10-Q 1 i00233_keyon-10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


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

	For the quarterly period ended March 31, 2011

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

For the transition period from ________ to ____________

Commission file number 001-33842

KEYON COMMUNICATIONS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		74-3130469

(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)


	11742 Stonegate Circle
	Omaha, Nebraska 68164		68164

	(Address of Principal Executive Offices)		(Zip Code)

(402) 998-4000

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o No 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. (Check one):


	Large accelerated filer	o	Accelerated filer	o

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

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

As of May 16, 2011, 23,768,211 shares of the issuer’s common stock, $0.001 par value per share, were outstanding.

KEYON COMMUNICATIONS HOLDINGS, INC.

Table of Contents


		Page


Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010		1

Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (Unaudited)		2

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2011 (Unaudited)		3

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited)		4

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KEYON COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31, 2011			December 31, 2010
	(unaudited)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,859,804		$	766,264
Accounts receivable, net of allowance for doubtful accounts		463,205			282,951
Marketable securities		750,077			5,746,612
Prepaid expenses and other current assets		364,781			278,671

Total current assets		3,437,867			7,074,498

PROPERTY AND EQUIPMENT - Net		4,839,796			3,406,340
OTHER ASSETS
Goodwill		2,227,802			1,815,095
Subscriber base – net		2,185,596			864,867
Trademarks		16,567			16,567
Deposits		43,480			85,386
Debt issuance costs – net		269,414			278,880

Total other assets		4,742,859			3,060,795

TOTAL ASSETS	$	13,020,522		$	13,541,633

CURRENT LIABILITIES:
Accounts payable	$	2,072,535		$	2,017,896
Accrued expenses		455,767			186,481
Accrued interest expenses		9,700			1,096,787
Revolving line of credit		1,224,271			1,215,938
Current portion of notes payable		691,227			396,847
Current portion of capital lease obligations		556,752			644,119
Deferred Rent		68,543			66,835
Deferred revenue		230,105			253,596
Derivative liability		—			2,390,515

Total current Liabilities		5,308,900			8,269,014

LONG-TERM LIABILITIES:
Convertible note (net of a $13,041,549 discount at December 31, 2010)		—			1,958,451
Notes payable, less current maturities		661,571			505,312
Capital lease obligations, less current portion		45,386			145,605
Deferred rent liability, less current portion		—			16,147
Deferred tax liability		179,581			165,471

Total long-term liabilities		886,538			2,790,986

TOTAL LIABILITIES		6,195,438			11,060,000

STOCKHOLDERS’ EQUITY:
Preferred Stock - 30,000,000 shares authorized with 30,000,000 shares designated in the following class:
Series A preferred stock, 30,000,000 shares authorized; 16,315,068 shares issued, liquidation preference of 24,472,602		16,315,068			—
Common stock, $0.001 par value; 115,000,000 shares authorized; 23,768,211 and 23,668,211 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		23,768			23,668
Additional paid-in capital		34,692,074			28,718,581
Accumulated deficit		(44,205,995	)		(26,261,840	)
Accumulated other comprehensive income		169			1,224

Total stockholders’ equity		6,825,084			2,481,633

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	13,020,522		$	13,541,633

See notes to condensed consolidated financial statements.

KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	For the Quarter Ended March 31,

	2011			2010

REVENUES:
Service and installation revenue	$	2,345,822		$	1,554,428
Support and other revenue		19,816			40,531

Total revenues		2,365,638			1,594,959

OPERATING COSTS AND EXPENSES:
Payroll, bonuses and taxes		2,571,377			1,077,292
Network operating costs		1,039,474			904,649
Professional fees		95,957			665,274
Depreciation and amortization		650,386			470,495
General and administrative expenses		476,470			290,040
Installation expense		72,374			51,575
Marketing and advertising		100,764			50,652

Total operating costs and expenses		5,006,802			3,509,977

LOSS FROM OPERATIONS		(2,641,164	)		(1,915,018	)
OTHER INCOME (EXPENSE):
Gain/(loss) on disposal of equipment		246,197			1,459
Other income		13,775			151,897
Interest income		704			853
Interest expense		(13,327,210	)		(535,100	)
Fair value of derivative in excess of debt proceeds					(29,792,150	)
Debt conversion inducement expense		(2,292,059	)
Change in fair value of derivative instruments		159,110			34,341,508

Total other income (expense)		(15,199,483	)		4,168,467

PROVISION FOR INCOME TAXES		(14,110	)		—

NET INCOME (LOSS)	$	(17,854,757	)	$	2,253,449

Series A Preferred Stock Dividends		(89,398	)		—
OTHER COMPREHENSIVE INCOME (LOSS)
Net income (loss) available to common stockholders	$	(17,944,155	)	$	2,253,449
Unrealized gain on investments		1,055			—

Total comprehensive income (loss)	$	(17,943,100	)	$	2,253,449

Net income (loss) per common share, basic	$	(0.76	)	$	0.11

Net income (loss) per common share, diluted	$	(0.76	)	$	(0.05	)

Weighted average common shares outstanding, basic		23,718,211			20,382,567

Weighted average common shares outstanding, diluted		23,718,211			34,719,514

See notes to condensed consolidated financial statements

KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)


	Common Stock			Class A Preferred Stock

	Shares	Amount		Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity (Deficit)


BALANCE, January 1, 2011	23,668,211	$	23,668				$	28,718,581	$	(26,261,840	)	$	1,224		$	2,481,633
Employee stock option compensation expense								1,418,129								1,418,129
Purchase of ERF Wireless for Stock	100,000		100					31,900								32,000
Warrants issued as an inducement to convert debt								2,292,059								2,292,059
Elimination of derivative liability								2,231,405								2,231,405
Preferred Stock issued upon conversion of note				16,315,068		16,315,068										16,315,068
Dividends issued on Series A Preferred Stock										(89,398	)					(89,398	)
Unrealized gain (loss) on marketable security investment													(1,055	)		(1,055	)
Net loss for the three months ended March 31, 2011										(17,854,757	)					(17,854,757	)


Balance, March 31, 2011	23,768,211	$	23,768	16,315,068	$	16,315,068	$	34,692,074	$	(44,205,995	)	$	169		$	6,825,084

See notes to condensed consolidated financial statements.

KEYON COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the Quarter Ended March 31,

	2011			2010

CASH FLOWS FROM OPERATIONS:
Net income (loss)	$	(17,854,757	)	$	2,253,449
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		654,130			470,495
Provision for doubtful accounts		91,110			37,632
Deferred Income tax		14,110
(Gain) on disposal of equipment		(246,197	)		(1,459	)
Stock based compensation expense		1,418,129			538,520
Change in fair value of derivative liability		(159,110	)		(4,549,358	)
Non-cash interest expense		13,051,016			352,174
Debt conversion inducement expense		2,292,059			—

Change in assets and liabilities, net effect of acquisitions
Accounts receivable		(271,364	)		12,586
Prepaid expenses and other current assets		(86,109	)		24,507
Refundable deposits		41,904			—
Accounts payable and accrued expenses		234,522			(238,781	)
Accrued interest expense		236,319			19,350
Deferred rent liability		(14,439	)		(14,460	)
Deferred revenue		(23,491	)		(24,425	)

Net cash flows used in operations		(622,168	)		(1,119,770	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment		(416,388	)		(103,770	)
Investments in acquisitions		(2,794,734	)		—
Proceeds on disposal of equipment		252,500			1,800
Proceeds from sales of marketable securities		6,499,991			—
Investments in marketable securities		(1,504,512	)		—


