** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-QSB**

** **

**(MarkOne)**

 
| **x**  | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934**                                                                                                                                                                                                                           |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                         |
|   |       | **For the quarterly period ended  September 30, 2007**                                                                                                                                                                                                                                                       |
|   |       | ** **                                                                                                                                                                                                                                                                                                   |
| **o**  |       | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                                                                                                                                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                         |
|   |       | **For the transition period from                      to                      ** |
|   |       |                                                                                                                                                                                                                                                                                                         |
|   |       | **Commission file number:  333-127259**                                                                                                                                                                                                                                                                      |

 

**KeyOn Communications Holdings, Inc.**

**(ExactName of Small Business Issuer in Its Charter)**

** **

| **Delaware**                                  | ** ** | **74-3130469**                       |
|-----------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation |       | (I.R.S. Employer Identification No.) |
| or Organization)                              |       |                                 |
|                                          |       |                                 |
| **11742 Stonegate Circle**                    | ** ** | ** **                           |
| **Omaha, Nebraska**                           | ** ** | **68164**                            |
| (Address of Principal Executive Offices)      |       | (Zip Code)                           |

 

**(402) 998-4000**

(Issuer’s Telephone Number)

 

 

(Former Name, Former Address and Former Fiscal

Year, if Changed Since Last Report)

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

 

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

 

As of November 14, 2007, there were8,101,770 shares of the issuer’s common equity outstanding.

 

Transitional Small BusinessDisclosure Format (Check one):  Yes o  No x

 

 

----

 

**Table of Contents**

** **
| ** **  | ** ** | ** **                                                                                                                                                 | ** ** | **Page**   |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Part I**  | ** ** | **FINANCIAL INFORMATION**                                                                                                                                  | ** ** | 2          |
| ** **  | ** ** | ** **                                                                                                                                                 | ** ** | ** ** |
| **Item 1.** |       | Financial  Statements (Unaudited)                                                                                                                          |       | 2          |
| ** **  |       |                                                                                                                                                       |       |       |
|        |       | Condensed Consolidated Balance Sheet as of September  30, 2007                                                                                             |       | 2          |
|        |       |                                                                                                                                                       |       |       |
|        |       | Condensed Consolidated Statements of Operations for  the three-months ended September 30, 2007 and 2006 and nine months ended  September 30, 2007 and 2006 |       | 3          |
|        |       |                                                                                                                                                       |       |       |
|        |       | Consolidated Statement of Stockholders’ Equity for the  nine-months ended September 30, 2007                                                          |       | 4          |
|        |       |                                                                                                                                                       |       |       |
|        |       | Condensed Consolidated Statements of Cash Flows for  the nine-months ended September 30, 2007 and 2006                                                     |       | 5          |
|        |       |                                                                                                                                                       |       |       |
|        |       | Notes to  Condensed Financial Statements                                                                                                                   |       | 6          |
|        |       |                                                                                                                                                       |       |       |
| **Item 2.** |       | Management’s  Discussion and Analysis or Plan of Operation                                                                                            |       | 24         |
| ** **  |       |                                                                                                                                                       |       |       |
| **Item 3.** |       | Controls and  Procedures                                                                                                                                   |       | 33         |
| ** **  |       |                                                                                                                                                       |       |       |
| **Part II** | ** ** | **OTHER INFORMATION**                                                                                                                                      | ** ** | 34         |
| ** **  | ** ** | ** **                                                                                                                                                 | ** ** | ** ** |
| **Item 4.** |       | Submission  of Matters to a Vote of Security Holders                                                                                                       |       | 34         |
| ** **  |       |                                                                                                                                                       |       |       |
| **Item 6.** |       | Exhibits                                                                                                                                                   |       | 34         |

 

i

----

 

**PART I**

**FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements.**

 

**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

 

**CONDENSEDCONSOLIDATED BALANCE SHEET**

**AS OF SEPTEMBER 30, 2007 (UNAUDITED)**

 
| ** **                                                                                                                                                                                | ** ** | **2007**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                                                                                                                |       |        |       |
| **ASSETS**                                                                                                                                                                                |       |        |       |
|                                                                                                                                                                                      |       |        |       |
| CURRENT ASSETS:                                                                                                                                                                           |       |        |       |
| Cash                                                                                                                                                                                      |       | $           | 1,569,403  |   |
| Accounts receivable, net of allowance for  doubtful accounts                                                                                                                              |       | 93,757      |       |
| Prepaid expenses and other current assets                                                                                                                                                 |       | 84,289      |       |
| Total current assets                                                                                                                                                                      |       | 1,747,449   |       |
|                                                                                                                                                                                      |       |        |       |
| PROPERTY AND EQUIPMENT - Net                                                                                                                                                              |       | 4,450,880   |       |
|                                                                                                                                                                                      |       |        |       |
| OTHER ASSETS                                                                                                                                                                              |       |        |       |
| Goodwill                                                                                                                                                                                  |       | 1,630,609   |       |
| Subscriber base -net                                                                                                                                                                      |       | 832,749     |       |
| Trademarks                                                                                                                                                                                |       | 16,667      |       |
| Refundable deposits                                                                                                                                                                       |       | 73,211      |       |
| Debt issuance costs - net                                                                                                                                                                 |       | 71,883      |       |
| Other assets                                                                                                                                                                              |       | —      |       |
| Total other assets                                                                                                                                                                        |       | 2,625,119   |       |
|                                                                                                                                                                                      |       |        |       |
| TOTAL ASSETS                                                                                                                                                                              |       | $           | 8,823,448  |   |
|                                                                                                                                                                                      |       |        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                             | ** ** | ** **  | ** ** |
|                                                                                                                                                                                      |       |        |       |
| CURRENT LIABILITIES:                                                                                                                                                                      |       |        |       |
| Accounts payable and accrued expenses                                                                                                                                                     |       | $           | 1,309,666  |   |
| Cash overdraft                                                                                                                                                                            |       | 46,614      |       |
| Revolving line of credit                                                                                                                                                                  |       | 100,000     |       |
| Loan payable to shareholder                                                                                                                                                               |       | —      |       |
| Term loan payable - related party                                                                                                                                                         |       | 3,000,000   |       |
| Current portion of notes payable                                                                                                                                                          |       | 163,927     |       |
| Current portion of notes payable to  shareholders                                                                                                                                         |       | —      |       |
| Current portion of deferred rent liability                                                                                                                                                |       | 57,007      |       |
| Current portion of capital lease obligations                                                                                                                                              |       | 650,041     |       |
| Deferred revenue                                                                                                                                                                          |       | 444,821     |       |
| Total current liabilities                                                                                                                                                                 |       | 5,772,076   |       |
|                                                                                                                                                                                      |       |        |       |
| LONG-TERM LIABILITIES                                                                                                                                                                     |       |        |       |
| Deferred rent liability, less current  maturities                                                                                                                                         |       | 214,572     |       |
| Notes payable, less current maturities                                                                                                                                                    |       | 75,278      |       |
| Notes payable to shareholders, less current  maturities                                                                                                                                   |       | —      |       |
| Capital lease obligations, less current  maturities                                                                                                                                       |       | 670,285     |       |
| Total long term liabilities                                                                                                                                                               |       | 960,135     |       |
|                                                                                                                                                                                      |       |        |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                             |       |        |       |
|                                                                                                                                                                                      |       |        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                |       |        |       |
| Series A preferred stock, $0.001 par value;  5,000,000 shares authorized; 0 shares issued and outstanding at September 30,  2007 and at December 31, 2006                                 |       |        |       |
| Common stock, $0.001 par value; 95,000,000  shares authorized; 8,101,770 shares issued and outstanding at September,  2007; 4,712,308 shares issued and outstanding at December 31, 2006. |       | 8,102       |       |
| Additional paid-in capital                                                                                                                                                                |       | 12,985,409  |       |
| Accumulated deficit                                                                                                                                                                       |       | (10,902,274 | )          |
| Total stockholders’ equity                                                                                                                                                           |       | 2,091,237   |       |
|                                                                                                                                                                                      |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                           |       | $           | 8,823,448  |   |

 

See notes to condensed consolidated financial statements.

 

2

----

 

**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

** **

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                         | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| REVENUES:                                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Service and installation revenue                                   |       | $                                                        | 1,829,891  |                                                    | $          | 581,672 |   | $ | 5,119,460 |   | $ | 1,626,725 |   |
| Support and other revenue                                          |       | 33,531                                                   |       | 17,987                                                  |       | 97,516 |   | 145,557 |   |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Total revenues                                                     |       | 1,863,422                                                |       | 599,659                                                 |       | 5,216,976 |   | 1,772,282 |   |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| OPERATING COSTS AND EXPENSES:                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Payroll, bonuses and taxes                                         |       | 914,045                                                  |       | 334,607                                                 |       | 2,403,899 |   | 986,585 |   |
| Depreciation and amortization                                      |       | 668,354                                                  |       | 288,713                                                 |       | 1,862,646 |   | 748,799 |   |
| Other general and administrative expense                           |       | 391,025                                                  |       | 279,578                                                 |       | 1,306,298 |   | 535,826 |   |
| Network operating costs                                            |       | 673,478                                                  |       | 186,210                                                 |       | 1,662,310 |   | 497,136 |   |
| Marketing and advertising                                          |       | 166,958                                                  |       | 73,129                                                  |       | 397,593 |   | 205,638 |   |
| Installation expense                                               |       | 124,850                                                  |       | 14,366                                                  |       | 239,192 |   | 71,816 |   |
| Professional fees                                                  |       | 319,341                                                  |       | 63,528                                                  |       | 429,991 |   | 160,514 |   |
| Stock based compensation                                           |       | 1,335,306                                                |       | —                                                  |       | 1,339,891 |   | — |   |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Total operating costs and expenses                                 |       | 4,593,357                                                |       | 1,240,131                                               |       | 9,641,820 |   | 3,206,314 |   |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| LOSS FROM OPERATIONS                                               |       | (2,729,935                                               | )          | (640,472                                                | )          | (4,424,844 | ) | (1,434,032 | ) |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 23,026                                                   |       | 2,191                                                   |       | 30,931 |   | 7,086 |   |
| Interest expense                                                   |       | (159,647                                                 | )          | (66,717                                                 | )          | (460,451 | ) | (156,041 | ) |
| Minority interest in income                                        |       | —                                                   |       | 1,353                                                   |       | — |   | (238 | ) |
| Total other income (expense)                                       |       | (136,621                                                 | )          | (63,173                                                 | )          | (429,520 | ) | (149,193 | ) |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| PROVISION FOR INCOME TAXES                                         |       | —                                                   |       | —                                                  |       | — |   | — |   |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| NET LOSS                                                           |       | $                                                        | (2,866,556 | )                                                       | $          | (703,645 | ) | $ | (4,854,363 | ) | $ | (1,583,225 | ) |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss per common share—basic and diluted                   |       | $                                                        | (0.40      | )                                                       | $          | (0.15 | ) | $ | (0.81 | ) | $ | (0.35 | ) |
|                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average common shares outstanding—basic  and diluted |       | 7,217,569                                                |       | 4,712,308                                               |       | 6,001,741 |   | 4,471,791 |   |

 

See notes to condensed consolidated financial statements

 

3

----

 

**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

 

