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		September 30,
		2008
Cost and estimated earnings in excess of billings on uncompleted contracts		$	176
Billings in excess of costs and estimated earnings on uncompleted contracts			-
		$	176

 

NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

LEASES AND LICENSE AGREEMENTS

 

For the nine months ended September 30, 2008 and 2007, rental expenses of approximately $464,000 and $287,000, 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 September 2018, and requiring payment of property taxes, insurance, maintenance and utilities.

 

Future minimum lease payments under non-cancelable operating leases at September 30, 2008, were as follows:

Period Ending December 31,		Amount ($000)
2008		$	153
2009			589
2010			564
2011			390
2012			52
Thereafter			43
Total		$	1,791

 

11

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ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 - INDUSTRY SEGMENTS

 

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

 

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

 

WIRELESS MESSAGING SERVICES DIVISION (WMS)

 

WMS principally provides wireless broadband system design and implementation, manufactures paging equipment, repair and maintain paging infrastructure equipment and supplies high-power infrastructure equipment to the wireless messaging industry and owns and operates a wide-area messaging service. All sales from external customers are located within the United States as well as certain international locations.

 

NETWORK OPERATING SERVICES DIVISION (NOS)

 

NOS provide the overall day-to-day 24/7 monitoring of all wireless broadband networks that the Company constructs, acquires, maintains and administers. The transactions in the NOS segment for the nine months ended September 30, 2008 and 2007 were not material.

 

ENTERPRISE NETWORK SERVICES (ENS)

 

ENS provides product and service to operate an enterprise-class encrypted wireless banking network business. 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 customers; trade names, equipment and software, including the software architecture and design.

 

For the nine months ended September 30, 2008 (in thousands)

 

		WMS				WBS				ENS				Total
Revenue		$	633			$	2,945			$	243			$	3,821
Segment (loss) income			88				(1,446	)			(1,219	)			(2,577	)
Segment assets			401				5,175				1,578				7,154
Capital expenditures			14				1,244				777				2,035
Depreciation and amortization			11				1,150				109				1,270

 

		Nine Months Ended
Reconciliation of Segment Loss from Operations to Net Loss		September 30, 2008
Total segment loss from operations		$	(2,577	)
Total corporate overhead			(3,068	)
Net loss		$	(5,645	)

 

Reconciliation of Segment Assets to Total Assets		September 30, 2008
Total segment assets		$	7,154
Total corporate assets			411
Consolidated  assets		$	7,565

12

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ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The accounting policies of the reportable segments are the same as those described in the section titled Basis of Accounting. The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation and amortization expense, accounting changes and non-recurring items.

 

For the quarter ended September 30, 2008, one customer accounts for $552,000 of Wireless Messaging Services Division revenues. At September 30, 2007, one customer accounts for $311,000 of Enterprise Network Services Division revenues and one customer accounts for $2,025,000 of Wireless Messaging Services Division revenues.

 

NOTE 11 - SUPPLEMENTAL NON-CASH DISCLOSURES:

 

During 2008, the Company issued stock in lieu of cash as payment for the following (in thousands):

September 30, 2008		Supplemental Non-Cash Disclosure
Professional fees		$	702
Settlements			265
Salary and compensation			700
Other services rendered			123
Total for services, interest, liabilities and compensation		$	1,790
Notes payable		$	167
Acquisition		$	400

 

SUPPLEMENTAL SCHEDULE OF ASSETS ACQUIRED RECONCILING CASH PAID:

On January 11, 2008, ERF Wireless, Inc (ERFW) completed the purchase of assets from Crosswind Enterprises Inc. The schedule below reflects the fair value of assets acquired, liabilities assumed, common stock issued and note payable issued.

