UNITED STATES SECURITIES AND EXCHANGE COMMISSION




Washington, D.C. 20549




FORM 10-Q





x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934




For the quarterly period ended June 30, 2009




OR




o 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 xNo o




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 oNo o




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 o
Accelerated filer oNon-accelerated filer o
Smaller reporting company x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)





Yes oNo x




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 130,037,973 common shares issued and outstanding as of August 18, 2009









PART I - FINANCIAL INFORMATION





ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS





ERF WIRELESS, INC.


CONSOLIDATED BALANCE SHEETS


JUNE 30, 2009, AND DECEMBER 31, 2008


($ in thousands except share data)






June 30,


December 31,2009


2008(unaudited)ASSETSCurrent assetsCash and cash equivalents

$
180


$
348Accounts receivable, net


283



248Accounts receivable, other


127



52Inventories


241



193Costs and profits in excess of billings


160



427Prepaid expenses and other current assets


361



494Total current assets


1,352



1,762Property and equipmentProperty and equipment


8,583



7,751Less: accumulated depreciation


(2,630
)


(1,649
)Net property and equipment


5,953



6,102Goodwill


1,255



436Intangible assets, net


1,040



1,059Other assets


250



264Total assets

$
9,850


$
9,623LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of long-term debt

$
1,560


$
702Capital leases and current portion of long-term capital leases


908



861Accounts payable


689


$
981Accrued expenses


1,551



1,269Derivative liabilities


196



78Deferred liability and revenue


526



237Total current liabilities


5,430



4,128Long-term debt, net of current portion


3,707



2,844Long-term capital leases, net of current portion


1,187



1,581Deferred liability and revenue, net of current portion


231



316Total liabilities


10,555



8,869CommitmentsShareholders’ equity (deficit):Preferred stock  -  $.001 par valueSeries A authorized  25,000,000 sharesIssued and outstanding at June 30, 2009, andDecember 31, 2008, 3,670,175 and 4,085,514, respectively


4



4Common stock  -  $.001 par valueAuthorized 475,000,000 sharesIssued and outstanding at June 30, 2009, andDecember 31, 2008, 120,294,968 and 101,884,119, respectively


120



102Additional paid in capital


30,485



27,504Accumulated deficit


(31,314
)


(26,856
)Total shareholders’ equity (deficit)


(705
)


754Total liabilities and shareholders' equity (deficit)

$
9,850


$
9,623




See accompanying notes to consolidated financial statements.
  2




ERF WIRELESS, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(Unaudited)


($ in thousands except share data and loss per share)







For the Three Months


For the Six MonthsEnded June 30,


Ended June 30,2009


2008


2009


2008Sales:Products

$
17


$
3


$
154


$
440Services


1,261



1,002



2,447



2,240Total sales


1,278



1,005



2,601



2,680Costs of goods sold:Products and integration services


287



156



655



516Rent, repairs and maintenance


110



105



206



196Salary and related cost


-



7



16



56Depreciation


296



211



561



407Other cost


8



105



66



244Total costs of goods sold


701



584



1,504



1,419Gross profit


577



421



1,097



1,261Operating expenses:Selling, general and administrative


2,100



2,125



4,340



4,229Depreciation and amortization


370



237



722



466Total operating expenses


2,470



2,362



5,062



4,695Loss from operations


(1,893
)


(1,941
)


(3,965
)


(3,434
)Other income (expenses):Interest expense, net


(288
)


(170
)


(543
)


(354
)Derivative income


80



151



45



279Other income


2



-



5



8Total other income (expense)


(206
)


(19
)


(493
)


(67
)Net loss

$
(2,099
)

$
(1,960
)

$
(4,458
)

$
(3,501
)Net loss per common share:Basic

$
(0.02
)

$
(0.03
)

$
(0.04
)

$
(0.05
)Diluted

$
(0.02
)

$
(0.03
)

$
(0.04
)

$
(0.05
)
  See accompanying notes to consolidated financial statements.




3




ERF WIRELESS, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(Unaudited)


($ in thousands)







2009


2008Cash flows from operating activitiesNet loss

$
(4,458
)

$
(3,501
)Adjustments to reconcile net loss to net cash used by operating activities:Amortization of debt discount


89



15Depreciation and amortization


1,283



874Stock issued for services rendered and interest


1,375



1,246Derivative (income)


(45
)


(279
)Bad debt expense


37



102Changes in:Accounts receivable, net


(39
)


(310
)Accounts receivable other


(70
)


6Inventories


(48
)


(112
)Prepaid expenses


133



93Costs and profits in excess of billings


267



267Accounts payable


(292
)


(389
)Accrued expenses


282



(16
)Deferred liability and revenue


203



(87
)Total adjustment


3,175



1,410Net cash used by operating activities


(1,283
)


(2,091
)Cash flows from investing activitiesPurchase of property and equipment


(394
)


(351
)Business acquisitions, net of cash acquired


(167
)


(171
)Change in other assets


14



(56
)Net cash used by investing activities


(547
)


(578
)Cash flows from financing activitiesNet proceeds from line of credit


818



635Proceeds from notes payable


150



25Proceeds from long-term debt obligations


990



-Payment of long-term debt obligations


(200
)


(135
)Payment on capital lease obligations


(430
)


(249
)Proceeds from sale of common stock, net


334



272Net cash provided by financing activities


1,662



548Net decrease in cash


(168
)


(2,121
)Cash and cash equivalents at the beginning of the period


348



2,211Cash and cash equivalents at the end of the period

$
180


$
90Supplemental disclosure of cash flow information:Net cash paid during the year for:Interest

$
166


$
156Income taxes

$
-


$
-Supplemental non-cash investing and financing activities:Conversion of debt through issuance of common stock

$
320


$
143Issuance of shares for asset acquisition

$
884


$
400Property acquired under capital lease

$
68


$
809Note payable for acquisition

$
444


$
150





See accompanying notes to consolidated financial statements.
  4
  ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  NOTE 1 - BASIS OF PRESENTATION




NATURE OF THE COMPANY




ERF Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity wireless products and services to a broad spectrum of customers in primarily underserved, rural and suburban parts of the United States.  We provide our customers with high quality broadband services
and basic communications services to residential, oil and gas, and bank customers in the areas that otherwise would not be able to receive such services.   We are also a comprehensive solutions provider to other enterprise customers, providing them with a wide array of 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 Internet and 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 networks and other services associated with providing wireless products and services to the regional banking industry.




