Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - ERF Wireless, Inc. | Financial_Report.xls |
EX-32.2 - CERTIFICATION - ERF Wireless, Inc. | erf_10q-ex3202.htm |
EX-31.2 - CERTIFICATION - ERF Wireless, Inc. | erf_10q-ex3102.htm |
EX-32.1 - CERTIFICATION - ERF Wireless, Inc. | erf_10q-ex3201.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 March 31, 2012
OR
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 x 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. 2,893,092 common shares issued and outstanding as of May 21, 2012
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ERF WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2012, AND DECEMBER 31, 2011
($ in thousands except share data)
March 31,
2012 |
December 31,
2011 |
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 149 | $ | 591 | ||||
Securities held for resale
|
3 | 7 | ||||||
Accounts receivable, net
|
743 | 596 | ||||||
Accounts receivable, other
|
336 | 310 | ||||||
Inventories
|
438 | 358 | ||||||
Prepaid expenses and other current assets
|
168 | 285 | ||||||
Total current assets
|
1,837 | 2,147 | ||||||
Property and equipment
|
||||||||
Property and equipment
|
10,495 | 9,932 | ||||||
Less: accumulated depreciation
|
(6,207 | ) | (5,868 | ) | ||||
Net property and equipment
|
4,288 | 4,064 | ||||||
Goodwill
|
176 | 176 | ||||||
Other assets
|
30 | 63 | ||||||
Total assets
|
$ | 6,331 | $ | 6,450 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
||||||||
Current liabilities:
|
||||||||
Notes payable and current portion of long-term debt
|
$ | 616 | $ | 259 | ||||
Current portion of long-term capital leases
|
134 | 126 | ||||||
Accounts payable
|
720 | 694 | ||||||
Accrued expenses
|
594 | 661 | ||||||
Derivative liabilities
|
130 | 27 | ||||||
Deferred liability and revenue
|
209 | 210 | ||||||
Total current liabilities
|
2,403 | 1,977 | ||||||
Line of credit (LOC)
|
4,310 | 4,592 | ||||||
Long-term debt, net of current portion
|
1,643 | 1,667 | ||||||
Long-term capital leases, net of current portion
|
297 | 305 | ||||||
Total liabilities
|
8,653 | 8,541 | ||||||
Commitments
|
||||||||
Shareholders’ deficit:
|
||||||||
Preferred stock - $0.001 par value, 25,000,000 authorized
Series A designated 10,000,000 shares
Issued and outstanding at March 31, 2012 and December 31,
2011, 8,508,887 and 8,578,887, respectively
|
9 | 9 | ||||||
Common stock - $0.001 par value
Authorized 975,000,000 shares
Issued and outstanding at March 31, 2012 and December 31,
2011, 2,505,541 and 2,160,996, respectively
|
2 | 2 | ||||||
Additional paid in capital
|
49,751 | 49,121 | ||||||
Accumulated deficit
|
(52,163 | ) | (51,198 | ) | ||||
Accumulated other comprehensive loss
|
(29 | ) | (25 | ) | ||||
Total ERF wireless, Inc. shareholders’ deficit
|
(2,430 | ) | (2,091 | ) | ||||
Noncontrolling interest
|
108 | - | ||||||
Total shareholders’ deficit
|
(2,322 | ) | (2,091 | ) | ||||
Total liabilities and shareholders' deficit
|
$ | 6,331 | $ | 6,450 |
See accompanying notes to consolidated financial statements.
2
ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Unaudited)
($ in thousands except loss per share)
March 31, | ||||||||
2012
|
2011
|
|||||||
Sales:
|
||||||||
Products
|
$ | 107 | $ | 28 | ||||
Services
|
1,541 | 1,101 | ||||||
Total sales
|
1,648 | 1,129 | ||||||
Costs of goods sold:
|
||||||||
Products and integration services
|
416 | 306 | ||||||
Rent, repairs and maintenance
|
127 | 75 | ||||||
Depreciation
|
286 | 342 | ||||||
Total costs of goods sold
|
829 | 723 | ||||||
Gross profit
|
819 | 406 | ||||||
Operating expenses:
|
||||||||
Selling, general and administrative
|
1,450 | 1,095 | ||||||
Depreciation and amortization
|
53 | 69 | ||||||
Total operating expenses
|
1,503 | 1,164 | ||||||
Operating loss from continuing operations
|
(684 | ) | (758 | ) | ||||
Other income (expenses):
|
||||||||
Interest expense, net and other income
|
(359 | ) | (194 | ) | ||||
Gain on sale of assets
|
- | 1,176 | ||||||
Derivative income
|
83 | 13 | ||||||
Total other (expense) income
|
(276 | ) | 995 | |||||
(Loss) income from continuing operations
|
(960 | ) | 237 | |||||
Loss from discontinued operations
|
- | (78 | ) | |||||
Consolidated net (loss) income
|
(960 | ) | 159 | |||||
Net income attributable to noncontrolling interest
|
(5 | ) | - | |||||
Net (loss) income attributable to ERF Wireless Inc.
|
(965 | ) | 159 | |||||
Other comprehensive (loss) income:
|
||||||||
Unrealized (loss) income on securities held for resale
|
(4 | ) | 8 | |||||
Total other comprehensive (loss) income
|
(4 | ) | 8 | |||||
Total comprehensive (loss) income
|
$ | (969 | ) | $ | 167 | |||
Basic (loss) income per common share:
|
||||||||
(Loss) income from continuing operations
|
$ | (0.40 | ) | $ | 0.27 | |||
(Loss) from discontinued operations
|
$ | - | $ | (0.09 | ) | |||
Net (loss) income
|
$ | (0.40 | ) | $ | 0.18 | |||
Diluted (loss) income per common share:
|
||||||||
(Loss) income from continuing operations
|
$ | (0.40 | ) | $ | 0.22 | |||
(Loss) from discontinued operations
|
$ | - | $ | (0.07 | ) | |||
Net (loss) income
|
$ | (0.40 | ) | $ | 0.15 |
See accompanying notes to consolidated financial statements.
