Add
ERFB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ERFB > SEC Filings for ERFB > Form 10-Q on 16-Aug-2012 | All Recent SEC Filings |
16-Aug-2012
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the other sections of this quarterly report on Form 10-Q, including the financial statements.
OUR MARKETS AND BUSINESS STRATEGY
Historically, our revenues have been generated primarily from Internet and construction services. Our Internet revenues result from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues result from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry. During the six months ended June 30, 2012, approximately 34% of our revenues were generated from internet services, 61% of our revenues were generated from providing broadband services to the energy industry and 5% of our revenues were generated from construction services. We expect that our internet services will continue to decline as a percentage of the total consolidated revenues in 2012 and that the most growth during fiscal 2012 will continue to come from devoting significant capital resources to developing the oil and gas market utilizing wireless services.
During the second quarter of fiscal 2012, the Company continued to make substantial progress with its strategic business plan as evidenced by the completion and announcement of numerous significant activities. These include:
· The Company's financial results reflect the Company's continued focus on aggressively expanding our turnkey communications services to the oil and gas industry during a period of continued brisk oil and gas drilling activity in North America. These results include but are not limited to the following attributes:
· The Company reported overall consolidated revenues of $1,687,000 for the quarter ended June 30, 2012 as compared to $1,311,000 for the same prior year quarter ended June 30, 2011; an increase of $376,000 or 29%. The overall increase was comprised of a $380,000 increase in revenues in our oil and gas operations subsidiary, Energy Broadband, Inc. plus a combined increase of $24,000 from our wireless bundled services and wireless messaging services business units and a $28,000 decline in our enterprise network services.
· The Company's Energy Broadband, Inc. subsidiary reported revenues of $1,022,000 for the quarter ended June 30, 2012 as compared to revenues of $642,000 for the same prior year quarter ended June 30, 2011; an increase of $380,000 or 59%.
· The Company reported Gross Profit of $746,000 for the quarter ended June 30, 2012 as compared to $501,000 for the same prior year quarter ended June 30, 2011; an increase of $245,000 or 49%. This 49% increase in Gross Profits on our 29% increase in revenues drove our overall gross margins to 44% for the quarter ended June 30, 2012 as compared to 38% for the same prior year quarter ended June 30, 2011. This 6% increase in our overall gross margins demonstrates continued solid performance against our number one business objective of growing high margin revenue while maintaining and strengthening our position as the largest terrestrial wireless provider to the oil and gas industry in North America.
· The Company reported a Consolidated Net Loss of $1,352,000 for the quarter ended June 30, 2012 as compared to a Consolidated Net Loss of $1,150,000 for the same prior quarter ended June 30, 2011.
· The Company reported an increase of $303,000 or 20% increase in Operating Expenses in the quarter ended June 30, 2012 as compared to the same prior year quarter ended June 30, 2011 to support the 29% increase in our consolidated revenues and our continued aggressive strategy to grow our Energy Broadband business unit.
· Lastly, the Company invested $199,000 in cash during the quarter ended June 30, 2012 for the purchase of assets in its Energy Broadband, Inc. subsidiary for the continued expansion of networks and infrastructure, including increasing its Mobile Broadband Trailer ("MBT") fleet associated with the increased oil and gas business growth being experienced.
· The Company announced the appointment of Mr. Tom Wiedebush as Chief Operating Officer (COO) to take over all of the day-to-day high-level operational management responsibilities previously conducted by its Chief Executive Officer. Mr. Wiedebush joined the ERF Board of Directors in December 2011 bringing more than 35 years of experience as a banking executive to ERF Wireless. Mr. Wiedebush's background includes serving as Chief Operating Officer of Stearns Financial Services, a $1 billion diversified financial organization, and as Group Executive - Western Region of Marquette Banks, a $6 billion bank with operations in eight states.
· The Company announced that it has recently initiated expansion of its existing terrestrial broadband networks through a combination of construction and contractual agreements into major oil and gas drilling areas in the states of Kansas, Nebraska and Montana; allowing our Energy Broadband subsidiary to meet the communications needs of existing Fortune 200 customers increased drilling in these markets. Additionally, the Company is in the process of building a new terrestrial broadband network in the Bakken Shale area of North Dakota as well as has significantly expanded its existing networks in Texas, New Mexico and Oklahoma.