Fair value of assets acquired			724
Liabilities assumed			(3	)
Common stock issued for acquisition			(400	)
Note payable issued for acquisition			(150	)
Cash paid for acquisition		$	171

 

NOTE 12 - EMPLOYEE STOCK OPTIONS

 

In 2004, the Board of Directors adopted a Non-Qualified Stock Option Plan under which 5,000,000 shares of the Company's common stock were reserved for issuance. In March 2007, the Board of Directors adopted a Non-Qualified Stock Option Plan under which an additional 10,000,000 shares were reserved for issuance. In April 2008, the Board of directors adopted a Non-Qualified Stock Option Plan whereby an additional 15,000,000 shares were reserved for issuance. There were 95,742 Series A preferred stock convertible to 1,788,111 common stock shares granted to certain Officers and employees under employment agreements. As of September 30, 2008, 270,135 common stock shares remain to be converted from Series A preferred stock. Also the Company has granted to certain officers and employees 500,000 stock options which are currently exercisable. As of September 30, 2008, under all Non-Qualified Stock Option Plans, 16,218,171 shares were issued and exercised by certain employees and consultants for services rendered.

 

 

13

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ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

	2008
			Weighted-Average Exercise Price
	Shares
Outstanding at beginning of year	3,302,000		$	2.98
Granted	125,000			0.43
Assumed through acquisitions	-			-
Exercised	-			-
Forfeited/cancelled	(2,927,000)			3.28
Outstanding throughout the period	500,000		$	0.57
Exercisable at September 30, 2008	500,000		$	0.57

 

								Remaining				Average								Average
Class				Number				Average Contractual				Exercise				Number				Exercise
Exercise Price				Outstanding				Life in Years				Price				Exercisable				Price
$	0.10				225,000				0.83			$	0.10				225,000			$	0.10
$	1.38				150,000				0.83			$	1.38				150,000			$	1.38
$	0.43				125,000				2.33			$	0.43				125,000				0.43
					500,000				1.13			$	0.57				500,000			$	0.57

 

 

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008, COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007

 

The following table sets forth summarized consolidated financial information for the three and nine months ended September 30, 2008 and 2007:

		Three Months Ended September 30,																Nine Months Ended September 30,
($ in thousands)		2008				2007				$ Change				% Change				2008				2007				$ Change				% Change
Total sales		$	1,141			$	1,236			$	(95	)			-8%			$	3,821			$	4,165			$	(344	)			-8%
Cost of goods sold			734				894				(160	)			-18%				2,153				2,697				(544	)			-20%
Gross profit			407				342				65				19%				1,668				1,468				200				14%
Percent of total sales			36%				28%												44%				35%
Operating expenses			2,324				1,662				662				40%				7,019				4,668				2,351				50%
Loss from operations			(1,917	)			(1,320	)			(597	)			45%				(5,351	)			(3,200	)			(2,151	)			67%
Other income/(expense)			(227	)			(448	)			221				-49%				(294	)			(1,236	)			942				-76%
Net loss			(2,144	)			(1,768	)			(376	)			21%				(5,645	)			(4,436	)			(1,209	)			27%

 

For the three months ended September 30, 2008, the Company's business operations reflected an increase in sales for Wireless Bundled Services with an offset of decreased sales for both Wireless Messaging Services and Enterprise Network Services. For the three months ended September 30, 2008, the Company's consolidated operations generated net sales of $1,141,000 compared to prior year net sales of $1,236,000. The $95,000 decrease in net sales is primarily attributable to $447,000 decrease in Wireless Messaging Services attributable to prior year sales with the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico project, with no similar sales comparison in the same quarter 2008, a $255,000 decrease in banking network installation and services and offset with an increase of $607,000 in recurring wireless WISP services with the increased growth attributed to recent WISP acquisitions. Product sales decrease $621,000 and offset with an increase in service and other sales of $526,000. The decrease is primarily due to prior year sales in the Wireless Messaging Services associated with El Dorado Golf and Beach Club of San Jose del Cabo, Mexico project and decrease sales in Enterprise Network Services in product and services to banks. For the three months ended September 30, 2008, the Company had a gross profit margin of 36%, compared to a gross profit margin of 28% for the prior year. The increased in gross profit margin is primarily attributable to several factors: (i) Increased WISP customer base in recurring revenue with strong consistent margins on wireless broadband services and (ii) consistent margins in our Wireless Messaging Services change orders in completing the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico project.