3
ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
($ in thousands)
March 31, | ||||||||
2012
|
2011
|
|||||||
Cash flows from operating activities
|
||||||||
(Loss) income from continuing operations
|
$ | (960 | ) | $ | 237 | |||
Loss from discontinued operations
|
- | (78 | ) | |||||
Net (loss) income
|
(960 | ) | 159 | |||||
Adjustments to reconcile net (loss) income to net cash used by operating activities:
|
||||||||
Gain on sale of assets
|
- | (1,176 | ) | |||||
Amortization of debt discount
|
93 | - | ||||||
Depreciation and amortization
|
339 | 466 | ||||||
Stock issued for services rendered, interest and compensation
|
- | 547 | ||||||
Derivative income
|
(83 | ) | (13 | ) | ||||
Changes in:
|
||||||||
Accounts receivable, net
|
(147 | ) | (26 | ) | ||||
Accounts receivable, other
|
(26 | ) | (94 | ) | ||||
Inventories
|
(80 | ) | (16 | ) | ||||
Prepaid expenses and other current assets
|
117 | (67 | ) | |||||
Accounts payable
|
26 | (94 | ) | |||||
Accrued expenses
|
117 | (426 | ) | |||||
Deferred liability and revenue
|
(2 | ) | (209 | ) | ||||
Total adjustment
|
354 | (1,108 | ) | |||||
Net cash used by operating activities
|
(606 | ) | (949 | ) | ||||
Cash flows from investing activities
|
||||||||
Purchase of property and equipment
|
(526 | ) | (717 | ) | ||||
Proceeds from sale of assets
|
- | 2,700 | ||||||
Change in other assets
|
33 | (23 | ) | |||||
Net cash (used by) provided by investing activities
|
(493 | ) | 1,960 | |||||
Cash flows from financing activities
|
||||||||
Net proceeds from line of credit
|
137 | 328 | ||||||
Proceeds from long-term debt obligations
|
560 | - | ||||||
Payment of long-term debt obligations
|
(3 | ) | (371 | ) | ||||
Payment on capital lease obligations
|
(37 | ) | (253 | ) | ||||
Net cash provided by (used by) financing activities
|
657 | (296 | ) | |||||
Net change in cash and cash equivalents
|
(442 | ) | 715 | |||||
Cash and cash equivalents at the beginning of the period
|
591 | 43 | ||||||
Cash and cash equivalents at the end of the period
|
$ | 149 | $ | 758 | ||||
Supplemental disclosure of cash flow information:
|
||||||||
Net cash paid during the period for:
|
||||||||
Interest
|
$ | 173 | $ | 36 | ||||
Income taxes
|
$ | - | $ | - | ||||
Supplemental non-cash investing and financing activities:
|
||||||||
Conversion of debt through issuance of common stock
|
$ | 130 | $ | 85 | ||||
Conversion of LOC and interest through issuance of common stock
|
$ | 500 | $ | 600 | ||||
Unrealized (loss) income on securities held for resale
|
$ | (4 | ) | $ | 8 | |||
Dividends declared
|
$ | 103 | $ | - | ||||
Property and equipment financed with capital lease
|
$ | 37 | $ | - |
See accompanying notes to consolidated financial statements.
4
ERF WIRELESS, INC.
CONSOLIDATED STATEMENTSS OF SHAREHOLDERS’ DEFICIT
FOR THE PERIOD ENDED MARCH 31, 2012
($ in thousands)
Common Stock
|
Preferred Stock
|
Additional
Paid in |
Accumulated
|
Accumulated
Comprehensive
|
Noncontrolling
|
Total
Shareholders’ |
||||||||||||||||||||||||||||||
Shares
|
Value
|
Shares
|
Value
|
Capital
|
Deficit
|
Income
|
Interest
|
Deficit
|
||||||||||||||||||||||||||||
Total shareholders’ deficit as of December 31, 2010
|
785 | $ | 1 | 4,613 | $ | 5 | $ | 45,091 | $ | (47,819 | ) | $ | - | $ | - | $ | (2,722 | ) | ||||||||||||||||||
Net loss
|
- | - | - | - | - | (3,379 | ) | - | - | (3,379 | ) | |||||||||||||||||||||||||
New stock issued to shareholders:
|
||||||||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock
|
441 | - | (1,404 | ) | (1 | ) | 1 | - | - | - | - | |||||||||||||||||||||||||
For services, compensation and interest
|
203 | - | - | - | 1,023 | - | - | - | 1,023 | |||||||||||||||||||||||||||
For retirement of debt
|
88 | - | - | - | 369 | - | - | - | 369 | |||||||||||||||||||||||||||
Conversion of LOC and interest to preferred stock
|
- | - | 5,370 | 5 | 392 | - | - | - | 397 | |||||||||||||||||||||||||||
Conversion of LOC and interest to common stock
|
644 | 1 | - | - | 2,378 | - | - | - | 2,379 | |||||||||||||||||||||||||||
Dividend declared
|
- | - | - | - | (133 | ) | - | - | - | (133 | ) | |||||||||||||||||||||||||
Unrealized loss on securties held for resale
|
- | - | - | - | - | - | (25 | ) | - | (25 | ) | |||||||||||||||||||||||||
Total shareholders’ deficit as of December 31, 2011
|
2,161 | 2 | 8,579 | 9 | 49,121 | (51,198 | ) | (25 | ) | - | (2,091 | ) | ||||||||||||||||||||||||
Net loss
|
- | - | - | - | - | (965 | ) | - | 5 | (960 | ) | |||||||||||||||||||||||||
New stock issued to shareholders:
|
||||||||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock
|
70 | - | (70 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||
For retirement of debt
|
52 | - | - | - | 130 | - | - | - | 130 | |||||||||||||||||||||||||||
Conversion of LOC and interest to common stock
|
223 | - | - | - | 500 | - | - | - | 500 | |||||||||||||||||||||||||||
Dividend declared
|
- | - | - | - | - | - | - | 103 | 103 | |||||||||||||||||||||||||||
Unrealized loss on securties held for resale
|
- | - | - | - | - | - | (4 | ) | - | (4 | ) | |||||||||||||||||||||||||
Total shareholders’ deficit as of March 31, 2012 (unaudited)
|
2,506 | $ | 2 | 8,509 | $ | 9 | $ | 49,751 | $ | (52,163 | ) | $ | (29 | ) | $ | 108 | $ | (2,322 | ) |
See accompanying notes to consolidated financial statements.
