UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2013

 

OR

 

£ TRANSITION 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 S    No £

 

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 S    No £

 

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 £     Accelerated filer £

Non-accelerated filer £       Smaller reporting company S

 

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

Yes £    No S

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 25,014,251 common shares issued and outstanding as of November 14, 2013

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

ERF WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2013, AND DECEMBER 31, 2012
($ in thousands except share data)

 

		September 30,				December 31,
		2013				2012
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	110			$	118
Accounts receivable, net			682				828
Accounts receivable, other			647				346
Inventories			313				377
Costs and estimated earnings in excess of billings on uncompleted contracts			–				35
Prepaid expenses and other current assets			218				221
Total current assets			1,970				1,925
Property and equipment
Property and equipment			12,089				11,644
Less: accumulated depreciation			(8,962	)			(7,511	)
Net property and equipment			3,127				4,133
Goodwill			176				176
Other assets			37				37
Total assets		$	5,310			$	$6,271
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt		$	3,490			$	1,358
Current portion of long-term capital leases			252				169
Accounts payable			1,005				1,226
Accrued expenses			821				1,120
Derivative liabilities			1,072				492
Deferred revenue			21				20
Total current liabilities			6,661				4,385
Line of credit (LOC)			2,523				3,168
Long-term debt, net of current portion			1,016				1,419
Long-term capital leases, net of current portion			233				214
Total liabilities			10,433				9,186
Commitments
Shareholders’ deficit:
Preferred stock - $0.001 par value, 25,000,000  authorized Series A designated 10,000,000 shares Issued and outstanding at September 30, 2013 and December 31, 2012, 8,176,982 and 8,426,982 shares, respectively			8				8
Common stock - $0.001 par value Authorized 975,000,000 shares Issued and outstanding at September 30, 2013 and December 31, 2012, 14,981,195 and 5,487,072 shares, respectively			15				6
Additional paid in capital			57,302				52,987
Accumulated deficit			(62,545	)			(56,012	)
Accumulated other comprehensive loss			(32	)			(32	)
Total ERF Wireless, Inc. shareholders’ deficit			(5,252	)			(3,043	)
Non-controlling interest			129				128
Total shareholders’ deficit			(5,123	)			(2,915	)
Total liabilities and shareholders' deficit		$	5,310			$	$6,271

  

See accompanying notes to consolidated financial statements.

 

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)
($ in thousands except loss per share)

 

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2013				2012				2013				2012
Sales:
Products		$	38			$	6			$	49			$	49
Services			1,765				2,002				5,230				5,294
Total sales			1,803				2,008				5,279				5,343
Costs of goods sold:
Products and integration services			412				448				1,171				1,399
Rent, repairs and maintenance			212				194				605				495
Depreciation			435				389				1,306				1,013
Total costs of goods sold			1,059				1,031				3,082				2,907
Gross profit			744				977				2,197				2,436
Operating expenses:
Selling, general and administrative			1,841				1,917				5,677				5,003
Depreciation			51				54				155				161
Total operating expenses			1,892				1,971				5,832				5,164
Loss from operations			(1,148	)			(994	)			(3,635	)			(2,728	)
Other income (expense):
Interest expense, net			(1,479	)			(475	)			(3,268	)			(1,151	)
Derivative income			8				26				347				124
Gain on sale of assets			–				–				24				–
Total other (expense) income			(1,471	)			(449	)			(2,897	)			(1,027	)
Consolidated net loss			(2,619	)			(1,443	)			(6,532	)			(3,755	)
Net loss (income) attributable to non-controlling interest			(2	)			(9	)			(1	)			(17	)
Net loss attributable to ERF Wireless, Inc.			(2,621	)			(1,452	)			(6,533	)			(3,772	)
Other comprehensive (loss):
Unrealized loss on securities held for resale			–				(1	)			–				(7	)
Total other comprehensive loss			–				(1	)			–				(7	)
Total comprehensive loss		$	(2,621	)		$	(1,453	)		$	(6,533	)		$	(3,779	)
Basic loss per common share:
Net loss		$	(0.22	)		$	(0.39	)		$	(0.69	)		$	(1.25	)
Net loss attributable to ERF Wireless, Inc.		$	(0.22	)		$	(0.39	)		$	(0.69	)		$	(1.25	)
Diluted loss per common share:
Net loss		$	(0.22	)		$	(0.39	)		$	(0.69	)		$	(1.25	)
Net loss attributable to ERF Wireless, Inc.		$	(0.22	)		$	(0.39	)		$	(0.69	)		$	(1.25	)

 

 

See accompanying notes to consolidated financial statements.

 

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)
($ in thousands)

 

		2013				2012
Cash flows from operating activities
Net loss		$	(6,532	)		$	(3,755	)
Adjustments to reconcile net loss to net cash used by operating activities:
Gain on sale of assets			(24	)			–
Amortization of debt discount			1,796				193
Depreciation			1,461				1,174
Stock issued for services rendered, interest  and compensation			1,325				479
Derivative income			(347	)			(124	)
Bad debt expense			30				7
Changes in:
Accounts receivable, net			116				(302	)
Accounts receivable, other			(301	)			(158	)
Inventories			58				(27	)
Prepaid expenses and other current assets			114				202
Costs and profits in excess of billings			35				–
Accounts payable			(220	)			160
Accrued expenses			54				728
Deferred revenue			1				23
Total adjustments			4,098				2,355
Net cash used by operating activities			(2,434	)			(1,400	)
Cash flows from investing activities
Purchase of property and equipment			(221	)			(1,196	)
Proceeds from sale of assets			34				–
Change in other assets			–				30
Net cash used by investing activities			(187	)			(1,166	)
Cash flows from financing activities
Net proceeds from line of credit			798				662
Proceeds from long-term debt obligations			2,966				2,298
Payment of long-term debt obligations			(1,015	)			(801	)
Payment on capital lease obligations			(136	)			(113	)
Net cash provided by financing activities			2,613				2,046
Net change in cash and cash equivalents			(8	)			(520	)
Cash and cash equivalents at the beginning of the period			118				591
Cash and cash equivalents at the end of the period		$	110			$	71
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest		$	210			$	309
Income taxes		$	–			$	–
Supplemental non-cash investing and financing activities:
Conversion of debt through issuance of common stock		$	1,203			$	231
Conversion of preferred stock to common stock		$	250			$	70
Conversion of LOC and interest through issuance of preferred stock		$	–			$	124
Conversion of LOC and interest through issuance of common stock		$	1,733			$	1,964
Unrealized loss on securities held for resale		$	–			$	(7	)
Transfer of subsidiary equity to non-controlling interest		$	–			$	107
Property and equipment financed with debt and capital leases		$	238			$	260

 

See accompanying notes to consolidated financial statements.

