ERF Wireless, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - CERTIFICATION - ERF Wireless, Inc.	erf_10q-ex3102.htm
EX-32.1 - CERTIFICATION - ERF Wireless, Inc.	erf_10q-ex3201.htm
EX-32.2 - CERTIFICATION - ERF Wireless, Inc.	erf_10q-ex3202.htm
EX-31.1 - CERTIFICATION - ERF Wireless, Inc.	erf_10q-ex3101.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

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

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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. (Check one):

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 248,985,542 common shares issued and outstanding as of August 16, 2010.

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ERF WIRELESS, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2010, AND DECEMBER 31, 2009

($ in thousands except share data)

	June 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	208		$	228
Accounts receivable, net		488			494
Accounts receivable, other		85			78
Inventories		240			222
Costs and profits in excess of billings		18			17
Prepaid expenses and other current assets		148			242
Total current assets		1,187			1,281

Property and equipment
Property and equipment		9,839			9,347
Less: accumulated depreciation		(4,917	)		(3,712	)
Net property and equipment		4,922			5,635

Goodwill		1,255			1,255
Intangible assets, net		365			701
Other assets		216			245

Total assets	$	7,945		$	9,117

LIABILITIES AND SHAREHOLDERS’ (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt	$	1,204		$	1,881
Current portion of long-term capital leases		664			854
Accounts payable		785			586
Accrued expenses		848			486
Derivative liabilities		83			269
Deferred liability and revenue		568			585
Total current liabilities		4,152			4,661

Line of credit		6,197			5,449
Long-term debt, net of current portion		442			442
Long-term capital leases, net of current portion		523			789
Deferred liability and revenue, net of current portion		75			150
Total liabilities		11,389			11,491

Commitments

Shareholders’ (deficit):
Preferred stock - $.001 par value, Authorized 25,000,000
Series A authorized 5,000,000 shares; issued and
Outstanding at June 30, 2010, and December 31, 2009,
2,516,799 and 3,043,580, respectively		3			3
Common stock - $.001 par value
Authorized 475,000,000 shares
Issued and outstanding at June 30, 2010, and
December 31, 2009, 205,419,310 and 145,575,735, respectively		205			146
Additional paid in capital		39,590			36,785
Accumulated deficit		(43,242	)		(39,308	)
Total shareholders’ (deficit)		(3,444	)		(2,374	)

Total liabilities and shareholders' (deficit)	$	7,945		$	9,117

See accompanying notes to consolidated financial statements.

ERF WIRELESS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

($ in thousands except loss per share)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2010			2009			2010			2009

Sales:
Products	$	82		$	17		$	100		$	154
Services		1,494			1,261			2,955			2,447
Total sales		1,576			1,278			3,055			2,601

Costs of goods sold:
Products and integration services		377			295			751			737
Rent, repairs and maintenance		148			110			269			206
Depreciation		506			296			999			561
Total costs of goods sold		1,031			701			2,019			1,504

Gross profit		545			577			1,036			1,097
Operating expenses:
Selling, general and administrative		1,884			2,100			3,940			4,340
Depreciation and amortization		286			370			548			722
Total operating expenses		2,170			2,470			4,488			5,062
Loss from operations		(1,625	)		(1,893	)		(3,452	)		(3,965	)
Other income (expense):
Interest expense, net		(395	)		(288	)		(815	)		(543	)
Sale of assets, net and other income		4			2			7			5
Derivative income		157			80			326			45
Total other income (expense)		(234	)		(206	)		(482	)		(493	)

Net loss	$	(1,859	)	$	(2,099	)	$	(3,934	)	$	(4,458	)
Net loss per common share:
Basic	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.04	)
Diluted	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.04	)

See accompanying notes to consolidated financial statements.

ERF WIRELESS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

($ in thousands)

	2010			2009

Cash flows from operating activities
Net loss	$	(3,934	)	$	(4,458	)

Adjustments to reconcile net loss to net cash used by operating activities:
Loss on sale of assets		1			-
Amortization of debt discount		145			89
Depreciation and amortization		1,547			1,283
Stock based compensation		13			-
Stock issued for services rendered and interest		818			1,375
Derivative (income)		(326	)		(45	)
Bad debt expense		82			37
Changes in:
Accounts receivable, net		(76	)		(39	)
Accounts receivable, other		(7	)		(70	)
Inventories		(18	)		(48	)
Prepaid expenses		94			133
Costs and profits in excess of billings		(1	)		267
Accounts payable		199			(292	)
Accrued expenses		705			282
Deferred liability and revenue		(92	)		203
Total adjustment		3,084			3,175
Net cash used by operating activities		(850	)		(1,283	)

Cash flows from investing activities
Proceeds from sale of assets		8			-
Purchase of property and equipment		(507	)		(394	)
Business acquisitions, net of cash acquired		-			(167	)
Change in other assets		29			14
Net cash used by investing activities		(470	)		(547	)

Cash flows from financing activities
Net proceeds from line of credit		1,512			818
Proceeds from notes payable		-			150
Proceeds from long-term debt obligations		759			990
Payment of long-term debt obligations		(767	)		(200	)
Payment on capital lease obligations		(456	)		(430	)
Proceeds from sale of common stock, net		252			334
Net cash provided by financing activities		1,300			1,662

Net change in cash		(20	)		(168	)
Cash and cash equivalents at the beginning of the period		228			348
Cash and cash equivalents at the end of the period	$	208		$	180

Supplemental disclosure of cash flow information:
Net cash paid during the year for:
Interest	$	151		$	166
Income taxes	$	-		$	-

Supplemental non-cash investing and financing activities:
Conversion of debt through issuance of common stock	$	674		$	320
Conversion of debt through issuance of preferred stock	$	1,104		$	-
Issuance of shares for asset acquisition	$	-		$	884
Property acquired under capital lease	$	-		$	68
Note payable for acquisition	$	-		$	444

See accompanying notes to consolidated financial statements.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

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 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 wireless broadband products and services to rural oil and gas locations are recorded in our subsidiary, “Energy Broadband, Inc. (EBI)”. Please refer to segment footnote 9 for additional information regarding the Company’s operating divisions.

