ERF Wireless 10Q 2014 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

ERF WIRELESS, INC.
(Exact name of registrant as specified in its charter)

Nevada		000-27467		76-0196431
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

2911 SOUTH SHORE BOULEVARD, SUITE 100, LEAGUE CITY, TEXAS 77573
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:(281) 538-2101

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes ☒ No ☐

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

Yes ☒ No ☐

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

	Large accelerated filer£	Accelerated filer£
	Non-accelerated filer£	Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 2,478,115 common shares issued and outstanding as of May 20, 2014

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

Unaudited

	March 31,			December 31,
	2014			2013
ASSETS
Current assets
Cash and cash equivalents	$	216		$	42
Accounts receivable, net		551			1,001
Accounts receivable, other		332			489
Inventories		252			264
Prepaid expenses and other current assets		230			286
Total current assets		1,581			2,082

Property and equipment
Property and equipment		12,172			12,142
Less: accumulated depreciation		(9,799	)		(9,365	)
Net property and equipment		2,373			2,777

Goodwill		176			176
Other assets		37			37

Total assets	$	4,167		$	5,072

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt	$	3,622		$	3,183
Current portion of long-term capital leases		231			252
Accounts payable		964			1,299
Accrued expenses		1,321			1,158
Derivative liabilities		398			677
Deferred revenue		7			13
Total current liabilities		6,543			6,582

Line of credit (LOC)		4,514			4,281
Long-term debt, net of current portion		781			1,024
Long-term capital leases, net of current portion		134			174
Total liabilities		11,972			12,061

Commitments

Shareholders’ deficit:
Preferred stock - $0.001 par value, 25,000,000 authorized Series A designated 10,000,000 shares Issued and outstanding at March 31, 2014 and December 31, 2013, 9,380,129 and 9,930,982 shares, respectively		9			10
Common stock - $0.001 par value Authorized 975,000,000 shares Issued and outstanding at March 31, 2014 and December 31, 2013, 1,001,743 and 111,633 shares, respectively		1			–
Additional paid in capital		56,412			56,177
Accumulated deficit		(64,326	)		(63,276	)
Accumulated other comprehensive loss		(32	)		(32	)
Total ERF Wireless, Inc. shareholders’ deficit		(7,936	)		(7,121	)
Non-controlling interest		131			132
Total shareholders’ deficit		(7,805	)		(6,989	)

Total liabilities and shareholders' deficit	$	4,167		$	5,072

See accompanying notes to consolidated financial statements.

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

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

	2014			2013

Sales:
Products	$	17		$	11
Services		1,575			1,902
Total sales		1,592			1,913

Cost of goods sold:
Products and integration services		312			394
Rent, repairs and maintenance		210			194
Depreciation		410			436
Total cost of goods sold		932			1,024
Gross profit		660			889
Operating expenses:
Selling, general and administrative		1,341			1,966
Depreciation		23			52
Total operating expenses		1,364			2,018
Loss from operations		(704	)		(1,129	)
Other income (expenses):
Interest expense, net		(446	)		(758	)
Derivative income		207			234
Loss on extinguishment of debt		(108	)		–
Total other expense		(347	)		(524	)
Consolidated net loss		(1,051	)		(1,653	)

Net income (loss) attributable to non-controlling interest		1			(3	)
Net loss attributable to ERF Wireless, Inc.	$	(1,050	)	$	(1,656	)
Basic and diluted loss per common share:
Net loss	$	(2.65	)	$	(97.24	)
Net loss attributable to ERF Wireless, Inc.	$	(2.64	)	$	(97.41	)

See accompanying notes to consolidated financial statements.

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)
($ in thousands)

	2014			2013

Cash flows from operating activities
Net loss	$	(1,051	)	$	(1,653	)

Adjustments to reconcile net loss to net cash used by operating activities:
Gain on sale of assets		–			(11	)
Loss on extinguishment of debt		108			–
Amortization of debt discount		127			350
Depreciation		433			488
Stock issued for services rendered, interest and compensation		42			496
Derivative income		(207	)		(234	)
Bad debt expense		9			1
Changes in:
Accounts receivable, net		441			(18	)
Accounts receivable, other		157			(18	)
Inventories		12			(14	)
Prepaid expenses and other current assets		56			9
Costs and profits in excess of billings		–			(4	)
Accounts payable		(334	)		(201	)
Accrued expenses		212			(294	)
Deferred revenue		(6	)		(6	)
Total adjustments		1,050			544
Net cash used by operating activities		(1	)		(1,109	)

Cash flows from investing activities
Purchase of property and equipment		(30	)		(85	)
Proceeds from sale of assets		–			17
Change in other assets		–			1
Net cash used by investing activities		(30	)		(67	)

Cash flows from financing activities
Net proceeds from line of credit		292			566
Proceeds from long-term debt obligations		–			1,200
Payment of long-term debt obligations		(26	)		(618	)
Payment on capital lease obligations		(61	)		(34	)
Net cash provided by financing activities		205			1,114

Net change in cash and cash equivalents		174			(62	)
Cash and cash equivalents at the beginning of the period		42			118
Cash and cash equivalents at the end of the period	$	216		$	56

Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest	$	70		$	87
Income taxes	$	–		$	–

Supplemental non-cash investing and financing activities:
Conversion of notes payable and line of credit principal through issuance of common stock	$	121		$	1,408

See accompanying notes to consolidated financial statements.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

Nature of the Company

ERF Wireless, Inc. (“Company” or “ERF Wireless”) provides critical infrastructure wireless broadband communications products and services to a broad spectrum of customers in primarily rural oil and gas exploration areas of North America. We also provide high quality broadband services and critical communications services to residential, oil and gas, educational, health care, and regional banks in rural areas utilizing our Company owned and operated wireless networks. As a total comprehensive solutions provider we offer a wide array of critical communications services including high speed broadband, voice over Internet Protocol (VOIP) telephone and facsimile service, and video security.

Historically, our revenues have been generated primarily from wireless internet and network construction services. Our Internet revenues have resulted from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues typically have consisted of revenues generated from the construction of bank, educational, and healthcare networks and other services associated with providing wireless products and services to the regional banking, educational and healthcare industries.

