ERFB ERF Wireless Inc (CE)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q/A

 

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

 

For the quarterly period ended September 30, 2014

 

OR

 

o 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  x     No  o

 

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

Yes  x     No  o

 

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

 

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

 

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

Yes  o     No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 36,320,832 common shares issued and outstanding as of November 19, 2014.

 

 

EXPLANATORY NOTE

 

We are filing this Amendment No. 1 on Form 10-Q/A to amend and correct in their entirety the following items of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 as originally filed with the Securities and Exchange Commission on November 19, 2014 (the “Original Form 10-Q”): (i) Item 1 of Part I “Financial Information,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and (iii) Item 6 of Part II, “Exhibits”, and we have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2.

 

We have also furnished the Interactive Data files as Exhibit 101, in accordance with Rule 405 of Regulation S-T, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected, but for the convenience of the reader, this report on Form 10-Q/A corrects in its entirety, as amended, our Original Form 10-Q. This report on Form 10-Q/A is presented as of the filing date of the Original Form 10-Q and does not reflect events occurring after that date, or modify or update disclosures in any way other than as required to reflect the correction described below.  These corrections were made following the discovery that the final version of the filing the Company authorized the filing service to file did not reflect the audit firms final reviews and changes due to an internal Company communication issue.  Accordingly, this amendment corrects all such differences.

 

We have determined that our previously reported results for the quarter ended September 30, 2014 overstated loss per share for the three and nine months ended September 30, 2014 and contained incorrect calculations of the effects of various equity transactions in the consolidated statement of cash flows. Our results understated the effects both of stock issued for services rendered, interest and compensation, and of derivatives, and misstated various the cash flow related to various debt transactions. The adjustments do not affect reported balances for debt, derivatives, interest expense or equity. We have made necessary conforming changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” resulting from the correction of this error.

 

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

ERF WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2014, AND DECEMBER 31, 2013
($ in thousands except share data)

Unaudited

 

		September 30				December 31,
		2014				2013
ASSETS
Current assets
Cash and cash equivalents		$	179			$	42
Accounts receivable, net			455				1,001
Accounts receivable, other			1,046				489
Inventories			269				264
Prepaid expenses and other current assets			142				286
Total current assets			2,091				2,082
Property and equipment
Property and equipment			7,635				12,142
Less: accumulated depreciation			(6,196	)			(9,365	)
Net property and equipment			1,439				2,777
Goodwill			–				176
Other assets			63				37
Total assets		$	3,593			$	5,072
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt		$	2,953			$	3,183
Current portion of long-term capital leases			92				252
Accounts payable			1,218				1,299
Accrued expenses			1,107				1,158
Derivative liabilities			216				677
Deferred revenue			23				13
Total current liabilities			5,609				6,582
Line of credit (LOC)			4,049				4,281
Long-term debt, net of current portion			634				1,024
Long-term capital leases, net of current portion			141				174
Total liabilities			10,433				12,061
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, 2014 and December 31, 2013, 9,215,129 and 9,930,982 shares, respectively			9				10
Common stock - $0.001 par value authorized 975,000,000 shares issued and outstanding at September 30, 2014 and December 31,  2013, 14,520,177 and 111,633 shares, respectively			15				–
Additional paid in capital			57,695				56,177
Accumulated deficit			(64,659	)			(63,276	)
Accumulated other comprehensive loss			(32	)			(32	)
Total ERF Wireless, Inc. shareholders’ deficit			(6,972	)			(7,121	)
Non-controlling interest			132				132
Total shareholders’ deficit			(6,840	)			(6,989	)
Total liabilities and shareholders' deficit		$	3,593			$	5,072

 

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, 2014 AND 2013

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

 

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Sales:
Products		$	1			$	38			$	40			$	49
Services			1,361				1,765				4,548				5,230
Total sales			1,362				1,803				4,588				5,279
Cost of goods sold:
Products and integration services			397				412				1,037				1,171
Rent, repairs and maintenance			236				212				652				605
Depreciation			376				435				1,190				1,306
Total cost of goods sold			1,009				1,059				2,879				3,082
Gross profit			353				744				1,709				2,197
Operating expenses:
Selling, general and administrative			1,247				1,841				3,819				5,677
Depreciation			22				51				68				155
Total operating expenses			1,269				1,892				3,887				5,832
Loss from operations			(916	)			(1,148	)			(2,178	)			(3,635	)
Other income (expenses):
Interest expense, net			(555	)			(1,479	)			(1,466	)			(3,268	)
Derivative income			119				8				363				347
Loss on extinguishment of debt			–				–				(108	)			–
Gain on sale of assets			2,006				–				2,006				24
Total other (expense) income			1,570				(1,471	)			795				(2,897	)
Consolidated net loss			655				(2,619	)			(1,383	)			(6,532	)
Net income (loss) attributable to non-controlling interest			0				(2	)			–				(1	)
Net loss attributable to ERF Wireless, Inc.			655				(2,621	)			(1,383	)			(6,533	)
Basic income (loss) per common share:
Net income (loss)*		$	0.08			$	(0.22	)		$	(0.38	)		$	(0.69	)
Net loss attributable to ERF Wireless, Inc.*		$	0.08			$	(0.22	)		$	(0.38	)		$	(0.69	)
Fully diluted income (loss) per common share:
Net income (loss)*		$	0.01			$	(0.22	)		$	(0.38	)		$	(0.69	)
Net loss attributable to ERF Wireless, Inc.*		$	0.01			$	(0.22	)		$	(0.38	)		$	(0.69	)

 

* As restated for the three and six months ended June 30, 2014 (refer to note 4).

 

See accompanying notes to consolidated financial statements.

 

 

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)
($ in thousands)

 

		2014				2013
Cash flows from operating activities
Net loss		$	(1,383	)		$	(6,532	)
Adjustments to reconcile net loss to net cash used by operating activities:
Gain on sale of assets			(2,006	)			(24	)
Loss on extinguishment of debt			108				–
Amortization of debt discount			597				1,796
Depreciation			1,258				1,461
Stock issued for services rendered, interest  and compensation			293				1,325
Derivative income			(363	)			(347	)
Bad debt expense			75				30
Changes in:
Accounts receivable, net			471				116
Accounts receivable, other			(82	)			(301	)
Inventories			(5	)			58
Prepaid expenses and other current assets			144				114
Costs and profits in excess of billings			–				35
Accounts payable			89				(220	)
Accrued expenses			171				54
Deferred revenue			10				1
Total adjustments			760				4,098
Net cash (used) by operating activities			(623	)			(2,434	)
Cash flows from investing activities
Purchase of property and equipment			(115	)			(221	)
Proceeds from sale of operations			522				–
Proceeds from sale of assets			–				34
Change in other assets			(26	)			–
Net cash provided (used) by investing activities			381				(187	)
Cash flows from financing activities
Net proceeds from line of credit			504				798
Proceeds from long-term debt obligations			253				2,966
Payment of long-term debt obligations			(185	)			(1,015	)
Payment on capital lease obligations			(193	)			(136	)
Net cash provided by financing activities			379				2,613
Net change in cash and cash equivalents			137				(8	)
Cash and cash equivalents at the beginning of the period			42				118
Cash and cash equivalents at the end of the period		$	179			$	110
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest		$	303			$	210
Income taxes		$	–			$	–
Supplemental non-cash investing and financing activities:
Conversion of debt through issuance of common stock		$	223			$	1,203
Conversion of preferred stock to common stock		$	–			$	250
Conversion of LOC and interest through issuance of common stock		$	736			$	1,733
Property and equipment financed with debt and capital leases		$	–			$	238

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(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 9 for additional information regarding segment operations.

 

Basis of Accounting

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's annual report for the year ended December 31, 2013 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, 2013 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 2013 financial statements have been reclassified to conform to the 2014 financial presentation. These reclassifications have no impact on net loss.

 

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.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

Restatement of Financial Statements

 

Our condensed statement of cash flows for the nine months ended September 30, 2014 has been corrected to reflect the proper effects of various debt and equity transactions in the consolidated statement of cash flows. The following table summarizes the effects of our correction.