Our revenues are principally internet and construction. Our internet revenues are recorded in our subsidiary, Wireless Bundled Services, Inc. (“WBS”), construction of bank networks in our subsidiary, Enterprise Network Services, Inc. (“ENS”) and other construction in our subsidiary, Wireless
Messaging Services, Inc. (“WMS”). Please refer to segment footnote 10 for additional information regarding the Company’s operating divisions.




BASIS OF ACCOUNTING




The accompanying unaudited interim 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, 2008 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 financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year ended December 31, 2008 as reported in form 10-K have been omitted.




INVENTORIES




Inventories are valued at the lower of cost or market. The cost is determined by using the average cost method.Inventories consist of the following items as of June 30, 2009 and December 31, 2008, in thousands:




June 30,


December 31,2009


2008Raw material

$
117


$
113Finished goods


124



80$
241


$
193




The Company has pledged all the inventory of WBS of $124,000 and $56,000 as collateral against outstanding notes as of June 30, 2009 and December 31, 2008, respectively.




RECENT ACCOUNTING PRONOUNCEMENTS




In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. The effective date of this statement was November 15, 2008. The adoption of SFAS 162 did not have a material impact on the Company’s consolidated financial statements.




In April 2008, the FASB issued FASB Staff Position (“FSP”) No. SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) and other applicable accounting literature. FSP SFAS
142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company has not acquired any intangible assets since adopting FSP SFAS 142-3. As such, there has been no impact to the Company’s financial statements since the January 1, 2009 adoption date.




5




ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”), which expands the disclosure requirements in SFAS 133 about an entity’s derivative instruments and hedging
activities. SFAS 161’s disclosure provisions apply to all entities with derivative instruments subject to SFAS 133 and its related interpretations. The provisions also apply to related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. Such disclosures, as well as existing SFAS 133 required disclosures,
generally will need to be presented for every annual and interim reporting period. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. For the three months ended March 31, 2009, we have included the statement’s expanded disclosures about derivative instruments and hedging activities within the Company’s financial statements.




In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that accounting and reporting for minority interests will be recharacterized as noncontrolling interests
and classified as a component of equity. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This Statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The adoption of SFAS 160 did not have a material impact on the Company’s consolidated financial statements.




In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on at least an annual basis, until fiscal years beginning after November 15, 2008. Nonfinancial assets and liabilities that the Company measures at fair value on a non-recurring basis consist primarily of property and equipment, goodwill, and intangible assets, which are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The adoption of FSP FAS 157-2 did not have a material impact on the Company’s consolidated
financial statements.




NOTE 2 - GOODWILL




At June 30, 2009 and December 31, 2008, goodwill totaled $1,255,000 and $436,000 respectively.




On June 1, 2009, the Company acquired assets from Frontier Internet, LLC and Itexas.net and recorded goodwill of $819,000, which is not subject to amortization.




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 500,000,000, of which 25,000,000 are shares of preferred stock with a par value of $.001 per share ("Preferred Stock"), and 475,000,000 are shares of common stock with a par value of $.001 per share.




COMMON STOCK




As of June 30, 2009, there were 120,294,968 shares of common stock issued and outstanding.








6




ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


June 30, 2009

Supplemental
Non-Cash
DisclosureProfessional fees

$
708Settlements


16Salary and compensation


397Other services rendered


254Total for services, interest, liabilities and compensation

$
1,375Notes payable

$
320Acquisition

$
884




During the six months ended June 30, 2009, the Company issued 3,273,000 shares of common stock in lieu of cash for asset acquisitions of $884,000.  The Company valued the 3,273,000 shares at the closing market price on the date of issuance of such shares.




During the six months ended June 30, 2009, we issued to various accredited investors an aggregate of 1,918,000 shares of restricted common stock for net consideration of $334,000. We relied on Section 4(2) of the Securities Act in effecting this transaction.




SUPPLEMENTAL SCHEDULE OF ASSETS ACQUIRED RECONCILING CASH PAID





On June 1, 2009, ERF Wireless, Inc completed the purchase of assets from Frontier Internet LLC and iTexas.net. The schedule below reflects the fair value of assets acquired, liabilities assumed, common stock issued and note payable issued.




Fair value of assets acquired


1,510Liabilities assumed


(25
)Common stock issued for acquisition


(884
)Note payable issued for acquisition


(434
)Cash paid for acquisition

$
167




PREFERRED STOCK




The Company has 3,670,175 shares of Series A Preferred Stock issued and outstanding as of June 30, 2009. The Series A Preferred Stock is convertible at holder's option at one preferred share for 18.676347 shares common stock and has a 2:1 liquidation preference. The holder of Series A Preferred Stock is required to give
a 65-day notice of conversion to the Company. With respect to the Series A Preferred Stock outstanding at June 30, 2009, the Company would be required to issue 68,545,462 shares of its common stock, subject to certain contractually imposed conversion restrictions as described herein. During the fourth quarter 2005, all of the Series A Preferred Stock holders entered into a conversion restriction agreement whereby all Series A Preferred Stock holders, as a group, are prohibited from converting more than 5% of
the total outstanding  Series A Preferred Stock holdings in any one calendar quarter. During the six months of 2009, we issued 7,758,000 shares of common stock upon conversion of 415,339 Series A Preferred Stock.




WARRANTS




The Company had warrants outstanding to third parties to purchase 6,301,780 shares of common stock as of June 30, 2009.




Warrants to purchase 389,999 shares of common stock at a purchase price of $3.57 per share were issued by the Company in September 2005 and November 2005. Specifically, the Company issued convertible notes for $1,500,000 to accredited investors and issued warrants to purchase 389,999 shares of common stock at $3.57
per share, subject to adjustment, expiring September 2010, as additional consideration.












7




ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


The following table summarizes warrants that are issued, outstanding and exercisable.





Warrants OutstandingExercise Price

Expiration Date

December 31,2008


Issued

Exercised

June 30,20093.57

Sep-10


389,999







389,9990.45

Mar-12






1,109,867




1,109,8675.00

August-11 thru May-14


3,775,272



1,026,642




4,801,9144,165,271



2,136,509

-


6,301,780




NOTE 4 - EMPLOYEE STOCK OPTIONS




In April 2008, the Board of directors adopted a Non-Qualified Stock Option Plan whereby 15,000,000 shares were reserved for issuance. The Company has granted to certain officers and employees 500,000 stock options which are currently exercisable. As of June 30, 2009, under the 2008 Non-Qualified Stock Option Plans,
5,945,149 shares were issued and exercised by certain employees and consultants for services rendered.




