NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Nature of the Company
ERF Wireless, Inc. (“Company” or “ERF Wireless”)
provides critical infrastructure wireless broadband communications products and services to a broad spectrum of customers in primarily
rural oil and gas exploration areas of North America. We also provide high quality broadband services and critical communications
services to residential, oil and gas, educational, health care, and regional banks in rural areas utilizing our Company owned and
operated wireless networks. As a total comprehensive solutions provider we offer a wide array of critical communications services
including high speed broadband, voice over Internet Protocol (VOIP) telephone and facsimile service, and video security.
Historically, our revenues have been generated primarily from
wireless internet and network construction services. Our Internet revenues have resulted from our offering of broadband and basic
communications services to residential and enterprise customers. Our construction revenues typically have consisted of revenues
generated from the construction of bank, educational, and healthcare networks and other services associated with providing wireless
products and services to the regional banking, educational and healthcare industries.
Our internet revenues are recorded in “ERF Wireless Bundled
Services, Inc. (WBS)”, revenues from construction of bank, healthcare and educational networks in our “ERF Enterprise
Network Services, Inc. (ENS)” and wireless broadband products and services to rural oil and gas locations are recorded in
“Energy Broadband, Inc. (EBI)”. Please refer to segment footnote 12 for additional information regarding segment operations.
Basis of Accounting
The accompanying unaudited interim consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and
the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated
financial statements and notes thereto contained in the Company's annual report for the year ended December 31, 2012 filed with
the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes
to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated
financial statements for the most recent fiscal year ended December 31, 2012 as reported in form 10-K have been omitted.
Non-controlling Interest
Non-controlling interest in our majority owned subsidiary EBI,
is included in the equity section of the consolidated balance sheets. Non-controlling interest represents 3.63% of the equity of
EBI and any transfer of value from ERF to non-controlling interest holders. Non-controlling interest is adjusted for the non-controlling
interest holders’ proportionate share of the earnings or losses of EBI. Any excess losses applicable to the non-controlling
interests have been and are borne by the Company as there is no obligation of the non-controlling interests to fund any losses
in excess of their original investment. There is also no obligation or commitment on the part of the Company to fund operating
losses of any subsidiary whether wholly-owned or majority-owned.
Reclassification
Certain amounts in the 2012 financial statements have been reclassified
to conform to the 2013 financial presentation. These reclassifications have no impact on the total comprehensive loss.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
Recent Accounting Pronouncements
Management does not anticipate that the recently issued but
not yet effective accounting pronouncements will materially impact the Company’s financial condition.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accounts receivable
|
|
$
|
856
|
|
|
$
|
838
|
|
Allowance for doubtful accounts
|
|
|
(11
|
)
|
|
|
(10
|
)
|
Accounts receivable, net
|
|
$
|
845
|
|
|
$
|
828
|
|
NOTE 3 - INVENTORIES
Inventories are valued at the lower of cost or market. The
cost is determined by using the average cost method. Inventories consist of the following items as of March 31, 2013 and December
31, 2012, in thousands:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Raw material
|
|
$
|
45
|
|
|
$
|
46
|
|
Work in process
|
|
|
90
|
|
|
|
115
|
|
Finished goods
|
|
|
250
|
|
|
|
216
|
|
Total inventory
|
|
$
|
385
|
|
|
$
|
377
|
|
NOTE 4 - DEBT CONVERSION
(a) Line of Credit
During the three months ended March 31, 2013, the Company issued
777,825 shares of its Common Stock (as defined below) for the settlement of $338,208 of principal and $101,792 of accrued interest
for a total amount of $440,000 owed to Angus Capital Partners. The Company issued Common Stock at an average price of $0.56 per
share calculated based on the closing price the day the debt was settled. See Note 9 for additional information on this facility.
(b) Other Debt
During the three months ended March 31, 2013, the Company issued
1,263,974 and 408,287 shares of its Common Stock for the settlement of principal amount of $968,500 and $196,941 of accrued interest,
respectively, for a total of $1,165,441. The Company issued Common Stock at an average price of $.70 per share calculated based
on the closing price the day the debt was settled.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
NOTE 5 - COMMON STOCK , PREFERRED STOCK AND WARRANTS
The total number of shares of stock of all classes which the
Company shall have the authority to issue is 1,000,000,000, of which 25,000,000 shall be shares of preferred stock with a par value
of $0.001 per share ("Preferred Stock"), and 975,000,000 shall be shares of common stock with a par value of $0.001 per
share ("Common Stock").
