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EX-21 - LIST OF SUBSIDIARIES - ERF Wireless, Inc.erf_10k-ex21.htm
EX-31.1 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3101.htm
EX-14.1 - CODE OF BUSINESS CONDUCT AND ETHICS - ERF Wireless, Inc.erf_10k-ex1401.htm
EX-32.2 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3202.htm
EX-32.1 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3201.htm
EX-31.2 - CERTIFICATION - ERF Wireless, Inc.erf_10k-ex3102.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

FOR THE YEAR ENDED DECEMBER 31, 2010

COMMISSION FILE NUMBER 000-27467

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

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

$.001 PAR VALUE COMMON STOCK

Check whether the issuer is not required to file report pursuant to Section 13
or 15(d) of the Exchange Act o

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 x No

Indicate by check mark that disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 
 

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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.

Large accelerated filer ¨
 
Accelerated filer o
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company x

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

ERF Wireless, Inc.'s revenue for its most recent fiscal year was $5,915,000.

As of March 30, 2011 the aggregate market value of the shares of common stock held by non-affiliates (based on the closing price of $0.02 per share for the common stock as quoted on that date) was approximately $9,385,063.

As of March30, 2011, the Company had outstanding 469,253,146 shares of its $.001 par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

None.


 
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TABLE OF CONTENTS

ITEM
   
NUMBER
CAPTION
PAGE
     
PART I
   
     
ITEM 1.
Business
5
     
ITEM 1A.
Risk Factors
12
     
ITEM 1B.
Unresolved Staff Comments
18
     
ITEM 2.
Properties
18
     
ITEM 3.
Legal Proceedings
19
     
ITEM 4.
Removed and Reserved
19
     
PART II
   
     
ITEM 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
20
     
ITEM 6.
Selected Financial Data
22
     
ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
     
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
30
     
ITEM 8.
Financial Statements and Supplementary Data
31
     
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
59
     
ITEM 9A.
Controls and Procedures
59
     
ITEM 9B.
Other Information
60
     
PART III
   
     
ITEM 10.
Directors, Executive Officers and Corporate Governance
61
     
ITEM 11.
Executive Compensation
62
     
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
64
     
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
65
     
ITEM 14.
Principal Accountant Fees and Services
66
     
ITEM 15.
Exhibits and Financial Statement Schedules
66
 
 
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FORWARD LOOKING STATEMENTS

Except for the historical information and discussions contained herein, statements contained in this Annual Report on Form 10-K, may constitute forward-looking statements. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed elsewhere in the ERF Wireless, Inc. ("Company" or "ERF"), filings with the U.S. Securities and Exchange Commission ("SEC"). The statements contained in this document that are not purely historical are forward-looking statements including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding our business. This Annual Report on Form 10-K includes forward-looking statements about our business including, but not limited to, the level of our expenditures and savings for various expense items and our liquidity in future periods. We may identify these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "project," "should," "will," "would" and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law. Our actual results could differ materially from those anticipated in these forward-looking statements.


 
 
 
 
 
 
 
 
 
 
 

 
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ITEM 1. BUSINESS

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, educational 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.

During 2010 we expanded our network coverage in Texas, Oklahoma, Arkansas, New Mexico, Louisiana, Colorado and Kansas to better serve our enterprise and oil and gas customers.  This focused expansion has contributed to an increase in revenues and establishment of Energy Broadband, Inc., our subsidiary, as a preferred choice in broadband service offerings to the oil and gas industry.  For the fiscal year 2011, we intend to use the funds from the recent divestiture of certain non-core assets to accelerate network expansion in Texas's Permian Basin and Eagle Ford Shale as well as North Dakota's Bakken Oil Shale. Oil and gas operators have accelerated their drilling programs in these areas by as much as 40%, according to recent rig data statistics, and are planning for additional increases in 2011 and 2012.  We intend to achieve this expansion through contractual partnerships for specific area coverages and internally built networks.  Additionally, we anticipate the commencement of services to additional vertical markets including purpose built educational networks for school districts.

Our principal executive offices are located at 2911 South Shore Blvd., Suite 100, League City, Texas 77573, and our telephone number is (281) 538-2101. We maintain web sites at www.erfwireless.com and www.erfwireless.net. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. You may access and read our SEC filings through the SEC's web site (:www.sec.gov). This site contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC.  All references to "we," "our," or "us" refer to ERF Wireless, Inc., a Nevada corporation, and our subsidiaries.

The Company offers its services through its subsidiaries. Our wholly owned subsidiaries are ERF Wireless Bundled Services, Inc. (“WBS”), Energy Broadband, Inc. (“EBI”), ERF Wireless Messaging Services, Inc. (“WMS”) and ERF Enterprise Network Services (“ENS”)

Wireless Bundled Services Subsidiary

WBS provides wireless broadband products and services, including Internet, voice and data to serve private entities, cities, municipalities and the general public in rural markets. For the year ended December 31, 2010 and 2009, WBS contributed 78% and 86% of the revenues of the Company and 63% and 74% of the losses attributable to the Company's business segments, respectively.

Energy Broadband, Inc.
 
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 and Canada. For the year ended December 31, 2010 and 2009, EBI contributed 15 % and 5 % of the revenues of the Company and 14% and 1% of the losses attributable to the Company's business segments, respectively.
 
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Enterprise Network Services Subsidiary

ENS provides turnkey design and implementation service in the area of secure wireless broadband networks for regional banks. For the year ended December 31, 2010 and 2009 ENS contributed 5% and 6% of the revenues of the Company and 17% and 24% of the losses attributable to the Company's business segments, respectively.

Wireless Messaging Services Subsidiary

WMS provides wireless broadband and fiber-to-the-home system network design and implementation, manufacture and supply high-power infrastructure equipment to the paging and mobile industry and owns and operate a wide-area messaging service (paging retail).  For the year ended December 31, 2010 and 2009, WMS contributed 2 % and 3% of the revenues of the Company and 5% and 1% of the losses attributable to the Company's business segments, respectively.

Our Industries

Oil and Gas Industry

ERF Wireless will market its oil and gas products and services through its oil and gas division and report such results in its segment reporting under EBI, a wholly owned subsidiary The demand for oil and gas continues to grow, and exploration and production consistently moves farther away from civilization and into more remote environments to meet this need. As a result, companies have been forced to change the way in how they operate. One approach is to achieve a “digital oilfield.” In a digital oilfield process digitization, real time data collection, and intelligent controls are combined to improve recovery, accelerate production, reduce downtime, and reduce the number of on-site engineers required to oversee the operation.

At the heart of a digital oilfield is a reliable, fast, and cost-effective means of communications. Oil and gas companies have historically relied on cellular and satellite communications to transmit data from the wellsite to the home office. These technologies, however, can be expensive and often suffer from high latency (a delay due to the time to send the data to the satellite and back). This latency can interrupt the fluency of voice communications and make machine to machine communications complex and unreliable.

We plan to utilize our existing and expanding wireless network to address this need by offering 1.5Mbps encrypted data communications using wireless and (WORLDWIDE INTEROPERABILITY for MICROWAVE ACCESS) WiMAX technologies. We believe this will enable real-time data collaboration between remote oil field operations. Our long term strategy is to be able to offer ongoing services to the operator of the well and to the owner of the gathering system or pipeline as we expand our offerings further downstream to the oil and gas industry.

On January 13, 2009, the Company entered into exclusive reseller agreements with Schlumberger Technology Corporation and Schlumberger Canada Limited (Schlumberger).  Currently, the contract is in operation in its second year.  During the fourth quarter of 2010 the Company and Schlumberger entered into a contractual mediation to resolve various financial issues.  During 2011 the Company and Schlumberger were unable to resolve these financial issues through mediation and the Company will avail itself of binding arbitration as mandated in the contract.

Regional Banking Industry

ENS provides a turnkey design and implementation service in the area of secure wireless broadband networks for regional banks. ENS’ focus is on obtaining design and construction contracts with banks in conjunction with long-term maintenance and monitoring contracts. All monitoring contracts are managed by the Company's network operations services division. Additionally, once the Company has designed and constructed the wireless broadband networks for the banks, the Company may, through its WBS subsidiary, use the same network under a revenue sharing agreement with the banks to sell wireless broadband services to private entities, cities, municipalities and the general public in that region.

ENS currently has long term maintenance contracts with four banking networks. For the twelve months ended December 31, 2010 and 2009 ENS contributed 5% and 6% of the revenues of the Company and 17% and 24% of the losses attributable to the Company's business segments.
 
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Residential and Enterprise

ERF Wireless markets its residential and enterprise services through its WBS subsidiary. Wireless broadband Internet systems consist of a radio transmitter that sends a signal on a combination of radio channels to receivers located at or in homes and businesses. Wireless broadband Internet networks can be roughly categorized based upon which wireless technology (e.g., standards or proprietary) they utilize and whether they utilize licensed or unlicensed spectrum.

The wireless broadband sector has begun a new stage of growth in the rural residential and enterprise markets, fueled primarily by technology improvements and increased consumer demand. Rural areas in America, however, have experienced a lower Internet penetration rate, and substantially less access to broadband, than the more densely populated urban and suburban areas.
 
We believe the rural and suburban markets are typically avoided or overlooked by other providers due to technical limitations and the high cost of providing broadband over terrestrial-based networks in densely populated areas. Our wireless broadband Internet services are offered utilizing fixed point-to-multipoint wireless technology in the licensed and unlicensed spectrums. We offer these services to both business and residential customers within our network footprint without the use of terrestrial lines. This allows our services to cover a rural or suburban geographical area at a fraction of the cost of terrestrial based broadband provided by cable modems or DSL lines. As a result of these savings, we are able to offer broadband Internet to communities and business that would otherwise be ignored by terrestrial based providers.

Our current residential and enterprise market is focused in the South Central United States, where we have developed areas of wireless coverage through acquisitions and contracts in Texas, Oklahoma, Arkansas, New Mexico, Louisiana, Colorado and Kansas. Our existing network allows us to provide our high capacity wireless broadband offerings to the oil and gas industry, financial institutions, and our residential customer base. We plan to continue to expand our wireless broadband coverage through acquisitions, internal development and partnerships in specific rural areas.

ERF Wireless’ Products and Services

Wireless Services to Oil and Gas Customers

We are able to provide low latency, high speed connections to both static and mobile drilling sites. We believe that our service is specifically designed to meet the oil and gas industries environmental, operational, and safety requirements in the land-based oilfield, and the compendium of services that we provide offers a compelling solution for the mobile oil platform. Our wireless service provides a 1.5Mbps or greater VOIP, facsimile and encrypted data transmission. These are the types of services that we believe oil and gas customers demand.