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007**

 
| ** **                                                                     | ** ** | **Common Stock** | ** ** | **Additional Paid-** | ** ** | **Accumulated**     | ** ** | **Total  Stockholders’** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|---------------------|------------|-------------------------------|------------|
| ** **                                                                     | ** ** | **Shares**            | ** ** | **Amount**                | ** ** | **In Capital** | ** ** | **Deficit**                   | ** ** | **Equity** | ** ** |
|                                                                           |       |                  |       |                      |       |                |       |                          |       |   |   |
| BALANCE, January 1, 2007 (see Note 1)                                          |       | 4,712,308             |       | $                         | 4,712      |                | $          | 6,446,036                     |       | (6,047,911 | ) | $ | 402,837 |   |
|                                                                           |       |                  |       |                      |       |                |       |                          |       |   |   |   |   |   |
| Common Stock Issued for Cash, January 5,  2007                                 |       | 422,617               |       | 423                       |       | 1,607,627           |       |                          |       | 1,608,050 |   |
| Common Stock Exchanged for Professional  Services, March 31, 2007              |       | 6,861                 |       | 7                         |       | 26,098              |       |                          |       | 26,105 |   |
| Common Stock Issued for Mandatorily  Converted Notes Payable, January 31, 2007 |       | 306,566               |       | 307                       |       | 1,166,253           |       |                          |       | 1,166,560 |   |
| Warrants Granted on Mandatorily Converted  Notes Payable                       |       |                  |       |                      |       | 54,139              |       |                          |       | 54,139 |   |
| Warrants Granted for Debt Issuance Costs,  March 31, 2007                      |       |                  |       |                      |       | 4,586               |       |                          |       | 4,586 |   |
| Stock Based Compensation, March 31, 2007                                       |       |                  |       |                      |       | 4,585               |       |                          |       | 4,585 |   |
| Warrants Granted for Debt Issuance Costs,  June 30, 2007                       |       |                  |       |                      |       | 30,590              |       |                          |       | 30,590 |   |
| Exercise of $.05 Warrants, August 1, 2007                                      |       | 192,906               |       | 193                       |       | 9,509               |       |                          |       | 9,702 |   |
| Exercise of $.0007 Warrants, August 1, 2007                                    |       | 92,055                |       | 92                        |       | (36                 | )          |                          |       | 56 |   |
| Grant of Guaranty Warrants, July, 2007                                         |       |                  |       |                      |       | 901,566             |       |                          |       | 901,566 |   |
| Exercise of Guaranty Warrants, August, 2007                                    |       | 225,393               |       | 225                       |       | (225                | )          |                          |       | — |   |
| Stock Option Exercised, July, 2007                                             |       | 816                   |       | 1                         |       | —              |       |                          |       | 1 |   |
| Grant of $.0007 Stock Options, July, 2007                                      |       |                  |       |                      |       | 181,073             |       |                          |       | 181,073 |   |
| Conversion of $.0007 Employee Options to  Restricted Stock, August, 2007       |       | 640,496               |       | 640                       |       | (640                | )          |                          |       | — |   |
| Common Stock Issued for Professional  Services, August 9, 2007                 |       | 50,000                |       | 50                        |       | 199,950             |       |                          |       | 200,000 |   |
| Common Stock Issued for Cash, August 9, 2007                                   |       | 551,750               |       | 552                       |       | 2,087,948           |       |                          |       | 2,088,500 |   |
| Grant Enterprise Merger Shares                                                 |       | 900,001               |       | 900                       |       | (900                | )          |                          |       | — |   |
| Stock Option Compensation Expense, September  30, 2007                         |       |                  |       |                      |       | 256,644             |       |                          |       | 256,644 |   |
| Warrant Granted for Debt Issuance Costs,  September 30, 2007                   |       |                  |       |                      |       | 10,606              |       |                          |       | 10,606 |   |
|                                                                           |       |                  |       |                      |       |                |       |                          |       |   |   |
| Net loss                                                                       |       | —                |       | —                    |       | —              |       | (4,854,363                    | )          | (4,854,363 | ) |
|                                                                           |       |                  |       |                      |       |                |       |                          |       |   |   |
| BALANCE, September 30, 2007                                                    |       | 8,101,770             |       | $                         | 8,102      |                | $          | 12,985,409                    |       | $ | (10,902,274 | ) | $ | 2,091,237 |   |
|                                                                                |            |                       |            |                           |            |                     |            |                               |            |  |  |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

4

----

 

**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006(UNAUDITED)**

 
| ** **                                                            | ** ** | **2007**   | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|----------|------------|
|                                                                  |       |       |       |     |       |
| **CASH FLOWS FROM OPERATIONS:**                                       |       |       |       |     |       |
| Net loss                                                              |       | $          | (4,854,363 | )        | $          | (1,583,225 | ) |
| Adjustments to reconcile net loss to net  cash flows from operations: |       |       |       |     |       |
| Depreciation expense                                                  |       | 1,625,243  |       | 748,799  |       |
| Amortization expense on customer lists                                |       | 219,514    |       | —   |       |
| Amortization expense on debt issuance costs                           |       | 17,889     |       | —   |       |
| Stock based compensation expense                                      |       | 1,339,891  |       | —   |       |
| Warrant expense on convertible debt                                   |       | 54,139     |       | —   |       |
| Professional services in exchange for stock                           |       | 226,105    |       | —   |       |
| Minority interest                                                     |       | —     |       | 238      |       |
| Change in assets and liabilities, net of  effect of acquisitions:     |       |       |       |     |       |
| Accounts receivable                                                   |       | (3,219     | )          | (17,340  | )          |
| Prepaid expenses and other current assets                             |       | 33,659     |       | (12,270  | )          |
| Refundable deposits                                                   |       | (7,592     | )          | (40,159  | )          |
| Other assets                                                          |       | 36,761     |       | —   |       |
| Accounts payable and accrued expenses                                 |       | 616,195    |       | 114,468  |       |
| Deferred rent liability                                               |       | 6,579      |       | —   |       |
| Deferred revenue                                                      |       | (18,287    | )          | 51,908   |       |
|                                                                  |       |       |       |     |       |
| **Net cash flows from operations**                                    |       | (707,486   | )          | (737,581 | )          |
|                                                                  |       |       |       |     |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                             |       |       |       |     |       |
|                                                                  |       |       |       |     |       |
| Capital expenditures for property and  equipment                      |       | (339,044   | )          | (144,379 | )          |
| Acquisition of SpeedNet                                               |       | (3,458,255 | )          | —   |       |
|                                                                  |       |       |       |     |       |
| **Net cash flows from investing activities**                          |       | (3,797,299 | )          | (144,379 | )          |
|                                                                  |       |       |       |     |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                             |       |       |       |     |       |
| Proceeds from cash overdraft                                          |       | —     |       | 21,737   |       |
| Payment for stock dividend payable                                    |       | —     |       | (11,222  | )          |
| Payment on cash overdraft                                             |       | (17,246    | )          | —   |       |
| Payments on loans payable to shareholder                              |       | (160,000   | )          | —   |       |
| Proceeds from term note payable                                       |       | 3,000,000  |       | 18,000   |       |
| Payments on notes payable                                             |       | (27,695    | )          | (7,070   | )          |
| Proceeds from notes payable                                           |       | 102,988    |       | —   |       |
| Payments on capital lease obligations                                 |       | (509,841   | )          | (133,484 | )          |
| Proceeds from notes payable to shareholders                           |       | —     |       | 850,000  |       |
| Payments on notes payable to shareholders                             |       | (25,000    | )          | (10,000  | )          |
| Proceeds from stock issuance                                          |       | 3,706,292  |       | —   |       |
|                                                                  |       |       |       |     |       |
| **Net cash flows from financing activities**                          |       | 6,069,498  |       | 727,962  |       |
|                                                                  |       |       |       |     |       |
| **NET INCREASE/ (DECREASE) IN CASH**                                  |       | 1,564,713  |       | (153,998 | )          |
| * *                                                              | * *   | * *   | * *   | * * | * *   |
| **CASH - Beginning of period**                                        |       | 4,690      |       | 187,205  |       |
|                                                                  |       |       |       |     |       |
| **CASH - End of period**                                              |       | $          | 1,569,403  |     | $          | 33,207 |   |
|                                                                  |       |       |       |     |       |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:**               |       |       |       |     |       |
|                                                                  |       |       |       |     |       |
| Acquistion - SpeedNet:                                                |       |       |       |     |       |
| Accounts receivable                                                   |       | 73,197     |       | —   |       |
| Prepaid assets                                                        |       | 109,913    |       | —   |       |
| Goodwill                                                              |       | 1,282,052  |       | —   |       |
| Subscriber Base                                                       |       | 916,301    |       | —   |       |
| Trademark                                                             |       | 16,667     |       | —   |       |
| Property and equipment                                                |       | 1,927,125  |       | —   |       |
| Accounts payable and accrued expenses                                 |       | (180,846   | )          | —   |       |
| Deferred Revenue                                                      |       | (431,912   | )          | —   |       |
| Capital lease obligations                                             |       | (254,242   | )          | —   |       |
|                                                                  |       | $          | 3,458,255  |     | $          | — |   |
|                                                                  |       |       |       |     |       |
| Acquisition - Minority Interest                                       |       | $          | —     |     | $          | 238 |   |
| Stock Acquisition - Pocatello                                         |       | $          | —     |     | $          | 912,700 |   |
| Stock issued to shareholders for notes  payable                       |       | $          | 1,065,999  |     | $          | — |   |
| Stock issued to shareholders for notes  payable interest              |       | $          | 100,561    |     | $          | — |   |
| Common stock exchange for professional services                       |       | $          | 226,105    |     | $          | — |   |
| Warrants for debt issuance costs                                      |       | $          | 45,782     |     | $          | — |   |
| Warrant granted for debt converted to stock                           |       | $          | 54,139     |     | $          | — |   |
| Stock based compensation                                              |       | $          | 1,339,891  |     | $          | — |   |
| Deferred rent liability for tenant  improvement                       |       | $          | 265,000    |     | $          | — |   |
| Capital lease obligations for property and  equipment                 |       | $          | 587,612    |     | $          | 834,782 |   |
|                                                                  |       |       |       |     |       |
| **Cash payments for:**                                                |       |       |       |     |       |
| Interest                                                              |       | $          | 381,878    |     | $          | 123,469 |   |
|                                                                  |       |       |       |     |       |
| Tax                                                                   |       | $          | —     |     | $          | — |   |

 

See notes to condensed consolidated financial statements.