Common Stock
As of March 31, 2013 and December 31, 2012, there were 8,281,809
and 5,487,072 shares of its Common Stock issued and outstanding, respectively.
During the three months ended March 31, 2013, the Company issued
2,794,737 shares of Common Stock which was valued at the closing market price on the date of issuance of such shares, which were
issued in lieu of cash as payment for the following (in thousands):
March 31, 2013
|
|
Supplemental Non-Cash Disclosure
|
|
Professional fees
|
|
$
|
138
|
|
Services and compensation
|
|
|
160
|
|
Other services rendered
|
|
|
198
|
|
Total for services, compensation and interest
|
|
$
|
496
|
|
|
|
|
|
|
Notes payable
|
|
$
|
968
|
|
Line of credit and interest
|
|
$
|
440
|
|
Preferred Stock
The Company has 25,000,000 shares of Preferred Stock authorized
of which 10,000,000 shares had been designated as Series A Preferred Stock (“Series A Preferred Stock”). There were
8,426,982 shares of Series A Preferred Shares issued and outstanding at March 31, 2013 and December 31, 2012. With respect to the
Series A Preferred Stock outstanding at March 31, 2013, the Company would be required to issue 8,426,982 shares of its Common Stock
upon conversion.
ERF Wireless, Inc Distribution of EBI
Equities to Non-controlling Interest
As of March 31, 2013, the Company had issued 725,611 shares
of EBI as a stock dividend and three year warrant expiring December 31, 2014, to purchase 725,611 shares of EBI Common Stock at
an exercise price of $4.00 per share and three year warrant expiring December 31, 2014, to purchase 725,611 shares of EBI Common
Stock at an exercise price of $6.00; such issuances are valued at $107,000. The Company expects to issue the remaining stock dividends
on 2013. No stock dividends were issued during the three months ended March 31, 2013.
Warrants
During 2013, the Company entered into a convertible promissory
note with Tonaquint, Inc for $791,500 and issued five year warrants to purchase 148,406 shares of common stock at $.80 per share,
expiring March 2018.
The following tables set forth summarized warrants that are
issued, outstanding and exercisable for the three months ended March 31, 2013:
Warrants Outstanding
|
|
Weighted Average Exercise Price
|
|
|
Expiration
Date
|
|
December 31,
2012
|
|
|
Issued
|
|
|
Exercised
|
|
|
Expired
|
|
|
March 31,
2013
|
|
$
|
0.80
|
|
|
Mar-18
|
|
|
–
|
|
|
|
148,406
|
|
|
|
–
|
|
|
|
–
|
|
|
|
148,406
|
|
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
NOTE 6 – STOCK PLAN
In December 2012, the board of directors adopted a non-qualified
stock option plan whereby 450,000 shares were reserved for issuance. As of March 31, 2013, 288,420 shares of Common Stock were
issued and outstanding to certain employees and consultants for services rendered under the plan. This plan is for key employees,
officers, directors, and consultants of ERF Wireless, Inc.
Non-Qualified Stock Option Plan, December 2012
|
|
2013
|
|
|
|
Plan
|
|
Shares initially reserved
|
|
|
450,000
|
|
|
|
|
|
|
Shares issued during 2012 and 2013
|
|
|
288,420
|
|
|
|
|
|
|
Remaining shares available to be issued at March 31, 2013
|
|
|
161,580
|
|
|
|
|
|
|
Shares issued and outstanding as of March 31, 2013
|
|
|
288,420
|
|
NOTE 7 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and
diluted earnings per share of Common Stock (in thousands, except per share amount):
|
|
For the three months ended March 31, 2013
|
|
|
|
Net loss
|
|
|
Shares
|
|
|
Per-Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,653
|
)
|
|
|
6,837
|
|
|
$
|
(0.24
|
)
|
Loss attributable to non-controlling interest
|
|
$
|
(3
|
)
|
|
|
6,837
|
|
|
$
|
(0.00
|
)
|
Net loss attributable to ERF Wireless, Inc.