Our internet revenues are recorded in “ERF Wireless Bundled Services, Inc. (WBS)”, revenues from construction of bank, healthcare and educational networks in our “ERF Enterprise Network Services, Inc. (ENS)” and wireless broadband products and services to rural oil and gas locations are recorded in “Energy Broadband, Inc. (EBI)”. Please refer to segment footnote 9 for additional information regarding segment operations.

Basis of Accounting

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's annual report for the year ended December 31, 2013 filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the most recent fiscal year ended December 31, 2013 as reported in form 10-K have been omitted.

Non-controlling Interest

Non-controlling interest in our majority owned subsidiary EBI, is included in the equity section of the consolidated balance sheets. Non-controlling interest represents 3.63% of the equity of EBI and any transfer of value from ERF to non-controlling interest holders. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses of EBI. Any excess losses applicable to the non-controlling interests have been and are borne by the Company as there is no obligation of the non-controlling interests to fund any losses in excess of their original investment. There is also no obligation or commitment on the part of the Company to fund operating losses of any subsidiary whether wholly-owned or majority-owned.

Reclassification

Certain amounts in the 2013 financial statements have been reclassified to conform to the 2014 financial presentation. These reclassifications have no impact on net loss.

Recent Accounting Pronouncements

Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

NOTE 2 - DEBT CONVERSION

(a) LINE OF CREDIT

During the three months ended March 31, 2014, the Company issued 105,000 shares of its common stock for the settlement of $52,482 of principal owed to Angus Capital Partners. The Company issued common stock at an average price of $.50 per share calculated based on the closing price the day the debt was settled.

(b) Other Debt

During the three months ended March 31, 2014, the Company issued 155,937 and 48,743 shares of its Common Stock for the settlement of principal amount of $68,667 and $39,315 of interest, respectively, for a total of $107,982. The Company issued Common Stock at an average price of $.53 per share calculated based on the closing price the day the debt was settled.

NOTE 3 - COMMON STOCK , PREFERRED STOCK AND WARRANTS

The total number of shares of stock of all classes which the Company shall have the authority to issue is 1,000,000,000, of which 25,000,000 shall be shares of preferred stock with a par value of $0.001 per share ("Preferred Stock"), and 975,000,000 shall be shares of common stock with a par value of $0.001 per share ("Common Stock").

Common Stock

As of March 31, 2014 and December 31, 2013, there were 1,001,743 and 111,633 shares of its Common Stock issued and outstanding, respectively.

During the three months ended March 31, 2014, the Company issued 376,042 shares of Common Stock which was valued at the closing market price on the date of issuance of such shares, which were issued in lieu of cash as payment for the following (in thousands):

March 31, 2014	Supplemental Non-Cash Disclosure
Professional fees	$	23
Other services rendered		19
Total for services, compensation and interest	$	42

Notes payable, principal	$	69
Line of credit, principal	$	52

Preferred Stock

The Company has 25,000,000 shares of Preferred Stock authorized of which 10,000,000 shares had been designated as Series A Preferred Stock (“Series A Preferred Stock”). There were 9,380,129 of Series A Preferred Shares issued and outstanding at March 31, 2014 and 9,930,982 at December 31, 2013. With respect to the Series A referred Stock outstanding at March 31, 2014, the Company would be required to issue 9,380,129 shares of its Common Stock upon conversion. During the period ended March 31, 2014, 550,853 Series A Preferred Stock were converted into 514,068 shares of common stock.

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

As of March 31, 2014, the Company had issued 725,611 shares of EBI as a stock dividend and three year warrant expiring December 31, 2014, to purchase 725,611 shares of EBI Common Stock at an exercise price of $4.00 per share and three year warrant expiring December 31, 2014, to purchase 725,611 shares of EBI Common Stock at an exercise price of $6.00; such issuances are valued at $107,000. The Company expects to issue the remaining stock dividends during calendar year 2014. No stock dividends were issued during the three months ended March 31, 2014.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

NOTE 4 - EARNINGS PER SHARE:

The following table sets forth the computation of basic and diluted earnings per share of Common Stock (in thousands, except per share amount):

	For the three months ended March 31, 2014
	Net loss			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Basic and diluted EPS:
Net loss	$	(1,051	)		397	$	(2.65	)
Net loss attributable to ERF Wireless, Inc.	$	(1,050	)		397	$	(2.64	)

		For the three months ended March 31, 2013
		Net loss		Shares		Per-Share
		(Numerator)		(Denominator)		Amount
Basic and diluted EPS:
Net loss	$	(1,653	)	17	$	(97.24	)
Net loss attributable to ERF Wireless, Inc.	$	(1,656	)	17	$	(97.41	)

For the three months ended March 31, 2014, dilutive securities existed, but due to the Company’s net loss there is an anti-dilutive effect. Diluted earnings per share reflect the potential dilution of security that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities.

The calculation of diluted earnings per share for the three months ended March 31, 2014 does not include 598,077 shares of Common Stock underlying the Bonds (as define below); 529 of warrants underlying promissory convertible debt, 2,677,382 shares of Common stock underlying promissory convertible debt and 9,380,129 shares of Common Stock underlying the Series A Preferred Stock, due to their anti-dilutive effect.