 

5

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** **

**KEYONCOMMUNICATIONS HOLDINGS, INC.**

**ANDRELATED ENTITIES**

** **

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

**Note 1 – Organization and Nature of Business**

** **

OnAugust 9, 2007, KeyOn Communications, Inc. (“KeyOn”) became a publicly-tradedcompany by virtue of a Merger with a publicly-traded company, GrantEnterprises, Inc. (“Grant”), a holding company with minimal operations (the “Merger”).  In connection with the Merger, 900,001 sharesof Grant remained outstanding and all other outstanding shares of Grant werecancelled.  Also, in connection with theMerger, Grant issued 6,650,069 shares of its common stock for all of theoutstanding shares of common stock of KeyOn. Upon closing of the Merger, a wholly owned subsidiary of Grant mergedwith and into KeyOn, and KeyOn, as the surviving corporation, became awholly-owned subsidiary of Grant.  Allpre-merger assets and liabilities of Grant were split -off from Grant followingthe Merger, leaving KeyOn’s business as the surviving operations of Grant.  As a result of the transaction, the formerowners of KeyOn became the controlling stockholders of Grant and Grant changedits name to KeyOn Communications Holdings, Inc. (the “Company”).  Accordingly, the merger of KeyOn and Grant isa reverse merger.  Effective on August 9,2007, and for all reporting periods thereafter, the operating activities ofKeyOn Communications Holdings, Inc., including any prior comparative period,will include only those of KeyOn.  Allreferences to shares and per share amounts in the accompanying financialstatements have been restated to reflect the aforementioned share exchange.Furthermore, unless the context requires otherwise, references hereafter to“KeyOn” and the “Company” for periods prior to the Merger refer to KeyOnCommunications, Inc., a private Nevada Corporation that is now a wholly ownedsubsidiary, and references to “KeyOn” and the “Company” for periods followingthe Merger refer to KeyOn Communications Holdings, Inc., a publicly tradedDelaware corporation.

 

OnOctober 26, 2007, the Company effectuated a 1-for-2 reverse stock split (the “ReverseSplit”) of its common stock. Pursuant to the Reverse Split, every two (2)shares of the Company’s issued and outstanding common stock was reclassifiedand combined into one (1) whole post-split share of the common stock. Nofractional shares were issued in connection with the Reverse Split.Stockholders who were entitled to a fractional post-split share received inlieu thereof one (1) whole post-split share. All shares of stock, warrants and options contained within thesefinancial statements reflect this reverse split.

 

KeyOnCommunications, Inc. was incorporated on December 16, 2004, under the laws ofthe State of Nevada.  The Companyprovides wireless broadband and voice-over-IP (VoIP) services primarily tosmall and rural markets in the Western and Midwestern United States.  Our markets are located in eleven (11)Western and Midwestern states: Colorado, Idaho, Illinois, Indiana, Iowa,Kansas, Nebraska, Nevada, Ohio, South Dakota, and Texas.  The Company has seven wholly-ownedorganizations (in combination referred to as the “related entities”):  KeyOn Communications, LLC; KeyOn SIRIS, LLC;KeyOn Grand Junction, LLC; KeyOn Idaho Falls, LLC; KeyOn Pahrump, LLC; KeyOn Pocatello,LLC and KeyOn SpeedNet LLC.

 

KeyOnCommunications, LLC (KeyOn LLC), a wholly-owned limited liability operatingentity of the Company, was organized on February 26, 2002 under the laws of theState of Nevada, to serve a market located in Las Vegas, Nevada and itssurrounding areas with wireless broadband services.  It will continue its operations untilFebruary 26, 2502 or until dissolved, if sooner.

 

6

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KeyOnPahrump, LLC (Pahrump), a wholly-owned limited liability operating entity ofthe Company, was organized on September 26, 2003 under the laws of the State ofNevada, to serve a market located in Pahrump, Nevada and its surrounding areaswith a wireless broadband service as previously described.  It will continue its operations untilSeptember 26, 2503 or until dissolved, if sooner.

 

KeyOnSIRIS, LLC (SIRIS), a wholly-owned limited liability operating entity of theCompany, was organized on June 16, 2005 under the laws of the State of Nevada,to serve markets KeyOn acquired in June 2005 located in southern Iowa with awireless broadband service as previously described.  It will continue its operations until June16, 2505 or until dissolved, if sooner.

 

KeyOnGrand Junction, LLC (Grand Junction), a wholly-owned limited liabilityoperating entity of the Company, was organized on May 31, 2005 under the lawsof the State of Nevada, to serve a market located in Grand Junction, Coloradoand its surrounding areas with a wireless broadband service as previouslydescribed.  It will continue itsoperations until May 31, 2505 or until dissolved, if sooner.

 

KeyOnIdaho Falls, LLC (Idaho Falls), a wholly-owned limited liability operatingentity of the Company, was organized on May 31, 2005 under the laws of the Stateof Nevada, to serve a market located in Idaho Falls, Idaho and its surroundingareas with a wireless broadband service as previously described.  It will continue its operations until May 31,2505 or until dissolved, if sooner.

 

KeyOnPocatello, LLC (Pocatello), a wholly-owned limited liability operating entityof the Company, was organized on May 31, 2005 under the laws of the State ofNevada to serve a market located in Pocatello, Idaho and its surrounding areaswith a wireless broadband service as previously described.  It will continue its operations until May 31,2505 or until dissolved, if sooner.

 

KeyOnSpeedNet, LLC (SpeedNet LLC), a wholly-owned limited liability operating entityof the Company, was organized on June 27, 2006 under the laws of the State ofNevada.  It served as an acquisitionsubsidiary in the acquisition of SpeedNet. SpeedNet LLC houses the previous operations of SpeedNet, includingwireless broadband markets operating the states of Idaho, Illinois, Indiana,Iowa, Kansas, Nebraska, Ohio, South Dakota, and Texas.  It will continue its operations until June27, 2506 or until dissolved, if sooner.

** **

**Note 2 – Summary of Significant Accounting Policies**

 

**Basis of Presentation**

** **

Thecondensed consolidated financial statements have been prepared in accordance

 

7

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with accounting principles generally acceptedin the United States of America for interim financial statements and with form10-QSB and Item 310 of Regulation S-B of the Securities and ExchangeCommission. Accordingly, they do not contain all the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for annual financial statements. The consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated inconsolidation. In the opinion of the Company’s management, the accompanyingcondensed consolidated financial statements contain all the adjustmentsnecessary (consisting only of normal recurring accruals) to make the financialposition of the Company as of September 30, 2007 and the results of operationsand cash flows for the nine months ended September 30, 2007 and 2006 notmisleading. The unaudited condensed consolidated financial statements for thenine-month period ended September 30, 2007, should be read in conjunction withthe audited financial statements for the years ended December 31, 2006 and 2005as contained in the Form 8K filed on August 10, 2007.

 

**Estimates**

 

Managementuses estimates and assumptions in preparing these financial statements inaccordance with U.S. generally accepted accounting principles.  Those estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  Actual results could vary from the estimatesthat were used, and such variances could be significant.

 

**Revenue Recognition**

** **

TheCompany prepares its financial statements on the accrual method ofaccounting.  Under this basis, income isrecognized when earned, and expenses are generally recognized when incurred.******The Company charges a recurring subscriptionfee for providing its various Internet access services to its subscribers andrecognizes revenues when they are earned, which generally occurs as the serviceis provided.  The services are subscribedto for the periods of either annual, two year or by month-to-month contractsand are generally billed monthly, quarterly, semiannually or annually inadvance.  Payments received in advancefor subscriptions are deferred and recognized as the services are provided.Service initiation fees are recognized at time of installation.

 

**Cash and Cash Equivalents**

 

TheCompany considers all highly liquid investments with a maturity of three monthsor less when purchased to be cash equivalents. For financial statement purposes, investments in money market funds areconsidered a cash equivalent and are included in cash and cash equivalents.

 

8

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**Acquisition Costs and Intangible Assets**

** **

Acquisitioncosts, which may include certain intangible assets, are capitalized as incurredas part of the related investment.  Oncea potential acquisition is identified as no longer attainable, such costs arecharged to expense.

 

Intangibleassets, including goodwill, are accounted for under the provisions of Statementof Financial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets” (SFAS 142”).  Under SFAS 142,intangible assets, other than goodwill, are identified and segregated betweenamortizable and non-amortizable assets. Amortizable intangibles are amortized over their estimated, contractual,or regulated useful lives.  Goodwill andother non-amortizable assets are reviewed, at least annually, for impairment inthe carrying value of the intangible asset. In addition, this review also includes the net carrying value ofamortizable intangible assets.  Ifimpairment is deemed to have occurred, a loss for such impairment is recordedas part of current operations.

 

**Deferred Revenues**

** **

Paymentsreceived in advance for subscriptions are deferred and recognized as theservices are provided.  The amount of revenuethat was deferred was $444,821 at September 30, 2007.

 

**Reclassifications**

** **

Certainreclassifications have been made to the 2006 financial statement amounts toconform to the 2007 financial presentation.

 

**Income Taxes**

 

TheCompany has adopted SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).  Under SFAS 109, deferred tax assets andliabilities are recognized for the expected future tax consequencesattributable to differences between the financial statements carrying amountsof existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  Under SFAS 109 the effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  A valuation is established, when necessary,to reduce deferred income tax assets to the amount that is more likely than notto be realized. The Company recorded a full valuation loss for the net lossincurred for the nine months ended September 30, 2007.

 

Assingle-member limited liability companies, KeyOn LLC, Pahrump, SIRIS, GrandJunction, Idaho Falls, Pocatello and SpeedNet LLC are not taxed as separateentities for federal income

 

9

----

 

tax purposes. Rather, these organizations’ taxable items of income, deduction, loss,and credit are included with the federal income tax return of the Company.  Accordingly, the members separately accountfor their share of the organization’s income, deductions, losses andcredits.  Therefore, no separateprovision for income tax expense or benefit has been recognized in theaccompanying consolidated financial statements for these related entities, butwas considered for KeyOn as part of its SFAS 109 reporting requirement.

 

**Stock-Based Compensation**

** **

EffectiveJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”),which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”(SFAS No. 123”).  SFAS No. 123Rsupersedes APB No. 25, “Accounting for Stock Issued to Employees”, and amendsSFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased upon their fair values.  TheCompany recorded total stock-based compensation of $1,339,891 for the ninemonths ended September 30, 2007.  Nostock-based compensation was recorded for the nine months ended September 30,2006.  For the three months endedSeptember 30, 2007, $1,335,306 of stock-based compensation was recorded.  No stock-based compensation was recorded forthe three months ended September 30, 2006.

 

**Consolidation Policy**

** **

Theaccompanying consolidated balance sheets and consolidated statements ofoperations, stockholders’ equity, and****cashflows, referred to as “KeyOn Communications Holdings, Inc.,” includes theaccounts of KeyOn Communications, LLC, KeyOn Pahrump, LLC, KeyOn SIRIS, LLC,KeyOn Grand Junction, LLC, KeyOn Idaho Falls, LLC, KeyOn Pocatello, LLC, andKeyOn SpeedNet LLC (as of February 1, 2007) all of which are under commonownership. Intercompany balances and transactions have been eliminated inconsolidation.

 

**Recent Accounting Pronouncements**

** **

Thefollowing pronouncements have been issued by the Financial Accounting StandardsBoard (“FASB”):

 

In July 2006, FASB issued Financial AccountingStandards Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty inIncome Taxes – an interpretation of FASB Statement No. 109.”  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a company’s income taxreturn, and also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure, and transition.

 

10

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FIN 48 utilizes a two-stepapproach for evaluating tax positions. Step one, *Recognition*,occurs when a company concludes that a tax position is more likely than not tobe sustained upon examination, Step two, *Measurement*,is based on the largest amount of benefit, which is more likely than not to berealized on ultimate settlement. FIN 48 is effective for fiscal years beginningafter December 15, 2006, with the cumulative effect of the change in accountingprinciple to be recorded as an adjustment to the beginning balance of retainedearnings; and, therefore, is effective for the Company in the first quarter offiscal 2008.  The Company is currently inthe process of evaluating the effects of adopting FIN 48 and the impact ofadoption on its consolidated financial position, results of operations or cashflows.