 

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
(in thousands)

 

		Common Stock								Preferred Stock								Additional Paid in				Accumulated				Accumulated Comprehensive				Non-controlling				Total Shareholders’
		Shares				Value				Shares				Value				Capital				Deficit				Income				Interest				Deficit
Total shareholders’ deficit as of December 31, 2011			2,161			$	2				8,579			$	9			$	49,121			$	(51,198	)		$	(25	)		$	–			$	(2,091	)
Net loss			–				–				–				–				–				(4,814	)			–				21				(4,793	)
New stock issued to shareholders:
Conversion of preferred stock to common stock			270				–				(270	)			(1	)			1				–				–				–				–
For services, compensation and interest			440				1				–				–				620				–				–				–				621
For retirement of debt			393				1				–				–				534				–				–				–				535
Conversion of LOC and interest to preferred stock			–				–				118				–				124				–				–				–				124
Stock based compensation			–				–				–				–				–				–				–				–				–
Conversion of LOC and interest to common stock			2,223				2				–				–				2,587				–				–				–				2,589
Transfer of subsidiary equity to non-controlling interest			–				–				–				–								–				–				107				107
Unrealized loss on securities held for resale			–				–				–				–				–				–				(7	)			–				(7	)
Total shareholders’ deficit as of December 31, 2012			5,487				6				8,427				8				52,987				(56,012	)			(32	)			128				(2,915	)
Net loss			–				–				–				–				–				(6,533	)			–				1				(6,532	)
New stock issued to shareholders:
Conversion of preferred stock to common stock			250				–				(250	)			–				–				–				–				–				–
For services, compensation, interest and prepaids			2,457				3				–				–				1,322				–				–				–				1,325
For retirement of debt			2,264				2				–				–				1,201				–				–				–				1,203
Conversion of LOC and interest to common stock			4,523				4				–				–				1,729				–				–				–				1,733
Derivative liability			–				–				–				–				63				–				–				–				63
Total shareholders’ deficit as of September 30,  2013 (unaudited)			14,981			$	15				8,177			$	8			$	57,302			$	(62,545	)		$	(32	)		$	129			$	(5,123	)

 

See accompanying notes to consolidated financial statements.

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(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 also 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)”, revenues from construction of bank, healthcare and educational networks in our “ERF Enterprise Network Services, Inc. (ENS)” and wireless broadband products and services to rural oil and gas locations are recorded in “Energy Broadband, Inc. (EBI)”. Please refer to segment footnote 13 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, 2012 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, 2012 as reported in form 10-K have been omitted.

 

Non-controlling Interest

 

Non-controlling interest in our majority owned subsidiary EBI, is included in the equity section of the consolidated balance sheets. Non-controlling interest represents 3.63% of the equity of EBI and any transfer of value from ERF to non-controlling interest holders. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses of EBI. Any excess losses applicable to the non-controlling interests have been and are borne by the Company as there is no obligation of the non-controlling 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.

 

Reclassification

 

Certain amounts in the 2012 financial statements have been reclassified to conform to the 2013 financial presentation. These reclassifications have no impact on the total comprehensive loss.

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

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):

 

		September 30,				December 31,
		2013				2012
Accounts receivable		$	721			$	838
Allowance for doubtful accounts			(39	)			(10	)
Accounts receivable, net		$	682			$	828

 

NOTE 3 – 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 September 30, 2013 and December 31, 2012, in thousands:

 

		September 30,				December 31,
		2013				2012
Raw material		$	46			$	46
Work in process			74				115
Finished goods			193				216
Total inventory		$	313			$	377

 

NOTE 4 - DEBT CONVERSION

 

(a) Line of Credit

 

During the nine months ended September 30, 2013, the Company issued 4,523,000 shares of its Common Stock (as defined below) for the settlement of $1,444,000 of principal and $289,000 of accrued interest for a total amount of $1,733,000 owed to Angus Capital Partners. The Company issued Common Stock at an average price of $0.38 per share calculated based on the closing price the day the debt was settled. See Note 9 for additional information on this facility.

 

(b) Other Debt

 

During the nine months ended September 30, 2013, the Company issued 2,264,000 and 1,213,000 shares of its Common Stock for the settlement of principal amount of $1,203,000 and $551,000 of accrued interest, respectively, for a total of $1,754,000. The Company issued Common Stock at an average price of $.50 per share calculated based on the closing price the day the debt was settled.

 

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

NOTE 5 - 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 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 September 30, 2013 and December 31, 2012, there were 14,981,195 and 5,487,072 shares of its Common Stock issued and outstanding, respectively.

 

During the nine months ended September 30, 2013, the Company issued 9,244,123 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):

 

September 30, 2013		Supplemental Non-Cash Disclosure
Professional fees		$	377
Services and compensation			386
Other services rendered			562
Total for services, compensation and interest		$	1,325
Notes payable		$	1,203
Line of credit and interest		$	1,733

 

Preferred Stock

 

The Company has 25,000,000 shares of Preferred Stock authorized of which 10,000,000 shares had been designated as Series A Preferred Stock (“Series A Preferred Stock”). There were 8,176,982 shares of Series A Preferred Shares issued and outstanding at September 30, 2013 and 8,426,982 at December 31, 2012. With respect to the Series A Preferred Stock outstanding at September 30, 2013, the Company would be required to issue 8,176,982 shares of its Common Stock upon conversion.

 

ERF Wireless, Inc Distribution of EBI Equities to Non-controlling Interest

 

As of September 30, 2013, the Company had issued 725,611 shares of EBI as a stock dividend and three year warrant expiring December 31, 2014, to purchase 725,611 shares of EBI Common Stock at an exercise price of $4.00 per share and three year warrant expiring December 31, 2014, to purchase 725,611 shares of EBI Common Stock at an exercise price of $6.00; such issuances are valued at $107,000. The Company expects to issue the remaining stock dividends during calendar year 2013. No stock dividends were issued during the nine months ended September 30, 2013.

 

Warrants

 

During 2013, the Company entered into a convertible promissory note with Tonaquint, Inc. for $791,500 and issued five-year warrants to purchase 148,406 shares of common stock at $0.80 per share, expiring March 2018.

 

During 2013, the Company entered into a convertible promissory note with Willow Creek Capital for $244,200 and issued five-year warrants to purchase 48,775 shares of common stock at $0.751 per share, expiring April 2018.

 

During 2013, the Company entered into a convertible promissory note with Vista Capital for $60,500 and issued five year warrants to purchase 14,405 shares of common stock at $0.80 per share, expiring April 2018.

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

The following tables set forth summarized warrants that are issued, outstanding and exercisable for the nine months ended September 30, 2013:

 

Warrants Outstanding

Weighted Average Exercise Price

Expiration Date

December 31, 2012

Issued

Exercised

Expired

September 30, 2013

$

0.80

Mar-18

–

148,406

–

–

148,406

$

0.80

Apr-18

–

14,405

–

–

14,405

$

0.75

Apr-18

–

48,775

–

–

48,775

Total Warrants

–

211,586

–

–

211,586

 

NOTE 6 – STOCK PLAN

 

In May 2013, the board of directors adopted a non-qualified stock option plan whereby 1,000,000 shares were reserved for issuance. As of September 30, 2013, 533,091 shares of Common Stock were issued and outstanding to certain employees and consultants for services rendered under the plan. This plan is for key employees, officers, directors, and consultants of ERF Wireless, Inc.

 

Non-Qualified Stock Option Plan, May 2013		2013-A
		Plan
Shares initially reserved			1,000,000
Shares issued during 2013			533,091
Remaining shares available to be issued at September 30, 2013			466,909
Shares issued and outstanding as of September 30, 2013			533,091

 

In December 2012, the board of directors adopted a non-qualified stock option plan whereby 450,000 shares were reserved for issuance. As of September 30, 2013, 450,000 shares of Common Stock were issued and outstanding to certain employees and consultants for services rendered under the plan. This plan is for key employees, officers, directors, and consultants of ERF Wireless, Inc.

