, net of current portion
    5,449       2,183  
Long-term debt, net of current portion
    442       661  
Long-term capital leases, net of current portion
    789       1,581  
Deferred liability and revenue, net of current portion
    150       316  
Total liabilities
    11,491       8,869  
                 
Commitments
               
                 
Shareholders’ equity (deficit):
               
Preferred stock  -  $.001 par value
               
Series A authorized  25,000,000 shares
               
Issued and outstanding at December 31, 2009, and
       
December 31, 2008, 3,043,580 and 4,085,514, respectively
    3       4  
Common stock  -  $.001 par value
               
Authorized 475,000,000 shares
               
Issued and outstanding at December 31, 2009, and
       
December 31, 2008, 145,575,735 and 101,884,119, respectively
    146       102  
Additional paid in capital
    36,785       31,084  
Accumulated deficit
    (39,308 )     (30,436 )
Total shareholders’ equity (deficit)
    (2,374 )     754  
                 
Total liabilities and shareholders' equity (deficit)
  $ 9,117     $ 9,623  
 
See accompanying notes to consolidated financial statements.
 
30

 
ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
($ in thousands except share data and loss per share)

   
2009
   
2008
 
             
Sales:
           
Products
  $ 196     $ 772  
Services
    5,337       4,383  
Total sales
    5,533       5,155  
                 
Costs of goods sold:
               
Products and integration services
    1,317       1,511  
Rent, repairs and maintenance
    475       391  
Salary and related cost
    23       78  
Depreciation
    1,340       900  
Other cost
    99       241  
Total costs of goods sold
    3,254       3,121  
Gross profit
    2,279       2,034  
Operating expenses:
               
Selling, general and administrative
    8,557       8,777  
Depreciation and amortization
    1,364       876  
Total operating expenses
    9,921       9,653  
Loss from operations
    (7,642 )     (7,619 )
Other income (expenses):
               
Interest expense, net
    (1,293 )     (887 )
Loss on extinguishment of related party debt
    -       (3,580 )
Gain on sale of assets and other income
    13       38  
Derivative income
    50       306  
Total other income (expense)
    (1,230 )     (4,123 )
Net loss
  $ (8,872 )   $ (11,742 )
Net loss per common share:
               
Basic
  $ (0.07 )   $ (0.15 )
Diluted
  $ (0.07 )   $ (0.15 )
 
 
See accompanying notes to consolidated financial statements.
 
31

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
($ and shares in thousands)

                           
Additional
         
Total
 
    Common Stock    
Preferred Stock
   
Paid in
   
Accumulated
   
Shareholders’
 
   
Shares
   
Value
   
Shares
   
Value
   
Capital
   
Deficit
   
Equity (Deficit)
 
                                           
Total shareholders’ equity (deficit)
    61,541     $ 62       3,312     $ 3     $ 19,098     $ (18,694 )   $ 469  
    as of December 31, 2007
                                                       
                                                         
Net loss
    -       -       -       -       -       (11,742 )     (11,742 )
                                                         
New stock issued to shareholders:
                                                       
Conversion of preferred stock to common stock
    22,896       24       (1,226 )     (1 )     (23 )     -       -  
For services rendered and interest
    5,615       5       -       -       2,370       -       2,375  
For retirement of debt
    635       -       -       -       186       -       186  
Asset acquisition
    5,171       5       -       -       1,645       -       1,650  
For retirement of debt and conversion of convertible preferred stock
    -       -       2,000       2       2,998       -       3,000  
Loss on extinguishment of related party debt
    -       -       -       -       3,580       -       3,580  
Stock based compensation
    -       -       -       -       29       -       29  
Warrant expense
    -       -       -       -       27       -       27  
Proceeds from sale of common stock, net
    6,026       6       -       -       1,174       -       1,180  
                                                         
Total shareholders’ equity
                                                       
    as of December 31, 2008
    101,884       102       4,086       4       31,084       (30,436 )     754  
                                                         
Net loss
    -       -       -       -       -       (8,872 )     (8,872 )
                                                         
New stock issued to shareholders:
                                                       
Conversion of preferred stock to common stock
    28,796       29       (1,542 )     (1 )     (28 )     -       -  
For services rendered and interest
    8,069       8       -       -       2,449       -       2,457  
For retirement of debt
    1,636       2       -       -       473       -       475  
Asset acquisition
    3,273       3       -       -       881       -       884  
For retirement of debt and conversion of convertible preferred stock
    -       -       500       -       1,500       -       1,500  
Stock based compensation
    -       -       -       -       -       -       -  
Derivative liability
    -       -       -       -       39       -       39  
Warrant expense
    -       -       -       -       55       -       55  
Proceeds from sale of common stock, net
    1,918       2       -       -       332       -       334  
Total shareholders’ equity
                                                       
    as of December 31,  2009
    145,576     $ 146       3,044     $ 3     $ 36,785     $ (39,308 )   $ (2,374 )
 
 
See accompanying notes to consolidated financial statements.
 
32

 
ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
($ in thousands)
 
 
 
2009
   
2008
 
             
Cash flows from operating activities
           
Net loss
  $ (8,872 )   $ (11,742 )
                 
Adjustments to reconcile net loss to net cash used by operating activities:
               
Loss on extinguishment of related party debt
    -       3,580  
Gain on sale of assets
    -       (26 )
Amortization of debt discount
    228       31  
Depreciation and amortization
    2,704       1,776  
Stock issued for services rendered and interest
    2,457       2,375  
Derivative (income)
    (50 )     (277 )
Bad debt expense
    105       439  
Changes in:
               
Accounts receivable, net
    (318 )     (279 )
Accounts receivable, other
    (21 )     62  
Inventories
    (29 )     (75 )
Prepaid expenses
    276       50  
Costs and profits in excess of billings
    410       (17 )
Accounts payable
    (395 )     (108 )
Accrued expenses
    364       337  
Deferred liability and revenue
    182       (174 )
Total adjustment
    5,913       7,694  
Net cash used by operating activities
    (2,959 )     (4,048 )
                 
Cash flows from investing activities
               
Proceeds from sale of assets
    -       27  
Purchase of property and equipment
    (1,158 )     (558 )
Business acquisitions, net of cash acquired
    (167 )     (321 )
Change in other assets
    19       (122 )
Net cash used by investing activities
    (1,306 )     (974 )
                 
Cash flows from financing activities
               
Net proceeds from line of credit
    3,618       2,810  
Proceeds from notes payable
    150       50  
Proceeds from long-term debt obligations
    1,390       -  
Payment of long-term debt obligations
    (465 )     (314 )
Payment on capital lease obligations
    (882 )     (567 )
Proceeds from sale of common stock, net
    334       1,180  
Net cash provided by financing activities
    4,145       3,159  
                 
Net decrease in cash
    (120 )     (1,863 )
Cash and cash equivalents at the beginning of the period
    348       2,211  
Cash and cash equivalents at the end of the period
  $ 228     $ 348  
                 
Supplemental disclosure of cash flow information:
         
Net cash paid during the year for:
               
Interest
  $ 361     $ 258  
Income taxes
  $ -     $ -  
                 
Supplemental non-cash investing and financing activities:
         
Conversion of debt through issuance of common stock
  $ 475     $ 186  
Conversion of debt and interest through issuance of Preferred stock
  $ 1,500     $ 3,000  
Issuance of shares for asset acquisition
  $ 884     $ 1,650  
Property acquired under capital lease
  $ 68     $ 1,597  
Note payable for acquisition
  $ 444     $ 750  
 
See accompanying notes to consolidated financial statements.
 
33

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - BASIS OF PRESENTATION

Nature of the Company

ERF Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity wireless products and services to a broad spectrum of customers in primarily underserved, rural and suburban parts of the United States. We provide our customers with high quality broadband services and basic communications services to residential, oil and gas, and bank customers in the areas that otherwise would not be able to receive such services. We are also a comprehensive solutions provider to other enterprise customers, providing them with a wide array of communications services including high speed broadband, voice over Internet Protocol (VOIP) telephone and facsimile service, and video security.

Historically, our revenues have been generated primarily from Internet and construction services. Our Internet revenues have resulted from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues typically have consisted of revenues generated from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry.

Our revenues are principally internet and construction. Our internet revenues are recorded in our subsidiary, “Wireless Bundled Services, Inc. (WBS)”, construction of bank networks in our subsidiary, “Enterprise Network Services, Inc. (ENS)” and other construction in our subsidiary, “Wireless Messaging Services, Inc. (WMS)” and Oil & Gas Division (O&G). Please refer to segment footnote 16 for additional information regarding the Company’s operating divisions.

We have evaluated subsequent events through the date the consolidated financial statements were issued.

Basis of Accounting

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (SEC). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations have been reflected herein.

Principles of Consolidation

The consolidated financial statements include the accounts of the company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
 
RECLASSIFICATION
 
Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 financial presentation. These reclassifications have no impact on net loss.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less at the date of purchase. At various times during the year, the Company maintained cash balances in excess of FDIC insurable limits. Management feels this risk is mitigated due to the longstanding reputation of these banks.

Credit Risk

In the normal course of business, the Company extends unsecured credit to the majority of its customers. The company controls credit risk associated with its receivables through credit checks, approvals, and monitoring procedures. Generally, the company requires no collateral from its customers.
 
34

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leases

We recognize lease expense on a straight-line basis over the minimum lease terms which expire at various dates through 2018. These leases are for office and radio tower facilities and are classified as operating leases. For leases that contain predetermined, fixed escalations of the minimum rentals, we recognize the rent expense on a straight-line basis and record the difference between the rent expense and the rental amount payable in liabilities.

Leasehold improvements made at the inception of the lease are amortized over the shorter of the asset life or the initial lease term as described above. Leasehold improvements made during the lease term are also amortized over the shorter of the asset life or the remaining lease term.

On December 15, 2006, the Company entered into an agreement with Southwest Enhanced Network Services, LP, a wireless broadband company, to assume multiple tower and office leases in the greater Lubbock, Texas area. As part of the agreement the Company received $825,000 in cash to offset certain of the future operating lease costs. The $825,000 is recorded as a deferred leased liability and recognized as a reduction to rent expense on a straight-line basis over the lease term as described above. At the end of December 2009 and 2008, this deferred lease liability balance was $313,000 and $476,000, respectively.

Assets Held under Capital Leases

Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.

Allowance for Doubtful Accounts

The Company uses the allowance method to account for uncollectible accounts receivable. The Company's estimate is based on historical collection experience and a review of the current status of accounts receivable. The company reviews its accounts receivable balances by customer for accounts greater than 90 days old and makes a determination regarding the collectibility of the accounts based on specific circumstances and the payment history that exists with such customers. The company also takes into account its prior experience, the customer's ability to pay and an assessment of the current economic conditions in determining the net realizable value of its receivables. The company also reviews its allowances for doubtful accounts in aggregate for adequacy following this assessment. Accordingly, the company believes that its allowances for doubtful accounts fairly represent the underlying collectibility risks associated with its accounts receivable.

Deferred Revenues

Revenues that are billed in advance of services being completed are deferred until the conclusion of the period of the service for which the advance billing relates. Deferred revenues are included on the balance sheet in current and long-term liabilities until the service is performed and then recognized in the period in which the service is completed. The Company's deferred revenues consist of billings in advance for services being rendered for its wireless broadband, banking network monitoring and maintenance and wireless messaging customers and, accordingly, are deferred and recognized monthly as earned. The Company had deferred revenues in current and long-term liabilities of approximately $422,000 and $77,000 as of December 31, 2009, and December 31, 2008, respectively.

Advertising Costs

Advertising costs are expensed when incurred. For the periods ended December 31, 2009 and 2008, the Company expensed $118,000 and $111,000, respectively.