Stock Plan activity was as follows for the six months ended June 30, 2009:




2008PlanShares initially reserved


15,000,000Remaining shares January 01, 2009


12,018,541Issued


2,963,690Remaining shares June 30, 2009


9,054,851Outstanding June 30, 2009


5,945,149




Option activity was as follows for the six months ended June 30, 2009:




Shares


Weighted-Average
Exercise PriceOutstanding at beginning of year


500,000


$
0.57Granted


-



-Exercised


-



-Forfeited/cancelled


-



-Outstanding at the end of period


500,000


$
0.57Exercisable at June 30, 2009


500,000


$
0.57





Information about options outstanding was as follows at June 30, 2009:




Remaining





AverageClass


Number


Average Contractual


Number


ExerciseExercise Price


Outstanding


Life in Years


Exercisable


Price$0.10



225,000


1.08



225,000


$0.10$1.38



150,000


0.08



150,000


$1.38$0.43



125,000


1.58



125,000


$0.43500,000


0.78



500,000


$0.57




8




ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


NOTE 5 - EARNINGS PER SHARE:




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




For the six months ended June 30, 2009Income


Shares


Per-Share(Numerator)


(Denominator)

AmountBasic EPS:Loss available to common stockholders

$
(4,458
)


106,905


$
(0.04
)Effect of dilutive securities


-



-



-Diluted EPS:Loss available to common stockholders and assumed conversions

$
(4,458
)


106,905


$
(0.04
)For the six months ended June 30, 2008Income


Shares


Per-Share(Numerator)


(Denominator)

AmountBasic EPS:Loss available to common stockholders

$
(3,501
)


70,834


$
(0.05
)Effect of dilutive securities


-



-



-Diluted EPS:Loss available to common stockholders and assumed conversions

$
(3,501
)


70,834


$
(0.05
)






For the three months ended June 30, 2009Income


Shares


Per-Share(Numerator)


(Denominator)

AmountBasic EPS:Loss available to common stockholders

$
(2,099
)


107,830


$
(0.02
)Effect of dilutive securities


-







-Diluted EPS:Loss available to common stockholders and assumed conversions

$
(2,099
)


107,830


$
(0.02
)For the three months ended June 30, 2008Income


Shares


Per-Share(Numerator)


(Denominator)

AmountBasic EPS:Loss available to common stockholders

$
(1,960
)


76,018


$
(0.03
)Effect of dilutive securities


-







-Diluted EPS:Loss available to common stockholders and assumed conversions

$
(1,960
)


76,018


$
(0.03
)







9




ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




NOTE 6 - MAJOR CUSTOMERS




The Company had gross sales of approximately $2,601,000 and $2,680,000 for the six months ended June 30, 2009 and 2008, respectively. The Company did not have any customers that represented 10% of the gross sales in the six months ended June 30, 2009. The Company had one customer that represented approximately 17%
of gross sales for the six months ended June 30, 2008.




NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES




Notes payable, long-term debts and capital leases consist of the following as of June 30, 2009 (in thousands):





Terms

Maturity
Date

Interest
Rate

Gross
Balance

Debt
Discount

Net
BalanceBancleasing, Inc.
$10,660 / Month including interest

October-14

11.62%

$
524

$
-

$
524Agility Capital Lease
$91,457 / Month including interest

Various

18.82%


1,554


-


1,554Balboa Lease
$225 / Month including interest

June-10

27.74%


3


-


3Ervin Leasing
$921 / Month including interest

September-09

12.18%


1


-


1De Lage Landen Lease
$691 / Month including interest

December-10

19.12%


13


-


13Liberty Finance
$517 / Month including interest

September-09

13.97%


2


-


2Toyota
$517 / Month including interest

December-10

8.01%


9


-


9Blanco National Bank
$3,913 / Month including interest

August-10

9.50%


44


-


44Premium Assignment, Insurance notes
$2,199 / Month including interest

September-09

8.65%


3


-


3Robert McClung, Momentum
$23,476 / Quarterly including interest

October-10

7.50%


132


-


132George Kemper, TSTAR
$38,254 / Quarterly including interest

April-10

7.50%


151


-


151Shane Griffths, Crosswind
$13,911 / Quarterly including interest

December-10

7.50%


92


-


92Centramedia
$56,342 / Quarterly including interest

December-11

7.50%


555


-


555Frontier Internet LLC
$33,846 / Quarterly including interest

May-12

6.00%


369


-


369Ronnie D Franklin
$6,054 / Quarterly including interest

May-12

6.00%


66


-


66Convertible Subordinated Financing
1 year

Demand

10.00%


990


171


819Line of credit
2 years/ Quarterly interest (See below)

March-11

12.00%


3,001


-


3,001E-bond investor notes
3 years/ Semiannual interest (See below)

Various

10.00%


25


1


24Total debt






$
7,534

$
172


7,362Less current maturities













(2,468
)Add back debt discount current maturities












172Long-term debt












$
5,066





INVESTOR NOTES




The following table summarizes the convertible debt derivative liability activity for the period December 31, 2008, to June 30, 2009 in (000’s):




Description

Investor
Notes


Warrant Liabilities


Compound Derivative Liability


TotalFair value at December 31, 2008

$
-


$
29


$
-


$
2901-01-09 to 03-31-09 change in fair value


-



(5
)


-



(5
)04-01-09 to 06-30-09 change in fair value


-



(13
)


-



(13
)Fair value at June 30, 2009

$
-


$
11


$
-


$
11




For the year to date ended June 30, 2009 and 2008, net derivative income was $18,000 and $242,000, respectively.




10


ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




The following assumptions were used in the fair value determination of warrants liabilities at June 30, 2009:





WarrantsAssumptions


3/31/2009


6/30/2009Dividend yield



0.00%



0.00%Risk-free rate for term



0.81%



0.56%Volatility



140.00%



140.00%Maturity date


1.43 years


1.19 years




A Black-Scholes methodology was used to value the warrants.