Additionally, by using WiMAX-based equipment as an adjunct to its existing fixed-wireless networks, the Company intends to create a compelling service offering to the oil and gas industry, including enhanced nomadic and portable data and video services. The advantages of deploying WiMAX technology based on a global standard, include higher data speeds, greater spectral efficiency, advanced nomadic services with self-installation features, global economies of scale and forward compatibility with the mobile WiMAX (802.16 (e) standard). In addition, with the certification of network standards and profiles to standards, network equipment costs should continue to decrease. The resulting interoperability of hardware will not only accelerate downward pricing, but should also afford service providers greater vendor selection and potential roaming revenues.

As opposed to the wireless communications service in an airport or home or office internet, there are few limitations on the amount of data that can be transferred in this area. Our data communications is non-contended, which means that every single individual site can receive the full 1.5Mbps. In addition, because our service uses a range of protocols, entire networks of data can be transported from the wellsite to the home office. We believe this will allow companies to reduce the number of personnel located at the wellsite, while providing fast, reliable, real time drilling and reservoir performance data to the home office.
 
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We believe our services offered to the oil and gas industry are unique, and that we are in a position to be a provider of choice for high-speed Internet bandwidth for managing drilling rig operations, supporting remote field offices, and video surveillance for production facilities and pipelines.

Wireless Services to Residential and Enterprise

We also provide wireless broadband products and services, including Internet, voice and data to serve private entities, cities, municipalities and the general public. We offer these services primarily in the rural markets which tend to be underserved by the major telephone and cable companies and where wireless broadband can offer a distinct cost advantage over other forms of broadband connectivity. These services are provided to both commercial and retail customers throughout the coverage area where the Company owns wireless broadband networks or operates wireless broadband networks. The Company offers these services by acquiring established rural wireless broadband companies.

Serving the Banking Industry

We provide a turnkey design and implementation in the area of secure wireless broadband networks for regional banks located primarily in areas of southern Louisiana, as well as in areas of central and west Texas.

This application of wireless broadband technology provides regional financial institutions, with between ten and one hundred branches, a cost-effective way to replace all of their recurring T1 and other telephone company costs. The resulting encrypted wireless broadband network connects all of their branches to the central bank and can provide up to 300 Mbps of continuous bandwidth as compared to the typical 1.4 Mbps of a T1 connection from the telephone company. In order to satisfy the security concerns of banking regulators, we have developed a proprietary encryption device (CryptoVueTM), consisting of hardware and software, as well as an integrated security protocol and 24x7 monitoring.

Broadband System Design and Manufacturing

We provide broadband system design and implementation services, manufacture and supply high-power infrastructure equipment to the paging and mobile industry, and own and operate a wide-area messaging service (paging retail). We also implement and construct new fiber-to-the-home broadband networks for third party customers. The wireless broadband system design and implementation function is a service that we provide to other outside organizations.

Day-to-Day Monitoring Services

We provide the overall day-to-day operation and 24/7 monitoring to all wireless broadband networks that we construct, acquire, maintain and administer. In addition, we may provide monitoring for other third parties. This service function is conducted from the state-of-the-art network operations center facility located at the ERF Wireless corporate headquarters in League City, Texas.

Growth Strategy

Background

The market for rural wireless broadband products and services has grown dramatically and we believe it will continue to grow. Broadband wireless has been in use for several years, but only with the advent of industry standards has it been possible to link the many small systems that have grown up into a much more robust wide-area network that we believe will accelerate the growth of the wireless broadband industry.

Wireless broadband provides a versatile broadband communication medium that we believe is more economical than a wired solution, is faster to implement and can be configured for multiple applications. Given the wireless technology gains and the Federal Communications Commission's ("FCC") adoption of an order to restructure frequencies within one of the several bands used for wireless broadband communication, we believe that wireless broadband will become a "third pipe" as both an alternative and extension to DSL and cable modem services, the two chief means of delivering high-speed Internet and data service today. In addition, we believe wireless broadband can replace costly telephone company T1 leased lines for many point to point data and voice applications as are generally utilized in the banking and healthcare industries.
 
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Historically, the Company’s growth strategy involved expanding its offerings to provide wireless broadband product to banks and other vertical markets where high bandwidth and secure communications are needed (such as hospitals, schools and law enforcement). Over the past year, however, the oil and gas industry has become an increasingly important part of our business plan to further utilize the extensive wireless networks we have built and acquired over the past four years. The demand for wireless broadband connectivity, bandwidth and other wireless services to support oilfield activities has increased. Today, we believe the oil and gas industry is looking for a way to move from its traditional low bandwidth, high cost satellite-based connectivity model to one where true high-speed broadband can be purchased for field operations at a reasonable cost. We believe that our wireless technology and existing network can best serve this need.

Continue to Acquire Networks

Our strategy is to focus on the acquisition of Wireless Internet Service Providers (WISPs) in locations that enhance our geographic and strategic plans. We believe that this acquisition strategy offers two benefits.  First, we are able to acquire operations that provide immediate revenue. Secondly, we are able to leverage the acquired network to provide services to the oil and gas market at higher rates than we offer to residential users. Our acquisition targets are typically capital constrained with underutilized network capacity. While there is no assurance that we will make additional acquisitions, we believe that there are WISPs that currently meet our acquisition criteria. As of the date of this Annual Report, we have not entered into any arrangements or understandings with any potential acquisition targets.

Competition

The Internet services industry is extremely competitive. We compete for revenues with multiple companies providing Internet services on a nationwide basis, discount ISPs and smaller regional ISPs. We also compete with companies that provide Internet access via narrowband and broadband technologies, such as Internet access providers, cable companies and telephone companies, most of which offer the same Internet connectivity services.  While there is still significant competition, we are utilizing a strategy of focusing on marketing to underserved geographic areas (i.e. those areas where there is less competition or technically inferior services available). We believe competition in these areas is generally from locally owned wireless broadband operators who lack the operating scale and monitoring systems. These operators generally have significantly higher prices or inefficient operations.

Incumbent Local Exchange Carrier (ILECs)

We face competition from ILECs in our markets in Texas and Louisiana. In particular, the Company generally faces competition from companies such as AT&T Inc. and smaller regional or local phone companies. If the market has a significant population density, the larger ILECs have typically deployed DSL in the one central office in the market. DSL deployments by smaller regional and local phone companies vary; however, the Company believes that all providers of DSL are restricted by DSL's physical distance limitations.

Wireless Broadband Service Providers

We also face competition from other wireless broadband providers that use unlicensed or licensed spectrum. For example, there may be a locally owned "mom and pop" wireless broadband operator present in the market offering local services. The Company believes these operators lack the operating scale and thus are burdened with significant operating costs from inefficient operations.

Wireless broadband competition may also come from local governments, universities, and municipalities that provide "WiFi" networks over unlicensed spectrum. These services are occasionally characterized as public-private partnerships and may be partially subsidized. In some cases, they are offered to subscribers at no cost at all.

In addition, Sprint Nextel Corporation, which holds 2.5 GHz licenses throughout much of the United States, has announced plans to invest up to $5 billion in building out a nationwide WiMAX-based network.  Sprint Nextel Corporation intends to provide services under the "Xohm" brand. Clearwire Corporation, who has partnered with Sprint Nextel Corporation, also offers wireless high speed Internet access utilizing pre-WiMAX-based technology in 46 markets in the United States. In terms of both domestic deployments and subscribers, Clearwire Corporation is the largest company providing advanced data services. Both Sprint Nextel Corporation and Clearwire Corporation are focused on larger population centers, underscoring the significant market opportunity available to the Company in serving underserved rural markets.
 
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Satellite

Satellite providers also offer broadband data services in rural and underserved markets. Although satellite has the capability to serve a large geographic area, the service levels can be impaired by the distance the signal travels to and from the satellite. Communication delays, or latency, can significantly inhibit satellite providers' ability to offer advanced services, such as VOIP. We believe our services can be provided to target customers more efficiently and at more competitive prices than satellite broadband services and as a result, it does not compete effectively with fixed wireless broadband.

Cellular and PCS Services

Many of the major mobile wireless carriers offer higher data rate access plans, but these plans are either restricted to larger urban and suburban markets or the actual data transfer rate can be significantly less than our fixed broadband services. However, wireless carriers continue to expand their network coverage, allowing advanced data services to be offered to a broader subscriber base. Also, wireless carriers have continued to leverage data services by offering personal computer data card devices and providing customers with wireless access to the Internet. We believe that these nationwide players will continue to focus on larger metropolitan markets, and will continue to be limited in bandwidth relative to the fixed wireless providers.

Third Party Products

The Company also sells third-party licensed products and services into its customer base such as VOIP phone systems, check and deposit item imaging and bank branch capture systems, video conferencing systems, video surveillance systems, satellite systems and other high bandwidth-consuming products and services. This is a highly competitive market dominated by large, well-funded incumbent providers. These markets are also characterized by competition that includes smaller regional telecommunications providers.

New Technology

We face competition in developing technologies, and risks from potential new developments in distribution technologies and equipment in Internet access. In particular, we face competition from developments in the following types of Internet access distribution technologies or equipment: broadband distribution technologies used in cable Internet access services; advanced personal computer-based access services offered through DSL technologies and by local telecommunications companies; other advanced digital services offered by wireless companies; television-based interactive services; personal digital assistants or handheld computers; and enhanced mobile phones. We must attempt to monitor these developments and to ensure that we either have comparable and compatible technology or access to distribution technologies developed or owned by third parties.

Intellectual Property, Proprietary Rights and Licenses

With respect to our Internet services, we believe that our success is more dependent upon technical, marketing and customer service expertise than upon our proprietary rights. We do, however, file copyright and trademark applications as deemed necessary. In addition, we rely on laws protecting trade secrets, common law rights with respect to copyrights and trademarks, as well as non-disclosure and other contractual agreements to protect proprietary rights. There can be no guarantee that our intellectual property and those laws, and the procedures initiated to protect our business, will prevent misappropriation of our proprietary software and web site applications. In addition, those protections may not preclude competitors from developing products with similar features as those of ERF Wireless.

The Company has received two patents and has three patents applications pending on its CryptoVue (TM) technology. The abstract of the patent application filing included the secure, triple-controlled system for data over a network, which protects against data theft or alteration by one or more ("e.g., two") corrupt insiders working together with outsiders. A combination of dual-control tamper-resistant routers, physical hardware keys and encryption keys enforces what the Company believes to be best practice security protocols with thorough auditing. A remote monitoring center provides a third level of control along with remote auditing and detailed change-control alerts. Two of the five patent applications had been issued; however the Company can provide no assurance that the remaining three patents will be successfully obtained.