Stock-Based Compensation

Stock based compensation expense is recorded in accordance with FASB ASC Topic 718 formerly SFAS 123R (Revised 2004), Share-Based Payment , for stock and stock options awarded in return for services rendered. The expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis over the service period, which is the vesting period. The Company estimates forfeitures that it expects will occur and records expense based upon the number of awards expected to vest.
Derivative Instruments

In connection with the sale of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
 
35

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. Because of the limited trading history for our common stock, the Company estimates the future volatility of its common stock price based on not only the history of its stock price but also the experience of other entities considered comparable to the Company.

Inventories

Inventories are valued at the lower of cost or market. The cost is determined by using the average cost method. Inventories consist of the following items as of December 31, 2009 and 2008 in thousands:

     
December 31,
   
December 31,
   
     
2009
   
2008
   
 
Raw material
  $ 63     $ 113    
 
Finished goods
    159       80    
      $ 222     $ 193    

The Company has pledged all the inventory of WBS of $159,000 and $56,000 as collateral against outstanding notes and capital leases as of December 31, 2009 and December 31, 2008, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to seven years.

Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment losses have been recorded since inception.

Goodwill

Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets at the dates of acquisition. Under current accounting pronouncements, the company is required to annually assess the carrying value of goodwill associated with each of its distinct business units that comprise its business segments of the company to determine if impairment in value has occurred.

Intangible Assets

Intangible assets are amortized using methods that approximate the benefit provided by the utilization of the assets. The Company continually evaluates the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or impairment in value. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our Intangibles assets, we may incur charges for impairment in the future.


36

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Long-Lived Assets

We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be recoverable. Such circumstances include, but are not limited to:
 
a significant decrease in the market price of the asset;
 
a significant change in the extent or manner in which the asset is being used;
 
a significant change in the business climate that could affect the value of the asset;
 
a current period loss combined with projection of continuing loss associated with use of the asset;
 
a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

We continually evaluate whether such events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we may incur charges for impairment in the future.

Revenue Recognition

The Company's revenue is generated primarily from the sale of wireless communications products and services on a nationwide basis, including providing enterprise-class wireless broadband services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.

The Company records revenues from its fixed-price, long-term contracts using the percentage-of-completion method. Revenues are recorded based on construction costs incurred to date as a percentage of estimated total cost at completion. The percentage-of-completion, determined by using total costs incurred to date as a percentage of estimated total costs at completion, reflects the actual physical completion of the project. If the current projected costs on a fixed fee contract exceed projected revenue, the entire amount of the loss is recognized in the period such loss is identified.

The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product warranties and reduces revenue for estimated product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold.

Service revenue is principally derived from wireless broadband services, including internet, voice, and data and monitoring service. Subscriber fees are recorded as revenues in the period during which the service is provided.

Warranty

The Company's suppliers generally warrant the products distributed by the Company and allow returns of defective products, including those that have been returned to the Company by its customers. The Company does not independently warrant the products that it distributes, but it does provide warranty services on behalf of the supplier.

Income Taxes

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
 
37

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, inventory, accounts receivable and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.

Beneficial Conversion

Equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible equity instruments. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as a deemed dividend or interest expense and an increase to additional paid-in-capital.

Basic Loss per Share

The Company is required to provide basic and dilutive earnings (loss) per common share information.

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.

Diluted net loss per common share is computed by dividing the net loss, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods ended December 31, 2009, and December 31, 2008, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of fully diluted net loss per common share.

Recent Accounting Pronouncements

In July 2009, the FASB established the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States. This guidance was included in the Codification under FASB Accounting Standard Codification (“ASC”) Topic 105, Generally Accepted Accounting Principles. All prior accounting standard documents were superseded by the Codification and any accounting literature not included in the Codification is no longer authoritative. Rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. The Codification became effective for the Company beginning with the third quarter of 2009. Therefore, beginning with the third quarter of 2009, all references made by the Company in its consolidated condensed financial statements use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, did not have a material impact on the Company’s consolidated condensed financial statements.

In April 2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic 350, Intangibles Goodwill and Other. This pronouncement amends the factors to be considered in determining the useful life of intangible assets accounted for pursuant to previous topic guidance. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This pronouncement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, and its adoption had no effect on the Company’s consolidated financial statements.

In March 2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic 815, Derivatives and Hedging. This pronouncement requires enhanced disclosure about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of the pronouncement is to provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. This pronouncement became effective in the first quarter of 2009, and its adoption from January 1, 2009 had no effect on the Company’s consolidated financial statements.

In February 2008, the FASB issued ASC 820 — 10 (formerly “Financial Staff Position SFAS No. 157-2”), which delayed the effective date of ASC 820 - 10 (formerly “SFAS No. 157”) for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. Nonfinancial assets and liabilities that the Company measures at fair value on a non-recurring basis consist primarily of property and equipment, goodwill, and intangible assets, which are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).The adoption of the provisions of ASC 820-10 did not have a material impact on the Company’s consolidated financial position and results of operations or cash flows.

Effective June 30, 2009, the Company adopted guidance issued by the FASB and included in ASC 855-10, “Subsequent Events,” which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date through the date  the financial statements are issued..
 
38

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - ACCOUNTS RECEIVABLE

Accounts Receivable consists of the following (in thousands):

     
December 31,
   
December 31,
   
     
2009
   
2008
   
 
Accounts receivable
  $ 623     $ 731    
 
Allowance for doubtful accounts
    (129 )     (483 )  
 
Accounts receivable, net
  $ 494     $ 248    

The Company has pledged substantially all the accounts receivables of WBS as collateral against outstanding notes and capital leases.
NOTE 3 - PROPERTY AND EQUIPMENT:

Components of property and equipment consist of the following items (in thousands):

     
December 31,
   
December 31,
   
     
2009
   
2008
   
 
Automobiles
  $ 297     $ 201    
 
Operating equipment
    7,526       5,393    
 
Office furniture and equipment
    243       219    
 
Leasehold improvements
    71       67    
 
Computer equipment
    358       296    
 
Building
    29       29    
 
Land
    37       37    
 
Construction in progress
    786       1,509    
 
Total property and equipment
    9,347       7,751    
 
Less accumulated depreciation
    (3,712 )     (1,649 )  
 
Net property and equipment
  $ 5,635     $ 6,102    

Depreciation expense was $2,063,000 and $1,088,000 for the twelve months ended December 31, 2009 and 2008, respectively.

Operating equipment under construction in progress is primarily due to the build out of our wide area network of WiNet constructed by our subsidiary ENS.

The Company has pledged substantially all the operating equipment and some furniture and vehicles as collateral against outstanding notes and capital leases.

NOTE 4 - GOODWILL

At December 31, 2009 and 2008, goodwill totaled $1,255,000 and $436,000 respectively. The goodwill increase during 2009 and 2008 is attributable to the following acquisitions:
 
On June 1, 2009, the Company acquired assets from Frontier Internet, LLC and iTEXAS Net and recognized goodwill of $819,000, which is not subject to amortization.
 
On January 11, 2008, the Company acquired assets from Crosswind, Inc. and recognized goodwill of $176,000, which is not subject to amortization.
 
 
39

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 5 - INTANGIBLE ASSETS, NET

Intangible assets consist of the following (in thousands):
 
           
December 31, 2009
   
     
Useful Life
(in years)
   
Gross
Carrying
Amount
     
Accumulated Amortization
   
Net
Carrying
Amount
   
                             
 
Customer relationships
  3.0     $ 2,311     $ 1,610     $ 701    
 
Workforce in place
  3.0       125       125       -    
 
Non-compete agreement
  3.0       100       100       -    
 
Developed technology
  3.0       20       20       -    
            $ 2,556     $ 1,855     $ 701    
 
           
December 31, 2008
   
     
Useful Life 
(in years)
   
Gross
Carrying
Amount
    Accumulated Amortization      
Net
Carrying
Amount
   
                             
 
Customer relationships
  3.0     $ 2,028     $ 969     $ 1,059    
 
Workforce in place
  3.0       125       125       -    
 
Non-compete agreement
  3.0       100       100       -    
 
Developed technology
  3.0       20       20       -    
            $ 2,273     $ 1,214     $ 1,059    

Intangible assets are amortized using methods that approximate the benefit provided by the utilization of the assets. Customer relationships, workforce in place, non-compete-agreements and developed technology are amortized on a straight-line basis. We continually evaluate the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or reduction in value.

On June 1, 2009, the Company acquired from Frontier Internet, LLC and iTEXAS Net, a customer list which was valued at $283,000 and is being amortized over three years.

On January 11, 2008, the Company acquired from Crosswind, Inc. a customer list which was valued at $206,000 and is being amortized over three years.

Total amortization of intangibles was $641,000 and $688,000 for the twelve months ended December 31, 2009 and 2008, respectively. The estimated amortization expense for the remaining years will be $568,000 for 2010, $94,000 for 2011 and $39,000 in 2012.

NOTE 6 - DEBT CONVERSION

The Company during the fourth quarter 2009 signed a debt conversion agreement to convert a portion of the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 500,000 shares of its Series A Preferred Stock for the conversion of $352,838 of debt and $1,147,162 in accrued interest for a total amount of $1,500,000. The Company issued one share of Series A Convertible Preferred Stock for every Three Dollars ($3.00) in claims converted. As additional consideration for the conversion, when the number of shares of outstanding common stock equals or exceeds 120 million shares, the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 20 votes to 50 votes on all matters in which the common stock holders and preferred stock holders vote together. The fair market value of the Series A stock was valued at $1,325,000 on the date of issuance, which was exchange for a conversion of $1,500,000 in debt and interest. Thus a gain on extinguishment of related party debt of $175,000 was recognized on the exchange as a credit to paid in capital.

The Company during the fourth quarter 2008 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 2,000,000 shares of its Series A Preferred Stock for the conversion of $3,000,000 in debt. The Company issued one share of Series A Convertible Preferred Stock for every One Dollar and Fifty Cents ($1.50) in claims converted.  As additional consideration for the conversion, when the number of shares of outstanding common stock equals or exceeds 120 million shares, the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 20 votes to 50 votes on all matters in which the common stock holders and preferred stock holders vote together. The fair market value of the Series A stock was valued at $6,580,000 on the date of issuance, which was exchange for a conversion of $3,000,000 in debt.  Thus a loss on extinguishment of related party debt of $3,580,000 was recognized on the exchange.
 
40

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - COMMON STOCK, PREFERRED STOCK AND WARRANTS

The total number of shares of stock of all classes which the Company shall have the authority to issue is 500,000,000, of which 25,000,000 shall be shares of preferred stock with a par value of $.001 per share ("Preferred Stock"), and 475,000,000 shall be shares of common stock with a par value of $.001 per share ("Common Stock").

Common Stock

As of December 31, 2009, there were 145,575,735 shares of its $.001 par value common stock issued and outstanding.

During the twelve months ended December 31, 2009, the Company issued 9,705,000 shares of common stock which was valued at the closing market price on the date of issuance of such shares, which were issued in lieu of cash as payment for the following (in thousands):
 
 
December 31, 2009
 
Supplemental
Non-Cash
Disclosure
   
 
Professional fees
  $ 1,292    
 
Settlements
    36    
 
Salary and compensation
    804    
 
Other services rendered
    325    
 
Total for services, interest, liabilities and compensation
  $ 2,457    
             
 
Notes payable
  $ 475    
 
During the twelve months ended December 31, 2009, the Company issued 3,273,000 shares of common stock in lieu of cash for asset acquisitions of $884,000.  The value of the 3,273,000 common shares was based on the average market price of the Company’s common shares over the 2-day period before and after the terms of the acquisition were agreed to and announced.
 
