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ERFB > SEC Filings for ERFB > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for ERF WIRELESS, INC.

Form 10-Q for ERF WIRELESS, INC.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the other sections of this quarterly report on Form 10-Q, including the financial statements.

OUR MARKETS AND BUSINESS STRATEGY

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

The Company reported overall consolidated revenues of $2,008,000 for the quarter ended September 30, 2012, compared to $1,331,000 for the same prior year quarter, an increase of $677,000 or 51%.

The Company's EBI oil and gas subsidiary reported revenues of $1,363,000 for the quarter ended September 30, 2012, compared to revenues of $709,000 for the same prior year quarter an increase of $654,000 or 92%.

The Company reported gross profit of $977,000 for the quarter ended September 30, 2012, compared to $298,000 for the same prior year quarter ended September 30, 2011, an increase of $679,000 or 228%. This increase reflects the strong operating margins recognized in our oil and gas internet service operations.

The Company continued its recently initiated expansion of its existing terrestrial broadband networks through a combination of construction and contractual agreements into oil and gas drilling areas in the states of Kansas and Montana; allowing us to meet the communications needs of existing customers in these markets. The Company recently opened warehouse and operating facilities and is in the process of designing and building a new terrestrial broadband network in the Bakken Shale area of North Dakota. Additionally, the Company continues to expand its existing networks in Texas, New Mexico and Oklahoma.

The Company's revenue is generated primarily from the sale of wireless communications products and services, including providing reliable enterprise-class wireless broadband services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.

The Company records revenues from its fixed-price, long-term contracts using the percentage-of-completion method. Revenues are recorded based on construction costs incurred to date as a percentage of estimated total cost at completion. The percentage-of-completion, determined by using total costs incurred to date as a percentage of estimated total costs at completion, reflects the actual physical completion of the project. This method of revenue recognition is used because management considers total cost to be the best available measure of progress on the contracts.

The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product warranties and reduces revenue for estimated product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold.

Service revenue is principally derived from wireless broadband services, including internet, voice, and data and monitoring service. Subscriber fees are recorded as revenues in the period during which the service is provided.

RESULTS OF OPERATIONS



THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012, COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2011



The following table sets forth summarized consolidated financial information for
the three and nine months ended September 30, 2012 and 2011:



                               Three Months Ended September 30,                           Nine Months Ended September 30,

($ in thousands)       2012          2011        $ Change        % Change        2012         2011         $ Change        % Change
Total sales         $    2,008     $  1,331     $       677            51%     $  5,343     $  3,772     $      1,571            42%
Cost of goods
sold                     1,031        1,033              (2 )           0%        2,907        2,567              340            13%
Gross profit               977          298             679           228%        2,436        1,205            1,231           102%
Percent of total
sales                      49%          22%                                         46%          32%
Operating
expenses                 1,971        1,434             537            37%        5,164        4,090            1,074            26%
Loss from
operations                (994 )     (1,136 )           142           -13%       (2,728 )     (2,885 )            157            -5%
Other
income/(expense)          (449 )       (203 )          (246 )         121%       (1,027 )        634           (1,661 )        -262%
Loss from
continuing
operations              (1,443 )     (1,339 )          (104 )          -8%       (3,755 )     (2,251 )         (1,504 )         -67%
Loss from
discontinued
operations                   -            -               -             0%            -          (78 )             78           100%
Net income
attributable to
non-controlling
interest                    (9 )          -              (9 )         100%          (17 )          -              (17 )         100%
Other
comprehensive
loss                        (1 )         (9 )             8           -89%           (7 )        (12 )              5           -42%
Total
comprehensive
(loss)              $   (1,453 )   $ (1,348 )   $      (105 )           8%     $ (3,779 )   $ (2,341 )   $     (1,438 )          61%

For the three months ended September 30, 2012, the Company's business operations reflected an increase in sales for its EBI, WBS and ENS subsidiaries that were offset by a decrease in the WMS subsidiary. For the three months ended September 30, 2012, the Company's consolidated operations generated net sales of $2,008,000 compared to prior-year period net sales of $1,331,000 The $677,000 increase in net sales is primarily attributable to $654,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBT's) in the oil and gas regions. Service sales increased $707,000 and product sales decreased $30,000. For the three months ended September 30, 2012, the Company had a gross profit margin of 49%, compared to a gross profit margin 22% for the prior year period. The $679,000 increase in gross profit margin is primarily attributed to; (i) approximately $558,000 increase in gross margin in EBI attributable to increased sales associated with deployment of MBT's in oil and gas regions, (ii) $139,000 increase in gross margins in WBS primarily related to decrease third party service cost, and (iii) offset with a $13,000 decrease in gross margin in WMS and a $5,000 decrease in gross margins in ENS.