All spectrum in the US and generally internationally is controlled by each country's equivalent of the FCC.  In some cases and some countries portions of the spectrum are set aside for general use such as license-free networks.  Part of the spectrum in most countries is controlled for military use, public safety and commercial services.  Only the entities so entitled may use the frequency bands they have rights to.  Considering the wide variety of International differences in other areas of public policy, radio spectrum is remarkably homogenous. Although we believe our products and services are unique and do not infringe upon the proprietary rights of others, there is no assurance that infringement claims will not be brought against us in the future. Any such claim could result in costly litigation or have a material adverse effect on our business, operating results and financial condition.
 
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Governmental Regulation

Our wireless Internet access products currently operate in a combination of licensed and unlicensed spectrums.

We provide Internet access, in part, using telecommunications services provided by third-party carriers. Terms, conditions and prices for telecommunications services are subject to economic regulation by state and federal agencies. As an Internet access provider, we are not currently subject to direct economic regulation by the FCC or any state regulatory body, other than the type and scope of regulation that is applicable to businesses generally. In April 1998, the FCC reaffirmed that Internet access providers should be classified as unregulated "information service providers" rather than regulated "telecommunications providers" under the terms of the 1996 Telecommunications Act (the "1996 Act"). As a result, we are not subject to federal regulations applicable to telephone companies and similar carriers merely because we provide our services using telecommunications services provided by third-party carriers. To date, no state has attempted to exercise economic regulation over Internet access providers.

Governmental regulatory approaches and policies to Internet access providers and others that use the Internet to facilitate data and communication transmissions are continuing to develop and, in the future, we could be exposed to regulation by the FCC or other federal agencies or by state regulatory agencies or bodies. In this regard, the FCC has expressed an intention to consider whether to regulate providers of voice and fax services that employ the Internet, or IP, switching as "telecommunications providers," even though Internet access itself would not be regulated. The FCC is also considering whether providers of Internet-based telephone services should be required to contribute to the universal service fund, which subsidizes telephone service for rural and low-income consumers, or should pay carrier access charges on the same basis as applicable to regulated telecommunications providers. To the extent that we engage in the provision of Internet or Internet protocol-based telephony or fax services, we may become subject to regulations promulgated by the FCC or states with respect to such activities. We cannot assure you that these regulations, if adopted, would not adversely affect our ability to offer certain enhanced business services in the future. Due to the increasing popularity and use of the Internet by broad segments of the population, it is possible that laws and regulations may be adopted with respect to the Internet pertaining to content of Web sites, privacy, pricing, encryption standards, consumer protection, electronic commerce, taxation, and copyright infringement and other intellectual property issues. No one is able to predict the effect, if any, that any future regulatory changes or developments may have on the demand for our Internet access or other Internet-related services. Changes in the regulatory environment relating to the Internet access industry, including the enactment of laws or promulgation of regulations that directly or indirectly affect the costs of telecommunications access or that increase the likelihood or scope of competition from national or regional telephone companies, could materially and adversely affect our business, operating results and financial condition.

Our future telecommunications business is subject to regulations under both state and federal telecommunications laws which are fluid and rapidly changing. On the state level, rules and policies are set by each state's Public Utility Commission or Public Service Commission (collectively, PUC). At the federal level, the Federal Communication Commission (FCC), among other agencies, dictates the rules and policies which govern interstate communications providers. The FCC is also the main agency in charge of creating rules and regulations to implement the 1996 Act. The 1996 Act opened the local telecommunications markets to competition by mandating the elimination of many legal, regulatory, economic and operational barriers to competitive entry. These changes provide us with new opportunities to provide local telephone services on a more cost-effective basis.

The FCC has granted direct broadcast satellite (DBS) and multi-channel, multi-point distribution service (MMDS) operator rights on a national basis similar to the mandatory access provided to franchise cable operators in some state and local jurisdictions. The FCC has adopted rules prohibiting homeowners associations, manufactured housing parks and state and local governments from imposing any restriction on a property owner that impairs the owner's installation, maintenance or use of DBS and MMDS antennas one meter or less in diameter or diagonal measurement. We do not believe our business will be significantly impacted by these rights.

Certain wireless broadband services are subject to regulation by the FCC. At the federal level, the FCC has jurisdiction over wireless transmissions over the electromagnetic spectrum, all interstate and foreign telecommunications services, and many aspects of intrastate telecommunications. State and municipalities also may regulate many aspects of intrastate telecommunications. Broadband Internet-related regulatory policies are continuing to develop and it is possible that our services could be subject to additional regulations in the future. The extent of regulations and their impact on its business and its ability to compete are currently unknown.

Due to the increasing popularity and use of the Internet, it is possible that additional laws, regulations or legal precedent may be adopted with respect to the Internet, covering issues such as content, privacy, pricing, unsolicited email, encryption standards, consumer protection, electronic commerce, taxation, copyright infringement and other intellectual property issues. ERF Wireless cannot predict the impact, if any, that any future legal or regulatory changes or developments may have on its business, financial condition and results of operations. Changes in the legal or regulatory environment relating to the Internet access industry, including changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies, cable operators or others, could have a material adverse effect on its business, financial condition and results of operations.
 
 
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Employees

As of March 16, 2011, we employ 51 full-time employees and 4 consultants. We have no collective bargaining agreements with our employees, and believe relationships are satisfactory.

Customers

The Company had one oil and gass customer that represented approximately 12% and 4% of gross sales for the years ended December 31, 2010 and 2009, respectively.

Research and Development

We provide internal research and development for our patented CryptoVue technology. Otherwise, we rely on the providers of the products we sell to upgrade their products through research and development. Consequently, we do not perform material research and development and we have not incurred any material research and development costs during the two previous fiscal years and do not anticipate incurring any such costs in the current fiscal year.

ITEM 1A. RISK FACTORS

Risks Related to Our Business

The following factors affect our business and the industry in which we operate. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or which we currently consider immaterial may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows, or prospects could be materially adversely affected.

A prolonged economic recession or depression will have an adverse effect on our operating results.

Continued adverse economic conditions will impact both business and residential customers that utilize our wireless services and products. It should be expected that adverse economic conditions will negatively impact our results of operations.

We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.

We have incurred annual operating losses since our inception. As a result, at December 31, 2010, we had an accumulated deficit of $47,819,000. Our gross revenues for the year ended December 31, 2010 were $5,915,000, with a loss from operations of $7,273,000. As we pursue our business plan, we expect our operating expenses to increase, especially in the areas of sales, marketing and acquisitions. As a result of these expected cost increases, we may incur losses from operations in 2011.

We have a limited cash and liquidity position and need to raise additional funds to fund operations.

As of December 31, 2010, we had cash and cash equivalents balances of $43,000 and negative working capital of $2,649,000. As of December 31, 2010, we had long-term indebtedness of approximately (i) $5.22 million on our credit facility, (ii) $.79 million of capital leases, and (iii) $.68 million of outstanding notes. The Company has a $12.0 million unsecured revolving credit facility, bearing interest at an annum rate of 12%, which matures in December 2013, and as of December 31, 2010, there was approximately $6,775,000 available under that facility. During February, 2011, we sold certain non-core assets for cash of approximately $3 million. We believe our cash and available credit facilities afford us adequate liquidity for 2011, although we will likely need to raise additional capital during this period to fund our anticipated growth for our oil and gas wireless business. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity funding at this time, and equity funding may not be available to us on favorable terms, if at all. As such there is no assurance that we can raise equity capital from external sources when such need arises, the failure of which could cause us to curtail operations.
 
12

 
We may not be successful in acquiring other existing wireless companies, which could negatively affect our offerings and sales.

Our business plan is dependent on acquiring existing companies that expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities, and we may not be able to make such acquisitions. These acquisitions are important to ensure that our products, services and technologies are compatible with third-party products and technologies, to enable us to sell or license our services and products to potential new customers and into potential new markets, and to enable us to continue with our existing customers. There can be no assurance that we will identify the best acquisitions for our business or enter into acquisitions of other companies on acceptable terms or at all. The failure to make strategic acquisitions could have a material adverse effect on our business or financial results. If we cannot make significant strategic acquisitions as our target markets and technology evolve, the sales opportunities for our services and products could deteriorate.

A default of the terms of our significant debt obligations may subject us to the risk of foreclosure on certain of our assets.

As of December 31, 2010, certain operating assets, inventory, furniture and accounts receivable are pledged as collateral on $1,231,000 of outstanding notes and capital leases. The occurrence of an event of default under any of our obligations might subject us to foreclosure by the lenders to the extent necessary to repay any amounts due. If a foreclosure were to happen, it might have a material adverse effect on our financial condition.

The Company's revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause its stock price to decline.

The Company's revenue and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, operating results may be below the expectations of investors, and the price of our common stock may decline. Factors that could cause quarterly fluctuations include:

·
The ability to raise the necessary capital to execute mergers, acquisitions and asset purchases, as needed to implement the Company's strategic plan;

·
The ability to keep current customers and secure new customers;

·
The ability to acquire existing rural wireless broadband networks throughout North America and the ability to secure customers in the rural regions in which the Company acquires these wireless broadband networks; and

·
The ability to secure new regional banking network customers for both the construction and design of new broadband networks and for the maintenance and monitoring of these broadband networks.

Accordingly, the failure to obtain significant future revenue, lower than expected revenue in the future, increased losses in the future, and decreased working capital could adversely affect our stock price and liquidity.

During 2010, the majority of our revenue was generated from short-term agreements.

For the year ended December 31, 2010, the majority of our revenues resulted from short-term, terminable at will, arrangements. We had one customer that provided revenue in excess of 10%. There is no assurance that our customers will continue to conduct business with us in the future, the failure of which could have a material adverse effect on our business operations.
We compete with many companies that are larger and better capitalized than us.

We face competition from many entities with significantly greater financial resources, well-established brand names and larger customer bases. We may become subject to price competition for our services as companies seek to enter our industry or current competitors attempt to gain market share. We expect competition to intensify in the future and expect significant competition from traditional and new telecommunications companies including, local, long distance, cable modem, Internet, digital subscriber line, microwave, mobile and satellite data providers. If we are unable to make or keep our products competitively priced and attain a larger market share in the markets in which our products compete, our levels of sales and our ability to achieve profitability may suffer.
 
13

 
We utilize the unlicensed spectrum, which is subject to intense competition, low barriers of entry and potential interference from multiple competing users.

We presently utilize unlicensed spectrum in connection with our broadband service offerings. While unlicensed spectrum is regulated by the FCC, it is available to multiple simultaneous users and may be subject to interference, which may reduce the quality of the service provided to subscribers. The availability of unlicensed spectrum is limited, and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum used by the Company currently or which it may in the future utilize. Accordingly, utilization of unlicensed spectrum could threaten our ability to reliably deliver services.

