News Column

ERF WIRELESS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

August 19, 2014

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



OUR MARKETS AND BUSINESS STRATEGY

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



We reported revenues of $1,635,000 for the quarter ended June 30, 2014 as

compared to $1,563,000 for the same prior year quarter ended June 30, 2013; an

increase of $72,000 or 5%.



We reported gross profit of $696,000 for the quarter ended June 30, 2014 as

compared to $564,000 for the same prior year quarter ended June 30, 2013; an

increase of $132,000 or 23%. This increase reflects higher rig count deployments for the Company's communication solutions in our oil and gas internet service operations.



We reported a total comprehensive loss of $988,000 for the quarter ended June

30, 2014 as compared to a comprehensive loss of $2,256,000 for the same prior

year quarter ended June 30, 2013; a decrease of $1,268,000 or 56%.



Our subsidiary, Energy Broadband, Inc., reported revenues of $866,000 for the

quarter ended June 30, 2014 as compared to revenues of $809,000 for the same

prior year quarter ended June 30, 2013, representing an increase of $57,000 or

7%.



We reported a decrease of $656,000 or 34% in operating expenses for the three

months ended June 30, 2014 as compared to the same prior year quarter ended

June 30, 2013. The decrease is primarily related to lower employment expenses

of $319,000 associated with a headcount decrease of employees and approximately

$241,000 in lower legal and professional fees associated with the concluded

arbitration proceedings with Schlumberger pertaining to disputes to resolve

certain financial issues contained in the 2009 exclusive reseller agreement.

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

We record 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. We recognize product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, we provide 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.

18 RESULTS OF OPERATIONS



THREE AND SIX MONTHS ENDED JUNE 30, 2014, COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2013

The following table sets forth summarized consolidated financial information for the three and six months ended June 30, 2014 and 2013:

Three Months Ended June 30, Six Months Ended June 30, ($ in thousands) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Total sales $ 1,635$ 1,563$ 72 5% $ 3,226$ 3,477$ (251 ) -7% Total Cost of goods sold 939 999 (60 ) -6% 1,870 2,024 (154 ) -8% Gross profit 696 564 132 23% 1,356 1,453 (97 ) -7% Percent of total sales 43% 36% 42% 42% Total operating expenses 1,255 1,911 (656 ) -34% 2,619 3,940 (1,321 ) -34% Loss from operations (559 ) (1,347 ) 788 -59% (1,263 ) (2,487 ) 1,224 -49% Total other income/(expense) (428 ) (913 ) 485 -53% (775 ) (1,426 ) 651 -46% Consolidated net loss (987 ) (2,260 ) 1,273 -56% (2,038 ) (3,913 ) 1,875 -48% Net income (loss) attributable to non-controlling interest (1 ) 4 (5 ) -125% - 1 (1 ) -100% Total comprehensive loss $ (988 )$ (2,256 )$ 1,268 -56% $

(2,038 ) $ (3,912 )$ 1,874 -48%

For the three months ended June 30, 2014, our business operations reflected an increase in sales for EBI and WBS, offset with a decrease in sales in its ENS subsidiary. For the three months ended June 30, 2014, our consolidated operations generated total sales of $1,635,000 compared to prior-year period total sales of $1,563,000. The $72,000 increase in total sales is primarily attributable to $57,000 increased sales in EBI from increased deployment of our Mobile Broadband Trailers (MBT's) in the oil and gas regions. For the three months ended June 30, 2014, we had a gross profit margin of 43%, compared to a gross profit margin 36% for the prior year comparable period. The $132,000 increase in gross profit margin is primarily attributed to; (i) approximately $59,000 increase in gross margin in EBI attributable to increased sales associated with deployment of MBT's in oil and gas regions, (ii) increased of $56,000 in gross margin in WBS primarily related to decreased depreciation and (iii) $17,000 increase in ENS due to bank network construction projects. For the six months ended June 30, 2014, our business operations reflected an increase in sales for its WBS subsidiary offset with decreased sales in EBI subsidiary and ENS subsidiary. For the six months ended June 30, 2014, our consolidated operations generated total sales of $3,226,000 compared to prior-year period total sales of $3,477,000. The $251,000 decrease in total sales is primarily attributable to $260,000 decreased sales in EBI from overall 6-month average declining deployment of our Mobile Broadband Trailers (MBT's) in the oil and gas regions. For the six months ended June 30, 2014, we had a gross profit margin of 42%, compared to a gross profit margin 42% for the prior year comparable period. The $97,000 decrease in gross profit margin is primarily attributed to: (i) approximately $179,000 decrease in gross margin in EBI attributable to decreased sales associated with lower average count of MBT deployments in oil and gas regions and increased depreciation and (ii) offset with a $70,000 increase in gross margin in WBS primarily related to decreased depreciation; and (iii) $12,000 increase in ENS due to bank network construction projects. 19 SALES INFORMATION Set forth below are tables presenting summarized sales information for our business segments for the three and six months ended June 30, 2014 and 2013: ($ in thousands) Three Months Ended June 30, Business Segment 2014 % of Total 2013 % of Total $ Change % Change Energy Broadband, Inc. $ 866 53% $ 809 52% $ 57 7%