Net cash flows provided by investing activities		2,036,857			(101,970	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on revolving line of credit-related parties		—			(100,000	)
Payments on term note payable - related parties		—			(4,050,000	)
Deposits for future financing		—			(250,000	)
Payments on notes payable		(133,563	)		(77,576	)
Proceeds from issuance of convertible note		—			15,000,000
Payments on capital lease obligations		(187,586	)		(154,232	)
Proceeds from stock issuance		—			456,101

Net cash flows provided by (used in) financing activities		(321,149	)		10,824,293


NET INCREASE IN CASH		1,093,540			9,602,553
CASH - Beginning of period		766,264			125,083

CASH - End of period	$	1,859,804		$	9,727,636


SUPPLEMENTAL NON-CASH DISCLOSURES FROM INVESTING & FINANCING ACTIVITIES:
Stock issued for acquisition - Affinity:
Network equipment	$	—		$	118,205
Customer premise equipment		—			20,150
Subscriber base		—			51,860
Vehicles		—			9,840
Office equipment		—			5,795
Prepaid expenses		—			2,580
Accounts receivable		—			3,401
Accounts payable and accrued expenses		—			(11,342	)
Loan payable		—			(69,487	)
Obligation to subscribers		—			(7,607	)
Goodwill		—			287,016

Total Consideration	$	—		$	410,411

Wells Rural Electric:
Subscriber base	$	125,642
Network equipment		23,348
Customer premise equipment		195,298
Goodwill		34,648

Total cash and debt consideration	$	378,936			—

ERF Wireless
Subscriber base		1,339,851		$	—
Network equipment		1,219,081			—
Vehicles		40,575			—
Network equipment not deployed		54,435			—
Goodwill		378,058			—

Total cash and stock consideration		3,032,000			—

Total paid in Stock		32,000			—

Total cash consideration		3,000,000			—

Common stock payable subscription sales	$	—		$	456,108

Common stock issued for common stock payable		—		$	370,041

Common stock issued for professional services		—		$	123,834

Capital lease obligations for property and equipment		—		$	83,122

Cash payments for:
Interest		216,785			241,004

Tax		—			—

See notes to condensed consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Organization and Nature of Business

On August 9, 2007, KeyOn Communications, Inc.(“KeyOn”) became a publicly-traded company upon its completion of a reverse merger and recapitalization with Grant Enterprises, Inc. (“Grant”), a publicly-traded company with no operations (the “Merger”). Grant subsequently changed its name to KeyOn Communications Holdings, Inc. (the “Company”). KeyOn was incorporated on December 16, 2004, under the laws of the State of Nevada.

The Company provides wireless broadband, satellite video and voice-over-IP (VoIP) services primarily to small and rural markets in the Western and Midwestern United States. KeyOn’s markets are located in eleven Western and Midwestern states: Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Nevada, Ohio, South Dakota, and Texas. In an effort to generate additional accounting and operational efficiencies, the Company consolidated its eight wholly-owned subsidiaries: KeyOn Communications, LLC; KeyOn SIRIS, LLC; KeyOn Grand Junction, LLC; KeyOn Idaho Falls, LLC; KeyOn Pahrump, LLC; KeyOn Pocatello, LLC and KeyOn SpeedNet LLC and KeyOn Spectrum Holdings, LLC (which had previously been referred to as the “related entities”), into one, wholly-owned operating subsidiary: KeyOn Communications, Inc.

Note 2 – Liquidity and Financial Condition

The Company’s net loss amounted to $17,854,757 for the quarter ended March 31, 2011 and includes a $13,051,056 non-cash interest charge to the statement of operations, principally relating to the acceleration of the discount of our convertible note upon its conversion into Series A Preferred Stock on March 11, 2011 (the “Conversion”), and a debt conversion inducement charge of $2,292,059 from the issuance of warrants as a part of the Conversion (see Note 7 – Settlement of convertible Note). As a result, during the quarter ended March 31, 2011, net cash used in operating activities amounted to $622,168. The Company’s accumulated deficit amounted to $44,205,995 at March 31, 2011. At March 31, 2011, The Company’s working capital amounted to a deficit of $1,871,033.

On February 1, 2011 we sold a limited number of fixed assets and subscribers from within one of our geographical markets for $252,500 in proceeds. These assets had a net carrying amount of $6,303 resulting in a gain of $246,197.

We have continued to take measures during the quarter ended March 31, 2011 to streamline our operations and increase our overall revenue generating capabilities by reducing and controlling operating costs and increasing our overall base of subscribers by completing several acquisitions (See Note 4). As a result, management anticipates that the Company’s capital resources, which consist of cash and cash equivalents of approximately $1,859,804 and marketable securities with a fair value of approximately $750,077, will enable it to meet its general working capital requirements, repay the current portion of its debt obligations and continue its business development efforts through at least April 1, 2012. However, in order to execute our long-term strategy and penetrate new and existing markets, we may need to raise additional funds, through public, debt financings, or other means. Management believes that we have access to capital resources through possible public or private equity offerings, debt financings or other means; however, we have not secured any commitments for new financing at this time, nor can we provide any assurance that new financing will be available on commercially acceptable terms, if needed. If we are unable to secure additional capital, we may be required to curtail our business development initiatives and take additional measures to reduce costs in order to conserve our cash.

In addition, we received an award under ARRA, specifically, Round Two of the Broadband Initiatives Program (BIP) administered by the Rural Utilities Service (RUS). On September 13, 2010, we were announced as a $10.2 million award winner to build and operate networks throughout rural Nevada to nearly 100,000 rural residents. We expect to contribute approximately $2 million in matching funds during the project’s construction. We anticipate commencing our project in the second quarter of 2011 and will be substantially complete within two years. Although we are currently working with our third-party contractors and applicable RUS personnel to begin requisitioning funds pursuant to the award, we cannot provide any assurances as to the timing of the funding of the award or whether we will ultimately receive it. By accepting the loan and grant funds, we also agreed to certain long-term conditions. The RUS will have a continued interest (in the form of a retained security interest) in the assets over their economic life, which is expected to be up to 12 years. In the event of default of the award documents, the government could exercise the rights under its retained security interest to gain control and ownership of these assets. In addition, in the event of a proposed change in control of KeyOn, the acquiring party would need to receive approval from the RUS prior to effectuating the proposed transaction, for which pre-approval will not be unreasonably withheld.

Note 3 – Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2011 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2010, filed on March 30, 2011, and updated, as necessary, in this Quarterly Report on Form 10-Q.

Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued as consideration in business combinations and/or in financing transactions and in share based payment arrangements, accounts receivable reserves, deferred taxes and related valuation allowances, allocating the purchase price to the fair values of assets acquired and liabilities assumed in business combinations (including separately identifiable intangible assets and goodwill) and estimating the fair values of long lived assets to assess whether impairment charges may be necessary. Certain of our estimates, including accounts receivable and the carrying amounts of intangible assets could be affected by external conditions including those unique to our industry and general economic conditions. It is reasonably possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate all of our accounting estimates at least quarterly based on these conditions and record adjustments, when necessary.

Consolidation Policy

The accompanying consolidated balance sheets and consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the quarter ended March 31, 2011, include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. During the year ended December 31, 2010, the Company transferred and assigned all assets and liabilities of its wholly owned subsidiaries into a single subsidiary.

Revenue Recognition

The Company records revenue in accordance with SEC Staff Accounting Bulletin No. 104 based on when (i) persuasive evidence of an arrangement exists, (ii) delivery or performance has occurred, (iii) the fee is fixed or determinable, and (iv) collectability of the sale is reasonably assured.