· The Company announced that it has recently integrated several additions into the communications services that Energy Broadband provides its oil and gas customers in remote locations throughout North America; including wide acceptance of a wireless Intercom system produced by Energy Broadband that provides all of the on-site drilling personnel with a local wireless telephone communication system to their respective trailers and the rig floor. Additionally, Energy Broadband provides voice services to the outside world via VoIP technology that now includes E911 service in many areas.
The Company's revenue is generated primarily from the sale of wireless communications products and services, including providing reliable enterprise-class wireless broadband services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.
The Company records revenues from its fixed-price, long-term contracts using the percentage-of-completion method. Revenues are recorded based on construction costs incurred to date as a percentage of estimated total cost at completion. The percentage-of-completion, determined by using total costs incurred to date as a percentage of estimated total costs at completion, reflects the actual physical completion of the project. This method of revenue recognition is used because management considers total cost to be the best available measure of progress on the contracts.
The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product warranties and reduces revenue for estimated product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold.
Service revenue is principally derived from wireless broadband services, including internet, voice, and data and monitoring service. Subscriber fees are recorded as revenues in the period during which the service is provided.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2012, COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2011
The following table sets forth summarized consolidated financial information for
the three and six months ended June 30, 2012 and 2011:
Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2012 2011 $ Change % Change 2012 2011 $ Change % Change
Total sales $ 1,687 $ 1,311 $ 376 29% $ 3,335 $ 2,441 $ 894 37%
Cost of goods sold 941 810 131 16% 1,770 1,533 237 15%
Gross profit 746 501 245 49% 1,565 908 657 72%
Percent of total sales 44% 38% 47% 37%
Operating expenses 1,796 1,493 303 20% 3,299 2,657 642 24%
Loss from operations (1,050 ) (992 ) (58 ) 6% (1,734 ) (1,749 ) 15 -1%
Other income/(expense) (302 ) (158 ) (144 ) 91% (578 ) 836 (1,414 ) -169%
Loss from continuing
operations (1,352 ) (1,150 ) (202 ) -18% (2,312 ) (913 ) (1,399 ) -153%
Loss from discontinued
operations - - - 0% - (78 ) 78 100%
Net income
attributable to
noncontrolling
interest (3 ) - (3 ) 100% (8 ) - (8 ) 100%
Other comprehensive
loss (2 ) (8 ) 6 -75% (6 ) (3 ) (3 ) 100%
Total comprehensive
(loss) $ (1,357 ) $ (1,158 ) $ (199 ) 17% $ (2,326 ) $ (994 ) $ (1,332 ) 134%
|
For the three months ended June 30, 2012, the Company's business operations reflected an increase in sales for Energy Broadband, Inc. ("EBI"), Wireless Bundled Services ("WBS"), Wireless Messaging Services ("WMS") and offset with a decrease in Enterprise Network Services ("ENS"). For the three months ended June 30, 2012, the Company's consolidated operations generated net sales of $1,687,000 compared to prior-year net sales of $1,311,000 for the quarter ended June 30, 2011. The $376,000 increase in net sales is primarily attributable to $380,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBT's) in the oil and gas regions, $13,000 increased sales in WBS, $11,000 increased sales in WMS and offset with a $28,000 decreased sales in ENS. Service sales increased $446,000 and product sales decreased $70,000. For the three months ended June 30, 2012, the Company had a gross profit margin of 44%, compared to a gross profit margin 38% for the prior year. The $245,000 increase in gross profit margin is primarily attributed to the following factors; (i) approximately $188,000 increase in gross margin in EBI attributable to increased sales associated with deployment of MBT's in oil and gas regions, (ii) $61,000 increase in gross margins in WBS primarily related to decrease third party service cost, $2,000 increase in gross margin in WMS and (iii) offset with a $6,000 decrease in gross margins in ENS.