BASIS OF ACCOUNTING

The accompanying unaudited interim 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") and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's annual report for the year ended December 31, 2009 filed with the SEC on Form 10-K. 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 for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year ended December 31, 2009 as reported in form 10-K have been omitted.

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 June 30, 2010 and December 31, 2009, in thousands:

	June 30,		December 31,
	2010		2009
Raw material	$	64	$	63
Finished goods		176		159
	$	240	$	222

The Company has pledged all the finished goods inventory of WBS of $176,000 and $159,000 as collateral against outstanding notes as of June 30, 2010 and December 31, 2009, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.

NOTE 2 – DEBT SETTLEMENT

The Company during the second quarter 2010 had two debt settlements of the unsecured revolving credit facility which provides financing for working capital requirements. During June 2010 the Company issued 1,668,873 shares of its Series A Preferred Stock for the settlement of $763,803 of debt and $340,123 in accrued interest for a total amount of $1,103,926. The Company issued Preferred A Stock at an average price of $.6615 per share or $.0354 per share of common of the ERFW common stock the day the debt is settled and converted to Preferred A Stock. As additional consideration for the settlement the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 50 votes to 100 votes on all matters in which the common stock holders and preferred stock holders vote together. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $27,541 would have been recognized in this quarter.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

NOTE 3 – 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 are shares of preferred stock with a par value of $.001 per share ("Preferred Stock"), and 475,000,000 are shares of common stock with a par value of $.001 per share.

COMMON STOCK

As of June 30, 2010, there were 205,419,310 shares of common stock issued and outstanding.

During the six months ended June 30, 2010, the Company issued 16,391,000 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):

June 30, 2010	Supplemental Non-Cash Disclosure
Professional fees	$	370
Settlements		26
Salary and compensation		359
Other services rendered		63
Total for services, interest, liabilities and compensation	$	818

Notes payable	$	674

During the six months ended June 30, 2010, we issued to various accredited investors an aggregate of 2,453,000 shares of restricted common stock for net consideration of $252,000. We relied on Section 4(2) of the Securities Act in effecting this transaction.

PREFERRED STOCK

The Company has 25,000,000 shares of Preferred Stock of which of which 5,000,000 shares had been set aside as Series A Preferred Stock. At June 30, 2010, 2,516,799Series A preferred shares were issued and outstanding. With respect to the Series A Preferred Stock outstanding at June 30, 2010, the Company would be required to issue 47,004,615 shares of its common stock. During the six months ended June 30, 2010, 2,195,654 Series A Preferred Stock was converted into net amount of 40,999,710 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 100 votes on all matters submitted to a vote of the Company’s stockholders.

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.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

WARRANTS

The Company had warrants outstanding to third parties to purchase 3,305,049 shares of common stock as of June 30, 2010.

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.

In conjunction with financing in 2009, the Company issued to accredited investors 1,558,297 warrants with an exercise of $.45 per share. These warrants expire three years from issuance.

At June 30, 2010, the Company has 1,356,753 warrants exercisable at $5.00 per share. The remaining warrants will continue to expire at various dates from July thru the end of year of December 2010.

NOTE 4 – 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 June 30, 2010, under the 2008 Non-Qualified Stock Option Plans, 14,457,975 shares were issued to certain employees and consultants for services rendered.

In June 2010, the Board of directors adopted a Non-Qualified Stock Option Plan whereby 25,000,000 shares were reserved for issuance. As of June 30, 2010, under the 2010 Non-Qualified Stock Option Plan, there were no shares issued under this plan.

Stock Plan activity was as follows for the six months ended June 30, 2010:

	2008
	Plan
Shares initially reserved		15,000,000

Remaining shares January 1, 2010		5,995,378

Shares issued during 2010		5,453,353

Remaining shares available to be issued at June 30, 2010		542,025

Shares issued and outstanding as of June 30, 2010		14,457,975


	2010
	Plan
Shares initially reserved		25,000,000

Remaining shares June 30, 2010		25,000,000

Shares issued during 2010		-

Remaining shares available to be issued at June 30, 2010		25,000,000

Shares issued and outstanding as of June 30, 2010		-

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

The Company has granted to certain officers and employees 325,000 stock options which are currently exercisable. Option activity was as follows for the six months ended June 30, 2010:

	Shares	Weighted-Average Exercise Price

Outstanding at beginning of year	125,000	$	0.43
Granted	200,000		0.17
Exercised	-		-
Forfeited/cancelled	-		-

Outstanding at the end of period	325,000	$	0.27

Exercisable at June 30, 2010	325,000	$	0.27

The weighted average fair value of the individual options granted during the six months ended June 30, 2010, is estimated at $.06 on the date of grant. The fair values were determined using a Black-Scholes option-pricing model with the following assumptions:

		3/31/2010
Assumptions		Options
Dividend yield		0.00%
Risk-free rate for term		0.20%
Volatility		84.00%
Expected life		5.0

Information about options outstanding was as follows at June 30, 2010:

			Remaining Weighted			Remaining Weighted
Class	Number		Average Contractual	Number		Average Exercise
Exercise Price	Outstanding		Life in Years	Exercisable		Price