 

		Nine Months Ended September 30, 2014
		Previously Reported				Adjustment				Corrected
Cash flows from operating activities
Net loss		$	(1,383	)		$	–			$	(1,383	)
Adjustments to reconcile net loss to net cash used by operating activities:
Gain on sale of assets			(2,006	)			–				(2,006	)
Loss on extinguishment of debt			108				–				108
Amortization of debt discount			597				–				597
Depreciation			1,258				–				1,258
Stock issued for services rendered, interest and compensation			133				160				293
Derivative income			(244	)			(119	)			(363	)
Bad debt expense			75				–				75
Changes in:
Accounts receivable, net			471				–				471
Accounts receivable, other			(82	)			–				(82	)
Inventories			(5	)			–				(5	)
Prepaid expenses and other current assets			144				–				144
Costs and profits in excess of billings			–				–				–
Accounts payable			89				–				89
Accrued expenses			162				9				171
Deferred revenue			10				–				10
Total adjustments			710				50				760
Net cash (used) by operating activities			(673	)			50				(623	)
Cash flows from investing activities
Purchase of property and equipment			(115	)			–				(115	)
Proceeds from sale of operations			522				–				522
Proceeds from sale of assets			–				–				–
Change in other assets			(26	)			–				(26	)
Net cash used by investing activities			381				–				381
Cash flows from financing activities
Net proceeds from line of credit			540				(36	)			504
Proceeds from long-term debt obligations			267				(14	)			253
Payment of long-term debt obligations			(185	)			–				(185	)
Payment on capital lease obligations			(193	)			–				(193	)
Net cash provided by financing activities			429				(50	)			379
Net change in cash and cash equivalents			137				–				137
Cash and cash equivalents at the beginning of the period			42				–				42
Cash and cash equivalents at the end of the period		$	179			$	–			$	179
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest		$	113			$	190			$	303
Income taxes		$	–			$	–			$	–
Supplemental non-cash investing and financing activities:
Conversion of debt through issuance of common stock		$	309			$	(86	)		$	223
Conversion of preferred stock to common stock		$	–			$	–			$	–
Conversion of LOC and interest through issuance of common stock		$	717			$	19			$	736
Property and equipment financed with debt and capital leases		$	–			$	–			$	–

  

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

NOTE 2 – DEBT CONVERSION

 

(a) LINE OF CREDIT

 

During the nine months ended September 30, 2014, the Company issued 7,952,487 shares of its common stock for the settlement of $735,845 of principal owed to Angus Capital Partners. The Company issued common stock at an average price of $.096 per share calculated based on the closing price the day the debt was settled. Of the 7,952,487 shares of common stock issued a total of 4,226,487 were issued to third parties that had acquired a portion of the Angus Capital Partners debt in private transactions.

 

(b) Other Debt

 

During the nine months ended September 30, 2014, the Company issued 3,142,571 and 2,826,156 shares of its Common Stock for the settlement of principal amount of $222,525 and $203,253 of accrued interest, respectively, for a total of $425,778. The Company issued Common Stock at an average price of $.22 per share calculated based on the closing price the day the debt was settled.

 

NOTE 3 – COMMON STOCK, PREFERRED STOCK AND WARRANTS

 

The total number of shares of stock of all classes which the Company shall have the authority to issue is 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, 2014 and December 31, 2013, there were 14,520,177 and 111,633 net shares of its Common Stock issued and outstanding, respectively.

 

During the nine months ended September 30, 2014, the Company issued 14,408,544 net 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.

 

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 9,215,129 shares of Series A Preferred Shares issued and outstanding at September 30, 2014 and 9,930,982 at December 31, 2013. With respect to the Series A Preferred Stock outstanding at September 30, 2014, the Company would be required to issue 9,215,129 shares of its Common Stock upon conversion.

 

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

 

As of September 30, 2014, 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 2014. No stock dividends were issued during the nine months ended September 30, 2014.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

NOTE 4 – 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, 2014
		Net loss				Shares*				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	655				7,901			$	0.08
Net income attributable to ERF Wireless, Inc.		$	655				7,901			$	0.08
Diluted EPS:
Effect of dilutive securities							84,942				–
Net income			655				92,843			$	0.01
Net income attributable to ERF Wireless, Inc.		$	655				92,843			$	0.01

 

		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	)
Net loss attributable to ERF Wireless, Inc.		$	(2,621	)			12,077			$	(0.22	)

 

		For the nine months ended September 30, 2014
		Net loss				Shares*				Per-Share
		(Numerator)				(Denominator)				Amount
Basic and diluted EPS:
Net loss		$	(1,383	)			3,634			$	(0.38	)
Net loss attributable to ERF Wireless, Inc.		$	(1,383	)			3,634			$	(0.38	)

 

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

 

*Share counts have been restated.

 

NOTE 5 – MAJOR CUSTOMERS

 

The Company had gross sales of $4,587,833 and 5,279,181 for the nine months ended September 30, 2014 and 2013, respectively. The Company had two customers that met the required disclosure of 10% that represented 28% and 12% of the gross sales during the nine months ended September 30, 2014. Additionally, the Company had two customers that met the required disclosure of 10% that represented 28% and 12% of the gross sales during the nine months ended September 30, 2013.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

NOTE 6 – NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES

 

Notes payable, long-term debts and capital leases consist of the following as of September 30, 2014 (in thousands):

 

		Terms		Maturity Date		Interest Rate				Gross Balance				Debt Discount				Balance
Banc leasing, Inc.		$10,660 / Month including interest		January-15			11.62%			$	42			$	–			$	42
Advantage leasing associates		$8,269 / Month including interest		Various			Various				47				–				47
Legacy laser services Dallas, LLC		$9,947 / Month including interest		May-16			42.00%				144				–				144
KBM World Wide, Inc.		$103,500 / Month including interest		March-15			8.00%				189				153				36
Tonaquint		$950,400 / Lump sum payment including interest		Immediately due and payable			12.00%				734				–				734
JMJ Financial		$330,000 / Lump sum payment including interest		March-14			12.00%				142				–				142
Vista capital		$72,600 / Lump sum payment including interest		Immediately due and payable			12.00%				40				–				40
Willow creek capital		$293,040 / Lump sum payment including interest		Immediately due and payable			12.00%				202				–				202
TCA global line of credit		$149,609 / Month including interest		July-14			12.00%				–				–				–
Group 10		$157,500 / Month including interest		July-14			12.00%				94				–				94
Investor financing		$495,000 / Lump sum payment including interest		April-14			12.00%				548				–				548
Premium assignment		$2,063 / Month including interest		September-14			5.68%				–				–				–
Dakota capital equipment financing		$178,031 / Quarterly including interest		March-16			12.00%				1,518				2				1,516
Union Capital/Adar Bays		$100,000 / Lump Sum including interest		July-15			10.00%				100				100				–
E-bond investor notes		3 years/ Semiannual interest (See below)		Various			7.50%				311				36				275
Line of credit		2 years/ Quarterly interest (See below)		December-16			3.00%				4,049				–				4,049
Total debt										$	8,160			$	297				7,869
Less current maturities																			(3,045	)
Long-term debt																		$	4,824