During the twelve months ended December 31, 2009, we issued to various accredited investors an aggregate of 1,918,000 shares of restricted common stock for net consideration of $334,000. We relied on Section 4(2) of the Securities Act in effecting this transaction.

During the twelve months ended December 31, 2008, the Company issued 11,421,000 shares of common stock which was valued at the closing market price on the date of issuance of such shares, which were issued in lieu of cash as payment for the following (in thousands):
 
 
December 31, 2008
 
Supplemental
Non-Cash
Disclosure
   
 
Professional fees
  $ 895    
 
Settlements
    311    
 
Salary and compensation
    943    
 
Other services rendered
    226    
 
Total for services, interest, liabilities and compensation
  $ 2,375    
             
 
Notes payable
  $ 186    
 
During the twelve months ended December 31, 2008, the Company issued 5,171,000 shares of common stock in lieu of cash for asset acquisitions of $1,650,000.  The value of the 5,171,000 common shares was based on the average market price of the Company’s common shares over the 2-day period before and after the terms of the acquisition were agreed to and announced.
 
During the twelve months ended December 31, 2008, we issued to various accredited investors an aggregate of 6,026,000 shares of restricted common stock for net consideration of $1,180,000. We relied on Section 4(2) of the Securities Act in effecting this transaction.
 
41

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Preferred Stock

The Company has 25,000,000 shares of Series A Preferred Stock authorized of which 3,043,580 shares were issued and outstanding as of December 31, 2009. With respect to the Series A Preferred Stock outstanding at December 31, 2009, the Company would be required to issue 56,842,956 shares of its common stock. In December 2005, the holders of Series A Preferred Stock entered into a conversion restriction agreement limiting the number of shares of Series A Preferred Stock that can be converted into shares of Company common stock. Compliance with this agreement is voluntary. During the fourth quarter of 2009, the conversion restriction agreement limited the conversion of Series A Preferred Stock to no more than 14,740,671 shares of common stock. During the fourth quarter of 2009, Series A Preferred Stock was converted into 9,338,174 shares of common stock.

Each share of Series A Preferred Stock is convertible at holder's option for 18.676347 shares common stock. The holder of Series A Preferred Stock is required to give a 65-day notice of conversion to the Company.  The holders of the Series A Preferred Stock are entitled to receive out of funds of the Company legally available therefore, dividends at the same rate as dividends are paid with respect to outstanding shares of common stock.

Holders of shares of the Series A Preferred Stock are entitled to vote, together with the holders of our common stock, on all matters submitted to a vote of the Company’s stockholders. Each share of Series A Preferred Stock entitles the holder thereof to 20 votes on all matters submitted to a vote of the Company’s stockholders.  Additionally, as part of the December 2008 debt reduction agreement the Company agreed to increase the Series A voting rights to 50 votes per share when the Company’s outstanding common stock exceeds 120,000,000 shares.

Holders of the Series A Preferred Stock are also entitled to elect one director at any meeting of the Company’s stockholder at which such directors are to be elected.  The right of the holders of the Series A Preferred Stock to elect such additional director shall cease when all outstanding shares of Series A Preferred Stock have been converted or are no longer outstanding.  The shares of the Series A Preferred Stock are not redeemable by the Company.

In the event of any liquidation, the holders of shares of the Series A Preferred Stock are entitled to receive out of the assets of the Company available for distribution to the Company’s stockholders, before any distribution of assets is made to holders of any other class of capital stock of the Company, an amount equal to the purchase price per share, plus accumulated and unpaid dividends thereon to the date fixed for distribution.

Warrants
 
The Company had warrants outstanding to third parties to purchase 6,837,544 shares of common stock as of December 31, 2009.
 
Warrants to purchase 389,999 shares of common stock at a purchase price of $3.57 per share were issued by the Company in September 2005 and November 2005. Specifically, the Company issued convertible notes for $1,500,000 to accredited investors and issued warrants to purchase 389,999 shares of common stock at $3.57 per share, subject to adjustment, expiring September 2010, as additional consideration.
 
During 2009, The Company issued convertible subordinated notes for $1,390,000 to accredited investors and issued warrants to purchase 1,558,297 shares of common stock at $.45 per share, subject to adjustment if future equity financing is below their exercise price, expiring three years from issuance, as additional consideration.
 
Warrants to purchase 4,889,248 shares of Common stock at a purchase price $5.00 per share were issued by the Company during 2006 thru 2009. For the twelve months ending December 31, 2009, the Company has attributed $55,000 in warrant expense for the fair value of these warrants.
 
The following table summarizes warrants that are issued, outstanding and exercisable:
 
 
Warrants Outstanding
   
 
Exercise
 
Expiration
 
December 31,
               
December 31,
   
  Price   Date  
2008
   
Issued
   
Exercised
   
2009
   
  3.57  
Sep-10
    389,999       -       -       389,999    
  0.45  
Mar-12
    -       1,558,297       -       1,558,297    
  5.00  
August-11 thru May-14
    3,775,272       1,113,976       -       4,889,248    
            4,165,271       2,672,273       -       6,837,544    

NOTE 8 – STOCK PLAN AND EMPLOYEE STOCK OPTIONS
 
In April 2008, the Board of directors adopted a Non-Qualified Stock Option Plan whereby 15,000,000 shares were reserved for issuance. As of December 31, 2009 and 2008, under the 2008 Non-Qualified Stock Option Plans, 9,004,622 and 2,981,459 shares were issued and outstanding by certain employees and consultants for services rendered, respectively.
 
42

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Stock Plan activity was as follows for the twelve months ended December 31, 2009 and 2008, respectively:
 
   
2008
 
   
Plan
 
Shares initially reserved
    15,000,000  
         
Remaining shares January 01, 2009
    12,018,541  
         
Shares issued during 2009
    6,023,163  
         
Remaining shares available to be issued at December 31, 2009
    5,995,378  
         
Shares issued and outstanding as of December 31, 2009
    9,004,622  
         
         
    2008  
   
Plan
 
Shares Initially Reserved
    15,000,000  
         
Remaining shares January 01, 2008
    15,000,000  
         
Shares issued during 2008
    2,981,459  
         
Remaining shares available to be issued at December 31, 2008
    12,018,541  
         
Shares issued and outstanding as of December 31, 2008
    2,981,459  
 
The Company has granted to certain officers and employees 125,000 and 500,000 stock options which are currently exercisable. Option activity was as follows for the twelve months ended December 31, 2009 and 2008, respectively:

   
Shares
   
Weighted-Average
Exercise Price
 
Outstanding at beginning of year
    500,000     $ 0.57  
Granted
    -       -  
Exercised
    -       -  
Forfeited/cancelled
    (375,000 )     0.61  
                 
Outstanding at the end of period
    125,000     $ 0.43  
                 
Exercisable at December 31, 2009
    125,000     $ 0.43  
 
         
Weighted-Average Exercise Price
 
   
Shares
       
Outstanding at beginning of year
    3,302,000     $ 2.98  
Granted
    125,000       0.43  
Assumed through acquisitions
    -       -  
Exercised
    -       -  
Forfeited/cancelled
    (2,927,000 )     3.28  
                 
Outstanding throughout the period
    500,000     $ 0.57  
                 
Exercisable at December 31, 2008
    500,000     $ 0.57  
 
The weighted average fair value of the individual options granted during the twelve months ended December 31, 2009, is estimated at $.43 on the date of grant. The fair values were determined using a Black-Scholes option-pricing model with the following assumptions:
 
   
9/30/2009
Assumptions
 
Options
Dividend yield
 
0.00%
Risk-free rate for term
 
2.62%
Volatility
 
84.00%
Remaining life
 
1.08
 
 
43

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Information about options outstanding was as follows at December 31, 2009:
 
       
Remaining
     
Average
Class
 
Number
 
Average Contractual
 
Number
 
Exercise
Exercise Price
 
Outstanding
 
Life in Years
 
Exercisable
 
Price
                 
$0.43
 
125,000
 
1.08
 
        125,000
 
 $         0.43
                 
                 
   
125,000
 
1.08
 
125,000
 
 $         0.43

NOTE 9 - INCOME TAXES

The Company adopted the provisions of ASC Topic 760 (formerly “SFAS No. 109”), "Accounting for Income Taxes." Implementation of ASC Topic 760 did not have a material cumulative effect on prior periods nor did it result in a change to the current year's provision.

The effective tax rate for the Company is reconcilable to statutory tax rates as follows:

   
December 31, 2009
 
December 31, 2008
             
U. S. Federal statutory tax rate
 
%
          34
 
 %
              34
U.S. valuation difference
   
        (34)
   
            (34)
Effective U. S. tax rate
   
             -
   
                 -
Foreign tax valuation
   
             -
   
                 -
Effective tax rate
   
             -
   
                 -

Income tax expense (benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. Federal income tax of 34% to pretax income from continuing operations as a result of the following (in thousands):

   
December 31, 2009
   
December 31, 2008
 
Computed expected tax benefit
  $
(3,016)
    $
(3,992)
 
Increase in valuation allowance
   
             3,016
     
                 3,992
 
Income tax expense
  $
-
    $
-
 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2009, and December 31, 2008, are presented below (in thousands):

   
December 31, 2009
   
December 31, 2008
 
Deferred tax assets:
               
Net operating loss carry forwards
  $
(12,610)
    $
(9,594)
 
Less valuation allowance
   
           12,610
     
              9,594
 
Net deferred tax assets
  $
-
    $
-
 

The Company has determined that a valuation allowance of $12,610,000 at December 31, 2009, is necessary to reduce the deferred tax assets to the amount that will more than likely than not be realized. The change in valuation allowance for 2009 was approximately $3,016,000. As of December 31, 2009, the Company has a net operating loss carry-forward of $34,844,000, which is available to offset future federal taxable income, if any, with expiration beginning 2012 and ending 2029.
 
 
44

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 10 - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amount):

    For the twelve months ended December 31, 2009  
   
Income
   
Shares
   
Per-Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic EPS:
                 
Loss available to common stockholders
  $ (8,872 )     123,292     $ (0.07 )
Effect of dilutive securities
    -       -       -  
Diluted EPS:
                       
Loss available to common stockholders
  $ (8,872 )     123,292     $ (0.07 )
and assumed conversions
                       
                         
    For the twelve months ended December 31, 2008  
   
Income
   
Shares
   
Per-Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic EPS:
                       
Loss available to common stockholders
  $ (11,742 )     78,074     $ (0.15 )
Effect of dilutive securities
    -       -       -  
Diluted EPS:
                       
Loss available to common stockholders
  $ (11,742 )     78,074     $ (0.15 )

For the twelve months ended December 31, 2009, dilutive securities existed. Diluted earnings per share reflect the potential dilution of security that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities.
 
The calculation of diluted earnings per share for the twelve months ended December 31, 2009 does not include 125,000 shares of common stock assuming all employee stock options were exercised; 6,837,544 shares of common stock assuming all warrants were exercised; 14,740,671 shares of common stock assuming all Series A Preferred Stock (1% per participating trust or 11% of the prior quarter outstanding common shares based on 2005 restricted agreement) were converted due to their anti-dilutive effect.

NOTE 11 - MAJOR CUSTOMERS

The Company had gross sales of approximately $5,533,000 and $5,155,000 for the twelve months ended December 31, 2009 and 2008, respectively. The Company did not have any customer that represented 10% of the gross sales in the twelve months ended December 31, 2009. The Company had one customer that represented 11% of gross sales for the twelve months ended December 31, 2008.