 

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For the nine months ended September 30, 2008, the Company's consolidated operations generated net sales of $3,821,000 compared to prior-year net sales of $4,165,000 for the nine months ended September 30, 2007. The $344,000 decrease in net sales is primarily attributable to $1,717,000 decrease in Wireless Messaging Services prior year sales associated with the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico, a $541,000 decrease in banking network installation and services resulting in reduced network construction revenues in 2008 and offset with an increase of $1,914,000 in recurring wireless WISP services with the increased growth attributed to recent WISP acquisitions. For the nine months ended September 30, 2008, the Company had a gross profit margin of 44%, compared to a gross profit margin of 35% for the prior-year nine-month period ended September 30, 2007. The increased in gross profit margin is primarily attributable to several factors: (i) Increased WISP customer base growth through acquisition in recurring revenue with strong consistent margins on wireless broadband services and (ii) consistent margins in our Wireless Messaging Services change orders in completing the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico project.

 

 

SALES INFORMATION

 

Set forth below is a table presenting summarized sales information for our business segments for the three and nine months ended September 30, 2008 and 2007:

($ in thousands)		Three Months Ended September 30,
Business Segment			2008		% of Total			2007		% of Total			$ Change		% Change
Wireless Messaging Services		$	65		6%		$	512		41%		$	(447	)	-87%
Wireless Bundled Services			961		84%			354		29%			607		171%
Enterprise Network Services			115		10%			370		30%			(255	)	-69%
Total Sales		$	1,141		100%		$	1,236		100%		$	(95	)	-8%
($ in thousands)		Nine Months Ended September 30,
Business Segment			2008		% of Total			2007		% of Total			$ Change		% Change
Wireless Messaging Services		$	633		17%		$	2,350		56%		$	(1,717	)	-73%
Wireless Bundled Services			2,945		77%			1,031		25%			1,914		186%
Enterprise Network Services			243		6%			784		19%			(541	)	-69%
Total Sales		$	3,821		100%		$	4,165		100%		$	(344	)	-8%

 

For the three months ended September 30, 2008, net sales decreased to $1,141,000 from $1,236,000 for the three months ended September 30, 2007. The overall decrease of 8% was attributable to a decrease of $447,000 of Wireless Messaging Services, a decrease in Enterprise Network Services of $255,000 and an increase in Wireless Bundled Services of $607,000. The $447,000 decrease in Wireless Messaging Services was primarily attributable to prior year sales with the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico project, with no similar sales comparison in the same quarter 2008. The $255,000 decrease in banking network installation and services was primarily attributable to Banks opting to construct networks in subsequent quarter. The $607,000 increase was primarily attributable to recurring wireless WISP services with recent WISP asset acquisitions including approximately 5,000 customers.

 

For the nine months ended September 30, 2008, net sales decreased to $3,821,000 from $4,165,000 for the nine months ended September 30, 2007. The overall decrease of 8% was primarily attributable to $1,717,000 decrease in Wireless Messaging Services prior year sales associated with the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico. The $541,000 decrease is primarily attributable to banking network installation and services resulting in reduced network construction revenues in 2008. The $1,914,000 increase is primarily attributable to recurring wireless WISP services with the increased sales growth attributed to recent WISP acquisitions.

 

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COST OF GOODS SOLD

 

The following tables set forth summarized cost of goods sold information for the three months ended September 30, 2008 and 2007:

($ in thousands)		Three Months Ended September 30,
Business Segment			2008		% of Total			2007		% of Total			$ Change			% Change
Wireless Messaging Services		$	85		11%		$	434		49%		$	(349	)		-80%
Wireless Bundled Services			513		70%			207		23%			306			148%
Enterprise Network Services			136		19%			253		28%			(117	)		-46%
Total cost of sales		$	734		100%		$	894		100%		$	(160	)		-18%

 

		Three Months Ended September 30,
($ in thousands)		2008				2007				$ Change				% Change
Products and integration service		$	436			$	291			$	145				50%
Rent and maintenance			103				46				57				124%
Salary and related cost			18				230				(212	)			-92%
Depreciation			239				56				183				327%
Other costs			(62	)			271				(333	)			-123%
Total cost of sales		$	734			$	894			$	(160	)			-18%