5
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Nature of the Company
ERF Wireless, Inc. (“Company” or “ERF Wireless”) provides critical infrastructure wireless broadband communications products and services to a broad spectrum of customers in primarily rural oil and gas exploration areas of North America. We provide high quality broadband services and critical communications services to residential, oil and gas, educational, health care, and regional banks in rural areas utilizing our Company owned and operated wireless networks. As a total comprehensive solutions provider we offer a wide array of critical 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 wireless internet and network 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 , educational , and healthcare networks and other services associated with providing wireless products and services to the regional banking, educational and healthcare industries.
Our internet revenues are recorded in “ERF Wireless Bundled Services, Inc. (WBS)”, construction of bank, healthcare and educational networks in our “ERF Enterprise Network Services, Inc. (ENS)” and other construction in “ERF Wireless Messaging Services, Inc. (WMS)” and wireless broadband products and services to rural oil and gas locations are recorded in “Energy Broadband, Inc. (EBI)”. Please refer to segment footnote 9 for additional information regarding segment operations.
Basis of Accounting
The accompanying unaudited interim consolidated 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, 2011 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 consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the most recent fiscal year ended December 31, 2011 as reported in form 10-K have been omitted.
Noncontrolling Interest
Non-controlling interest in Energy Broadband Inc., its majority owned subsidiary, is included in the equity section of the consolidated balance sheets. Noncontrolling interest represents 3.5% of the equity of the Company’s majority-owned subsidiary, Energy Broadband Inc., Noncontrolling interest is adjusted for the noncontrolling interest holders’ proportionate share of the earnings or losses of ERF Wireless Inc., Operating losses applicable to majority-owned Energy Broadband Inc., have periodically exceeded the noncontrolling interests in the equity capital of the Subsidiary. Such excess losses applicable to the noncontrolling interests have been and are borne by the Company as there is no obligation of the noncontrolling interests to fund any losses in excess of their original investment. There is also no obligation or commitment on the part of the Company to fund operating losses of any subsidiary whether wholly-owned or majority-owned. The Company allocates the noncontrolling interest’s share of net loss in excess of the noncontrolling interest’s initial investment.
Reclassification
Certain amounts in the 2011 financial statements have been reclassified to conform to the 2012 financial presentation. These reclassifications have no impact on the total comprehensive loss.
6
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
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 March 31, 2012 and December 31, 2011, in thousands:
March 31,
2012 |
December 31,
2011 |
|||||||
Raw material
|
$ | 42 | $ | 44 | ||||
Work in process
|
138 | 116 | ||||||
Finished goods
|
258 | 198 | ||||||
$ | 438 | $ | 358 |
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 - ACCOUNTS RECEIVABLE
Accounts Receivable consists of the following (in thousands):
March 31,
2012
|
December 31,
2011
|
|||||||
Accounts receivable
|
$ | 776 | $ | 628 | ||||
Allowance for doubtful accounts
|
(33 | ) | (32 | ) | ||||
Accounts receivable, net
|
$ | 743 | $ | 596 |
NOTE 3 - DEBT CONVERSION
(a) Line of Credit
For the three months ended March 31, 2012, the Company has had several debt settlements of the unsecured revolving credit facility. See Note 7 for additional information on this facility. The unsecured revolving credit facility provides financing for working capital requirements. During the three months ended March 31, 2012 the Company issued 223,052 shares of its Common Stock for the settlement of $419,426 of debt and $80,574 in accrued interest for a total amount of $500,000. The Company issued Common Stock at an average price of $2.24 per share of the ERFB common stock the day the debt was settled.
(b) Other Debt
During the three months ended March 31, 2012 the Company issued 51,493 shares of its Common Stock for the settlement of $130,000 of debt. The Company issued Common Stock at an average price of $2.52 per share of the ERFB common stock the day the debt was settled.
7
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The total number of shares of stock of all classes which the Company shall have the authority to issue is 1,000,000,000, of which 25,000,000 shall be shares of preferred stock with a par value of $0.001 per share ("Preferred Stock"), and 975,000,000 shall be shares of common stock with a par value of $0.001 per share ("Common Stock").
Common Stock
As of March 31, 2012, there were 2,505,541 shares of its $0.001 par value common stock issued and outstanding.
During the three months ended March 31, 2012, the Company issued 274,545 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):
March 31, 2012
|
Supplemental Non-Cash Disclosure
|
|||
Notes payable
|
$ | 130 | ||
Line of credit and interest
|
$ | 500 |
Preferred Stock
The Company has 25,000,000 shares of Preferred Stock of which 10,000,000 shares had been designated as Series A Preferred Stock. 8,508,887 and 8,578,887 Series A preferred shares were issued and outstanding at March 31, 2012 and December 31, 2011, respectively. With respect to the Series A Preferred Stock outstanding at March 31, 2012, the Company would be required to issue 8,508,887 shares of its common stock upon conversion. During the three months ended March 31, 2012, 70,000 Series A Preferred Stock was converted into 70,000 shares of common stock.
EBI Stock Dividend
The Company will issue a stock dividend to ERF Wireless shareholders of up to 5% of the existing common stock in Energy Broadband, the Company's wholly owned oil and gas private subsidiary. ERF Wireless declared for each 200 shares of ERF Wireless common stock, that a shareholder owns as of September 30, 2011, the shareholder will receive one unit of Energy Broadband securities consisting of 100 Energy Broadband common shares, one warrant to purchase 100 shares of Energy Broadband at a fixed price of $4.00 per share and one warrant to purchase an additional 100 shares of Energy Broadband at a fixed price of $6.00 per share. The Company has estimated the stock dividend to be 900,000 shares of EBI stock which may not be confirmed for up to 180 days. The stock dividend was recorded based on our historical cost. The EBI shares were originally acquired by ERF at par of $0.001 for a total historical cost of $900. ERF acquired the warrants from EBI on September 30, 2011 at fair value for a total cost of $132,302.
As of March 31, 2012 the Company has issued 696,500 shares of EBI as a stock dividend and is expecting to fully issue all stock dividends before June 30, 2012. The dividend issued as of March 31, 2012 was $103,000 and the Company expects to issue remaining dividends before quarter end June 30, 2012.