|
|
$
|
(1,656
|
)
|
|
|
6,837
|
|
|
$
|
(0.24
|
)
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net loss
|
|
$
|
(1,653
|
)
|
|
|
6,837
|
|
|
$
|
(0.24
|
)
|
Loss attributable to non-controlling interest
|
|
$
|
(3
|
)
|
|
|
6,837
|
|
|
$
|
(0.00
|
)
|
Net loss attributable to ERF Wireless, Inc.
|
|
$
|
(1,656
|
)
|
|
|
6,837
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2012
|
|
|
|
|
Net loss
|
|
|
|
Shares
|
|
|
|
Per-Share
|
|
|
|
|
(Numerator)
|
|
|
|
(Denominator)
|
|
|
|
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(960
|
)
|
|
|
2,388
|
|
|
$
|
(0.40
|
)
|
Loss attributable to non-controlling interest
|
|
$
|
(5
|
)
|
|
|
2,388
|
|
|
$
|
(0.00
|
)
|
Net loss attributable to ERF Wireless, Inc.
|
|
$
|
(965
|
)
|
|
|
2,388
|
|
|
$
|
(0.40
|
)
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net loss
|
|
$
|
(960
|
)
|
|
|
2,388
|
|
|
$
|
(0.40
|
)
|
Loss attributable to non-controlling interest
|
|
$
|
(5
|
)
|
|
|
2,388
|
|
|
$
|
(0.00
|
)
|
Net loss attributable to ERF Wireless, Inc.
|
|
$
|
(965
|
)
|
|
|
2,388
|
|
|
$
|
(0.40
|
)
|
For the three months ended March 31, 2013,
dilutive securities existed. Diluted earnings per share reflect the potential dilution of security that could share in the earnings
of an entity, such as convertible preferred stock, stock options, warrants or convertible securities.
The calculation of diluted earnings per share for the three
months ended March 31, 2013 does not include 353,086 shares of Common Stock underlying the Bonds (as define below); 148,406 of
warrants underlying Tonaquint promissory note and 8,426,982 shares of Common Stock underlying the Series A Preferred Stock, due
to their anti-dilutive effect.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
NOTE 8 - MAJOR CUSTOMERS
The Company had gross sales of approximately $1,913,000 and
$1,648,000 for the three months ended March 31, 2013 and 2012, respectively. The Company had two customers that met the required
disclosure of 10% that represented 36% and 13% of the gross sales and 42% and 25% of total accounts receivable during the three
months ended March 31, 2013. Additionally, the Company had two customers that met the required disclosure of 10% that represented
43% and 14% of the gross sales and 55% and 20% of total accounts receivable during the three months ended March 31, 2012.
NOTE 9 – NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL
LEASES
Notes payable, long-term debts and capital leases consist of
the following as of March 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%
|
|
$
|
210
|
|
|
$
|
–
|
|
|
$
|
210
|
|
Advantage leasing associates
|
|
$7,186 / Month including interest
|
|
Various
|
|
Various
|
|
|
139
|
|
|
|
–
|
|
|
|
139
|
|
MP Nexlevel LLC
|
|
$7,043 / Month including interest
|
|
May-14
|
|
10.00%
|
|
|
93
|
|
|
|
–
|
|
|
|
93
|
|
Tonaquint
|
|
$791,500 / Lump sum payment including interest
|
|
September-13
|
|
12.00%
|
|
|
792
|
|
|
|
545
|
|
|
|
247
|
|
JMJ Financial
|
|
$165,000 / Lump sum payment including interest
|
|
March-14
|
|
12.00%
|
|
|
165
|
|
|
|
160
|
|
|
|
5
|
|
Investor financing
|
|
$495,000 / Lump sum payment including interest
|
|
May-13
|
|
12.00%
|
|
|
495
|
|
|
|
–
|
|
|
|
495
|
|
Premium assignment
|
|
$1,495 / Month including interest
|
|
July-13
|
|
6.00%
|
|
|
11
|
|
|
|
–
|
|
|
|
11
|
|
Dakota capital equipment financing
|
|
$178,031 / Quarterly including interest
|
|
March-16
|
|
18.00%
|
|
|
1,623
|
|
|
|
50
|
|
|
|
1,573
|
|
E-bond investor notes
|
|
3 years/ Semiannual interest (See below)
|
|
Various
|
|
7.50%
|
|
|
286
|
|
|
|
212
|
|
|
|
74
|
|
Line of credit
|
|
2 years/ Quarterly interest (See below)
|
|
December-15
|
|
12.00%
|
|
|
3,379
|
|
|
|
–
|
|
|
|
3,379
|
|
Total debt
|
|
|
|
|
|
|
|
$
|
7,193
|
|
|
$
|
967
|
|
|
|
6,226
|
|
Less current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,262
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Gross Balance
|
|
|
|
Debt Discount
|
|
|
|
Balance
|
|
Banc leasing, Inc.