For the nine months ended September 30, 2012, the Company's business operations reflected an increase in sales for its EBI, WBS and WMS subsidiaries that were offset by a decrease in the ENS subsidiary. For the nine months ended September 30, 2012, the Company's consolidated operations generated net sales of $5,343,000 compared to prior-year period net sales of $3,772,000. The $1,571,000 increase in net sales is primarily attributable to $1,511,000 increased sales in EBI from deployment of our MBT's in the oil and gas regions. Service sales increased $1,684,000 and product sales decreased $113,000. For the nine months ended September 30, 2012, the Company had a gross profit margin of 46%, compared to a gross profit margin 32% for the prior year period. The $1,231,000 increase in gross profit margin is primarily attributed to; (i) approximately $919,000 increase in gross margin in EBI attributable to increased sales associated with deployment of MBT's in oil and gas regions, (ii) $336,000 increase in gross margins in WBS primarily related to decrease third party service cost, and (iii) offset with a $11,000 decrease in gross margin in WMS and a $13,000 decrease in gross margins in ENS.

SALES INFORMATION



Set forth below are tables presenting summarized sales information for our
business segments for the three and nine months ended September 30, 2012 and
2011:



        ($ in thousands)                                   Three Months Ended September 30,
        Business Segment            2012       % of Total       2011       % of Total      $ Change       % Change
Energy Broadband, Inc.             $ 1,363             68%     $   709             53%     $     654            92%
Wireless Bundled Services              576             29%         543             41%            33             6%
Enterprise Network Services             69              3%          65              5%             4             6%
Wireless Messaging Services              -              0%          14              1%           (14 )        -100%
Total Sales                        $ 2,008            100%     $ 1,331            100%     $     677            51%




        ($ in thousands)                                   Nine Months Ended September 30,
        Business Segment            2012       % of Total       2011       % of Total       $ Change      % Change
Energy Broadband, Inc.             $ 3,398             64%       1,887             50%     $    1,511           80%
Wireless Bundled Services            1,702             32%       1,640             44%             62            4%
Enterprise Network Services            220              4%         227              6%             (7 )         -3%
Wireless Messaging Services             23              0%          18              0%              5           28%
Total Sales                        $ 5,343            100%     $ 3,772            100%     $    1,571           42%

For the three months ended September 30, 2012, net sales increased to $2,008,000 from $1,331,000 for the three months ended September 30, 2011. The overall increase of 51% was attributable to increased sales of $654,000 in EBI, increased sales of $33,000 in WBS, increased sales in ENS of $4,000, offset with decreased sales in WMS of $14,000. The $677,000 increase in net sales is primarily attributable to $654,000 increased sales in EBI are from deployment of our MBT's in the oil and gas regions.

For the nine months ended September 30, 2012, net sales increased to $5,343,000 from $3,772,000 for the nine months ended September 30, 2011. The overall increase of 42% was attributable to increased sales of $1,511,000 in EBI, increased sales of $62,000 in WBS, increased sales in WMS of $5,000, offset with decreased sales in ENS of $7,000. The $1,571,000 increase in net sales is primarily attributable to $1,511,000 increased sales in EBI are from deployment of our MBT's in the oil and gas regions.

COST OF GOODS SOLD



The following tables set forth summarized cost of goods sold information for the
three months ended September 30, 2012 and 2011:



        ($ in thousands)                                   Three Months Ended September 30,
        Business Segment            2012       % of Total       2011       % of Total       $ Change       % Change
Energy Broadband, Inc.             $   631             61%     $   537             52%     $       94            18%
Wireless Bundled Services              301             29%         407             39%           (106 )         -26%
Enterprise Network Services             95             10%          85              8%             10            12%
Wireless Messaging Services              4              0%           4              0%              -             0%
Total cost of sales                $ 1,031            100%     $ 1,033            100%     $       (2 )           0%




                                     Three Months Ended
                                        September 30,
        ($ in thousands)              2012          2011        $ Change       % Change

Products and integration service   $      448      $   566     $     (118 )         -21%
Rent and maintenance                      194          114             80            70%
Depreciation                              389          353             36            10%
Total cost of sales                $    1,031      $ 1,033     $       (2 )           0%

For the three months ended September 30, 2012, cost of goods sold decreased by $2,000, to $1,031,000 from $1,033,000 as compared to the three months ended September 30, 2011. The decrease of $2,000 in cost of goods sold is primarily attributable to an increased cost of $94,000 in EBI due to increased depreciation and tower rents for deployment of our MBT's in oil and gas regions, increased cost in ENS of $10,000, offset with decreased costs in WBS of $106,000 due to a decreasing third party services and depreciation.