LINE OF CREDIT




During 2008, the Company increased its unsecured revolving credit facility with certain private investors from $3 million to $6.5 million maturing March 31, 2011. The terms of the unsecured revolving credit facility allow the Company to draw upon the facility as financing requirements dictate and provide for quarterly
interest payments at a 12% rate per annum. At June 30, 2009, the line of credit of totaled $3,001,000.




E-SERIES BOND INVESTOR NOTE




The Company issued to certain accredited investors a principal amount of $1,200,000 of E-series bonds (the "Bonds") between May 2006 and June 2009, of which $1,175,000 has been converted to common stock leaving a principal amount of $25,000 of Bonds outstanding as of June 30, 2009. 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 10% 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 value of the common stock issued under this
option will be the lesser of $1.50 or the 20-day trailing average per share closing price of common stock preceding the notice of conversion. If the Bond is converted the Company will issue a warrant to purchase one additional share of common stock at a price of $5.00 for every share of common stock that has been received from the conversion of the 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 repaid in cash or in shares of our common Stock, which shares will be valued at the average last sales price of our common stock over the 60-trading-day period
preceding any prepayment date. If the Company elects to issue shares of our common stock as repayment of the Bond, we will issue shares representing a value equal to 125% of the Bond principal. If the Company elects to issue shares of our common stock as payment of interest, we will issue shares representing a value equal to 100% of the interest due.




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 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 income statement. The Company uses the effective interest method to record interest expense and related debt accretion which was $41,186 for the six months ended June 30, 2009, and the estimated debt accretion for 2009 is $607.




The following table summarizes the convertible debt activity for the period December 31, 2008, to June 30, 2009 in (000’s):





Description

E-Series
Bonds


Compound
Derivative
Liability


TotalFair value at December 31, 2008

$
165


$
49


$
214Fair value issuance at inception


118



-



11801-01-09 to 03-31-09 change in fair value


36



(1
)


3504-01-09 to 06-30-09 change in fair value


5



(41
)


(36
)Conversions during 2009


(300
)


-



(300
)Fair value at June 30, 2009

$
24


$
7


$
31





For the year to date ended June 30, 2009 and 2008, net derivative income was $41,745 and $59,864, respectively.




11




ERF WIRELESS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





CONVERTIBLE SUBORDINATED FINANCING





During the period ended June 30th 2009, the Company entered into an agreement with an investment banking firm to raise up to $3,000,000 in convertible subordinated promissory notes. These notes are unsecured, bear interest at 10% and are
due upon the earlier of one year or completion of second private placement.  The note holder has the option of exchanging their notes for an equivalent amount of the subsequent funding transaction or being repaid the principal and interest at this second funding date. In connection with the issuance of the convertible subordinated promissory notes the investors will be issued common stock purchase warrants to purchase up to 1,109,867 shares of common stock that are exercisable at $.45 per share subject
to adjustment from future equity financing if below their exercise price, and expire three years from issuance.





Based on the guidance in SFAS 133 and EITF 07-05, the Company concluded the warrants are required to be accounted for as derivatives as of the issue date due to the reset feature on the exercise price.  At the date of issuance the convertible subordinated financing, warrant derivative liabilities were measured
at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statements of operations as “Gain (loss) on derivative liabilities.”  These derivative instruments are not designated as hedging instruments under SFAS 133 and are disclosed on the balance sheet
under Derivative Liabilities.





The Company uses the effective interest method to record interest expense and related debt accretion which was $47,821 for the six months ended June 30, 2009, and the estimated debt accretion for 2009 and 2010 are $112,923 and $57,831, respectively.




The following table summarizes the convertible debt activity for the period March 18, 2009, to June 30, 2009 in (000’s):




Description

Bridge Note


Warrant Liabilities


TotalFair value issuance at inception

$
771


$
219


$
99003-18-09 to 03-31-09 change in fair value


4



(4
)


-04-01-09 to 06-30-09 change in fair value


44



(37
)


7Conversions from inception to date


-



-



-Fair value at June 30, 2009

$
819


$
178


$
997




Frontier Internet, LLC.




On June 1, 2009, the Company issued a note to Frontier Internet LLC., totaling $369,000 bearing interest at 6.0% and are secured by the equipment acquired, payable in twelve quarterly payments of $33,846 plus interest.




Ronnie D. Franklin




On June 1, 2009, the Company issued a note to Ronnie D. Franklin., totaling $66,000 bearing interest at 6.0% and are secured by the equipment acquired, payable in twelve quarterly payments of $6,054 plus interest.




CAPITAL LEASES




Agility Lease Fund, LLCIncluded in property and equipment at June 30, 2009, is $1,542,993 capitalized equipment, net of amortization. The equipment and one of the Company's bank accounts are the primary collateral securing the financing with a guarantee of
repayment by ERF Wireless, Inc.




Bancleasing Inc.,Included in property and equipment at June 30, 2009, is $610,900 capitalized equipment, net of amortization. The equipment is the primary collateral securing the financing.




12




ERF WIRELESS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


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 June 30, 2009 (in thousands):




Year Ending  December 31,2009

$
6122010


1,0542011


5242012


1412013


128Thereafter


139Total minimum lease payments


2,598Less amount representing interest


(503
)Present value of net minimum lease payments


2,095Current maturities of capital lease obligations


(908
)Long-term portion of capital lease obligations

$
1,187




NOTE 8 - UNCOMPLETED CONTRACTS




Costs, estimated earnings and billings on uncompleted contracts as of June 30, 2009 and December 31, 2008 are summarized as follows (in thousands):




June 30,


December 31,2009


2008Costs incurred on uncompleted contracts

$
3,123


$
2,953Estimated profit


664



656Gross revenue


3,787



3,609Less: billings to date


3,627



3,182Costs and profit in excess of billings

$
160


$
427




Such amounts are included in the accompanying balance sheets at June 30, 2009 and December 31, 2008 are summarized as follows (in thousands):




June 30,


December 31,2009


2008Cost and estimated earnings in excess of billings on uncompleted contracts

$
160


$
427Billings in excess of costs and estimated earnings on uncompleted contracts


-



-$
160


$
427




NOTE 9 - COMMITMENTS




LEASES AND LICENSE AGREEMENTS




For the six months ended June 31, 2009 and 2008, rental expenses of approximately $384,000 and $302,000, 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 June 30, 2009, were as follows (in thousands):





Period Ending December 31,

Amount ($000)2009

$
4682010


5952011


4072012


562013


14Thereafter


43Total

$
1,583




13




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.