 

Non-Qualified Stock Option Plan, December 2012		2013
		Plan
Shares initially reserved			450,000
Shares issued during 2012 and 2013			450,000
Remaining shares available to be issued at September 30, 2013			–
Shares issued and outstanding as of September 30, 2013			450,000

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

NOTE 7 - EARNINGS PER SHARE:

 

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

 

		For the three months ended September 30, 2013
		Net loss				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net loss		$	(2,619	)			12,077			$	(0.22	)
Loss attributable to non-controlling interest		$	(2	)			12,077			$	–
Net loss attributable to ERF Wireless, Inc.		$	(2,621	)			12,077			$	(0.22	)
Diluted EPS:
Net loss		$	(2,619	)			12,077			$	(0.22	)
Loss attributable to non-controlling interest		$	(2	)			12,077			$	–
Net loss attributable to ERF Wireless, Inc.		$	(2,621	)			12,077			$	(0.22	)

 

		For the three months ended September 30, 2012
		Net loss				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net loss		$	(1,443	)			3,718			$	(0.39	)
Loss attributable to non-controlling interest		$	(9	)			3,718			$	–
Net loss attributable to ERF Wireless, Inc.		$	(1,452	)			3,718			$	(0.39	)
Diluted EPS:
Net loss		$	(1,443	)			3,718			$	(0.39	)
Loss attributable to non-controlling interest		$	(9	)			3,718			$	–
Net loss attributable to ERF Wireless, Inc.		$	(1,452	)			3,718			$	(0.39	)

 

		For the nine months ended September 30, 2013
		Net loss				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net loss		$	(6,532	)			9,505			$	(0.69	)
Loss attributable to non-controlling interest		$	(1	)			9,505			$	–
Net loss attributable to ERF Wireless, Inc.		$	(6,533	)			9,505			$	(0.69	)
Diluted EPS:
Net loss		$	(6,532	)			9,505			$	(0.69	)
Loss attributable to non-controlling interest		$	(1	)			9,505			$	–
Net loss attributable to ERF Wireless, Inc.		$	(6,533	)			9,505			$	(0.69	)

 

		For the nine months ended September 30, 2012
		Net loss				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net loss		$	(3,755	)			3,008			$	(1.25	)
Loss attributable to non-controlling interest		$	(17	)			3,008			$	(0.01	)
Net loss attributable to ERF Wireless, Inc.		$	(3,772	)			3,008			$	(1.25	)
Diluted EPS:
Net loss		$	(3,755	)			3,008			$	(1.25	)
Loss attributable to non-controlling interest		$	(17	)			3,008			$	(0.01	)
Net loss attributable to ERF Wireless, Inc.		$	(3,772	)			3,008			$	(1.25	)

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

For the nine months ended September 30, 2013, dilutive securities existed, but due to the Company’s net loss there is an anti-dilutive effect. 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 nine months ended September 30, 2013 does not include 1,727,778 shares of Common Stock underlying the Bonds (as define below); 211,586 of warrants underlying promissory convertible debt, 7,571,209 shares of Common stock underlying promissory convertible debt and 8,176,982 shares of Common Stock underlying the Series A Preferred Stock, due to their anti-dilutive effect.

 

NOTE 8 - MAJOR CUSTOMERS

 

The Company had gross sales of 5,279,000 and $5,343,000 for the nine months ended September 30, 2013 and 2012, respectively. The Company had two customers that met the required disclosure of 10% that represented 30% and 10% of the gross sales and 52% and 15% of total accounts receivable during the nine months ended September 30, 2013. Additionally, the Company had two customers that met the required disclosure of 10% that represented 41% and 15% of the gross sales and 56% and 17% of total accounts receivable during the nine months ended September 30, 2012.

 

NOTE 9 – NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES

 

Notes payable, long-term debts and capital leases consist of the following as of September 30, 2013 (in thousands):

 

		Terms		Maturity Date		Interest Rate		Gross Balance				Debt Discount				Balance
Banc leasing, Inc.		$10,660 / Month including interest		January-15		11.62%		$	157			$	–			$	157
Advantage leasing associates		$7,186 / Month including interest		Various		Various			137				–				137
Legacy laser services Dallas, LLC		$9,947 / Month including interest		May-16		42.00%			191				–				191
MP Nexlevel LLC		$7,043 / Month including interest		May-14		10.00%			54				–				54
Tonaquint		$791,500 / Lump sum payment including interest		September-13		12.00%			909				–				909
JMJ Financial		$330,000 / Lump sum payment including interest		March-14		12.00%			307				273				34
Vista capital		$60,500 / Lump sum payment including interest		October-13		12.00%			61				3				58
Willow creek capital		$244,200 / Lump sum payment including interest		October-13		12.00%			244				3				241
TCA global line of credit		$139,523 / Month including interest		July-14		12.00%			1,262				123				1,139
Investor financing		$495,000 / Lump sum payment including interest		September-13		12.00%			473				–				473
Dakota capital equipment financing		$178,031 / Quarterly including interest		March-16		18.00%			1,518				33				1,485
E-bond investor notes		3 years/ Semiannual interest (See below)		Various		7.50%			311				198				113
Line of credit		2 years/ Quarterly interest (See below)		December-15		12.00%			2,523				–				2,523
Total debt								$	8,147			$	633				7,514
Less current maturities																	(3,742	)
Long-term debt																$	3,772

 

Notes payable, long-term debts and capital leases consist of the following as of December 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%		$	227			$	–			$	227
Advantage leasing associates		$7,186 / Month including interest		Various		Various			156				–				156
MP Nexlevel LLC		$7,043 / Month including interest		May-14		10.00%			111				–				111
Investor financing		$765,000 / Lump sum payment including interest		January-13		12.00%			765				–				765
Premium assignment		$1,495 / Month including interest		July-13		6.00%			17				–				17
Dakota capital equipment financing		$178,031 / Quarterly including interest		March-16		18.00%			1,820				57				1,763
E-bond investor notes		3 years/ Semiannual interest (See below)		Various		7.50%			687				566				121
Line of credit		2 years/ Quarterly interest (See below)		December-15		12.00%			3,168				–				3,168
Total debt								$	6,951			$	623				6,328
Less current maturities																	(1,527	)
Long-term debt																$	4,801

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

Line of Credit

 

During December 2012, the Company extended its maturity date of its $12.0 million unsecured revolving credit facility with Angus Capital Partners, a related party, from December 31, 2013 to December 30, 2015. 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 September 30, 2013, the outstanding balance on the line of credit totaled $2,523,000 with a remaining line of credit available of $9,477,000.

 

During the nine months ended September 30, 2013, the Company issued 4,523,000 shares of its Common Stock for the settlement of $1,444,000 of principal and $289,000 of accrued interest for a total amount of $1,733,000 owed to Angus Capital Partners. The Company issued Common Stock at an average price of $0.38 per share calculated based on the closing price the day the debt was settled.

 

E-Series Bond Investor Note

 

During the nine months ended September 30, 2013, the Company issued to certain accredited investors a principal amount of $325,000 of E-Series bonds (the "Bonds") in addition to the $687,000 which was outstanding at December 31, 2012. At September 30, 2013, the outstanding principal balance of the Bonds totaled $311,000. 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. 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 average closing price 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 three-year warrant to purchase one share of EBI 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, valued at the average last sales price over the 20-trading-day period preceding any payment date. If the Company chooses to issue Common Stock as redemption of the Bond principal, we will issue shares representing a value equal to 125% of the Bond principal and shares representing a value equal to 100% of the Bond interest through redemption date.

 

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 of 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 statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $506,639 for the nine months ended September 30, 2013. The estimated debt accretion for subsequent years is $15,893, $92,678, and $89,560 for years ending December 31, 2013, 2014, and 2015, respectively.