$0.17		200,000	4.75		200,000	$	0.17
$0.43		125,000	3.08		125,000	$	0.43

		325,000	3.92		325,000	$	0.27

NOTE 5 – 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 six months ended June 30, 2010
	Net loss			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Basic EPS:
Loss available to common stockholders	$	(3,934	)		167,302	$	(0.02	)
Effect of dilutive securities		-			-		-
Diluted EPS:
Loss available to common stockholders and assumed conversions	$	(3,934	)		167,302	$	(0.02	)


	For the six months ended June 30, 2009
	Net loss			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Basic EPS:
Loss available to common stockholders	$	(4,458	)		106,905	$	(0.04	)
Effect of dilutive securities		-			-		-
Diluted EPS:
Loss available to common stockholders and assumed conversions	$	(4,458	)		106,905	$	(0.04	)

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

	For the three months ended June 30, 2010
	Income			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Basic EPS:
Loss available to common stockholders	$	(1,859	)		181,896	$	(0.01	)
Effect of dilutive securities		-					-
Diluted EPS:
Loss available to common stockholders and assumed conversions	$	(1,859	)		181,896	$	(0.01	)


	For the three months ended June 30, 2009
	Income			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Basic EPS:
Loss available to common stockholders	$	(2,099	)		107,830	$	(0.02	)
Effect of dilutive securities		-					-
Diluted EPS:
Loss available to common stockholders and assumed conversions	$	(2,099	)		107,830	$	(0.02	)

For the six months ended June 30, 2010, 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 six months ended June 30, 2010 does not include 325,000 shares of common stock assuming all employee stock options were exercised; 3,305,049 shares of common stock assuming all warrants were exercised; 11,296,296 shares of common stock assuming all convertible debt were exercised; 47,004,615 shares of common stock assuming all Series A Preferred Stock were converted due to their anti-dilutive effect.

NOTE 6 – MAJOR CUSTOMERS

The Company had gross sales of approximately $3,055,000 and $2,601,000 for the six months ended June 30, 2010 and 2009, respectively. The Company had one customer that represented 10% of the gross sales in the six months ended June 30, 2010. The Company did not have any customers that represented approximately 10% of gross sales for the six months ended June 30, 2009.

NOTE 7 – NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES

Notes payable, long-term debts and capital leases consist of the following as of June 30, 2010 (in thousands):

	Terms	Maturity Date	Interest Rate	Gross Balance		Debt Discount		Net Balance
Bancleasing, Inc.	$10,660 / Month including interest	October-14	11.62%	$	453	$	-	$	453
Agility Capital Lease	$77,369 / Month including interest	Various	18.82%		728		-		728
De Lage Landen Lease	$691 / Month including interest	April-11	19.12%		6		-		6
Toyota	$517 / Month including interest	December-10	8.01%		1		-		1
Blanco National Bank	$3,913 / Month including interest	August-10	9.50%		1		-		1
Robert McClung, Momentum	$23,476 / Quarterly including interest	October-10	7.50%		46		-		46
Shane Griffths, Crosswind	$13,911 / Quarterly including interest	December-10	7.50%		42		-		42
Centramedia	$56,342 / Quarterly including interest	December-11	7.50%		366		-		366
Frontier Internet LLC	$33,846 / Quarterly including interest	May-12	6.00%		253		-		253
Ronnie D Franklin	$6,054 / Quarterly including interest	May-12	6.00%		45		-		45
Premium Assignment, Insurance notes	$2,434 / Month including interest	September-10	7.54%		1		-		1
Convertible Note	1 year	Demand	10.00%		305		97		208
Bridge Financing	1 year	Demand	10.00%		701		18		683
Line of credit	2 years/ Quarterly interest (See below)	December-11	12.00%		6,197		-		6,197
Total debt				$	9,145	$	115		9,030
Less current maturities									(1,868)
Long-term debt								$	7,162

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

LINE OF CREDIT

During June 2010, the Company increased its unsecured revolving credit facility with Angus Capital Partners a related party from $10.5 million to $12.0 million maturing December 31, 2013. 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 June 30, 2010, the outstanding balance on the line of credit of totaled $6,197,000 with a remaining line of credit availability of $5,803,000.

BRIDGE FINANCING

During 2009, the Company borrowed $1,390,000 from certain accredited investors. These notes are unsecured, bear interest at 10% and are due within one year. In connection with the issuance of the these promissory notes the investors have been issued common stock purchase warrants to purchase up to 1,558,297 shares of common stock that are exercisable at $.45 per share, which expire three years from issuance. The balance at June 30, 2010, of these notes is $701,000.

The Company uses the effective interest method to record interest expense and related debt accretion which was $100,000 for the six months ended June 30, 2010, and the estimated debt accretion for 2010 is $17,000.

The following table summarizes the convertible debt activity for the period December 31, 2009, to June 30, 2010 (in thousands):

Description	Bridge Note			Warrant Liabilities			Total
Fair value at December 31, 2009	$	1,273		$	268		$	1,541
01-01-10 to 03-31-10 change in fair value		77			(134	)		(57	)
04-01-10 to 06-30-10 change in fair value		23			(85	)		(62	)
Conversions during period		(690	)		-			(690	)
Fair value at June 30, 2010	$	683		$	49		$	732

For the year to date ended June 30, 2010 and 2009, net derivative income was $219,000 and $75,000 respectively.

CONVERTIBLE NOTE

For the six months ended June 30, 2010, the Company borrowed from certain accredited investors $605,000 for working capital and debt retirement purposes. During the second quarter 2010 the Company retired $300,000 leaving a balance of $305,000, which was paid off subsequent to June 30, 2010. These notes are unsecured, bear interest at 10% and are convertible into common stock within one year of the signed notes. The notes will be guaranteed for any remaining outstanding amount by Angus Capital Partners, a related party.