The licensing of additional spectrum in our markets by the FCC could introduce additional competition.

The FCC regulates the spectrum bands in which the companies and their competitors operate. The FCC can make additional spectrum available for use or change the way existing spectrum is used, which may result in additional competitors entering our markets and providing services that may directly compete with our offerings. In particular, in January 2008, the FCC offered several blocks of spectrum in the 700 MHz frequency range as part of Auction 73. This frequency range has been determined to be suitable for offering data, voice and video services particularly in sparsely populated rural areas. As a result, the licensing and eventual build out of this spectrum may bring additional competition to the Company’s principal markets.

A system failure could delay or interrupt our ability to provide products or services and could increase our costs and reduce our revenues.

Our operations are dependent upon our ability to support a highly complex network infrastructure. Many of our customers are particularly dependent on an uninterrupted supply of services. Any damage or failure that causes interruptions in our operations could result in loss of these customers. To date, we have not experienced any significant interruptions or delays which have affected our ability to provide services to our clients and we believe that we have satisfactory back-up systems in place. Because our headquarters and infrastructure are located in the Texas Gulf Coast area, there is likelihood that our operations may be affected by hurricanes or tropical storms, tornados, or flooding. The occurrence of a natural disaster, operational disruption or other unanticipated problem could cause interruptions in the services we provide and significantly impair our ability to generate revenue and achieve profitability.

Our industry changes rapidly due to evolving technology standards and our future success will depend on our ability to continue to meet the sophisticated needs of our customers.

Our future success will depend on our ability to address the increasingly sophisticated needs of our customers. We will have to develop and introduce enhancements to our existing services and products on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. We expect that we will have to respond quickly to rapid technological change, changing customer needs, frequent new service and product introductions and evolving industry standards that may render existing products and services obsolete. As a result, our position in existing markets or potential markets could be eroded rapidly by new services or product advances. The life cycles of products utilizing our services are difficult to estimate. Our growth and future financial performance will depend in part upon our ability to enhance existing services and applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements and respond to competitive products. We expect that our wireless service will continue to require substantial investments. We may not have sufficient resources to make the necessary investments. Any of these events could have a material adverse effect on our business, quarterly and annual operating results and financial condition.

An inability to overcome competition from alternative communication systems could adversely affect our results of operations.

We already face, and may increasingly encounter, competition from competing wireless technologies that are constantly improving. In addition, our technology competes with other high-speed solutions, such as wired DSL, cable networks, fiber optic cable and satellite technologies. Our service competes with alternative communications systems on the basis of reliability, price and functionality. For example, the performance and coverage area of our wireless systems are dependent on certain factors that are outside of our control, including features of the environment in which the systems are deployed, such as the amount of clutter (natural terrain features and man-made obstructions) and the radio frequency available. Depending on specific customer needs, these obstacles may make our technology less competitive in comparison with other technologies and make other technologies less expensive or more suitable. Our business may also compete in the future with products and services based on other wireless technologies and other technologies that have yet to be developed.
 
14

 
We may not be able to successfully upgrade our existing network infrastructure.

If the number of subscribers using our network and the complexity of its services increase, it will require more infrastructure, network and customer service resources to maintain the quality of its services. We may experience quality deficiencies, cost overruns and delays in implementing network improvements and expansion, in maintenance and upgrade projects, including slower than anticipated technology migrations. If we do not implement necessary developments and network upgrades successfully, or if it experiences inefficiencies, operational failures, or unforeseen costs during implementation, we may lose customers or incur additional liabilities.

If unauthorized persons gain access to our network, subscribers may perceive its network and services as not secure, which may adversely affect our ability to attract and retain subscribers and expose the Company to liability.

Although we take certain measures to guard against unauthorized access to our network, we may be unable to anticipate or implement adequate preventive measures against unauthorized access. Unauthorized parties may overcome our encryption and security systems and obtain access to data on customers’ networks, including on a device connected to such network. In addition, because we operate and control our network and our subscribers' Internet connectivity, unauthorized access of our network could result in damage to customers’ networks and to the computers or other devices used by their subscribers. An actual or perceived breach of network security, regardless of whether the breach is the Company’s fault, could harm public perception of the effectiveness of its security measures, adversely affect the ability to attract and retain subscribers, expose the Company to significant liability and adversely affect its business prospects

We are subject to extensive regulation that could limit or restrict our activities. If we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, and past due fees and interest, which may adversely affect our financial condition and results of operations.

Our business, including the acquisition, lease, maintenance, and use of spectrum licenses, is extensively regulated by federal, state and local governmental authorities. A number of federal, state and local privacy, security and consumer laws also apply to our business. These regulations and their application are subject to continual change as new legislation, regulations or amendments to existing regulations are adopted from time to time by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services we are able to offer and may impact the rates, terms and conditions of our services. Regulation of companies that offer competing services, such as cable and DSL providers and telecommunications carriers, also affects our business.

Certain wireless broadband services are subject to regulation by the FCC. At the federal level, the FCC has jurisdiction over wireless transmissions over the electromagnetic spectrum, all interstate and foreign telecommunications services, and many aspects of intrastate telecommunications. Wireless broadband services may become subject to greater state or federal regulation in the future. ERF Wireless cannot predict the impact, if any, that any future legal or regulatory changes or developments may have on its business, financial condition and results of operations. Changes in the legal or regulatory environment relating to the Internet access industry, including changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies, cable operators or others, could have a material adverse effect on its business, financial condition and results of operations.

Much of the law related to the liability of Internet service providers remains unsettled. For example, many jurisdictions have adopted laws related to unsolicited commercial email or “spam” in the last several years. Other legal issues, such as the sharing of copyrighted information, transborder data flow, universal service, and liability for software viruses could become subjects of additional legislation and legal development. We cannot predict the impact of these changes on them. Regulatory changes could have a material adverse effect on our business, financial condition or results of operations.

We depend upon our intellectual property and our failure to protect existing intellectual property or secure and enforce such rights for new proprietary technology could adversely affect our future growth and success.

The Company has filed trademark and patent applications to protect intellectual property rights for technology that it develops. The Company's future success also may depend upon its ability to obtain additional licenses for other intellectual properties. The Company may not be successful in acquiring additional intellectual property rights with significant commercial value on acceptable terms. Even if the Company is successful in acquiring such rights, it can provide no assurance that it will be successful in adapting or deploying them as to the timing or cost of such development efforts or as to the commercial success of the resulting products or services.
 
15

 
Our competitors may develop non-infringing products or technologies that adversely affect our future growth and revenues.

It is possible that our competitors will produce proprietary technologies similar to ours without infringing on our intellectual property rights. We also rely on unpatented proprietary technologies. It is possible that others will independently develop the same or similar technologies or otherwise obtain access to the unpatented technologies upon which we rely for future growth and revenues. Failure to meaningfully protect our trade secrets, know-how or other proprietary information could adversely affect our future growth and revenues.

We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow.

Significant litigation regarding intellectual property exists in our industry. Competitors and other third parties may infringe on our intellectual property rights. Alternatively, competitors may allege that we have infringed on their intellectual property rights, resulting in significant litigation expenses. Any claims, even those made by third parties who are without merit, could:

·
be expensive and time consuming to defend, resulting in the diversion of management's attention and resources;

·
require us to cease making, licensing or using products or systems that incorporate the challenged intellectual property; or

·
require us to spend significant time and money to redesign, re-engineer or re-brand our products or systems if feasible.

If the wireless broadband market does not evolve as we anticipate, our business may be adversely affected.

If we fail to properly assess and address the broadband wireless market or if our services fail to achieve market acceptance for any reason, our business and quarterly and annual operating results would be materially adversely affected. Since the market for our products is still evolving, it is difficult to assess the competitive environment or the size of the market that may develop. In addition, technologies, customer requirements and industry standards may change rapidly. If we cannot improve or augment our services and products as rapidly as existing technologies, customer requirements and industry standards evolve, our products or services could become obsolete. The introduction of new or technologically superior products by competitors could also make our services less competitive or obsolete. As a result of any of these factors, our position in existing markets or potential markets could be eroded.

Future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.

As part of our business strategy, we intend to acquire companies and technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities. If we fail to achieve the anticipated benefits of any acquisitions we complete, our business, operating results, financial condition and prospects may be impaired. Acquisitions and investments involve numerous risks, including:

·
difficulties in integrating operations, technologies, services, accounting and personnel;

·
inability to manage our growth;

·
difficulties in supporting and transitioning customers of our acquired companies to our technology platforms and business processes;

·
ability to maintain sufficient internal controls;

 
16

 
·
diversion of financial and management resources from existing operations;

·
difficulties in obtaining regulatory approval for technologies and products of acquired companies;

·
potential loss of key employees;

·
if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which dilution could adversely affect the market price of our stock;

·
inability to generate sufficient revenues to offset acquisition or investment costs; and

Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. It is also possible that at some point in the future we may decide to enter new markets, thus subjecting ourselves to new risks associated with those markets.

Risks Related to Our Securities

There is currently a limited market for our securities, and any trading market that exists in our securities may be highly illiquid and may not reflect the underlying value of our net assets or business prospects.

Although our common stock is traded on the OTC Bulletin Board, there is currently a limited market for our securities and there can be no assurance that an improved market will ever develop.  Investors are cautioned not to rely on the possibility that an active trading market may develop.

The market price of our common stock is very volatile and the value of your investment may be subject to sudden decreases.

The trading price for our common stock has been, and we expect it to continue to be, volatile. For example, the closing bid price of our stock has fluctuated between $.01 per share and $.04 per share since January 1, 2011. The price at which our common stock trades depends upon a number of factors, including our historical and anticipated operating results and general market and economic conditions, which are beyond our control. Factors such as fluctuations in our financial and operating results, technological innovations or new commercial products and services by us or our competitors, could also cause the market price of our common stock to fluctuate substantially. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations. These broad market fluctuations may lower the market price of our common stock. Moreover, during periods of stock market price volatility, share prices of many companies have often fluctuated in a manner not necessarily related to their operating performance. Accordingly, our common stock may be subject to greater price volatility than the stock market as a whole.

As our share price is volatile, we may be or become the target of securities litigation, which is costly and time-consuming to defend.

In the past, following periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders have often instituted class action litigation. If the market value of our securities experience adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.

Our “blank check” preferred stock could be issued to prevent a business combination not desired by management or our current majority shareholders.

Our articles of incorporation authorize the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined by our board of directors without shareholder approval. Our preferred stock could be utilized as a method of discouraging, delaying, or preventing a change in our control and as a method of preventing shareholders from receiving a premium for their shares in connection with a change of control.
 