 

The following table summarizes the convertible debt activity for the period January 1, 2013 through September 30, 2013:

 

Description		Bonds				Compound Derivative Liability				Total
Fair value at December 31, 2012		$	121,446			$	492,043			$	613,489
Fair value issuances during 2013 (principal amount)			325,000				–				325,000
Fair value issuances during 2013 (debt discount)			(139,216	)			139,216				–
Change in fair value			506,639				(130,623	)			376,016
Conversions			(701,000	)			(443,611	)			(1,144,611	)
Fair value at September 30, 2013		$	112,869			$	57,025			$	169,894

 

The Company recorded a net change in fair value of derivatives of $130,623 and a gain on debt redemption of $156,791 for a total net derivative income of $287,414 for the nine months ended September 30, 2013.

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

Dakota Capital Fund LLC Equipment Financing

 

In November 2011, the Company entered into debt financing agreement with Dakota Capital Fund LLC, for financing of up to $3,000,000. During the fourth quarter of 2011, the Company received proceeds of $2,000,000 and had the option of additional funding of $1,000,000 for equipment purchases. This debt facility is secured by certain ERF Wireless assets and there is no prepayment penalty. At September 30, 2013, the outstanding balance on the debt financing agreement totaled $1,485,000 and the Company has elected not to request any additional funds under this credit facility. The payment terms are $178,031 per quarter including interest, at an annual rate of 18% per annum plus 10% of positive operational cash flow as determined on a quarterly basis for repayment of additional principal beginning July 1, 2012. The funding was utilized to purchase equipment to build out networks in oil and gas exploration regions of North America.

 

The Company issued 30,000 shares of 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 $24,361 for the nine months ended September 30, 2013. The estimated debt accretion for subsequent years is $8,653 and $24,611 for years ending December 31, 2013, and 2014, respectively.

 

Tonaquint Convertible Promissory Note

 

On March 5, 2013, the Company entered into a six-month secured convertible promissory note secured debt financing agreement with Tonaquint, Inc. (“holder”), for $791,500, bearing interest at a rate of 12% per annum and maturing September 5, 2013. At September 30, 2013, the outstanding principal balance of the Tonaquint convertible promissory note totaled $909,000. The note includes an original issue discount (“OID”) of $65,000 based on the consideration funded, prepaid interest of $71,500 and $5,000 in legal and other expense. The Company also paid holder an origination fee in the amount of $227,500 in 144 Stock (284,375 shares) at the closing bid price on March 5, 2013, plus 50,000 shares (valued at $40,000) of the Company’s Common Stock. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of 144 Common Stock at any time after the six-month term of the note. The Common Stock issued will be valued using a conversion factor of 80% of the average of the lowest two (2) trading prices for common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder received the option to purchase five-year warrants expiring March 5, 2018 to purchase 148,406 shares of ERF Common Stock at an exercise price of $0.80 or the per-share price at which the Common Stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this warrant. The Company is not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $791,500 to $949,800. The note will accrue interest at a rate of 12% from September 5, 2013 until the March 4, 2014 and thereafter at a rate of 18% per annum. The note is recorded as a current liability and has been reduced subsequently by a payment of $59,000.

 

The Tonaquint promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Tonaquint 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 statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount, which totaled $588,724 for the nine months ended September 30, 2013.

 

The following table summarizes the convertible debt activity for the period March 5, 2013 through September 30, 2013:

 

Description		Tonaquint				Warrant Compound Derivative Liability				Compound Derivative Liability				Total
Fair value issuances at inception		$	949,800			$	–			$	–			$	949,800
Fair value issuances during 2013 (debt discount)			(588,724	)			16,400				256,224				(316,100	)
Change in fair value			588,724				(13,891	)			172,799				747,632
Conversions during			(40,882	)							–				(40,882	)
Fair value at September 30, 2013		$	908,918			$	2,509			$	429,023			$	1,340,450

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

The Company recorded a net change in fair value of derivative expense of $187,322 and a loss on debt redemption of $19,162 for a total net derivative expense of $206,484 for the nine months ended September 30, 2013.

 

JMJ Financial Convertible Promissory Note

 

On March 20, 2013, the Company entered into a one year unsecured promissory note debt financing agreement with JMJ Financial for (“JMJ”) up to $500,000 at the sole discretion of additional consideration with the Lender. The note includes a 10% original issue discount that is prorated based on the consideration funded. The Company also paid holder an origination fee in the amount of $40,500 in 144 Stock (50,000 shares) at the closing bid price of the Company’s Common Stock. As of September 30, 2013 the Company has received funding of $300,000, bearing interest at a rate of 12% per annum and maturing in one year from the effective date of each payment. At September 30, 2013, the outstanding principal balance of the JMJ Financial convertible promissory note totaled $307,000 including OID. The conversion price is the lesser of $0.59 or 60% of the lowest trade price in the 25 trading days previous to the conversion.

 

The JMJ promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the JMJ 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 statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $56,731 for the nine months ended September 30, 2013. The estimated debt accretion for subsequent years is $63,688 and $209,581 for years ending December 31, 2013 and 2014, respectively.

 

The following table summarizes the convertible debt activity for the period March 20, 2013 through September 30, 2013:

 

Description		JMJ				Compound Derivative Liability				Total
Fair value issuances at inception		$	330,000			$	–			$	330,000
Fair value issuances during 2013 (debt discount)			(330,000	)			382,260				52,260
Change in fair value			56,731				(123,659	)			(66,928	)
Conversions during			(22,500	)			–				(22,500	)
Fair value at September 30, 2013		$	34,231			$	258,601			$	292,832

 

The Company recorded a net change in fair value of derivatives income of $104,200 and a loss on debt redemption of $13,819 for a total net derivative income of $90,381 for the nine months ended September 30, 2013.

 

Willow Creek Capital Convertible Promissory Note

 

On April 2, 2013, the Company entered into a nine month convertible promissory note secured debt financing agreement with Willow Creek Capital, LLC, for $244,200, bearing interest at a rate of 12% per annum and maturing October 01, 2013. The note also includes a 10% OID of $20,000 based on the consideration funded, prepaid interest of $22,200 and $2,000 in legal and other expense. The Company also paid holder an origination fee in the amount of $109,890 in 144 Stock (146,325 shares) at the closing bid price of the Company’s Common Stock. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of 144 Common Stock at any time after the six months term of the note. The Common Stock issued will be valued using a conversion factor of 80% the average of the lowest two (2) trading prices common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder will be entitled to purchase from the Company five year warrants expiring April 2, 2018 to purchase 48,775 shares of ERF Common Stock at an exercise price of $0.751 or the per-share price at which the Common Stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this Warrant.

 

The Willow Creek promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price full ratchet reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Willow Creek 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 statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $240,793 for the nine months ended September 30, 2013. The estimated debt accretion for the remainder of 2013 is $3,407.

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

The following table summarizes the convertible debt activity for the period April 2, 2013 through September 30, 2013:

 

Description		Willowcreek				Compound Derivative Liability				Total
Fair value issuances at inception		$	244,200			$	–			$	244,200
Fair value issuances during 2013 (debt discount)			(244,200	)			255,000				10,800
Change in fair value			240,793				(104,257	)			136,536
Conversions during			–				–				–
Fair value at September 30, 2013		$	240,793			$	150,743			$	391,536

 

The Company recorded a net change in fair value of derivative income of $104,257 for the nine months ended September 30, 2013.