The Company charges a recurring subscription fee for providing its various Internet access services to its subscribers and recognizes revenues when they are earned, which generally occurs as the service is provided. Subscriptions to the services are in the form of one or two year contracts and are billed monthly, quarterly, semi-annually or annually in advance. Payments received in advance for subscriptions are deferred and recognized as the services are provided. Deferred revenues for payments received in advance of subscription services amounted to $230,105 and $253,596 at March 31, 2011 and 2010, respectively. For the satellite video business in which the Company is a retailer of video services from DISH Network Corporation (“DISH”), the Company recognizes revenues at the time of installation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. For financial statement purposes, investments in money market funds are considered a cash equivalent and are included in cash and cash equivalents. The Company maintains it cash and cash equivalents at high credit quality institutions, with balances, at times, in excess of federally insured limits. As of March 31, 2011, the Company has approximately $1,589,505 in excess of federally insured limits. Management believed that the financial institution that holds our deposits are financially sound and therefore pose minimal credit risk.

Marketable Securities

Marketable securities consist of investments in government agencies’ notes. The maximum maturity for any investment is six months. The Company accounts for its marketable securities in accordance with the provisions of ASC 320-10. The Company classifies these securities as available for sale and the securities are reported at fair value. Unrealized gains and losses are recorded as a component of accumulated other comprehensive income and excluded from net income (loss). As of March 31, 2011, the Company had an unrealized gain of $169 relating to the marketable securities.

Goodwill and Intangible Assets

We account for goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”) 350 Intangibles - Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. GAAP requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment. Upon consideration of our operations, we have determined that we operate a single reporting unit.

Our business includes one goodwill reporting unit. We annually review goodwill for possible impairment by comparing the fair value of the reporting unit to the carrying value of the assets. If the fair value exceeds the carrying value of net asset, no goodwill impairment is deemed to exist. If the fair value does not exceed the carrying value, goodwill is tested for impairment and written down to its implied fair value if it is determined to be impaired. We determined that goodwill was not impaired as of March 31, 2011.

Our amortizable intangible assets consist of acquired subscriber bases. These costs are being amortized using the straight-line method over their estimated useful lives. We amortize customer relationships on a straight line basis over a 36 to 48 month estimated useful life.

We review the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. We intend to re-evaluate the carrying amounts of our amortizable intangibles at least quarterly to identify any triggering events. As described above, if triggering events require us to undertake an impairment review, it is not possible at this time to determine whether it would be necessary to record a charge or if such charge would be material.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

As of December 31, 2010, the Company had approximately $23,238,000 and $17,377,000 of federal and state net operating loss carryovers (“NOLS”) which begin to expire in 2025. The net operating loss carryovers may be subject to limitation under Section 382 of the Internal Revenue Code should there be a greater than 50% ownership change as determined under the applicable regulations.

Management prepared an analysis of the Company’s stock ownership activity from November 2007 through March 2011 and concluded that no ownership change occurred prior to December 31, 2010, but an ownership change did occur in March 2011 with the result being that our ability to use $23,000,000 of federal and state NOL carryforwards is subject to an annual limitation.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax strategies in making this assessment. Based on this assessment, management has established a full valuation allowance against all of the deferred tax assets for every period, since it is more likely than not that all of the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions based upon authoritative guidance that prescribes a recognition and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return (ASC 740-10). The guidance also provides direction on derecognition and classification of interest and penalties. Management has evaluated and concluded that there are no material uncertain tax positions requiring recognition in the financial statements for any of the periods presented. The Company files a federal income tax return as well as income tax returns in eight state jurisdictions in the United States. The tax years ended December 31, 2007 through 2009 remain subject to examination for federal, state and local income tax purposes as of December 31, 2010.

The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as tax expense

Net Loss per Share

The Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share includes the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.

The table of all of our common stock equivalents is as follows:


	March 31,

	2011		2010

	Common Stock		Common Stock

Common stock purchase warrants		3,750,494		3,943,642
Warrants to purchase convertible Series A preferred stock - convertible into common stock on a 1 for 1 basis		10,300,000		—
Stock options		2,634,344		2,290,000
Convertible notes		—		20,000,000
Convertible Series A preferred stock- convertible into common stock on a 1 for 1 basis		16,404,466

		33,089,304		26,233,642

The numerator in the EPS calculation for the three months ended March 31, 2010 gives effect to addbacks of (i) $90,411 of contractual interest expense under our convertible notes, and (ii) $330,976 of accretion of discount under the convertible notes (recorded as interest expense) and (iii) the elimination of the $4,549,358 change in the fair value of the derivative liability associated with the conversion option embedded in our convertible notes. The number of shares included in the presentation of diluted loss per share for the three months ended March 31, 2010 includes (i) 1,454,630 employee stock options and (ii) 1,221,205 common stock purchase warrants, each with exercises prices that are less than the average share price of $1.91 per share for the three months ended March 31, 2010 and (iii) 11,111,111 shares of common stock underlying the conversion option embedded in our convertible notes outstanding as of March 31, 2010.

The adjustment for employee stock options was calculated using the treasury stock method and the adjustment for the conversion option embedded in our notes was calculated using the “if converted” method.

Share-Based Payments

We account for share based payments in accordance with ASC 718 Compensation — Stock Payments which results in the recognition of expense under applicable GAAP and requires measurement of compensation cost for all share based payment awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. We calculate the fair value of stock options using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the fair value of our common stock on date of grant. The recognized expense is net of expected forfeitures.

Common Stock Purchase Warrants and Derivative Financial Instruments

The Company classifies all of its common stock purchase warrants and derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contracts that contain reset provisions. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

Fair Value Measurements

Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts. The interest rates featured in these obligations are comparable to those of other financial instruments with similar credit risks.

The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

Financial liabilities measured at fair value on a recurring basis are summarized below:

Fair value measurements at March 31, 2011


	March 31, 2011		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)

Marketable securities	$	750,077	$	750,077	$	—	$	—

The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock, and are classified within Level 3 of the valuation hierarchy.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:


	March 31, 2011			December 31, 2010

Beginning Balance	$	2,390,515		$	—
Aggregate fair value of derivative issued					44,792,150
Issuance date charge for difference between fair value and note proceeds		—			(29,792,150	)
Change in fair value of derivative		(159,110	)		(12,609,485	)
Elimination of derivative upon the conversion of related
Note into Series A Preferred Stock to paid in capital		(2,231,405	)		—


Ending Balance	$	—		$	2,390,515

The significant assumptions and valuation methods that we used to determine fair value and the change in fair value of the derivative financial instrument at issue are discussed in Note 7 (disclosure of Notes, Loans and Derivative Liabilities).

In accordance with the provisions of ASC 815, the Company presented the conversion option liability at fair value on its balance sheet, with the corresponding changes in fair value recorded in the Company’s statement of operations for the applicable reporting periods. As disclosed in Note 7, the Company computed the fair value of the derivative liability at the date of issuance and the reporting date of March 31, 2011 using both the Black-Scholes option pricing and lattice pricing methods. The value calculated using the lattice pricing method is within 1% of the value determined under the Black-Scholes method.

The Company developed the assumptions that were used as follows: The fair value of the Company’s common stock was obtained from quoted market prices; the term represents the remaining contractual term of the derivative; the volatility rate was developed based on analysis of the Company’s historical stock price volatility and the historical volatility rates of several other similarly situated companies (using a number of observations that was at least equal to or exceeded the number of observations in the life of the derivative financial instrument at issue); the risk free interest rates were obtained from publicly available US Treasury yield curve rates; the dividend yield is zero because the Company has not paid dividends and does not expect to pay dividends in the foreseeable future.