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) 157, “Fair Value Measurements.”  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  SFAS 157 applies to other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not require any new fair valuemeasurements.  However, for someentities, the application of SFAS 157 will change current practice.  The provisions of SFAS 157 are effective asof the beginning of the Company’s 2009 fiscal year.  The Company is currently evaluating theimpact of SFAS 157, but does not expect the adoption of SFAS 157 to have amaterial impact on its consolidated financial position, results of operationsor cash flows.

 

InSeptember 2006, the Securities and Exchange Commission issued Staff AccountingBulletin No. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in the Current Year Financial Statements” (SAB 108).SAB 108 addresses how the effects of prior-year uncorrected misstatementsshould be considered when quantifying misstatements in current-year financialstatements. SAB 108 requires an entity to quantify misstatements using abalance sheet and income-statement approach and to evaluate whether eitherapproach results in quantifying an error that is material in light of relevantquantitative and qualitative factors. The guidance is applicable for fiscalyears ending after November 15, 2006. We currently do not believe that SAB 108will have a material impact on our financial statements.

 

InFebruary 2007, the FASB issued****SFAS159, “The Fair Value Option for Financial Assets and Financial Liabilities,”which expands opportunities to use fair value measurements in financialreporting and permits entities to choose to measure many financial instrumentsand certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15,2007.  The Company is currentlyevaluating SFAS 159 to determine its impact on its consolidated financialposition, results of operations or cash flows.

 

11

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**Note 3 – Equipment**

** **

Equipmentat September 30, 2007, consisted of the following:

 
| ** **                                       | ** ** | **9/30/2007** | ** ** |
|--------------------------------------------------|------------|---------------|------------|
|                                             |       |          |       |
| Subscriber equipment                             |       | $             | 4,669,013  |   |
| Fixed wireless tower site equipment              |       | 2,423,106     |       |
| Software and consulting costs                    |       | 426,082       |       |
| Computer and office equipment                    |       | 409,316       |       |
| Vehicles                                         |       | 240,764       |       |
| Leasehold improvements                           |       | 310,740       |       |
|                                             |       | 8,479,021     |       |
| Less: accumulated depreciation and  amortization |       | (4,028,141    | )          |
|                                             |       |          |       |
| Fixed assets - net                               |       | $             | 4,450,880  |   |

 

Depreciationexpense for the three months ended September 30, 2007 and 2006 was $567,921 and$288,713 respectively.  Depreciation forthe nine months ended September 30, 2007 and 2006 was $1,625,242 and $460,086,respectively.

 

**Note 4 – Intangible Assets**

** **

Intangibleassets at September 30, 2007, consisted of the following:

 
| ** **                     | ** ** | **9/30/2007** | ** ** |
|--------------------------------|------------|---------------|------------|
|                           |       |          |       |
| Goodwill                       |       | $             | 1,630,609  |   |
| Subscriber base                |       | 1,064,624     |       |
| Debt issuance cost             |       | 99,330        |       |
| Trademark                      |       | 16,667        |       |
|                           |       | 2,811,230     |       |
| Less: accumulated amortization |       | (259,321      | )          |
|                           |       |          |       |
| Intangible assets - net        |       | $             | 2,551,909  |   |

 

Amortizationexpense for the three months ended September 30, 2007 was $100,432.  No amortization was recorded in during thefirst three months ended September 30, 2006. Amortization for the nine months ended September 30, 2007 was$237,203.  No amortization was recordedfor the nine months ended September 2006.

 

Estimatedamortization expense for future fiscal years is as follows:

 

12

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| 2007       |   | $       | 89,933  |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 359,733 |    |
| 2009       |   | 357,118 |    |
| 2010       |   | 46,642  |    |
| 2011       |   | 21,189  |    |
| Thereafter |   | 30,018  |    |
|       |   | $       | 904,633 |   |

 

### **Note 5 – Line of Credit andOther Debt**

### ** **

OnJanuary 30, 2007, in connection with the acquisition of SpeedNet, the Companyentered into a $3,000,000 secured commercial loan agreement with a lendinginstitution (the “Loan”).  A shareholderin the Company is also a minority shareholder and Board member of the lendinginstitution.  The shareholder did abstainfrom voting on this transaction in the bank board loan committee as is requiredunder the banking regulations.  The Loanis guaranteed by two shareholders of the Company, one being an officer of theCompany as well. The Loan has an interest rate of prime +1% with an initialinterest rate of 9.25% and matured on July 30, 2007 with a six (6) monthextension option.  The interest ispayable upon maturity or every six months if the loan is extended.  On or around July 30, 2007, KeyOn exercisedits extension option on the Loan, extending the maturity to January 30, 2008.

 

TheCompany holds a line of credit loan for $100,000 with Sun West Bank.  The line of credit agreement was entered intoon December 18, 2006.  The line is avariable rate revolving line of credit loan for $100,000 due upon demand.  The interest rate is the base rate plus anadded margin rate of 3%.  The base rate forfloating commercial loans is published by Sun West Bank and varies weekly. Thevariable interest rate as of September 30, 2007 was 11%.  The interest on the line of credit is paidmonthly.

 

13

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| **Notes payable**                                                                                                                                               | ** ** | **9/30/2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                                                                                                           | ** ** | ** **    | ** ** |
| 7.0% note payable to Teletronics  International, Inc., payable in monthly payments of $4,000 including  interest, through December 2007, collateralized by equipment |       | $             | 14,440     |   |
| Note and loan payable for professional  services non-interest bearing                                                                                                |       | 121,736       |       |
| 7.8% note payable to American National Bank,  payable monthly for 48 months for the purchase of vans                                                                 |       | 74,510        |       |
| 9.1% note payable to GMAC, payable monthly  for 60 months for the purchase of two trucks                                                                             |       | 28,519        |       |
|                                                                                                                                                                 |       | 239,205       |       |
| Less current  portion                                                                                                                                                |       | (163,927      | )          |
|                                                                                                                                                                 |       |          |       |
| Long term  portion                                                                                                                                                   |       | $             | 75,278     |   |

 

Futureminimum payments on the notes payable, which are stated at their principalamounts with initial or remaining terms of one year or more consist of thefollowing as of September 30, 2007:

 
| 2007       |   | $      | 142,900 |   |
|------------|--------|--------|---------|--------|
| 2008       |   | 28,317 |    |
| 2009       |   | 30,736 |    |
| 2010       |   | 29,578 |    |
| 2011       |   | 7,675  |    |
| Thereafter |   | — |    |
|       |   |   |    |
|       |   | $      | 239,205 |   |

 

Onor about May 22, 2006, the Company raised debt financing in the form of SeniorUnsecured Convertible Promissory Notes (“Convertible Notes”) totaling$1,065,999.  On February 1, 2007, theConvertible Notes together with $100,561 of accrued interest converted into306,570 shares of common stock together with 45,970 warrants to purchase commonstock.  The warrant expense on thesewarrants recognized in Q1 2007 is $54,139.

 

Onor about September 24, 2007, the Company paid the notes payable outstanding toa shareholder for $25,000.

 

14

----

 

 

###### **Note 6 -Operating and Capital Leases**

###### ** **

TheCompany has existing capital lease financing relationships with certainparties.  In connection with an existingcapital lease relationship with two institutions, the Company has drawn down anadditional $215,652 in the three months ended September 30, 2007 and $587,612 inthe nine months ended September 30, 2007.

 

TheCompany and its related entities lease equipment under various capital leasesexpiring in 2008 through 2011.  Inaddition, the related entities lease tower and roof-top space under operatingleases with terms that are typically for 5 years and contain automatic renewalsfor an additional 10 years.  Finally,several also have various operating leases for office space, equipment, andvehicles that generally are for 3 to 5 year terms.  The total amount of fixed assets capitalizedthrough leasing is $2,318,512 as of September 30, 2007.

 

Futureminimum lease payments under the capital leases, which are stated at theirprincipal amounts with initial or remaining terms of one year or more consistof the following as of September 30, 2007:

 
| 2007                                |   | $         | 238,942 |   |
|-------------------------------------|--------|-----------|---------|--------|
| 2008                                |   | 782,552   |    |
| 2009                                |   | 391,018   |    |
| 2010                                |   | 147,284   |    |
| 2011                                |   | 26,496    |    |
| Total mimimum lease payments        |   | 1,586,292 |    |
| Less amounts representing interest  |   | 265,966   |    |
|                                |   | 1,320,326 |    |
|                                |   |      |    |
| Less current portion                |   | (650,041  | )       |
|                                |   |      |    |
| Long term capital lease obligations |   | $         | 670,285 |   |

 

15

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Futureminimum lease payments under the operating leases with initial or remainingterms of one year or more consist of the following at September 30, 2007:

 
| 2007       |   | $       | 250,540   |   |
|------------|--------|---------|-----------|--------|
| 2008       |   | 789,150 |      |
| 2009       |   | 701,426 |      |
| 2010       |   | 563,926 |      |
| 2011       |   | 333,235 |      |
| Thereafter |   | 193,886 |      |
|       |   |    |      |
|       |   | $       | 2,832,163 |   |

** **

The total rental expenseincluded in operating expenses for operating leases included above is $267,629and $114,808 for the three months ended September 30, 2007 and September 30,2006, respectively and $759,322 and $344,261 for the nine months endedSeptember 30, 2007 and September 30, 2006, respectively.

 

###### **Note 7 -Related Party Transactions**

###### ** **

##### Related parties that entered into transactions with theCompany include officers and stockholders. Transactions with related parties as of September 30, 2007:

#####  

| ** **                          | ** ** | **9/30/2007** | ** ** |
|-------------------------------------|------------|---------------|------------|
| ** **                          | ** ** | ** **    | ** ** |
| Term loan payable (see also Note 5) |       | $             | 3,000,000  |   |
|                                     |            |               |            |  |

 

**Note 8 - Business Combinations**

** **

OnOctober 31, 2006, the Company entered into a definitive purchase agreement toacquire substantially all of the assets of SpeedNet Services, Inc. (“SpeedNet”),including subscriber contracts, accounts, and fixed assets, and assume certainoperating liabilities. Headquartered in Omaha, Nebraska, SpeedNet is a leadingprovider of fixed wireless broadband services to non-metropolitan communitiesand rural areas in the central United States. On January 31, 2007, through a wholly owned subsidiary, KeyOn SpeedNetLLC (SpeedNet LLC) purchased the assets for $3,458,255 in cash, with certainadjustments to the purchase price for working capital, deferred revenue and theassumption of certain capital lease obligations.  The purchase allocation is categorized asfollows:

 

16

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| Accounts receivable               |       | $         | 73,197        |       |
|-----------------------------------|------------|-----------|---------------|------------|
|                              |       |      |          |
| Prepaid expenses                  |       | 109,913   |          |
|                              |       |      |          |
| Accounts payable                  |       | (180,846  | )             |
|                              |       |      |          |
| Capital lease obligations assumed |       | (254,242  | )             |
|                              |       |      |          |
| Deferred subscription revenue     |       | (431,912  | )             |
|                              |       |      |          |
| Fixed assets at fair market value |       | 1,927,125 |          |
|                              |       |      |          |
| Trademark                         |       | 16,667    |          |
|                              |       |      |          |
| Customer list                     |       | 916,301   |          |
|                              |       |      |          |
| Goodwill                          |       | 1,282,052 |          |
|                              |       |      |          |
| **Purchase Price - SpeedNet**     | ** ** | **$**     | **3,458,255** | ** ** |

 

KeyOn’spurchase price for SpeedNet was in excess of the estimated fair market value ofSpeedNet’s fixed assets and KeyOn’s assessment of value of the customer base atthe time of purchase.  KeyOn’s purchaseprice reflects a premium to the fair market value of these assets as a resultof the potential for customer growth using the strong brand name of SpeedNetthroughout the Midwest.  Also, KeyOnexpects to realize additional margin enhancement on a prospective basis ascertain duplicative expenses, such as personnel, can be eliminated and otheroperating expenses, such as internet bandwidth, can be decreased due to theincreased scale of combined operations. KeyOn’s internal valuation and forecast for the SpeedNet business underKeyOn’s management took into account these additional tangible and intangiblefactors which resulted in a higher purchase price than the fair market value ofthe assets.