The following tables set forth summarized cost of goods sold information for the nine months ended September 30, 2012 and 2011:

        ($ in thousands)                                    Nine Months Ended September 30,
        Business Segment            2012       % of Total       2011       % of Total       $ Change       % Change
Energy Broadband, Inc.             $ 1,815             62%     $ 1,223             48%     $      592            48%
Wireless Bundled Services              793             26%       1,067             42%           (274 )         -26%
Enterprise Network Services            280             11%         273             11%              7             3%
Wireless Messaging Services             19              1%           4              0%             15           375%
Total cost of sales                $ 2,907            100%     $ 2,567            100%     $      340            13%




                                         Nine Months
                                     Ended September 30,
        ($ in thousands)              2012           2011       $ Change      % Change

Products and integration service   $    1,399       $ 1,223     $     176           14%
Rent and maintenance                      495           314           181           58%
Depreciation                            1,013         1,030           (17 )         -2%
Total cost of sales                $    2,907       $ 2,567     $     340           13%

For the nine months ended September 30, 2012, cost of goods sold increased by $340,000, or 13%, to $2,907,000 from $2,567,000 as compared to the nine months ended September 30, 2011. The increase of $340,000 in cost of goods sold is primarily attributable to an increased cost of $592,000 in EBI due to increased depreciation and tower rents for deployment of our MBT's in oil and gas regions, increased cost in WMS of $15,000, increased cost in ENS of $7,000 offset with decreased costs in WBS of $274,000 due to a decreasing third party services and depreciation.

OPERATING EXPENSES



The following table sets forth summarized operating expense information for the
three months and nine months ended September 30, 2012 and 2011:



                             Three Months Ended September 30,                          Nine Months Ended September 30,
($ in thousands)     2012            2011       $ Change       % Change        2012         2011        $ Change       % Change

Employment
expenses           $   1,066       $    808     $     258            32%     $   2,921     $ 2,139     $      782            37%
Professional
services                 475            314           161            51%         1,036         841            195            23%
Rent and
maintenance              105             95            10            11%           304         286             18             6%
Depreciation              54             61            (7 )         -11%           161         193            (32 )         -17%
Other general
and
administrative           271            156           115            74%           742         631            111            18%
Total operating
expenses           $   1,971       $  1,434     $     537            37%     $   5,164     $ 4,090     $    1,074            26%

For the three months ended September 30, 2012, operating expenses increased by 37% to $1,971,000, as compared to $1,434,000 for the three months ended September 30, 2011, resulting from:

A $258,000 increase in employment expense - primarily attributable to increased employee headcount to 68 at September 30, 2012 from 55 at September 30, 2011;
A $161,000 increase in professional services - primarily attributable to consulting services;
A $10,000 increase in rent and maintenance;
A $7,000 decrease in depreciation; and
A $115,000 increase in other general and administrative - expense primarily attributable to travel, utility and transportation cost.

For the nine months ended September 30, 2012, operating expenses increased by 26% to $5,164,000, as compared to $4,090,000 for the nine months ended September 30, 2011 resulting from:

A $782,000 increase in employment expense - primarily attributable to increased employee headcount to 68 at September 30, 2012 from 55 at September 30, 2011;
A $195,000 increase in professional services - primarily attributable to consulting services;
A $18,000 increase in rent and maintenance;
A $32,000 decrease in depreciation - is primarily due to fully depreciated assets; and
A $111,000 increase in other general and administrative expense - primarily attributable to travel, utility and transportation cost.

OTHER (INCOME) EXPENSE, NET

For the three months ended September 30, 2012, the increase in other expense of $246,000 from the prior year period is primarily attributable to an increase in our interest expense, net on debt obligations totaling $472,000, and offset with a increase in our net derivative income of $23,000 as compared to interest expense, net of $194,000, derivative loss of $11,000 and gain on sale of assets of $2,000 for the three months ended September 30, 2011. The derivative expense/income represents the net unrealized (non-cash) charge during the three months ended September 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 nine months ended September 30, 2012, the increase in other expense of $1,661,000 from the prior period is primarily attributable to an increase in our interest expense, net on debt obligations totaling $1,151,000 and offset with a increase in our net derivative income of $124,000 as compared to interest expense, net of $560,000 offset with derivative income of $2,000 and a gain on sale of assets of $1,192,000 for the nine months ended September 30, 2011. The derivative expense/income represents the net unrealized (non-cash) charge during the nine months ended September 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 nine months ended September 30, 2012, our total comprehensive loss was $3,779,000 compared to comprehensive loss of $2,341,000 for the nine months ended September 30, 2011. The increased comprehensive loss for the nine months ended September 30, 2012, as compared to the comprehensive loss for nine months ended September 30, 2011 is primarily attributable to the factors described above.