NOTE 12 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES

Notes payable, long-term debts and capital leases consist of the following as of December 31, 2009 (in thousand s):

 
Terms
Maturity Date
 
Interest Rate
   
Gross Balance
   
Debt Discount
   
Net Balance
 
Bancleasing, Inc.
$10,660 / Month including interest
October-14
    11.62%     $ 489     $ -     $ 489  
Agility Capital Lease
$86,968 / Month including interest
Various
    18.82%       1,143       -       1,143  
Balboa Lease
$225 / Month including interest
August-10
    27.74%       1       -       1  
De Lage Landen Lease
$691 / Month including interest
April-11
    19.12%       10       -       10  
Toyota
$517 / Month including interest
December-10
    8.01%       5       -       5  
Blanco National Bank
$3,913 / Month including interest
August-10
    9.50%       23       -       23  
Robert McClung, Momentum
$23,476 / Quarterly including interest
October-10
    7.50%       89       -       89  
George Kemper, TSTAR
$38,254 / Quarterly including interest
April-10
    7.50%       79       -       79  
Shane Griffths, Crosswind
$13,911 / Quarterly including interest
December-10
    7.50%       55       -       55  
Centramedia
$56,342 / Quarterly including interest
December-11
    7.50%       414       -       414  
Frontier Internet LLC
$33,846 / Quarterly including interest
May-12
    6.00%       312       -       312  
Ronnie D Franklin
$6,054 / Quarterly including interest
May-12
    6.00%       56       -       56  
Premium Assignment, Insurance notes
$2,434 / Month including interest
September-10
    7.54%       17       -       17  
Convertible Subordinated Financing
 1 year
Demand
    10.00%       1,390       117       1,273  
Line of credit
 2 years/ Quarterly interest (See below)
December-11
    12.00%       5,449       -       5,449  
Total debt
              $ 9,532     $ 117       9,415  
Less current maturities
                                (2,735 )
Add back debt discount current maturities
                                117  
Long-term debt
                              $ 6,797  
 
 
 
45

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The gross maturities of these debts are $2,735,000, $6,259,000, $185,000, $106,000 and $130,000 for the years ended December 31, 2010, 2011, 2012, 2013 and 2014, and thereafter, respectively.

Notes payable, long-term debts and capital leases consist of the following as of December 31, 2008 (in thousand s):

 
Terms
Maturity Date
 
Interest Rate
   
Gross Balance
   
Debt Discount
   
Net Balance
 
Bancleasing, Inc.
$10,660 / Month including interest
October-14
    11.62%     $ 556     $ -     $ 556  
Agility Capital Lease
$91,457 / Month including interest
Various
    18.82%       1,882       -       1,882  
Balboa Lease
$225 / Month including interest
August-10
    27.74%       4       -       4  
Liberty Finance
$517 / Month including interest
September-09
    13.97%       3       -       3  
Chase Bank
$449 / Month including interest
November-09
    5.89%       5       -       5  
Blanco National Bank
$3,913 / Month including interest
August-10
    9.50%       65       -       65  
Premium Assignment, Insurance notes
$2,199 / Month including interest
September-09
    8.65%       16       -       16  
Robert McClung, Momentum
$23,476 / Quarterly including interest
October-10
    7.50%       173       -       173  
George Kemper, TSTAR
$38,254 / Quarterly including interest
April-10
    7.50%       220       -       220  
Shane Griffths, Crosswind
$13,911 / Quarterly including interest
December-10
    7.50%       116       -       116  
Centramedia
$56,342 / Quarterly including interest
December-11
    7.50%       600       -       600  
Line of credit
 2 years/ Quarterly interest (See below)
March-11
    12.00%       2,183       -       2,183  
E-bond investor notes
 3 years/ Semiannual interest (See below)
Various
    10.00%       175       10       165  
Total debt
              $ 5,998     $ 10       5,988  
Less current maturities
                                (1,563 )
Less debt discount current maturities
                                10  
Long-term debt
                              $ 4,435  

Investor Notes

The following table summarizes the convertible debt activity for the period December 31, 2008, to December 31, 2009:

Description
 
Investor Notes
   
Warrant Liabilities
   
Compound Derivative Liability
   
Total
 
Fair value at December 31, 2008
  $ -     $ 29     $ -     $ 29  
01-01-09 to 03-31-09 change in fair value
    -       (5 )     -       (5 )
04-01-09 to 06-30-09 change in fair value
    -       (13 )     -       (13 )
07-01-09 to 09-30-09 change in fair value
    -       (3 )     -       (3 )
10-01-09 to 12-31-09 change in fair value
    -       (7 )     -       (7 )
Fair value at December 31, 2009
  $ -     $ 1     $ -     $ 1  

For the year ended December 31, 2009 and 2008, net derivative income was $28,000 and $271,000, respectively.

A Black-Scholes methodology was used to value the warrants, with the following assumptions.
Warrants
Assumptions
 
3/31/2009
6/30/2009
9/30/2009
12/31/2009
Dividend yield
 
0.00%
0.00%
0.00%
0.00%
Risk-free rate for term
 
0.81%
0.56%
0.40%
0.20%
Volatility
 
140.00%
140.00%
140.00%
130.00%
Maturity date
 
1.43 years
1.19 years
0.93 years
0.68 years
           
           
Warrants
Assumptions
 
3/31/2008
6/30/2008
9/30/2008
12/31/2008
Dividend yield
 
0.00%
0.00%
0.00%
0.00%
Risk-free rate for term
 
1.62%
2.91%
2.00%
0.76%
Volatility
 
180.00%
170.00%
155.00%
150.00%
Maturity date
 
2.43 years
2.18 years
1.93 years
1.68 years

Line of Credit
 
December 2009, the Company increased its unsecured revolving credit facility with certain private investors from $6.5 million to $10.5 million maturing December 30, 2011. The terms of the unsecured revolving credit facility allow the Company to draw upon the facility as financing requirements dictate and provide for quarterly interest payments at a 12% rate per annum. The payment of principal and interest may be paid in cash, common shares or preferred shares. At December 31, 2009, the line of credit of totaled $5,449,000 with a remaining line of credit of $5,051,000.
 
 
46

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
The Company during the fourth quarter 2009 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 500,000 shares of its Series A Preferred Stock for the conversion of $352,838 of debt and $1,147,162 in accrued interest for a total amount of $1,500,000. The fair market value of the Series A stock was valued at $1,325,000 at the time of the exchange, resulting in the recognition of a gain on extinguishment of related party debt of $175,000 in equity. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the  sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.

E-Series Bond Investor Note
 
The Company issued to certain accredited investors a principal amount of $1,200,000 of E-series bonds (the "Bonds") between May 2006 and June 2009, as of December 31, 2009 all remaining principal and interest has been converted to common stock. For every Bond converted the Company will issue a warrant to purchase one additional share of common stock at a price of $5.00 for every share of common stock that has been received from the conversion of the Bond principal.
 
The Bonds were determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature and the redemption option (compound embedded derivative liability). At the date of issuance the Bond, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the income statement. The Company uses the effective interest method to record interest expense and related debt accretion which was $41,793 for the twelve months ended December 31, 2009.

The following table summarizes the convertible debt activity for the period December 31, 2008, to December 31, 2009:

Description
 
E-Series
 Bonds
   
Compound
Derivative
 Liability
   
Total
 
                   
Fair value at December 31, 2008
  $ 165     $ 49     $ 214  
Fair value issuance at inception
    118       -       118  
01-01-09 to 03-31-09 change in fair value
    36       (1 )     35  
04-01-09 to 06-30-09 change in fair value
    5       (41 )     (36 )
07-01-09 to 09-30-09 change in fair value
    -       -       -  
10-01-09 to 12-31-09 change in fair value
    1       (7 )     (6 )
Conversions during 2009
    (325 )     -       (325 )
Fair value at December 31, 2009
  $ -     $ -     $ -  

For the year ended December 31, 2009 and 2008, net derivative income was $42,000 and $62,000, respectively.

A Black-Scholes methodology was used to value the warrants, with the following assumptions.

Warrants
Assumptions
 
3/31/2009
6/30/2009
9/30/2009
12/31/2009
Dividend yield
 
0.00%
0.00%
0.00%
0.00%
Risk-free rate for term
0.81%
0.56%
0.40%
0.20%
Volatility
 
140.00%
140.00%
140.00%
130.00%
Maturity date average
3.38 years
3.20 years
3.05 years
2.95 years
           
           
Warrants
Assumptions
 
3/31/2008
6/30/2008
9/30/2008
12/31/2008
Dividend yield
 
0.00%
0.00%
0.00%
0.00%
Risk-free rate for term
1.62%
2.91%
2.00%
0.76%
Volatility
 
180.00%
170.00%
155.00%
150.00%
Maturity date average
4.05 years
3.99 years
3.82 years
3.61 years
 
 
47

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
CONVERTIBLE SUBORDINATED FINANCING

During 2009, the Company entered into an agreement with an investment banking firm to raise up to $3,000,000 in convertible subordinated promissory notes. These notes are unsecured, bear interest at 10% and are due upon the earlier of one year or completion of second private placement. The note holder has the option of exchanging their notes for an equivalent amount of the subsequent funding transaction or being repaid the principal and interest at this second funding date. In connection with the issuance of the convertible subordinated promissory notes the investors will be issued common stock purchase warrants to purchase up to 1,558,297 shares of common stock that are exercisable at $.45 per share subject to adjustment from future equity financing if below their exercise price, and expire three years from issuance.

Based on the guidance in ASC 815-10 (formerly SFAS 133)  and ASC 815-40-15 (formerly EITF 07-05), the Company concluded the warrants are required to be accounted for as derivatives as of the issue date due to a reset feature on the exercise price. At the date of issuance the convertible subordinated financing, warrant derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statements of operations as “Gain (loss) on derivative liabilities.” These derivative instruments are not designated as hedging instruments under ASC 815-10 (formerly SFAS 133) and are disclosed on the balance sheet under Derivative Liabilities.

The Company uses the effective interest method to record interest expense and related debt accretion which was $186,000 for the twelve months ended December 31, 2009, and the estimated debt accretion for 2010 is $117,156.
 
The following table summarizes the convertible debt activity for the period March 18, 2009, to December 31, 2009 (in thousands):
 
Description
 
Bridge Note
   
Warrant Liabilities
   
Total
 
Fair value issuance at inception
  $ 1,087     $ 303     $ 1,390  
03-18-09 to 03-31-09 change in fair value
    4       (3 )     1  
04-01-09 to 06-30-09 change in fair value
    44       (37 )     7  
07-01-09 to 09-30-09 change in fair value
    60       50       110  
10-01-09 to 12-31-09 change in fair value
    78       (45 )     33  
Conversions from inception to date
    -       -       -  
Fair value at December 31, 2009
  $ 1,273     $ 268     $ 1,541  
 

For the year to date ended December 31, 2009 and 2008, net derivative income was $35,000 and $0, respectively.

The lattice methodology was used to value the warrants, with the following assumptions.

Warrants
 
Assumptions
 
3/31/2009
6/30/2009
9/30/2009
12/31/2009
 
Dividend yield
 
0.00%
0.00%
0.00%
0.00%
 
Risk-free rate for term
0.81%
0.56%
0.40%
0.20%
 
Volatility
 
140.00%
140.00%
140.00%
130.00%
 
Maturity date
 
2.97 years
2.75 years
2.58 years
2.33 years
 

Blanco National Bank

In August 2007, the Company assumed a note from the purchase of certain assets from Momentum Online Computer Services, Inc., that financed a 9.50% installment note to a Blanco National bank, secured by operating equipment, inventory and accounts receivable, payable in monthly installments of $3,913 including interest and is guaranteed by a shareholder.