8
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
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 three months ended March 31, 2012 | ||||||||||||
Net loss
(Numerator) |
Shares
(Denominator) |
Per-Share
Amount |
||||||||||
Basic EPS:
|
||||||||||||
Loss from continuing operations
|
$ | (960 | ) | 2,388 | $ | (0.40 | ) | |||||
Loss attributable to noncontrolling interest
|
$ | (5 | ) | 2,388 | $ | - | ||||||
Net loss attributable to ERF Wireless Inc.
|
$ | (965 | ) | 2,388 | $ | (0.40 | ) | |||||
Diluted EPS:
|
||||||||||||
Effect of dilutive securities
|
- | - | - | |||||||||
Loss from continuing operations
|
$ | (960 | ) | 2,388 | $ | (0.40 | ) | |||||
Loss attributable to noncontrolling interest
|
$ | (5 | ) | 2,388 | $ | - | ||||||
Net loss attributable to ERF Wireless Inc.
|
$ | (965 | ) | 2,388 | $ | (0.40 | ) |
For the three months ended March 31, 2011 | ||||||||||||
Net (loss) income
(Numerator) |
Shares
(Denominator) |
Per-Share
Amount |
||||||||||
Basic EPS:
|
||||||||||||
Income from continuing operations
|
$ | 237 | 891 | $ | 0.27 | |||||||
Loss from discontinued operations
|
$ | (78 | ) | 891 | $ | (0.09 | ) | |||||
Net income attributable to ERF Wireless Inc.
|
$ | 159 | 891 | $ | 0.18 | |||||||
Diluted EPS:
|
||||||||||||
Effect of dilutive securities
|
- | 169 | - | |||||||||
Income from continuing operations
|
$ | 237 | 1,060 | $ | 0.22 | |||||||
Loss from discontinued operations
|
$ | (78 | ) | 1,060 | $ | (0.07 | ) | |||||
Net income attributable to ERF Wireless Inc.
|
$ | 159 | 1,060 | $ | 0.15 |
For the three months ended March 31, 2012, 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 three months ended March 31, 2012 does not include 8,508,887 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 $1,648,000 and $1,129,000 for the three months ended March 31, 2012 and 2011, respectively. The Company had two customers that represented 43% and 14% and one customer that represented 41% of the gross sales in the three months ended March 31, 2012 and 2011, respectively.
9
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
Notes payable, long-term debts and capital leases consist of the following as of March 31, 2012 (in thousands):
Terms
|
Maturity Date
|
Interest Rate
|
Gross Balance
|
Debt Discount
|
Balance
|
||||||||||||||||
Banc leasing, Inc.
|
$10,660 / Month including interest
|
January-15
|
11.62% | $ | 300 | $ | - | $ | 300 | ||||||||||||
Advantage leasing associates
|
$4,936 / Month including interest
|
Various
|
Various
|
130 | - | 131 | |||||||||||||||
Investor bridge loan
|
$300,000 / Lump sum payment including interest
|
July-12
|
12.00% | 300 | - | 300 | |||||||||||||||
Premium assignment
|
$1,495 / Month including interest
|
July-12
|
7.45% | 6 | - | 5 | |||||||||||||||
Dakota capital line of credit
|
$178,031 / Quarterly including interest
|
March-16
|
18.00% | 2,000 | 80 | 1,920 | |||||||||||||||
E-bond investor notes
|
3 years/ Semiannual interest (See below)
|
Various
|
7.50% | 160 | 126 | 34 | |||||||||||||||
Line of credit
|
2 years/ Quarterly interest (See below)
|
December-13
|
12.00% | 4,310 | - | 4,310 | |||||||||||||||
Total debt
|
$ | 7,206 | $ | 206 | 7,000 | ||||||||||||||||
Less current maturities
|
(750 | ) | |||||||||||||||||||
Long-term debt
|
$ | 6,250 |
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 the Company’s election. At March 31, 2012, the outstanding balance on the line of credit totaled $4,310,000 with a remaining line of credit availability of $7,690,000.
For the three months ended March 31, 2012, the Company has had a debt settlement of the unsecured revolving credit facility. The unsecured revolving credit facility provides financing for working capital requirements. During the three months ended March 31, 2012, the Company issued 223,052 shares of its Common Stock for the settlement of $419,426 of debt and $80,574 in accrued interest for a total amount of $500,000. The Company issued Common Stock at an average price of $2.24 per share of the ERFB common stock the day the debt was settled.
E-Series Bond Investor Note
Since July 2011, the Company issued to certain accredited investors a principal amount of $360,000 of E-series bonds (the "Bonds"). At March 31, 2012, the outstanding balance of the Bonds totaled $160,000. The Bonds are due and payable upon maturity, a three-year period from the issuance date. Interest on the Bonds is payable at the rate of 7.5% per annum, and is payable semiannually. The Bondholder may require the Company to convert the Bond (including any unpaid interest) into shares of common stock at any time only during the first year, but not thereafter. If the Bonds are converted under this option, the Company will issue shares representing 100% of the Bond principal and unpaid interest calculated through maturity. The common stock issued under this option will be valued at the five days closing price average of the common shares for the five days prior to the notification. If the Bond is converted within the first year the Company will issue a warrant to purchase one share of Energy Broadband Inc., common stock at a price of $4.00 for every $2.00 of Bond principal.
At the Company's discretion at any time after the first year, the Bonds, including the interest payments calculated through the date of conversion may be redeemed in cash or in shares of our common Stock ERF Wireless Inc., (ERFB), which shares will be valued at the average last sales price of our common stock over the 5-trading-day period preceding any payment date. If the Company chooses to issue shares of our common stock as redemption of the Bond principal, we will issue shares representing a value equal to 125% of the Bond principal. If the Company elects to issue shares of our common stock as payment of interest, we will issue shares representing a value equal to 100% of the interest due.