 

The following tables set forth summarized cost of goods sold information for the nine months ended September 30, 2008 and 2007:

 

($ in thousands)		Nine Months Ended September 30,
			2008		% of Total			2007		% of Total			$ Change			% Change
Wireless Messaging Services		$	320		15%		$	1,627		60%		$	(1,307	)		-80%
Wireless Bundled Services			1,522		71%			471		18%			1,051			223%
Enterprise Network Services			311		14%			599		22%			(288	)		-48%
Total cost of sales		$	2,153		100%		$	2,697		100%		$	(544	)		-20%

 

		Nine Months Ended September 30,
($ in thousands)		2008				2007				$ Change				% Change
Products and integration service		$	953			$	1,736			$	(783	)			-45%
Rent and maintenance			299				138				161				117%
Salary and related cost			74				378				(304	)			-80%
Depreciation			646				143				503				352%
Other costs			181				302				(121	)			-40%
Total cost of sales		$	2,153			$	2,697			$	(544	)			-20%

 

For the three months ended September 30, 2008, cost of goods sold decreased by $160,000, or 18%, to $734,000 from $894,000 as compared to the three months ended September 30, 2007. The decrease of $160,000 in cost of goods sold is primarily attributable to other costs of $333,000 of travel associated with prior year costs with the El Dorado Golf and Beach Club project in Mexico and broadband utility cost due to growth of our WISP customer base; a $212,000 decrease in salary and related costs is due to prior year El Dorado Golf and Beach Club project in Mexico and wireless banking installations; offset with an increase of $145,000 of product and service costs primarily attributable to additional change orders due to the El Dorado Golf and Beach Club project in Mexico and due to increase maintenance and repair cost associated with Hurricane Gustav with our wireless banking networks; a $183,000 increase is attributable to depreciation expense associated with recent acquisitions and growth of our wireless network area to increase our WISP customer base and $57,000 increase is attributable to rent and maintenance cost associated with acquisitions and growth of  our wireless network area to increase our WISP customer base.

 

For the nine months ended September 30, 2008, cost of goods sold decreased by $544,000, or 20%, to $2,153,000 from $2,697,000 as compared to the nine months ended September 30, 2007. The decrease of $544,000 in cost of goods sold is primarily attributable to product and service cost of $783,000 associated with prior year cost with El Dorado Golf and Beach Club project in Mexico and wireless banking installations; a $304,000 decrease in salary and related cost is due to prior year El Dorado Golf and Beach Club project in Mexico and wireless banking installations; a decrease of $121,000 of other cost is primarily attributable to travel cost due to El Dorado Golf and Beach Club project in Mexico and broadband utility cost due to growth of our WISP customer base; offset with an increase of $503,000 is attributable to depreciation expense associated with recent acquisitions and growth of our wireless network area to increase our WISP customer base and $161,000 increase is attributable to rent and maintenance cost associated with acquisitions and growth of  our wireless network area to increase our WISP customer base.

 

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OPERATIONS EXPENSES

 

The following table sets forth summarized operating expense information for the three and nine months ended September 30, 2008 and 2007:

		Three Months Ended September 30,																Nine Months Ended September 30,
($ in thousands)		2008				2007				$ Change				% Change				2008				2007				$ Change				% Change
Employment expenses		$	1,193			$	646			$	547				85%			$	3,433			$	2,246			$	1,187				53%
Professional services			452				588				(136	)			-23%				1,423				1,334				89				7%
Rent and maintenance			98				66				32				48%				281				200				81				41%
Research and development			6				-				6				100%				25				-				25				100%
Depreciation and amortization			208				68				140				206%				674				203				471				232%
Other general and administrative			367				294				73				25%				1,183				685				498				73%
Total operating expenses		$	2,324			$	1,662			$	662				40%			$	7,019			$	4,668			$	2,351				50%

 

For the three months ended September 30, 2008, operating expenses increased by 40% to $2,324,000, as compared to $1,662,000 for the three months ended September 30, 2007. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:

 

·	A $547,000 increase in employment expense. The increase is primarily attributable to growth of the company through recent acquisitions;

 

·	A $136,000 decrease in professional services. The decrease is primarily related to legal expenses related to registration filings in the prior year;

 

·	A $32,000 increase in rent and maintenance. The increase is primarily attributable to growth of the company through recent acquisitions;

 

·	A $6,000 increase in research and development expense. The increase is primarily attributable to expense in improving efficiencies of VOIP data encryption;

 

·	A $140,000 increase in depreciation and amortization; The increase is primarily attributable to growth of the company through recent acquisitions; and

 

·	A $73,000 increase in other general and administrative expense.