Robert McClung, Momentum Online Computer Services, Inc.

On October 17, 2007, the Company issued a note to Momentum Online Computer, Inc., totaling $250,000 that bear interest at 7.5% and are secured by all of the capital stock issued and outstanding of a subsidiary of the Company, payable in twelve quarterly payments of $23,476 plus interest.
 
 
48

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
George Kemper, TSTAR Internet, Inc.

On November 1, 2007, the Company issued a note to TSTAR, Inc., totaling $350,000 bearing interest at 7.5% and are secured by the equipment acquired, payable in ten quarterly payments of $38,254 plus interest.

Shane Griffiths, Crosswind, Inc.

On January 11, 2008, the Company issued a note to Crosswind, Inc., totaling $150,000 bearing interest at 7.5% and are secured by the equipment acquired, payable in twelve quarterly payments of $13,911 plus interest.

Centramedia, Inc.

On December 31, 2008, the Company issued a note to Centramedia, Inc., totaling $600,000 bearing interest at 7.5% and are secured by the equipment acquired, payable in twelve quarterly payments of $56,342 plus interest.
 
Frontier Internet, LLC.
 
On June 1, 2009, the Company issued a note to Frontier Internet LLC., totaling $369,000 bearing interest at 6.0% and are secured by the equipment acquired, payable in twelve quarterly payments of $33,846 plus interest.
 
Ronnie D. Franklin
 
On June 1, 2009, the Company issued a note to Ronnie D. Franklin., totaling $66,000 bearing interest at 6.0% and are secured by the equipment acquired, payable in twelve quarterly payments of $6,054 plus interest.

Capital Leases

Agility Lease Fund, LLC Included in property and equipment at December 31, 2009, is $1,136,677 capitalized equipment, net of amortization. The equipment and one of the Company's bank accounts are the primary collateral securing the financing along with a guarantee by the Company.

Banc Leasing Inc., Included in property and equipment at December 31 2009, is $605,809 capitalized equipment, net of amortization. The equipment is the primary collateral securing the financing.

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2009(in thousands):

Year Ending  December 31,
     
2010
  $ 1,053  
2011
    524  
2012
    141  
2013
    128  
2014
    128  
Thereafter
    10  
Total minimum lease payments
    1,984  
Less amount representing interest
    (341 )
Present value of net minimum lease payments
    1,643  
Current maturities of capital lease obligations
    (854 )
Long-term portion of capital lease obligations
  $ 789  
49

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 13 - UNCOMPLETED CONTRACTS

Costs, estimated earnings and billings on uncompleted contracts for the twelve months ended December 31, 2009 and December 31, 2008 are summarized as follows (in thousands):

   
December 31,
   
December 31,
 
   
2009
   
2008
 
Costs incurred on uncompleted contracts
  $ 9     $ 2,953  
Estimated profit
    8       656  
Gross revenue
    17       3,609  
Less: billings to date
    -       3,182  
Costs and profit in excess of billings
  $ 17     $ 427  

Such amounts are included in the accompanying balance sheets at December 31, 2009 and December 31, 2008 and are summarized as follows (in thousands):
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Cost and estimated earnings in excess of billings on uncompleted contracts
  $ 17     $ 427  
                 
Billings in excess of costs and estimated earnings on uncompleted contracts
    -       -  
                 
    $ 17     $ 427  

NOTE 14 - COMMITMENTS

Leases and License Agreements

For the twelve months ended December 31, 2009 and 2008, rental expenses of approximately $845,000 and $642,000, respectively, were incurred. The Company accounts for rent expense under leases that provide for escalating rentals over the related lease term on a straight-line method. The Company occupies office and tower facilities under several non-cancelable operating lease agreements expiring at various dates through December 2018, and requiring payment of property taxes, insurance, maintenance and utilities.

Future minimum lease payments under non-cancelable operating leases at December 31, 2009 were as follows:

Period Ending December 31,
 
Amount
 
2010
  $ 617  
2011
    417  
2012
    63  
2013
    20  
2014
    13  
Thereafter
    34  
Total
  $ 1,164  

Banc Leasing Inc.,

During August 2007, the Company entered into a contract with Banc Leasing Inc., to fund the Company’s US-BankNet System to provide up to $10 Million into equipment financing. The funding is provided only after contract is sign with financial institution. Each funding is collateralize by the equipment and normally is repaid over a seven year period with interest established at the date of the inception of the lease. Each lease has a $1 buyout provision. The details of the capital lease are included in footnote 12.

Employment Agreements

Richard R. Royall

Mr. Royall’s employment agreement was executed in March 2008 and expires January 2011. During the term of his employment, Mr. Royall is entitled to the following compensation: (i) base salary of $200,000 per year (ii) standard benefits that are available to other Company executive officers and (iii) a stock grant of up to 3,000,000 shares, 1,000,000 shares will be awarded when the Company achieves positive EBITDA (as reported in an Exchange Act filing), 1,000,000 shares will be awarded when the Company closes a $25 million financing and 1,000,000 shares will be awarded when the Company lists on a national stock exchange.
 
 
50

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
R. Greg Smith

On July 1, 2008, the Company entered into an executive employment agreement with R. Greg Smith, expiring December 31, 2010. During the term of his employment, Mr. Smith is entitled to (i) a base salary of $200,000 per year, (ii) standard benefits that are available to other executive officers, and (iii) a stock grant of up to 2,550,000 shares, as follows. The ERF Wireless incentive targets up to 1,300,000 shares of common stock: (1) 500,000 shares if the Company achieves positive EBITDA; (ii) 500,000 shares upon cumulative funding of $25 million; and (3) 300,000 shares upon satisfaction of certain acquisition thresholds. The ENS incentive targets up to 500,000 shares of common stock: (i) 300,000 shares upon achieving 2009 positive EBITDA; and (ii) 200,000 shares upon obtaining 2009 ENS contract values of $1,000,000. The WBS incentive targets up to 750,000 shares of common stock: (i) 250,000 shares upon securing school district contracts within certain thresholds and (ii) 500,000 shares upon obtaining certain gross profit thresholds on these contracts. In the event Mr. Smith employment agreement is terminated without cause he is entitled to receive (i) the balance of this unpaid salary through the term of the agreement, (ii) a one year extension for vesting of stock grants, (iii) and the grant of an option to purchase 500,000 shares of Company common stock at an exercise price equal to the lesser of $.50 a share or the market price on the date of termination, provided that such option terminates on May 31, 2013.

As of December 31, 2009 and 2008, Mr. Smith did not earned any options for meeting any milestones within his employment agreement.

Michael R. Jones

Mr. Jones’s employment agreement was executed in September 2009 and expires September 2011. During the term of his employment, Mr. Jones is entitled to the following compensation: (i) base salary of $180,000 per year (ii) standard benefits that are available to other Company executive officers and (iii) a stock grant of up to 1,150,000 shares plus an additional 50,000 shares for each attainment of a certain licensing coverage in geographic areas , 250,000 shares will be awarded when the Company achieves positive EBITDA (as reported in an Exchange Act filing) and additional 1% of funding when Executive has a significant role in completion of private or public funding , 900,000 shares plus an additional 50,000 shares for each attainment of a certain licensing coverage in geographic areas when achieving Technology Performance Milestones and 1% to 1.5% when successful completion of funding for either loans or grants from the government, respectively.

NOTE 15 - RELATED PARTY

In March 2005, the Company entered into an annual professional services agreement with Synchton Incorporated for financial and business support services. The agreement required Synchton to provide one or more consultants for a total of 100 hours per month but as of March 2008 the agreement has been modified and requires a commitment of 50 hours per month. This agreement is automatically renewable on each anniversary date and can be terminated by the Company prior to the renewal date. The Company is obligated to pay Synchton $6,000 per month plus an additional $120 per hour that is greater than the required 50 hours per month in cash or shares of common stock. The Company at its discretion may issue up to 50% of the monthly fee in common stock at the market price on the date of issuance; provided that if Synchton sells the stock within 30 days of issuance the Company is obligated to pay Synchton any shortfall between the difference in the market price on the issuance date and the market price on the sale date. During December 2009, the Company amended the agreement to pay $3,000 per month for a minimum of 25 hours.  Any hours in excess of the minimum are billable at $120 per hour.  Synchton's President is Scott A. Cubley. For the period ended December 31, 2009 and 2008, total fees incurred by the Company under the agreement were $121,000 and $116,000, respectively.

Brian Cubley, son of our chief executive officer, entered into an employment agreement that expires December 31, 2010. During the term of his employment, Mr. Cubley is entitled to the following compensation: (i) base salary of $110,000 per year; (ii) standard benefits that are available to other Company executive officers; and (iii) a stock grant of up to 1,925,000 shares as follows: up to 525,000 shares of common stock will be awarded when the Company achieves certain incremental market capitalization, 1,125,000 shares will be awarded when the Company attain certain incremental cumulative revenue, and 125,000 shares will be awarded when the Company achieves certain incremental recurring revenue streams. In the event Mr. Cubley’s employment agreement is terminated without cause he is entitled to receive (i) the balance of this unpaid salary through the term of the agreement, (ii) a one year extension for vesting of stock grants, (iii) and the grant of an option to purchase of 50,000 shares of Company common stock at an exercise price equal to the average closing price during the six month period following the termination. As of December 31, 2009, Brian Cubley has earned options to purchase a total of 125,000 shares of common stock at an average exercise price of $.43 expiring July 31, 2011. Mr. Cubley was compensated in cash and shares of common stock for services rendered for fiscal 2009 and 2008 in the amount of $124,000 and $116,000, respectively.

The Company during the fourth quarter 2009 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 500,000 shares of its Series A Preferred Stock for the conversion of $352,838 of debt and $1,147,162 in accrued interest for a total amount of $1,500,000. The fair market value of the Series A stock was valued at $1,325,000 at the time of the exchange, resulting in the recognition of a gain on extinguishment of related party debt of $175,000 in equity. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the adult sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.

The Company during the fourth quarter 2008 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. On December 31, 2008 the Company issued 2,000,000 shares of its Series A Preferred Stock for the conversion of $3,000,000 in debt. The Series A Preferred shares were valued at $6,580,000 at the time of the exchange, resulting in the recognition of a loss on extinguishment of related party debt in the amount of $3,580,000 during 2008. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the adult sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.
 
 
51

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 16 - INDUSTRY SEGMENTS

This summary reflects the Company's current segments, as described below.

Wireless Bundled Services Division (WBS)

WBS provides wireless broadband products and services to commercial and individual customers throughout the wireless industry. The company is in the early stages of building and acquiring a seamless wireless broadband network throughout North America to serve private entities, cities, municipalities and the general public. All sales from external customers are located within the United States.

Wireless Messaging Services Division (WMS)

WMS principally provides wireless broadband system design and implementation, manufactures paging equipment, repair and maintain paging infrastructure equipment and supplies high-power infrastructure equipment to the wireless messaging industry and owns and operates a wide-area messaging service. All sales from external customers are located within the United States as well as certain international locations.

Enterprise Network Services (ENS)

ENS provides product and service to operate an enterprise-class encrypted wireless banking network business. ENS provides the CryptoVue System consisting of software, site-based hardware devices and servers to perform network encryption; contracts for the construction, operation, monitoring and maintenance of fixed wireless networks for banking customers; trade names, equipment and software, including the software architecture and design.

Oil & Gas Division (O&G)
 
O&G provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (MBTs). O&G provides wireless broadband products and services focusing primarily on commercial customers providing high speed bandwidth to rural North America to serve the Oil and Gas sector. All sales from external customers are located within the United States. The O&G division is a division of WBS.