Recent Accounting Pronouncements

In February 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09, “Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements.” ASC 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on the Company’s consolidated financial position or results of operations. Disclosures have been modified to reflect the new requirements.

The FASB has issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” This amendment affects any public entity as defined by Topic 805, Business Combinations that enters into business combinations that are material on an individual or aggregate basis. The comparative financial statements should present and disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In December 2010, the FASB issued ASU 2010-28, “Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

Other accounting standards that have been issued or proposed by the FASB, SEC and/or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Note 4 - Business Combinations

Wells Rural Electric Company

On January 31, 2011, KeyOn Communications Holdings, Inc. purchased the assets of Wells Rural Electric Company (“WREC”), pursuant to an Asset Purchase Agreement, including subscriber contracts, accounts, and fixed assets. As consideration for the acquired assets, we agreed to pay $378,936 in cash over a period of two years, subject to further adjustments. Upon the satisfaction of certain closing conditions, we initiated the Closing Payment of $94,734. The balance of the purchase price which amount to $284,202 will be made in eight consecutive quarterly payments and will accrue interest at the rate of 5.25% per annum (See Note 7).

The final purchase price is subject to adjustments for net working capital and qualified subscribers as described in the asset purchase agreement and it is not expected to exceed $20,000.

The preliminary allocation of the purchase price breakdown is as follows:


Subscriber base	$	125,642
Network equipment		23,348
Customer premise equipment		195,298
Goodwill		34,648

Total consideration	$	378,936

Grand Junction, Colorado market sale

On February 1, 2011, we entered into an agreement to sell substantially all of the wireless broadband assets and assign certain liabilities used in the operation of our Grand Junction, Colorado network to Skybeam, Inc. As consideration for the acquired assets, the Company agreed to accept an aggregate purchase price of $261,000 in cash, subject to a holdback in the amount of $52,200 with which to make post-closing purchase price adjustments based upon the number of broadband subscribers and monthly Internet service revenue. Also, on February 1, 2011, upon the satisfaction of certain closing conditions as described in the Asset Purchase Agreement, KeyOn completed the divesture, and received the initial closing payment of $208,800. We received the balance of the purchase price of $38,915 on May 2, 2011 after making certain purchase price adjustments as described in the Asset Purchase Agreement.

The preliminary sales price breakdown is as follows:


Network equipment	$	272,510
Customer premise equipment		226,757
Software		461
Computer equipment		2,460
Accumulated depreciation		(495,885	)
Gain on sale of assets		246,197


Total consideration	$	252,500

ERF Wireless, Inc

On February 10, 2011, we entered into an agreement to acquire certain wireless broadband assets and assume certain liabilities used to provide wireless Internet access and other related services from ERF Wireless, Inc., (“ERF”). The assets to be acquired are used in the business of operating wireless networks that provide high-speed Internet access and other related services to residential and commercial subscribers in East Central Texas (the “Business”). As consideration for the acquired assets, the Company paid $3,000,000 in cash, subject to further adjustments as described in the Asset Purchase Agreement and issue 100,000 shares of the Company’s common stock. The Asset Purchase Agreement contains customary representations and warranties by the Company and ERF. On February 15, 2011, upon the satisfaction of the closing conditions, we consummated this transaction by delivering $2,700,000 in cash, $300,000 in debt consideration (see Note 7) and issued 100,000 restricted shares of our common stock.

The final purchase price is subject to adjustments for net working capital as described in the asset purchase agreement which is not expected to exceed $50,000.

The preliminary allocation of the purchase price breakdown is as follows:


Network equipment	$	1,219,082
Vehicles		40,575
Subscriber base		1,339,851
Network equipment not deployed		54,434
Goodwill		378,058


Total consideration	$	3,032,000

The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisitions of these businesses taken place at the beginning of each of the periods presented nor is the pro-forma financial information intended to project expected results for any future period.

Pro forma financials

The Company accounted for these business combinations using the acquisition method of accounting. The results of operations for the three months ended March 31, 2011, include the revenues and expenses of these acquired businesses since their respective dates of acquisition.

The unaudited pro-forma financial results for the three months ended March 31, 2011 and March 31, 2010, combines the historical results of Affinity Wireless, ERF Wireless, Inc., and Wells Rural Electric Company with those of the Company as if these acquisitions had been completed as of the beginning of each of the periods presented. The pro-forma weighted average number of shares outstanding also assumes that the shares issued as purchase consideration were outstanding as of the beginning of each of the periods presented.

As described in Note 3, the Company adopted ASU 2010-29 relating to pro forma disclosures effective January 1, 2011. There were no material non-recurring pro forma adjustments directly attributable to these acquisitions.


PRO FORMA COMBINED STATEMENT OF OPERATIONS

	Three Months Ended			Three Months Ended
	31-Mar-11			31-Mar-10

Total revenues	$	2,661,661		$	2,273,031
Loss from operations	$	(2,500,021	)	$	(1,609,896	)
Net income/(loss) available to common stockholders	$	(17,713,614	)	$	2,558,571
Net income/(loss) per share, basic	$	(0.78	)	$	0.12
Net income/(loss) per share, diluted	$	(0.78	)	$	(0.03	)
Pro forma weighted average shares outstanding, basic		22,649,114			21,096,744
Pro forma weighted average shares outstanding, diluted		23,718,211			43,691,745

Note 5 – Property and Equipment

Property and equipment at March 31, 2011 and December 31, 2010, consisted of the following:


	March 31, 2011			December 31, 2010

Subscriber equipment	$	7,087,012		$	7,027,318
Fixed wireless tower site equipment		6,526,385			5,253,097
Software and consulting costs		637,371			633,704
Computer and office equipment		754,664			703,467
Vehicles		287,183			243,107
Leasehold improvements		330,029			315,013

Property and equipment		15,622,644			14,175,706
Less: accumulated depreciation		(10,782,847	)		(10,769,366	)

Property and equipment, net	$	4,839,796		$	3,406,340

Depreciation expense amounted to $509,366 and $416,064 for the quarters ended March 31, 2011 and 2010 respectively.

Note 6 – Intangible Assets


Goodwill Detail	March 31, 2011		December 31, 2010


Pocatello Acquisition Goodwill	$	165,016	$	165,016
Speednet Acquisition Goodwill		1,176,800		1,176,800
Affinity Acquisition Goodwill		287,016		287,016
Dynamic Broadband Acquisition
Goodwill		50,495		50,495
RidgeviewTel Acquisition Goodwill		37,970		37,970
TS Wireless Acquisition Goodwill		56,610		56,610
Southwest Wireless Acquisition
Goodwill		9,879		9,879
On A Wave Acquisition Goodwill		31,309		31,309

WREC Acquisition Goodwill		34,648		—
ERF Acquisition Goodwill		378,059		—

Goodwill	$	2,227,802	$	1,815,095


Subscriber Base


Subscriber Base-December 31, 2010	$	2,290,464
Wells Electric Acquisition Subscriber Base		125,642
ERF Acquisition Subscriber Base		1,339,851

Subscriber Base- March 31, 2011		3,755,957
Less accumulated amortization		(1,570,362	)

Subscriber Base, net	$	2,185,595

Trademarks were $16,567 and 16,567 as of March 31, 2011 and 2010, respectively.

Amortization expense for the three months ended March 31, 2011 and 2010 was $141,020 and $54,431, respectively.

Note 7 – Notes, Loans and Derivative Liabilities

Lines of Credit:

In August 2010, the Company entered into a Portfolio Loan Account agreement with Morgan Stanley for an amount up to $5,000,000, under which it may borrow up to the amount of marketable securities held by the Company. The amount outstanding at March 31, 2011 was $1,224,271 at an interest rate of 2.76%. The borrowings are due on demand. Accordingly, the outstanding balance is classified as current. The facility agreement has no contractual expiration date.