 

Vista Capital Convertible Promissory Note

 

On April 4, 2013, the Company entered into a six month convertible promissory note secured debt financing agreement with Vista Capital Investments, LLC, for $60,500, bearing interest at a rate of 12% per annum and maturing October 4, 2013. The note also includes a 10% OID of $5,000 based on the consideration funded, prepaid interest of $5,500. The Company also paid holder an origination fee in the amount of $21,175 in 144 Stock (33,611 shares) at the closing bid price plus of the Company’s Common Stock. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of 144 Common Stock at any time after the six months term of the note. The Common Stock issued will be valued using a conversion factor of 80% the average of the lowest two (2) trading prices common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder will be entitled to purchase from the Company five year warrants expiring April 4, 2018 to purchase 14,405 shares of ERF Common Stock at an exercise price of $0.80 or the per-share price at which the Common Stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this Warrant.

 

The Vista promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price full ratchet reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Vista 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 statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $57,543 for the nine months ended September 30, 2013. The estimated debt accretion for the remaining 2013 is $3,047.

 

The following table summarizes the convertible debt activity for the period April 4, 2013 through September 30, 2013:

 

Description		Vista				Compound Derivative Liability				Total
Fair value issuances at inception		$	60,500			$	–			$	60,500
Fair value issuances during 2013 (debt discount)			(60,500	)			70,967				10,467
Change in fair value			57,453				(33,621	)			23,832
Conversions during			–				–				–
Fair value at September 30, 2013		$	57,453			$	37,346			$	94,799

 

The Company recorded a net change in fair value of derivatives income of $33,621 for the nine months ended September 30, 2013.

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

TCA Global Convertible Promissory Note

 

On June 28, 2013, the Company entered into a twelve month convertible promissory note secured debt financing agreement with TCA Global Credit Master Fund for $1,500,000, bearing interest at a rate of 12% per annum and maturing July 28, 2014. At September 30, 2013, the outstanding principal balance of the TCA Global convertible promissory note totaled $1,262,000. The note also includes $153,300 in commitment fees; due diligence fees; document review fees; service fees; legal; and other expense. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of 144 Common Stock at any time during the twelve months term of the note or thereafter. The Common Stock issued will be valued using a conversion factor of 85% the average VWAP trading price during the five (5) trading day period ending on the latest complete trading day prior to the conversion date.

 

The TCA Global promissory note was 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 of the TCA Global 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 statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $15,764 for the nine months ended September 30, 2013. The estimated debt accretion for subsequent years is $18,261, $69,168 and $35,155 for years ending December 31, 2013, 2014 and 2015, respectively.

 

The following table summarizes the convertible debt activity for the period June 28, 2013 through September 30, 2013:

 

Description		TCA Global				Compound Derivative Liability				Total
Fair value issuances at inception		$	1,500,000			$	–			$	1,500,000
Fair value issuances during 2013 (debt discount)			(138,312	)			138,312				–
Change in fair value			15,764				(2,249	)			13,515
Conversions during			(237,729	)			–				(237,729	)
Fair value at September 30, 2013		$	1,139,723			$	136,063			$	1,275,786

 

The Company recorded a net change in fair value of derivatives income of $2,249 for the nine months ended September 30, 2013.

 

Investor Financing

 

On July 13, 2012, the Company entered into a three-month secured debt financing agreement with individuals for $1,000,000 with an interest rate of 12% per annum. Under the agreement, as amended, the maturity date was extended to September 30, 2013. Both parties under the amendment agreed to apply the Dakota Capital Fund payment of $181,235 including interest as a subset to the bridge note incurring an interest rate at .5% interest per day on a 360 day calendar year. At September 30, 2013, the outstanding principal balance totaled $473,000. The Company is in negotiations of extending the investor financing note through fourth quarter 2013.

 

Capital Leases

 

Banc Leasing Inc. Included in property and equipment at September 30, 2013, the cost of the equipment was $610,900 and the accumulated amortization was $463,263. 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 September 30, 2013, the cost of the vehicles was $273,443 and the accumulated amortization was $134,307. Amortization of assets under capital leases is included in depreciation expense. The vehicles are the primary collateral securing the financing.

 

Legacy Laser Services Dallas, LLC Included in property and equipment at September 30, 2013, the cost of the equipment was $155,349 and the accumulated amortization was $19,447. Amortization of assets under capital leases is included in depreciation expense. The equipment is the primary collateral securing the financing.

 

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

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 September 30, 2013 (in thousands):

 

Year Ending  December 31,
2013		$	86
2014			335
2015			159
2016			63
Thereafter			–
Total minimum lease payments			643
Less amount representing interest			(158	)
Present value of net minimum lease payments			485
Current maturities of capital lease obligations			(252	)
Long-term portion of capital lease obligations		$	233

 

NOTE 10 - COMMITMENTS

 

Leases and License Agreements

 

For the nine months ended September 30, 2013 and 2012, rental expenses of approximately $902,000 and $750,000, 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 as of December 31, 2013 were as follows (in thousands):

 

Year Ending December 31,		Amount
2013			229
2014			779
2015			707
2016			610
Thereafter			126
Total		$	2,451

 

Banc Leasing Inc.

 

During August 2007, the Company entered into a contract with Banc Leasing Inc. to fund the Company’s US-Banknet System. 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 Note 9.

 

NOTE 11 – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS

 

Costs and estimated earnings in excess of billings on uncompleted contracts for the nine months ended September 30, 2013, are summarized as follows (in thousands):

 

		September 30,
		2013
Costs incurred on uncompleted contracts		$	51
Estimated profit			57
Gross revenue			108
Less: billings to date			108
Costs and profit in excess of billings		$	–

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

Such amounts are included in the accompanying balance sheet at September 30, 2013, are summarized as follows (in thousands):

 

			September 30,
			2013
Cost and estimated earnings in excess of billings on uncompleted contracts		$	–
Billings in excess of costs and estimated earnings on uncompleted contracts			–
		$	–

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

In May 2013, the Company entered into a capital lease agreement with Legacy Laser Services Dallas, LLC and (Affiliate). Manny M. Carter is a Managing Member of Legacy Laser Services and a current Board Member of ERF Wireless Inc. At September 30, 2013, the outstanding balance on the capital leases totaled $191,000. The payment terms are $9,947 per month including interest, at an annual rate of 42% per annum. The capital leased equipment is to be utilized in our networks in oil and gas exploration regions. The equipment is the primary collateral securing the financing.

 

NOTE 13 - INDUSTRY SEGMENTS

 

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

 

Energy Broadband, Inc. (EBI)

 

EBI provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (“MBTs”). 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.

 

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 in certain regions of North America to serve private entities, cities, municipalities and the general public. All sales from external customers are located within the United States.

 

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. All sales from external customers are located within the United States.