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 from the accretion of the debt discount and accretes the unamortized discount upon conversion which totaled $107,270 for the three months ended March 31, 2012. The estimated debt accretion for subsequent years is $14,177, $32,195, $56,645 and $23,356 for years ending December 31, 2012, 2013, 2014 and 2015, respectively
10
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The following table summarizes the convertible debt activity for the period January 1, 2012, thru March 31, 2012:
Description
|
E-Series Bonds
|
Compound Derivative Liability
|
Total
|
|||||||||
Fair value at December 31, 2011
|
$ | 2,682 | $ | 27,346 | $ | 30,028 | ||||||
Fair value issuance at inception
|
53,675 | 206,325 | 260,000 | |||||||||
01-01-12 to 03-31-12 change in fair value
|
107,270 | 3,786 | 111,056 | |||||||||
Conversions during 2012
|
(130,000 | ) | (107,857 | ) | (237,857 | ) | ||||||
Fair value at March 31, 2012
|
$ | 33,627 | $ | 129,600 | $ | 163,227 |
The Company recorded a net change in fair value of derivatives of $3,786 and a gain on debt redemption of $87,021 for a total net derivative income of $83,235 for the three months ended March 31, 2012.
Dakota Capital Fund LLC Equipment Line of Credit
In November 2011, the Company signed a debt financing agreement with Dakota Capital Fund LLC of Sioux Falls, South Dakota, for financing of up to $3,000,000. The payment terms are $178,031 per quarter including interest, at an annual rate of 18% plus 10% of positive operational cash flow as determine on a quarterly basis for repayment of additional principal beginning July 1, 2012. The funding will primarily be utilized for equipment to build out networks in major oil and gas exploration regions of North America. During the fourth quarter of 2011 the Company received proceeds of $2,000,000 and has the option of additional funding of $1,000,000 for equipment purchases provided that the Company has submitted an advance request with acceptable and sufficient information of assets to be purchased. The financing received under this debt facility is secured by certain ERF Wireless assets and there is no prepayment penalty. At March 31, 2012, the outstanding balance on the line of credit totaled $2,000,000 with a remaining line of credit availability of $1,000,000.
The Company issued 30,000 shares of ERF Wireless, Inc. common stock for the consummation of the initial $2,000,000 debt financing agreement from Dakota Capital Fund LLC resulting in a debt discount of $93,600. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and accretes the unamortized discount upon conversion which totaled $6,915 for the three months ended March 31, 2012. The estimated debt accretion is $22,290, $33,014 and $24,611 for years ending December 31, 2012, 2013 and 2014, respectively
Investor Bridge Loan
On March 20, 2011 the Company entered into a three-month secured bridge financing agreement with individuals for $300,000 with and interest rate of twelve percent (12%). The $300,000 loan is due July 1, 2012 unless the Company receives subsequent financing from E-Bond agreements in the months of April, May and June of 2012. The Company has agreed to apply fifty percent (50%) of all E-Bond financing to pay down the investor bridge loan accrued interest then principal until any remaining balance is paid in full by July 1, 2012.
11
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Capital Leases
Banc Leasing Inc., Included in property and equipment at March 31, 2012, the cost of the equipment was $611,000 and the accumulated amortization was$280,000. Amortization of assets under capital leases is included in depreciation expense. The equipment is the primary collateral securing the financing.
Advantage Leasing Inc., Included in Vehicles at March 31 2012, the cost of the vehicles was $159,000 and the accumulated amortization was $21,000. Amortization of assets under capital leases is included in depreciation expense. The vehicles are 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, 2012 (in thousands):
Year Ending December 31,
|
||||
2012
|
$ | 129 | ||
2013
|
187 | |||
2014
|
176 | |||
2015
|
14 | |||
Thereafter
|
- | |||
Total minimum lease payments
|
506 | |||
Less amount representing interest
|
(75 | ) | ||
Present value of net minimum lease payments
|
431 | |||
Current maturities of capital lease obligations
|
(134 | ) | ||
Long-term portion of capital lease obligations
|
$ | 297 |
NOTE 8 - COMMITMENTS
Leases and License Agreements
For the three months ended March 31, 2012 and 2011, rental expenses of approximately $216,000 and $138,000, 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 March 31, 2012, were as follows (in thousands):
Year Ending
December 31,
|
Amount
|
|||
2012
|
$ | 425 | ||
2013
|
439 | |||
2014
|
414 | |||
2015
|
401 | |||
2016
|
384 | |||
Thereafter
|
8 | |||
Total
|
$ | 2,071 |
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 a contract is signed 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 7.
12
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Purchase Commitment – Mobile Broadband Trailers
On March 15, 2011, the Company entered into a settlement agreement with the current manufacturer of mobile broadband trailers (MBT’s). Under the terms of this settlement the Company agreed to purchase an additional 168 MBT’s and replacement inventory on a delivery schedule which commenced March 15, 2011 and terminates October 1, 2013. The estimated value of the purchase obligation is $3,000,000
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. 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. Also, 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, healthcare and educational 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). EBI 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 and Canada.
For the three months ended March 31, 2012 and 2011 (in thousands)
Three Months Ended March 31, 2012
|
EBI
|
WBS
|
ENS
|
WMS
|
ERF
|
Total
|
||||||||||||||||||
Revenue
|
$ | 1,013 | $ | 559 | $ | 66 | $ | 10 | $ | - | $ | 1,648 | ||||||||||||
Segment (loss) income
|
160 | (44 | ) | (91 | ) | (5 | ) | (704 | ) | (684 | ) | |||||||||||||
Segment assets
|
3,160 | 2,036 | 769 | 20 | 346 | 6,331 | ||||||||||||||||||
Capital expenditures
|
331 | 225 | - | - | 7 | 563 | ||||||||||||||||||
Depreciation and amortization
|
154 | 113 | 58 | - | 14 | 339 |
Three Months Ended March 31, 2011
|
EBI
|
WBS
|
ENS
|
WMS
|
ERF
|
Total
|
||||||||||||||||||
Revenue
|
$ | 535 | $ | 544 | $ | 47 | $ | 3 | $ | - | $ | 1,129 | ||||||||||||
Segment (loss) income
|
34 | (121 | ) | (31 | ) | (8 | ) | (632 | ) | (758 | ) | |||||||||||||
Segment assets
|
1,795 | 2,110 | 1,254 | 2 | 1,289 | 6,450 | ||||||||||||||||||
Capital expenditures
|
591 | 121 | - | - | 5 | 717 | ||||||||||||||||||
Depreciation and amortization
|
83 | 255 | 53 | - | 20 | 411 |
13
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Reconciliation of Segment Loss from Operations
|
Three Months Ended
March 31, 2012 |
Three Months Ended
March 31, 2011 |
||||||
Total segment loss from operations
|
$ | 20 | $ | (126 | ) | |||
Total corporate overhead
|
(704 | ) | (632 | ) | ||||
Operating loss from continuing operations
|
$ | (684 | ) | $ | (758 | ) |
Reconciliation of Segment Assets to Total Assets
|
March 31, 2012
|
December 31, 2011
|
||||||
Total segment assets
|
$ | 5,985 | $ | 5,161 | ||||
Total corporate assets
|
346 | 1,289 | ||||||
Total assets
|
$ | 6,331 | $ | 6,450 |
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 March 31, 2012, two customers accounted for $705,000 and $239,000 of EBI revenues each.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to March 31, 2012, the Company issued 387,551 shares of common stock for debt and conversion of preferred stock.