NOTE 5 - MAJOR CUSTOMERS

The Company had gross sales of $1,592,000 and $1,913,000 for the three months ended March 31, 2014 and 2013, respectively. The Company had two customers that met the required disclosure of 10% that represented 38% and 11% of the gross sales during the three months ended March 31, 2014. Additionally, the Company had two customers that met the required disclosure of 10% that represented 36% and 13% of the gross sales during the three months ended March 31, 2013.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

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

Notes payable, long-term debts and capital leases consist of the following as of March 31, 2014 (in thousands):

	Terms	Maturity Date	Interest Rate	Gross Balance		Debt Discount		Balance
Banc leasing, Inc.	$10,660 / Month including interest	January-15	11.62%	$	101	$	–	$	101
Advantage leasing associates	$8,269 / Month including interest	Various	Various		93		–		93
Legacy laser services Dallas, LLC	$9,947 / Month including interest	May-16	42.00%		170		–		170
MP Nexlevel LLC	$7,043 / Month including interest	May-14	10.00%		14		–		14
Tonaquint	$950,400 / Lump sum payment including interest	Immediately due and payable	12.00%		764		–		764
JMJ Financial	$330,000 / Lump sum payment including interest	March-14	12.00%		204		92		112
Vista capital	$72,600 / Lump sum payment including interest	Immediately due and payable	12.00%		64		–		64
Willow creek capital	$293,040 / Lump sum payment including interest	Immediately due and payable	12.00%		202		–		202
TCA global line of credit	$139,523 / Month including interest	July-14	12.00%		1,136		102		1,034
Group 10	$157,500 / Month including interest	July-14	12.00%		157		128		29
Investor financing	$495,000 / Lump sum payment including interest	April-14	12.00%		523		–		523
Premium assignment	$2,063 / Month including interest	September-14	5.68%		12		–		12
Dakota capital equipment financing	$178,031 / Quarterly including interest	March-16	12.00%		1,519		16		1,503
E-bond investor notes	3 years/ Semiannual interest (See below)	Various	7.50%		311		164		147
Line of credit	2 years/ Quarterly interest (See below)	December-16	3.00%		4,514		–		4,514
Total debt				$	9,784	$	502		9,282
Less current maturities									(3,853	)
Long-term debt								$	5,429

Notes payable, long-term debts and capital leases consist of the following as of December 31, 2013 (in thousands):

	Terms	Maturity Date	Interest Rate	Gross Balance		Debt Discount		Balance
Banc leasing, Inc.	$10,660 / Month including interest	January-15	11.62%	$	130	$	–	$	130
Advantage leasing associates	$8,269 / Month including interest	Various	Various		115		–		115
Legacy laser services Dallas, LLC	$9,947 / Month including interest	May-16	42.00%		181		–		181
MP Nexlevel LLC	$7,043 / Month including interest	May-14	10.00%		34		–		34
Tonaquint	$950,400 / Lump sum payment including interest	Immediately due and payable	12.00%		793		–		793
JMJ Financial	$330,000 / Lump sum payment including interest	March-14	12.00%		232		174		58
Vista capital	$72,600 / Lump sum payment including interest	Immediately due and payable	12.00%		51		–		51
Willow creek capital	$293,040 / Lump sum payment including interest	Immediately due and payable	12.00%		228		–		228
TCA global line of credit	$139,523 / Month including interest	July-14	12.00%		1,019		104		915
Group 10	$157,500 / Month including interest	July-14	12.00%		157		143		14
Investor financing	$495,000 / Lump sum payment including interest	April-14	12.00%		473		–		473
Premium assignment	$2,063 / Month including interest	September-14	5.68%		18		–		18
Dakota capital equipment financing	$178,031 / Quarterly including interest	March-16	12.00%		1,519		25		1,494
E-bond investor notes	3 years/ Semiannual interest (See below)	Various	7.50%		311		182		129
Line of credit	2 years/ Quarterly interest (See below)	December-16	3.00%		4,281		–		4,281
Total debt				$	9,542	$	628		8,914
Less current maturities									(3,435	)
Long-term debt								$	5,479

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

Line of Credit

In December 2013, the maturity date of the $12.0 million unsecured revolving credit facility with Angus Capital Partners, a related party, was extended from December 31, 2015 to December 31, 2017. The Company also renegotiated the interest rate from 12% per annum to 3% per annum retroactive to January 1, 2013. The Company in consideration has accepted the return and cancellation of 36,784 common shares (post-split) of Company common stock issued for the Line of Credit conversions during 2013. The Company has accordingly reversed the payment of principal and interest of $2,158,000 in December 2013 and subsequently received the canceled shares in February 2014. The terms of the unsecured revolving credit facility allow the Company to draw upon the facility as financing requirements dictate and provide for quarterly interest payments at a 3% rate per annum. The payment of principal may be paid in cash, common shares or preferred shares at the Lender’s election. The payment of interest may only be paid in cash. At March 31, 2014, the outstanding balance on the line of credit totaled $4,514,000 leaving a remaining line of credit available of $7,486,000.

E-Series Bond Investor Note

During the three months ended March 31, 2014, the outstanding principal balance of the Bonds totaled $311,000. The Bonds are due and payable upon maturity, a three-year period from the issuance date. Interest on the Bonds is payable at the rate of 7.5% per annum, and is payable semiannually. The Bondholder may require the Company to convert the Bond (including any unpaid interest) into shares of Common Stock at any time only during the first year. If the Bonds are converted under this option, the Company will issue shares representing 100% of the Bond principal and unpaid interest calculated through maturity. The Common Stock issued under this option will be valued at the average closing price of the common shares for the five days prior to the notification. If the Bond is converted within the first year the Company will issue a three-year warrant to purchase one share of EBI Common Stock at a price of $4.00 for every $2.00 of Bond principal.

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

The Bonds were determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Bond, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $18,000 for the three months ended March 31, 2014. The estimated debt accretion for subsequent years is $75,000 and $89,000 for years ending December 31, 2014, and 2015, respectively.

The following table summarizes the convertible debt activity for the period from January 1, 2014 through March 31, 2014:

Description	Bonds		Compound Derivative Liability			Total
Fair value at December 31, 2013	$	128,762	$	39,730		$	168,492
Change in fair value		17,995		(6,339	)		11,656
Fair value at March 31, 2014	$	146,757	$	33,391		$	180,148

The Company recorded derivative income of $6,339 for the three months ended March 31, 2014.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

Dakota Capital Fund LLC Equipment Financing

In November 2011, the Company entered into debt financing agreement with Dakota Capital Fund LLC, for financing of up to $3,000,000. During the fourth quarter of 2011, the Company received proceeds of $2,000,000 and had the option of additional funding of $1,000,000 for equipment purchases. This debt facility is secured by certain ERF Wireless assets and there is no prepayment penalty. At March 31, 2014, the outstanding balance on the debt financing agreement totaled $1,519,000 and the Company has elected not to request any additional funds under this credit facility. The payment terms are $178,031 per quarter including interest, at an annual rate of 18% per annum plus 10% of positive operational cash flow as determined on a quarterly basis for repayment of additional principal beginning July 1, 2012. The funding was utilized to purchase equipment to build out networks in oil and gas exploration regions of North America.