 

 

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

For the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

Three Months Ended September 30, 2013		EBI				WBS				ENS				Total Segment				ERF Corporate				Total Consolidated
Revenue		$	1,121			$	610			$	72			$	1,803			$	–			$	1,803
Segment income (loss) from operations			82				(360	)			(26	)			(304	)			(844	)			(1,148	)
Total assets			3,006				1,580				435				5,021				289				5,310
Capital expenditures			74				69				–				143				–				143
Depreciation			215				204				58				477				8				485

 

Three Months Ended September 30, 2012		EBI				WBS				ENS				Total Segment				ERF Corporate				Total Consolidated
Revenue		$	1,363			$	576			$	69			$	2,008			$	–			$	2,008
Segment income (loss) from operations			245				(158	)			(78	)			9				(1,003	)			(994	)
Total assets			3,388				2,238				656				6,282				171				6,453
Capital expenditures			147				321				5				473				3				476
Depreciation			191				182				59				432				11				443

 

Nine Months Endeed September 30, 2013		EBI				WBS				ENS				Total Segment				ERF Corporate				Total Consolidated
Revenue		$	3,134			$	1,818			$	327			$	5,279			$	–			$	5,279
Segment income (loss) from operations			64				(1,032	)			(21	)			(989	)			(2,645	)			(3,634	)
Total assets			3,006				1,580				435				5,021				289				5,310
Capital expenditures			270				174				–				444				15				459
Depreciation			645				616				176				1,437				24				1,461

 

Nine Months Endeed September 30, 2012		EBI				WBS				ENS				Total Segment				ERF Corporate				Total Consolidated
Revenue		$	3,398			$	1,725			$	220			$	5,343			$	–			$	5,343
Segment income (loss) from operations			479				(350	)			(245	)			(116	)			(2,612	)			(2,728	)
Total assets			3,388				2,238				656				6,282				171				6,453
Capital expenditures			677				761				5				1,443				13				1,456
Depreciation			510				451				175				1,136				38				1,174

 

Reconciliation of Segment Assets to Total Assets		September 30, 2013				December 31, 2012
Total segment assets		$	5,021			$	5,989
Total corporate assets			289				282
Total assets		$	5,310			$	6,271

 

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation expense, accounting changes and non-recurring items.

 

For the nine months ended September 30, 2013, two customers accounted for $1,572,000 and $542,000 of EBI revenues each.

 

NOTE 14 - SUBSEQUENT EVENTS

 

Subsequent to September 30, 2013, the Company issued 10,033,056 shares of common stock valued at approximately $641,000 for services rendered, and conversion of debt.

 

Subsequent to September 30, 2013, the Company, received conversion notices from the holder and made payments toward the Tonaquint convertible promissory note of $59,000.

 

 

 

 

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

 

Our Company provides critical infrastructure wireless broadband communication products and services to a broad spectrum of customers in primarily rural oil and gas exploration areas of North America. We plan to devote a majority of our financial and personnel resources to develop a long term, internet solution for the energy industry in North America and Canada. The Company’s recent financial results reflect our focus on providing turnkey communications services to the oil and gas industry. These results include but are not limited to the following attributes:

 

The Company’s financial results reflect the Company’s continued focus on expanding our turnkey communications services to the oil and gas industry. The following reflects the three and nine month activity ended September 30, 2013.

 

	—	The Company reported overall consolidated revenues of $1,803,000 for the quarter ended September 30, 2013 as compared to $2,008,000 for the same prior year quarter ended September 30, 2012; a decrease of $205,000 or 10%. The overall decrease was comprised of a $242,000 decrease in revenues in our oil and gas operations subsidiary, Energy Broadband, Inc., due to lower oil and gas sales to one of our major customers and an overall drop in U.S. rig count, offset with an increase of $34,000 from our wireless bundled services and a $3,000 increase in our enterprise network services.
	—	The Company’s Energy Broadband, Inc. subsidiary reported revenues of $3,134,000 for the nine months ended September 30, 2013 as compared to revenues of $3,398,000 for the same prior year nine month quarter ended September 30, 2012; a decrease of $264,000 or 8%.
	—	The Company reported Gross Profit of $744,000 for the quarter ended September 30, 2013 as compared to $977,000 for the same prior year quarter ended September 30, 2012; a decrease of $233,000 or 24%. This 24% decrease in Gross Profits is primarily due to lower oil and gas sales to one of our major customers. The Company reported Gross Profit of $2,197,000 for the nine months ended September 30, 2013 as compared to $2,436,000 for the same prior year nine months ended September 30, 2012; a decrease of $239,000 or 10%. This 10% decrease in Gross Profits is primarily due to lower oil and gas sales to one of our major customers.
	—	The Company reported a Consolidated Net Loss of $2,621,000 for the quarter ended September 30, 2013 as compared to a Consolidated Net Loss of $1,453,000 for the same prior quarter ended September 30, 2012.
	—	The Company reported a increase of $668,000 or 13% increase in Operating Expenses for the nine months ended September 30, 2013 as compared to the same prior year nine months ended September 30, 2012 to support the continued aggressive strategy to grow our Energy Broadband business unit.

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2013, COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012

 

The following table sets forth summarized consolidated financial information for the three and nine months ended September 30, 2013 and 2012:

 

		Three Months Ended September 30,																Nine Months Ended September 30,
($ in thousands)		2013				2012				$ Change				% Change				2013				2012				$ Change				% Change
Total sales		$	1,803			$	2,008			$	(205	)			-10%			$	5,279			$	5,343			$	(64	)			-1%
Total Cost of goods sold			1,059				1,031				28				3%				3,082				2,907				175				6%
Gross profit			744				977				(233	)			-24%				2,197				2,436				(239	)			-10%
Percent of total sales			41%				49%												42%				46%
Total operating expenses			1,892				1,971				(79	)			-4%				5,832				5,164				668				13%
Loss from operations			(1,148	)			(994	)			(154	)			15%				(3,635	)			(2,728	)			(907	)			33%
Total other income/(expense)			(1,471	)			(449	)			(1,022	)			228%				(2,897	)			(1,027	)			(1,870	)			182%
Consolidated net loss			(2,619	)			(1,443	)			(1,176	)			-81%				(6,532	)			(3,755	)			(2,777	)			-74%
Net income attributable to non-controlling interest			(2	)			(9	)			7				100%				(1	)			(17	)			16				100%
Other comprehensive loss			–				(1	)			1				-100%				–				(7	)			7				-100%
Total comprehensive loss		$	(2,621	)		$	(1,453	)		$	(1,168	)			80%			$	(6,533	)		$	(3,779	)		$	(2,754	)			73%

 

For the three months ended September 30, 2013, the Company's business operations reflected a decrease in sales for EBI, offset with increase sales in WBS and ENS subsidiaries. For the three months ended September 30, 2013, the Company's consolidated operations generated net sales of $1,803,000 compared to prior-year period net sales of $2,008,000. The $205,000 decrease in total sales is primarily attributable to $242,000 decreased sales in EBI from declining deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions. Service sales decreased $237,000 and product sales increased $32,000. For the three months ended September 30, 2013, the Company had a gross profit margin of 41%, compared to a gross profit margin 49% for the prior year period. The $233,000 decrease in gross profit margin is primarily attributed to; (i) approximately $197,000 decrease in gross margin in EBI attributable to decreased sales associated with declining deployment of MBT’s in oil and gas regions and increased depreciation and (ii) $36,000 decrease in gross margin in WBS primarily related to increased depreciation, fuel cost and tower rent cost.

 

For the nine months ended September 30, 2013, the Company's business operations reflected an increase in sales for its WBS, ENS subsidiaries and offset with decrease sales in EBI subsidiary. For the nine months ended September 30, 2013, the Company's consolidated operations generated net sales of $5,279,000 compared to prior-year period net sales of $5,343,000. The $64,000 decrease in total sales is primarily attributable to $264,000 decreased sales in EBI from declining deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions. Service sales decreased $64,000 and product sales were flat. For the nine months ended September 30, 2013, the Company had a gross profit margin of 42%, compared to a gross profit margin 46% for the prior year period. The $239,000 decrease in gross profit margin is primarily attributed to; (i) approximately $134,000 decrease in gross margin in EBI attributable to decreased sales associated with deployment of MBT’s in oil and gas regions, (ii) $144,000 decrease in gross margins in WBS due to increased depreciation and tower rent cost, and (iii) offset with a $39,000 increase in gross margin in ENS primarily related to sales in bank network construction.