17

 
Future sales of our common stock in the public market could lower our stock price.

We may sell additional shares of common stock in subsequent public or private offerings. We may also issue additional shares of common stock to finance future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

A significant number of shares of common stock may be issued during the next 12 months. The issuance of these shares will have a dilutive effect on our common stock and may lower our stock price.

We have reserved for issuance the following as of December 31, 2010:

·
4,374,000 shares of common stock are eligible to be issued pursuant to the Company's Non-qualified stock option plan;

·
1,933,000 shares of common stock underlying outstanding common stock purchase warrants at prices between $.08 and $.45 per share;

·
86,146,000 shares of common stock issuable upon conversion of Series A Preferred Stock, for an effective purchase price of $0.02 per share of common stock.

Further, we may issue shares to reduce our debt obligations. Accordingly, the issuance of these shares will have a dilutive effect from both a net tangible book value per share basis and from a number of shares of common stock outstanding basis. This overhang could have a depressive effect on our common stock price.

We presently do not intend to pay cash dividends on our common stock.

We currently anticipate that no cash dividends will be paid on the common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance the future expansion of our business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable to smaller reporting companies.

ITEM 2. PROPERTIES

Our principal offices are located in League City and Lubbock Texas, pursuant to term leases believed to reflect market rates and terms, including the following:

           
Approximate
 
Lease
Location
 
Function
 
Size (square feet)
 
Monthly lease payment
 
Expiration
                 
League City, TX
 
ERF Wireless Inc. Corporate Headquarters
 
                               24,700
 
 $                                   20,583
 
August 2011
                 
Lubbock, TX
 
WBS West Texas Operational Division Headquarters
 
                               10,000
 
 $                                     5,000
 
December 2011
                 
 
18

 

Our interests in our communications sites are comprised of operating leases created by long-term lease agreements at market rates. A typical tower site consists of a compound enclosing the tower site, a tower structure, and an equipment shelter that houses a variety of transmitting, receiving and switching equipment.

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.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

On January 13, 2009, the Company entered into exclusive reseller agreements with Schlumberger Technology Corporation and Schlumberger Canada Limited (Schlumberger).  Currently, the contract is in operation in its second year.  During the fourth quarter of 2010 the Company and Schlumberger entered into a contractual mediation to resolve various financial issues.  During 2011 the Company and Schlumberger were unable to resolve these financial issues through mediation and the Company will avail itself of binding arbitration as mandated in the contract.

ITEM 4. (REMOVED AND RESERVED)

None.



 
19

 
PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price Information

Our common stock trades on the OTC Electronic Bulletin Board under the symbol ERFW. The market for our common stock is limited, sporadic, and highly volatile. The following table sets forth the approximate high and low closing sales prices for our common stock for the last two fiscal years. The quotations reflect inter-dealer prices, without retail markups, markdowns, or commissions and may not represent actual transactions.
 
     
High Bid
   
Low Bid
 
               
YEAR 2010
             
 
Quarter ended December 31
  $ 0.04     $ 0.01  
 
Quarter ended September 30
  $ 0.09     $ 0.03  
 
Quarter ended June 30
  $ 0.15     $ 0.03  
 
Quarter ended March 31
  $ 0.27     $ 0.15  
YEAR 2009
                 
 
Quarter ended December 31
  $ 0.36     $ 0.21  
 
Quarter ended September 30
  $ 0.38     $ 0.25  
 
Quarter ended June 30
  $ 0.39     $ 0.25  
 
Quarter ended March 31
  $ 0.66     $ 0.29  

Stockholders

As of March 16, 2011 there were approximately 3,936 stock holders of record of our common stock.

Dividends

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and do not anticipate declaring or paying any cash dividends on our common stock in the near future.

Equity Compensation Plan Information

The following table sets forth certain information, as of December 31, 2010, concerning securities authorized for issuance under our plans;
 
 
20

 
   
Number of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants & Rights
 
Weighted Averaged Exercise Price of Outstanding Options, Warrants & Rights
   
Number of Securities Remaining Available for Future Issuance Under Stock Option Plans (Excluding Securities Reflected in Column (a)
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders:
 
                   
None
    -       -       -  
                         
Equity compensation plans not approved by security holders:
         
                         
2010 Non-Qualified Stock Compensation Plan
    700,000     $ 0.23       4,049,409  
                         
                         
Total
    700,000     $ 0.23       4,049,409  
                         

In June 2010, the Board of Directors adopted a Non-Qualified Stock Option Plan (the “Plan”) whereby 25,000,000 shares were reserved for issuance to key employees, officers, directors, and consultants of the Company and its affiliates. As of December 31, 2010, under the Plan, there were 20,625,591 shares issued to certain employees and consultants for services rendered and an outstanding option to purchase 325,000 shares of the Company’s common stock at a purchase price ranging from $.17 to $.43 per share. The Plan is administered by the Compensation Committee of the Company and if there is no Compensation Committee, by the entire board of directors. The Plan allows stock option grants, performance stock awards, restricted stock awards, and stock appreciation rights ("SAR") as determined by the Committee. No award may be granted pursuant to the Plan ten years after the effective date (June 1, 2010). The entire text of the Plan was filed with the Commission on June 24, 2010 as an exhibit to the Company's registration statement on Form S-8.

During 2010, the Company issued Weed & Co., LLP $.25 and $.08 warrants convertible into 250,000 and 125,000 shares of common stock, respectively, as part of payment of services. Furthermore Weed & Co., LLP would be granted additional warrants every six months following the date of the initial agreement and as long as the agreement continues to remain in effect. ERFW shall grant Weed & Co., LLP a warrant to purchase 125,000 shares of ERFW common stock at a price equal to 125% of the average closing bid price for the 10 days immediately prior to the date of grant. All warrants will expire five years from date of grant.

Recent Sales of Unregistered Securities

Set forth below is certain information concerning issuances of common stock that were not registered under the Securities Act that occurred in the fourth quarter of fiscal 2010.
 
Common Stock Issued for Cash Consideration
 
·  
No shares were issued for cash consideration for the three months ended December 31, 2010.
 
Common Stock Issued for Debt Conversions and Services Rendered
 
·  
In October, 2010, 17,764,945 shares of common stock at average price of $.03 were issued for debt conversions and services rendered.
 
 
21

 
 
·  
In November, 2010, 28,883,054 shares of common stock at average price of $.02 were issued for debt conversions and services rendered.

 
·  
In December, 2010, 26,777,991 shares of common stock at average price of $.02 were issued for debt conversions and services rendered.
 
Common Stock Issued Upon Conversion of Series A Preferred Stock
 
·  
On November 17, 2010, an accredited investor acquired 7,470,539 shares of common stock pursuant to Preferred A Conversions.
 
The issuances referenced above were completed pursuant to either Section 4(2) of the Securities Act or Regulation D of the Securities Act Rules. 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.

Equity Repurchases by Issuer

The Company did not affect any common stock repurchases during fiscal 2010.

ITEM 6.SELECTED FINANCIAL DATA

Not applicable to smaller reporting companies.


ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 annual report on Form 10-K, including the financial statements.

Overview

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 fiscal 2010, approximately 80% of our revenues were generated from internet services, 15% of our revenues were generated from providing broadband services to the energy industry and 5% of our revenues were generated from construction services. We expect that our internet services will experience a decline in 2011 as a result of our recent divestiture of certain wireless broadband assets and operations in territories that are not core to our oil and gas vertical market focus and that the most growth during fiscal 2011 will continue to come from devoting significant capital resources to developing the oil and gas market utilizing wireless services.

 
22

 
During the 2010 fiscal year and the first quarter of fiscal 2011, the Company made significant progress with its strategic business plan as evidenced by the completion and announcement of numerous agreements and business developments. These include:
 
·  
The completion, closing and funding associated with the divestiture of certain wireless broadband assets and operations that were not core to the Company’s vertical market focus in oil and gas through its subsidiary, Energy Broadband, Inc.  ERF received $3 million in cash and 100,000 shares of KeyOn Communications Holdings, Inc. stock for two wireless networks that were sold, specifically the Central Texas network west of Austin and the smaller North Texas network in Granbury.  The primary allocation of the cash proceeds will be used to retire certain liabilities and to provide for aggressive growth for our oil and gas vertical subsidiary, Energy Broadband.
 
·  
The completion of a Master Services Agreement with KeyOn Communications to deliver digital oilfield solutions in 4 of the 11 states where KeyOn has networks, with initial focus in Texas and Kansas.
 
·  
The completion of a Master Services Agreement with Skybeam, Inc. to deliver digital oilfield solutions in Texas, Colorado and Oklahoma.  Specifically, the agreement allows Energy Broadband to serve oil and gas customers under existing contracts, as well as to other oil and gas companies active in areas such as Colorado’s Piceance Creek and Denver Basin, Texas’ Barnett Shale and locations near Oklahoma’s Anadarko and Arkoma Basins.
 
·  
The completion of a Master Services Agreement with Bluebird Broadband Services to deliver digital oilfield solutions in the Haynesville Shale market covering northwest Louisiana and northeast Texas.
 
·  
The completion of a Master Services Agreement with Advanced Data Technologies to deliver digital oilfield solutions in the western Eagle Ford Shale formation in South Texas.
 
·  
The Company opened a new office in Odessa, Texas to support the growth of the oil and gas business in that region and completed the first phase of a new terrestrial wireless network that will cover more than 5,000 square miles of new coverage for our oil and gas customers to the west and south of the Midland/Odessa area.
 
·  
The Company completed the design of   a new wireless broadband network in the Eagle Ford Shale covering approximately 25,000 square miles of territory.
 
·  
The Company announced that it ranked number 137 on Deloitte's 2010 Technology Fast 500™, an annual ranking by Deloitte LLP of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America. ERF Wireless grew by 760% from 2005-2009.
 
·  
The Company received correspondence from the U.S. Patent Office that the second patent previously applied for relating other aspects of the CryptoVue encrypted security device has been approved and that the patent will be issued as soon as the forms are submitted.
 
·  
The Company announced that it has repaid all of its outstanding convertible debt as of close of business August 4, 2010. As reported in its 10-Q for the first quarter of 2010, the Company received approximately $600,000 USD in financing through convertible debentures with several institutional investors during the first quarter of 2010.
 
·  
The Company entered into a contract with the world's leading oil and gas services company in support of BP and the U.S. Coast Guard. The Company was selected to provide its world-class integrated communications systems to provide bandwidth to the U.S. Coast Guard's Incident Command Center recently set up on Galveston Island to search for and respond to all reports of oil affecting the Texas Gulf Coast that may be associated with the BP Deepwater Horizon spill off the coast of Louisiana.
 