|
|
$10,660 / Month including interest
|
|
January-15
|
|
11.62%
|
|
$
|
227
|
|
|
$
|
–
|
|
|
$
|
227
|
|
Advantage leasing associates
|
|
$7,186 / Month including interest
|
|
Various
|
|
Various
|
|
|
156
|
|
|
|
–
|
|
|
|
156
|
|
MP Nexlevel LLC
|
|
$7,043 / Month including interest
|
|
May-14
|
|
10.00%
|
|
|
111
|
|
|
|
–
|
|
|
|
111
|
|
Investor financing
|
|
$765,000 / Lump sum payment including interest
|
|
January-13
|
|
12.00%
|
|
|
765
|
|
|
|
–
|
|
|
|
765
|
|
Premium assignment
|
|
$1,495 / Month including interest
|
|
July-13
|
|
6.00%
|
|
|
17
|
|
|
|
–
|
|
|
|
17
|
|
Dakota capital equipment financing
|
|
$178,031 / Quarterly including interest
|
|
March-16
|
|
18.00%
|
|
|
1,820
|
|
|
|
57
|
|
|
|
1,763
|
|
E-bond investor notes
|
|
3 years/ Semiannual interest (See below)
|
|
Various
|
|
7.50%
|
|
|
687
|
|
|
|
566
|
|
|
|
121
|
|
Line of credit
|
|
2 years/ Quarterly interest (See below)
|
|
December-15
|
|
12.00%
|
|
|
3,168
|
|
|
|
–
|
|
|
|
3,168
|
|
Total debt
|
|
|
|
|
|
|
|
$
|
6,951
|
|
|
$
|
623
|
|
|
|
6,328
|
|
Less current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,527
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,801
|
|
Line of Credit
During December 2012, the Company extended its maturity date
of its $12.0 million unsecured revolving credit facility with Angus Capital Partners, a related party, from December 31, 2013 to
December 30, 2015. The terms of the unsecured revolving credit facility allow the Company to draw upon the facility as financing
requirements dictate and provide for quarterly interest payments at a 12% rate per annum. The payment of principal and interest
may be paid in cash, common shares or preferred shares at the Company’s election. At March 31, 2013, the outstanding balance
on the line of credit totaled $3,379,000 with a remaining line of credit available of $8,621,000.
During the three months ended March 31, 2013, the Company issued
777,825 shares of its Common Stock for the settlement of $338,208 of principal and $101,792 of accrued interest for a total of
$440,000 owed to Angus Capital Partners. The Company issued Common Stock at an average price of $0.56 per share calculated based
on the closing price the day the debt was settled.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
E-Series Bond Investor Note
During the three months ended March 31, 2013, the Company issued
to certain accredited investors a principal amount of $300,000 of E-Series bonds (the "Bonds") in addition to the $687,000
which was outstanding at December 31, 2012. At March 31, 2013, the outstanding principal balance of the Bonds totaled $286,000.
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 accretes the unamortized discount upon conversion
which totaled $481,333 for the three months ended March 31, 2013. The estimated debt accretion for subsequent years is $39,278,
$89,304, and $83,929 for years ending December 31, 2013, 2014, and 2015, respectively.