 

SALES INFORMATION

 

Set forth below are tables presenting summarized sales information for our business segments for the three and nine months ended September 30, 2013 and 2012:

 

($ in thousands)		Three Months Ended September 30,
Business Segment		2013				% of Total				2012				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	1,121				62%			$	1,363				68%			$	(242	)			-18%
Wireless Bundled Services			610				34%				576				29%				34				6%
Enterprise Network Services			72				4%				69				3%				3				4%
Total Sales		$	1,803				100%			$	2,008				100%			$	(205	)			-10%

 

($ in thousands)		Nine Months Ended September 30,
Business Segment		2013				% of Total				2012				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	3,134				60%				3,398				64%			$	(264	)			-8%
Wireless Bundled Services			1,818				34%				1,725				32%				93				5%
Enterprise Network Services			327				6%				220				4%				107				49%
Total Sales		$	5,279				100%			$	5,343				100%			$	(64	)			-1%

 

For the three months ended September 30, 2013, net sales decreased to $1,803,000 from $2,008,000 for the three months ended September 30, 2012. The overall decrease of 10% was attributable to decreased sales of $242,000 in EBI offset with increased sales of $34,000 in WBS and increased sales in ENS of $3,000. The $205,000 decrease in net sales is primarily attributable to $242,000 decreased sales in EBI from declining deployment of our MBT’s in the oil and gas regions.

 

For the nine months ended September 30, 2013, net sales decreased to $5,279,000 from $5,343,000 for the nine months ended September 30, 2012. The overall decrease of 1% was attributable to decreased sales of $264,000 in EBI offset with increased sales of $93,000 in WBS and increased sales in ENS of $107,000. The $64,000 decrease in net sales is primarily attributable to $264,000 decreased sales in EBI from declining deployment of our 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 September 30, 2013 and 2012:

 

($ in thousands)		Three Months Ended September 30,
Business Segment		2013				% of Total				2012				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	586				55%			$	631				61%			$	(45	)			-7%
Wireless Bundled Services			375				36%				305				30%				70				23%
Enterprise Network Services			98				9%				95				9%				3				3%
Total cost of sales		$	1,059				100%			$	1,031				100%			$	28				3%

 

		Three Months Ended September 30,
($ in thousands)		2013				2012				$ Change				% Change
Products and integration service		$	412			$	448			$	(36	)			-8%
Rent and maintenance			212				194				18				9%
Depreciation			435				389				46				12%
Total cost of sales		$	1,059			$	1,031			$	28				3%

 

For the three months ended September 30, 2013, cost of goods sold increased by $28,000, to $1,059,000 from $1,031,000 as compared to the three months ended September 30, 2012. The increase of $28,000 in cost of goods sold is primarily attributable to a decreased cost of $45,000 in EBI due to decreased sales affecting a reduction in our third party services during the quarter in the oil and gas regions, offset with increased cost in WBS of $70,000 due to increased depreciation and tower rents for expansion and upgrade of networks and increased cost in ENS of $3,000 due to banking network construction project.

 

The following tables set forth summarized cost of goods sold information for the nine months ended September 30, 2013 and 2012:

 

($ in thousands)		Nine Months Ended September 30,
Business Segment		2013				% of Total				2012				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	1,686				55%			$	1,815				62%			$	(129	)			-7%
Wireless Bundled Services			1,049				34%				812				28%				237				29%
Enterprise Network Services			347				11%				280				10%				67				24%
Total cost of sales		$	3,082				100%			$	2,907				100%			$	175				6%

 

		Nine Months Ended September 30,
($ in thousands)		2013				2012				$ Change				% Change
Products and integration service		$	1,171			$	1,399			$	(228	)			-16%
Rent and maintenance			605				495				110				22%
Depreciation			1,306				1,013				293				29%
Total cost of sales		$	3,082			$	2,907			$	175				6%

 

For the nine months ended September 30, 2013, cost of goods sold increased by $175,000, to $3,082,000 from $2,907,000 as compared to the nine months ended September 30, 2012. The increase of $175,000 in cost of goods sold is primarily attributable to a decreased cost of $129,000 in EBI due to decreased sales affecting a reduction in our third party services in the oil and gas regions, offset with increased cost in WBS of $237,000 due to increased depreciation and tower rents for expansion and upgrade of networks and increased cost in ENS of $67,000 due to banking network construction project.

 

OPERATING EXPENSES

 

The following table sets forth summarized operating expense information for the three and nine months ended September 30, 2013 and 2012:

 

		Three Months Ended September 30,																Nine Months Ended September 30,
($ in thousands)		2013				2012				$ Change				% Change				2013				2012				$ Change				% Change
Employment expenses		$	1,069			$	1,066			$	3				0%			$	3,235			$	2,921			$	314				11%
Professional services			356				475				(119	)			-25%				1,315				1,036				279				27%
Rent and maintenance			106				105				1				1%				340				304				36				12%
Depreciation			51				54				(3	)			-6%				155				161				(6	)			-4%
Other general and administrative			310				271				39				14%				787				742				45				6%
Total operating expenses		$	1,892			$	1,971			$	(79	)			-4%			$	5,832			$	5,164			$	668				13%

 

For the three months ended September 30, 2013, operating expenses decreased by 4% to $1,892,000, as compared to $1,971,000 for the three months ended September 30, 2012, resulting from:

 

	—	A $3,000 increase in employment expense ;
	—	A $119,000 decrease in professional services - primarily attributable to a decrease in consulting services compared to last year;
	—	A $1,000 increase in rent and maintenance;
	—	A $3,000 decrease in depreciation; and
	—	A $39,000 increase in other general and administrative.

 

For the nine months ended September 30, 2013, operating expenses increased by 13% to $5,832,000, as compared to $5,164,000 for the nine months ended September 30, 2012, resulting from:

 

	—	A $314,000 increase in employment expense - primarily attributable to increased employee headcount during the first quarter of the year as compared to prior quarter;
	—	A $279,000 increase in professional services - primarily attributable to accounting and legal services;
	—	A $36,000 increase in rent and maintenance;
	—	A $6,000 decrease in depreciation; and
	—	A $45,000 increase in other general and administrative.

 

OTHER INCOME (EXPENSE), NET

 

For the three months ended September 30, 2013, other expense, net increases to $1,471,000 from $449,000 as compared to three months ended September 30, 2012. The increase in other expense of $1,022,000 from the prior year period is primarily attributable to an increase in our interest expense, net on debt obligations totaling $1,004,000 and a decrease in our net derivative income of $18,000 as compared to interest expense, net of $475,000 and offset with a derivative income of $26,000 for the three months ended September 30, 2012. The derivative expense/income represents the net unrealized (non-cash) charge during the three months ended September 30, 2013 and 2012, 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.

 

For the nine months ended September 30, 2013, other expense, net increases to $2,897,000 from $1,027,000 as compared to nine months ended September 30, 2012. The increase in other expense of $1,870,000 from the prior year period is primarily attributable to an increase in our interest expense, net on debt obligations totaling $2,117,000 and offset with a increase in our net derivative income of $223,000 and gain on sale of assets of $24,000 as compared to interest expense, net of $1,151,000 and offset with derivative income of $124,000 for the nine months ended September 30, 2012. The derivative expense/income represents the net unrealized (non-cash) charge during the nine months ended September 30, 2013 and 2012, 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 LOSS

 

For the nine months ended September 30, 2013, our total comprehensive loss was $6,533,000 compared to comprehensive loss of $3,779,000 for the nine months ended September 30, 2012. The increased comprehensive loss for the nine months ended September 30, 2013, as compared to the comprehensive loss for nine months ended September 30, 2012 is primarily attributable to the factors described above.