 

Thefinancial results for the nine months ended September 30, 2007 for KeyOnCommunications Holdings, Inc. include eight months of operations from KeyOnSpeedNet, LLC.  The year to date 2007reflected on a pro forma basis by adding in the January 2007 SpeedNet Services,Inc financial results is reported as follows:

 

17

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**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

 

**PRO FORMA CONDENSED CONSOLIDATED STATEMENT OFOPERATIONS (Unaudited)**

 
| ** **                         | ** ** | **for the nine months ended September 30, 2007** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **KeyOn**                                                                           | ** ** | **Jan 2007 SpeedNet  Services** | ** ** | **Adjustments** | ** ** | **Pro forma** | ** ** |
| TOTAL REVENUES                     |       | $                                                                                   | 5,216,976  |   | $ | 482,435 |   | $ | — |   | $ | 5,699,411 |   |
| OPERATING COSTS  AND EXPENSES:     |       |                                                                                |       |   |   |   |   |   |   |
| Depreciation and  amortization     |       | 1,862,646                                                                           |       | 170,567 | c | (50,228 | ) | 1,982,985 |   |
| TOTAL OPERATING  COSTS AND EXPENSE |       | 9,641,820                                                                           |       | 710,670 | (a),(b),(c),(d) | (1,813,632 | ) | 8,538,858 |   |
| LOSS FROM  OPERATIONS              |       | (4,424,844                                                                          | )          | (228,235 | ) | 1,813,632 |   | (2,839,447 | ) |
| TOTAL OTHER  INCOME (EXPENSE):     |       | (429,520                                                                            | )          | (18,869 | )(e) | 14,651 |   | (433,738 | ) |
| NET LOSS                           |       | $                                                                                   | (4,854,363 | ) | $ | (247,104 | ) | $ | 1,828,283 |   | $ | (3,273,185 | ) |

 

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(a).       $192k,Elimination of retention bonuses (plus payroll taxes) paid to top employees tostay during sale of business plus elimination of executive’s salary for January

(b).      $1,539k,Elimination of one time other non-cash expenses in Q3 2007

(c).       $50k,Depreciation adjustment for January for new fair market valuation of assets

(d).      $32k,Adjustment for one quarter rent due to relocation into a smaller facility in Q22007

(e).       $15k,Adjustment of interest charged on SpeedNet Services other debt that is not aliablity under KeyOn SpeedNet

 

Thefinancial results for the year ended December 31, 2006, for KeyOnCommunications Holdings, Inc. do not include of operations with KeyOn SpeedNet,LLC. The financials for the year ended December 31, 2006,  reflected on a pro forma basis by adding inthe financials for the year ended December 31, 2006 SpeedNet Services, Inc.,financial results are reported as follows:

 

**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

 

**PRO FORMA COMBINED STATEMENT OF OPERATIONS  (Unaudited)**

** **
| ** **                          | ** ** | **for the year ended December 31, 2006** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **KeyOn**                                                              | ** ** | **SpeedNet** | ** ** | **Adjustments** | ** ** | **Pro forma** | ** ** |
| TOTAL REVENUES                      |       | $                                                                      | 2,430,830  |   | $ | 5,203,296 |   | $ | — |   | $ | 7,634,126 |   |
| OPERATING COSTS  AND EXPENSES:      |       |                                                                   |       |   |   |   |   |   |   |
| Depreciation and  amortization      |       | 1,063,881                                                              |       | 2,373,167 |   | — |   | 3,437,048 |   |
| TOTAL OPERATING  COSTS AND EXPENSES |       | 4,330,676                                                              |       | 7,154,244 | (a),(b),(c),(d) | (588,212 | ) | 10,896,708 |   |
| LOSS FROM  OPERATIONS               |       | (1,899,846                                                             | )          | (1,950,948 | ) | 588,212 |   | (3,262,582 | ) |
| TOTAL OTHER  INCOME (EXPENSE)       |       | (306,528                                                               | )          | (658,924 | )(e) | 331,732 |   | (633,720 | ) |
| NET LOSS                            |       | $                                                                      | (2,206,374 | ) | $ | (2,609,872 | ) | $ | 919,944 |   | $ | (3,896,303 | ) |
|                                     |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(a).       $174kreduction in executive compensation and bonuses

(b).      $225k—20%reduction in data transmission costs due to new contracts

(c).       $84kreduction in professional fees due to acquisition expenses

(d).      $105kreduction in rent due to move/consolidation

(e).       $332kreduction in interest paid for debt in SpeedNet Services

 

Thefinancial results for the quarter ended September 30, 2006, for KeyOnCommunications Holdings, Inc. do not include of operations with KeyOn SpeedNet,LLC.

 

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The financials for the quarter endedSeptember 30, 2006,  reflected on a proforma basis by adding in the financials for the quarter ended September 30,2006 SpeedNet Services, Inc., financial results are reported as follows:

 

**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

 

**PRO FORMA COMBINED STATEMENT OF OPERATIONS  (Unaudited)**

 
| ** **                          | ** ** | **for the three months ended September 30, 2006** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **KeyOn**                                                                            | ** ** | **SpeedNet** | ** ** | **Adjustments** | ** ** | **Pro forma** | ** ** |
| TOTAL REVENUES                      |       | $                                                                                    | 599,659    |   | $ | 1,329,412 |   | $ | — |   | $ | 1,929,071 |   |
| OPERATING COSTS  AND EXPENSES:      |       |                                                                                 |       |   |   |   |   |   |   |
| Depreciation and  amortization      |       | 288,713                                                                              |       | 572,859 |   | — |   | 861,572 |   |
| TOTAL OPERATING  COSTS AND EXPENSES |       | 1,240,131                                                                            |       | 1,773,553 | (a),(b),(c) | (191,500 | ) | 2,822,184 |   |
| LOSS FROM OPERATIONS                |       | (640,472                                                                             | )          | (444,142 | ) | 191,500 |   | (893,114 | ) |
| TOTAL OTHER  INCOME (EXPENSE)       |       | (63,819                                                                              | )          | (189,441 | ) | — |   | (253,260 | ) |
| NET LOSS                            |       | $                                                                                    | (704,291   | ) | $ | (633,583 | ) | $ | 191,500 |   | $ | (1,146,374 | ) |

 

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(a).       $113k—20%reduction in data transmission costs due to new contracts

(b).      $34kreduction in professional fees due to acquisition expenses

(c).       $45kreduction in rent due to move/consolidation

 

Thefinancial results for the three quarters ended September 30, 2006, for KeyOnCommunications Holdings, Inc. do not include of operations with KeyOn SpeedNet,LLC. The financials for three quarters ended September 30, 2006,  reflected on a pro forma basis by adding inthe financials for three quarters ended September 30, 2006 SpeedNet Services,Inc., financial results are reported as follows:

 

**KEYON COMMUNICATIONS HOLDINGS INC. AND RELATEDENTITIES**

 

**PRO FORMA COMBINED STATEMENT OF OPERATIONS  (Unaudited)**

 
| ** **                          | ** ** | **for the nine months ended September 30, 2006** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **KeyOn**                                                                           | ** ** | **SpeedNet** | ** ** | **Adjustments** | ** ** | **Pro forma** | ** ** |
| TOTAL REVENUES                      |       | $                                                                                   | 1,772,282  |   | $ | 3,930,752 |   | $ | — |   | $ | 5,703,034 |   |
| OPERATING COSTS  AND EXPENSES:      |       |                                                                                |       |   |   |   |   |   |   |
| Depreciation and  amortization      |       | 748,799                                                                             |       | 1,833,698 |   | — |   | 2,582,497 |   |
| TOTAL OPERATING  COSTS AND EXPENSES |       | 3,206,314                                                                           |       | 5,470,132 | (a),(b),(c) | (191,500 | ) | 8,484,946 |   |
| LOSS FROM  OPERATIONS               |       | (1,434,032                                                                          | )          | (1,539,380 | ) | 191,500 |   | (2,781,912 | ) |
| TOTAL OTHER  INCOME (EXPENSE)       |       | (147,133                                                                            | )          | (537,795 | )d | 315,980 |   | (368,948 | ) |
| NET LOSS                            |       | $                                                                                   | (1,581,165 | ) | $ | (2,077,175 | ) | $ | 507,480 |   | $ | (3,150,860 | ) |

 

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(a).       $113k—20%reduction in data transmission costs due to new contracts

(b).      $34kreduction in professional fees due to acquisition expenses

(c).       $45kreduction in rent due to move/consolidation

(d).      $316kreduction in interest paid for debt in SpeedNet Services

 

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**Note 9 - Capital Stock, Stock Based Compensation, andWarrants**

 

OnDecember 31, 2006, the Company adopted Statement of Financial AccountingStandards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring us torecognize expenses related to the fair value of its employee stock optionawards. The Company recognizes the cost of all share-based awards on a straightline vesting basis over the vesting period of the award.

 

***Common Shareholders’ Equity***

 

OnAugust 9, 2007, KeyOn became a publicly-traded company by virtue of a mergerwith Grant, whereby a wholly owned subsidiary of Grant merged with and intoKeyOn, and KeyOn, as the surviving corporation, became a wholly-ownedsubsidiary of Grant. All pre-merger assets and liabilities of Grant were split offfrom Grant leaving KeyOn’s business as the surviving operations of Grant.Concurrent with the merger, Grant raised $2,088,500 (net of $118,500 inoffering costs) with the sale of 551,750 shares of common stock in an equityoffering.

 

Grantsubsequently changed its name to KeyOn Communications Holdings, Inc. (“KeyOnHoldings”) and KeyOn and its subsidiaries became wholly owned subsidiaries ofKeyOn Holdings. KeyOn Holdings’ shares are listed on the OTC Bulletin Boardunder the symbol “KEYO”. After accounting for the merger and the equityfinancing, KeyOn Holdings had 8,101,770 shares outstanding.

 

TheCompany is authorized to issue up to 95,000,000 shares of common stock with apar value of $.001 for each share. As of September 30, 2007, 8,101,770 shares wereissued and outstanding.

 

Inconnection with the acquisition of SpeedNet, the Company raised both equity anddebt capital for the purchase and for general working capital purposes. On orabout January 31, 2007, KeyOn raised an aggregate of $1,608,050 in the sale of422,617 shares of common stock. On January 31, 2007, 306,566 shares of commonstock together with, 45,967 warrants to purchase common stock were issued inconnection with the conversion of the Company’s Senior Unsecured PromissoryNotes (Note 5).