The following table summarizes the convertible debt activity
for the period January 1, 2013, thru March 31, 2013:
Description
|
|
Bonds
|
|
|
Compound Derivative Liability
|
|
|
Total
|
|
Fair value at December 31, 2012
|
|
$
|
121,446
|
|
|
$
|
492,043
|
|
|
$
|
613,489
|
|
Fair value issuances during 2013 (principal amount)
|
|
|
300,000
|
|
|
|
–
|
|
|
|
300,000
|
|
Fair value issuances during 2013 (debt discount)
|
|
|
(128,284
|
)
|
|
|
128,284
|
|
|
|
–
|
|
Change in fair value
|
|
|
481,333
|
|
|
|
(63,976
|
)
|
|
|
417,357
|
|
Conversions
|
|
|
(701,000
|
)
|
|
|
(443,611
|
)
|
|
|
(1,144,611
|
)
|
Fair value at March 31, 2013
|
|
$
|
73,495
|
|
|
$
|
112,740
|
|
|
$
|
186,235
|
|
The Company recorded a net change in fair value of derivatives
of $63,976 and a gain on debt redemption of $156,791 for a total net derivative income of $220,767 for the three months ended March
31, 2013.
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 March 31, 2013, the outstanding
balance on the debt financing agreement totaled $1,623,000 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 $7,775 for the three months ended March 31, 2013. The estimated debt accretion for subsequent
years is $25,238 and $24,611 for years ending December 31, 2013, and 2014, respectively.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
Tonaquint Convertible Promissory Note
On March 5, 2013, the Company entered into a six-month secured
convertible promissory note secured debt financing agreement with Tonaquint, Inc. (“holder”), for $791,500, bearing
interest at a rate of 12% per annum and maturing September 5, 2013. The note also includes an original issue discount (“OID”)
of $65,000 based on the consideration funded, prepaid interest of $71,500 and $5,000 in legal and other expense. The Company also
paid holder an origination fee in the amount of $227,500 in 144 Stock (284,375 shares) at the closing bid price on March 5, 2013,
plus 50,000 shares (valued at $40,000) of the Company’s Common Stock. The holder may require the Company to convert the outstanding
principal balance (including any unpaid interest) into shares of 144 Common Stock at any time during the six-month term of the
note or thereafter. The Common Stock issued will be valued using a conversion factor of 80% of the average of the lowest two (2)
trading prices for common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the
conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to
70%. The holder received the option to purchase five-year warrants expiring March 5, 2018 to purchase 148,406 shares of ERF Common
Stock at an exercise price of $0.80 or the per-share price at which the Common Stock is sold in an underwritten public offering
that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to
the terms and conditions of this warrant.
The Tonaquint promissory note was determined to include various
embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price reset feature and the
redemption option (compound embedded derivative liability). At the date of issuance of the Tonaquint note, compound embedded derivative
liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics
or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value
recorded in the statement of operations. The Company uses the effective interest method to record interest expense from the accretion
of the debt discount and accretes the unamortized discount upon conversion which totaled $43,762 for the three months ended March
31, 2013. The estimated debt accretion for the remainder of 2013 is $544,962.
The following table summarizes the convertible debt activity
for the period March 5, 2013, through March 31, 2013:
Description
|
|
Tonaquint
|
|
|
Warrant Compound Derivative Liability
|
|
|
Compound Derivative Liability
|
|
|
Total
|
|
Fair value issuances at inception
|
|
$
|
791,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
791,500
|
|
Fair value issuances during 2013 (debt discount)
|
|
|
(588,724
|
)
|
|
|
16,400
|
|
|
|
256,224
|
|
|
|
(316,100
|
)
|
Change in fair value
|
|
|
43,762
|
|
|
|
1,974
|
|
|
|
1,294
|
|
|
|
47,030
|
|
Conversions during
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
Fair value at March 31, 2013
|
|
$
|
246,538
|
|
|
$
|
18,374
|
|
|
$
|
257,518
|
|
|
$
|
522,430
|
|
The Company recorded a net change in fair value of derivatives
expense of $3,268 for the three months ended March 31, 2013.
The compound derivative liability associated with the warrants
issued was $18,374 as of March 31, 2013.