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.




Oil & Gas Division (O&G)




O&G provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (MBT’s). O&G 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. The O&G division is a division of WBS.





For the six months ended June 30, 2009 (in thousands)WMS


WBS


O&G


ENS


TotalRevenue

$
91


$
2,247


$
20


$
243


$
2,601Segment (loss) income


(70
)


(1,379
)


(8
)


(379
)


(1,836
)Segment assets


(21
)


7,404



284



1,837



9,504Capital expenditures


-



614



-



154



768Depreciation and amortization


8



1,207



20



7



1,242





Six Months EndedReconciliation of Segment Loss fromOperations to Net Loss

June 30, 2009Total segment loss from operations

$
(1,836
)Total corporate overhead including other, net


(2,622
)Net loss

$
(4,458
)




Reconciliation of Segment Assets to Total Assets

June 30, 2009Total segment assets

$
9,504Total corporate assets


346Consolidated  assets

$
9,850




14




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 June 30, 2009, one customer accounts for $143,000 of Enterprise Network Services Division revenues. At June 30, 2008, one customer accounts for $457,000 of Wireless Messaging Services Division revenues.





NOTE 11 - BUSINESS COMBINATIONS





FRONTIER INTERNET, LLC, AND ITEXAS NET ACQUISITION




PURCHASE PRICE




On June 1, 2009, ERF Wireless, Inc completed the purchase of assets from Frontier Internet, LLC and iTexas net, which are related companies under an Asset Purchase Agreement dated June 1, 2009. Under the Asset Purchase Agreement, ERF Wireless, Inc acquired the wireless internet service provider ("WISP"), which includes
all of the current customers, contract rights, inventory, equipment and network infrastructure equipment. The acquisition will also increase the Company's footprint covering geographic areas in certain cities in North Texas within Hood, Somervell, Johnson and Parker Counties, Texas including portions of the Barnett Shale area that covers approximately 6,000 square miles of natural gas production territory. At the time of the transaction, there were no material relationships between the seller and ERF Wireless,
Inc or any of its affiliates, or any director or officer of ERF Wireless, Inc, or any associate of any such officer or director. ERF Wireless, Inc paid $1,485,000 in cash, notes and securities and assumed $25,000 in note payables and capital leases.




The purchase price allocation is as follows (in thousands):




Accounts receivable

$
33Note receivable


5Property and equipment


370Goodwill


819Identifiable intangible assets


283Note payable


(25
)Total adjusted purchase price

$
1,485




NOTE 12 - SUBSEQUENT EVENTS




During the third fiscal quarter 2009, the Company issued 871,739 shares of common stock for services rendered and in exchange of liabilities, and 8,871,266 shares of common stock upon conversion of preferred stock.





15





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




Historically, our revenues have been generated primarily from Internet and construction services.  Our Internet revenues result from our offering of broadband and basic communications services to residential and enterprise customers.  Our construction revenues result from the construction of bank networks
and other services associated with providing wireless products and services to the regional banking industry.  During the first half of 2009, approximately 86% of our revenues were generated from internet services and 14% of our revenues were generated from construction services. We expect that our internet services will experience the most growth during fiscal 2009, as we expect to devote significant capital resources to developing the oil and gas market utilizing wireless services.





During the second quarter of fiscal 2009, the Company made significant progress with its strategic business plan as evidenced by the completion and announcement of numerous agreements and activities. These include:





●
The acquisition and integration of integration of two wireless ISP companies operating in the Barnett Shale, Frontier Internet LLC and iTexas.net; adding over $1 million in recurring annual revenues in addition to the future oil and gas potential revenue capability in this area.




●
The announcement of energy sector expert, Douglas Gibson joining ERF as energy industry consultant.  Douglas has an impressive resume of profitable results in company start-ups, development of corporate strategy, international selling and negotiations, and overall technology development.  In the mid-1990’s Gibson founded
Petrosol, generating over $110 million in total sales through 2002.  Petrosol, in 2000, became a partner of Sensa, which developed revolutionizing fiber optic sensing technologies for use within the oil and gas industry.  Schlumberger later acquired Sensa in 2001.




●
ERF announced that it had engaged the consulting firm of ACRS 2000 Corp. out of Oklahoma City, OK to assist the company in the preparation of all its applications for portions of the RUS and NTIA stimulus funding designed to accelerate broadband deployment in rural markets.




●
ERF was identified by an independent analyst, Emerging Growth Research LLP, as a very strong candidate to receive stimulus funds in its July 2009 Broadband Stimulus Report.





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.




16




RESULTS OF OPERATIONS




THREE AND SIX MONTHS ENDED JUNE 30, 2009, COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2008




The following table sets forth summarized consolidated financial informatio n for the three months ended June 30, 2009 and 2008:





Three Months Ended June 30,


Six Months Ended June 30,($ in thousands)

2009


2008


$ Change


% Change


2009


2008


$ Change


% ChangeTotal sales

$
1,278


$
1,005


$
273



27%


$
2,601


$
2,680


$
(79
)


-3%Cost of goods sold


701



584



117



20%



1,504



1,419



85



6%Gross profit


577



421



156



37%



1,097



1,261



(164
)


-13%Percent of total sales


45%



42%











42%



47%Operating expenses


2,470



2,362



108



5%



5,062



4,695



367



8%Loss from operations


(1,893
)


(1,941
)


48



-2%



(3,965
)


(3,434
)


(531
)


15%Other income/(expense)


(206
)


(19
)


(187
)


984%



(493
)


(67
)


(426
)


636%Net loss


(2,099
)


(1,960
)


(139
)


7%



(4,458
)


(3,501
)


(957
)


27%
 
 For the three months ended June 30, 2009, the Company's business operations reflected an increase in sales for Wireless Bundled Services and Enterprise Network Services with an offset of decreased sales for Wireless Messaging Services. For the three months ended June 30, 2009, the Company's consolidated operations generated net sales of $1,278,000 compared to prior year net sales of $1,005,000. The $273,000
increase in net sales is primarily attributable to $56,000 increase in banking network installation and services and increase of $258,000 in recurring wireless WISP services with the increased growth attributed to recent WISP acquisitions offset with a $41,000 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, without similar sales comparison in the same quarter 2009.  Product sales increase $14,000 and
service sales increase $277,000. The increase is primarily due to recurring wireless WISP services with the increase growth attributed to recent WISP acquisitions. For the three months ended June 30, 2009, the Company had a gross profit margin of 45%, compared to a gross profit margin of 42% for the prior year. The $156,000 increase in gross profit margin percentage is primarily due to net increase in sales volume which attributed to margins as follows; (i) approximately $165,000 increase in gross margin attributable
to increase recurring customers as result of recent acquisitions  (ii) $33,000 increase in gross margins for banking network services due to efficient execution of current banking contracts, and (iii) offset by approximately $43,000 decreased in gross margin due to lower sales expectation in our wireless infrastructure construction.