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

Notes payable, long-term debts and capital leases consist of the following as of December 31, 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%			$	130			$	–			$	130
Advantage leasing associates		$8,269 / Month including interest		Various			Various				115				–				115
Legacy laser services Dallas, LLC		$9,947 / Month including interest		May-16			42.00%				181				–				181
MP Nexlevel LLC		$7,043 / Month including interest		May-14			10.00%				34				–				34
Tonaquint		$950,400 / Lump sum payment including interest		Immediately due and payable			12.00%				793				–				793
JMJ Financial		$330,000 / Lump sum payment including interest		March-14			12.00%				232				174				58
Vista capital		$72,600 / Lump sum payment including interest		Immediately due and payable			12.00%				51				–				51
Willow creek capital		$293,040 / Lump sum payment including interest		Immediately due and payable			12.00%				228				–				228
TCA global line of credit		$139,523 / Month including interest		July-14			12.00%				1,019				104				915
Group 10		$157,500 / Month including interest		July-14			12.00%				157				143				14
Investor financing		$495,000 / Lump sum payment including interest		April-14			12.00%				473				–				473
Premium assignment		$2,063 / Month including interest		September-14			5.68%				18				–				18
Dakota capital equipment financing		$178,031 / Quarterly including interest		March-16			12.00%				1,519				25				1,494
E-bond investor notes		3 years/ Semiannual interest (See below)		Various			7.50%				311				182				129
Line of credit		2 years/ Quarterly interest (See below)		December-16			3.00%				4,281				–				4,281
Total debt										$	9,542			$	628				8,914
Less current maturities																			(3,435	)
Long-term debt																		$	5,479

 

Line of Credit

 

In December 2013, the maturity date of the $12.0 million unsecured revolving credit facility with Angus Capital Partners, a related party, was extended from December 31, 2015 to December 31, 2017. The Company also renegotiated the interest rate from 12% per annum to 3% per annum retroactive to January 1, 2013. The Company in consideration has accepted the return and cancellation of 36,784 common shares (post-split) of Company common stock issued for the Line of Credit conversions during 2013. The Company has accordingly reversed the payment of principal and interest of $2,158,000 in December 2013 and subsequently received the canceled shares in February 2014. 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 3% rate per annum. The payment of principal may be paid in cash, common shares or preferred shares at the Lender’s election. The payment of interest may only be paid in cash. At September 30, 2014, the outstanding balance on the line of credit totaled $4,049,397.80 leaving a remaining line of credit available of $7,950,602.20. Under the terms of the Angus Capital Partners credit facility all or a portion of the master note may be used by Angus Capital Partners as collateral or may be sold to third parties in a private transaction with the consent of the Company. Such private sales among third parties have previously been concluded by Angus Capital Partners between IBC and CP US and reported by the Company. The Company has subsequently repurchased and cancelled the remaining balances of these two resold notes.

 

During the nine months ended September 30, 2014, the Company issued 7,952,487 shares of its common stock for the settlement of $735,845 of principal owed to Angus Capital Partners. The Company issued common stock at an average price of $.096 per share calculated based on the closing price the day the debt was settled. Of the 7,952,487 shares of common stock issued, a total of 4,226,487 were issued to third parties that had acquired a portion of the Angus Capital Partners debt in private transactions.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

E-Series Bond Investor Note

 

During the nine months ended September 30, 2014, 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 $146,174 for the nine months ended September 30, 2014. 

 

The following table summarizes the Bond debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		Bonds				Compound Derivative Liability				Total
Fair value at December 31, 2013		$	128,762			$	39,730			$	168,492
Change in fair value			146,238				(36,484	)			109,754
Conversions			–				–				–
Fair value at September 30, 2014		$	275,000			$	3,246			$	278,246

 

The Company recorded derivative income of $36,484 for the nine months ended September 30, 2014.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(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, 2014, the outstanding balance on the debt financing agreement totaled $1,518,000 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 $22,459 for the nine months ended September 30, 2014. The estimated debt accretion for the remainder of 2014 is $2,152.

 

Investor Financing Loan

 

On July 13, 2012, the Company entered into a three-month secured debt financing agreement with certain individuals for $1,000,000 with an interest rate of 12% per annum. Under a subsequent modified agreement dated April 2014, as amended, the maturity date has been extended from April 15, 2014 to October 15, 2014. 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. The Company has also renegotiated the subset interest rate from .5% interest per day on a 360 day calendar year to 12% rate per annum retroactive to March 23, 2013. The Company in consideration has accepted the return and cancellation of 796 common shares (post-split) of Company common stock issued during the third quarter of 2013 for interest. The Company also agreed to additional consideration of 5,000 of preferred A shares to be issued as long as the note remains unpaid and to be remitted once the note is paid in full. The Company has agreed to add a $50,000 penalty to principal in January 2014 for the consideration of the extension of the note. The Company has accordingly reversed the payment of interest of $159,259 in December 2013. The Company has agreed to add an additional $25,000 penalty to principal in April 2014 for the extension of the note to October 2015. In addition, the Company will pay $1,500 toward the bridge loan interest on the 1st and 15th of each month beginning May 15, 2014 until loan is fully paid. At September 30, 2014, the outstanding principal balance totaled $548,000.

 

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 matured on September 5, 2013. At September 30, 2014, the outstanding principal balance of the Tonaquint convertible promissory note totaled $734,000. 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 (711 post-split shares) at the closing bid price on March 5, 2013, plus 125 post-split 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 restricted 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 371 shares of ERF common stock at an exercise price of $320.00 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 March 4, 2014 and thereafter at a rate of 18% per annum. The note is recorded as a current liability.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

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 used the effective interest method to record interest expense from the accretion of the debt discount.

 

The following table summarizes the convertible debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		Tonaquint				Warrant Compound Derivative Liability				Compound Derivative Liability				Total
Fair value at December 31, 2013		$	793,368			$	96			$	80,569			$	874,033
Change in fair value			–				(96	)			(45,500	)			(45,596	)
Conversions			(59,343	)			–				–				(59,343	)
Fair value at September 30, 2014		$	734,025			$	–			$	35,069			$	769,094

 

The Company recorded derivative income of $17,391 for the nine months ended September 30, 2014.

 

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 (125 post-split shares) at the closing bid price of the Company’s common stock. As of September 30, 2014 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, 2014, the outstanding principal balance of the JMJ Financial convertible promissory note totaled $142,281. 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 note is recorded as a current liability.

 

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 $179,451 for the nine months ended September 30, 2014.

 

The following table summarizes the convertible debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		JMJ				Compound Derivative Liability				Total
Fair value at December 31, 2013		$	58,363			$	134,113			$	192,476
Change in fair value			174,009				(131,383	)			42,626
Conversions			(90,091	)			–				(90,091	)
Fair value at September 30, 2014		$	142,281			$	2,730			$	145,011

 

The Company recorded derivative income of $99,783 for the nine months ended September 30, 2014.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

Willow Creek Capital Convertible Promissory Note

 

On April 2, 2013, the Company entered into a nine-month secured convertible promissory note debt financing agreement with Willow Creek Capital, LLC, for $244,200, bearing interest at a rate of 12% per annum and matured on October 1, 2013. At September 30, 2014, the outstanding principal balance of the Willow Creek convertible promissory note totaled $182,000. 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 (366 post-split 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 restricted 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 122 post-split shares of ERF common stock at an exercise price of $300.00 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 used the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion. The Company is not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $244,200 to $293,040. At September 30, 2014, the outstanding principal balance of the convertible promissory note totaled $201,617. The note will accrue interest at a rate of 12% from October 1, 2013 until April 1, 2014 and thereafter at a rate of 18% per annum. The note is recorded as a current liability.

 

The following table summarizes the convertible debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		Willowcreek				Compound Derivative Liability				Total
Fair value at December 31, 2013		$	227,800			$	51,276			$	279,076
Change in fair value			–				(40,943	)			(40,943	)
Conversions			(26,183	)			–				(26,183	)
Fair value at September 30, 2014		$	201,617			$	10,333			$	211,950

 

The Company recorded derivative expense of $13,824 for the nine months ended September 30, 2014.

 

Vista Capital Convertible Promissory Note

 

On April 4, 2013, the Company entered into a six-month secured convertible promissory note debt financing agreement with Vista Capital Investments, LLC, for $60,500, bearing interest at a rate of 12% per annum and matured on October 4, 2013. The note also includes a 10% OID of $5,000 based on the consideration funded and prepaid interest of $5,500. The Company also paid holder an origination fee in the amount of $21,175 in 144 Stock (84 post-split 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 restricted 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 36 post-split shares of ERF common stock at an exercise price of $320.00 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 used the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion. The Company is not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $60,500 to $72,600. The note will accrue interest at a rate of 12% from October 4, 2013 until April 3, 2014 and thereafter at a rate of 18% per annum. At September 30, 2014, the outstanding principal balance of the Vista Capital convertible promissory note totaled $40,343.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

The following table summarizes the convertible debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		Vista				Compound Derivative Liability				Total
Fair value at December 31, 2013		$	50,558			$	37,516			$	88,074
Change in fair value			–				(34,505	)			(34,505	)
Conversions			(10,215	)			–				(10,215	)
Fair value at September 30, 2014		$	40,343			$	3,011			$	43,354

 

The Company recorded derivative income of $31,825 for the nine months ended September 30, 2014.