At the Company's discretion principal and interest can be repaid in cash or in shares of our common stock, which shares will be valued at the 75% of the average of the three (3) lowest daily VWAPs during the twenty (20) trading days immediately preceding the applicable conversion date on which the holder elects to convert all or part of the note.

These convertible notes were determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, the redemption option, forced conversion and full reset feature (compound embedded derivative liability). At the date of issuance the convertible note, 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 $45,000 for the six months ended June 30, 2010, and the estimated debt accretion for 2010 is $97,000.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

The following table summarizes the convertible debt activity for the period March 19, 2010, to June 30, 2010 (in thousands):

Description	Convertible Note			Compound Derivative Liability			Total
Fair value issuance at inception	$	355		$	250		$	605
03-19-10 to 03-31-10 change in fair value		33			(62	)		(29	)
04-01-10 to 06-30-10 change in fair value		120			(154	)		(34	)
Conversions during period		(300	)		-			(300	)
Fair value at June 30, 2010	$	208		$	34		$	242

For the year to date ended June 30, 2010, net derivative income was $107,000.

CAPITAL LEASES

Agility Lease Fund, LLC Included in property and equipment at June 30, 2010, is $701,000 capitalized equipment, net of amortization. The equipment and one of the Company's bank accounts are the primary collateral securing the financing with a guarantee of repayment by ERF Wireless, Inc.

Banc Leasing Inc., Included in property and equipment at June 30, 2010, is $545,000 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 June 30, 2010 (in thousands):

Year Ending December 31,
2010	$	477
2011		524
2012		141
2013		128
2014		128
Thereafter		11
Total minimum lease payments		1,409
Less amount representing interest		(222	)
Present value of net minimum lease payments		1,187
Current maturities of capital lease obligations		(664	)
Long-term portion of capital lease obligations	$	523

NOTE 8 – COMMITMENTS

LEASES AND LICENSE AGREEMENTS

For the six months ended June 30, 2010 and 2009, rental expenses of approximately $453,000 and $384,000, 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 September 2018, and requiring payment of property taxes, insurance, maintenance and utilities.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

Future minimum lease payments under non-cancelable operating leases at June 30, 2010, were as follows (in thousands):

Period Ending December 31,	Amount
2010	$	305
2011		424
2012		71
2013		25
2014		12
Thereafter		25
Total	$	862

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 the contract is sign with financial institution. Each funding is collateralized 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 7.

Purchase Commitment – Mobile Broadband Trailers

The Company entered into a contract in the amount $4.7 million for the production of 321 Mobile Broadband Trailers (MBTs). The production of the MBTs will take an extended period of time to complete with the Company currently taking initial delivery of MBTs. The Company will utilize the MBTs for deployment of the high-speed wireless broadband digital oilfield solutions for oil and gas drilling operations throughout North America.

NOTE 9 – 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.

Energy Broadband, Inc. (EBI)

EBI provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (MBT’s). 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.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

The Company’s industry segment data for the three months ended June 30, 2010and 2009 is as follows (in thousands)

Three Months Ended June 30, 2010	WMS			WBS			EBI			ENS			Total
Revenue	$	63		$	1,172		$	206		$	135		$	1,576
Segment (loss) income		5			(499	)		(61	)		(94	)		(649	)
Segment assets		66			4,907			1,168			1,485			7,626
Capital expenditures		-			83			51			-			134
Depreciation and amortization		4			677			34			55			770


Three Months Ended June 30, 2009	WMS			WBS			EBI			ENS			Total
Revenue	$	31		$	1,145		$	16		$	86		$	1,278
Segment (loss) income		(56	)		(631	)		(66	)		(165	)		(918	)
Segment assets		(21	)		7,404			284			1,837			9,504
Capital expenditures		-			485			12			105			602
Depreciation and amortization		4			611			26			3			644

Reconciliation of Segment Loss from Operations	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009
Total segment loss from operations	$	(649	)	$	(918	)

Total corporate overhead		(976	)		(975	)
Net loss	$	(1,625	)	$	(1,893	)

The Company’s industry segment data for the six months ended June 30, 2010and 2009 is as follows (in thousands):

Six Months Ended June 30, 2010	WMS			WBS			EBI			ENS			Total
Revenue	$	85		$	2,405		$	378		$	187		$	3,055
Segment (loss) income		(40	)		(981	)		(156	)		(244	)		(1,421	)
Segment assets		66			4,907			1,168			1,485			7,626
Capital expenditures		-			175			326			-			501
Depreciation and amortization		7			1,321			63			111			1,502


Six Months Ended June 30, 2009	WMS			WBS			EBI			ENS			Total
Revenue	$	91		$	2,247		$	20		$	243		$	2,601
Segment (loss) income		(70	)		(1,307	)		(80	)		(379	)		(1,836	)
Segment assets		(21	)		7,404			284			1,837			9,504
Capital expenditures		-			602			12			154			768
Depreciation and amortization		8			1,198			29			7			1,242

Reconciliation of Segment Loss from Operations	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009
Total segment loss from operations	$	(1,421	)	$	(1,836	)

Total corporate overhead		(2,031	)		(2,129	)
Net loss	$	(3,452	)	$	(3,965	)

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

Reconciliation of Segment Assets to Total Assets	June 30, 2010		December 31, 2009
Total segment assets	$	7,626	$	8,745
Total corporate assets		319		372
Consolidated assets	$	7,945	$	9,117

The accounting policies of the reportable segments are the same as those described in footnote one. The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, accounting changes and non-recurring items.

For the quarter ended June 30, 2010, one customer accounted for $301,000 of EBI revenues.

NOTE 10 – SUBSEQUENT EVENTS

Subsequent to June 30, 2010, the Company issued 43,566,232 shares of common stock for services rendered, debt, exchange of liabilities, and conversion of preferred stock.