Wireless Bundled Services 625 38% 597 38% 28 5% Enterprise Network Services 144 9% 157

10% (13 ) -8% Total Sales $ 1,635 100% $ 1,563 100% $ 72 5% ($ in thousands) Six Months Ended June 30, Business Segment 2014 % of Total 2013 % of Total $ Change % Change Energy Broadband, Inc. $ 1,754 54% 2,014 58% $ (260 ) -13% Wireless Bundled Services 1,259 39% 1,208 35% 51 4%

Enterprise Network Services 213 7% 255

7% (42 ) -16% Total Sales $ 3,226 100% $ 3,477 100% $ (251 ) -7% For the three months ended June 30, 2014, total sales increased to $1,635,000 from $1,563,000 for the three months ended June 30, 2013. The overall increase of 5% was attributable to increased sales of $57,000 in EBI and increased sales of $28,000 in WBS offset with decreased sales of $13,000 in ENS. The $72,000 increase in total sales is primarily attributable to $57,000 increased sales in EBI from increasing deployment of our MBT's in the oil and gas regions. For the six months ended June 30, 2014, total sales decreased to $3,226,000 from $3,447,000 for the six months ended June 30, 2013. The overall decrease of 7% was attributable to decreased sales of $260,000 in EBI offset with increased sales of $51,000 in WBS and decreased sales in ENS of $42,000. The $251,000 decrease in total sales is primarily attributable to $260,000 decreased sales in EBI from lower average count of MBT deployments. COST OF GOODS SOLD



The following tables set forth summarized cost of goods sold information for the three and six months ended June 30, 2014 and 2013:

($ in thousands) Three Months Ended June 30, Business Segment 2014 % of Total 2013 % of Total $ Change % Change Energy Broadband, Inc. $ 511 54% $ 513 51% $ (2 ) 0% Wireless Bundled Services 328 36% 356 36% (28 ) -8% Enterprise Network Services 100 10% 130 13% (30 ) -23% Total cost of sales $ 939 100% $ 999 100% $ (60 ) -6% Three Months Ended June 30,

($ in thousands) 2014 2013 $ Change % Change Products and integration service $ 329$ 366$ (37 ) -10% Rent and maintenance 206 198 8 4% Depreciation 404 435 (31 ) -7% Total cost of sales $ 939$ 999$ (60 ) -6% For the three months ended June 30, 2014, cost of goods sold decreased by $60,000 to $939,000 from $999,000 as compared to the three months ended June 30, 2013. The decrease of $60,000 in cost of goods sold is primarily attributable to a decreased cost of $2,000 in EBI due to decreased sales effecting a reduction in our third-party services during the quarter in the oil and gas regions and decreased cost of $30,000 in ENS due to sales decrease in banking construction projects and a decreased cost in WBS of $28,000. 20



The following tables set forth summarized cost of goods sold information for the six months ended June 30, 2014 and 2013:

($ in thousands) Six Months Ended June 30, Business Segment 2014 % of Total 2013 % of Total $ Change % Change Energy Broadband, Inc. $ 1,020 55% $ 1,101 54% $ (81 ) -7% Wireless Bundled Services 656 35% 675 34% (19 ) -3% Enterprise Network Services 194 10% 248 12% (54 ) -22% Total cost of sales $ 1,870 100% $ 2,024 100% $ (154 ) -8% Six Months Ended June 30,