For the six months ended June 30, 2009, the Company's business operations reflected an increase in sales for Wireless Bundled Services and increase sales for Enterprise Network Services with an offset of decreased sales for Wireless Messaging Services. For the six months ended June 30, 2009, the Company's consolidated
operations generated net sales of $2,601,000 compared to prior year net sales of $2,680,000. The $79,000 decrease in net sales is primarily attributable to $115,000 increase in banking network installation and services and increase of $283,000 in recurring wireless WISP services with the increased growth attributed to recent WISP acquisitions offset with a $477,000 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.  Product
sales decrease $286,000 and offset with services and other increase sales of $207,000. The decrease is primarily due prior year sales with the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico project, without similar sales comparison in year 2009. For the six months ended June 30, 2009, the Company had a gross profit margin of 42%, compared to a gross profit margin of 47% for the prior year. The $164,000 decrease in gross profit margin percentage is primarily due to net decrease in sales volume which
attributed to margins as follows; (i) approximately $51,000 increase in gross margin attributable to increase recurring customers base as result of recent acquisitions  (ii) $125,000 increase in gross margins for banking network services due to efficient execution of current banking contracts, and (iii) offset by approximately $340,000 decreased in gross margin due to lower sales expectation in our wireless infrastructure construction.




The Company incurred a net loss of $2,099,000 for the three months ended June 30, 2009. The Company's principal components of the net loss for the three months ended June 30, 2009, included approximately $666,000 in depreciation and amortization expenses, $288,000 of interest expense, and $447,000 of other general
and administrative expense, $1,169,000 in employment expenses and $368,000 in professional services expense.




The Company incurred a net loss of $4,458,000 for the six months ended June 30, 2009. The Company's principal components of the net loss for the six months ended June 30, 2009, included approximately $1,283,000 in depreciation and amortization expenses, $543,000 of interest expense, and $828,000 of other general
and administrative expense, $2,333,000 in employment expenses and $955,000 in professional services expense.




17





SALES INFORMATION




Set forth below is a table presenting summarized sales information for our business segments for the three and six months ended June 30, 2009 and 2008:





($ in thousands)

Three Months Ended June 30,Business Segment

2009


% of Total


2008


% of Total


$ Change


% ChangeWireless Messaging Services

$
31



2%


$
72



7%


$
(41
)


-57%Wireless Bundled Services


1,161



91%



903



90%



258



29%Enterprise Network Services


86



7%



30



3%



56



187%Total Sales

$
1,278



100%


$
1,005



100%


$
273



27%





($ in thousands)

Six Months Ended June 30,Business Segment

2009


% of Total


2008


% of Total


$ Change


% ChangeWireless Messaging Services

$
91



4%


$
568



21%


$
(477
)


-84%Wireless Bundled Services


2,267



87%



1,984



74%



283



14%Enterprise Network Services


243



9%



128



5%



115



90%Total Sales

$
2,601



100%


$
2,680



100%


$
(79
)


-3%




For the three months ended June 30, 2009, net sales increased to $1,278,000 from $1,005,000 for the three months ended June 30, 2008. The overall increase of 27% was attributable to an increase of $258,000 of Wireless Bundled Services and an increase $56,000, increase in Enterprise Network Services offset with a
decrease in Wireless Messaging Services of $41,000. The $41,000 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, without similar sales comparison in the same year in 2009. The $56,000 increase in banking network installation and services was primarily attributable to executing current bank contracts. The $258,000 increase was primarily attributable to recurring wireless WISP services with recent
WISP asset acquisitions.




For the six months ended June 30, 2009, net sales decrease to $2,601,000 from $2,680,000 for the six months ended June 30, 2008. The overall decrease of 3% was attributable to an increase of $283,000 of Wireless Bundled Services and an increase $115,000, increase in Enterprise Network Services offset with a decrease
in Wireless Messaging Services of $477,000. The $477,000 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, without similar sales comparison in the same year in 2009. The $115,000 increase in banking network installation and services was primarily attributable to executing current bank contracts. The $283,000 increase was primarily attributable to recurring wireless WISP services with recent WISP asset
acquisitions.




COST OF GOODS SOLD




The following tables set forth summarized cost of goods sold information for the three months ended June 30, 2009 and 2008:





($ in thousands)

Three Months Ended June 30,Business Segment

2009


% of Total


2008


% of Total


$ Change


% ChangeWireless Messaging Services

$
55



8%


$
51



9%


$
4



8%Wireless Bundled Services


616



88%



524



89%



92



18%Enterprise Network Services


30



4%



9



2%



21



233%Total cost of sales

$
701



100%


$
584



100%


$
117



20%




Three Months Ended June 30,($ in thousands)

2009


2008


$ Change


% ChangeProducts and integration service

$
287


$
156


$
131



84%Rent and maintenance


110



105



5



5%Salary and related cost


-



7



(7
)


-100%Depreciation


296



211



85



40%Other costs


8



105



(97
)


-92%Total cost of sales

$
701


$
584


$
117



20%




18







($ in thousands)

Six Months Ended June 30,2009


% of Total


2008


% of Total


$ Change


% ChangeWireless Messaging Services

$
99



7%


$
235



17%


$
(136
)


-58%Wireless Bundled Services


1,241



82%



1,009



71%



232



23%Enterprise Network Services


164



11%



175



12%



(11
)


-6%Total cost of sales

$
1,504



100%


$
1,419



100%


$
85



6%


Six Months Ended June 30,($ in thousands)

2009


2008


$ Change


% ChangeProducts and integration service

$
655


$
516


$
139



27%Rent and maintenance


206



196



10



5%Salary and related cost


16



56



(40
)


-71%Depreciation


561



407



154



38%Other costs


66



244



(178
)


-73%Total cost of sales

$
1,504


$
1,419


$
85



6%


For the three months ended June 30, 2009, cost of goods sold increase by $117,000, or 20%, to $701,000 from $584,000 as compared to the three months ended June 30, 2008. The increase of $117,000 in cost of goods sold is primarily attributable to an increase of $92,000 in WBS due to increase depreciation and third party and services as a result of recent acquisitions, increase $21,000 in ENS and an increase of $4,000 in WMS.