 

TCA Global Convertible Promissory Note

 

On June 28, 2013, the Company entered into a twelve-month secured convertible promissory note debt financing agreement with TCA Global Credit Master Fund (TCA) for $1,500,000, bearing interest at a rate of 12% per annum and maturing July 28, 2014. Under a subsequent modified agreement dated March 25, 2014, TCA has agreed to restructure the agreement and extend the maturity date to November 15, 2014. The Company in consideration has agreed to a $75,000 and a $50,000 restructuring and advisory fee to be added to the sum of the principal balance including a $40,791 interest charge to be paid and nominal legal fees. The monthly principal and interest payments will be $149,609 per month. At September 30, 2014, the outstanding principal balance of the TCA Global convertible promissory note totaled $1,007,000. 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 restricted 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. Due to the restructuring of the note the Company incurred $108,000 loss on extinguishment of debt.

 

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 used the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion that totaled $43,416 for the nine months ended September 30, 2014. On September 16, 2014 the TCA Global note was completely paid off by the Company at a price of $1,165,222.  

 

The following table summarizes the convertible debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		TCA Global				Compound Derivative Liability				Total
Fair value at December 31, 2013		$	915,440			$	28,716			$	944,156
Fair value issuances at inception			161,713				(28,716	)			132,997
Change in fair value			(70,153	)			–				(70,153	)
Conversions			(1,007,000	)			–				(1,007,000	)
Fair value at September 30, 2014		$	–			$	–			$	–

 

The Company recorded derivative expense of $49,937 for the nine months ended September 30, 2014.

 

Group 10 Holdings Convertible Promissory Note

 

On October 3, 2013, the Company entered into a twelve-month unsecured convertible promissory note debt financing agreement with Group 10 Holdings, LLC, for $157,500, bearing interest at a rate of 12% per annum and maturing October 2, 2014. The note also includes a 5% OID of $7,500 based on the consideration funded. The Company also paid holder a commitment fee in the amount of $45,000 in 144 Stock (1,125 post-split 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 restricted common stock at any time after the twelve months term of the note. The common stock issued will be valued using a conversion factor of 55% multiplied by the lowest closing bid price of the (20) trading days prior to the conversions, which represents a discount rate of 45%.

 

The Group 10 Holdings 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 Group 10 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 that totaled $143,497 for the nine months ended September 30, 2014. The note will accrue interest at a rate of 12% from October 3, 2013 until October 2, 2014 and thereafter at a rate of 18% per annum. At September 30, 2014, the outstanding principal balance of the Group 10 convertible promissory note totaled $94,000. Subsequent to September 30, 2014 the Group 10 Note was completely paid at a price of $85,290.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

The following table summarizes the convertible debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		Group 10				Compound Derivative Liability				Total
Fair value at December 31, 2013		$	14,155			$	304,519			$	318,674
Change in fair value			143,497				(301,081	)			(157,584	)
Conversions			(63,944	)			–				(63,944	)
Fair value at September 30, 2014		$	93,708			$	3,438			$	97,146

 

The Company recorded derivative income of $79,340 for the nine months ended September 30, 2014.

 

KBM World Wide Inc. Convertible Promissory Note

 

On June 26, 2014, the Company entered into a nine-month unsecured convertible promissory note debt financing agreement with KBM World Wide Inc. for $103,500, bearing interest at a rate of 8% per annum and maturing March 27, 2015. On August 18 and August 28, 2014, the Company expanded the initial relationship with KBM in non-material amounts by entering into a nine-month unsecured convertible promissory note debt financing agreement with KBM World Wide Inc. for $53,000, bearing interest at a rate of 8% per annum and maturing May 18, 2015 and a nine-month unsecured convertible promissory note debt financing agreement with KBM World Wide Inc. for $32,500, bearing interest at a rate of 8% per annum and maturing May 28, 2015. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after 180 days following the date of this note and ending on final payment of the convertible note. The common stock issued will be valued using a conversion factor of 61% multiplied by the lowest three trading prices of the (10) trading days prior to the conversion date, which represents a discount rate of 39%.

 

The KBM World Wide Inc. promissory notes were 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 KBM World Wide Inc. notes, 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 that totaled $19,516 for the nine months ended September 30, 2014. The estimated debt accretion for subsequent years is $46,500 and $106,593 for years ending December 31, 2014, and 2015, respectively. The notes will accrue interest at a rate of 8% from their inception until nine months later and thereafter at a rate of 22% per annum. At September 30, 2014, the outstanding principal balance of the KBM World Wide Inc. convertible promissory notes totaled $189,000.

 

The following table summarizes the convertible debt activity for the period from inception through September 30, 2014:

 

Description		KBM World Wide				Compound Derivative Liability				Total
Fair value issuances at inception		$	189,000			$	166,277			$	194,777
Fair value issuances during 2014 (debt discount)			(166,277	)			–				(166,277	)
Change in fair value			13,683				(127,834	)			(39,151	)
Conversions			–				–				–
Fair value at September 30, 2014		$	36,406			$	38,443			$	74,849

 

The Company recorded derivative income of $127,834 for the nine months ended September 30, 2014.

 

Union Capital/Adar Bays Convertible Promissory Note

 

On August 4, 2014, the Company entered into two twelve-month unsecured $50,000 convertible promissory notes totaling $100,000 for a dual debt financing agreement with the combination of Union capital LLC and Adar Bays LLC bearing interest at a rate of 10% per annum and maturing August 15, 2015. The Company will pay principal and interest due on the notes before or on the maturity date. The holders may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of common stock without a legend at any time after 180 days following the date of these notes. The common stock issued will be valued using a conversion factor of 55% multiplied by the lowest daily closing bid price for the (15) trading days prior to the conversion date.

 

The notes 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 notes, 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 used the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion that totaled $0 for the nine months ended September 30, 2014. The estimated debt accretion for the remainder of 2014 is $5, and $99,995 for 2015.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

The following table summarizes the convertible debt activity for the period from January 1, 2014 through September 30, 2014:

 

Description		Union Capital/Adar Bays				Compound Derivative Liability				Total
Fair value issuances at inception		$	87,000			$	87,000			$	174,000
Fair value issuances during 2014 (debt discount)			(87,000	)			–				(87,000	)
Change in fair value			–				(21,128	)			(21,128	)
Fair value at September 30, 2014		$	–			$	65,872			$	65,872

 

The Company recorded derivative expense of $34,129 for the nine months ended September 30, 2014.

 

Capital Leases

 

Banc Leasing Inc. Included in property and equipment at September 30, 2014, the cost of the equipment was $610,900. 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, 2014, the cost of the vehicles was $273,443. 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, 2014, the cost of the equipment was $155,349. Amortization of assets under capital leases is included in depreciation expense. The equipment is the primary collateral securing the financing.

 

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2014 (in thousands):

 

Year Ending December 31,
2014			92
2015			142
2016			63
2017			0
Thereafter			–
Total minimum lease payments			297
Less amount representing interest			-64
Present value of net minimum lease payments			233
Current maturities of capital lease obligations			-92
Long-term portion of capital lease obligations			141

 

NOTE 7 – COMMITMENTS

 

Leases and License Agreements

 

For the nine months ended September 30, 2014 and 2013, rental expenses of approximately $652,000 and $605,000, 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, 2014 were as follows (in thousands):

 

Year Ending December 31,		Amount
2014		$	372
2015			707
2016			610
2017			116
Thereafter			9
Total		$	1,814

 

 

ERF WIRELESS., INC.