 

For the nine months ended September 30, 2008, operating expenses increase by 50% to $7,019,000, as compared to $4,668,000 for the nine months ended September 30, 2007. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:

 

·	A $1,187,000 increase in employment expense. The increase is primarily attributable to growth of the company through recent acquisitions;

 

·	A $89,000 increase in professional services. The increase is primarily related to accounting expenses related to recent acquisitions and audits;

 

·	A $81,000 increase in rent and maintenance. The increase is primarily attributable to growth of the company through recent acquisitions;

 

·	A $25,000 increase in research and development expense. The increase is primarily attributable to expense in improving efficiencies of VOIP data encryption;

 

·	A $471,000 increase in depreciation and amortization; The increase is primarily attributable to growth of the company through recent acquisitions; and

 

·	A $498,000 increase in other general and administrative expense.

 

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OTHER (INCOME) EXPENSE, NET

 

For the nine months ended September 30, 2008, the decrease in other (income) expense is primarily attributable to derivative income of $287,000 and interest expense of $616,000, net as compared to $330,000 derivative expense and $903,000, net, respectively for the nine months ended September 30, 2007. The derivative income represents the net unrealized (non-cash) charge during the nine months ended September 30, 2008, 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.

 

NET LOSS

 

For the nine months ended September 30, 2008, our net loss was $5,645,000 compared to a loss of $4,436,000 for the nine months ended September 30, 2007. The increase in the loss for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007, is primarily attributable to increase in employment, professional services, depreciation and amortization and general and administrative.

 

CASH FLOWS

 

The Company's operating activities increased net cash used by operating activities to $3,004,000 in the nine months ended September 30, 2008, compared to net cash used of $1,376,000 in the nine months ended September 30, 2007. The increase in net cash used by operating activities was primarily attributable to fund an increase in the company's net operating loss $5,645,000, net of $3,306,000 non-cash charges combined with derivative income $287,000 to equal net non-cash charge of $3,019,000, combined together with $378,000 of cash used by fluctuations in working capital requirements consisting of the combination of accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses, cost and profit in excess of billings, deferred liability lease and deferred revenue.

 

The Company's investing activities used net cash of $851,000 in the nine months ended September 30, 2008, compared to use of net cash of $475,000 in the nine months ended September 30, 2007. The increase in investing activities is primarily growing WISP capabilities through asset acquisition and expansion of our infrastructure in Texas, New Mexico and Louisiana.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2008, the Company's current assets totaled $1,648,000 (including cash and cash equivalents of $195,000). Total current liabilities were $3,347,000, resulting in negative working capital of $1,699,000. The Company has funded operations to date through a combination of utilizing cash on hand, issuing common stock to settle certain current liabilities, borrowings and raising additional capital through the sale of its securities. The Company operations for the nine months ended September 30, 2008, was primarily funded by proceeds from the Company's line of credit totaling $2,134,000, sale of restricted common stock, net to accredited investors of $270,000, and convertible debt financing of $50,000.

 

CURRENT DEBT FACILITY

 

At September 30, 2008, the Company had approximately $1,957,000 available on a $6.5 million unsecured revolving credit facility with Angus Capital Partners, which matures in March 2011. The terms of the two-year 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.

 

ISSUANCE OF COMMON STOCK

 

During the nine months ended September 30, 2008, we issued to various accredited investors an aggregate of 621,000 shares of restricted common stock for net consideration of $270,000. We relied on Section 4(2) of the Act in effecting this transaction.