The Company issued 30,000 shares of Common Stock for the consummation of the initial $2,000,000 debt financing agreement from Dakota Capital Fund LLC resulting in a debt discount of $93,600. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and accretes the unamortized discount upon conversion which totaled $9,000 for the three months ended March 31, 2014. The estimated debt accretion for subsequent years is $8,653 and $16,000 for years ending December 31, 2014.

Investor Financing Loan

On July 13, 2012, the Company entered into a three-month secured debt financing agreement with certain individuals for $1,000,000 with an interest rate of 12% per annum. Under a subsequent modified agreement dated April 2014, as amended, the maturity date has been extended from April 15, 2014 to October 15, 2014. Both parties under the amendment agreed to apply the Dakota Capital Fund payment of $181,235 including interest as a subset to the bridge note. The Company has also renegotiated the subset interest rate from .5% interest per day on a 360 day calendar year to 12% rate per annum retroactive to March 23, 2013. The Company in consideration has accepted the return and cancellation of 796 common shares (post-split) of Company common stock issued during the third quarter of 2013 for interest. The Company also agreed to additional consideration of 5,000 of preferred A shares to be issued as long as the note remains unpaid and to be remitted once the note is paid in full. The Company has agreed to add a $50,000 penalty to principal in January 2014 for the consideration of the extension of the note. The Company has accordingly reversed the payment of interest of $159,259 in December 2013. The Company has agreed to add an additional $25,000 penalty to principal in April 2014 for the extension of the note to October 2014. In addition the Company will pay $1,500 toward the bridge loan interest on the 1st and 15th of each month beginning May 15,2014 until loan is fully paid. At March 31, 2014, the outstanding principal balance totaled $523,000.

Tonaquint Convertible Promissory Note

On March 5, 2013, the Company entered into a six-month secured convertible promissory note secured debt financing agreement with Tonaquint, Inc. (“holder”), for $791,500, bearing interest at a rate of 12% per annum and maturing September 5, 2013. At March 31, 2014, the outstanding principal balance of the Tonaquint convertible promissory note totaled $764,000. The note includes an original issue discount (“OID”) of $65,000 based on the consideration funded, prepaid interest of $71,500 and $5,000 in legal and other expense. The Company also paid holder an origination fee in the amount of $227,500 in 144 Stock (711 post-split shares) at the closing bid price on March 5, 2013, plus 125 post-split shares (valued at $40,000) of the Company’s common stock. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the six-month term of the note. The common stock issued will be valued using a conversion factor of 80% of the average of the lowest two (2) trading prices for common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder received the option to purchase five-year warrants expiring March 5, 2018 to purchase 371 shares of ERF common stock at an exercise price of $320.00 or the per-share price at which the common stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this warrant. The Company is not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $791,500 to $949,800. The note will accrue interest at a rate of 12% from September 5, 2013 until the March 4, 2014 and thereafter at a rate of 18% per annum. The note is recorded as a current liability.

The Tonaquint promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Tonaquint note, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement of operations. The Company used the effective interest method to record interest expense from the accretion of the debt discount.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

The following table summarizes the convertible debt activity for the period from January 1, 2014 through March 31, 2014:

Description	Tonaquint			Warrant Compound Derivative Liability			Compound Derivative Liability			Total
Fair value at December 31, 2013	$	793,368		$	96		$	80,569		$	874,033
Change in fair value		–			(84	)		(80,569	)		(80,653	)
Conversions		(28,841	)		–			–			(28,841	)
Fair value at March 31, 2014	$	764,527		$	12		$	–		$	764,539

The Company recorded derivative income of $54,635 for the three months ended March 31, 2014.

JMJ Financial Convertible Promissory Note

On March 20, 2013, the Company entered into a one year unsecured promissory note debt financing agreement with JMJ Financial for (“JMJ”) up to $500,000 at the sole discretion of additional consideration with the Lender. The note includes a 10% original issue discount that is prorated based on the consideration funded. The Company also paid holder an origination fee in the amount of $40,500 in 144 Stock (125 post-split shares) at the closing bid price of the Company’s common stock. As of March 31, 2014 the Company has received funding of $300,000, bearing interest at a rate of 12% per annum and maturing in one year from the effective date of each payment. At March 31, 2014, the outstanding principal balance of the JMJ Financial convertible promissory note totaled $204,000 including OID. The conversion price is the lesser of $0.59 or 60% of the lowest trade price in the 25 trading days previous to the conversion. The note is recorded as a current liability.

The JMJ promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the JMJ note, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $81,248 for the three months ended March 31, 2014. The estimated debt accretion for the remainder of 2014 is $92,069.

The following table summarizes the convertible debt activity for the period from January 1, 2014 through March 31, 2014:

Description	JMJ			Compound Derivative Liability			Total
Fair value at December 31, 2013	$	58,363		$	134,113		$	192,476
Change in fair value		81,248			(115,607	)		(34,359	)
Conversions		(27,530	)		–			(27,530	)
Fair value at March 31, 2014	$	112,081		$	18,506		$	130,587

The Company recorded derivative income of $100,716 for the three months ended March 31, 2014.