NOES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

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 6.

 

NOTE 8 – 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, 2014, the outstanding balance on the capital leases totaled $144,000. 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 9 – 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.

 

Disposition of Certain Assets:

 

On September 15, 2014, ERF Wireless, Inc. entered into an Asset Purchase Agreement (the “Agreement”) that was effective as of September 1, 2014 with Rhino Communications, Inc. The agreement is between ERF Wireless, Inc., a Nevada corporation and ERF Wireless Bundled Services, Inc., a Texas corporation (collectively with ERF Wireless, Inc., the “Company”) and Rhino Communications, Inc., a Colorado corporation (he “Purchaser”) and involves certain obligations of JAB Wireless, Inc., a Colorado corporation (“JAB”). The Agreement is for the purchase of certain of the Company’s WISP (Wireless Internet Service Provider) assets required for operating the Company’s WISP services in certain geographical areas which were not associated with the Company’s oil and gas sector communications operations .The purchase price of $2,377,000, is payable in cash (including a holdback amount of $475,400 to be placed in an interest bearing account for a period of 90 days pending determination of any required price adjustment).

 

In conjunction with this disposition of certain assets, the Company recorded a one-time gain on sale of $2,006,000 in the three-months ended September 30, 2014.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

For the three and nine months ended September 30, 2014 and 2013 (in thousands):

 

Three Months Ended September 30, 2014		EBI				WBS				ENS				Total Segment				ERF Corporate				Total Consolidated
Revenue		$	832			$	466			$	64			$	1,362			$	–			$	1,362
Segment income (loss) from operations			(66	)			(328	)			(40	)			(434	)			(482	)			(916	)
Total assets			1,950				1,045				259				3,254				339				3,593
Capital expenditures			24				5				–				29				–				29
Depreciation			186				149				58				393				5				398

 

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

 

Nine Months Ended September 30, 2014		EBI				WBS				ENS				Total Segment				ERF Corporate				Total Consolidated
Revenue		$	2,585			$	1,725			$	278			$	4,588			$	–			$	4,588
Segment income (loss) from operations			6				(557	)			(24	)			(575	)			(1,603	)			(2,178	)
Total assets			1,950				1,045				259				3,254				339				3,593
Capital expenditures			26				32				–				58				–				58
Depreciation			574				491				175				1,240				18				1,258

 

Nine Months Ended 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

 

Reconciliation of Segment Assets to Total Assets		September 30, 2014				December 31, 2013
Total segment assets		$	3,254			$	5,989
Total corporate assets			339				(917	)
Total assets		$	3,593			$	5,072

 

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, 2014, two customers accounted for $1,297,219 and $545,270 of EBI revenues each.

 

NOTE 10 – SUBSEQUENT EVENTS

 

Subsequent to September 30, 2014, the Company issued 21,800,655 shares of common stock valued at a value of $289,395 for services rendered, and conversion of debt.

 

 

ERF WIRELESS., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

Subsequent to September 30, 2014 the Company entered into negotiations and concluded a $2,500,000 Master Lease Finance Agreement on October 30, 2014 with WISPer Ventures Leasing LLC an Arizona limited liability company for the purpose of debt restructuring and operational capital. The funding to be provided under the Master Lease finance Agreement will be provided in the form of one or more lease schedules. The basis terms of the agreement are structured as a true lease with a 10% repurchase option by Company at the end of the lease. The initial $403,000 portion Schedule 001 of this Master Lease Finance Agreement was funded on October 30, 2014 for the specific purpose of repayment and retirement of certain convertible debentures of the Company. Additional Schedules under the Master Lease Finance Agreement will be utilized to consolidate other debt and for working capital. For the Schedule 001 funding WISPer Ventures Leasing has required the Company to provide additional collateral and assurances beyond the basic Company assets required for all Schedules in order to fund the $403,000 for specific purpose of repaying convertible debentures. The additional collateral that was required consisted of three residential rental properties owned by the HC1 Trust and managed for the HC1 Trust by the management company of Angus Capital Partners. Angus Capital Partners also manages the Line of Credit to the Company and is a related party to Dr. H. Dean Cubley the CEO of the Company. Neither Angus Capital Partners nor the HC1 Trust are affiliates of the Company. In addition to the additional collateral being provided WISPer Ventures Leasing for funding Schedule 001 of the lease Whisper Venture Leasing has also required Dr. Cubley to enter into a personal guarantee for the $403,000 to be utilized to repay Company convertible debentures. In return for supplying the additional $403,000 of collateral, Angus Capital Partners has required, and the Company has agreed, to not object to the pledge or sale of a portion of the Angus Capital Partners Line of Credit debt up to the actual value of the collateral should such a request be made. One such request has been made for the sale of $100,000 of the Line of Credit debt to WHC Capital LLC. Dr. Cubley has received no consideration for providing his personal guarantee other than the agreement among WISPer Ventures and Company that the personal guarantee and additional collateral requirement will both be released as soon as the Company has made a composite total of $403,000 in payments under all schedules under the $2,500,000 Sale Leaseback transaction.

 

Following the initial $403,000 funding of the WISPer Ventures Sale Leaseback Transaction the Company has begun negotiations with a number of the Company convertible debenture funds to begin to effect repayment.

 

On November 3, 2014, we terminated our April 24, 2014, Settlement Agreements and Stipulation with IBC Fund, LLC (“IBC”) previously disclosed and documented in our September 5, 2014, 8-K filing and simultaneously repaid the remaining balance of that convertible debenture as well as the associated prepayment penalty.

 

On November 3, 2014, we terminated our January 29, 2014, Settlement Agreements and Stipulation with CP US Income Group, LLC (“CP”) previously disclosed and documented in our September 5, 2014, 8-K filing, and simultaneously repaid the remaining balance of that convertible debenture as well as the associated prepayment penalty.

 

On November 3, 2014, we terminated our October 23, 2013, Convertible debenture with Group 10 Holdings LLC (“Group 10”) and simultaneously repaid the remaining balance of that convertible debenture as well as the associated prepayment penalty.

 

As of the filing date of this September 30, 2014 10Q the company is in negotiations with most of the remaining companies with which it has convertible debentures and will continue to consolidate and repay these as available funds permit.

 

 

ERF Wireless, Inc. is referred to hereafter as “we”, “our” or “us”.

 

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 and footnotes.

 

OUR MARKETS AND BUSINESS STRATEGY

 

We provide 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.

 

Disposition of Certain Assets:

 

On September 15, 2014, ERF Wireless, Inc. entered into an Asset Purchase Agreement (the “Agreement”) that was effective as of September 1, 2014 with Rhino Communications, Inc. The agreement is between ERF Wireless, Inc., a Nevada corporation and ERF Wireless Bundled Services, Inc., a Texas corporation (collectively with ERF Wireless, Inc., the “Company”) and Rhino Communications, Inc., a Colorado corporation (he “Purchaser”) and involves certain obligations of JAB Wireless, Inc., a Colorado corporation (“JAB”). The Agreement is for the purchase of certain of the Company’s WISP (Wireless Internet Service Provider) assets required for operating the Company’s WISP services in certain geographical areas which were not associated with the Company’s oil and gas sector communications operations .The purchase price of $2,377,000, is payable in cash (including a holdback amount of $475,400 to be placed in an interest bearing account for a period of 90 days pending determination of any required price adjustment).

 

In conjunction with this disposition of certain assets, the Company recorded a one-time gain on sale of $2,006,000 in the three-months ended September 30, 2014.

 

Our 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:

 

·

We reported revenues of $1,362,000 for the quarter ended September 30, 2014 as compared to $1,803,000 for the same prior year quarter ended September 30, 2013; a decrease of $441,000 or 24%.  This decrease reflects lower rig count for the Company’s communications solutions in our oil and gas vertical market and lower residential wireless ISP services from our divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions.

 

·

We reported gross profit of $352,000 for the quarter ended September 30, 2014 as compared to $744,000 for the same prior year quarter ended September 30, 2013; a decrease of $392,000 or 53%. This decrease reflects lower rig count for the Company’s communications solutions in our oil and gas vertical market and lower residential wireless ISP services from our divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions.