·  
The Company completed deploying a BranchNet(TM) and BankNet(TM) encrypted enterprise-class wireless banking network for First Federal Bank of Louisiana that spans almost the entire western region of Louisiana from Lake Charles in the south to Natchitoches in the north. This network provides more than 280 miles of continuous network coverage with the most disparate branch locations being approximately 140 miles apart encompassing some of the most difficult rain and foliage regions in the United States. The construction of this network has been a real mix of engineering skill as well as perseverance since it has been under construction for more than two years and construction even continued with minor interruptions through two major hurricanes in the region. This high-speed broadband network connects all 14 of First Federal's current branch locations with their Operations Center and is ERF Wireless' largest bank project to date. The BankNet(TM) network backbone portion, which is owned by ERF Wireless and generates recurring revenue, provides speeds that range from 20 Mbps up to 100 Mbps delivered over the bank-owned BranchNet portion of the network going to each branch location.
 
 
23

 
·  
The Company launched a marketing campaign in support of its WiNet Agreement with West Texas State Bank in Monahans, Texas. This agreement calls for the utilization of the bank's excess bandwidth and wireless infrastructure to provide Internet products and services to the bank's commercial and retail customers in the Monahans and Kermit areas. ERF Wireless plans to operate and support its WiNet product offerings through its Wireless Bundled Services subsidiary. 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

Year Ended December 31, 2010, Compared to Year Ended December 31, 2009

The following table sets forth summarized consolidated financial information for the years ended December 31, 2010 and 2009:

   
Fiscal Year Ended December 31,
 
                         
($ in thousands)
 
2010
   
2009
   
$ Change
   
% Change
 
Total sales
  $ 5,915     $ 5,533     $ 382       7 %
Cost of goods sold
    3,910       3,254       656       20 %
Gross profit
    2,005       2,279       (274 )     -12 %
Percent of total sales
    34 %     41 %                
Operating expenses
    9,278       9,921       (643 )     -6 %
Loss from operations
    (7,273 )     (7,642 )     369       -5 %
Other income/(expense)
    (1,238 )     (1,230 )     (8 )     1 %
Net loss
  $ (8,511 )   $ (8,872 )   $ 361       -4 %

 
 
24

 
For the year ended December 31, 2010, the Company's business operations reflected an increase in sales for Energy Broadband, Inc. (EBI) with an offset of decreased sales for Wireless Bundled Services (WMS), Enterprise Network Services (ENS) and for Wireless Messaging Services (WMS) For the year ended December 31, 2010, the Company's consolidated operations generated net sales of $5,915,000 compared to prior-year net sales of $5,533,000 for the year ended December 31, 2009. The $382,000 increase in net sales is primarily attributable to $608,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions, with an offset of $121,000 in decreased sales in WBS due to a reduction in our retail wireless and dialup customer base, $47,000 decreased sales in ENS are due to banking network installation and services and a $58,000 decrease in WMS attributable to decrease paging retail customer base and equipment sales.  Product sales decreased $72,000 and offset with increased service sales of $454,000. The $382,000 increased sales in EBI due primarily to our wireless broadband services from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions. For the year ended December 31, 2010, the Company had a gross profit margin of 34%, compared to a gross profit margin of 41% for the prior year. The $274,000 decrease in gross profit margin is primarily attributed to the following factors; (i) approximately $154,000 increase in gross margin in EBI attributable to our wireless broadband services from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions (ii) $75,000 increase in gross margins in WMS primarily related to wireless paging infrastructure sales and services (iii) offset with $177,000 decrease in gross margins in ENS primarily related to depreciation of our BankNet infrastructure with minimal customer base offsetting the expense at this time, and (iv) approximately $326,000 decrease in gross margin in WBS attributable to increased depreciation and tower rent due to prior year asset acquisitions; and decrease sales related to reduction in our retail wireless and dialup customer base.

The Company incurred a net loss of $8,511,000 for the year ended December 31, 2010. The Company's principal components of the net loss for the year ended December 31, 2010, included approximately $2,938,000 in depreciation and amortization expenses, $1,513,000 of interest expense, $363,000 of derivative income, $1,318,000 of other general and administrative expense, $4,275,000 in employment expenses and $2,306,000 in professional services.

Sales Information

Set forth below is a table presenting summarized sales information for our business segments for the years ended December 31, 2010 and 2009:

($ in thousands)
 
Fiscal Year Ended December 31,
Business Segment
  2010
% of Total
  2009  
% of Total
  $ Change
% Change
Wireless Messaging Services
 
$
          101
 
2%
 
$
          159
 
3%
 
$
          (58)
 
-36%
Wireless Bundled Services
   
       4,628
 
78%
   
       4,749
 
86%
   
        (121)
 
-3%
Enterprise Network Services
   
          270
 
5%
   
          317
 
6%
   
          (47)
 
-15%
Energy Broadband, Inc.
   
          916
 
15%
   
          308
 
5%
   
          608
 
197%
Total Sales
 
$
       5,915
 
100%
 
$
       5,533
 
100%
 
$
          382
 
7%
 
For the year ended December 31, 2010, net sales increased to $5,915,000 from $5,533,000 for the year ended December 31, 2009. The overall increase of 7% was attributable to an increase of $608,000 of Energy Broadband, Inc., and offset with a decrease of $121,000 of Wireless Bundled Services, $47,000 decrease in Enterprise Network Services and a decrease in Wireless Messaging Services of $58,000. The $608,000 increased sales in EBI are from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions, with an offset of $121,000 decreased sales in WBS due to a reduction in our retail wireless and dialup customer base, $47,000 decreased sales in ENS due to banking network installation and services and a $58,000 decreased sales in WMS is attributable to a decline in our paging retail customer base.
 
 
25

 
Cost of Goods Sold

The following tables set forth summarized cost of goods sold information for the years ended December 31, 2010 and 2009:

($ in thousands)
 
Fiscal Year Ended December 31,
                 
    2010  
% of Total
   
2009
 
% of Total
  $ Change  
% Change
Wireless Messaging Services
 
$
            74
 
2%
 
$
          207
 
6%
 
$
               (133)
 
-64%
Wireless Bundled Services
   
       2,868
 
73%
   
       2,577
 
79%
   
                 291
 
11%
Enterprise Network Services
   
          403
 
10%
   
          274
 
8%
   
                 129
 
47%
Energy Broadband, Inc.
   
          565
 
15%
   
          196
 
6%
   
            369
 
188%
Total cost of sales
 
$
       3,910
 
100%
 
$
       3,254
 
100%
 
$
                 656
 
20%

   
Fiscal Year Ended December 31,
             
($ in thousands)
 
2010
   
2009
   
$ Change
   
% Change
 
                         
Products and integration service
  $ 1,403     $ 1,439     $ (36 )     -3 %
Rent and maintenance
    524       475       49       10 %
Depreciation
    1,983       1,340       643       48 %
Total cost of sales
  $ 3,910     $ 3,254     $ 656       20 %

For the year ended December 31, 2010, cost of goods sold increased by $656,000, or 20%, to $3,910,000 from $3,254,000 as compared to the year ended December 31, 2009. The increase of $656,000 in cost of goods sold is primarily attributable to an increase of cost of goods sold of $129,000 in ENS due to depreciation of our BankNet infrastructure, $291,000 increase in WBS due to depreciation and tower rent as a result of prior year acquisitions, $369,000 increase in EBI due to increased depreciation and third party services for deployment of our Mobile Broadband Trailers (MBTs) in oil and gas regions, and offset with a decrease of cost of goods sold of $133,000 in WMS attributable to reduced revenue in wireless paging service and infrastructure construction.

Operations Expenses

The following table sets forth summarized operating expense information for the years ended December 31, 2010 and 2009:

   
Fiscal Year Ended December 31,
 
($ in thousands)
 
2010
   
2009
   
$ Change
   
% Change
 
                         
Employment expenses
  $ 4,275     $ 4,870     $ (595 )     -12 %
Professional services
    2,306       1,832       474       26 %
Rent and maintenance
    424       444       (20 )     -5 %
Depreciation and amortization
    955       1,364       (409 )     -30 %
Other general and administrative
    1,318       1,411       (93 )     -7 %
Total operating expenses
  $ 9,278     $ 9,921     $ (643 )     -6 %
 
26

 

For the year ended December 31, 2010, operating expenses decreased by 6% to $9,278,000, as compared to $9,921,000 for the year ended December 31, 2009. The changes that occurred, as evidenced by the immediately preceding table, are discussed below:
 
·  
A $595,000 decrease in employment expense. The decrease is primarily attributable to the centralization of our operations;
 
·  
A $474,000 increase in professional services. The increase is primarily attributable to settlement expenses.
 
·  
A $20,000 decrease in rent and maintenance.
 
·  
A $409,000 decrease in depreciation and amortization;
 
·  
A $93,000 decrease in other general and administrative expense.

Other (Income) Expense, Net

For the year ended December 31, 2010, the decrease in other expense is primarily attributable to interest expense, net on debt obligations totaling $1,513,000, loss on extinguishment of debt of $63,000 and offset with a net derivative income of $363,000 as compared to interest expense, net of $1,293,000, and offset with derivative income of $50,000 for the year ended December 31, 2009. The derivative expense represents the net unrealized (non-cash) charge during the year ended December 31, 2010 and 2009, 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 year ended December 31, 2010, our net loss was $8,511,000 compared to a loss of $8,872,000 for the year ended December 31, 2009. The deceased in the loss for the year ended December 31, 2010, as compared to the year ended December 31, 2009 is primarily attributable as evidenced by the immediately preceding table, are discussed above.

Cash Flows

The Company's operating activities decreased net cash used by operating activities to $2,081,000 in the year ended December 31, 2010, compared to net cash used of $2,959,000 in the year ended December 31, 2009. The decrease in net cash used by operating activities was primarily attributable to an improvement  in the company's net operating loss of $8,511,000, net of $5,313,000 non-cash charges combined with derivative income $363,000 to equal net non-cash charge of $4,950,000, combined together with $1,480,000 of cash provided 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 $690,000 in the year ended December 31, 2010, compared to use of net cash of $1,306,000 in the year ended December 31, 2009. The decrease in investing activities is primarily attributable to no new acquisitions in 2010, as compared to the prior year.
 
The Company's financing activities provided net cash of $2,586,000 in the year ended December 31, 2010, compared to $4,145,000 of cash provided in year ended December 31, 2009. The cash provided in the year ended December 31, 2009, was primarily associated with the proceeds from equity financings, convertible debt financing and the line of credit, net.