Willow Creek Capital Convertible Promissory Note

On April 2, 2013, the Company entered into a nine-month secured convertible promissory note debt financing agreement with Willow Creek Capital, LLC, for $244,200, bearing interest at a rate of 12% per annum and maturing October 1, 2013. At March 31, 2014, the outstanding principal balance of the Willow Creek convertible promissory note totaled $228,000. The note also includes a 10% OID of $20,000 based on the consideration funded, prepaid interest of $22,200 and $2,000 in legal and other expense. The Company also paid holder an origination fee in the amount of $109,890 in 144 Stock (366 post-split shares) at the closing bid price of the Company’s common stock. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the six months term of the note. The common stock issued will be valued using a conversion factor of 80% the average of the lowest two (2) trading prices common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder will be entitled to purchase from the Company five year warrants expiring April 2, 2018 to purchase 122 post-split shares of ERF common stock at an exercise price of $300.00 or the per-share price at which the common stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this Warrant.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

The Willow Creek promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature; conversion price full ratchet reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Willow Creek note, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement of operations. The Company used the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion. The Company is not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $244,200 to $293,040. The note will accrue interest at a rate of 12% from October 1, 2013 until the April 1, 2014 and thereafter at a rate of 18% per annum. The note is recorded as a current liability.

The following table summarizes the convertible debt activity for the period from January 1, 2014 through March 31, 2014:

Description	Willowcreek			Compound Derivative Liability			Total
Fair value at December 31, 2013	$	227,800		$	51,276		$	279,076
Change in fair value		–			(50,204	)		(50,204	)
Conversions		(26,183	)		–			(26,183	)
Fair value at March 31, 2014	$	201,617		$	1,072		$	202,689

The Company recorded derivative income of $20,422 for the three months ended March 31, 2014.

Vista Capital Convertible Promissory Note

On April 4, 2013, the Company entered into a six-month secured convertible promissory note debt financing agreement with Vista Capital Investments, LLC, for $60,500, bearing interest at a rate of 12% per annum and maturing October 4, 2013. The note also includes a 10% OID of $5,000 based on the consideration funded and prepaid interest of $5,500. The Company also paid holder an origination fee in the amount of $21,175 in 144 Stock (84 post-split shares) at the closing bid price of the Company’s common stock. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the six months term of the note. The common stock issued will be valued using a conversion factor of 80% the average of the lowest two (2) trading prices common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder will be entitled to purchase from the Company five year warrants expiring April 4, 2018 to purchase 36 post-split shares of ERF common stock at an exercise price of $320.00 or the per-share price at which the common stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this Warrant.

The Vista promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature; conversion price full ratchet reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Vista note, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement of operations. The Company used the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion. The Company is not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $60,500 to $72,600. The note will accrue interest at a rate of 12% from October 4, 2013 until the April 3, 2014 and thereafter at a rate of 18% per annum. At March 31, 2014, the outstanding principal balance of the Vista Capital convertible promissory note totaled $64,000.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

The following table summarizes the convertible debt activity for the period from January 1, 2014 through March 31, 2014:

Description	Vista		Compound Derivative Liability			Total
Fair value at December 31, 2013	$	50,558	$	37,516		$	88,074
Change in fair value		–		(35,496	)		(35,496	)
Conversions		13,887		–			13,887
Fair value at March 31, 2014	$	64,445	$	2,020		$	66,465

The Company recorded derivative income of $35,496 for the three months ended March 31, 2014.

TCA Global Convertible Promissory Note

On June 28, 2013, the Company entered into a twelve-month secured convertible promissory note debt financing agreement with TCA Global Credit Master Fund for $1,500,000, bearing interest at a rate of 12% per annum and maturing July 28, 2014. Under a subsequent modified agreement dated March 25, 2014, TCA has agreed to restructure the agreement and extend the maturity date to November 15, 2014. The Company in consideration has agreed to a $75,000 restructuring fee to be added to the sum of the principal balance including a $40,791 interest charge to be paid and nominal legal fees. The monthly principal and interest payments will be $149,609 per month. At March 31, 2014, the outstanding principal balance of the TCA Global convertible promissory note totaled $1,136,000. The note also includes $153,300 in commitment fees; due diligence fees; document review fees; service fees; legal; and other expense. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time during the twelve months term of the note or thereafter. The common stock issued will be valued using a conversion factor of 85% the average VWAP trading price during the five (5) trading day period ending on the latest complete trading day prior to the conversion date. Due to the restructuring of the note the Company realized a $108,000 loss on extinguishment of debt.

The TCA Global promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature and the redemption option (compound embedded derivative liability). At the date of issuance of the TCA Global note, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $2,506 for the three months ended March 31, 2014. The estimated debt accretion for the remainder of the 2014 will be $101,837.

The following table summarizes the convertible debt activity for the period from January 1, 2014 through March 31, 2014:

Description	TCA Global		Compound Derivative Liability		Total
Fair value at December 31, 2013	$	915,440	$	28,716	$	944,156
Fair value issuances at inception		115,791		65,818		181,609
Change in fair value		2,506		–		2,506
Fair value at March 31, 2014	$	1,033,737	$	94,534	$	1,128,271

The Company recorded derivative expense of $65,818 for the three months ended March 31, 2014.

Group 10 Holdings Convertible Promissory Note

On October 3, 2013, the Company entered into a twelve-month unsecured convertible promissory note debt financing agreement with Group 10 Holdings, LLC, for $157,500, bearing interest at a rate of 12% per annum and maturing October 2, 2014. The note also includes a 5% OID of $7,500 based on the consideration funded. The Company also paid holder a commitment fee in the amount of $45,000 in 144 Stock (1,125 post-split shares) at the closing bid price of the Company’s common stock. The holder may require the Company to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the twelve months term of the note. The common stock issued will be valued using a conversion factor of 55% multiplied by the lowest closing bid price of the (20) trading days prior to the conversions, which represents a discount rate of 45%. As of March 31, 2014, the balance outstanding on this note was $157,500.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

The Group 10 Holdings promissory note was determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature; conversion price full ratchet reset feature and the redemption option (compound embedded derivative liability). At the date of issuance of the Group 10 note, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the statement of operations. The Company uses the effective interest method to record interest expense from the accretion of the debt discount and from the accretion of unamortized discount upon conversion which totaled $14,905 for the three months ended March 31, 2014. The note will accrue interest at a rate of 12% from October 3, 2013 until the October 2, 2014 and thereafter at a rate of 18% per annum.