For the six months ended June 30, 2012, the Company's business operations reflected an increase in sales for EBI, WBS, WMS and offset with a decrease in ENS. For the six months ended June 30, 2012, the Company's consolidated operations generated net sales of $3,335,000 compared to prior-year net sales of $2,441,000 for the six months ended June 30, 2011. The $894,000 increase in net sales is primarily attributable to $857,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBT's) in the oil and gas regions, $28,000 increased sales in WBS, $19,000 increased sales in WMS and offset with a $10,000 decreased sales in ENS. Service sales increased $977,000 and product sales decreased $83,000. For the six months ended June 30, 2012, the Company had a gross profit margin of 47%, compared to a gross profit margin 37% for the prior year. The $657,000 increase in gross profit margin is primarily attributed to the following factors; (i) approximately $440,000 increase in gross margin in EBI attributable to increased sales associated with deployment of MBT's in oil and gas regions, (ii) $223,000 increase in gross margins in WBS primarily related to decrease third party service cost, $2,000 increase in gross margin in WMS and (iii) offset with a $8,000 decrease in gross margins in ENS.
The Company incurred a total comprehensive net loss of $2,326,000 for the six months ended June 30, 2012, compared to a comprehensive net loss of $994,000 from the six months ended June 30, 2011. The Company's principal components of the total comprehensive loss for the six months ended June 30, 2012 included approximately $731,000 in depreciation expenses, $679,000 of interest expense, $577,000 of other general and administrative expense, $1,855,000 in employment expenses and $561,000 in professional services expense.
SALES INFORMATION
Set forth below is tables presenting summarized sales information for our
business segments for the three and six months ended June 30, 2012 and 2011:
($ in thousands) Three Months Ended June 30,
Business Segment 2012 % of Total 2011 % of Total $ Change % Change
Energy Broadband, Inc. $ 1,022 60% $ 642 49% $ 380 59%
Wireless Bundled Services 567 34% 554 42% 13 2%
Enterprise Network Services 86 5% 114 9% (28 ) -25%
Wireless Messaging Services 12 1% 1 0% 11 1100%
Total Sales $ 1,687 100% $ 1,311 100% $ 376 29%
|
($ in thousands) Six Months Ended June 30,
Business Segment 2012 % of Total 2011 % of Total $ Change % Change
Energy Broadband, Inc. $ 2,035 61% 1,178 48% $ 857 73%
Wireless Bundled Services 1,126 34% 1,098 45% 28 3%
Enterprise Network Services 151 4% 161 7% (10 ) -6%
Wireless Messaging Services 23 1% 4 0% 19 475%
Total Sales $ 3,335 100% $ 2,441 100% $ 894 37%
|
For the three months ended June 30, 2012, net sales increased to $1,687,000 from $1,311,000 for the three months ended June 30, 2011. The overall increase of 29% was attributable to increased sales of $380,000 of Energy Broadband, Inc., increased sales of $13,000 of Wireless Bundled Services, increased sales in Wireless Messaging Services of $11,000, offset with decreased sales in Enterprise Network Services of $28,000. The $376,000 increase in net sales is primarily attributable to $380,000 increased sales in EBI are from deployment of our Mobile Broadband Trailers (MBT's) in the oil and gas regions.
For the six months ended June 30, 2012, net sales increased to $3,335,000 from $2,441,000 for the six months ended June 30, 2011. The overall increase of 37% was attributable to increased sales of $857,000 of Energy Broadband, Inc., increased sales of $28,000 of Wireless Bundled Services, increased sales in Wireless Messaging Services of $19,000, offset with decreased sales in Enterprise Network Services of $10,000. The $894,000 increase in net sales is primarily attributable to $857,000 increased sales in EBI are from deployment of our Mobile Broadband Trailers (MBT's) in the oil and gas regions.