JMJ Financial Convertible Promissory Note
On March 20, 2013, the Company entered into a one year unsecured
promissory note debt financing agreement with JMJ Financial for (“JMJ”) up to $500,000 at the sole discretion of additional
consideration with the Lender. The note includes a 10% original issue discount that is prorated based on the consideration funded.
As of March 20, 2013 the Company received funding of $150,000, bearing interest at a rate of 12% per annum and maturing in one
year from the effective date of each payment. The conversion price is the lesser of $0.59 or 60% of the lowest trade price in the
25 trading days previous to the conversion.
The JMJ promissory note was determined to include various embedded
derivative liabilities. The derivative liabilities are the conversion feature, conversion price reset feature and the redemption
option (compound embedded derivative liability). At the date of issuance of the JMJ note, compound embedded derivative liabilities
were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation
techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement
of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount
and accretes the unamortized discount upon conversion which totaled $4,973 for the three months ended March 31, 2013. The estimated
debt accretion for subsequent years is $55,869 and $55,691 for years ending December 31, 2013 and 2014, respectively.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
The following table summarizes the convertible debt activity
for the period March 20, 2013, through March 31, 2013:
Description
|
|
JMJ
|
|
|
Compound Derivative Liability
|
|
|
Total
|
|
Fair value issuances at inception
|
|
$
|
165,000
|
|
|
$
|
–
|
|
|
$
|
165,000
|
|
Fair value issuances during 2013 (debt discount)
|
|
|
(165,000
|
)
|
|
|
203,420
|
|
|
|
38,420
|
|
Change in fair value
|
|
|
4,973
|
|
|
|
18,209
|
|
|
|
23,182
|
|
Conversions during
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Fair value at March 31, 2013
|
|
$
|
4,973
|
|
|
$
|
221,629
|
|
|
$
|
226,602
|
|
The Company recorded a net change in fair value of derivatives
expense of $18,209 for the three months ended March 31, 2013.
Investor Financing
On July 13, 2012, the Company entered into a three-month secured
debt financing agreement with individuals for $1,000,000 with an interest rate of 12% per annum. Under the agreement, as amended,
the maturity date was extended to May1, 2013. Both parties under the amendment agreed to apply the Dakota Capital Fund payment
of $181,235 including interest as a subset to the bridge note incurring an interest rate at .5% interest per day on a 360 day calendar
year. At March 31, 2013, the outstanding principal balance totaled $495,000.
Capital Leases
Banc Leasing Inc.
Included in property and equipment
at March 31, 2013, the cost of the equipment was $611,000 and the accumulated amortization was $208,724. Amortization of assets
under capital leases is included in depreciation expense. The equipment is the primary collateral securing the financing.
Advantage Leasing Inc.
Included in vehicles at March
31 2013, the cost of the vehicles was $141,039 and the accumulated amortization was $56,000. Amortization of assets under capital
leases is included in depreciation expense. The vehicles are the primary collateral securing the financing.
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2013 (in thousands):
Year Ending December 31,
|
|
2013
|
|
$
|
161
|
|
2014
|
|
|
203
|
|
2015
|
|
|
26
|
|
Thereafter
|
|
|
–
|
|
Total minimum lease payments
|
|
|
390
|
|
Less amount representing interest
|
|
|
(40
|
)
|
Present value of net minimum lease payments
|
|
|
350
|
|
Current maturities of capital lease obligations
|
|
|
(183
|
)
|
Long-term portion of capital lease obligations
|
|
$
|
167
|
|
NOTE 10 - COMMITMENTS
Leases and License Agreements
For the three months ended March 31, 2013 and 2012, rental expenses
of approximately $299,000 and $216,000, 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.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
Future minimum lease payments under non-cancelable operating
leases as of December 31, 2013 were as follows (in
thousands):
Year Ending December 31,
|
|
Amount
|
|
2013
|
|
|
352
|
|
2014
|
|
|
407
|
|
2015
|
|
|
401
|
|
2016
|
|
|
385
|
|
Thereafter
|
|
|
8
|
|
Total
|
|
$
|
1,553
|
|
Banc Leasing Inc.