For the six months ended June 30, 2009, cost of goods sold increase by $85,000, or 6%, to $1,504,000 from $1,419,000 as compared to the six months ended June 30, 2008. The increase of $85,000 in cost of goods sold is primarily attributable to an increase of $232,000 in WBS due to increase depreciation and third party
and services as a result of recent acquisitions, offset with a decrease of cost of goods sold of $11,000 in ENS and a decrease of $136,000 in cost of goods sold due to decrease sales over the same period last year.




OPERATING EXPENSES




The following table sets forth summarized operating expense information for the three and six months ended June 30, 2009 and 2008:




Three Months Ended June 30,


Six Months Ended June 30,($ in thousands)

2009


2008


$ Change


% Change


2009


2008


$ Change


% ChangeEmployment expenses

$
1,169


$
1,139


$
30



3%


$
2,333


$
2,240


$
93



4%Professional services


368



477



(109
)


-23%



955



971



(16
)


-2%Rent and maintenance


116



94



22



23%



224



184



40



22%Research and development


-



18



(18
)


100%



-



18



(18
)


100%Depreciation and amortization


370



237



133



56%



722



466



256



55%Other general and administrative


447



397



50



13%



828



816



12



1%Total operating expenses

$
2,470


$
2,362


$
108



5%


$
5,062


$
4,695


$
367



8%




For the three months ended June 30, 2009, operating expenses increased by 5% to $2,470,000, as compared to $2,362,000 for the three months ended June 30, 2008. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:




●
A $30,000 increase in employment expense. The increase is primarily attributable to growth of the company through recent acquisitions;




●
A $109,000 decrease in professional services. The decrease  is primarily related to consulting expenses;




●
A $22,000 increase in rent and maintenance. The increase is primarily attributable to growth of the company through recent acquisitions;




●
A $133,000 increase in depreciation and amortization; The increase is primarily attributable to growth of the company through recent acquisitions; and




●
A $50,000 increase in other general and administrative expense.




19




For the six months ended June 30, 2009, operating expenses increased by 14% to $5,369,000, as compared to $4,695,000 for the six months ended June 30, 2008. The increases that occurred, as evidenced by the immediately preceding table, are discussed below:




●
A $93,000 increase in employment expense. The increase is primarily attributable to growth of the company through recent acquisitions;




●
A $16,000 decrease in professional services. The decrease  is primarily related to consulting expenses;




●
A $40,000 increase in rent and maintenance. The increase is primarily attributable to growth of the company through recent acquisitions;




●
A $256,000 increase in depreciation and amortization; The increase is primarily attributable to growth of the company through recent acquisitions; and




●
A $12,000 increase in other general and administrative expense.




OTHER (INCOME) EXPENSE, NET




For the six months ended June 30, 2009, the increase in other expense is primarily attributable to interest expense, net on debt obligations totaling $543,000 and a net derivative income of $45,000 as compared to interest expense, net of $354,000 and derivative income of $279,000 for the six months ended June 30,
2008. The derivative expense/income represents the net unrealized (non-cash) charge during the six months ended June 30, 2009 and 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 six months ended June 30, 2009, our net loss was $4,458,000 compared to a loss of $3,501,000 for the six months ended June 30, 2008. The increase in the loss for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008 is primarily attributable to increase in employment, other
general administrative and depreciation and amortization.




CASH FLOWS




The Company's operating activities decreased net cash used by operating activities to $1,283,000 in the six months ended June 30, 2009, compared to net cash used of $2,091,000 in the six months ended June 30, 2008. The decrease in net cash used by operating activities was primarily attributable to fund an increase
in the company's net operating loss of $4,458,000, net of $2,739,000 non-cash charges and combine with $436,000 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 $547,000 in the six months ended June 30, 2009, compared to use of net cash of $578,000 in the six months ended June 30, 2008. The increase in investing activities is primarily growing WISP capabilities through expansion of our infrastructure in Texas, New Mexico
and Louisiana.




The Company's financing activities provided net cash of $1,662,000 in the six months ended June 30, 2009, compared to $548,000 of cash provided in the six months ended June 30, 2008. The cash provided in the six months ended June 30, 2009, was primarily associated with the proceeds from equity financings, subordinated
promissory financing, convertible debt financing and the line of credit, net.




LIQUIDITY AND CAPITAL RESOURCES




At June 30, 2009, the Company's current assets totaled $1,352,000 (including cash and cash equivalents of $180,000); total current liabilities were $5,430,000, resulting in negative working capital of $4,078,000. The Company has funded operations to date primarily through a combination of utilizing cash on hand,
borrowings and raising additional capital through the sale of its securities. The Company operation for the six months ended June 30, 2009, was primarily funded by proceeds from the Company's line of credit totaling $818,000, subordinated promissory financing of $990,000, sale of restricted common stock, net to accredited investors of $334,000 and convertible debt financing of $150,000.




20




CURRENT DEBT FACILITY




At June 30, 2009, the Company had approximately $3,499,000 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 six months ended June 30, 2009, we issued to various accredited investors and third parties (i) 1,918,000 shares of restricted common stock for net consideration of $334,000, (ii) 5,772,000 shares for services rendered and debt conversions, and (iii) 7,758,000 shares upon conversion of Series A Preferred
Stock. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the six months ended June 30, 2009, we issued 2,964,000 shares of common stock to employees and business consultants, for aggregate consideration of $978,000 of services rendered, pursuant to a registration statement on form S-8.




USE OF WORKING CAPITAL




We believe our cash and available credit facilities afford us adequate liquidity for the balance of fiscal 2009.  We anticipate that we will need additional capital in the future to continue to expand our business operations, which expenditures may include acquisitions and capital expenditures.  We
have historically financed our operations through private equity and debt financings. We do not have any commitments for significant 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 curtail operations.