Subsequent to June 30, 2010 the convertible notes balance of $305,000 were settled in stock.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 quarterly report on Form 10-Q, including the financial statements.

OUR MARKETS AND BUSINESS STRATEGY

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 the second quarter of 2010, approximately 91% of our revenue was generated from Internet services and 9% of our revenue was generated from construction services. We expect our Internet services to experience the most growth during the fiscal year 2010 as we devote significant capital resources to developing the sale of wireless products and services in the oil and gas market.

During the second quarter of fiscal 2010, the company advanced its strategic business plan as evidenced by a number of agreements and activities. A summary of milestones during and subsequent to the quarter ended June 30, 2010, includes:

●

The Company announced that it received Second Round Review letters from the United States Department of Agriculture’s Rural Utilities Service (RUS) regarding their broadband stimulus applications. These letters pertained to three separate applications that ERF Wireless had previously submitted to the RUS in response to the Administration's stated objective to award approximately $7 billion in grants and low interest loans to companies, private and public entities, and other parties to enable the creation of jobs and the development of broadband access to all American citizens. These letters allowed for the submittal of supplemental information to address specific and limited adjustments to all three of the company's Round Two Broadband Initiatives Program (BIP) Infrastructure applications. ERF Wireless submitted separate applications for each of these "last-mile" projects that total approximately $31 million in loan and grant funding. These projects include:

Eagle Ford Shale Broadband Project. The agricultural area of Texas south of San Antonio has long lagged behind the rest of the state in access to technology. This is a significant barrier to the development in the region. The recent expansion in natural gas exploration in the region has created opportunity for change. The community can only reach the outside world at high speed if they live in close proximity to a telephone company end office, and even then access is not economical.

Texas Educational Broadband Network. ERF Wireless has developed an open partnership with several Texas Independent School Districts as anchor tenants. A WiMax access network will be implemented for this area west of Houston, Texas, covering some 600 square miles. Wireless access will be provided to schools and other community anchors in this coverage area, and otherwise unavailable broadband Internet access will be provided at competitive rates to businesses and homes.

Central Louisiana WiMax Project . This project proposes to blanket 900 square miles of rural and economically-distressed communities with the latest in WiMax broadband service. The project will offer a Broadband Lifeline Program that will enable low income families who qualify to receive discounted broadband services. This project will create hundreds of long-term job opportunities and will offer service to all critical community facilities.

Over the past five years, the company has demonstrated its ability to successfully design, build and operate wireless broadband networks in rural communities throughout Texas, Louisiana, Oklahoma and New Mexico. We believe that, even though this request for more information from the RUS should not be viewed as an indication that the applications will be approved and that our resubmitting updated applications does not guarantee funding, our past experience has made ERF Wireless a leading candidate to receive the broadband funding under the American Recovery and Reinvestment Act of 2009. We would expect to hear the outcome of these applications before the end of September 2010, based on previously disclosed RUS timelines.

●

The Company announced that it has settled in stock all of its outstanding convertible debt as of close of business August 4, 2010. As reported in its 10-Q for the first quarter of 2010, the company received approximately $605,000 USD in financing through convertible debentures with several institutional investors during the first quarter of 2010. Since that time, the company has worked to repay that debt, while continuing to execute its business plan for overall revenue growth. In particular, Energy Broadband, Inc., the company's oil and gas services division, continues to gain substantial sales momentum and is currently working to finalize contracts with multiple customers, including some high-profile Fortune 500 companies.

●

The Company announced that it has entered into a contract with the world's leading oil and gas service’s company in support of BP and the U.S. Coast Guard. ERF Wireless was selected to provide its world-class integrated communications systems to provide bandwidth to the U.S. Coast Guard's Incident Command Center recently set up on Galveston Island to search for and respond to all reports of oil affecting the Texas Gulf Coast that may be associated with the BP Deepwater Horizon spill off the coast of Louisiana.

●

The Company announced it continues to sign multiple new contracts to provide communications service, equipment, and infrastructure with a number of oil and gas sector companies for products and services to be provided in the United States as well as several foreign countries. While the size of these recent contracts is typically hundreds of thousands of dollars over multiple-year periods, it further validates that the momentum the company has been realizing in Energy Broadband, Inc., should continue to grow into the future. In addition, the company is in late-stage negotiations with several very large, global energy companies to provide comprehensive communications services to help support a substantial augmentation in communications capabilities for exploration and production activities. The company expects to complete at least one of these large contracts in the short term and will keep shareholders abreast of any new developments regarding signing of any additional contracts.

●

The Company announced that it continues to grasp significantly more oil and gas business along with expanding its overall recurring revenue base from broadband to drilling operations, oil and gas well rework, frac operation support, SCADA wireless connectivity, pipeline wireless surveillance and connectivity support, customer wireless network design and construction, new bank customer contracts, and NOC support. All of this new business, which has largely materialized since the start of 2010, is mostly as a result of the increased ERF Wireless sales and marketing efforts starting in the latter half of 2009 and has continued to move the company forward toward its goal of cash flow positive operations in the next few quarters. In view of all of this increased business activity by ERF Wireless, the company finds it ironic that its market capitalization has also seen a steady decline over recent months coupled with the receipt of a large number of shareholder inquiries regarding this decline in market capitalization of the company and the related causes. ERF Wireless has assured all of these inquiring shareholders that the company is continuing to effectively execute its business plan and is currently on track to meet its objective of near-term positive cash flow.

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.