 

Commonstock of 6,861 shares valued at $3.80 per share was issued on March 22, 2007,for payment of professional services performed by a third party. Common stockof 50,000 shares valued at $4.00 per share was issued on July 30, 2007, for thepayment of professional services performed by a third party.

 

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***Preferred Shareholders’ Equity***

 

TheCompany is authorized to issue up to 5,000,000 shares of preferred stock with apar value of $0.001 for each share. As of September 30, 2007, no shares ofpreferred stock were issued and outstanding.

 

***Warrants***

 

TheCompany has 632,345 common stock warrants outstanding and exercisable as ofSeptember 30, 2007 with a warrant strike price ranging from $3.31 to $6.70 andan average price of $4.92 for each share of common stock. These warrants haveexpiration dates of three to seven years from their date of issue. As ofDecember 31, 2006, a total of 492,342 warrants to purchase shares of our commonstock were outstanding and exercisable. A total of 650,537 warrants were issuedduring the nine months ended September 30, 2007. The cost of $46,682 for thesewarrants granted was capitalized as debt issuance costs. No shares wereforfeited during the nine months ended September 30, 2007. No warrants wereexercised until the three months ended September 30, 2007 at which time,510,534 shares were exercised at an average exercise price of $.02 per share. Thecash amount paid to the Company was $9,758 in exercising the warrants for 285,141warrants and a cashless exercise for 225,393 warrants. The amount expensed inthe third quarter of 2007 was $901,566 as compensation expense for 225,393warrants and $9,096 as amortization of debt issuance costs. The amount expensedin the first three quarters of 2007 is $901,566 as compensation expense and$17,889 as amortization of debt issuance costs.

 

***Stock Option Plans***

 

InJune 2006, we adopted the 2006 Stock Option Plan (the “2006 Plan”). The 2006Plan provides for the granting of stock options to purchase up to 1,250,000shares of our common stock to current employees, officers, directors,consultants and advisors. These option shares are subject to adjustment only inthe event of a stock split, stock or other extraordinary dividend, or other similarchange in the common stock or capital structure. The 2006 Plan expires in July2015, ten years after its adoption. The 2006 Plan was created both to replaceKeyOn Communications LLC’s stock option plan (canceled in February 2006) and toauthorize new options for issuance.

 

The2006 Plan provides for non-qualified stock options. The Board of Directorsauthorizes an Administrator to provide oversight and make decisions regardingthe administration of the Plan. The Administrator has the authority to setvesting schedules, payment terms and other provisions for each grant. Optionsgranted under the Plan generally vest over four years at a rate of 25% afteryear one and then equally on a monthly basis over the next three years from thedate of grant. No stock appreciation rights were granted under the Plan. As ofSeptember 30, 2007, 679,100 options are outstanding. As of December 31, 2006,672,145 options were outstanding. For the nine months ended September 30, 2007,685,715 options were granted and 38,264 were forfeited. Compensation expenserecorded on

 

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stock options for the three months endedSeptember 30, 2007 totaled $433,740 and for the nine months ended September 30,2007 totaled $438,325. During the three months ended September 30, 2007, allemployee options, totaling 640,496 shares, at the $.0007 strike price wereconverted to common stock shares. The range of strike price per outstandingoption is $2.48 to $8.16 and the weighted average strike price is $2.95 pershare.

 

**Note 10 – Commitments and Contingencies**

 

The Companycurrently is a party to a litigation against one of the Company’s wholly-ownedsubsidiaries (KeyOn Communications, LLC “LLC”), in connection with certainservices provided to LLC by the claimant in 2005 which were only partially paidby LLC. The claimant seeks the payment of certain unpaid invoices. The Companyasserts that such performance of services was unsatisfactory and/or fraudulentand has filed a counter claim seeking unspecified damages. The Company believesit will prevail in this action, but has reserved the amount demanded by theclaimant as of 2005.

 

The Companyanticipates the payment of bonuses to certain members of the executivemanagement team and other managers in 2008 for services directly connected withthe Company’s 2007 equity fund raising initiatives. The bonuses are contingentupon the success of the equity fund raise.

 

**Note 11 - Subsequent Events**

 

***Acquisition of MicroLnk, LLC***

 

OnOctober 22, 2007, the Company acquired substantially all of the assets andassumed certain liabilities of MicroLnk, LLC, a Nebraska limited liabilitycompany (“MicroLnk”), pursuant to an Asset Purchase Agreement (the “AssetPurchase Agreement”) entered into by and between the Company and MicroLnk onOctober 18, 2007. The assets acquired relate to MicroLnk’s business of operatinga wireless communications network that provides high-speed Internet access andother related services to both residential and commercial subscribers in Nebraskaand Iowa. As consideration for these acquired assets, the Company paid MicroLnk$659,981 in cash.

 

***Reverse Stock Split***

 

OnOctober 26, 2007, the Company effectuated a 1-for-2 reverse stock split (the “ReverseSplit”) of its common stock. Pursuant to the Reverse Split, every two (2)shares of the Company’s issued and outstanding common stock was reclassifiedand combined into one (1) whole post-split share of the common stock. Nofractional shares were issued in connection with the Reverse Split. Stockholderswho were entitled to a fractional post-split share received in lieu thereof one(1) whole post-split share.

 

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***Bridge Loan Financing***

 

On November 6, 2007, the Company entered into a Bridge Note PurchaseAgreement with a lender, pursuant to which the lender committed to advance theCompany up to $750,000 in exchange for a promissory note that bears interest atthe rate of 5% per annum. The maturity date for this promissory note is theearlier of November 6, 2008 or the consummation of a transaction, or series ofrelated transactions, in which the Company sells shares of its capital stock orsecurities convertible into shares of capital stock in exchange for aggregategross proceeds of at least $5,000,000. As of November 7, 2007, the Company hadnot drawn down any funds under this promissory note.

 

In connection with this Bridge Note Purchase Agreement the Companyissued the lender a five-year warrant to purchase up to 93,750 shares of commonstock at an initial exercise price equal to the greater of $6.70 per share orthe price per share of its common stock is sold to investors in anytransaction, or series of related transactions, in which the Company sellsshares of its capital stock or securities convertible into shares of capitalstock on or before December 31, 2007 in exchange for aggregate gross proceedsof at least $5,000,000.

 

***Filing of Registration Statement***

 

OnOctober 5, 2007, the Company filed a Form SB-2 Registration Statement with theSecurities Exchange Commission under the Securities Act of 1933. Pursuant tothis Registration Statement, the Company intends to issue a minimum of $30million of our common shares. On November 7, 2007, the Company filed an amendedSB-2 Registration Statement.

 

***Appointment of Executive Officer***

 

Onor around October, 30, 2007, the Company hired Sid Ganju as the Executive VicePresident of Corporate Development and Strategy. Mr. Ganju has been hired as anat will employee with a base annual compensation of $220,000, an annual bonuspotential of 80%, and 250,000 options at a strike price of fair market value onhis date of hire.

 

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**Item 2.  Management’s Discussion and Analysis orPlan of Operation**

** **

**Recent Events**

** **

Priorto August 9, 2007, we were a public shell company, as defined by the Securitiesand Exchange Commission, without material assets or activities. On August 9,2007, we completed a reverse merger, pursuant to which a wholly-ownedsubsidiary of ours merged with and into a private company, KeyOnCommunications, Inc., with such private company being the surviving company. Inconnection with this reverse merger, we discontinued our former business andsucceeded to the business of KeyOn Communications, Inc. as our sole line ofbusiness. For financial reporting purposes, KeyOn Communications, Inc., and notus, is considered the accounting acquiror. Accordingly, the historical financialstatements presented and the discussion of financial condition and results ofoperations herein are those of KeyOn Communications, Inc. and do not includeour historical financial results. All costs associated with the reverse merger,other than financing related costs in connection with the simultaneous sale of$2,207,000 of units consisting of common stock and warrants, were expensed asincurred.

 

OnOctober 26, 2007, we effectuated a 1-for-2 reverse split of our common stock.As a result of this reverse stock split, every two shares of our issued andoutstanding common stock as of the close of business on October 26, 2007, werereclassified and combined into one whole share of common stock.

 

**Overview**

 

Weprovide wireless broadband services primarily to rural and other underservedmarkets under the “KeyOn,” “SpeedNet,” and “SIRIS” brands. We offer ourbroadband services along with VoIP services to both residential and businesssubscribers. In January 2007, we acquired substantially all of the assets ofSpeedNet Services, Inc., a leading provider of fixed wireless broadbandservices to non-metropolitan communities and rural areas in the central UnitedStates. Including the operations of SpeedNet Services, Inc., our markets arelocated in the following 11 Western and Midwestern states: Colorado, Idaho,Illinois, Indiana, Iowa, Kansas, Nebraska, Nevada, Ohio, South Dakota, andTexas. On June 1, 2006, we acquired the assets of an operational market locatedin Pocatello, Idaho for stock. The Pocatello market was acquired from FreemontBroadband, LLC, a subsidiary of Fairpoint Communications, Inc., a leading rurallocal exchange carrier. Finally, in June 2005, we acquired substantially all ofthe assets of Southern Iowa Regional Internet Services, LC, or SIRIS, for cash.Our results for the year ended 2006 include a full year of operations fromSIRIS and 7 months of operations from the Pocatello market.

 

**Characteristicsof Our Revenues and Operating Costs and Expenses**

 

Weoffer our services under annual, two-year or month-to-month service agreements.These services are generally billed monthly, quarterly, semiannually orannually in advance. Payments

 

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received in advance for subscriptions aredeferred and recognized as the services are provided. Service initiation feesare recognized at the time of installation.

 

Operatingcosts and expenses consist of payroll and related expenses, network operatingcosts, marketing and advertising, professional fees, installation expense andgeneral and administrative expenses. Payroll expenses consist of personnelcosts, including salaries, employer taxes and bonuses across our functionalareas: executive, customer support, engineering, accounting and billing,marketing, and local market operational staff.

 

Networkoperating costs are comprised of costs directly associated with providing ourservices including tower rent, circuits to transport data to the Internettermination point and Internet termination bandwidth. Fluctuations with networkexpenses occur when additional rent associated with adding new towers, whetherinitiated by us or assumed by us in an acquisition, transpire. The increase inour customer base also requires additional purchases of Internet transport andtermination bandwidth.

 

Marketingand advertising expenses primarily consist of the direct marketing andadvertising costs. Professional fees relate to legal, accounting and consultingand recruiting resources that we utilize periodically in the normal course ofdoing business. General and administrative expenses primarily consist of thesupport costs of our operations, such as costs related to office real estateleases, company insurance, travel and entertainment, banking and credit cardfees, taxes and vehicle leases.

 

**Resultsof Operations**

 

*Three-MonthPeriod Ended September 30, 2007 Compared to the Three-Month Period EndedSeptember 30, 2006*

 

*Revenues.  *During the three-month period ended September 30, 2007, we recognizedrevenues of $1,863,422, as compared to revenues of $599,659 during thethree-month period ended September 30, 2006, representing an increase ofapproximately 211%. This increase was primarily the result of customer growthassociated with our acquisition of SpeedNet Services, Inc. as well as organiccustomer growth. Specifically, our acquisition of SpeedNet Services, Inc.accounted for 95% of this increase and organic growth accounted for 5%.