 

·

We reported a total comprehensive income of $653,000 for the quarter ended September 30, 2014 as compared to a comprehensive loss of $2,621,000 for the same prior year quarter ended September 30, 2013; an improvement of $3,274,000.  This improvement included a one-time gain on sale of assets of $2,006,000 recorded on the divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions.

 

·

Our subsidiary, Energy Broadband, Inc., reported revenues of $831,000 for the three months ended September 30, 2014 as compared to revenues of $1,121,000 for the same prior year quarter ended September 30, 2013, representing a decrease of $290,000 or 26%.

 

·

We reported a decrease of $623,000 or 33% in operating expenses for the three months ended September 30, 2014 as compared to the same prior year quarter ended September 30, 2013 and a decrease of $1,945,000 or 33% in operating expenses for the nine months ended September 30, 2014 as compared to the same prior year quarter ended September 30, 2013. The $1,945,000 decrease is primarily related to lower employment expenses of $1,289,000 associated with a headcount decrease of employees and approximately $660,000 in lower legal, accounting and professional fees associated with the concluded arbitration proceedings with Schlumberger pertaining to disputes to resolve certain financial issues contained in the 2009 exclusive reseller agreement.

 

Our revenue is generated primarily from the sale of wireless communications products and services, including providing reliable enterprise-class wireless broadband services. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and the ability to collect is probable.

 

We record 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.

 

 

We recognize product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, we provide for the estimated cost of product warranties and revenue reduction 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, 2014, COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013

 

The following table sets forth summarized consolidated financial information for the three and nine months ended September 30, 2014 and 2013:

 

		Three Months Ended September 30,																Nine Months Ended September 30,
($ in thousands)		2014				2013				$ Change				% Change				2014				2013				$ Change				% Change
Total sales		$	1,362			$	1,803			$	(441	)			-24%			$	4,588			$	5,279			$	(691	)			-13%
Total Cost of goods sold			1,009				1,059				(50	)			-5%				2,879				3,082				(203	)			-7%
Gross profit			353				744				(391	)			-53%				1,709				2,197				(488	)			-22%
Percent of total sales			26%				41%												37%				42%
Total operating expenses			1,269				1,892				(623	)			-33%				3,887				5,832				(1,945	)			-33%
Loss from operations			(916	)			(1,148	)			232				-20%				(2,178	)			(3,635	)			1,457				-40%
Total other income/(expense)			1,570				(1,471	)			3,041				-207%				795				(2,897	)			3,692				-127%
Consolidated net income (loss)			655				(2,619	)			3,274				-125%				(1,383	)			(6,532	)			5,149				-79%
Net income (loss) attributable to non-controlling interest			–				(2	)			2				-100%				–				(1	)			1				-100%
Total comprehensive income (loss)		$	655			$	(2,621	)		$	3,276				-125%			$	(1,383	)		$	(6,533	)		$	5,150				-79%

 

For the three months ended September 30, 2014, our business operations reflected a decrease in sales for EBI, WBS and ENS subsidiaries. For the three months ended September 30, 2014, our consolidated operations generated total sales of $1,362,000 compared to prior-year period total sales of $1,803,000. The $441,000 decrease in total sales is primarily attributable to $290,000 decreased sales in EBI from lower deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions and $144,000 decrease in WBS revenues from our divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions. We reported a total comprehensive income of $655,000 for the quarter ended September 30, 2014 as compared to a comprehensive loss of $2,621,000 for the same prior year quarter ended September 30, 2013; an improvement of $3,276,000. This improvement included a one-time gain on sale of assets of $2,006,000 recorded on the divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions.

 

For the nine months ended September 30, 2014, our business operations reflected a decrease in sales for its EBI, WBS and ENS subsidiaries. For the nine months ended September 30, 2014, our consolidated operations generated total sales of $4,588,000 compared to prior-year period total sales of $5,279,000. The $691,000 decrease in total sales is primarily attributable to $549,000 decreased sales in EBI from overall declining deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions and a $93,000 decline in WBS revenues associated with the divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions. We reported a total comprehensive loss of $1,383,000 for the nine months ended September 30, 2014 as compared to a comprehensive loss of $6,533,000 for the same prior year nine month period ended September 30, 2013; an improvement of $5,150,000. This improvement included a one-time gain on sale of assets of $2,006,000 recorded on the divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions.

 

 

SALES INFORMATION

 

Set forth below are tables presenting summarized sales information for our business segments for the three and nine months ended September 30, 2014 and 2013:

 

($ in thousands)		Three Months Ended September 30,
Business Segment		2014				% of Total				2013				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	831				61%			$	1,121				62%			$	(290	)			-26%
Wireless Bundled Services			466				34%				610				34%				(144	)			-24%
Enterprise Network Services			65				5%				72				4%				(7	)			-10%
Total Sales		$	1,362				100%			$	1,803				100%			$	(441	)			-24%

 

($ in thousands)			Nine Months Ended September 30,
Business Segment		2014				% of Total				2013				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	2,585				56%				3,134				59%			$	(549	)			-18%
Wireless Bundled Services			1,725				38%				1,818				34%				(93	)			-5%
Enterprise Network Services			278				6%				327				6%				(49	)			-15%
Total Sales		$	4,588				100%			$	5,279				100%			$	(691	)			-13%

 

For the three months ended September 30, 2014, total sales decreased to $1,362,000 from $1,803,000 for the three months ended September 30, 2013. The $442,000 decrease in total sales is primarily attributable to $290,000 decreased sales in EBI from lower deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions and $144,000 decrease in WBS revenues from our divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions.

 

For the nine months ended September 30, 2014, total sales decreased to $4,588,000 from $5,279,000 for the nine months ended September 30, 2013. The $691,000 decrease in total sales is primarily attributable to $549,000 decreased sales in EBI from overall declining deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions and a $93,000 decline in WBS revenues associated with the divestiture of certain residential WISP networks and operations that are non-core to our oil and gas communications solutions.

 

COST OF GOODS SOLD

 

The following tables set forth summarized cost of goods sold information for the three and nine months ended September 30, 2014 and 2013:

 

($ in thousands)		Three Months Ended September 30,
Business Segment		2014				% of Total				2013				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	577				57%			$	586				55%			$	(9	)			-2%
Wireless Bundled Services			327				32%				375				35%				(48	)			-13%
Enterprise Network Services			105				10%				98				9%				7				7%
Total cost of sales		$	1,009				100%			$	1,059				100%			$	(50	)			-5%

 

 

($ in thousands)		Nine Months Ended September 30,
Business Segment		2014				% of Total				2013				% of Total				$ Change				% Change
Energy Broadband, Inc.		$	1,597				55%			$	1,686				55%			$	(89	)			-5%
Wireless Bundled Services			983				34%				1,049				34%				(66	)			-6%
Enterprise Network Services			299				10%				347				11%				(48	)			-14%
Total cost of sales		$	2,879				100%			$	3,082				100%			$	(203	)			-7%

 

For the three months ended September 30, 2014, cost of goods sold decreased by $50,000 to $1,009,000 from $1,059,000 as compared to the three months ended September 30, 2013. The decrease of $50,000 in cost of goods sold is primarily attributable to a decreased cost of $48,000 in WBS due to decreased sales affecting a reduction in our third-party services during the quarter associated with the divestiture.