Notes Payable


	March 31, 2011		December 31, 2010


Note payable to Nevada State Bank in monthly installments of $10,828 including interest at 7% through October 2014.	$	400,158	$	425,087

Note payable in connection with acquisition of assets and assumption of certain liabilities of Southwest Wireless, payable in quarterly non-interest bearing payments of $30,000 through August 1, 2012. (Note 4)		180,000		210,000

Note payable in connection with acquisition of assets and assumption of certain liabilities of TS Wireless, payable in quarterly non-interest bearing payments of $18,750 through June 30, 2012. (Note 4)		118,750		184,456

Note payable in connection with acquisition of assets and assumption of certain liabilities of On A Wave Wireless, Inc., payable in two semi-annually non-interest bearing payments of 53,000 through October 11, 2011. (Note 4)		53,000		59,000

Note payable to a Blencoe State Bank assumed in connection with acquisition of On A Wave Wireless, Inc., payable in monthly installments of $450 including interest at 7.25% through May 2014. (Note 4)		14,703		15,774

Note payable to Wells Rural Electric, payable in 8 quarterly installments including interest at 5.25%		284,202		—
Note payable to ERF Wireless, payable in 1 non-interest bearing payment		300,000		—
Note payable to American National Bank, payable in 48 monthly installments including interest at 7.8%.		1,985		7,842

		1,352,798		902,159
Current portion		691,227		396,847

Non-current portion	$	661,571	$	505,312

Settlement of Convertible Note

On February 5, 2010, pursuant to the Note Purchase Agreement, the Company issued to CalCap a secured convertible promissory note for the principal sum of $15,000,000 (the “Note”). On December 3, 2010, we entered into the Conversion Agreement with CalCap, subject to stockholder approval, pursuant to which CalCap agreed to convert all of the outstanding principal and accrued but unpaid interest under the Note into Preferred Stock at a conversion price of $1.00 per share. In addition, upon the conversion of the Note and in accordance with the Conversion, we also agreed to issue CalCap a five year warrant to purchase 4,300,000 shares of Preferred Stock at an exercise price of $0.25 per share, a five year warrant to purchase 4,000,000 shares of Preferred Stock at an exercise price of $0.40 per share and a five year warrant to purchase 2,000,000 shares of Preferred Stock at an exercise price of $0.60 per share (collectively, the “Warrants”). Upon approval by vote of the stockholders, on March 11, 2011, the Company issued 16,315,068 shares of Preferred Stock in addition to 10,300,000 exercisable warrants to obtain Preferred Stock, thereby satisfying the Note.

The conversion of the Cal Cap Note into Series A Preferred Stock has been accounted for as an induced conversion. The Company induced conversion of the Note through the issuance of warrants to purchase additional shares of Series A Preferred Stock at exercise prices not provided for in the original Note, b) additional voting rights granted to Preferred Stock holders relative to those possessed by common stockholders and c) control of the Board of Directors through the ability to appoint a majority of its members.

Under the induced conversion accounting rules, if a convertible debt instrument is converted to equity securities of the debtor pursuant to an inducement offer, the debtor recognizes an expense equal to the fair value of the securities and other consideration transferred in the transaction in excess of the fair market value of securities issuable pursuant to the original conversion terms. The fair value of the derivative liability, after giving the effect to the increase in the exercise price from $0.75 to $1.00 amounted to $2,231,405 immediately prior to the conversion of the rate. The fair value of the derivative liability amounted to $2,390,515 at December 31, 2010. Accordingly, we recorded a $159,110 credit to other income during the period January 1, 2011 to March 11, 2011. Upon the conversion of the Note, the derivative liability no longer exists and was therefore reclassified to additional paid in capital. The Company recorded accretion on the Note of $589,055 as interest expense during the period January 1, 2011 to March 11, 2011 to a value of $2,547,416 at the conversion date. After giving effect to the conversion, the unamortized discount on the Note of $12,452,584 was accelerated and has been charged to interest expense.

Derivative Financial Instrument

The Company computed the fair value of the derivative liability at the conversion date of March 11, 2011 using the Black-Scholes option pricing model with the following assumptions:


Input	March 11, 2011 (Conversion Date)

Fair value of common stock	$	.42
Exercise Price of Option	$	.75
Term (years)		3.83
Volatility		53.25	%
Risk Free Interest Rate		3.12	%
Dividend Yield		0	%
Unit fair value	$	0.11
Shares issuable upon exercise		20,000,000

Aggregate fair value	$	2,231,405

Note 8 - Operating and Capital Leases

Capital Leases:

The Company leases equipment from certain parties under various capital leases expiring in 2011 through 2014. Future minimum lease payments under the capital leases, which are stated at their principal amounts with initial or remaining terms of one year or more consist of the following as of March 31, 2011:


2011	$	539,186
2012		139,283
2013		3,083
2014		503
Thereafter		—

Total minimum lease payments		682,055
Less amounts representing interest		(79,917	)

		602,138
Less current portion		(556,752	)

Capital lease obligations, non-current	$	45,386

Operating Leases:

In addition, the Company leases tower and roof-top space under operating leases with terms that are typically for 5 years and contain automatic renewals for 2 or 3 additional 5 year terms. Finally, the Company also has various operating leases for office space, equipment, and vehicles that generally are for 3 to 5 year terms. Future minimum lease payments under the operating leases with initial or remaining terms of one year or more consist of the following at March 31, 2011:


For the period of April 1, 2011 through December 31, 2011	$	976,869
For the years ending December 2012		622,326
2013		359,620
2014		161,443
2015		38,528
Thereafter		6,502

	$	2,165,288

The total rental expense included in operating expenses for operating leases included above is $462,232 and $353,676 for the quarters ended March 31, 2011 and March 31, 2010, respectively.

In February 2007, the Company entered into a lease agreement for its corporate offices in Omaha, Nebraska. The lease term commenced in February 2007 and terminates five years from the date of commencement with an option to renew for an additional five-year term. The Company’s annual rent payments totaled approximately $103,000 in 2010 and will remain at that level through March 2011, before increasing to approximately $106,200 through March 2012. Additionally, we have entered into a new lease for approximately 6,500 square feet of office space for $6,825 per month in Las Vegas. This facility will serve as our headquarters and accommodate our growth. This lease commences on May 1, 2011 and expires on April 30, 2016.

The landlord provided the Company with incentives as an inducement to enter the lease agreement. These incentives included (i) an allowance of $265,000 for leasehold improvements, (ii) an initial three-month rent-free period and (iii) a reduced initial monthly payment schedule from April 2007 through September 2007 with escalating monthly charges thereafter. Leasehold improvements funded by the landlord have been (i) capitalized and are being amortized over the remaining lease term and (ii) recognized as deferred rent and amortized ratably over the term of the lease. The economic value of the rent-free period and the reduced initial monthly payments are recognized as deferred rent and amortized ratably over the term of the lease. Current and long term balances totaled $68,543 and $0 at March 31, 2011.

Note 9 – Stockholder Equity

Preferred Stock

The Company is authorized to issue up to 145,000,000 shares of stock, of which 115,000,000 have been designated as Common Stock and 30,000,000 have been designated as preferred stock. Of the 30,000,000 shares of preferred stock, 30,000,000 shares have been designated as Series A Preferred Stock. The Series A Preferred Stock is entitled to certain powers, preferences and other special rights that are summarized below. The Series A Preferred Stock is not redeemable.