 

CASH FLOWS

 

The Company's operating activities increased net cash used by operating activities to $2,434,000 in the nine months ended September 30, 2013, compared to net cash used of $1,400,000 in the nine months ended September 30, 2012. The increase in net cash used by operating activities was primarily attributable to accounts payable and accrued liabilities compared to the prior year.

 

The Company's investing activities used net cash of $187,000 in the nine months ended September 30, 2013, compared to net cash used of $1,166,000 in the nine months ended September 30, 2012. The decrease in cash provided by investing activities is primarily attributable to a slower rollout of targeted oil and gas network upgrades.

 

The Company's financing activities provided net cash of $2,613,000 in the nine months ended September 30, 2013, compared to $2,046,000 of cash used in the nine months ended September 30, 2012. The cash provided in the nine months ended September 30, 2013, was primarily associated with proceeds from debt financings.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2013, the Company's current assets totaled $1,970,000 (including cash and cash equivalents of $110,000); and total current liabilities were $6,661,000, resulting in negative working capital of $4,691,000. The Company has funded operations during the last nine months primarily through borrowings. These borrowings during the nine months ended September 30, 2013 were incurred from the Company's line of credit, net totaling $798,000, and convertible debt financing of $2,966,000.

 

DEBT FACILITIES AND INSTRUMENTS

 

During December 2012, the Company extended its maturity date of its $12.0 million unsecured revolving credit facility with Angus Capital Partners, a related party, from December 31, 2013 to December 30, 2015. 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 September 30, 2013, the outstanding balance on the line of credit totaled $2,523,000 with a remaining line of credit available of $9,477,000. During the nine months ended September 30, 2013, the Company issued 4,524,000 shares of its Common Stock for the settlement of $1,444,000 of principal and $289,000 of accrued interest for a total amount of $1,733,000 owed to Angus Capital Partners. The Company issued Common Stock at an average price of $0.38 per share calculated based on the closing price the day the debt was settled.

 

In November 2011, the Company entered into debt financing agreement with Dakota Capital Fund LLC, for financing of up to $3,000,000. During the fourth quarter of 2011, the Company received proceeds of $2,000,000 and had the option of additional funding of $1,000,000 for equipment purchases. This debt facility is secured by certain ERF Wireless assets and there is no prepayment penalty. At September 30, 2013, the outstanding balance on the debt financing agreement totaled $1,485,000 and the Company has elected not to request any additional funds under this credit facility. The payment terms are $178,031 per quarter including interest, at an annual rate of 18% per annum plus 10% of positive operational cash flow as determined on a quarterly basis for repayment of additional principal beginning July 1, 2012. The funding was utilized to purchase equipment to build out networks in oil and gas exploration regions of North America.

 

During the nine months ended September 30, 2013, the Company issued to certain accredited investors a principal amount of $325,000 of E-Series bonds (the "Bonds") in addition to the $687,000 which was outstanding at December 31, 2012. At September 30, 2013, the outstanding principal balance of the Bonds totaled $311,000. 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. 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 average closing price 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 three-year warrant to purchase one share of EBI 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, valued at the average last sales price over the 20-trading-day period preceding any payment date. If the Company chooses to issue Common Stock as redemption of the Bond principal, we will issue shares representing a value equal to 125% of the Bond principal and shares representing a value equal to 100% of the Bond interest through redemption date.

 

On July 13, 2012, the Company entered into a three-month secured debt financing agreement with individuals for $1,000,000 with an interest rate of 12% per annum. Under the agreement, as amended, the maturity date was extended to September, 2013. Both parties under the amendment agreed to apply the Dakota Capital Fund payment of $181,235 including interest as a subset to the bridge note incurring an interest rate at 180% per annum. At September 30, 2013, the outstanding principal balance totaled $473,000.

 

On March 20, 2013, the Company entered into a one year unsecured promissory note debt financing agreement with JMJ Financial for (“JMJ”) up to $500,000 at the sole discretion of additional consideration with the Lender. The note includes a 10% original issue discount that is prorated based on the consideration funded. The Company also paid holder an origination fee in the amount of $40,500 in 144 Stock (50,000 shares) at the closing bid price of the Company’s Common Stock. As of September 30, 2013 the Company has received funding of $300,000, bearing interest at a rate of 12% per annum and maturing in one year from the effective date of each payment. At September 30, 2013, the outstanding principal balance of the JMJ Financial convertible promissory note totaled $308,000 including OID. The conversion price is the lesser of $0.59 or 60% of the lowest trade price in the 25 trading days previous to the conversion.

 

On June 28, 2013, the Company entered into a twelve month convertible promissory note secured debt financing agreement with TCA Global Credit Master Fund for $1,500,000, bearing interest at a rate of 12% per annum and maturing July 28, 2014. At September 30, 2013, the outstanding principal balance of the TCA Global convertible promissory note totaled $1,262,000. The note also includes $153,300 in commitment fees; due diligence fees; document review fees; service fees; legal; and other expense. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of 144 Common Stock at any time during the twelve months term of the note or thereafter. The Common Stock issued will be valued using a conversion factor of 85% the average VWAP trading price during the five (5) trading day period ending on the latest complete trading day prior to the conversion date.

 

ISSUANCE OF COMMON STOCK

 

During the three months ended September 30, 2013, we issued to various accredited investors 4,312,587 shares for interest, services rendered and debt conversions. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the three months ended September 30, 2013, we issued 424,455 shares of common stock to employees and business consultants, for aggregate consideration of $172,948 of services rendered, pursuant to a registration statement on Form S-8.

 

During the nine months ended September 30, 2013, we issued to various accredited investors 8,279,383 shares for interest, services rendered and debt conversions. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the nine months ended September 30, 2013, we issued 964,740 shares of common stock to employees and business consultants, for aggregate consideration of $547,587 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 through September 30, 2014. We anticipate that we will need additional capital in the future to continue to expand our business operations. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity or debt 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 September 30, 2013, 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 Form 10-K.

 

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

 

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2013, our disclosure controls and procedures were effective at the reasonable assurance level.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not a party to any material legal proceedings.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors previously disclosed under Item 1 of the Company’s Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on March 29, 2013.

 

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.

 

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 Interest, Services and Debt Conversions

 

In July 2013, 997,608 shares of Common Stock at average price of $0.42 were issued for interest, services and debt conversions.

 

In August 2013, 318,519 shares of Common Stock at average price of $0.50 were issued for interest.

 

In September 2013, 2,746,460 shares of common stock at average price of $0.19 were issued for interest services and debt conversions.

 

Common Stock Issued Upon Conversion of Series A Preferred Stock

 

On July 30, 2013, an accredited investor acquired 125,000 shares of common stock pursuant to Preferred A Conversions.

 

On August 13, 2013, an accredited investor acquired 125,000 shares of common stock pursuant to Preferred A Conversions.

 

 

ITEM 3. DEFAULT IN SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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
99.1	Temporary Hardship Exemption
101.INS*	XBRL Taxonomy Extension Schema Document
101.SCH*	XBRL Taxonomy Extension Calculation Linkbase Document
101.CAL*	XBRL Taxonomy Extension Label Linkbase Document
101.LAB*	XBRL Taxonomy Extension Presentation Linkbase Document
101.PRE*	XBRL Taxonomy Extension Definition Linkbase Document
101.DEF*	XBRL Instance Document

 

* To be furnished by amendment per Temporary Hardship Exemption under Regulation S-T.

 

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:	November 14, 2013

 

	By:	/s/ Richard R. Royall
		Richard R. Royall
		Chief Financial Officer
	Date:	November 14, 2013