Effective April 4, 2012, the Company registered a Non-Qualified Stock Option Plan approved by the board of directors reserving 250,000 shares for issuance for employees and consultants.
14
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 three months ended March 31, 2012, approximately 34% of our revenues were generated from internet services, 61% of our revenues were generated from providing broadband services to the energy industry, 4% of our revenues were generated from construction services and 1% was generated from wireless messaging services. We expect that our internet services will continue to decline as a percentage of the total consolidated revenues in 2012 and that the most growth during fiscal 2012 will continue to come from devoting significant capital resources to developing the oil and gas market utilizing wireless services.
During the first quarter of fiscal 2012, the Company continued to make substantial progress with its strategic business plan as evidenced by the completion and announcement of numerous significant activities. These include:
·
|
The Company’s financial results reflect the company’s continued focus on aggressively expanding our turnkey communications services to the oil and gas industry during a period of continued brisk oil and gas drilling activity in North America. These results include but are not limited to the following attributes:
|
§
|
The Company reported overall consolidated revenues of $1,648,000 for the quarter ended March 31, 2012 as compared to $1,129,000 for the same prior year quarter ended March 31, 2011; an increase of $519,000 or 46%. The overall increase was comprised of a $478,000 increase in revenues in our oil and gas operations subsidiary, Energy Broadband, Inc. plus a combined increase of $41,000 from our other business units.
|
§
|
The Company’s Energy Broadband, Inc. subsidiary reported revenues of $1,013,000 for the quarter ended March 31, 2012 as compared to revenues of $535,000 for the same prior year quarter ended March 31, 2011; an increase of $478,000 or 89%.
|
§
|
The Company reported Gross Profit of $819,000 for the quarter ended March 31, 2012 as compared to $406,000 for the same prior year quarter ended March 31, 2011; an increase of $413,000 or 102%. This 102% increase in Gross Profits on our 46% increase in revenues drove our overall gross margins to 50% for the quarter ended March 31, 2012 as compared to 36% for the same prior year quarter ended March 31, 2011. This 14% increase in our overall gross margins demonstrates continued solid performance against our number one business objective of growing high margin revenue while maintaining and strengthening our position as the largest terrestrial wireless provider to the oil and gas industry in North America.
|
§
|
The Company reported a Consolidated Net Loss of $960,000 for the quarter ended March 31, 2012 as compared to a Net Income of $159,000 for the same prior quarter ended March 31, 2011. The prior year net income of $159,000 included a $1,176,000 gain associated with the divestiture of certain non-core wireless broadband assets and operations in the first quarter of 2011. Excluding the one-time gain, our overall consolidated net loss improved by $57,000 when compared to the same prior year quarter.
|
§
|
The Company reported an increase of $339,000 or 29% increase in Operating Expenses in the quarter ended March 31, 2012 as compared to the same prior year quarter ended March 31, 2011 to support the 46% increase in our consolidated revenues and our continued aggressive strategy to grow our Energy Broadband business unit.
|
§
|
Lastly, the Company invested $526,000 in cash during the quarter ended March 31, 2012 for the purchase of assets in its Energy Broadband, Inc. subsidiary for the continued expansion of networks and infrastructure, including increasing its Mobile Broadband Trailer, (“MBT”) fleet associated with the increased oil and gas business growth being experienced.
|
15
§
|
The Company recently announced that it has engaged a major construction contractor to build out two additional high-speed wireless broadband networks in two separate areas of the Permian Basin region of West Texas adjacent to existing ERF Wireless networks. In addition, ERF Wireless is using its own construction crews to construct three new networks that are near the extensive terrestrial wireless network system already owned and operated by ERF Wireless in Texas, New Mexico and Oklahoma. These new network segments are part of a larger expansion of the overall ERF Wireless network throughout North America which will meet not only the immediate needs of our existing customers but also the growing demand by the oil and gas industry in general for more terrestrial wireless connectivity to support drilling activities.
|
§
|
The Company further discussed that it has a number of our existing oil and gas customers who are already drilling in remote areas of the Permian Basin and other areas of Texas, Oklahoma, and New Mexico that currently don't have any terrestrial wireless broadband service coverage. Moreover, these customers plan to be very active in these same areas over the next ten years or more. When our contractor completes our newest network additions to the Permian Basin and our own crews complete their new construction activity within the next sixty days, ERF Wireless will have added approximately 10,000 square miles of new terrestrial wireless broadband coverage in these highly active oil and gas drilling areas.
|
§
|
Additionally, the Company went on to note that with the simultaneous expansion of the ERF Wireless network footprint and the corresponding increasing number of drilling rigs that are being serviced, Energy Broadband, the company's oil and gas subsidiary, is already utilizing some of the funding received late last year to expand its workforce of technicians, trucks, Mobil Broadband Trailers (MBTs) and other equipment required for service to its oil and gas customers.
|
§
|
The Company expects all of this new activity to translate into increasing revenue and profitability for Energy Broadband as it continues its substantial growth rates in the oil and gas service industry.
|
Lastly, the Company reported that the formal arbitration process begun in 2011 versus Schlumberger Technology Corporation is continuing to progress and is expected to be completed in 2012.
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.