CASH FLOWS

The Company's operating activities decreased net cash used by operating activities to $1,400,000 in the nine months ended September 30, 2012, compared to net cash used of $1,632,000 in the nine months ended September 30, 2011. The decrease in net cash used by operating activities was primarily attributable to accounts payable and accrued liabilities compared to the prior year.

The Company's investing activities used net cash of $1,166,000 in the nine months ended September 30, 2012, compared to net cash provided of $1,085,000 in the nine months ended September 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 February 2011 in the amount of $2,700,000.

The Company's financing activities provided net cash of $2,046,000 in the nine months ended September 30, 2012, compared to $813,000 of cash used in the nine months ended September 30, 2011. The cash provided in the nine months ended September 30, 2012, was primarily associated with proceeds from debt financings.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2012, the Company's current assets totaled $1,899,000 (including cash and cash equivalents of $71,000) and; total current liabilities were $4,106,000, resulting in negative working capital of $2,207,000. The Company has funded operations during the last nine months primarily through borrowings. These borrowings during the period were incurred from the Company's line of credit, net totaling $662,000, debt of $1,300,000 and convertible debt financing of $998,000.

DEBT FACILITIES AND INSTRUMENTS

The Company entered into unsecured $12 million revolving credit facility with Angus Capital Partners, a related party, maturing on December 31, 2013. At September 30, 2012, the Company had an outstanding principal balance of $3,527,000 on this line of credit. 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 on outstanding principal at an annual rate of 12% per annum. The loan may be prepaid without penalty or repaid at maturity. During the nine months ended September 30, 2012, the Company issued 1,388,166 shares of its Common Stock for the settlement of total principal and interest of $1,964,000 owed to Angus Capital Partners. The Company issued the Common Stock at an average price of $1.41 per share calculated based on the closing price the day the debt was settled. Additionally, during the nine months ended September 30, 2012, the Company issued 118,095 shares of its Series A Preferred Stock for the settlement of total principal debt of $124,000. The Company issued Series Preferred A Stock at an average price of $1.05 per share of Common Stock the day the debt was settled.

In November 2011, the Company entered into a 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, 2012, the outstanding principal balance on the facility totaled $1,912,000 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 major oil and gas exploration regions of North America.

During the nine months ended September 30, 2012, the Company issued to certain accredited investors a principal amount of $998,000 of E-Series bonds (the "Bonds") in addition to $30,000 which was outstanding at December 31, 2012. At September 30, 2012, the outstanding principal balance of the Bonds totaled $797,000. 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 average of the Common Stock 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 expiring December 31, 2014, to purchase one share of EBI common stock at a price of $4.00 for every $2.00 of Bond principal.

At the Company's discretion at any time after the first year, the Bonds, including the interest payments calculated through the date of conversion may be redeemed in cash or in shares of our Common Stock, valued at the average last sales price over the 20-trading-day period preceding any payment date. If the Company chooses to issue Common Stock as redemption of the Bond principal, we will issue shares representing a value equal to 125% of the Bond principal and shares representing a value equal to 100% of the Bond interest through redemption date.

On July 13, 2012, the Company entered into a $1,000,000 secured debt financing agreement that matures on December 31, 2012, bearing interest at the annual rate of 12% per annum. At September 30, 2012, the outstanding principal balance on the line of credit totaled $620,000.

ISSUANCE OF COMMON STOCK

During the three months ended September 30, 2012, we issued to various accredited investors 711,790 shares for services rendered and debt conversions. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the three months ended September 30, 2012, we issued 104,295 shares of common stock to employees and business consultants, for aggregate consideration of $144,404 of services rendered, pursuant to a registration statement on form S-8.

During the nine months ended September 30, 2012, we issued to various accredited investors (i) 1,634,389 shares for services rendered and debt conversions, and
(ii) 70,000 shares upon conversion of Series A Preferred Stock. We relied on
Section 4(2) of the Securities Act in effecting these transactions. During the nine months ended September 30, 2012, we issued 185,796 shares of common stock to employees and business consultants, for aggregate consideration of $284,862 of services rendered, pursuant to a registration statement on Form S-8.

USE OF WORKING CAPITAL

We believe our cash and available credit facilities afford us adequate liquidity for the balance through September 30, 2013. 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, 2012, the Company did not have any significant off-balance-sheet arrangements other than certain office and tower facility operating leases requiring minimal commitments under non-cancelable leases disclosed in the Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to seven years.

Long-Lived Assets

. . .

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