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

THREE AND SIX MONTHS ENDED JUNE 30, 2010,

COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2009

The following table sets forth summarized consolidated financial information for the three and six months ended June 30, 2010 and 2009:

	Three Months Ended June 30,											Six Months Ended June 30,
($ in thousands)	2010			2009			$ Change			% Change		2010			2009			$ Change			% Change
Total sales	$	1,576		$	1,278		$	298			23%	$	3,055		$	2,601		$	454			17%
Cost of goods sold		1,031			701			330			47%		2,019			1,504			515			34%
Gross profit		545			577			(32	)		-6%		1,036			1,097			(61	)		-6%
Percent of total sales		35%			45%								34%			42%
Operating expenses		2,170			2,470			(300	)		-12%		4,488			5,062			(574	)		-11%
Loss from operations		(1,625	)		(1,893	)		268			-14%		(3,452	)		(3,965	)		513			-13%
Other income/(expense)		(234	)		(206	)		(28	)		14%		(482	)		(493	)		11			-2%
Net loss	$	(1,859	)	$	(2,099	)	$	240			-11%	$	(3,934	)	$	(4,458	)	$	524			-12%

For the three months ended June 30, 2010, the Company's business operations reflected an increase in sales for Wireless Bundled Services (WBS), Enterprise Network Services (ENS), Energy Broadband, Inc. (EBI) and for Wireless Messaging Services (WMS). For the three months ended June 30, 2010, the Company's consolidated operations generated net sales of $1,576,000 compared to prior year net sales of $1,278,000. The $298,000 increase in net sales is primarily attributable to $27,000 increased sales in WBS due to recurring wireless broadband services with the increased growth attributed to asset acquisitions, $190,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions, $49,000 increased sales in ENS due to banking network installation and services and a $32,000 increase in WMS due to paging infrastructure sales and services. Service sales increased $233,000 and product sales increased $65,000. The $298,000 increase is primarily attributable to EBI our wireless broadband services from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions. For the three months ended June 30, 2010, the Company had a gross profit margin of 35%, compared to a gross profit margin 45% for the prior year. The $32,000 decrease in gross profit margin is primarily attributed to the following factors; (i) approximately $121,000 increase in gross margin attributable to our wireless broadband services from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions (ii) approximately $160,000 decrease in gross margin attributable to increased depreciation and tower rent due to asset acquisitions (iii) $61,000 decrease in gross margins primarily related to depreciation of our BankNet infrastructure with minimal customer base offsetting the expense at this time, and (iv) $68,000 increase in gross margins primarily related to wireless paging infrastructure sales and services.

For the six months ended June 30, 2010, the Company's business operations reflected an increase in sales for Wireless Bundled Services and increase sales for Energy Broadband, Inc with an offset of decreased sales for Enterprise Network Services and for Wireless Messaging Services. For the six months ended June 30, 2010, the Company's consolidated operations generated net sales of $3,055,000 compared to prior year net sales of $2,601,000. The $454,000 increase in net sales is primarily attributable to $158,000 increased sales in WBS due to recurring wireless broadband services with the increased growth attributed to asset acquisitions, $358,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions, with an offset of $56,000 in decreased sales in ENS due to banking network installation and services and a $6,000 decrease in WMS attributable to decrease paging retail customer base. Product sales decreased $54,000 and offset with increased service sales of $508,000. The $454,000 increased sales is primarily attributable to EBI our wireless broadband services from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions and WBS due to recurring wireless broadband services with the increased growth attributed to asset acquisitions. For the six months ended June 30, 2010, the Company had a gross profit margin of 34%, compared to a gross profit margin of 42% for the prior year. The $61,000 decrease in gross profit margin percentage is primarily attributed to the following factors; (i) approximately $208,000 increase in gross margin attributable to our wireless broadband services from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions (ii) approximately $197,000 decrease in gross margin attributable to increased depreciation and tower rent due to asset acquisitions (iii) $130,000 decrease in gross margins primarily related to depreciation of our BankNet infrastructure with minimal customer base offsetting the expense at this time, and (iv) $58,000 increase in gross margins primarily related to wireless paging infrastructure sales and services.

The Company incurred a net loss of $1,859,000 for the three months ended June 30, 2010. The Company's principal components contributing to the net loss for the three months ended June 30, 2010, included approximately $792,000 in depreciation and amortization expenses, $395,000 of interest expense, and $371,000 of other general and administrative expense, $1,108,000 in employment expenses and $303,000 in professional services expense.

The Company incurred a net loss of $3,934,000 for the six months ended June 30, 2010. The Company's principal components of the net loss for the six months ended June 30, 2010, included approximately $1,547,000 in depreciation and amortization expenses, $815,000 of interest expense, and $725,000 of other general and administrative expense, $2,295,000 in employment expenses and $711,000 in professional services expense.

SALES INFORMATION

Set forth below is a table presenting summarized sales information for our business segments for the three months and six months ended June 30, 2010 and 2009.

($ in thousands)				Three Months Ended June 30,
Business Segment	2010		% of Total	2009		% of Total	$ Change		% Change
Wireless Messaging Services	$	63	4%	$	31	2%	$	32	103%
Wireless Bundled Services		1,172	74%		1,145	90%		27	2%
Enterprise Network Services		135	9%		86	7%		49	57%
Energy Broadband, Inc.		206	13%		16	1%		190	1188%
Total Sales	$	1,576	100%	$	1,278	100%	$	298	23%

($ in thousands)				Six Months Ended June 30,
Business Segment	2010		% of Total	2009		% of Total	$ Change		% Change
Wireless Messaging Services	$	85	3%	$	91	4%	$	(6)	-7%
Wireless Bundled Services		2,405	79%		2,247	86%		158	7%
Enterprise Network Services		187	6%		243	9%		(56)	-23%
Energy Broadband, Inc.		378	12%		20	1%		358	1790%
Total Sales	$	3,055	100%	$	2,601	100%	$	454	17%

For the three months ended June 30, 2010, net sales increased to $1,576,000 from $1,278,000 for the three months ended June 30, 2009. The overall increase of 23% was attributable to an increase of $27,000 of Wireless Bundled Services, increase of $190,000 of Energy Broadband, Inc., increase of $49,000 in Enterprise Network Services and an increase in Wireless Messaging Services of $32,000. The $27,000 increased sales in WBS are due to recurring wireless broadband services with the increased growth attributed to asset acquisitions. The $190,000 increased sales in EBI are from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions. The $49,000 increased sales in ENS are due to banking network installation and services and a $32,000 increase in WMS is due to paging infrastructure sales and services.