CONTRACTUAL OBLIGATIONS




The following table sets forth contractual obligations as of June 30, 2009:





Payments Due by PeriodTotal


Less than
1 Year


1-3 Years


3-5 Years


More than 5 YearsContractual obligations:Long-term debt obligations

$
6,612


$
1,995


$
4,617


$
-


$
-Capital lease obligations


2,598



612



1,719



256



11Operating lease obligations


1,583



468



1,058



24



33Total contractual obligations

$
10,793


$
3,075


$
7,394


$
280


$
44




The Company's contractual obligations consist of long-term debt of $5,267,000, derivative liabilities of $196,000, unamortized debt discount of $172,000 and interest expense of $977,000 as set forth in Note 7 to the company's financial statements, Notes Payable, Long-Term Debt, Capital Leases and certain obligations
for operating leases requiring future minimal commitments under non-cancelable leases set forth in Note 9 - Commitments .




OFF-BALANCE SHEET ARRANGEMENTS




As of June 30, 2009, 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.




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.




Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment losses have been recorded since inception.




21


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.





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




In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. The effective date of this statement was November 15, 2008. The adoption of SFAS 162 did not have a material impact on the Company’s consolidated financial statements.




In April 2008, the FASB issued FASB Staff Position (“FSP”) No. SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) and other applicable accounting literature. FSP SFAS
142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company has not acquired any intangible assets since adopting FSP SFAS 142-3. As such, there has been no impact to the Company’s financial statements since the January 1, 2009 adoption date.




22




In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”), which expands the disclosure requirements in SFAS 133 about an entity’s derivative instruments and hedging
activities. SFAS 161’s disclosure provisions apply to all entities with derivative instruments subject to SFAS 133 and its related interpretations. The provisions also apply to related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. Such disclosures, as well as existing SFAS 133 required disclosures,
generally will need to be presented for every annual and interim reporting period. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. For the three months ended March 31, 2009, we have included the statement’s expanded disclosures about derivative instruments and hedging activities within the Company’s financial statements.




In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that accounting and reporting for minority interests will be recharacterized as noncontrolling interests
and classified as a component of equity. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This Statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The adoption of SFAS 160 did not have a material impact on the Company’s consolidated financial statements.




In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on at least an annual basis, until fiscal years beginning after November 15, 2008. Nonfinancial assets and liabilities that the Company measures at fair value on a non-recurring basis consist primarily of property and equipment, goodwill, and intangible assets, which are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The adoption of FSP FAS 157-2 did not have a material impact on the Company’s consolidated
financial statements.




ITEM 3. CONTROLS AND PROCEDURES




We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Based upon their evaluation of those controls and procedures performed as of the end of the period covered by this report, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures were adequate.




There were no changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.




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PART II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS




None.




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.




Except as otherwise noted, 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 Cash Consideration




On January 21, 2009, an accredited investor acquired 26,215 shares of common stock at $.44 per share.




On February 9, 2009, accredited investors acquired 89,799 shares of common stock at $0.28 per share.




On February 9, 2009, accredited investors acquired 104,866 shares of common stock at $0.24 per share.




On February 9, 2009, accredited investors acquired 33,422 shares of common stock at $0.30 per share.




On February 9, 2009, accredited investors acquired 534,567 shares of common stock at $0.28 per share.




On February 9, 2009, accredited investors acquired 83,556 shares of common stock at $0.30 per share.




On February 9, 2009, accredited investors acquired 233,671 shares of common stock at $0.18 per share.




On March 03, 2009, accredited investors acquired 45,033 shares of common stock at $0.37 per share.




On April 01, 2009, accredited investors acquired 40,976 shares of common stock at $0.29 per share.




On June 17, 2009, accredited investors acquired 726,129 shares of common stock at $0.37 per share.




Common Stock Issued for Debt Conversions and Services Rendered




On February 09, 2009, accredited investors acquired 76,687 shares of common stock at $0.33 per share pursuant to a conversion of E-series bonds.




On February 09, 2009, accredited investors acquired 81,699 shares of common stock at $0.31 per share pursuant to a conversion of E-series bonds.




On February 09, 2009, accredited investors acquired 90,744 shares of common stock at $0.28 per share pursuant to a conversion of E-series bonds.




On February 09, 2009, accredited investors acquired 81,699 shares of common stock at $0.31 per share pursuant to a conversion of E-series bonds.




24




On February 09, 2009, accredited investors acquired 181,488 shares of common stock at $0.28 per share pursuant to a conversion of E-series bonds.




On June 15, 2009, accredited investors acquired 102,604 shares of common stock at $0.32 per share pursuant to a conversion of E-series bonds.




On June 30, 2009, accredited investors acquired 620,528 shares of common stock at $0.30 per share pursuant to a conversion of E-series bonds.




In January, 2009, 254,002 shares of common stock at average price of $.29 per share were issued for services rendered.




In February, 2009, 484,344 shares of common stock at average price of $.35 were issued for services rendered.




In March, 2009, 240,000 shares of common stock at average price of $.39 were issued for services rendered.




In June, 2009, 3,332,860 shares of common stock at average price of $.27 were issued for services rendered.




Common Stock Issued Upon Conversion of Series A Preferred Stock




On January 20, 2009, an accredited investor acquired 29,789 shares of common stock pursuant to Preferred A Conversions.




On January 27, 2009, an accredited investor acquired 1,500,010 shares of common stock pursuant to Preferred A Conversions.




On February 02, 2009, an accredited investor acquired 1,000,000 shares of common stock pursuant to Preferred A Conversions.




On March 25, 2009, an accredited investor acquired 1,867,634 shares of common stock pursuant to Preferred A Conversions.




On April 02, 2009, an accredited investor acquired 29,789 shares of common stock pursuant to Preferred A Conversions.




On May 26, 2009, an accredited investor acquired 3,300,000 shares of common stock pursuant to Preferred A Conversions.




On June 11, 2009, an accredited investor acquired 29,789 shares of common stock pursuant to Preferred A Conversions.




ITEM 3. DEFAULT IN SENIOR SECURITIES




None.




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





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





25





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 CubleyH. Dean Cubley
Chief Executive OfficerDate:
August 19, 2009








26