The following table summarizes the convertible debt activity for the period from January 1, 2014 through March 31, 2014:

Description	Group 10		Compound Derivative Liability			Total
Fair value at December 31, 2013	$	14,155	$	304,519		$	318,674
Change in fair value		14,905		(55,005	)		(40,100	)
Fair value at March 31, 2014	$	29,060	$	249,514		$	278,574

The Company recorded derivative income of $55,005 for the three months ended March 31, 2014.

Capital Leases

Banc Leasing Inc.Included in property and equipment at March 31, 2014, the cost of the equipment was $610,900 and the accumulated amortization was $524,356. Amortization of assets under capital leases is included in depreciation expense. The equipment is the primary collateral securing the financing.

Advantage Leasing Inc. Included in vehicles at March 31, 2014, the cost of the vehicles was $273,443 and the accumulated amortization was $177,618. Amortization of assets under capital leases is included in depreciation expense. The vehicles are the primary collateral securing the financing.

Legacy Laser Services Dallas, LLC Included in property and equipment at March 31, 2014, the cost of the equipment was $155,349 and the accumulated amortization was $45,310. Amortization of assets under capital leases is included in depreciation expense. The equipment is the primary collateral securing the financing.

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2014 (in thousands):

Year Ending December 31,
2014	$	249
2015		159
2016		63
Thereafter		–
Total minimum lease payments		471
Less amount representing interest		(106	)
Present value of net minimum lease payments		365
Current maturities of capital lease obligations		(231	)
Long-term portion of capital lease obligations	$	134

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

NOTE 7 - COMMITMENTS

Leases and License Agreements

For the three months ended March 31, 2014 and 2013, rental expenses of approximately $302,000 and $299,000, respectively, were incurred. The Company accounts for rent expense under leases that provide for escalating rentals over the related lease term on a straight-line method. The Company occupies office and tower facilities under several non-cancelable operating lease agreements expiring at various dates through December 2018, and requiring payment of property taxes, insurance, maintenance and utilities.

Future minimum lease payments under non-cancelable operating leases as of December 31, 2014 were as follows (in thousands):

Year Ending December 31,	Amount
2014	$	565
2015		707
2016		610
2017		116
Thereafter		9
Total	$	2,007

Banc Leasing Inc.

During August 2007, the Company entered into a contract with Banc Leasing Inc. to fund the Company’s US-Banknet System. Each funding is collateralize by the equipment and normally is repaid over a seven year period with interest established at the date of the inception of the lease. Each lease has a $1 buyout provision. The details of the capital lease are included in Note 6.

NOTE 8 - RELATED PARTY TRANSACTIONS

In May 2013, the Company entered into a capital lease agreement with Legacy Laser Services Dallas, LLC and (Affiliate). Manny M. Carter is a Managing Member of Legacy Laser Services and a current Board Member of ERF Wireless Inc. At March 31, 2014, the outstanding balance on the capital leases totaled $170,000. The payment terms are $9,947 per month including interest, at an annual rate of 42% per annum. The capital leased equipment is to be utilized in our networks in oil and gas exploration regions. The equipment is the primary collateral securing the financing.

NOTE 9 - INDUSTRY SEGMENTS

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

Energy Broadband, Inc. (EBI)

EBI provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (“MBTs”). EBI provides wireless broadband products and services focusing primarily on commercial customers providing high speed bandwidth to rural North America to serve the oil and gas sector. All sales from external customers are located within the United States.

Wireless Bundled Services Division (WBS)

WBS provides wireless broadband products and services to commercial and individual customers throughout the wireless industry. The company is in the early stages of building and acquiring a seamless wireless broadband network in certain regions of North America to serve private entities, cities, municipalities and the general public. All sales from external customers are located within the United States.

Enterprise Network Services (ENS)

ENS provides product and service to operate an enterprise-class encrypted wireless banking network business. Also, ENS provides the CryptoVue System consisting of software, site-based hardware devices and servers to perform network encryption; contracts for the construction, operation, monitoring and maintenance of fixed wireless networks for banking, healthcare and educational customers; trade names, equipment and software, including the software architecture and design. All sales from external customers are located within the United States.

ERF WIRELESS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014
(Unaudited)

For the three months ended March 31, 2014 and 2013 (in thousands):

Three Months Ended March 31, 2014	EBI		WBS			ENS			Total Segment			ERF Corporate			Total Consolidated
Revenue	$	889	$	633		$	70		$	1,592		$	–		$	1,592
Segment income (loss) from operations		4		(144	)		(24	)		(164	)		(540	)		(704	)
Total assets		2,485		1,191			285			3,961			206			4,167
Capital expenditures		2		28			–			30			–			30
Depreciation		195		173			58			426			7			433

Three Months Ended March 31, 2013	EBI		WBS			ENS			Total Segment			ERF Corporate			Total Consolidated
Revenue	$	1,205	$	610		$	98		$	1,913		$	–		$	1,913
Segment income (loss) from operations		109		(322	)		(20	)		(233	)		(896	)		(1,129	)
Total assets		3,065		1,873			606			5,544			391			5,935
Capital expenditures		10		61			–			71			14			85
Depreciation		215		207			59			481			7			488

Reconciliation of Segment Assets to Total Assets	March 31, 2014		December 31, 2013
Total segment assets	$	3,961	$	5,989
Total corporate assets		206		(917	)
Total assets	$	4,167	$	5,072

The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation expense, accounting changes and non-recurring items.

For the three months ended March 31, 2014, two customers accounted for $601,000 and $175,000 of EBI revenues each.

NOTE 10 - SUBSEQUENT EVENTS

Subsequent to March 31, 2014, the Company issued 1,476,372 shares of common stock valued at approximately $241,000 for preferred stock, services rendered, and conversion of debt.

Subsequent to March 31, 2014, the investor financing agreement dated May 2014, modified April 2014 as amended, allowing the maturity date to be extended from April 15, 2014 to October 15, 2014. The Company has agreed to add an additional $25,000 penalty to principal in April 2014 for the extension of the note to October 2015. In addition the Company will pay $1,500 toward the bridge loan interest on the 1st and 15th of each month beginning May 15,2014 until loan is fully paid.