For the six months ended June 30, 2010, net sales increased to $3,055,000 from $2,601,000 for the six months ended June 30, 2009. The overall increase of 17% was attributable to an increase of $158,000 of Wireless Bundled Services, increase of $358,000 of Energy Broadband, Inc., and offset with a decrease of $56,000 in Enterprise Network Services and a decrease in Wireless Messaging Services of $6,000. The $158,000 increased sales in WBS are due to recurring wireless broadband services with the increased growth attributed to asset acquisitions. The $358,000 increased sales in EBI are from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions. The $56,000decreased sales in ENS are due to banking network installation and services and a $6,000decreased sales in WMS is attributable to declining paging retail customer base.

COST OF GOODS SOLD

The following tables set forth summarized cost of goods sold information for the three months ended June 30, 2010 and 2009

($ in thousands)				Three Months Ended June 30,
Business Segment	2010		% of Total	2009		% of Total	$ Change		% Change
Wireless Messaging Services	$	19	2%	$	55	8%	$	(36)	-65%
Wireless Bundled Services		783	76%		594	85%		189	32%
Enterprise Network Services		140	13%		30	4%		110	367%
Energy Broadband, Inc.		89	9%		22	3%		67	305%
Total cost of sales	$	1,031	100%	$	701	100%	$	330	47%

	Three Months Ended June 30,
($ in thousands)	2010		2009		$ Change		% Change

Products and integration service	$	377	$	295	$	82		28%
Rent and maintenance		148		110		38		35%
Depreciation		506		296		210		71%
Total cost of sales	$	1,031	$	701	$	330		47%

The following tables set forth summarized cost of goods sold information for the six months ended June 30, 2010 and 2009

($ in thousands)				Six Months Ended June 30,
Business Segment	2010		% of Total	2009		% of Total	$ Change		% Change
Wireless Messaging Services	$	36	2%	$	99	7%	$	(63)	-64%
Wireless Bundled Services		1,568	78%		1,212	80%		356	29%
Enterprise Network Services		238	12%		164	11%		74	45%
Energy Broadband, Inc.		177	8%		29	2%		148	510%
Total Cost of Goods	$	2,019	100%	$	1,504	100%	$	515	34%

	Six Months Ended June 30,
($ in thousands)	2010		2009		$ Change		% Change

Products and integration service	$	751	$	737	$	14		2%
Rent and maintenance		269		206		63		31%
Depreciation		999		561		438		78%
Total Operating Expenses	$	2,019	$	1,504	$	515		34%

For the three months ended June 30, 2010, cost of goods sold increased by $330,000, or 47%, to $1,031,000 from $701,000 as compared to the three months ended June 30, 2009. The increase of $330,000 in cost of goods sold is primarily attributable to an increase of $189,000 in WBS due to increase depreciation and tower rent as a result of acquisitions, $67,000 increase in EBI due to increased depreciation and 3rd party services for deployment of our Mobile Broadband Trailers (MBT’s) in oil and gas regions, and $110,000 increase in ENS due to depreciation of our BankNet infrastructure offset with a decrease of $36,000 in WMS.

For the six months ended June 30, 2010, cost of goods sold increased by $515,000, or 34%, to $2,019,000 from $1,504,000 as compared to the six months ended June 30, 2010. The increase of $515,000 in cost of goods sold is primarily attributable to an increase of $356,000 in WBS due to increased depreciation and tower rent as a result of acquisitions, $148,000 increase in EBI due to increased depreciation and third party services for deployment of our Mobile Broadband Trailers (MBT’s) in oil and gas regions, and $74,000 increase in ENS due to depreciation of our BankNet infrastructure offset with a decrease of $63,000 in WMS.

OPERATING EXPENSES

The following table sets forth summarized operating expense information for the three months and six months ended June 30, 2010 and 2009:

	Three Months Ended June 30,									Six Months Ended June 30,
($ in thousands)	2010		2009		$ Change			% Change		2010		2009		$ Change			% Change

Employment expenses	$	1,108	$	1,169	$	(61	)		-5%	$	2,295	$	2,333	$	(38	)		-2%
Professional services		303		368		(65	)		-18%		711		955		(244	)		-26%
Rent and maintenance		102		116		(14	)		-12%		209		224		(15	)		-7%
Depreciation and amortization		286		370		(84	)		-23%		548		722		(174	)		-24%
Other general and administrative		371		447		(76	)		-17%		725		828		(103	)		-12%
Total operating expenses	$	2,170	$	2,470	$	(300	)		-12%	$	4,488	$	5,062	$	(574	)		-11%

For the three months ended June 30, 2010, operating expenses decreased by 12% to $2,170,000, as compared to $2,470,000 for the three months ended June 30, 2009. The decreases that occurred, as evidenced by the immediately preceding table, are discussed below:

	●	A $61,000 decrease in employment expense. The decrease is primarily attributable to the centralization of our operations;

	●	A $65,000 decrease in professional services. The decrease is primarily related to a reduction of outside consultants for investor relations and accounting expenses;

	●	A $84,000 decrease in depreciation and amortization; and

	●	A $76,000decrease in other general and administrative expense.