During August 2007, the Company entered into a contract with
Banc Leasing Inc. to fund the Company’s US-Banknet System. Each funding is collateralize by the equipment and normally is
repaid over a seven year period with interest established at the date of the inception of the lease. Each lease has a $1 buyout
provision. The details of the capital lease are included in Note 9.
NOTE 11 – COSTS AND ESTIMATED EARNINGS IN EXCESS OF
BILLINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts for the three months ended March 31, 2013, are summarized as follows (in thousands):
|
|
March 31,
|
|
|
|
2013
|
|
Costs incurred on uncompleted contracts
|
|
$
|
23
|
|
Estimated profit
|
|
|
16
|
|
Gross revenue
|
|
|
39
|
|
Less: billings to date
|
|
|
–
|
|
Costs and profit in excess of billings
|
|
$
|
39
|
|
Such amounts are included in the accompanying balance sheet
at March 31, 2013, are summarized as follows (in thousands):
|
|
March 31,
|
|
|
|
2013
|
|
Cost and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
39
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
–
|
|
|
|
|
|
|
|
|
$
|
39
|
|
NOTE 12 - 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.
ERF WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
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.
For the three months ended March 31, 2013 and 2012 (in thousands):
Three Months Ended March 31, 2013
|
|
EBI
|
|
|
WBS
|
|
|
ENS
|
|
|
Total Segment
|
|
|
ERF Corporate
|
|
|
Total Consolidated
|
|
Revenue
|
|
$
|
1,205
|
|
|
$
|
610
|
|
|
$
|
98
|
|
|
$
|
1,913
|
|
|
$
|
–
|
|
|
$
|
1,913
|
|
Segment income (loss) from operations
|
|
|
109
|
|
|
|
(322
|
)
|
|
|
(20
|
)
|
|
|
(233
|
)
|
|
|
(896
|
)
|
|
|
(1,129
|
)
|
Total assets
|
|
|
3,065
|
|
|
|
1,873
|
|
|
|
606
|
|
|
|
5,544
|
|
|
|
391
|
|
|
|
5,935
|
|
Capital expenditures
|
|
|
10
|
|
|
|
61
|
|
|
|
–
|
|
|
|
71
|
|
|
|
14
|
|
|
|
85
|
|
Depreciation
|
|
|
215
|
|
|
|
207
|
|
|
|
59
|
|
|
|
481
|
|
|
|
7
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012
|
|
|
EBI
|
|
|
|
WBS
|
|
|
|
ENS
|
|
|
|
Total Segment
|
|
|
|
ERF Corporate
|
|
|
|
Total Consolidated
|
|
Revenue
|
|
$
|
1,013
|
|
|
$
|
569
|
|
|
$
|
66
|
|
|
$
|
1,648
|
|
|
$
|
–
|
|
|
$
|
1,648
|
|
Segment income (loss) from operations
|
|
|
160
|
|
|
|
(49
|
)
|
|
|
(91
|
)
|
|
|
20
|
|
|
|
(704
|
)
|
|
|
(684
|
)
|
Total assets
|
|
|
3,160
|
|
|
|
2,056
|
|
|
|
769
|
|
|
|
5,985
|
|
|
|
346
|
|
|
|
6,331
|
|
Capital expenditures
|
|
|
331
|
|
|
|
225
|
|
|
|
–
|
|
|
|
556
|
|
|
|
7
|
|
|
|
563
|
|
Depreciation
|
|
|
154
|
|
|
|
113
|
|
|
|
58
|
|
|
|
325
|
|
|
|
14
|
|
|
|
339
|
|
Reconciliation of Segment Assets to Total Assets
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Total segment assets
|
|
$
|
5,544
|
|
|
$
|
5,989
|
|
Total corporate assets
|
|
|
391
|
|
|
|
282
|
|
Total assets
|
|
$
|
5,935
|
|
|
$
|
6,271
|
|
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 three months ended March 31, 2013, two customers accounted
for $695,000 and $257,000 of EBI revenues each.
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to March 31, 2013, the Company issued 1,351,631 shares
of common stock valued at approximately $780,000 for services rendered, and conversion of debt.
The Company is in negotiations of extending the investor financing
note through third quarter 2013.