($ in thousands) 2014 2013 $ Change % Change Products and integration service $ 640$ 759$ (119 ) -16% Rent and maintenance 416 393 23 6% Depreciation 814 872 (58 ) -7% Total cost of sales $ 1,870$ 2,024$ (154 ) -8% For the six months ended June 30, 2014, cost of goods sold decreased by $154,000, to $1,870,000 from $2,024,000 as compared to the six months ended June 30, 2013. The decrease of $154,000 in cost of goods sold is primarily attributable to a decreased cost of $81,000 in EBI due to decreased sales affecting a reduction in our third party services in the oil and gas regions, decreased cost in WBS of $19,000 due to decreased depreciation and decreased cost in ENS of $54,000 due to decline in banking network construction project. OPERATING EXPENSES



The following table sets forth summarized operating expense information for the three and six months ended June 30, 2014 and 2013:

Three Months Ended June 30, Six Months Ended June 30, ($ in thousands) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Employment expenses $ 671$ 990$ (319 ) -32% $ 1,456$ 2,166$ (710 ) -33% Professional services 260 501 (241 ) -48% 483 959 (476 ) -50% Rent and maintenance 86 111 (25 ) -23% 188 234 (46 ) -20% Depreciation 23 52 (29 ) -56% 46 104 (58 ) -56% Other general and administrative 215 257 (42 ) -16% 446 477 (31 ) -6%



Total operating expenses $ 1,255$ 1,911$ (656 ) -34% $ 2,619$ 3,940$ (1,321 ) -34%

For the three months ended June 30, 2014, operating expenses decreased by $656,000 or 34% to $1,255,000, as compared to $1,911,000 for the three months ended June 30, 2013, resulting from:

A $319,000 decrease in employment expense ; primarily attributable to decreased

in employee headcount to 41 at June 30, 2014 from 64 at June 30, 2013;



A $241,000 decrease in professional services - primarily attributable to a

decrease in legal, accounting and consulting services compared to last year

associated with our arbitration proceedings with Schlumberger pertaining to

disputes to resolve certain financial issues contained in the 2009 exclusive

reseller agreement;



A $25,000 decrease in rent and maintenance;

A $29,000 decrease in depreciation; and

A $42,000 decrease in other general and administrative.

For the six months ended June 30, 2014, operating expenses decreased by $1,321,000 or 34% to $2,619,000, as compared to $3,940,000 for the six months ended June 30, 2013, resulting from:

A $710,000 decrease in employment expense - primarily attributable to decreased

employee headcount to 41 at June 30, 2014 from 64 at June 30, 2013;



A $476,000 decrease in professional services - primarily attributable to

decrease in legal, accounting and consulting services compared to last year

associated with our arbitration proceedings with Schlumberger pertaining to

disputes to resolve certain financial issues contained in the 2009 exclusive

reseller agreement; 21



A $46,000 decrease in rent and maintenance;

A $58,000 decrease in depreciation; and

A $31,000 decrease in other general and administrative.

OTHER INCOME (EXPENSE), NET For the three months ended June 30, 2014, other expense, net decreased to $428,000 from $913,000 as compared to three months ended June 30, 2013. The decrease in other expense, net of $485,000 from the prior year period is primarily attributable to a decrease in our interest expense, net on debt obligations totaling $564,000, and offset with a decrease in our net derivative income of $66,000 and a decrease of $13,000 of gain on sale of assets. The derivative expense/income represents the net unrealized (non-cash) charge during the three months ended June 30, 2014 and 2013, in the fair value of our derivative instrument liabilities related to warrants and embedded derivatives in our debt instruments that have been bifurcated and accounted for separately. For the six months ended June 30, 2014, other expense, net decreased to $775,000 from $1,426,000 as compared to six months ended June 30, 2013. The decrease in other expense, net of $651,000 from the prior year period is primarily attributable to a decrease in our interest expense, net on debt obligations totaling $878,000, offset with a decrease in our net derivative income of $95,000, a decrease gain on sale of assets of $24,000 and a $108,000 loss on extinguishment of debt. The derivative expense/income represents the net unrealized (non-cash) charge during the six months ended June 30, 2014 and 2013, in the fair value of our derivative instrument liabilities related to warrants and embedded derivatives in our debt instruments that have been bifurcated

and accounted for separately. COMPREHENSIVE LOSS For the six months ended June 30, 2014, our total comprehensive loss was $2,038,000 compared to comprehensive loss of $3,912,000 for the six months ended June 30, 2013. The decreased comprehensive loss for the six months ended June 30, 2014, as compared to the comprehensive loss for three months ended June 30, 2013 is primarily attributable to the factors described above. CASH FLOWS