THREE MONTHS ENDED MARCH 31, 2012, COMPARED TO THREE MONTHS ENDED MARCH 31, 2011
The following table sets forth summarized consolidated financial information for the three months ended March 31, 2012 and 2011:
Three Months Ended March 31,
|
||||||||||||||||
($ in thousands)
|
2012
|
2011
|
$ Change
|
% Change
|
||||||||||||
Total sales
|
$ | 1,648 | $ | 1,129 | $ | 519 | 46 | % | ||||||||
Cost of goods sold
|
829 | 723 | 106 | 15 | % | |||||||||||
Gross profit
|
819 | 406 | 413 | 102 | % | |||||||||||
Percent of total sales
|
50 | % | 36 | % | ||||||||||||
Operating expenses
|
1,503 | 1,164 | 339 | 29 | % | |||||||||||
Loss from operations
|
(684 | ) | (758 | ) | 74 | 10 | % | |||||||||
Other (expense)/income
|
(276 | ) | 995 | (1,271 | ) | 128 | % | |||||||||
(Loss) income from continuing operations
|
(960 | ) | 237 | (1,197 | ) | 505 | % | |||||||||
Loss from discontinued operations
|
- | (78 | ) | 78 | 100 | % | ||||||||||
Net income attributable to noncontrolling interest
|
(5 | ) | - | (5 | ) | 100 | % | |||||||||
Other comprehensive (loss) income
|
(4 | ) | 8 | (12 | ) | 150 | % | |||||||||
Total comprehensive (loss) income
|
$ | (969 | ) | $ | 167 | $ | (1,136 | ) | 680 | % |
16
For the three months ended March 31, 2012, the Company's business operations reflected an increase in sales for Energy Broadband, Inc. (“EBI”), Wireless Bundled Services (“WBS”), Enterprise Network Services (“ENS”) and Wireless Messaging Services (“WMS”). For the three months ended March 31, 2012, the Company's consolidated operations generated net sales of $1,648,000 compared to prior-year net sales of $1,129,000 for the quarter ended March 31, 2011. The $519,000 increase in net sales is primarily attributable to $478,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions, $15,000 increased sales in WBS, $19,000 increased sales in ENS and $7,000 increased sales in WMS. Service sales increased 440,000 and product sales increased $79,000. For the three months ended March 31, 2012, the Company had a gross profit margin of 50%, compared to a gross profit margin 36% for the prior year. The $413,000 increase in gross profit margin is primarily attributed to the following factors; (i) approximately $253,000 increase in gross margin in EBI attributable to increased sales associated with deployment of (MBT’s) in oil and gas regions, (ii) $162,000 increase in gross margins in WBS primarily related to decrease third party service cost, and (iii) offset with a $2,000 decrease in gross margins in ENS.
The Company incurred a total comprehensive net loss of $969,000 for the three months ended March 31, 2012, compared to a net comprehensive income of $167,000 from the quarter ended March 31, 2011. The Company's principal components of the total comprehensive loss for the quarter ended March 31, 2012 included approximately $339,000 in depreciation expenses, $359,000 of interest expense, $280,000 of other general and administrative expense, $841,000 in employment expenses and $225,000 in professional services expense.
SALES INFORMATION
Set forth below is a table presenting summarized sales information for our business segments for the three months ended March 31, 2012 and 2011.
($ in thousands)
|
Three Months Ended March 31,
|
||||||||||||||
Business Segment
|
2012
|
% of Total
|
2011
|
% of Total
|
$ Change
|
% Change
|
|||||||||
Wireless Messaging Services
|
$
|
10
|
1%
|
$
|
3
|
0%
|
$
|
7
|
233%
|
||||||
Wireless Bundled Services
|
559
|
34%
|
544
|
48%
|
15
|
3%
|
|||||||||
Enterprise Network Services
|
66
|
4%
|
47
|
4%
|
19
|
40%
|
|||||||||
Energy Broadband, Inc.
|
1,013
|
61%
|
535
|
48%
|
478
|
89%
|
|||||||||
Total Sales
|
$
|
1,648
|
100%
|
$
|
1,129
|
100%
|
$
|
519
|
46%
|
For the three months ended March 31, 2012, net sales increased to $1,648,000 from $1,129,000 for the three months ended March 31, 2011. The overall increase of 46% was attributable to increased sales of $478,000 of Energy Broadband, Inc., increased sales of $15,000 of Wireless Bundled Services, increased sales of $19,000 in Enterprise Network Services and increased sales in Wireless Messaging Services of $7,000. The $519,000 increase in net sales is primarily attributable to $478,000 increased sales in EBI are from deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions.
COST OF GOODS SOLD
The following tables set forth summarized cost of goods sold information for the three months ended March 31, 2012 and 2011.
($ in thousands)
|
Three Months Ended March 31,
|
||||||||||||||
Business Segment
|
2012
|
% of Total
|
2011
|
% of Total
|
$ Change
|
% Change
|
|||||||||
Wireless Messaging Services
|
$
|
7
|
1%
|
$
|
-
|
0%
|
$
|
7
|
700%
|
||||||
Wireless Bundled Services
|
180
|
22%
|
327
|
45%
|
(147)
|
-45%
|
|||||||||
Enterprise Network Services
|
96
|
11%
|
75
|
10%
|
21
|
28%
|
|||||||||
Energy Broadband, Inc.
|
546
|
66%
|
321
|
45%
|
225
|
70%
|
|||||||||
Total cost of sales
|
$
|
829
|
100%
|
$
|
723
|
100%
|
$
|
106
|
15%
|
17
Three Months Ended March 31,
|
||||||||||||||||
($ in thousands)
|
2012
|
2011
|
$ Change
|
% Change
|
||||||||||||
Products and integration service
|
$ | 416 | $ | 306 | $ | 110 | 36% | |||||||||
Rent and maintenance
|
127 | 75 | 52 | 69% | ||||||||||||
Depreciation
|
286 | 342 | (56 | ) | -16% | |||||||||||
Total cost of sales
|
$ | 829 | $ | 723 | $ | 106 | 15% |
For the three months ended March 31, 2012, cost of goods sold increased by $106,000, or 15%, to $829,000 from $723,000 as compared to the three months ended March 31, 2011. The increase of $106,000 in cost of goods sold is primarily attributable to an increased cost of $225,000 in EBI due to increased depreciation and tower rents for deployment of our Mobile Broadband Trailers (MBT’s) in oil and gas regions, increased cost in ENS of $21,000, increased cost in WMS of $7,000 and offset with a $147,000 decreased cost in WBS due to a decreasing third party services and depreciation.