 

During the nine months ended September 30, 2008, we issued 3,509,592 shares of common stock to employees and business consultants, for aggregate consideration of $1,528,024 of services rendered, pursuant to a registration statement on form S-8.

 

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DUTCHESS FACILITY

 

On June 14, 2007, we entered into an Investment Agreement with Dutchess whereby Dutchess agreed to purchase up to $10,000,000 of our common stock over the course of thirty-six (36) months.  The Company filed a Registration Statement with the SEC covering an issuance of 10,000,000 of common stock under the equity line agreement. The Company has received comments from the SEC and intends to refile a pre-effective amendment to the registration with updated audited financial statements during 2008.

 

USE OF WORKING CAPITAL

 

We believe our cash, anticipated cash flow from operations and available credit facilities afford us adequate liquidity for the balance of fiscal 2008, although we expect to raise additional capital during this period to fund our anticipated growth for our banking and WISP network businesses if acceptable terms are available. Furthermore, we anticipate that we will need additional capital in the future to continue to expand our business operations, which expenditures may include the following:

 

·	Acquisitions of one or more companies, networks or other assets:

 

·	Investment in towers, radios, customer premise equipment and other related equipment associated with wireless broadband expansion plans:

 

·	Investment in back office systems and related infrastructure to support the Company's wireless broadband expansion plans:

 

·	Investment in laboratory facilities including test and simulation equipment:

 

·	Investment or licensing of certain intellectual property related to the Company's wireless broadband expansion plans:

 

·	General working capital purposes.

 

We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity 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 sell assets or curtail operations.

 

CONTRACTUAL OBLIGATIONS

 

The following table sets forth contractual obligations as of September 30, 2008:

		Payments Due by Period
		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Contractual obligations:
Long-term debt obligations		$	5,868			$	515			$	5,353			$	-			$	-
Capital lease obligations			2,832				254				2,183				384				11
Operating lease obligations			1,791				153				1,543				64				31
Total contractual obligations		$	10,491			$	922			$	9,079			$	448			$	42

 

The Company's contractual obligations consist of long-term debt of $5,868,000, derivative liabilities of $96,000 unamortized debt discount of $15,000 and interest expense of $392,000 as set forth in Note 7 to the company's financial statements, Notes Payable and Long-Term Debt, and certain obligations for operating leases requiring future minimal commitments under non-cancelable leases set forth in Note 9 - Commitments and Contingencies.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of September 30, 2008, 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 table above.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

GENERAL

 

We have adopted various accounting policies to prepare our consolidated financial statements in accordance with U.S. GAAP. Our most significant accounting policies are described in Note 1 to our consolidated financial statements included elsewhere in this report. The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, sales returns and discounts, and income taxes are updated as appropriate.

 

Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, and our observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. Different, reasonable estimates could have been used in the current period. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.

 

PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

DEFERRED SYNDICATION COSTS

 

Deferred syndication costs consist of those expenditures incurred that are directly attributable to fundraising and the collection thereto. Upon successful collection of the funds, all expenses incurred will be reclassified to additional paid in capital and treated as syndication costs; netted against the funds raised.

 

REVENUE RECOGNITION

 

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.

 

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WARRANTY

 

The Company's suppliers generally warrant the products distributed by the Company and allow returns of defective products, including those that have been returned to the Company by its customers. The Company does not independently warrant the products that it distributes, but it does provide warranty services on behalf of the supplier.

 

FIXED ASSETS

 

Furniture and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The costs associated with normal maintenance, repair, and refurbishment of equipment are charged to expense as incurred. The capitalized cost of equipment and vehicles under capital leases is amortized over the lesser of the lease term or the asset's estimated useful life, and is included in depreciation and amortization expense in the consolidated statements of operations.

 

When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized as income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deductions are made for retirements resulting from renewals or betterments.

 

GOODWILL

Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the dates of acquisition. Under current accounting pronouncement, the company is required to annually assess the carrying value of goodwill associated with each of its distinct business units that comprise its business segments of the company to determine if impairment in value has occurred.

 

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;

 

·	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.