Our operating activities decreased net cash used by operating activities to $60,000 in the six months ended June 30, 2014, compared to net cash used of $1,675,000 in the six months ended June 30, 2013. The decreased net cash used by operating activities was primarily attributable to accounts payable, accounts receivables and reduction of employee headcount and professional services as compared to June 30, 2013. Our investing activities used net cash of $64,000 in the six months ended June 30, 2014, compared to net cash used of $133,000 in the six months ended June 30, 2013. The decrease in cash from investing activities is primarily attributable to a slower rollout of targeted oil and gas network upgrades. Our financing activities provided net cash of $272,000 in the six months ended June 30, 2014, compared to $2,977,000 of cash used in the six months ended June 30, 2013. The cash provided in the six months ended June 30, 2014, was primarily associated with proceeds from debt financings.



LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2014, ours current assets totaled $1,401,000 (including cash and cash equivalents of $190,000); and total current liabilities were $6,603,000, resulting in negative working capital of $5,202,000. We funded our operations during the last six months primarily through borrowings. These borrowings during the six months ended June 30, 2014 were from our line of credit, net totaling $482,000 and convertible debt financing of $100,000.



DEBT FACILITIES AND INSTRUMENTS

In December 2013, the maturity date of the $12.0 million unsecured revolving credit facility with Angus Capital Partners, a related party, was extended from December 31, 2015 to December 31, 2017. The Company also renegotiated the interest rate from 12% per annum to 3% per annum retroactive to January 1, 2013. In consideration of the renegotiated interest rate, we have accepted the return and cancellation of 36,784 common shares (post-split) of our common stock issued for the Line of Credit conversions during 2013. Accordingly, we have reversed the payment of principal and interest of $2,158,000 in December 2013 and subsequently received the canceled shares in February 2014. The terms of the unsecured revolving credit facility allow us to draw upon the facility as financing requirements dictate and provide for quarterly interest payments at a 3% rate per annum. The payment of principal may be paid in cash, common shares or preferred shares at the Lender's election. The payment of interest may only be paid in cash. At June 30, 2014, the outstanding balance on the line of credit totaled $4,347,000 leaving a remaining line of credit available of $7,653,000. 22 During the six months ended June 30, 2014, the outstanding principal balance of the Bonds totaled $311,000. The Bonds are due and payable upon maturity, a three-year period from the issuance date. Interest on the Bonds is payable at the rate of 7.5% per annum, and is payable semiannually. The Bondholder may require us to permit the Holder to convert the Bond (including any unpaid interest) into shares of Common Stock at any time only during the first year. If the Bonds are converted under this option, the Company will issue shares representing 100% of the Bond principal and unpaid interest calculated through maturity. The Common Stock issued under this option will be valued at the average closing price of the common shares for the five days prior to the notification. If the Bond is converted within the first year we will issue a three-year warrant to purchase one share of EBI Common Stock at a price of $4.00 for every $2.00 of Bond principal. At our discretion at any time after the first year, the Bonds, including the interest payments calculated through the date of conversion may be redeemed in cash or in shares of our Common Stock, valued at the average last sales price over the 20-trading-day period preceding any payment date. If the Company chooses to issue Common Stock as redemption of the Bond principal, we will issue shares representing a value equal to 125% of the Bond principal and shares representing a value equal to 100% of the Bond interest through redemption date. In November 2011, we entered into debt financing agreement with Dakota Capital Fund LLC, for financing of up to $3,000,000. During the fourth quarter of 2011, we received proceeds of $2,000,000 and had the option of additional funding of $1,000,000 for equipment purchases. This debt facility is secured by certain ERF Wireless assets and there is no prepayment penalty. At June 30, 2014, the outstanding balance on the debt financing agreement totaled $1,518,000 and we elected not to request any additional funds under this credit facility. The payment terms are $178,031 per quarter including interest, at an annual rate of 18% per annum plus 10% of positive operational cash flow as determined on a quarterly basis for repayment of additional principal beginning July 1, 2012. The funding was utilized to purchase equipment to build out networks in oil and gas exploration regions of North America. On March 5, 2013, we entered into a six-month secured convertible promissory note secured debt financing agreement with Tonaquint, Inc. ("holder"), for $791,500, bearing interest at a rate of 12% per annum and matured on September 5, 2013. At June 30, 2014, the outstanding principal balance of the Tonaquint convertible promissory note totaled $764,000. The note includes an original issue discount ("OID") of $65,000 based on the consideration