For the twelve months ended December 31, 2009 (in thousands)

   
WMS
   
WBS
   
O&G
   
ENS
   
Total
 
Revenue
  $ 159     $ 4,749     $ 308     $ 317     $ 5,533  
Segment (loss) income
    (18 )     (2,473 )     (40 )     (843 )     (3,374 )
Segment assets
    104       6,651       415       1,575       8,745  
Capital expenditures
    -       1,185       87       237       1,509  
Depreciation and amortization
    15       2,498       81       23       2,617  

For the twelve months ended December 31, 2008 (in thousands)

   
WMS
   
WBS
   
O&G
   
ENS
   
Total
 
Revenue
  $ 742     $ 3,821     $ 72     $ 520     $ 5,155  
Segment (loss) income
    (165 )     (2,078 )     47       (1,592 )     (3,788 )
Segment assets
    92       6,794       287       1,918       9,091  
Capital expenditures
    14       3,239       292       855       4,400  
Depreciation and amortization
    15       1,574       5       113       1,707  

   
Twelve Months Ended
 
Reconciliation of Segment Loss from Operations to Net Loss
 
December 31, 2009
 
December 31, 2008
 
Total segment loss from operations
  $ (3,374 )   $ (3,788 )
Total corporate overhead including other, net
    (5,498 )     (7,954 )
Net loss
  $ (8,872 )   $ (11,742 )
 
52

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Reconciliation of Segment Assets to Total Assets
 
December 31, 2009
   
December 31, 2008
 
Total segment assets
  $ 8,745     $ 9,091  
Total corporate assets
    372       532  
Consolidated  assets
  $ 9,117     $ 9,623  
 
The accounting policies of the reportable segments are the same as those described in footnote 1. The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation and amortization expense, accounting changes and non-recurring items.

At December 31, 2009 one customer accounts for $165,000 of ENS Division revenues and one customer accounts for $200,000 of WBS Division revenues. One customer accounts for $272,000 of ENS Division revenues and one customer accounts for $550,000 of WMS Division revenues at December 31, 2008.
NOTE 17 – BUSINESS COMBINATIONS

The following table summarizes significant acquisitions completed during the year ended December 31, 2009 and 2008 (in thousands):

December 31, 2009
 
   
Purchase
         
Amortizable
 
   
Price
   
Goodwill
   
Intangibles
 
                   
Frontier/Itexas
  $ 1,485     $ 819     $ 283  

 
December 31, 2008
 
   
Purchase
         
Amortizable
 
   
Price
   
Goodwill
   
Intangibles
 
                   
Crosswind
  $ 650     $ 176     $ 206  
Centramedia
  $ 2,000     $ -     $ -  
 
 
FRONTIER INTERNET, LLC, AND ITEXAS NET ACQUISITION
 
Purchase Price
 
On June 1, 2009, ERF Wireless, Inc completed the purchase of assets from Frontier Internet, LLC and iTexas net, which are related companies under an Asset Purchase Agreement dated June 1, 2009. Under the Asset Purchase Agreement, ERF Wireless, Inc acquired the wireless internet service provider ("WISP"), which includes all of the current customers, contract rights, inventory, equipment and network infrastructure equipment. The acquisition will increase the Company's footprint covering geographic areas in certain cities in North Texas within Hood, Somervell, Johnson and Parker Counties, Texas including portions of the Barnett Shale area that covers approximately 6,000 square miles of natural gas production territory. At the time of the transaction, there were no material relationships between the seller and ERF Wireless, Inc or any of its affiliates, or any director or officer of ERF Wireless, Inc, or any associate of any such officer or director. ERF Wireless, Inc paid $1,485,000 in cash, notes and securities and assumed $25,000 in note payables and capital leases.
 
The purchase price allocation is as follows (in thousands):

Frontier/Itexas
     
       
Accounts receivable
  $ 33  
Note receivable
    5  
Property and equipment
    370  
Goodwill
    819  
Identifiable intangible assets
    283  
Note payable
    (25 )
Total adjusted purchase price
  $ 1,485  

 
 
53

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The amount allocated to identifiable intangible assets was determined by the company's management. Other intangibles assets are being amortized over their useful life in accordance with the guidance contained in the Financial Accounting Standards Board ("FASB") issued ASC Topic 350 (formerly "SFAS 142") "Goodwill and Other Intangible Assets".

Frontier/Itexas
     
Goodwill
  $ 819  
Non-compete agreement
    15  
Customer relationships
    268  
         
Total identifiable intangible assets
  $ 1,102  

CENTRAMEDIA, INC., ACQUISITION

Purchase Price

On December 31, 2008, the Company completed the purchase of substantially all the assets from Centramedia, Inc. The assets purchased include substantially all of the assets associated with the Internet operations of Centramedia including the current customer base, inventory, equipment, contract rights, vehicles, Internet address space, general intangibles, certain real property and wireless broadband equipment infrastructure. The acquisition will increase the Company's footprint geographically area covering certain cities and counties in the Texas Panhandle, this will lead to additional synergy with expansion of the WiNet and US-BankNet System and expand our Oil and Gas coverage. At the time of the transaction, there were no material relationships between the seller and the Company or any of its affiliates, or any director or officer of the Company, or any associate of any such officer or director. The Company paid $2,000,000 in cash, notes and securities and assumed $61,000 in current liabilities.

The purchase price allocation is as follows (in thousands):

Cash
 
$
1
 
Accounts receivable
   
40
 
Property and equipment
   
2,020
 
Deferred revenue
   
(61
)
Total adjusted purchase price
 
$
2,000
 

CROSSWIND ENTERPRISES, INC., ACQUISITION

Purchase Price

On January 11, 2008, the Company completed the purchase of substantially all assets from Crosswind Enterprises Inc. Under the asset purchase agreement, the Company acquired the wireless internet service provider, which includes all of the current customers, equipment and network infrastructure equipment. The acquisition will also increase the Company's footprint in west Texas and Eastern New Mexico. This will lead to additional synergy with expansion of the WiNet and US-BankNet System and expand our Oil and Gas coverage. At the time of the transaction, there were no material relationships between the seller and the Company or any of its affiliates, or any director or officer of the Company, or any associate of any such officer or director. The Company paid $650,000 in cash, notes and securities and assumed $3,000 in current liabilities and assumed $71,000 in note payables.

The purchase price allocation is as follows (in thousands):
Accounts receivable
 
$
2
 
Property and equipment
   
340
 
Goodwill
   
176
 
Identifiable intangible assets
   
206
 
Accounts payable and accrued expenses
   
(3
)
Note payable
   
(71
)
Total adjusted purchase price
 
$
650
 

 
54

ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The amount allocated to identifiable intangible assets was determined by the company's management. Other intangibles assets are being amortized over their useful life in accordance with the guidance contained in the Financial Accounting Standards Board ("FASB") issued ASC Topic 350 (formerly "SFAS 142") "Goodwill and Other Intangible Assets".
Crosswind
     
Goodwill
 
$
176
 
Non-compete agreement
   
50
 
Customer relationships
   
156
 
         
Total identifiable intangible assets
 
$
382
 

Proforma

The results of operations for Frontier Internet, LLC and iTexas net have been included in the Company’s consolidated statements since the completion of the acquisitions during the year ended December 31, 2009. Centramedia and Crosswind have been included in the Company’s consolidated statements of operations since the completion of the acquisitions during the year ended December 31, 2008. The following unaudited pro forma financial information presents the combined results of the Company and the 2009 acquisitions as if the acquisitions had occurred at the beginning 2009 and 2008 for the respective acquisitions (in thousands, except per share amounts):
Unaudited Proforma

   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
             
Net Revenue
  $ 6,011     $ 6,426  
Net income (loss)
  $ (9,057 )   $ (12,523 )
Net income (loss) available to common shareholder
  $ (9,057 )   $ (12,523 )
Net income (loss) per share-basic
  $ (0.07 )   $ (0.16 )
Net income (loss) per share-diluted
  $ (0.07 )   $ (0.16 )

The above unaudited pro forma financial information includes adjustments for depreciation and amortization of identifiable intangible assets.
NOTE 18 - SUBSEQUENT EVENTS

During the first fiscal quarter 2010, the Company issued 16,596,377 shares of common stock for services rendered, debt, exchange of liabilities, and conversion of preferred stock.
 
Additionally, the Company intends to convert $3,000,000 of the $5,448,811 Angus Capital line of credit that was outstanding at December 31, 2009 into Series A preferred stock over the next 120 days.
 
The Company intends to convert $3 million of line of credit into Series A preferred stock over the next 120 days.
 
 
55


 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2009.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None.
 
 

 
56

 

PART III
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Executive Officers and Directors

Our directors and executive officers and their ages as of March 16, 2010, are shown below.

Name
Age
Position
H. Dean Cubley
 68
 Chairman of the Board of Directors and CEO
Richard R. Royall
63
 Director and Chief Financial Officer
R. Greg Smith
51
 Director and EVP and CEO of ENS
Michael R. Jones
55
 Director  and CTO
Bartus H. Batson
67
 Director


Dr. H. Dean Cubley has served as chairman of ERF Wireless since May 2004 as chief executive officer since October 2006. Dr. Cubley has served as a director of Eagle Broadband, Inc. from March 1996 to September 2006 Dr. Cubley has been involved in forming, funding and opening wireless enterprises for over 30 years.

Richard R. Royall has served as chief financial officer since March 2008. Mr. Royall is a certified public accountant and has been engaged in the private practice of accounting since 1972 with concentration of expertise in accounting, mergers, acquisitions and SEC registrations and filings including implementation of SOX 404 compliance.

Mr. R. Greg Smith has served as executive vice president of ERF Wireless since July 2008, as chief financial officer from August 2004 to March 2008, as the chief executive officer from August 2004 to October 2006, and as a director since August 2004. Mr. Smith's professional background includes 25 years of executive management experience.

Mr. Michael R. Jones has served as a director of ERF Wireless since February 2008. In March 2009 Mr. Jones became chief technology officer. Mr. Jones’s professional background includes 30 years of executive management and technology innovation. Prior to joining ERF Wireless as Chief Technology officer, Mr. Jones was an executive with Broadwing for over five years. Mr. Jones was most recently employed by Level3, after its acquisition of Broadwing, where he was senior vice president and chief technology officer. His extensive successful telecommunications experience includes network design and development, major systems implementation, and network operations with companies such as Broadwing, MCI, Qwest and GTE.

Dr. Bartus H. Batson has served as a director of ERF Wireless since January 2005. Dr. Batson has served as president, chief executive officer and chairman of X-Analog Communications, Inc., since March 1992. Dr. Batson has over 40 years of experience in all fields of telecommunications with a major focus in satellite communications and wireless systems.

Key Employees

Mr. Michael R. Jones has served as a director of ERF Wireless since February 2008. In March 2009 Mr. Jones became chief technology officer. Mr. Jones’s professional background includes 30 years of executive management and technology innovation. Prior to joining ERF Wireless as Chief Technology officer, Mr. Jones was an executive with Broadwing for over five years. Mr. Jones was most recently employed by Level3, after its acquisition of Broadwing, where he was senior vice president and chief technology officer. His extensive successful telecommunications experience includes network design and development, major systems implementation, and network operations with companies such as Broadwing, MCI, Qwest and GTE.

Robert McClung has served as executive officer since October 2007 where he is responsible for overseeing the operations of WBS. ERF Wireless acquired his company, Momentum Online Service, in October 2007, where he served as owner operator for the five years prior to our acquisition.


 
57

 

Independence of Directors

Other than Dr. Batson, none of the directors are independent as defined by Rule 10A-3 of the Exchange Act. The board has established an audit committee and compensation committee, both of which are comprised of Dr. Cubley and Dr. Batson. The board serves as the nomination committee as it believes that the board, due to the size, can appropriately participate in the nominee identification and selection process. The board has determined that Dr. Cubley qualifies as an audit committee financial expert as defined in Item 407 of Regulation S-K and that he is not independent.