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 revenues of $1,592,000 for the quarter ended March 31, 2014 as compared to $1,913,000 for the same prior year quarter ended March 31, 2013; a decrease of $321,000 or 17%.

	—	The Company reported gross profit of $660,000 for the quarter ended March 31, 2014 as compared to $889,000 for the same prior year quarter ended March 31, 2013; a decrease of $229,000 or 26%. This decrease reflects lower rig count deployments for the Company’s communication solutions in our oil and gas internet service operations.

	—	The Company reported a total comprehensive loss of $1,050,000 for the quarter ended March 31, 2014 as compared to a comprehensive loss of $1,656,000 for the same prior year quarter ended March 31, 2013; a decrease of $606,000 or 37%.

	—	The Company’s Energy Broadband, Inc. subsidiary reported revenues of $889,000 for the quarter ended March 31, 2014 as compared to revenues of $1,205,000 for the same prior year quarter ended March 31, 2013; a decrease of $316,000 or 26%.

	—	The Company reported a decrease of $654,000 or 32% in operating expenses for the three months ended March 31, 2014 as compared to the same prior year quarter ended March 31, 2013. The decrease is primarily related to lower employment expenses of $390,000 associated with a headcount decrease of 17 employees and approximately $235,000 in lower legal and professional fees associated with the concluded arbitration proceedings with Schlumberger pertaining to disputes to resolve certain financial issues contained in the 2009 exclusive reseller agreement.

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 MONTHS ENDED MARCH 31, 2014, COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2013

The following table sets forth summarized consolidated financial information for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
($ in thousands)	2014			2013			$ Change			% Change
Total sales	$	1,592		$	1,913		$	(321	)		-17%
Total Cost of goods sold		932			1,024			(92	)		-9%
Gross profit		660			889			(229	)		-26%
Percent of total sales		41%			46%
Total operating expenses		1,364			2,018			(654	)		-32%
Loss from operations		(704	)		(1,129	)		425			-38%
Total other income/(expense)		(347	)		(524	)		177			-34%
Consolidated net loss		(1,051	)		(1,653	)		602			-36%
Net income (loss) attributable to non-controlling interest		1			(3	)		4			-133%
Total comprehensive loss	$	(1,050	)	$	(1,656	)	$	606			-37%

For the three months ended March 31, 2014, the Company's business operations reflected a decrease in sales for EBI and ENS, offset with increase sales in WBS subsidiary. For the three months ended March 31, 2014, the Company's consolidated operations generated net sales of $1,592,000 compared to prior-year period net sales of $1,913,000. The $321,000 decrease in total sales is primarily attributable to $316,000 decrease sales in EBI from declining deployment of our Mobile Broadband Trailers (MBT’s) in the oil and gas regions. Service sales decreased $327,000 and product sales increased $6,000. For the three months ended March 31, 2014, the Company had a gross profit margin of 41%, compared to a gross profit margin 46% for the prior year period. The $229,000 decrease in gross profit margin is primarily attributed to; (i) approximately $238,000 decrease in gross margin in EBI attributable to decreased sales associated with declining deployment of MBT’s in oil and gas regions and increased depreciation and (ii) offset with a $13,000 increase in gross margin in WBS primarily related to decreased depreciation.

SALES INFORMATION

Set forth below are tables presenting summarized sales information for our business segments for the three months ended March 31, 2014 and 2013:

($ in thousands)	Three Months Ended March 31,
Business Segment	2014		% of Total		2013		% of Total		$ Change			% Change
Energy Broadband, Inc.	$	889		56%	$	1,205		63%	$	(316	)		-26%
Wireless Bundled Services		633		40%		610		32%		23			4%
Enterprise Network Services		70		4%		98		5%		(28	)		-29%
Total Sales	$	1,592		100%	$	1,913		100%	$	(321	)		-17%

For the three months ended March 31, 2014, net sales decreased to $1,592,000 from $1,913,000 for the three months ended March 31, 2013. The overall decrease of 17% was attributable to decreased sales of $316,000 in EBI and decreased sales of $28,000 in ENS offset with increased sales of $23,000 in WBS. The $321,000 decrease in net sales is primarily attributable to $316,000 decreased sales in EBI from declining 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 March 31, 2014 and 2013:

($ in thousands)	Three Months Ended March 31,
Business Segment	2014		% of Total		2013		% of Total		$ Change			% Change
Energy Broadband, Inc.	$	509		55%	$	588		58%	$	(79	)		-13%
Wireless Bundled Services		329		35%		319		31%		10			3%
Enterprise Network Services		94		10%		117		11%		(23	)		-20%
Total cost of sales	$	932		100%	$	1,024		100%	$	(92	)		-9%

	Three Months Ended March 31,
($ in thousands)	2014		2013		$ Change			% Change

Products and integration service	$	312	$	394	$	(82	)		-21%
Rent and maintenance		210		194		16			8%
Depreciation		410		436		(26	)		-6%
Total cost of sales	$	932	$	1,024	$	(92	)		-9%

For the three months ended March 31, 2014, cost of goods sold decreased by $92,000, to $932,000 from $1,024,000 as compared to the three months ended March 31, 2013. The decrease of $92,000 in cost of goods sold is primarily attributable to a decreased cost of $79,000 in EBI due to decreased sales effecting a reduction in our third party services during the quarter in the oil and gas regions and decreased cost of $23,000 in ENS due to sales decrease in banking construction projects offset with increased cost in WBS of $10,000 associated with increased WBS sales.