 
27

 
Liquidity and Capital Resources

General

At December 31, 2010, the Company's current assets totaled $919,000 (including cash and cash equivalents of $43,000) total current liabilities were $3,568,000, resulting in negative working capital of $2,649,000. The Company has funded operations to date primarily through a combination of utilizing cash on hand, borrowings and raising additional capital through the sale of its securities. The Company’s operations for the year ended December 31, 2010, were as primarily funded by proceeds from the Company's line of credit totaling $3,026,000, sale of restricted common stock, net to accredited investors of $432,000 and convertible debt financing of $759,000.

Current Debt Facility
 
In June 2010, the Company increased its unsecured revolving credit facility with Angus Capital Partners a related party from $10.5 million to $12.0 million maturing December 31, 2013. At December 31, 2010, the Company had approximately $6,775,000 available on a $12.0 million unsecured revolving credit facility with Angus Capital Partners, with an outstanding balance of $5,225,000. The terms of the unsecured revolving credit facility will allow us to draw upon the facility as financing requirements dictate and provides for quarterly interest payments at an annual 12% rate. The loan may be prepaid without penalty or repaid at maturity.

Issuance of Common Stock
 
During the fiscal year ended December 31, 2010, we issued to various accredited investors and third parties (i) 9,555,000 shares of restricted common stock for cash consideration of $432,000, (ii) 125,286,000 shares for services rendered and debt conversions, and (iii) 85,364,000 shares upon conversion of Series A Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the fiscal year ended December 31, 2010, we issued 26,621,000 shares of common stock to employees and business consultants, for aggregate consideration of $1,234,000 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 2011. 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 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 December 31, 2010:
 
   
Payments Due by Period
 
   
Total
   
Less than 1 Year
   
1-3 Years
   
3-5 Years
   
More than 5 Years
 
Contractual obligations:
                             
Long-term debt obligations
  $ 8,660     $ 1,399     $ 7,261     $ -     $ -  
Capital lease obligations
    931       524       269       138       -  
Operating lease obligations
    631       465       126       24       16  
Total contractual obligations
  $ 10,222     $ 2,388     $ 7,656     $ 162     $ 16  

The Company's contractual obligations consist of long-term debt of $6,374,000 and interest expense of $2,286,000 as set forth in Note 12 to the company's financial statements, Notes Payable and Long-Term Debt. The capital lease obligations include interest as set forth in Note 12 in the future minimum lease payments schedule and certain obligations for operating leases requiring future minimal commitments under non-cancelable leases set forth in Note 14 - Commitments and Contingencies.
 
 
28

 
Off-Balance Sheet Arrangements

As of December 31, 2010 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.

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.

 
29

 
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

 
 
 
 
 

 
 
30

 
ITEM 8. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
ERF Wireless, Inc.
League City, Texas

We have audited the accompanying consolidated balance sheets of ERF Wireless, Inc., as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ERF Wireless, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ LBB & ASSOCIATES LTD., LLP

LBB & ASSOCIATES LTD., LLP
Houston, Texas
March 29, 2011

 
31

 
 
 
ERF WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 and 2009
($ in thousands except share data)

   
December 31,
   
December 31,
 
   
2010
   
2009
 
             
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 43     $ 228  
Accounts receivable, net
    392       485  
Accounts receivable, other
    124       87  
Inventories
    255       222  
Costs and profits in excess of billings
    -       17  
Prepaid expenses and other current assets
    105       242  
Total current assets
    919       1,281  
                 
Property and equipment
               
Property and equipment
    10,001       9,347  
Less: accumulated depreciation
    (5,987 )     (3,712 )
Net property and equipment
    4,014       5,635  
                 
Goodwill
    1,255       1,255  
Intangible assets, net
    134       701  
Other assets
    170       245  
                 
Total assets
  $ 6,492     $ 9,117  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
         
Current liabilities:
               
Notes payable and current portion of long-term debt
  $ 598     $ 1,881  
Current portion of long-term capital leases
    446       854  
Accounts payable
    872       586  
Accrued expenses
    1,139       486  
Derivative liabilities
    13       269  
Deferred liability and revenue
    500       585  
Total current liabilities
    3,568       4,661  
                 
Line of credit
    5,225       5,449  
Long-term debt, net of current portion
    78       442  
Long-term capital leases, net of current portion
    343       789  
Deferred liability and revenue, net of current portion
    -       150  
Total liabilities
    9,214       11,491  
                 
Commitments
               
                 
Shareholders’ deficit:
               
Preferred stock  -  $.001 par value Series A authorized 25,000,000 shares Issued and outstanding at December 31, 2010, and December 31, 2009, 4,612,583 and 3,043,580, respectively
    5       3  
Common stock  -  $.001 par value Authorized 975,000,000 shares Issued and outstanding at December 31, 2010, and December 31, 2009, 392,402,346 and 145,575,735, respectively
    392       146  
Additional paid in capital
    44,700       36,785  
Accumulated deficit
    (47,819 )     (39,308 )
Total shareholders’ deficit
    (2,722 )     (2,374 )
                 
Total liabilities and shareholders' deficit
  $ 6,492     $ 9,117  
See accompanying notes to consolidated financial statements.
         
 
 
32

 
 

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
($ in thousands except share data and loss per share)

   
2010
   
2009
 
             
Sales:
           
Products
  $ 124     $ 196  
Services
    5,791       5,337  
Total sales
    5,915       5,533  
                 
Costs of goods sold:
               
Products and integration services
    1,403       1,439  
Rent, repairs and maintenance
    524       475  
Depreciation
    1,983       1,340  
Total costs of goods sold
    3,910       3,254  
Gross profit
    2,005       2,279  
Operating expenses:
               
Selling, general and administrative
    8,323       8,557  
Depreciation and amortization
    955       1,364  
Total operating expenses
    9,278       9,921  
Loss from operations
    (7,273 )     (7,642 )
Other income (expense):
               
Interest expense, net
    (1,513 )     (1,293 )
(Loss) on extinguishment of debt
    (63 )     -  
Sale of assets, net and other income
    (25 )     13  
Derivative income
    363       50  
Total other income (expense)
    (1,238 )     (1,230 )
Net loss
  $ (8,511 )   $ (8,872 )
Net loss per common share:
               
Basic
  $ (0.04 )   $ (0.07 )
Diluted
  $ (0.04 )   $ (0.07 )
                 
See accompanying notes to consolidated financial statements.
         
 

 
33

 

ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
($ and shares in thousands)

                                       
Total
 
                           
Additional
         
Shareholders’
 
   
Common Stock
   
Preferred Stock
   
Paid in
   
Accumulated
    Equity  
   
Shares
   
Value
   
Shares
   
Value
   
Capital
   
Deficit
   
(Deficit)
 
                                           
Total shareholders’ equity (deficit as of December 31, 2008
    101,884     $ 102       4,086     $ 4     $ 31,084     $ (30,436 )   $ 754  
                                                         
Net loss
    -       -       -       -       -       (8,872 )     (8,872 )
                                                         
New stock issued to shareholders:
                                                       
Conversion of preferred stock to common stock
    28,796       29       (1,542 )     (1 )     (28 )     -       -  
For services rendered and interest
    8,069       8       -       -       2,449       -       2,457  
For retirement of debt
    1,636       2       -       -       473       -       475  
Asset acquisition
    3,273       3       -       -       881       -       884  
For retirement of debt and conversion of convertible preferred stock
    -       -       500       -       1,500       -       1,500  
Stock based compensation
    -       -       -       -       -       -       -  
Derivative liability
    -       -       -       -       39       -       39  
Warrant expense
    -       -       -       -       55       -       55  
Proceeds from sale of common stock, net
    1,918       2       -       -       332       -       334  
 
                                                       
Total shareholders’ (deficit) as of December 31, 2009
    145,576       146       3,044       3       36,785       (39,308 )     (2,374 )
                                                         
Net loss
    -       -       -       -       -       (8,511 )     (8,511 )
                                                         
New stock issued to shareholders:
                                                       
Conversion of preferred stock to common stock
    85,364       85       (4,571 )     (4 )     (81 )     -       -  
For services, compensation and interest
    41,290       41       -       -       1,926       -       1,967  
For retirement of debt
    51,049       51       -       -       1,713       -       1,764  
Conversion of LOC and interest to preferred stock
    -       -       6,140       6       2,398       -       2,404  
Stock based compensation
    -       -       -       -       40       -       40  
Derivative liability
    -       -       -       -       3       -       3  
Conversion of LOC and interest to common stock
    59,568       60       -       -       1,493       -       1,553  
Proceeds from sale of common stock, net
    9,555       9       -       -       423       -       432  
                                                         
Total shareholders’ (deficit) as of December 31,  2010
    392,402     $ 392       4,613     $ 5     $ 44,700     $ (47,819 )   $ (2,722 )
                                                         
See accompanying notes to consolidated financial statements.
                                   


 
34

 
ERF WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
($ in thousands)
 
 
 
2010
   
2009
 
             
Cash flows from operating activities
           
Net loss
  $ (8,511 )   $ (8,872 )
                 
Adjustments to reconcile net loss to net cash used by operating activities:
               
Loss on extinguishment of debt
    63       -  
Loss on foreign exchange translation
    1       -  
Loss on sale of assets
    16       -  
Amortization of debt discount
    162       228  
Depreciation and amortization
    2,938       2,704  
Stock issued for services, compensation and interest
    1,967       2,457  
Derivative (income) expense
    (363 )     (50 )
Stock base compensation
    40       -  
Bad debt expense
    126       105  
Changes in:
               
Accounts receivable, net
    (33 )     (318 )
Accounts receivable, other
    (37 )     (21 )
Inventories
    (33 )     (29 )
Prepaid expenses and other current assets
    150       276  
Costs and profits in excess of billings
    17       410  
Accounts payable
    285       (395 )
Accrued expenses
    1,366       364  
Deferred liability and revenue
    (235 )     182  
Total adjustment
    6,430       5,913  
Net cash used by operating activities
    (2,081 )     (2,959 )
                 
Cash flows from investing activities
               
Proceeds from sale of assets
    8       -  
Purchase of property and equipment
    (773 )     (1,158 )
Business acquisitions, net of cash acquired
    -       (167 )
Change in other assets
    75       19  
Net cash used by investing activities
    (690 )     (1,306 )
                 
Cash flows from financing activities
               
Net proceeds from line of credit
    3,026       3,618  
Proceeds from notes payable
    -       150  
Proceeds from long-term debt obligations
    759       1,390  
Payment of long-term debt obligations
    (777 )     (465 )
Payment on capital lease obligations
    (854 )     (882 )
Proceeds from sale of common stock, net
    432       334  
Net cash provided by financing activities
    2,586       4,145  
                 
Net decrease in cash
    (185 )     (120 )
Cash and cash equivalents at the beginning of the period
    228       348  
Cash and cash equivalents at the end of the period
  $ 43     $ 228  
                 
Supplemental disclosure of cash flow information:
         
Net cash paid during the year for:
               
Interest
  $ 241     $ 361  
Income taxes
  $ -     $ -  
                 
Supplemental non-cash investing and financing activities:
         
Conversion of debt through issuance of common stock
  $ 1,764     $ 475  
Conversion of LOC and interest through issuance of Preferred stock
  $ 2,404     $ 1,500  
Conversion of LOC and interest through issuance of Common stock
  $ 1,553     $ -  
Issuance of shares for asset acquisition
  $ -     $ 884  
Property acquired under capital lease
  $ -     $ 68  
Note payable for acquisition
  $ -     $ 444  
See accompanying notes to consolidated financial statements.
 