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own beneficially more than ten percent of the common stock of the Company, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based solely on the reports received by the Company and on written representations from certain reporting persons, the Company believes that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements.

Code of Ethics

The Company has not established a Code of Business Conduct and Ethics. We intend to adopt a Code of Business Conduct and Ethics this fiscal year and will report the adoption of a Code of Business Conduct and Ethics on Form 8-K promptly thereafter.
ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Objectives of Our Executive Compensation Program

The compensation committee of our Board administers our executive compensation program. The general philosophy of our executive compensation program is to align executive compensation with the Company’s business objectives and the long-term interests of our stockholders. To that end, the compensation committee believes executive compensation packages provided by the Company to its executives, including the named executive officers should include both cash and stock-based compensation that reward performance as measured against established goals. In addition, the Company strives to provide compensation that is competitive with other peer group companies and that will allow us to attract, motivate, and retain qualified executives with superior talent and abilities. Our executive compensation is designed to reward achievement of the Company’s corporate goals.

The Role of the Compensation Committee

The compensation committee has the primary authority to determine the Company’s compensation philosophy and to establish compensation for the Company’s executive officers. The compensation committee oversees the Company’s compensation and benefit plans and policies; administers the Company’s stock option plans; reviews the compensation components provided to officers, employees, and consultants; grants equity compensation to our officers, employees, and consultants; and reviews and makes recommendations to the Board regarding all forms of compensation to be provided to the members of the Board.

The compensation committee generally sets the initial compensation of each executive. The compensation committee annually reviews and in some cases adjusts compensation for executives. Although, the chief executive officer provides recommendations to the compensation committee regarding the compensation of the other executive officers, the compensation committee has full authority over all compensation matters relating to executive officers.
Elements of Executive Compensation

Although the compensation committee has not adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation, it strives to maintain a strong link between executive incentives and the creation of stockholder value. Executive compensation consists of the following elements:

Base Salary. Base salaries for our executives are generally established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions and recognizing cost of living considerations. Prior to making its recommendations and determinations, the compensation committee reviews each executive’s:
 
 
·
historical pay levels;
 
·
past performance; and
 
·
expected future contributions
 

 
58

 


The compensation committee does not use any particular indices or formulae to arrive at each executive’s recommended pay level.

Equity Award. We also use long-term incentives primarily in the form of stock grants. Employees and executive officers generally receive stock grants at the commencement of employment, the majority of which, if not all, vest upon the attainment of corporate goals. We believe that stock grants are instrumental in aligning the long-term interests of the Company’s employees and executive officers with those of the stockholders.
Executive Officer Compensation

Summary Compensation Table

The following tables set forth certain information regarding our chief executive officer, chief financial officer, and three of our most highly-compensated executive officers whose total annual salary and bonus for the fiscal year ended December 31, 2009 exceeded $100,000.

Name and Principal Position
Year
 
Salary and
Consulting
Payments ($)
   
Bonus
($)
   
Stock
Awards 
($)
   
All Other
Compensation ($)
   
Total
 ($)
 
H. Dean Cubley
2009
    135,000       -       -       13,500       148,500  
Chairman of the Board and CEO
2008
    135,000       -       -       15,500       150,500  
                                           
Richard R Royall
2009
    210,697       -       -       7,500       218,197  
Director and CFO
2008
    203,501       -       -       -       203,501  
                                           
R. Greg Smith
2009
    200,004       7,500       -       7,500       215,004  
Director and EVP and CEO ENS
2008
    190,502       50,346       -       7,500       248,348  
                                           
Michael R Jones
2009
    140,000       -       -       7,500       147,500  
Director and CTO
2008
    -       -       -       -       -  
                                           
Robert McClung
2009
    150,000       -       -       -       150,000  
Key employee
2008
    150,000       -       -       -       150,000  

 
59

 

Outstanding Equity Awards at December 31, 2009

The table below sets forth information with respect to our named executive officers regarding the value of equity compensation as of December 31, 2009.

         
Option Awards
   
Stock Awards
 
Name
       
Number of Securities Underlying Unexercised Options (#) Exercisable
   
Number of Securities Underlying Unexercised Options (#) Unexercisable
   
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
   
Option Exercised Price ($)
   
Option Expiration Date
   
Number of Shares or Units of Stock That Have Not Vested
   
Market Value of Shares or Units of Stock That Have Not Vested ($) (4)
   
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
   
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested ($)
 
H. Dean Cubley
          -       -       -       -       -       -       -       -       -  
Richard R. Royall
    (1)       -       -       -     $ -       -       3,000,000       750,000       -       -  
R. Greg Smith
    (2)       -       -       -     $ -       -       2,550,000       637,500       -       -  
Michael R. Jones
    (3)       -       -       -     $ -       -       1,150,000       287,500       -       -  
Robert McClung
      -       -       -     $ -       -       -       -       -       -  
 
(1)
Mr. Royall is entitled to receive a stock grant of up to 3,000,000 shares of common stock as follows: (i) 1,000,000 shares will be awarded when the Company achieves positive EBITDA (as reported in an Exchange Act filing); (ii) 1,000,000 shares will be awarded when the Company closes a $25 million financing; and (iii) 1,000,000 shares will be awarded when the Company lists on a national stock exchange.
(2)
Mr. Smith is entitled to receive a stock grant of up to 2,550,000 shares, as follows. The ERF Wireless incentive targets up to 1,300,000 shares of common stock: (1) 500,000 shares if the Company achieves positive EBITDA; (ii) 500,000 shares upon cumulative funding of $25 million; and (3) 300,000 shares upon satisfaction of certain acquisition thresholds. The ENS incentive targets up to 500,000 shares of common stock: (i) 300,000 shares upon achieving 2009 positive EBITDA; and (ii) 200,000 shares upon obtaining 2009 ENS contract values of $1,000,000. The WBS incentive targets up to 750,000 shares of common stock: (i) 250,000 shares upon securing school district contracts within certain thresholds and (ii) 500,000 shares upon obtaining certain gross profit thresholds on these contracts.
(3)
Mr. Jones’s is entitled to receive a stock grant of up to 1,150,000 shares plus an additional 50,000 shares for each attainment of a certain licensing coverage in geographic areas as follows: (i) 250,000 shares will be awarded when the Company achieves positive EBITDA (as reported in an Exchange Act filing) and additional 1% of funding when Executive has a significant role in completion of private or public funding ,(ii) 900,000 shares plus an additional 50,000 shares for each attainment of a certain licensing coverage in geographic areas when achieving Technology Performance Milestones and 1% to 1.5% when successful completion of funding for either loans or grants from the government, respectively.
(4)
Based on closing price of common stock on December 31, 2009.

Employment and Consulting Agreements

We have entered into employment and consulting agreements with the following named executive officers:

Richard Royall. Mr. Royall’s employment agreement expires January 2011. During the term of his employment, Mr. Royall is entitled to (i) base salary of $200,000 per year, (ii) standard benefits that are available to other Company executive officers, and (iii) a stock grant of up to 3,000,000 shares.

R. Greg Smith. On July 1, 2008, the Company entered into an executive employment agreement with R. Greg Smith, expiring December 31, 2010. During the term of his employment, Mr. Smith is entitled to (i) a base salary of $200,000 per year, (ii) standard benefits that are available to other executive officers, and (iii) a stock grant of up to 2,550,000 shares, as follows. The ERF Wireless incentive targets up to 1,300,000 shares of common stock: (1) 500,000 shares if the Company achieves positive EBITDA; (ii) 500,000 shares upon cumulative funding of $25 million; and (3) 300,000 shares upon satisfaction of certain acquisition thresholds. The ENS incentive targets up to 500,000 shares of common stock: (i) 300,000 shares upon achieving 2009 positive EBITDA; and (ii) 200,000 shares upon obtaining 2009 ENS contract values of $1,000,000. The WBS incentive targets up to 750,000 shares of common stock: (i) 250,000 shares upon securing school district contracts within certain thresholds and (ii) 500,000 shares upon obtaining certain gross profit thresholds on these contracts. In the event Mr. Smith employment agreement is terminated without cause he is entitled to receive (i) the balance of this unpaid salary through the term of the agreement, (ii) a one year extension for vesting of stock grants, (iii) and the grant of an option to purchase 500,000 shares of Company common stock at an exercise price equal to the lesser of $.50 a share or the market price on the date of termination, provided that such option terminates on May 31, 2013.

Michael Jones. Mr. Jones employment agreement expires September 2011. During the term of his employment, Mr. Jones is entitled to: (i) base salary of $180,000 per year (ii) standard benefits that are available to other Company executive officers and (iii) a stock grant of up to 1,150,000 shares plus an additional 50,000 shares for each attainment of a certain licensing coverage in geographic areas, 250,000 shares will be awarded when the Company achieves positive EBITDA (as reported in an Exchange Act filing) and additional 1% of funding when Executive has a significant role in completion of private or public funding , 900,000 shares plus an additional 50,000 shares for each attainment of a certain licensing coverage in geographic areas when achieving Technology Performance Milestones and 1% to 1.5% when successful completion of funding for either loans or grants from the government, respectively.
.

 
60

 

Director Compensation

Set forth below is information regarding compensation paid to each director during 2009. Additionally, we reimburse our directors for travel and lodging expenses in connection with their attendance at board meetings.

Name
 
Fees Earned
or Paid in
Cash ($)
   
Stock 
 Awards
($)
   
Option
Awards
($)
   
Non-Equity
Incentive Plan
 Compensation
($)
   
Change in
 Pension Value
and
Nonqualified
 Deferred
Compensation
Earnings 
($)
   
All Other
Compensation ($)
   
Total
 ($)
 
H. Dean Cubley
    13,500       -       -       -       -       -       13,500  
R. Greg Smith
    7,500       -       -       -       -       -       7,500  
Richard R. Royall
    7,500       -       -       -       -       -       7,500  
Bartus H. Batson
    10,500       -       -       -       -       -       10,500  
Michael Jones
    7,500       -       -       -       -       -       7,500  

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

As of March 16, 2010, 166,280,910 shares of common stock were outstanding and 3,043,580 shares of Series A Preferred Stock were outstanding. The following table sets forth, as of such date, information with respect to shares beneficially owned by:
 
 
·
each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;
 
 
·
each of our directors;
 
 
·
each of our named executive officers; and all of our directors and executive officers as a group.
 
Beneficial ownership has been determined in accordance with Rule 13d-3 of the Exchange Act. Under this rule, shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option) within 60 days of the date of this table. In computing the percentage ownership of any person, the amount of shares includes the amount of shares beneficially owned by the person by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person does not necessarily reflect the person's actual voting power.

To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the business address of the individuals listed is 2911 South Shore Blvd., Suite 100, League City, Texas 77573.