 

CONCENTRATIONS OF CREDIT RISK

 

Trade accounts receivable are concentrated with companies or entities in the regional banking and Internet services industry. Accordingly, the credit risk associated with the trade accounts receivable will fluctuate with the overall condition of the regional banking and Internet services industries. The primary component of accounts receivable relates to the Company's sales of banking wireless broadband networks and Internet service revenues. As a result, such estimates are based on the Company's historical collection experience and accounts receivable does reflect a general or specific provision for an allowance for doubtful accounts. During all periods presented, credit losses, to the extent identifiable, were within management's overall expectations.

 

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DERIVATIVE INSTRUMENTS

 

In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

 

The identification of, and accounting for, derivative instruments is complex. 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, we estimate 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, we have estimated the future volatility of our common stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. We expect SFAS No. 141R will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date. We are still assessing the impact of this standard on our future consolidated financial statements.

 

INFLATION

 

The Company's results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future.

 

 

ITEM 1. LEGAL PROCEEDINGS

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following transactions were completed pursuant to either Section 4(2) of the Securities Act or Regulation D of the Securities Act. With respect to issuances made pursuant to Section 4(2) of the Securities Act, the transactions did not involve any public offering and were sold to a limited group of persons. Each recipient either received adequate information about ERF Wireless or had access, through employment or other relationships, to such information, and ERF Wireless determined that each recipient had such knowledge and experience in financial and business matters that they were able to evaluate the merits and risks of an investment in the Company.

 

With respect to issuances made pursuant to Regulation D of the Securities Act, ERF Wireless determined that each purchaser was an "accredited investor" as defined in Rule 501(a) under the Securities Act, or if such investor was not an accredited investor, that such investor received the information required by Regulation D.

 

 

On January 7, 2008, an accredited investor acquired 50,000 shares of common stock at $1.06 per share.

 

On February 6, 2008, accredited investors acquired 52,615 shares of common stock at $0.65 per share.

 

On March 14, 2008, accredited investors acquired 518,987 shares of common stock at $0.40 per share.

 

On March 31, 2008, accredited investors acquired 196,850 shares of common stock at $0.38 per share pursuant to a conversion of E-series bonds.

 

On March 31, 2008, accredited investors acquired 191,571 shares of common stock at $0.13 per share pursuant to a conversion of E-series bonds.

 

On March 31, 2008, accredited investors acquired 40,783 shares of common stock at $0.61 per share pursuant to a conversion of E-series bonds.

 

On August 19, 2008, accredited investors acquired 80,828 shares of common stock at $0.31 per share pursuant to a conversion of E-series bonds.

 

On January 10, 2008, an accredited investor acquired 2,457,716 shares of common stock pursuant to Preferred A Conversions.

 

On March 14, 2008, an accredited investor acquired 28,803 shares of common stock pursuant to Preferred A Conversions.

 

On March 25, 2008, an accredited investor acquired 6,217,131 shares of common stock pursuant to Preferred A Conversions.

 

On April 10, 2008, an accredited investor acquired 308,160 shares of common stock pursuant to Preferred A Conversions.

 

On April 21, 2008, an accredited investor acquired 28,542 shares of common stock pursuant to Preferred A Conversions.

 

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On April 30, 2008, an accredited investor acquired 3,302,168 shares of common stock pursuant to Preferred A Conversions.

 

On July 29, 2008, an accredited investor acquired 1,548,042 shares of common stock pursuant to Preferred A Conversions.

 

On August 04, 2008, an accredited investor acquired 280,146 shares of common stock pursuant to Preferred A Conversions.

 

On August 25, 2008, an accredited investor acquired 933,818 shares of common stock pursuant to Preferred A Conversions.

 

On September 08, 2008, an accredited investor acquired 1,867,635 shares of common stock pursuant to Preferred A Conversions.

 

ITEM 3. DEFAULT IN SENIOR SECURITIES

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

Exhibit 31

Certification of Chief Executive officer and Chief Financial officer pursuant to Rules 13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ERF Wireless, Inc.
	By:  /s/H. Dean Cubley
	H. Dean Cubley Chief Executive Officer
	Date:  November 14, 2008

 

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