COST OF GOODS SOLD
The following tables set forth summarized cost of goods sold information for the
three months ended June 30, 2012 and 2011:
($ in thousands) Three Months Ended June 30,
Business Segment 2012 % of Total 2011 % of Total $ Change % Change
Energy Broadband, Inc. $ 558 59% $ 365 45% $ 193 53%
Wireless Bundled Services 286 30% 333 41% (47 ) -14%
Enterprise Network Services 89 10% 112 14% (23 ) -21%
Wireless Messaging Services 8 1% - 0% 8 800%
Total cost of sales $ 941 100% $ 810 100% $ 131 16%
|
Three Months Ended
June 30,
($ in thousands) 2012 2011 $ Change % Change
Products and integration service $ 430 $ 352 $ 78 22%
Rent and maintenance 173 124 49 40%
Depreciation 338 334 4 1%
Total cost of sales $ 941 $ 810 $ 131 16%
|
For the three months ended June 30, 2012, cost of goods sold increased by $131,000, or 16%, to $941,000 from $810,000 as compared to the three months ended June 30, 2011. The increase of $131,000 in cost of goods sold is primarily attributable to an increased cost of $193,000 in EBI due to increased depreciation and tower rents for deployment of our Mobile Broadband Trailers (MBT's) in oil and gas regions, increased cost in WMS of $8,000, offset with decreased cost in WBS of $47,000 due to a decreasing third party services and depreciation and a decreased cost $23,000 in ENS.
The following tables set forth summarized cost of goods sold information for the six months ended June 30, 2012 and 2011:
($ in thousands) Six Months Ended June 30,
Business Segment 2012 % of Total 2011 % of Total $ Change % Change
Energy Broadband, Inc. $ 1,104 62% $ 686 45% $ 418 61%
Wireless Bundled Services 466 26% 660 43% (194 ) -29%
Enterprise Network Services 185 11% 187 12% (2 ) -1%
Wireless Messaging Services 15 1% - 0% 15 1500%
Total cost of sales $ 1,770 100% $ 1,533 100% $ 237 15%
|
Six Months Ended
June 30,
($ in thousands) 2012 2011 $ Change % Change
Products and integration service $ 846 $ 657 $ 189 29%
Rent and maintenance 300 200 100 50%
Depreciation 624 676 (52 ) -8%
Total cost of sales $ 1,770 $ 1,533 $ 237 15%
|
For the six months ended June 30, 2012, cost of goods sold increased by $237,000, or 15%, to $1,770,000 from $1,533,000 as compared to the six months ended June 30, 2011. The increase of $237,000 in cost of goods sold is primarily attributable to an increased cost of $418,000 in EBI due to increased depreciation and tower rents for deployment of our Mobile Broadband Trailers (MBT's) in oil and gas regions, increased cost in WMS of $15,000, offset with decreased cost in WBS of $194,000 due to a decreasing third party services and depreciation and a decreased cost $2,000 in ENS.
OPERATING EXPENSES
The following table sets forth summarized operating expense information for the
three months and six months ended June 30, 2012 and 2011:
Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2012 2011 $ Change % Change 2012 2011 $ Change % Change
Employment expenses $ 1,013 $ 746 $ 267 36% $ 1,855 $ 1,332 $ 523 39%
Professional services 336 318 18 6% 561 526 35 7%
Rent and maintenance 95 117 (22 ) -19% 199 192 7 4%
Depreciation 55 62 (7 ) -11% 107 131 (24 ) -18%
Other general and
administrative 297 250 47 19% 577 476 101 21%
Total operating
expenses $ 1,796 $ 1,493 $ 303 20% $ 3,299 $ 2,657 $ 642 24%
|
For the three months ended June 30, 2012, operating expenses increased by 20% to $1,796,000, as compared to $1,493,000 for the three months ended June 30, 2011. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:
· A $267,000 increase in employment expense. The increase is attributable to increased employee headcount to 68 at June 30, 2012 from 51 at June 30, 2011;
· A $18,000 increase in professional services;
· A $22,000 decrease in rent and maintenance; The decrease rent was due to consolidation of operations
· A $7,000 decrease in depreciation; and
· A $47,000 increase in other general and administrative expense. The increase was attributable to travel, utility and transportation cost.
For the six months ended June 30, 2012, operating expenses increased by 24% to $3,299,000, as compared to $2,657,000 for the six months ended June 30, 2011. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:
· A $523,000 increase in employment expense. The increase is attributable to increased employee headcount to 68 at June 30, 2012 from 51 at June 30, 2011;
· A $35,000 increase in professional services;
· A $7,000 increase in rent and maintenance;
· A $24,000 decrease in depreciation. The decrease is primarily due to fully depreciated assets; and
· A $101,000 increase in other general and administrative expense. The increase was attributable to travel, utility and transportation cost.