 
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SHARES OF COMMON STOCK
BENEFICIALLY
OWNED  (1)
SHARES OF SERIES A
PREFERRED STOCK
BENEFICIALLY
 OWNED
TOTAL PERCENTAGE OF 
VOTING POWER  (2)
                         
NAME AND ADDRESS OF BENEFICIAL OWNER
NUMBER
 
%
 
NUMBER
 
%
 
NUMBER
%
 
Frances Cubley  (3)
 
10,378,010
(4)
7.04%
 
                   1,924,354
(5)
87%
 
               106,469,964
41.66%
 
STJV Trust
 
8,080,292
 
5.55%
 
                      521,513
 
24%
 
                 34,155,942
13.36%
 
Pauline Trust
 
541,783
 
0.37%
 
                      300,275
 
14%
 
                 15,555,533
6.09%
 
Carson Family Trust
 
336,772
 
0.23%
 
                      269,124
 
12%
 
                 13,792,972
5.40%
 
Leopard Family Trust
 
560,459
 
0.38%
 
                      266,305
 
12%
 
                 13,875,686
5.43%
 
Jauquine Trust
 
535,172
 
0.37%
 
                      109,131
 
5%
 
                   5,991,722
2.34%
 
Systom Trust
 
323,532
 
0.22%
 
                      458,006
 
21%
 
                 23,223,849
9.09%
 
Held in Escrow       0.00%   500,000   21%   25,000,000 0.38%  
R. Greg Smith
 
1,942,249
(6)
1.33%
 
                                -
 
0%
 
                   1,942,249
0.76%
 
Dr. H. Dean Cubley
 
610,300
 
0.42%
 
                                -
 
0%
 
                      610,300
0.24%
 
Richard R. Royall
 
372,186
(7)
0.26%
 
                                -
 
0%
 
                      372,186
0.15%
 
Dr Bartus H. Batson
 
142,997
 
0.10%
 
                                -
 
0%
 
                      142,997
0.06%
 
Mike Jones
 
352,967
 
0.24%
 
                                -
 
0%
 
                      352,967
0.14%
 
Robert McClung
 
872,264
 
0.60%
 
                                -
 
0%
 
                      872,264
0.34%
 
John Nagel
 
878,969
 
0.60%
 
                                -
 
0%
 
                      878,969
0.34%
 
All Executives Officers and Directors as a group
 
5,171,932
 
3.55%
 
                                -
 
0%
 
                   5,171,932
2.02%
 
(4 persons)
                       
 
(1)
This column does not include the shares of common stock issuable upon conversion of the Series A Preferred Stock.
(2)
This column includes the Series A Preferred Stock right to 50 votes on all matters in which the common stockholders and preferred stockholders vote together.
(3)
Dr. H. Dean Cubley has the sole investment and voting power for STJV Trust, Pauline Trust, Carson Trust, Leopard Family Trust, Jauquine Trust and Systom Trust (the "Frances Cubley Trusts").
(4)
Includes 10,378,010 shares owned by the Francis Cubley Trusts.
(5)
Includes 1,924,354 shares of Series A Preferred Stock held by the Francis Cubley Trusts.
(6)
Includes (i) 1,939,582 shares held by Lariat Financial, Inc., a corporation controlled by Mr. Smith.
(7)
Includes 372,186 shares owned by Mr. Royall.
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

In March 2005, the Company entered into an annual professional services agreement with Synchton Incorporated for financial and business support services. The agreement required Synchton to provide one or more consultants for a total of 100 hours per month but as of March 2008 the agreement has been modified and requires a commitment of 50 hours per month. This agreement is automatically renewable on each anniversary date and can be terminated by the Company prior to the renewal date. The Company is obligated to pay Synchton $6,000 per month plus an additional $120 per hour that is greater than the required 50 hours per month in cash or shares of common stock. The Company at its discretion may issue up to 50% of the monthly fee in common stock at the market price on the date of issuance; provided that if Synchton sells the stock within 30 days of issuance the Company is obligated to pay Synchton any shortfall between the difference in the market price on the issuance date and the market price on the sale date. Synchton's President is Scott A. Cubley. For the period ended December 31, 2009 and 2008, total fees incurred by the Company under the agreement were $121,000 and $116,000, respectively.

Brian Cubley, son of our chief executive officer, entered into an employment agreement that expires December 31, 2010. During the term of his employment, Mr. Cubley is entitled to the following compensation: (i) base salary of $110,000 per year; (ii) standard benefits that are available to other Company executive officers; and (iii) a stock grant of up to 1,925,000 shares as follows: up to 525,000 shares of common stock will be awarded when the Company achieves certain incremental market capitalization, 1,125,000 shares will be awarded when the Company attain certain incremental cumulative revenue, and 125,000 shares will be awarded when the Company achieves certain incremental recurring revenue streams. In the event Mr. Cubley’s employment agreement is terminated without cause he is entitled to receive (i) the balance of this unpaid salary through the term of the agreement, (ii) a one year extension for vesting of stock grants, (iii) and the grant of an option to purchase of 50,000 shares of Company common stock at an exercise price equal to the average closing price during the six month period following the termination. As of December 31, 2009, Brian Cubley has earned options to purchase a total of 125,000 shares of common stock at an average exercise price of $.43 expiring July 31, 2011. Mr. Cubley was compensated in cash and shares of common stock for services rendered for fiscal 2009 and 2008 in the amount of $124,000 and $116,000, respectively.

The Company during the fourth quarter 2009 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 500,000 shares of its Series A Preferred Stock for the conversion of $352,838 of debt and $1,147,162 in accrued interest for a total amount of $1,500,000. The fair market value of the Series A stock was valued at $1,325,000 at the time of the exchange, resulting in the recognition of a gain on extinguishment of related party debt of $175,000 in equity. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the adult sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.


 
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The Company during the fourth quarter 2008 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. On December 31, 2008 the Company issued 2,000,000 shares of its Series A Preferred Stock for the conversion of $3,000,000 in debt. The Series A Preferred shares were valued at $6,580,000 at the time of the exchange, resulting in the recognition of a loss on extinguishment of related party debt in the amount of $3,580,000 during 2008. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the adult sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
General

During the fiscal years ended December 31, 2009, and December 31, 2008, the aggregate fees billed by LBB & Associates Ltd., LLP, were as follows:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Audit fees
  $ 128,969     $ 113,132  
Audit related fees
  $ -     $ -  
Tax fees
  $ -     $ -  
All other fees
  $ -     $ -  

 
Audit Fees

Consist of fees billed for professional services rendered for the audit of our annual consolidated financial statements and review of the quarterly condensed consolidated financial statements and services that are normally provided by LBB & Associates Ltd., LLP, in connection with statutory and regulatory filings or engagements.

Audit-Related Fees

Consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under "Audit Fees."

Tax Fees

Consist of fees billed for professional services for tax compliance, tax advice and tax planning.

All Other Fees

Consist of fees for products and services other than the services reported above.


 
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit 2.1
Agreement and Plan of Merger between Fleetclean Systems, Inc. and ERF Wireless, Inc. (1)
Exhibit 2.2
Articles of Merger (1)
Exhibit 3.1
Articles of incorporation of ERF Wireless, Inc. (1)
Exhibit 3.1.1
Certificate of Amendment to Articles of incorporation of ERF Wireless, Inc. (1)
Exhibit 3.2
Bylaws of ERF Wireless, Inc. (1)
Exhibit 4.1
Designation of Preferences (1)
Exhibit 4.2
Amendment to Designation of Preferences (7)
Exhibit 4.3
Amended and Restated Designation of Series A Preferred Stock (11)
Exhibit 10.1
Greg Smith Amended and Restated Employment Agreement (5)
Exhibit 10.2
Addendum to Debt Conversion and Funding Agreement effective September 30, 2004 between ERF Wireless, Inc., Eagle R.F. International and Investors. (6)
Exhibit 10.3
Asset and Liability Contribution Agreement dated March 31, 2004 between Fleetclean Systems, Inc. and Fleetclean Chemicals, Inc. (2)
Exhibit 10.4
Stock Purchase Agreement dated May 15, 2004 between Systom Trust Joint Venture and Kenneth A. Phillips et. al. (3)
Exhibit 10.5
Subscription Agreement dated May 11, 2004 between Fleetclean Systems, Inc. and Systom Trust Joint Venture (3)
Exhibit 10.6
Acquisition Agreement dated May 15, 2004 between Kenneth A. Phillips and Fleetclean Systems, Inc. (3)
Exhibit 10.7
2004 Non-Qualified Stock Compensation Plan (4)
Exhibit 10.8
Second Addendum to Debt Conversion and Funding Agreement effective July 1, 2005 between ERF Wireless, Inc., Eagle R.F. International and Investors. (8)
Exhibit 10.9
Form of Common Stock Purchase Warrant Agreement, by and between ERF Wireless, Inc. and Investor (9)
Exhibit 10.10
Form of Convertible Term Note, by and between the ERF Wireless, Inc. and Investor (9)
Exhibit 10.11
Form of Registration Rights Agreement, by and between the ERF Wireless, Inc., and Investor (9)
Exhibit 10.12
Form of Stock Purchase Agreement, by and between ERF Wireless, Inc. and Investor.(9)
Exhibit 10.13
Asset Purchase Agreement dated August 8, 2005, by and among ERF Wireless, Inc., a Nevada corporation, ERF Enterprise Network Services, Inc., a Texas corporation, and Skyvue USA East Central Texas, Inc., a Texas corporation (10)
Exhibit 10.14
Form of Skyvue Note (11)
Exhibit 10.15
Series A Preferred Conversion Restriction Agreement (11)
Exhibit 10.16
Warrant issued in June 2004(11)
Exhibit 10.17
Employment Agreement with John Burns(11)
Exhibit 10.18
Employment Agreement with Arley Burns(12)
Exhibit 10.19
Amendment of Angus Capital (12)
Exhibit 10.20
Acquisition of Net Yeti (13)
Exhibit 10.21
Acquisition of Door (14)
Exhibit 20.1
List of Subsidiaries(11)
Exhibit 31.1
Certification of Chief Executive officer and Chief Financial officer pursuant to Rules
and 31.2
13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (15)
Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
and 32.2
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (15)

(1)
Incorporated by reference from the Form 10-QSB for September 30, 2004;
(2)
Incorporated by reference from the Form 10-QSB for June 30, 2004;
(3)
Incorporated by reference from the Form 8-K for May 28, 2004;
(4)
Incorporated by reference from the Form S-8 filed December 29, 2004;
(5)
Incorporated by reference from the Form 10-KSB filed April 15, 2005;
(6)
Incorporated by reference from the Form 10-KSB/A - Amendment No. 1 filed on August 29, 2005;
(7)
Incorporated by reference from the Form 10-QSB for March 31, 2005;
(8)
Incorporated by reference from the Form 10-QSB/A - Amendment No. 1;
(9)
Incorporated by reference from the Form 8-K for September 19, 2005;
(10)
Incorporated by reference from the Form 8-K for August 12, 2005;
(11)
Incorporated by reference from the Form SB-2 filed on December 12, 2005.
(12)
Incorporated by reference from the Form 10-KSB filed April 17, 2007
(13)
Incorporated by reference from the Form 8-K filed on October 20, 2006.
(14)
Incorporated by reference from the Form 8-K filed on December 21, 2006.
(15)
Filed herewith.


 
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Restated Report to be signed on its behalf by the undersigned, thereunto duly authorized.



 
ERF WIRELESS, INC.
 
 
 
By: /s/ H. Dean Cubley                                                     
 
Name: Dr. H. Dean Cubley
Title: Chief Executive Officer
Date: March 30, 2010
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this restated Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE
TITLE
DATE
     
     
/s/ H. Dean Cubley
Chairman of the Board of Directors
March 30, 2010
Dr. H. Dean Cubley
Principal Executive Officer, and Director
 
     
/s/ Richard R. Royall
Director, Chief Financial Officer,
March 30, 2010
Richard R. Royall
Principal Financial Officer and
 
 
Principal Accounting Officer
 
     
/s/ R. Greg Smith
Director
March 30, 2010
R. Greg Smith
   
     
     
/s/ Michael R. Jones
Director
March 30, 2010
Michael R. Jones
   
     
/s/ Dr. Bartus H. Batson
Director
March 30, 2010
Dr. Bartus H. Batson
   
 
 
 
 

 
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