Dividends

The holders of shares of Series A Preferred Stock are entitled to receive dividends, on a pari passu basis, out of any assets legally available therefore, prior and in preference to any declaration or payment of any dividend (payable other than in common stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of common stock) on the common stock, at the rate of 10% of the Original Issue Price ($1.00, subject to adjustment for any stock splits, stock dividends, combinations, recapitalizations or the like) per share per annum for the Series A Preferred Stock, payable within 30 days following the last day of each fiscal quarter. During the first two years following the initial issuance of the Series A Preferred Stock, such dividends shall, at the option of the Company, be payable in either cash or additional shares of Series A Preferred Stock (with such shares being valued consistently with the common stock). Following such two year period, dividends shall be paid in cash unless otherwise elected by the holder. The Company recorded a dividend on the Series A Preferred Stock of $89,398 for the period March 11 through March 31, 2011.

Liquidation Preference

In the event of the liquidation, dissolution or winding up of the Company, the acquisition of the Company by another entity as a result of which the Company’s stockholders have less than 50% control of the acquiring entity’s voting power following such acquisition or the sale of all or substantially all of the assets of the Company, the holders of Series A Preferred Stock shall be entitled to receive, on a pari passu basis, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock, an amount per share equal to the greater of (i) the sum of (A) $1.50 (subject to adjustment for any stock splits, stock dividends, combinations, recapitalizations or the like) and (B) an amount equal to all accrued but unpaid dividends on such share and (ii) the amount of cash, securities or other property which such holder would be entitled to receive in such sale, liquidation, dissolution or winding up of the Company with respect to such shares if such shares had been converted to common stock immediately prior to such sale, liquidation, dissolution or winding up of the Company. Accordingly, the Series A Preferred Stockholders and all security holders in classes equal to or subordinate to the Series A preferred are entitled to the same consideration upon any liquidation event.

Upon completion of these distributions, the holders of Series A Preferred Stock shall not be entitled to any further participation as such in any distribution of the assets or funds of the Company.

Optional Conversion

Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share into such number of fully paid and nonassessable shares of common stock as is determined by dividing the Original Issue Price by the Conversion Price. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Issue Price, which means that the shares of Series A Preferred Stock are initially convertible into shares of common stock on a one-for-one basis. In addition, each share of Series A Preferred Stock will automatically be converted into shares of common stock at the Conversion Price at the time in effect upon the written consent or agreement of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock.

Anti-Dilution Protection

The Series A Preferred Stock is subject to weighted-average anti-dilution adjustments in the event of an issuance of common stock below the then current conversion price of the Series A Preferred Stock, as the case may be, or the issuance of any securities convertible into common stock with an exercise or conversion price below such conversion prices, in each case subject to certain exemptions.

Mandatory Conversion

If the volume weighted average price for any 10 consecutive trading days exceeds, $5.00 (subject to adjustment for any stock splits, stock dividends, combinations, recapitalizations or the like), the Company may require any holder of shares of Series A Preferred Stock to convert such shares, and any accrued but unpaid dividends thereon, into such number of shares of common stock as provided above.

Voting Rights

The holders of Series A Preferred Stock are entitled to vote, together with holders of common stock as a single class, on any matter upon which holders of common stock have the right to vote, and shall have the right to three (3) votes for each share of common stock into which the shares of Series A Preferred Stock held by such holders could then be converted.

Election of Directors

So long as at least 10,000,000 shares of Series A Preferred Stock remain outstanding, the holders of the Series A Preferred Stock are entitled, voting together as a single class, to elect such number of directors at or pursuant to each meeting or consent of the Company’s stockholders for the election of directors equal to one-half of the then authorized number of directors plus one (1). Any resulting fractional number of directors that the holders of Series A Preferred Stock are entitled to elect hereunder shall be rounded down to the nearest whole number.

Protective Provisions

The consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock voting separately as a class is required in order for the Company to:


	•	alter or change, whether by merger, consolidation or otherwise, the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely such shares;

	•	increase or decrease (other than by redemption or conversion) the total number of authorized shares of preferred stock or common stock;

	•	authorize or issue, or obligate itself to issue, whether by merger, consolidation or otherwise, any equity security of the Company, including any other security convertible into or exercisable for any equity security, having rights, preferences or privileges senior or on parity with the Series A Preferred Stock;

	•	effect any reclassification or recapitalization of the outstanding capital stock of the Company;

	•	amend the Company’s certificate of incorporation or bylaws in a manner that adversely effects the holders of the Series A Preferred Stock;

	•	pay dividends or make other distributions on the capital stock of the Company (other than a dividend payable solely in shares of common stock); or

	•	approve any transaction that would be required to be disclosed as a related party transaction by a corporation that is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

Issuances of Common Stock

On February 15, 2011, we issued 100,000 shares of common stock with a fair value of $32,000 pursuant to the consummation of the ERF acquisition (See Note 4).

Warrants

A roll-forward of the Company’s stock purchase warrants for the quarter ended March 31, 2011 is as follows:


	Series A preferred stock purchase warrants

Outstanding at January 1, 2011		—
Issued		10,300,000
Exercised		—
Cancelled		—
Expired unexercised		—


Outstanding at March 31, 2011		10,300,000

As of March 31, 2011, there are 14,050,494 exercisable warrants outstanding that feature strike prices ranging from $0.20 to $8.00 per share. 8,393,333 exercisable warrants feature strike prices at or below $0.40 per share.

Stock Option Plans

A summary of the status of our stock option plans and the changes during the quarter ended March 31, 2011, is presented in the table below:


	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual term		Aggregate Intrinsic Value

Balance, December 31, 2010		2,159,344	$	0.96		4.42
Granted		425,000	$	0.37
Exercised		—	$	—
Cancelled		—	$	—
Forfeited		—	$	—


Balance, March 31, 2011		2,584,344	$	0.86		4.64	$	461,562


Options Exercisable, March 31, 2011		2,039,344	$	1.00		4.23	$	356,062

The Company calculates the fair value of stock options using the Black-Scholes option-pricing model. The option-pricing model requires the input of subjective assumptions, such as those included in the table above. The volatility rates are based on historical stock prices of similarly situated companies and expectations of the future volatility of our common stock. The expected life of options granted is based upon the average of the vesting and contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The total expense to be recorded in future periods will depend on several variables, including the number of share-based awards expected to vest.

Compensation expense recorded for stock options during the quarter ended March 31, 2011 amounted to $1,418,129.

Unamortized stock compensation expense as of March 31, 2011 amounted to $250,663 and is being recognized as compensation expense through February 28, 2015.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We provide wireless broadband services primarily to rural and other underserved markets under the “KeyOn,” “SpeedNet,” and “SIRIS” brands. We offer our broadband services along with VoIP and DISH Network video services to both residential and business subscribers. We currently offer our broadband services to residential and business subscribers in a market footprint covering over 62,000 square miles in the following 11 Western and Midwestern states: Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Nevada, Ohio, South Dakota and Texas. We estimate our existing footprint covers approximately 2.7 million people, as well as small to mid-sized businesses in these areas. We have principally grown our business through the acquisition of wireless broadband companies operating in areas adjacent to our existing network operations as well as through the organic growth of our subscriber base. From 2007 through today, we have acquired the assets of eleven companies, which has increased our subscriber base and expanded our network footprint.

We achieved a critical financing milestone in February 2010 through the issuance of a $15 million Note to CalCap. We believe that this financing provided us with sufficient capital to invest in our growth strategies in 2010, including strategic acquisitions, 4G WiMAX deployments and incremental sales and marketing efforts.