 

*Operating Loss.  *Operating expenses, which consist of payroll, bonuses and taxes,depreciation and amortization, other general and administrative costs, networkoperating costs, marketing and advertising, installation expense, professionalfees and stock based compensation totaled $4,593,357 for the three-month periodended September 30, 2007, as compared to $1,240,131 for the three-month periodended September 30, 2006, representing an increase of approximately 270%. Thisincrease was partially due to our acquisition of SpeedNet Services, Inc. andthe resulting increased costs associated with running the expanded operations. Anothercontributing factor for our increased operating loss was the incurrence of$1,539,283 for non-cash expenses, including stock-based and warrantcompensation expense and stock granted for professional services. Normalized operatingexpenses without these one time expenses would have been $3,054,074 for thethree-month period ended September 30, 2007, as compared to $1,240,131 for thethree-month period ended September 30, 2006, representing an increase of 146%.Our actual unadjusted operating loss margin declined by 40 percentage pointsfrom a total operating loss $2,729,935 for the three-month period endedSeptember 30, 2007, as compared to a total operating loss of $640,472 for thethree-month period ended September 30, 2006. By removing the one time non-cashexpenses of $1,539,283, our normalized operating loss margin improved by 43percentage points from a total normalized operating loss of $1,190,052 for thethree-month period ended September 30, 2007, as compared to a total

 

25

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normalized operating loss of $640,472 for thethree-month period ended September 30, 2006. This improvement in operatingmargin is the result of the elimination of duplicative costs and improvements inefficiencies due to economies of scale associated with our acquisition ofSpeedNet Services, Inc.

 

*Payroll, Bonuses and Taxes.  *Payroll bonuses and taxes totaled $914,045for the three-month period ended September 30, 2007, as compared to $334,607for the three-month period ended September 30, 2006, representing an increaseof approximately 173%. This increase was primarily due to incremental variablestaff additions, such as customer service representatives and installers neededto service the expanded customer base associated with our acquisition ofSpeedNet Services, Inc. However, duplicative executive management positionsresulting from this acquisition were eliminated. 

 

*Depreciation and Amortization.*  Depreciation and amortization expensestotaled $668,354 for the three-month period ended September 30, 2007, ascompared to $288,713 for the three-month period ended September 30, 2006,representing an increase of approximately 131%. This increase was primarily dueto the additional network footprint and customer premise equipment acquired inconnection with our acquisition of SpeedNet Services, Inc.

 

*Other General and Administrative Expenses.  *Other general and administrative expensestotaled $391,025 for the three-month period ended September 30, 2007, ascompared to $279,578 for the three-month period ended September 30, 2006,representing an increase of approximately 40%. This increase resulted fromgrowth associated with our acquisition of SpeedNet Services, Inc. and costsrelated with our August 9, 2007 reverse merger. Specifically, integratingSpeedNet Services, Inc.’s business with ours and moving our corporateheadquarters to Omaha, Nebraska during this period accounted for the majorityof the increase in general and administrative expenses during the three-monthperiod ended September 30, 2007, as compared to the three-month period endedSeptember 30, 2006. On the other hand, costs relating to our August 9, 2007reverse merger, such as travel, postage, printing and other general andadministrative expenses, accounted for approximately 7% of the increase.

 

*Network Operating Costs.  *Network operating costs, which consist oftower rent, local loop costs and Internet termination expense, totaled $673,478for the three-month period ended September 30, 2007, as compared to $186,210for the three-month period ended September 30, 2006, representing an increaseof approximately 262%. The additional network footprint and increased customerbases associated with our acquisition of SpeedNet Services, Inc. accounted for90% of this increase, while organic growth and an overall increase in networkoperating costs accounted for 10%.

 

*Marketing and Advertising Expenses.  *Marketing and advertising expenses totaled$166,958 for the three-month period ended September 30, 2007, as compared to$73,129 for the three-month period ended September 30, 2006, representing anincrease of approximately 128%. This increase was primarily due to our emphasison organic growth across all of our markets. With the additional network footprintassociated with our acquisition of SpeedNet Services, Inc., we have the abilityto market to a greater number of potential subscribers. As a percentage ofrevenue, our marketing costs were 9% for the three month period ended September30, 2007, as compared to 12% for the three month period ended September 30,2006.

 

*Installation Expense.  *Installation expense, which consistsprimarily of expenses associated with installation supplies, third partyinstallation costs and transportation expenses to the installation site,totaled $124,850 for the three-month period ended September 30, 2007, ascompared to $14,366 for the three-month period ended September 30, 2006,representing an increase of approximately 769%. Much of this increase ininstallation expense was attributable to a 96% increase in installation volumeduring the three-month period ended September 30, 2007, as compared to thethree-month

 

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period ended September 30, 2006. Ouracquisition of SpeedNet Services, Inc. accounted for 72% of this increase ininstallation volume and organic growth accounted for 24%.

 

*Professional Fees.  *Professional fees, which consist of legal, accounting, and otherrelated expenses, totaled $319,341 for the three-month period ended September30, 2007, as compared to $63,528 for the three-month period ended September 30,2006, representing an increase of approximately 403%. Specifically, legal feesassociated with our August 9, 2007 reverse merger accounted for 79% of thisincrease in professional fee costs, while non-cash investor relations servicesdirectly related our August 9, 2007 reverse merger accounted for 315%. Allother professional fees increased 9% due to our acquisition of SpeedNetServices, Inc.

 

*Stock-Based and Warrant Compensation.  *Stock-based and warrant compensation total$1,335,306 for the three-month period ended September 30, 2007. No stock-basedcompensation was expensed for the three-month period ended September 30, 2006.Warrants were granted during the three-month period ended September 30, 2007 toan executive officer and director as compensation for guarantying ourobligations under our $3,000,000 promissory note to Sun West Bank. The expenserecorded for these warrants granted was $901,566. Stock-based compensation forstock options issued under our option plan totaled $433,740 for the three-monthperiod ended September 30, 2007.

 

*Other Income and Expense.  *We incurred other income and expense of$136,621 for the three-month period ended September 30, 2007, as compared to$63,173 for the three-month period ended September 30, 2006, representing anincrease of 116%. This increase resulted primarily from interest expenseassociated with our $3,000,000 promissory note with Sun West Bank and interestexpense related to certain capital leases for equipment that we entered intobetween July 1, 2006 and September 30, 2007.

 

*Net Loss.**  *We had a net loss of $2,866,556 for thethree-month period ended September 30, 2007, as compared to a net loss of$703,645 for the three-month period ended September 30, 2006, representing anincrease of approximately 307%. This increase was partially due to ouracquisition of SpeedNet Services, Inc. and the resulting increased costsassociated with running the expanded operations. Another contributing factorfor the net loss increase was the incurrence of $1,539,283 for non-cashexpenses, including stock-based and warrant compensation, and stock granted forprofessional services. Normalized net loss without these one time expenseswould have been $1,327,273 for the three-month period ended September 30, 2007,as compared to a normalized net loss of $703,645 for the three-month periodended September 30, 2006, representing an increase of 89%. Our net loss margindeclined by 36 percentage points from a net loss $2,866,556 for the three-monthperiod ended September 30, 2007, as compared to a net loss of $703,645 for thethree-month period ended September 30, 2006. By removing the one time non-cashexpenses of $1,539,283, our normalized net loss margin  improved by 46 percentage points from a totalnormalized net loss $1,327,273 of the three-month period ended September 30,2007, as compared to a net normalized loss of $703,645 for the three-monthperiod ended September 30, 2006. This improvement was the result of theelimination of duplicative costs and improvements in efficiencies due toeconomies of scale associated with our acquisition of SpeedNet Services, Inc.

 

*Nine-MonthPeriod Ended September 30, 2007 Compared to the Nine-Month Period EndedSeptember 30, 2006*

 

*Revenues.*  During the nine-month period ended September30, 2007, we recognized revenues of $5,216,976, as compared to revenues of$1,772,282 during the nine-month period ended September 30, 2006, representingan increase of approximately 194%. This increase was primarily the result ofcustomer growth associated with our acquisition of SpeedNet Services, Inc. andthe Pocatello market,

 

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as well as organic customer growth. Specifically,our acquisition of SpeedNet Services, Inc. and the Pocatello market accountedfor 99% of this increase and organic growth accounted for 1%.

 

*Operating Loss.  *Operating expenses totaled $9,641,820 for the nine-month period endedSeptember 30, 2007, as compared to $3,206,314 for the nine-month period endedSeptember 30, 2006, representing an increase of approximately 201%. Thisincrease was partially due to our acquisitions of SpeedNet Services, Inc. andthe Pocatello market and the resulting increased costs associated with runningthe expanded operations. Another contributing factor for the operating lossincrease was the incurrence of $1,543,868 for non-cash expenses, includingstock-based and warrant compensation, and stock granted for professionalservices. Normalized operating expenses without these one time expenses wouldhave been $8,097,952 for the nine-month period ended September 30, 2007 ascompared to $3,206,314 for the nine-month period ended September 30, 2006,representing an increase of 153%. Our actual operating loss margin declined by4 percentage points from a total operating loss $4,424,844 for the nine-monthperiod ended September 30, 2007, as compared to a loss of $1,434,032 for thenine-month period ended September 30, 2006. By removing the one time non-cashexpenses of $1,543,868, our normalized operating loss margin  improved by 26 percentage points from a totalnormalized operating loss $2,880,976 for the nine-month period ended September30, 2007, as compared to a normalized operating loss of $1,434,032 for thenine-month period ended September 30, 2006. This adjusted change in operatingexpense is the result of the elimination of duplicative costs and improvementsin efficiencies due to economies of scale with our acquisitions of SpeedNetServices, Inc. and the Pocatello market.

 

*Payroll, Bonuses and Taxes.  *Payroll bonuses and taxes totaled $2,403,899for the nine-month period ended September 30, 2007, as compared to $986,585 forthe nine-month period ended September 30, 2006, representing an increase ofapproximately 144%. This increase was primarily due to incremental variablestaff additions, such as customer service representatives and installers,needed to service the expanded customer base associated with our acquisitionsof SpeedNet Services, Inc. and the Pocatello market. However, duplicativeexecutive management positions resulting from this acquisition were eliminated.

 

*Depreciation and Amortization.  *Depreciation and amortization expensestotaled $1,862,646 for the nine-month period ended September 30, 2007, ascompared to $748,799 for the nine-month period ended September 30, 2006,representing an increase of approximately 149%. This increase was primarily dueto the additional network footprint and customer premise equipment acquired inconnection with our acquisitions of SpeedNet Services, Inc. and the Pocatellomarket.

 

*Other General and Administrative Expenses.**  *Othergeneral and administrative expenses totaled $1,306,298 for the nine-monthperiod ended September 30, 2007, as compared to $535,826 for the nine-monthperiod ended September 30, 2006, representing an increase of approximately144%. This increase was primarily due to the increased costs associated withour acquisitions of SpeedNet Services, Inc. and the Pocatello market. Specifically,business initiatives to redirect the growth opportunities associated with ouracquisition of SpeedNet Services, Inc. and to move our corporate headquartersto Omaha, Nebraska during the nine-month period ended September 30, 2007 causedus to incur additional general and administrative expenses such as travel,postage, relocation of office equipment, and other miscellaneous expenses. Inaddition, the office rent for our Omaha, Nebraska office for the months ofFebruary 2007 and March 2007 were incurred at a premium to the local market. Thislease was discontinued in March 2007 and our headquarters was moved to a newlocation in Omaha, Nebraska on April 1, 2007.