For the six months ended June 30, 2010, operating expenses decreased by 11% to $4,488,000, as compared to $5,062,000 for the six months ended June 30, 2009. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:

	●	A $38,000 decrease in employment expense. The decrease is primarily attributable to the centralization of our operations;

	●	A $244,000 decrease in professional services. The decrease is primarily related to a reduction of outside consultants for investor relations and accounting expenses;

	●	A $174,000 decrease in depreciation and amortization; and

	●	A $103,000decrease in other general and administrative expense.

OTHER (INCOME) EXPENSE, NET

For the six months ended June 30, 2010, the increase in other expense is primarily attributable to interest expense, net on debt obligations totaling $815,000 and a net derivative income of $326,000 as compared to interest expense, net of $543,000 and net derivative income of $45,000 for the six months ended June 30, 2009. The derivative expense/income represents the net unrealized (non-cash) charge during the six months ended June 30, 2010 and 2009, 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 six months ended June 30, 2010, our net loss was $3,934,000 compared to a loss of $4,458,000 for the six months ended June 30, 2009. The decrease in the loss for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009 is primarily attributable as evidenced by the immediately preceding table, are discussed above.

CASH FLOWS

The Company's operating activities net cash used by operating activities decreased $433,000 to $850,000 in the six months ended June 30, 2010, as compared to net cash used of $1,283,000 in the six months ended June 30, 2009. The decrease in net cash used by operating activities was primarily attributable to an improvement in the company's net operating loss of $3,934,000, net of $2,606,000 non-cash charges and combined with derivative income of $326,000 to equal net non-cash charge of $2,280,000, combined together with $804,000 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 $470,000 in the six months ended June 30, 2010, compared to use of net cash of $547,000 in the six months ended June 30, 2009. The decrease in investing activities is primarily attributable to no new acquisitions in 2010, as compared to the prior year.

The Company's financing activities provided net cash of $1,300,000 in the six months ended June 30, 2010, compared to $1,662,000 of cash provided in the six months ended June 30, 2009. The cash provided in the six months ended June 30, 2010, was primarily associated with the proceeds from equity financings, debt financing and the line of credit, net.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2010, the Company's current assets totaled $1,187,000 (including cash and cash equivalents of $208,000); total current liabilities were $4,152,000, resulting in negative working capital of $2,965,000. 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 operation for the six months ended June 30, 2010, was primarily funded by proceeds from the Company's line of credit, net totaling $1,512,000, sale of restricted common stock, net to accredited investors of $252,000 and convertible debt financing of $759,000.

CURRENT DEBT FACILITY

In June 2010, the Company increased its unsecured revolving credit facility with Angus Capital Partners a related party from $10.5 million to $12.0 million maturing December 31, 2013. At June 30, 2010, the Company had approximately $5,803,000 available on a $12.0 million unsecured revolving credit facility with Angus Capital Partners, with an outstanding balance of $6,197,000. The terms of the 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.

ISSUANCE OF COMMON STOCK

During the three months ended June 30, 2010, we issued to various accredited investors and third parties (i) 9,420,000 shares for services rendered and debt conversions, and (ii) 29,367,000 shares upon conversion of Series A Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the three months ended June 30, 2010, we issued approximately 3,826,000 shares of common stock to employees and business consultants, for aggregate consideration of $327,000 of services rendered, pursuant to a registration statement on form S-8.

During the six months ended June 30, 2010, we issued to various accredited investors and third parties (i) 2,453,000 shares of restricted common stock for net consideration of $252,000, (ii) 10,938,000 shares for services rendered and debt conversions, and (iii) 40,999,000 shares upon conversion of Series A Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the six months ended June 30, 2010, we issued approximately 5,453,000 shares of common stock to employees and business consultants, for aggregate consideration of $640,000 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 significant equity funding at this time, and additional funding may not be available to us on favorable terms As such there is no assurance that we can raise additional capital from external sources to fund our current and future business models on a timely basis.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2010, 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 set forth in Note 8 -Commitments.

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:

	●	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

Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, as defined in rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information mandated by this item.

ITEM 4. CONTROLS AND PROCEDURES

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of the end of the period covered by this report, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures were adequate.

There were no changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

See Risk Factors in item 1A of the Company form 10-K of Fiscal year ended December 31, 2009.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following transactions 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.

Common Stock Issued for Cash Consideration

None

Common Stock Issued for Debt Conversions and Services Rendered

In April, 2010, 2,113,101 shares of common stock at average price of $.11 were issued for debt conversions and services rendered.

In May, 2010, 4,053,935 shares of common stock at average price of $.06 were issued for debt conversions and services rendered.

In June, 2010, 3,252,684 shares of common stock at average price of $.04 were issued for debt conversions and services rendered.

Common Stock Issued Upon Conversion of Series A Preferred Stock

On April 5, 2010, an accredited investor acquired 4,482,324 shares of common stock pursuant to Preferred A Conversions.

On May 13, 2010, an accredited investor acquired 7,470,540 shares of common stock pursuant to Preferred A Conversions.

On June 02, 2010, an accredited investor acquired 11,205,810 shares of common stock pursuant to Preferred A Conversions.

On June 30, 2010, an accredited investor acquired 6,209,214 shares of common stock pursuant to Preferred A Conversions.

ITEM 3. DEFAULT IN SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit 31

Certification of Chief Executive officer and Chief Financial officer pursuant to Rules 13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ERF Wireless, Inc.

	By:	/s/ H. Dean Cubley
		H. Dean Cubley
		Chief Executive Officer
	Date:	August 23, 2010

ERF Wireless, Inc. - FORM 10-Q - August 23, 2010

Attached files

ERF Wireless, Inc. Reports