Our present strategy is to achieve positive cash flow from operations by increasing our revenues through acquisitions, value-added services that increase our ARPU and growth in our subscriber base. In order to achieve this goal, we attempt to keep the rate of growth in normalized operating expenses less than the growth in revenues. Since receiving the proceeds from the CalCap Note, we believe we have executed our principal growth strategies which consist of: Rural UniFi, overall organic subscriber growth and strategic initiatives, including the participation in government broadband programs such as the BIP and the deployment of 4G WiMAX networks.

Rural Unifi

In September of 2009, we launched “Rural UniFi”, which formalized our strategic acquisition of wireless broadband companies and Rural UniFi continues to be one of our core growth strategies. We integrate each acquired business into our existing infrastructure and achieve economies of scale through common management, customer service, sales and marketing and billing functions. We are engaged in ongoing discussions with numerous potential acquisition candidates and believe we are well positioned to continue to make additional acquisitions and grow our revenue and cash flow.

Organic Subscriber Growth

During the second half of 2010, we increased our organic growth efforts through increased marketing expenses. We began to see effects of these efforts in the first quarter of 2011 as our new customer installations increased by 83% over the first quarter of 2010.

ARRA Stimulus Award

On September 13, 2010, we were announced as a $10.2 million award recipient under the BIP to deliver 4G wireless broadband services to almost 40 communities throughout rural Nevada. Pursuant to the project’s design, we will make 4G, last-mile wireless broadband access and VoIP services available to approximately 93,000 people, 5,522 businesses and 849 critical community facilities in qualified rural communities throughout Nevada under Round Two of the BIP. We plan to offer broadband service at speeds up to 8 megabits per second (Mbps). We anticipate commencing our project in the second quarter of 2011 and will be substantially complete within two years. We are currently working with our third-party contractors and applicable RUS personnel to begin requisitioning funds pursuant to the award, however, we cannot provide any assurances as to the timing of the funding of the award or whether we will ultimately receive it.

4G Wireless Network Deployment

We also implemented a next-generation, 4G wireless network with the launch of our WiMAX network in Pahrump, Nevada. We believe that the introduction of 4G networks will help increase both subscriber growth and ARPU. We have also launched 4G wireless services in eight markets in rural Nebraska, as well as in Wendover, Nevada.

Characteristics of Our Revenues and Operating Costs and Expenses

We offer our services under month-to-month, annual or two-year service agreements. These services are generally billed monthly, quarterly, semiannually or annually in advance. Payments received in advance for subscriptions are deferred and recognized as the services are provided. Service initiation fees are recognized at the time of installation.

Operating costs and expenses consist of payroll and related expenses, network operating costs, marketing and advertising, professional fees, installation expense and general and administrative expenses. Payroll expenses consist of personnel costs, including salaries, benefits, employer taxes, bonuses and stock compensation expenses across our functional areas: executive, customer support, engineering, accounting and billing, marketing, and local market operational staff.

Network operating costs are comprised of costs directly associated with providing our services, including tower rent, circuits to transport data to the Internet termination point and Internet termination bandwidth.

Marketing and advertising expenses primarily consist of direct marketing and advertising costs.

Professional fees relate to legal, accounting, consulting and recruiting resources that we periodically utilize for functions that we do not perform internally such as our ARRA applications. General and administrative expenses primarily consist of the support costs of our operations, such as costs related to office real estate leases, company insurance, travel and entertainment, banking and credit card fees, taxes and vehicle expenses.

Results of Operations

Three-Month Period Ended March 31, 2011 as Compared to the Three-Month Period Ended March 31, 2010

Revenues. During the three month period ended March 31, 2011, we recognized revenues of $2,365,638, as compared to revenues of $1,594,959 during the three month period ended March 31, 2010, representing an increase of approximately 48%. Our increased revenue was a result of the subscriber growth resulting from the completion of seven acquisitions during the last three quarters of the year ended December 31, 2010 and the three month period ended March 31, 2011, as well as the effects of the increase in organic marketing efforts during that second half of 2010.

Operating Loss. Operating expenses, which consist of payroll, bonuses, taxes and stock based compensation, depreciation and amortization, other general and administrative costs, network operating costs, marketing and advertising, installation expense, and professional fees totaled $5,006,802 for the three month period ended March 31, 2011, as compared to $3,509,977 for the three month period ended March 31, 2010, representing a increase of approximately $1.5 million or 43%. The majority of this increase, 81%, was due to an increase in non-cash compensation expenses during the three month period ended March 31, 2011, as compared to the three month period ended March 31, 2010. The additional increase of 19% was due to an increase in payroll and other operating expenses of approximately $847,000 offset by a reduction in professional fees of approximately $569,000. By removing non-cash stock compensation expense from payroll and professional fees of $1,418,129 for the three month period ended March 31, 2011 and $1,162,641 for the three month period ended March 31, 2010 our operating expenses increased by $1,241,337. After giving effect to the exclusion of stock compensation, our operating loss margin increased by 5 percent from a total normalized operating loss of $1,223,035 for the three month period ended March 31, 2011 as compared to a loss of $752,377 for the three month period ended March 31, 2010.

Payroll, Bonuses and Taxes. Payroll, bonuses and taxes totaled $2,571,377 for the three month period ended March 31, 2011, as compared to $1,077,292 for the three month period ended March 31, 2010, representing an increase of approximately $1.5 million or 139%. A majority of this increase, 82%, was due to an increase of non-cash deferred compensation expenses during the three month period ended March 31, 2011, as compared to the three month period ended March 31, 2010. By removing the non-recurring and non-cash expenses incurred during the three month period ended March 31, 2011 and 2010, normalized payroll, bonuses and taxes would be approximately $1,153,248 and $878,019, respectively, for an increase of approximately $275,229 or 31%.The remaining portion of the increase, 18 % was primarily due to additional headcount in support of our expanded operations resulting from our Rural Unifi initiatives for the three month period ended March 31, 2011.

Depreciation and Amortization. Depreciation and amortization expenses totaled $650,386 for the three month period ended March 31, 2011, as compared to $470,495 for the three month period ended March 31, 2010, representing an increase of approximately 38%. This increase was primarily due to new equipment purchases in connection to investments acquisitions during the three month period ended March 31, 2011 as compared to the three month period ended March 31, 2010.

Network Operating Costs. Network operating costs, which consist of tower rent, Internet transport costs and Internet termination expenses, totaled $1,039,474 for the three month period ended March 31, 2011, as compared to $904,649 for the three month period ended March 31, 2010, representing an increase of approximately 15%. The increase was primarily due to an increase in network costs resulting from acquisitions in support of our Rural UniFi initiative.

Other General and Administrative Expenses. Other general and administrative expenses totaled $476,470 for the three month period ended March 31, 2011, as compared to $290,040 for the three month period ended March 31, 2010, representing an increase of approximately $186,000 or 64%. This increase was due primarily to increased office rents, office utilities in support of our Rural UniFi initiative, travel related to acquisitions, hiring related expenses and insurance of approximately $163,000.

Installation Expense. Installation expense, which consists primarily of expenses associated with installation supplies, third party installation costs and transportation expenses relating to the installations, totaled $72,374 for the three month period ended March 31, 2011, as compared to $51,575 for the three month period ended March 31, 2010, representing an increase of approximately 40%. This is a direct result of the increase in gross subscriber additions during the three month period ended March 31, 2011 resulting from the effect of increased marketing expenses.

Professional Fees. Professional fees, which consist of legal, accounting, and other related expenses, totaled $95,957 for the three month period ended March 31, 2011, as compared to $665,274 for the three month period ended March 31, 2010, representing a decrease of approximately 86 %. The majority of this decrease was due to expenses incurred in connection with our Round Two ARRA applications during the three month period ended March 31, 2010.