OPERATING EXPENSES
The following table sets forth summarized operating expense information for the three months ended March 31, 2012 and 2011:
Three Months Ended March 31,
|
||||||||||||||||
($ in thousands)
|
2012
|
2011
|
$ Change
|
% Change
|
||||||||||||
Employment expenses
|
$ | 841 | $ | 586 | $ | 255 | 44% | |||||||||
Professional services
|
225 | 209 | 16 | 8% | ||||||||||||
Rent and maintenance
|
104 | 74 | 30 | 41% | ||||||||||||
Depreciation
|
53 | 69 | (16 | ) | -23% | |||||||||||
Other general and administrative
|
280 | 226 | 54 | 24% | ||||||||||||
Total operating expenses
|
$ | 1,503 | $ | 1,164 | $ | 339 | 29% |
For the three months ended March 31, 2012, operating expenses increased by 29% to $1,503,000, as compared to $1,164,000 for the three months ended March 31, 2011. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:
·
|
A $255,000 increase in employment expense. The increase is attributable to increased employee headcount to 66 at March 31, 2012 from 52 at March 31, 2011;
|
·
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A $16,000 increase in professional services;
|
·
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A $30,000 increase in rent and maintenance;
|
·
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A $16,000 decrease in depreciation ; and
|
·
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A $54,000 increase in other general and administrative expense.
|
OTHER (INCOME) EXPENSE, NET
For the three months ended March 31, 2012, the increase in other expense is primarily attributable to an increase in our interest expense, net on debt obligations totaling $359,000 and offset with a increase in our net derivative income of $83,000 as compared to interest expense, net of $194,000 offset with derivative income of $13,000 and a gain on sale of assets of $1,176,000 for the three months ended March 31, 2011. The derivative expense/income represents the net unrealized (non-cash) charge during the three months ended March 31, 2012 and 2011, 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.
COMPREHENSIVE NET INCOME (LOSS)
For the three months ended March 31, 2012, our total comprehensive loss was $969,000 compared to comprehensive income of $167,000 for the three months ended March 31, 2011. The increased comprehensive loss for the three months ended March 31, 2012, as compared to the comprehensive income for three months ended March 31, 2011 is primarily attributable to the factors describe in the preceding tables.
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CASH FLOWS
The Company's operating activities decreased net cash used by operating activities to $606,000 in the three months ended March 31, 2012, compared to net cash used of $949,000 in the three months ended March 31, 2011. The decrease in net cash used by operating activities was primarily attributable to decrease in prepaids, amortization of debt discount and stock payments of accrued liabilities compared to prior year.
The Company's investing activities used net cash of $493,000 in the three months ended March 31, 2012, compared to net cash provided of $1,960,000 in the three months ended March 31, 2011. The decrease in investing activities is primarily attributable to the expansion of oil and gas networks to utilize our MBTs to provide service to our customers and the cash received from the sale of non-core assets of our North and Central Texas network during the February 2011.
The Company's financing activities provided net cash of $657,000 in the three months ended March 31, 2012, compared to $296,000 of cash used in the three months ended March 31, 2011. The cash provided in the three months ended March 31, 2012, was primarily associated with proceeds from debt financing and the line of credit, net.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2012, the Company's current assets totaled $1,837,000 (including cash and cash equivalents of $149,000); total current liabilities were $2,403,000, resulting in negative working capital of $566,000. 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 operation for the three months ended March 31, 2012, was primarily funded by proceeds from the Company's line of credit, net totaling $137,000, debt of $300,000 and convertible debt financing of $260,000.
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 March 31, 2012, the Company had approximately $7,690,000 available on a $12.0 million unsecured revolving credit facility with Angus Capital Partners, with an outstanding balance of $4,310,000. 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.
In November 2011, the Company signed a debt financing agreement with Dakota Capital Fund LLC of Sioux Falls, South Dakota, for financing of up to $3,000,000. At March 31, 2012, the Company had approximately $1,000,000 available on a $3.0 million secured equipment credit facility with Dakota Capital Fund LLC, with an outstanding balance of $2,000,000. The terms of the secured credit facility will allow ERF to draw upon the facility for equipment purchases provided that the Company has submitted an advance request with acceptable and sufficient information of assets to be purchased. The payment terms are $178,031 per quarter including interest, at an annual rate of 18% plus 10% of positive operational cash flow as determined from the Company’s publically filed 10Q’s and 10K’s for repayment of additional principal beginning July 1, 2012.
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ISSUANCE OF COMMON STOCK
During the three months ended March 31, 2012, we issued to various accredited investors (i) 274,545 shares for debt conversions, and (ii) 70,000 shares upon conversion of Series A Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting these transactions.
USE OF WORKING CAPITAL
We believe our cash and available credit facilities afford us adequate liquidity for the balance through March 31, 2013. 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, 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.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2012, 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 10K.
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.
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.
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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 effective.
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.
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ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
During 2011 the Company and Schlumberger were unable to resolve these financial issues regarding 2009 exclusive reseller agreement through mediation and the Company has availed itself of binding arbitration as mandated in the contract. The binding arbitration process has been initiated in 2011 and is expected to be completed in 2012.
See Risk Factors in item 1A of the Company form 10-K of Fiscal year ended December 31, 2011.
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 Debt Conversions
In February 2012, 223,052 shares of common stock at average price of $2.24 were issued for LOC and interest conversions.
In March 2012, 51,493 shares of common stock at average price of $2.52 were issued for debt conversions.
Common Stock Issued Upon Conversion of Series A Preferred Stock
On January 21, 2012, an accredited investor acquired 70,000 shares of common stock pursuant to Preferred A Conversions.
ITEM 3. DEFAULT IN SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
31.1 |
Certification of Chief Executive Officer pursuant to Rules 13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
|
31.2 |
Certification of 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
|
32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS | XBRL Instance Document |
101.SCH | XBRL Schema Document |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | XBRL Definition Linkbase Document |
101.LAB | XBRL Label Linkbase Document |
101.PRE | XBRL Presentation Linkbase Document |
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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. | |||
Date: May 21, 2012
|
By:
|
/s/ H. Dean Cubley | |
H. Dean Cubley | |||
Chief Executive Officer | |||
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