funded, prepaid interest of $71,500 and $5,000 in legal and other expense. We also paid the holder an origination fee in the amount of $227,500 in 144 Stock (711 post-split shares) at the closing bid price on March 5, 2013, plus 125 post-split shares (valued at $40,000) of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the six-month term of the note. The common stock issued will be valued using a conversion factor of 80% of the average of the lowest two (2) trading prices for common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder received the option to purchase five-year warrants expiring March 5, 2018 to purchase 371 shares of ERF common stock at an exercise price of $320.00 or the per-share price at which the common stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this warrant. We are not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $791,500 to $949,800. The note will accrue interest at a rate of 12% from September 5, 2013 until March 4, 2014 and thereafter at a rate of 18% per annum. The note is recorded as a current liability. On March 20, 2013, we entered into a one-year unsecured promissory note debt financing agreement with JMJ Financial for ("JMJ") up to $500,000 at the sole discretion of additional consideration with the Lender. The note includes a 10% original issue discount that is prorated based on the consideration funded. We also paid the holder an origination fee in the amount of $40,500 in 144 Stock (125 post-split shares) at the closing bid price of our common stock. As of June 30, 2014, we received funding of $300,000, bearing interest at a rate of 12% per annum and maturing in one year from the effective date of each payment. At June 30, 2014, the outstanding principal balance of the JMJ Financial convertible promissory note totaled $187,000 including OID. The conversion price is the lesser of $0.59 or 60% of the lowest trade price in the 25 trading days previous to the conversion. The note is recorded as a current liability. On April 2, 2013, we entered into a nine-month secured convertible promissory note debt financing agreement with Willow Creek Capital, LLC, for $244,200, bearing interest at a rate of 12% per annum and matured on October 1, 2013. At June 30, 2014, the outstanding principal balance of the Willow Creek convertible promissory note totaled $182,000. The note also includes a 10% OID of $20,000 based on the consideration funded, prepaid interest of $22,200 and $2,000 in legal and other expense. We also paid holder an origination fee in the amount of $109,890 in 144 Stock (366 post-split shares) at the closing bid price of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the six-month term of the note. The common stock issued will be valued using a conversion factor of 80% the average of the lowest two (2) trading prices common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder will be entitled to purchase from the us five-year warrants expiring April 2, 2018, to purchase 122 post-split shares of ERF common stock at an exercise price of $300.00 or the per-share price at which the common stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this Warrant. 23 On April 4, 2013, we entered into a six-month secured convertible promissory note debt financing agreement with Vista Capital Investments, LLC, for $60,500, bearing interest at a rate of 12% per annum and matured on October 4, 2013. The note also includes a 10% OID of $5,000 based on the consideration funded and prepaid interest of $5,500. We also paid holder an origination fee in the amount of $21,175 in 144 Stock (84 post-split shares) at the closing bid price of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the six-month term of the note. The common stock issued will be valued using a conversion factor of 80% the average of the lowest two (2) trading prices of common shares during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. If the average two (2) lowest trading prices is less than $0.33, then the conversion factor will be reduced to 70%. The holder will be entitled to purchase from us five-year warrants expiring April 4, 2018, to purchase 36 post-split shares of ERF common stock at an exercise price of $320.00 or the per-share price at which the common stock is sold in an underwritten public offering that closes on or before the date that is six (6) months from the issue date, as may be adjusted from time to time pursuant to the terms and conditions of this Warrant. We are not in compliance with all the provisions of the note causing an automatic acceleration of the outstanding balance of $60,500 to $72,600. The note will accrue interest at a rate of 12% from October 4, 2013, until April 3, 2014 and thereafter at a rate of 18% per annum. At June 30, 2014, the outstanding principal balance of the Vista Capital convertible promissory note totaled $64,000. On June 28, 2013, we entered into a twelve-month secured convertible promissory note debt financing agreement with TCA Global Credit Master Fund (TCA) for $1,500,000, bearing interest at a rate of 12% per annum and maturing July 28, 2014. Under a subsequent modified agreement dated March 25, 2014, TCA has agreed to restructure the agreement and extend the maturity date to November 15, 2014. In consideration of the restructured agreement, we agreed to a $75,000 and a $50,000 restructuring and advisory fee to be added to the sum of the principal balance including a $40,791 interest charge to be paid and nominal legal fees. The monthly principal and interest payments will be $149,609 per month. At June 30, 2014, the outstanding principal balance of the TCA Global convertible promissory note totaled $1,007,000. The note also includes $153,300 in commitment fees; due diligence fees; document review fees; service fees; legal; and other expense. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time during the twelve months term of the note or thereafter. The common stock issued will be valued using a conversion factor of 85% of the average VWAP trading price during the five (5) trading day period ending on the latest complete trading day prior to the conversion date. Due to the restructuring of the note we incurred $108,000 loss on extinguishment of debt. The estimated debt accretion for the remainder of the 2014 will be $55,895. On October 3, 2013, we entered into a twelve-month unsecured convertible promissory note debt financing agreement with Group 10 Holdings, LLC, for $157,500, bearing interest at a rate of 12% per annum and maturing October 2, 2014. The note also includes a 5% OID of $7,500 based on the consideration funded. We also paid holder a commitment fee in the amount of $45,000 in 144 Stock (1,125 post-split shares) at the closing bid price of our common stock. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after the twelve-month term of the note. The common stock issued will be valued using a conversion factor of 55% multiplied by the lowest closing bid price of the (20) trading days prior to the conversions, which represents a discount rate of 45%. The estimated debt accretion for the remainder of 2014 is $84,886. The note will accrue interest at a rate of 12% from October 3, 2013, until October 2, 2014, and thereafter at a rate of 18% per annum. At June 30, 2014, the outstanding principal balance of the Group 10 convertible promissory note totaled $136,000. On June 26, 2014, we entered into a nine-month unsecured convertible promissory note debt financing agreement with KBM World Wide Inc. for $103,500, bearing interest at a rate of 8% per annum and maturing March 27, 2015. The holder may require us to convert the outstanding principal balance (including any unpaid interest) into shares of restricted common stock at any time after 180 days following the date of this note and ending on final payment of the convertible note. The common stock issued will be valued using a conversion factor of 61% multiplied by the lowest three trading prices of the ten (10) trading days prior to the conversion date, which represents a discount rate of 39%. The estimated debt accretion for subsequent years is $61,296 and $28,649 for years ending December 31, 2014 and 2015, respectively. The note will accrue interest at a rate of 8% from June 26, 2014, until March 27, 2015, and thereafter at a rate of 22% per annum. At June 30, 2014, the outstanding principal balance of the KBM World Wide Inc. convertible promissory note totaled $103,500. 24 ISSUANCE OF COMMON STOCK During the three months ended June 30, 2014, we issued to various accredited investors 3,168,373 shares for interest, services rendered and debt conversions. We relied on Section 4(2) of the Securities Act in effecting these transactions. There was not a registration statement for Form S-8. During the six months ended June 30, 2014, we issued to various accredited investors 3,544,415 shares for interest, services rendered and debt conversions. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the six months ended June 30, 2014, we issued 26,362 shares of common stock for fractional share roundup due to 400 to 1 reverse affected in December 2013. There was not a registration statement on Form S-8. USE OF WORKING CAPITAL We believe our cash and available credit facilities afford us adequate liquidity through June 30, 2015. We anticipate that we will need additional capital in the future to continue to expand our business operations. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity or debt funding at this time, and additional funding may not be available to us on favorable terms, if at all. As such, there is no assurance that we can raise additional capital from external sources, the failure of which could cause us to curtail operations.



OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2014, the Company did not have any significant off-balance-sheet arrangements other than certain office and tower facility operating leases requiring minimal commitments under non-cancelable leases disclosed in the

Form 10-K.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

three to seven years. Long-Lived Assets



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

a significant decrease in the market price of the asset;

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

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

asset; and



a current period loss combined with projection of continuing loss associated

with use of the asset;



a current expectation that, more likely than not, the asset will be sold or

otherwise disposed of before the end of its previously estimated useful life.

We continually evaluate whether such events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we may incur charges for impairment in the future. 25 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. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, 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.


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Source: Edgar Glimpses


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