 

 

The following tables set forth summarized cost of goods sold information for the nine months ended September 30, 2014 and 2013:

 

		Three Months Ended September 30,
($ in thousands)		2014				2013				$ Change				% Change
Products and integration service		$	397			$	412			$	(15	)			-4%
Rent and maintenance			237				212				25				12%
Depreciation			376				435				(59	)			-14%
Total cost of sales		$	1,009			$	1,059			$	(50	)			-5%

 

		Nine Months Ended September 30,
($ in thousands)		2014				2013				$ Change				% Change
Products and integration service		$	1,037			$	1,171			$	(134	)			-11%
Rent and maintenance			652				605				47				8%
Depreciation			1,190				1,306				(116	)			-9%
Total cost of sales		$	2,879			$	3,082			$	(203	)			-7%

 

For the nine months ended September 30, 2014, cost of goods sold decreased by $203,000, to $2,879,000 from $3,082,000 as compared to the nine months ended September 30, 2013. The decrease of $203,000 in cost of goods sold is primarily attributable to a decreased cost of $89,000 in EBI due to decreased sales affecting a reduction in our third party services in the oil and gas regions, decreased cost in WBS of $66,000 due to the decreased depreciation and decreased cost in ENS of $48,000 due to decline in banking network construction project.

 

OPERATING EXPENSES

 

The following table sets forth summarized operating expense information for the three and nine months ended September 30, 2014 and 2013:

 

		Three Months Ended September 30,																Niine Months Ended September 30,
($ in thousands)		2014				2013				$ Change				% Change				2014				2013				$ Change				% Change
Employment expenses		$	619			$	1,069			$	(450	)			-42%			$	1,946			$	3,235			$	(1,289	)			-40%
Professional services			202				356				(154	)			-43%				655				1,315				(660	)			-50%
Rent and maintenance			134				106				28				26%				322				340				(18	)			-5%
Depreciation			22				51				(29	)			-57%				68				155				(87	)			-56%
Other general and administrative			292				310				(18	)			-6%				896				787				109				14%
Total operating expenses		$	1,269			$	1,892			$	(623	)			-33%			$	3,887			$	5,832			$	(1,945	)			-33%

 

For the three months ended September 30, 2014, operating expenses decreased by $623,000 or 33% to $1,269,000, as compared to $1,892,000 for the three months ended September 30, 2013, resulting from:

 

·

A $450,000 decrease in employment expense ; primarily attributable to decreased in employee headcount to 34 at September 30, 2014 from 64 at September 30, 2013;

 

·

A $154,000 decrease in professional services - primarily attributable to a decrease in legal, accounting and consulting services compared to last year associated with our arbitration proceedings with Schlumberger pertaining to disputes to resolve certain financial issues contained in the 2009 exclusive reseller agreement;

 

·

A $28,000 increase in rent and maintenance;

 

·

A $29,000 decrease in depreciation; and

 

·

A $19,000 decrease in other general and administrative.

 

For the nine months ended September 30, 2014, operating expenses decreased by $1,945,000 or 33% to $3,887,000, as compared to $5,832,000 for the nine months ended September 30, 2013, resulting from:

 

·

A $1,289,000 decrease in employment expense - primarily attributable to decreased employee headcount to 34 at September 30, 2014 from 64 at September 30, 2013;

 

·

A $660,000 decrease in professional services - primarily attributable to decrease in legal, accounting and consulting services compared to last year associated with our arbitration proceedings with Schlumberger pertaining to disputes to resolve certain financial issues contained in the 2009 exclusive reseller agreement;

 

·

A $18,000 decrease in rent and maintenance;

 

·

A $87,000 decrease in depreciation; and

 

·

A $109,000 increase in other general and administrative.

 

 

OTHER INCOME (EXPENSE), NET

 

For the three months ended September 30, 2014, other income, net increase to $1,570,000 from $1,471,000 in other expense, net as compared to three months ended September 30, 2013. The increase in other income, net of $3,041,000 from the prior year period is primarily attributable to the gain on sale recorded with the divestiture totaling $2,006,000 and a decrease in our interest expense, net on debt obligations totaling $924,000. The derivative expense/income represents the net unrealized (non-cash) charge during the three months ended September 30, 2014 and 2013, 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, 2014, other income, net increased to $795,000 from $2,897,000 in other expense, net as compared to nine months ended September 30, 2013. The increase in other income, net of $3,692,000 from the prior-year period is primarily attributable to the gain on sale recorded with the divestiture totaling $2,006,000 and a decrease in our interest expense, net on debt obligations totaling $1,802,000. The derivative expense/income represents the net unrealized (non-cash) charge during the nine months ended September 30, 2014 and 2013, 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.

 

CASH FLOWS

 

Our operating activities decreased net cash used by operating activities to $673,000 in the nine months ended September 30, 2014, compared to net cash used of $2,434,000 in the nine months ended September 30, 2013. The decreased net cash used by operating activities was primarily attributable to accounts payable, accounts receivables and reduction of employee headcount and professional services as compared to September 30, 2013.

 

Our investing activities provided net cash of $382,000 in the nine months ended September 30, 2014, compared to net cash used of $187,000 in the nine months ended September 30, 2013. The increase in cash from investing activities is primarily attributable to the initial proceeds from the divestiture.

 

Our financing activities provided net cash of $429,000 in the nine months ended September 30, 2014, compared to $2,613,000 of cash used in the nine months ended September 30, 2013. The cash provided in the nine months ended September 30, 2014, was primarily associated with proceeds from debt financings.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2014, our current assets totaled $2,091,000 (including cash and cash equivalents of $179,000); and total current liabilities were $5,609,000, resulting in negative working capital of $3,518,000. We funded our operations during the last nine months primarily through borrowings. These borrowings during the nine months ended September 30, 2014 were from our line of credit, net totaling $503,830 and convertible debt financing of $253,000.

 

ISSUANCE OF COMMON STOCK

 

During the nine months ended September 30, 2014, we issued to various accredited investors 14,408,544 shares for interest, services rendered and debt conversions. We relied on Section 4(2) of the Securities Act in effecting these transactions. There was not a registration statement for Form S-8.

 

USE OF WORKING CAPITAL

 

We believe our cash and available credit facilities afford us adequate liquidity through September 30, 2015. 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, 2014, 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 that 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.

 

Our 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.

 

DEBT FACILITIES AND INSTRUMENTS

 

In December 2013, the maturity date of the $12.0 million unsecured revolving credit facility with Angus Capital Partners, a related party, was extended from December 31, 2015 to December 31, 2017. The Company also renegotiated the interest rate from 12% per annum to 3% per annum retroactive to January 1, 2013. In consideration of the renegotiated interest rate, we have accepted the return and cancellation of 36,784 common shares (post-split) of our common stock issued for the Line of Credit conversions during 2013. Accordingly, we have reversed the payment of principal and interest of $2,158,000 in December 2013 and subsequently received the canceled shares in February 2014. The terms of the unsecured revolving credit facility allow us to draw upon the facility as financing requirements dictate and provide for quarterly interest payments at a 3% rate per annum. The payment of principal may be paid in cash, common shares or preferred shares at the Lender’s election. The payment of interest may only be paid in cash. At September 30, 2014, the outstanding balance on the line of credit totaled $4,049,397.80 leaving a remaining line of credit available of $7,950,602.20. Under the terms of the Angus Capital Partners credit facility all or a portion of the master note may be used by Angus Capital Partners as collateral or may be sold to third parties in a private transaction with the consent of the Company. Such private sales among third parties have previously been concluded by Angus Capital Partners between IBC and CP US and reported by the Company. The Company has subsequently repurchased and cancelled the remaining balances of these two resold notes.

 

During the nine months ended September 30, 2014, the Company issued 7,952,487 shares of its common stock for the settlement of $735,845 of principal owed to Angus Capital Partners. The Company issued common stock at an average price of $.096 per share calculated based on the closing price the day the debt was settled. Of the 7,952,487shares of common stock issued a total of 4,226,487 were issued to third parties that had acquired a portion of the Angus Capital Partners debt in private transactions.

 

 

During the nine months ended September 30, 2014, the Company did not issue any principal amount of E-Series bonds (the "Bonds"). During the nine months ended September 30, 2014, 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 us to permit the Holder 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 we 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 our 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.

 

In November 2011, we entered into debt financing agreement with Dakota Capital Fund LLC, for financing of up to $3,000,000. During the fourth quarter of 2011, we 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, 2014, the outstanding balance on the debt financing agreement totaled $1,518,000 and we 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.  