 
 
35

 
 
ERF WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
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 internet revenues are recorded in “ERF Wireless Bundled Services, Inc. (WBS)”, construction of bank networks in our “ERF Enterprise Network Services, Inc. (ENS)” and other construction in “ERF Wireless Messaging Services, Inc. (WMS)” and wireless broadband products and services to rural oil and gas locations are recorded in “ERF Energy Broadband, Inc. (EBI)”. Please refer to segment footnote 16 for additional information regarding segment operations.

Basis of Accounting

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. The accompanying 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). 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 have been reflected herein.

Principles of Consolidation

The consolidated financial statements include the accounts of the company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
 
Reclassification
 
Certain amounts in the 2009 financial statements have been reclassified to conform to the 2010 financial presentation. These reclassifications have no impact on net loss.

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less at the date of purchase. At various times during the year, the Company maintained cash balances in excess of FDIC insurable limits. Management feels this risk is mitigated due to the longstanding reputation of these banks.  The Company has not experienced any losses related to these deposits.
 
 
36

 
 
ERF WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Credit Risk

In the normal course of business, the Company extends unsecured credit to the majority of its customers. The company controls credit risk associated with its receivables through credit checks, approvals, and monitoring procedures. Generally, the company requires no collateral from its customers.

Leases

We recognize lease expense on a straight-line basis over the minimum lease terms which expire at various dates through 2018. These leases are for office and radio tower facilities and are classified as operating leases. For leases that contain predetermined, fixed escalations of the minimum rentals, we recognize the rent expense on a straight-line basis and record the difference between the rent expense and the rental amount payable in liabilities.

Leasehold improvements made at the inception of the lease are amortized over the shorter of the asset life or the initial lease term as described above. Leasehold improvements made during the lease term are also amortized over the shorter of the asset life or the remaining lease term.

On December 15, 2006, the Company entered into an agreement with Southwest Enhanced Network Services, LP, a wireless broadband company, to assume multiple tower and office leases in the greater Lubbock, Texas area. As part of the agreement the Company received $825,000 in cash to offset certain of the future operating lease costs. The $825,000 is recorded as a deferred leased liability and recognized as a reduction to rent expense on a straight-line basis over the lease term as described above. At the end of December 2010 and 2009, this deferred lease liability balance was $150,000 and $313,000, respectively.

Assets Held under Capital Leases

Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.

Allowance for Doubtful Accounts

The Company uses the allowance method to account for uncollectible accounts receivable. The Company's estimate is based on historical collection experience and a review of the current status of accounts receivable. The company reviews its accounts receivable balances by customer for accounts greater than 90 days old and makes a determination regarding the collectibility of the accounts based on specific circumstances and the payment history that exists with such customers. The company also takes into account its prior experience, the customer's ability to pay and an assessment of the current economic conditions in determining the net realizable value of its receivables. The company also reviews its allowances for doubtful accounts in aggregate for adequacy following this assessment. Accordingly, the company believes that its allowances for doubtful accounts fairly represent the underlying collectibility risks associated with its accounts receivable.

Deferred Revenues

Revenues that are billed in advance of services being completed are deferred until the conclusion of the period of the service for which the advance billing relates. Deferred revenues are included on the balance sheet in current and long-term liabilities until the service is performed and then recognized in the period in which the service is completed. The Company's deferred revenues consist of billings in advance for services being rendered for its wireless broadband and, accordingly, are deferred and recognized monthly as earned. The Company had deferred revenues in current liabilities of approximately $350,000 and $422,000 as of December 31, 2010, and December 31, 2009, respectively.

Advertising Costs

Advertising costs are expensed when incurred. For the periods ended December 31, 2010 and 2009, the Company expensed $65,000 and $118,000, respectively.

Stock-Based Compensation

Stock based compensation expense is recorded in accordance with FASB ASC Topic 718 formerly SFAS 123R (Revised 2004), Share-Based Payment , for stock and stock options awarded in return for services rendered. The expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis over the service period, which is the vesting period. The Company estimates forfeitures that it expects will occur and records expense based upon the number of awards expected to vest.
 
37

 
 
ERF WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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.

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 December 31, 2010 and 2009 in thousands:

   
December 31,
   
December 31,
 
   
2010
   
2009
 
Raw material
  $ 48     $ 63  
Finished goods
    207       159  
    $ 255     $ 222  
 
The Company has pledged all the inventory of WBS of $178,000 and $159,000 as collateral against outstanding notes and capital leases as of December 31, 2010 and December 31, 2009, respectively.

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.

Goodwill

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

Intangible Assets

Intangible assets are amortized using methods that approximate the benefit provided by the utilization of the assets. The Company continually evaluates the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or impairment in value. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our Intangibles assets, we may incur charges for impairment in the future.


 
38

 
 
ERF WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Long-Lived Assets

We review our long-lived assets, which 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.

Revenue Recognition

The Company's revenue is generated primarily from the sale of wireless communications products and services on a nationwide basis, including providing 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. If the current projected costs on a fixed fee contract exceed projected revenue, the entire amount of the loss is recognized in the period such loss is identified.

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.

Warranty

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

Income Taxes

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
 
 
39

 

ERF WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, inventory, accounts receivable and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.

Beneficial Conversion

Equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible equity instruments. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as a deemed dividend or interest expense and an increase to additional paid-in-capital.

Basic and Diluted Loss per Share

The Company is required to provide basic and dilutive earnings (loss) per common share information.

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.

Diluted net loss per common share is computed by dividing the net loss, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods ended December 31, 2010, and December 31, 2009, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of fully diluted net loss per common share.

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.

NOTE 2 - ACCOUNTS RECEIVABLE

Accounts Receivable consists of the following (in thousands):

   
December 31,
   
December 31,
 
   
2010
   
2009
 
Accounts receivable
  $ 508     $ 614  
Allowance for doubtful accounts
    (116 )     (129 )
Accounts receivable, net
  $ 392     $ 485  

The Company has pledged $233,000 of the accounts receivables of WBS as collateral against outstanding notes and capital leases.

NOTE 3 - PROPERTY AND EQUIPMENT:

Components of property and equipment consist of the following items (in thousands):

   
December 31,
   
December 31,
 
   
2010
   
2009
 
Automobiles
  $ 326     $ 297  
Operating equipment
    8,342       7,526  
Office furniture and equipment
    253       243  
Leasehold improvements
    67       71  
Computer equipment
    376       358  
Building
    29       29  
Land
    37       37  
Construction in progress
    571       786  
Total property and equipment
    10,001       9,347  
Less accumulated depreciation
    (5,987 )     (3,712 )
Net property and equipment
  $ 4,014     $ 5,635  
 
 
40

 
 
ERF WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Depreciation expense was $2,370,000 and $2,063,000 for the twelve months ended December 31, 2010 and 2009, respectively.

Operating equipment under construction in progress is primarily due to the build out of our wide area network of WiNet constructed by our subsidiary ENS.

The Company has pledged substantially all the operating equipment and some furniture and vehicles as collateral against outstanding notes and capital leases.

NOTE 4 - GOODWILL

At December 31, 2010 and 2009, goodwill totaled $1,255,000 for both years respectively. The goodwill is attributable to the following acquisitions:
 
 
·
On June 1, 2009, the Company acquired assets from Frontier Internet, LLC and iTEXAS Net and recognized goodwill of $819,000, which is not subject to amortization.
 
 
·
On January 11, 2008, the Company acquired assets from Crosswind, Inc. and recognized goodwill of $176,000, which is not subject to amortization.
 
 
·
On November 30, 2007, the Company acquired assets from TStar, Inc. and recognized goodwill of $35,000, which is not subject to amortization.
 
 
·
On October 31, 2007, the Company acquired assets from Momentum, Inc. and recognized goodwill of $225,000, which is not subject to amortization.

NOTE 5 - INTANGIBLE ASSETS, NET

Intangible assets consist of the following (in thousands):

         
December 31, 2010
 
   
Useful Life
(in years)
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
 
                         
Customer relationships
    3.0     $ 2,311     $ 2,177       134  
Workforce in place
    3.0       125       125       -  
Non-compete agreement
    3.0       100       100       -  
Developed technology
    3.0       20       20       -  
            $ 2,556     $ 2,422     $ 134  
                                 
                                 
           
December 31, 2009
 
   
Useful Life
(in years)
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
 
                                 
Customer relationships
    3.0     $ 2,311     $ 1,610     $ 701  
Workforce in place
    3.0       125       125       -  
Non-compete agreement
    3.0       100       100       -  
Developed technology
    3.0       20       20       -  
            $ 2,556     $ 1,855     $ 701  

Intangible assets are amortized using methods that approximate the benefit provided by the utilization of the assets. Customer relationships, workforce in place, non-compete-agreements and developed technology are amortized on a straight-line basis. We continually evaluate the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or reduction in value.
 
 
 
41

 
 
ERF WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
On June 1, 2009, the Company acquired from Frontier Internet, LLC and iTEXAS Net, a customer list which was valued at $283,000 and is being amortized over three years.

Total amortization of intangibles was $568,000 and $641,000 for the twelve months ended December 31, 2010 and 2009, respectively. The estimated amortization expense for the remaining years will be $94,000 for 2011 and $40,000 in 2012.

NOTE 6 - DEBT CONVERSION

(a) LINE OF CREDIT

For the twelve months ended December 31, 2010, the Company has had several debt settlements of the unsecured revolving credit facility. See Note 12 for additional information on this facility.  The unsecured revolving credit facility provides financing for working capital requirements.  During the twelve months ended December 31, 2010 the Company issued 6,140,121 shares of its Series A Preferred Stock for the settlement of $1,982,688 of debt and $421,238 in accrued interest for a total amount of $2,403,926. The Company issued Preferred A Stock at an average price of $.3915 per share or $.0210 per share of common of the ERFW common stock the day the debt is settled and converted to Preferred A Stock.