OTHER (INCOME) EXPENSE, NET
For the three months ended June 30, 2012, the increase in other expense is primarily attributable to an increase in our interest expense, net on debt obligations totaling $320,000 and offset with a increase in our net derivative income of $18,000 as compared to interest expense, net of $165,000 offset with derivative income of $7,000 for the three months ended June 30, 2011. The derivative expense/income represents the net unrealized (non-cash) charge during the three months ended June 30, 2012 and 2011, in the fair value of our derivative instrument liabilities related to warrants and embedded derivatives in our debt instruments that have been bifurcated and accounted for separately.
For the six months ended June 30, 2012, the increase in other expense is primarily attributable to an increase in our interest expense, net on debt obligations totaling $679,000 and offset with a increase in our net derivative income of $101,000 as compared to interest expense, net of $360,000 offset with derivative income of $13,000 and a gain on sale of assets of $1,183,000 for the six months ended June 30, 2011. The derivative expense/income represents the net unrealized (non-cash) charge during the six months ended June 30, 2012 and 2011, in the fair value of our derivative instrument liabilities related to warrants and embedded derivatives in our debt instruments that have been bifurcated and accounted for separately.
COMPREHENSIVE LOSS
For the six months ended June 30, 2012, our total comprehensive loss was $2,326,000 compared to comprehensive loss of $994,000 for the six months ended June 30, 2011. The increased comprehensive loss for the six months ended June 30, 2012, as compared to the comprehensive loss for six months ended June 30, 2011 is primarily attributable to the factors describe in the preceding tables.
CASH FLOWS
The Company's operating activities decreased net cash used by operating activities to $651,000 in the six months ended June 30, 2012, compared to net cash used of $1,276,000 in the six months ended June 30, 2011. The decrease in net cash used by operating activities was primarily attributable to an increase in accounts payable and accrued liabilities compared to prior year.
The Company's investing activities used net cash of $875,000 in the six months ended June 30, 2012, compared to net cash provided of $1,381,000 in the six months ended June 30, 2011. The decrease in cash provided by investing activities is primarily attributable to the expansion of oil and gas networks to utilize our MBTs to provide service to our customers and the cash received from the sale of non-core assets of our North and Central Texas network during the February 2011.
The Company's financing activities provided net cash of $1,084,000 in the six months ended June 30, 2012, compared to $40,000 of cash used in the six months ended June 30, 2011. The cash provided in the three months ended June 30, 2012, was primarily associated with proceeds from debt financing and the line of credit, net.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2012, the Company's current assets totaled $1,783,000 (including cash and cash equivalents of $149,000); total current liabilities were $3,587,000, resulting in negative working capital of $1,804,000. The Company has funded operations to date primarily through a combination of utilizing cash on hand, borrowings and raising additional capital through the sale of its securities. The Company's operation for the six months ended June 30, 2012, was primarily funded by proceeds from the Company's line of credit, net totaling $319,000, debt of $400,000 and convertible debt financing of $445,000.
CURRENT DEBT FACILITY
In June 2010, the Company increased its unsecured revolving credit facility with Angus Capital Partners a related party from $10.5 million to $12.0 million maturing December 31, 2013. At June 30, 2012, the Company had approximately $8,123,000 available on a $12.0 million unsecured revolving credit facility with Angus Capital Partners, with an outstanding balance of $3,877,000. The terms of the unsecured revolving credit facility will allow us to draw upon the facility as financing requirements dictate and provides for quarterly interest payments at an annual 12% rate. The loan may be prepaid without penalty or repaid at maturity.
In November 2011, the Company signed a debt financing agreement with Dakota Capital Fund LLC of Sioux Falls, South Dakota, for financing of up to $3,000,000. At June 30, 2012, the Company had approximately $1,000,000 available on a $3.0 million secured equipment credit facility with Dakota Capital Fund LLC, with an outstanding balance of $2,000,000. The terms of the secured credit facility will allow ERF to draw upon the facility for equipment purchases provided that the Company has submitted an advance request with acceptable and sufficient information of assets to be purchased. The payment terms are $178,031 per quarter including interest, at an annual rate of 18% plus 10% of positive operational cash flow as determined from the Company's publically filed 10Q's and 10K's for repayment of additional principal beginning July 1, 2012.
ISSUANCE OF COMMON STOCK
. . .
|
|