 

On March 5, 2013, we 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 matured on September 5, 2013. At September 30, 2014, the outstanding principal balance of the Tonaquint convertible promissory note totaled $734,000. 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. We also paid the holder an origination fee in the amount of $227,500 in 144 Stock (711 post-split shares) at the closing bid price on March 5, 2013, plus 125 post-split shares (valued at $40,000) of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted 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 371 shares of ERF common stock at an exercise price of $320.00 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. We are 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 March 4, 2014 and thereafter at a rate of 18% per annum. The note is recorded as a current liability.

 

On March 20, 2013, we 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. We also paid the holder an origination fee in the amount of $40,500 in 144 Stock (125 post-split shares) at the closing bid price of our common stock. As of September 30, 2014, we 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, 2014, the outstanding principal balance of the JMJ convertible promissory note totaled $142,281. 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 note is recorded as a current liability.

 

On April 2, 2013, we entered into a nine-month secured convertible promissory note debt financing agreement with Willow Creek Capital, LLC, for $244,200, bearing interest at a rate of 12% per annum and matured on October 1, 2013. At September 30, 2014, the outstanding principal balance of the Willow Creek convertible promissory note totaled $201,617. 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. We also paid holder an origination fee in the amount of $109,890 in 144 Stock (366 post-split shares) at the closing bid price of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted 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% 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 us five-year warrants expiring April 2, 2018, to purchase 122 post-split shares of ERF common stock at an exercise price of $300.00 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.

 

 

On April 4, 2013, we entered into a six-month secured convertible promissory note debt financing agreement with Vista Capital Investments, LLC, for $60,500, bearing interest at a rate of 12% per annum and matured on October 4, 2013. The note also includes a 10% OID of $5,000 based on the consideration funded and prepaid interest of $5,500. We also paid holder an origination fee in the amount of $21,175 in 144 Stock (84 post-split shares) at the closing bid price of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted 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% the average of the lowest two (2) trading prices of 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 us five-year warrants expiring April 4, 2018, to purchase 36 post-split shares of ERF common stock at an exercise price of $320.00 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. We are not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $60,500 to $72,600. The note will accrue interest at a rate of 12% from October 4, 2013, until April 3, 2014 and thereafter at a rate of 18% per annum. At September 30, 2014, the outstanding principal balance of the Vista Capital convertible promissory note totaled $40,343.

 

On June 28, 2013, we entered into a twelve-month secured convertible promissory note debt financing agreement with TCA Global Credit Master Fund (TCA) for $1,500,000, bearing interest at a rate of 12% per annum and maturing July 28, 2014. Under a subsequent modified agreement dated March 25, 2014, TCA has agreed to restructure the agreement and extend the maturity date to November 15, 2014. In consideration of the restructured agreement, we agreed to a $75,000 and a $50,000 restructuring and advisory fee to be added to the sum of the principal balance including a $40,791 interest charge to be paid and nominal legal fees. The monthly principal and interest payments will be $149,609 per month. 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 us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted 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% of the average VWAP trading price during the five (5) trading day period ending on the latest complete trading day prior to the conversion date. Due to the restructuring of the note we incurred $108,000 loss on extinguishment of debt. On September 16, 2014 the TCA Global note was completely paid off by the Company at a price of $1,165,222.

 

On October 3, 2013, we entered into a twelve-month unsecured convertible promissory note debt financing agreement with Group 10 Holdings, LLC, for $157,500, bearing interest at a rate of 12% per annum and maturing October 2, 2014. The note also includes a 5% OID of $7,500 based on the consideration funded. We also paid holder a commitment fee in the amount of $45,000 in 144 Stock (1,125 post-split shares) at the closing bid price of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the twelve-month term of the note. The common stock issued will be valued using a conversion factor of 55% multiplied by the lowest closing bid price of the (20) trading days prior to the conversions, which represents a discount rate of 45%. The note will accrue interest at a rate of 12% from October 3, 2013, until October 2, 2014, and thereafter at a rate of 18% per annum. At September 30, 2014, the outstanding principal balance of the Group 10 convertible promissory note totaled $94,000.

 

On June 26, 2014, the Company entered into a nine-month unsecured convertible promissory note debt financing agreement with KBM World Wide Inc. for $103,500, bearing interest at a rate of 8% per annum and maturing March 27, 2015. On August 18 and August 28, 2014, the Company expanded the initial relationship with KBM in non-material amounts by entering into a nine-month unsecured convertible promissory note debt financing agreement with KBM World Wide Inc. for $53,000, bearing interest at a rate of 8% per annum and maturing May 18, 2015 and a nine-month unsecured convertible promissory note debt financing agreement with KBM World Wide Inc. for $32,500, bearing interest at a rate of 8% per annum and maturing May 28, 2015. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after 180 days following the date of this note and ending on final payment of the convertible note. The common stock issued will be valued using a conversion factor of 61% multiplied by the lowest three trading prices of the (10) trading days prior to the conversion date, which represents a discount rate of 39%. The notes will accrue interest at a rate of 8% from their issue dates until their maturity dates, and thereafter at a rate of 22% per annum. At September 30, 2014, the outstanding principal balance of the KBM World Wide Inc. convertible promissory notes totaled $189,000.

 

On August 4, 2014, we entered into two non-material twelve-month unsecured convertible promissory note debt financing agreements for $50,000, each with Union Capital LLC and Adar Bays LLC (collectively “Union Capital/Adar Bays”) bearing interest at a rate of 10% per annum and maturing August 15, 2015. The Company will pay principal and interest due on the notes before or on the maturity date. The holders may require the Company to convert the outstanding principal balances (including any unpaid interest) into shares of common stock without a legend at any time after 180 days following the date of these notes. The common stock issued will be valued using a conversion factor of 55% multiplied by the lowest daily closing bid price for the (15) trading days prior to the conversion date. At September 30, 2014, the outstanding principal balance of the convertible promissory notes totaled $100,000.

 

 

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. Following the review, the Chief Executive Officer and Chief Financial Officer added upgrades to the disclosure controls and procedures. Based on the foregoing, and after the upgrades, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2014, our disclosure controls and procedures were not effective in ensuring that: (i) information required to be disclosed by us in our reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

 

 

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, 2013 filed with the SEC on April 15, 2014. Additionally, as a Smaller Reporting Company, we are not required to provide risk factors in our periodic reports.

 

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, we 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 our officers 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 2014, we issued 2,257,299 shares of our Common Stock at an average price of $.070 for interest and debt conversions.

 

In August 2014, we issued 1,984,109 shares of our Common Stock at an average price of $.047 for interest and debt conversions.

 

In September 2014, we issued 5,943,654 shares of common stock at an average price of $.038 for interest, services and debt conversions.

 

Common Stock Issued Upon Conversion of Series A Preferred Stock

 

For the three-month period ended September 30, 2014 no shares of common stock were issued 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 31.1	Certification of Chief Executive officer pursuant to Rules 13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Chief Financial officer pursuant to Rules 13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

 

 

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 24, 2014
	By:	/s/ R. Greg Smith
		R. Greg Smith Chief Financial Officer
	Date:	November 24, 2014

 

 

EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT

 

I, H. Dean Cubley, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q/A of ERF Wireless, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 24, 2014

/s/ H. Dean Cubley
H. Dean Cubley
Chief Executive Officer and authorized officer on behalf of the registrant

EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT

 

I, R. Greg Smith, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q/A of ERF Wireless, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 24, 2014

/s/ R. Greg Smith

R. Greg Smith

Chief Financial Officer

EXHIBIT 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to 18 U.S.C. Section 1350, the undersigned Officer of ERF Wireless, Inc. (the "Company"), hereby certifies, that the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2014 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

November 24, 2014

/s/ H. Dean Cubley
H. Dean Cubley
Chief Executive Officer

EXHIBIT 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to 18 U.S.C. Section 1350, the undersigned Officer of ERF Wireless, Inc. (the "Company"), hereby certifies, that the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2014 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

November 24, 2014

/s/ R. Greg Smith

R. Greg Smith

Chief Financial Officer