Marketing and Advertising Expenses. Marketing and advertising expenses totaled $100,764 for the three month period ended March 31, 2011, as compared to $50,652 for the three month period ended March 31, 2010, representing an increase of approximately 99%. Due to our ongoing efforts to organically grow our subscriber base, we continued to increase marketing initiatives for the three month period ended March 31, 2011. Our marketing costs were 4.26% of revenue for the three month period ended March 31, 2011 and 3.18% of revenue for the three month period ended March 31, 2010, representing a 1.08 percentage point increase. We expect to see the full impact of our marketing efforts during the balance of 2011.

Other Income and Expense. We incurred other expense of $15,199,483 for the three month period ended March 31, 2011, as compared to an income of $4,168,467 for the three month period ended March 31, 2010, representing a decrease of $19,367,950. The primary reason for the decrease was the derivative accounting of the conversion option bifurcated from the CalCap Note, which included the following non-cash items: interest expense of $13,051,016 and a debt conversion inducement charge of $2,292,059. If the effects of the derivative accounting were removed, other Income and Expense for the three month period ended March 31, 2011 would have totaled an income of $143,592 as compared to an expense of $49,915 for the three months ended March 31, 2010, an increase of approximately $193,000.

Net Income (Loss). We had a net loss of $17,854,757 for the three month period ended March 31, 2011, as compared to a net income of $2,253,449 for the three month period ended March 31, 2010, representing a decrease of $20,108,206. The primary reasons for the decrease were non-cash effects of the conversion of the CalCap note into Series A Preferred Stock of $15,343,075 and non-cash stock compensation expense of $1,418,129. If the effect of the conversion of the Note and the non-cash compensation expenses are removed our net loss would be $1,093,553, as compared to a net loss of 1,765,660 for the three months ended March 31, 2010, an improvement of 38%.

Liquidity and Capital Resources

General

We incurred an operating loss of $2,641,164 for the three months ended March 31, 2011. At March 31, 2011, our accumulated deficit amounted to $44,205,995. During the three months ended March 31, 2011, net cash used in operating activities amounted to $622,168. At March 31, 2011, our working capital amounted to a deficit of $1,871,033.

We received an award under ARRA, specifically, Round Two of the BIP administered by the RUS. This federal program allocated $2.5 billion for broadband infrastructure in rural markets and created a new opportunity for us to access federal grants and loans for the build-out of next-generation wireless networks in eligible markets. On September 13, 2010, we were announced as a $10.2 million award winner to build and operate networks throughout rural Nevada to nearly 100,000 rural residents. We expect to contribute approximately $2 million in matching funds during the project’s construction. The RUS award makes it possible for us to provide 4G WiMAX broadband services where it is otherwise not economically feasible to do so, based on the high cost to deploy communications facilities in sparsely populated rural markets. We anticipate commencing its project in the second quarter of 2011 and will be substantially complete within two years. We are currently working with our third-party contractors and applicable RUS personnel to begin requisitioning funds pursuant to the award, however, we cannot provide any assurances as to the timing of the funding of the award or whether we will ultimately receive it.

On February 5, 2010, we issued the Cal Cap Note in exchange for gross proceeds of $15 million. On December 3, 2010, we entered into an agreement (the “Conversion Agreement”) with Cal Cap, pursuant to which CalCap agreed to convert all of the outstanding principal and accrued but unpaid interest under the Cal Cap Note into shares of Series A Preferred Stock (“Preferred Stock”) at a conversion price of $1.00 per share (the “Conversion”). The Cal Cap Note is convertible into shares of Series Cal Cap Preferred Stock and shares of common stock. On March 11, 2011, pursuant to the Conversion Agreement, the Company issued 16,315,068 shares of Preferred Stock, in addition to 10,300,000 exercisable warrants to obtain Preferred Stock.

We believe that this financing provided us with sufficient capital to execute our business plan, which consists of: Rural UniFi, overall organic subscriber growth and other strategic initiatives, including the participation in government broadband programs

We currently anticipate that our cash and cash equivalents will be sufficient to meet our working capital requirements to continue our sales and marketing and research and development through at least April 1, 2012. However, in order to execute our long-term strategy and penetrate new and existing markets, we may need to raise additional funds, through public or private equity offerings, debt financings, corporate collaborations or other means. Management believes that we may be able to access capital through public or private equity offerings, debt financings, corporate collaborations or other means; however, other than the $10.2 million award noted above we have not secured any commitment for new financing at this time, nor can we provide any assurance that new financing will be available on commercially acceptable terms, if needed. If we are unable to secure additional capital, we may be required to curtail our business development initiatives and take additional measures to reduce costs in order to conserve our cash needs.

Working Capital. As of March 31, 2011, we had negative working capital of $1,871,033. As of March 31, 2010 we had negative working capital of $1,194,516.

Item 4T Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 as amended, (the “Exchange Act”) is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated and communicated to our executive officers to allow timely decisions regarding required disclosure. As of March 31, 2011, our Chief Executive Officer, who acts in the capacity of principal executive officer and in the capacity of principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer, we have concluded that our disclosure controls and procedures were not effective as of March 31, 2011, based on our evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Disclosure Controls and Internal Controls

Disclosure controls are designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, recorded and reported and our assets are safeguarded against unauthorized or improper use, to permit the preparation of our financial statements in conformity with generally accepted accounting principles, including all applicable SEC regulations.

As of December 31, 2010, management of our Company had reported at previous dates of assessment that we identified various deficiencies in our accounting processes and procedures that constitute a material weakness in internal control over financial reporting and disclosure controls. We took certain steps during the year ended December 31, 2010 to correct previously reported material weaknesses that include, among other things, consolidating all legacy systems into a single unified accounting system, hiring additional personnel and undertaking the process of documenting our controls; however, we still need to make substantial progress in these areas before we can definitively conclude that we have remediated our material weaknesses.

Management has specifically observed that the Company’s accounting systems and current staffing resources in the Company’s finance department are currently insufficient to support the complexity of our financial reporting requirements. The Company has in the past, and is continuing to experience difficulty in (i) generating data in a form and format that facilitates the timely analysis of information needed to produce financial reports and (ii) applying complex accounting and financial reporting disclosure rules as required under various aspects of GAAP and SEC reporting regulations such as those relating to accounting for business combinations, stockholders equity transactions, derivatives and income taxes. The Company also has limited segregation of duties and it is becoming increasingly necessary for the Company to divide certain custodial, recordkeeping and authorization functions between its Chief Financial Officer, Controller, and supporting staff to mitigate the risk of material misstatements.

We believe that our internal control risks are sufficiently mitigated by the fact that our Chief Executive Officer and Chief Financial Officer review and approve substantially all of our major transactions and we have, when needed, hired outside experts to assist us with implementing complex accounting principles. We believe that our weaknesses in internal control over financial reporting and our disclosure controls relate in part to the fact that we are an emerging business with limited personnel. Management and the Board of Directors believe that the company must allocate additional human and financial resources to address these matters.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our last fiscal quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION


Item 6.	Exhibits.


Exhibit No.		Description


31.1*		Section 302 Certification by the Principal Executive Officer

31.2*		Section 302 Certification by the Principal Financial Officer

32.1*		Section 906 Certification by the Principal Executive Officer

32.2*		Section 906 Certification by the Principal Financial Officer



* Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	KEYON COMMUNICATIONS HOLDINGS, INC.

Date: May 16, 2011	By:	/s/ Jonathan Snyder

		Jonathan Snyder
		President and Chief Executive Officer and Chief Financial Officer
		(Principal Executive Officer and Principal Financial Officer)