OPERATING EXPENSES

The following table sets forth summarized operating expense information for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
($ in thousands)	2014		2013		$ Change			% Change

Employment expenses	$	786	$	1,176	$	(390	)		-33%
Professional services		223		458		(235	)		-51%
Rent and maintenance		102		123		(21	)		-17%
Depreciation		23		52		(29	)		-56%
Other general and administrative		230		209		21			10%
Total operating expenses	$	1,364	$	2,018	$	(654	)		-32%

For the three months ended March 31, 2014, operating expenses decreased by 32% to $1,364,000, as compared to $2,018,000 for the three months ended March 31, 2013, resulting from:

A $390,000 decrease in employment expense ; primarily attributable to decreased in employee headcount to 47 at March 31, 2014 from 64 at March 31, 2013;

A $235,000 decrease in professional services - primarily attributable to a decrease in legal, accounting and consulting services compared to last year associated with our arbitration proceedings with Schlumberger pertaining to disputes to resolve certain financial issues contained in the 2009 exclusive reseller agreement;

A $21,000 decrease in rent and maintenance;

A $29,000 decrease in depreciation; and

A $21,000 increase in other general and administrative.

OTHER INCOME (EXPENSE), NET

For the three months ended March 31, 2014, other expense, net decreased to $347,000 from $524,000 as compared to the three months ended March 31, 2013. The decrease in other expense of $177,000 from the prior year period is primarily attributable to a decrease in our interest expense, net on debt obligations totaling $312,000, a decrease in our net derivative income of $27,000, offset with an increase of $108,000 from loss on extinguishment of debt as compared to interest expense, net of $758,000 and offset with a derivative income of $234,000 for the three months ended March 31, 2013. The derivative expense/income represents the net unrealized (non-cash) charge during the three months ended March 31, 2014 and 2013, in the fair value of our derivative instrument liabilities related to warrants and embedded derivatives in our debt instruments that have been bifurcated and accounted for separately.

COMPREHENSIVE LOSS

For the three months ended March 31, 2014, our total comprehensive loss was $1,050,000 compared to comprehensive loss of $1,656,000 for the three months ended March 31, 2013. The decreased comprehensive loss for the three months ended March 31, 2014, as compared to the comprehensive loss for three months ended March 31, 2013 is primarily attributable to the factors described above.

CASH FLOWS

The Company's operating activities decreased net cash used by operating activities to $1,000 in the three months ended March 31, 2014, compared to net cash used of $1,109,000 in the three months ended March 31, 2013. The decrease in net cash used by operating activities was primarily attributable to accounts payable, accounts receivables and reduction of employee headcount and professional services as compared to March 31, 2013.

The Company's investing activities used net cash of $30,000 in the three months ended March 31, 2014, compared to net cash used of $67,000 in the three months ended March 31, 2013. The decrease in cash from investing activities is primarily attributable to a slower rollout of targeted oil and gas network upgrades.

The Company's financing activities provided net cash of $205,000 in the three months ended March 31, 2014, compared to $1,114,000 of cash provided in the three months ended March 31, 2013. The cash provided in the three months ended March 31, 2014, was primarily associated with proceeds from debt financings.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2014, the Company's current assets totaled $1,581,000 (including cash and cash equivalents of $216,000); and total current liabilities were $6,543,000, resulting in negative working capital of $4,962,000. The Company has funded operations during the last three months primarily through borrowings. These borrowings during the three months ended March 31, 2014 were incurred from the Company's line of credit, net totaling $292,000. The Company’s short-term liquidity will be financed with the remaining line of credit available of $7,486,000 as of March 31, 2014.

DEBT FACILITIES AND INSTRUMENTS

ISSUANCE OF COMMON STOCK

During the three months ended March 31, 2014, we issued to various accredited investors 349,680 shares for interest, services rendered and debt conversions. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the three months ended March 31, 2014, we issued 26,362 shares of common stock for fractional share roundup due to 400 to 1 reverse affected in December 2013.

USE OF WORKING CAPITAL

We believe our cash and available credit facilities afford us adequate liquidity through March 31, 2015. We anticipate that we will need additional capital in the future to continue to expand our business operations. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity or debt funding at this time, and additional funding may not be available to us on favorable terms, if at all. As such there is no assurance that we can raise additional capital from external sources, the failure of which could cause us to curtail operations.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2014, the Company did not have any significant off-balance-sheet arrangements other than certain office and tower facility operating leases requiring minimal commitments under non-cancelable leases disclosed in the Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Property and Equipment

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

Long-Lived Assets

We review our long-lived assets, to include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be recoverable. Such circumstances include, but are not limited to:

a significant decrease in the market price of the asset;

a significant change in the extent or manner in which the asset is being used;

a significant change in the business climate that could affect the value of the asset; and

a current period loss combined with projection of continuing loss associated with use of the asset;

a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

We continually evaluate whether such events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we may incur charges for impairment in the future.

Derivative Instruments

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

The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. Because of the limited trading history for our common stock, the Company estimates the future volatility of its common stock price based on not only the history of its stock price but also the experience of other entities considered comparable to the Company.

Recent Accounting Pronouncements

Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, as defined in rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information mandated by this item.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed under Item 1 of the Company’s Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on April 15, 2014.

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.

All sales of the Company's securities were made by officers of the Company who received no commission or other remuneration for the solicitation of any person in connection with the respective sales of securities described above. The recipients of securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions.

Common Stock Issued for Interest, Services and Debt Conversions

In January 2014, 9,906 shares of Common Stock at average price of $0.77 were issued for interest and debt conversions.

In February 2014, 101,309 shares of Common Stock at average price of $0.63 were issued for interest debt conversions.

In March 2014, 238,465 shares of common stock at average price of $0.47 were issued for interest, services and debt conversions.

Common Stock Issued Upon Conversion of Series A Preferred Stock

On January, 2014, an accredited investor acquired 68,740 shares of common stock pursuant to Preferred A Conversions.

On February, 2014, an accredited investor acquired 89,828 shares of common stock pursuant to Preferred A Conversions.

On March, 2014, an accredited investor acquired 355,500 shares of common stock pursuant to Preferred A Conversions.

ITEM 3. DEFAULT IN SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit 31	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

Exhibit 32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1	Temporary Hardship Exemption

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extension Schema Document

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*	XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

____________

* To be furnished by amendment per Temporary Hardship Exemption under Regulation S-T.

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:	May 20, 2014

	By:	/s/ R. Greg Smith
		R. Greg Smith
		Chief Financial Officer
	Date:	May 20, 2014

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ERF Wireless (ERFB) Inactive 10-Q2014 Q1 Quarterly report

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