 

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*Network Operating Costs.  *Network operating costs totaled $1,662,310for the nine-month period ended September 30, 2007, as compared to $497,136 forthe nine-month period ended September 30, 2006, representing an increase ofapproximately 234%. This increase was primarily due to the additional networkfootprint and increased customer base associated with our acquisitions ofSpeedNet Services, Inc. and the Pocatello market. Specifically, ouracquisitions accounted for 96% of this increase, while organic growth and increasedoperating costs accounted for 4%.

 

*Marketing and Advertising Expenses.  *Marketing and advertising expenses totaled$397,593 for the nine-month period ended September 30, 2007, as compared to$205,638 for the nine-month period ended September 30, 2006, representing anincrease of approximately 93%. This increase was primarily due to our emphasison organic growth across all of our markets. We now have the ability to marketto a greater number of potential customers served by the additional network footprintassociated with our acquisitions of SpeedNet Services, Inc. and the Pocatellomarket. As a percentage of revenue, our marketing costs were 8% for thenine-month period ended September 30, 2007, as compared to 12% for thenine-month period ended September 30, 2006. As such, we had a 4 percentagepoint improvement in marketing expenses due to our ability to utilize fixedmarketing expenditures over a larger customer base.

 

*Installation Expense.  *Installation expense totaled $239,192 for thenine-month period ended September 30, 2007, as compared to $71,816 for thenine-month period ended September 30, 2006, representing an increase ofapproximately 233%. Much of this increase in installation expense wasattributable to a 93% increase in installation volume and a 140% increase ininstallation costs. These cost increases were primarily the result of the usageby SpeedNet Services, Inc. of third party contractors, rather than employees,to perform installations. With respect to the increased installation volume,our acquisitions of SpeedNet Services, Inc. and the Pocatello market accountedfor 88% of the increase, while organic growth accounted for 5%.

 

*Professional Fees.  *Professional fees totaled $429,991 for the nine-month period endedSeptember 30, 2007, as compared to $160,514 for the nine-month period endedSeptember 30, 2006, representing an increase of approximately 168%.Specifically, legal fees associated with our August 9, 2007 reverse mergeraccounted for 33% of this increase, while non-cash investor relations servicesdirectly related with our August 9, 2007 reverse merger account for 125%. Allother professional fees increased 10% due to our acquisitions of SpeedNetServices, Inc. and the Pocatello market.

 

*Stock-Based and Warrant Compensation.  *Stock-based and warrant compensation totaled$1,339,891 for the nine-month period ended September 30, 2007. No stock-basedcompensation was expensed for the nine-month period ended September 30, 2006.Warrants were granted during the nine-month period ended September 30, 2007 ascompensation to an executive officer and director for guarantying ourobligations under our $3,000,000 promissory note to Sun West Bank. The expenserecorded for these warrants was $901,566. Stock-based compensation related tofor stock options granted under our option plan totaled $438,425 for thenine-month period ended September 30, 2007. Other Income and Expense. Weincurred other income and expense of $429,520 for the nine-month period endedSeptember 30, 2007, as compared to $149,193 for the nine-month period endedSeptember 30, 2006, representing an increase of 188%. This increase resultedprimarily from interest expense associated with our $3,000,000 promissory notewith Sun West Bank and interest expense related to certain capital leases forequipment that we entered into between July 1, 2006 and September 30, 2007.

 

*Net Loss.  *We had a net loss of $4,854,363 for the nine-month period endedSeptember 30, 2007, as compared to a net loss of $1,583,225 for the nine-monthperiod ended September 30, 2006,

 

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representing an increase of approximately207%. This increase in net loss was partially due to our acquisition ofSpeedNet Services, Inc. and the Pocatello market and the resulting increasedcosts associated with running the expanded operations. Another contributingfactor for the net loss increase was the incurrence of $1,543,868 for non-cashexpenses, including stock-based and warrant compensation and stock granted forprofessional services. Normalized net loss without these one time expenseswould have been $3,310,495 for the nine-month period ended September 30, 2007,as compared to $1,583,225 for the nine-month period ended September 30, 2006,representing an increase of 109%. Our actual net loss margin declined by 4percentage points from a net loss $4,854,363 for the nine-month period endedSeptember 30, 2007, as compared to a net loss of $1,583,225 for the nine-monthperiod ended September 30, 2006. By removing the one time non-cash expenses of$1,543,868, our normalized net loss margin improved by 26 percentage pointsfrom a total normalized net loss $3,310,495 of the nine-month period endedSeptember 30, 2007, as compared to a normalized net loss of $1,583,225 for the nine-monthperiod ended September 30, 2006. This improvement is as a result of theelimination of duplicative costs and improvements in efficiencies due toeconomies of scale associated with our acquisition of SpeedNet Services, Inc.and the Pocatello market.

 

**Liquidityand Capital Resources**

 

*General*

 

Asof September 30, 2007 and 2006, we had cash of $1,569,403 and $33,207,respectively.  Net Cash Used by OperatingActivities.  Net cash used in operating activities totaled $707,486for the nine-month period ended September 30, 2007, as compared to net cashused in operating activities of $737,581 for the nine-month period endedSeptember 30, 2006. This change is primarily attributable extended paymentterms with vendors.

 

NetCash Used in Investing Activities.  Net cash used in investingactivities totaled $3,797,299 for the nine-month period ended September 30,2007, as compared to $144,379 for the nine-month period ended September 30,2006. The cash usage in 2007 is the result of the asset purchase of SpeedNetServices, Inc.

 

NetCash Provided By Financing Activities.  Net cash provided byfinancing activities totaled $6,069,498 for the nine-month period endedSeptember 30, 2007, as compared to $727,962 for the nine-month period endedSeptember 30, 2006. During the first nine-months of 2007, we entered into acommercial loan agreement for $3,000,000. Proceeds from the sale of stock andthe exercise of warrants during the nine-month period ended September 30, 2007totaled $3,706,292.

 

WorkingCapital.  As of September 30, 2007, we had negative working capitalof $4,024,627, which includes the $3,000,000 promissory note, $650,041 forcapital leases, and $444,821 for deferred revenue.

 

*PrivatePlacement*

 

Inconnection with the reverse merger in August 2007, we completed a privateplacement, pursuant to which we issued 551,750 shares of common stock andfive-year warrants to purchase 275,875 shares of common stock at an initialexercise price of $6.70 per share for aggregate net proceeds of $2,088,500. Inconnection with this private placement, we incurred placement agent fees ofapproximately $56,000, and issued the placement agent three-year warrants topurchase an aggregate of 6,000 shares of common stock at an initial exerciseprice of $6.70 per share. In addition, we incurred

 

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other professional fees and expenses totalingapproximately $75,000 in connection with the reverse merger and privateplacement.

 

*BridgeLoan*

 

OnNovember 6, 2007, we entered into a Bridge Note Purchase Agreement with acertain lender, pursuant to which such lender committed to advance us up to$750,000 in exchange for a promissory note that bears interest at the rate of5% per annum. The maturity date for this promissory note is the earlier ofNovember 6, 2008 or the consummation of a transaction, or series of relatedtransactions, in which we sell shares of our capital stock or securitiesconvertible into shares of capital stock in exchange for aggregate grossproceeds of at least $5,000,000. In addition, if all of the outstandingprincipal and interest due under this promissory note in not repaid on orbefore February 6, 2008, the aggregate principal amount due under thepromissory note shall increase by $50,000 and the interest rate shall increaseto 10% per annum. As of November 6, 2007 we had not drawn down any funds underthis promissory note.

 

**CriticalAccounting Policies and Estimates**

 

Ourconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States that require us to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of our financial statements and the reported amounts ofrevenues and expenses during the reporting periods. The consolidated financialstatements include the accounts of our company and its wholly ownedsubsidiaries. All significant intercompany balances and transactions have beeneliminated in consolidation. In our opinion, the condensed consolidated financialstatements contain all the adjustments necessary (consisting only of normalrecurring accruals) to make the financial position of our company and theresults of operations and cash flows not misleading. Critical accountingpolicies are those that require the application of management’s most difficult,subjective, or complex judgments, often because of the need to make estimatesabout the effect of matters that are inherently uncertain and that may changein subsequent periods. In preparing the financial statements, we utilizedavailable information, including our past history, industry standards and thecurrent economic environment, among other factors, in forming our estimates andjudgments, giving due consideration to materiality. Actual results may differfrom these estimates. In addition, other companies may utilize differentestimates, which may impact the comparability of our results of operations tothose of companies in similar businesses. We believe that of our significantaccounting policies, the following may involve a higher degree of judgment andestimation.

 

*Equipment.  *Equipment is stated at the lower of cost or present value of thecapital lease obligation. Expenditures for additions, renewals, and bettermentsare capitalized; expenditures for maintenance and repairs are charged tooperations as incurred. Upon retirement, sale or other disposition ofequipment, the cost and accumulated depreciation are eliminated from theaccounts and any gain or loss is included in operations. In addition, long-livedassets are reviewed, at least annually, for impairment of the carrying value ofsuch assets. If impairment is deemed to have occurred, an impairment loss isincluded in our current operations. Depreciation is computed principally usingthe straight line method over estimated useful lives or the length of thecapital lease, ranging from two to seven years.

 

*Revenue Recognition.  *We prepare our financial statements on theaccrual method of accounting. Under this basis, income is recognized when earned,and expenses are generally recognized when incurred. We charge a recurringsubscription fee for providing our various Internet

 

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accessservices to our subscribers and recognize revenues when they are earned, whichgenerally occurs as the service is provided. The services are subscribed to forthe periods of either month-to-month, or with annual or two year contracts andare generally billed monthly, quarterly, semiannually or annually in advance.Payments received in advance for subscriptions are deferred and recognized asthe services are provided. Service initiation fees are recognized at the timeof installation.

 

*Intangible Assets.  *Intangible assets, including goodwill, are accounted for under theprovisions of Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets” (“SFAS 142”). Under SFAS 142, intangible assets,other than goodwill, are identified and segregated between amortizable andnonamortizable assets. Amortizable intangibles are amortized over theirestimated, contractual, or regulated useful lives. Goodwill and othernonamortizable assets are reviewed, at least annually, for impairment in thecarrying value of the intangible asset. In addition, this review also includesthe net carrying value of amortizable intangible assets. If impairment isdeemed to have occurred, a loss for such impairment is recorded as part ofcurrent operations.

 

*Stock Based Compensation.  *On December 31, 2006, we adopted Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,”requiring us to recognize expenses related to the fair value of our employeestock option awards. We recognize the cost of all share-based awards on astraight line vesting basis over the vesting period of the award.

 

Wehave estimated the fair value of our option awards granted after December 1,2005, using the Black-Scholes option pricing model. Expected volatilities arebased on the historical volatility of our valuation during prior financings. Asof December 31, 2006, the expected life, representing the period of time thatoptions granted are expected to remain outstanding, is 3 years. The risk-freerate for periods within the contractual life of the option is based on theUnited States Treasury yield curve in effect at the time of grant.

 

**RecentlyIssued Accounting Pronouncements**

 

Thefollowing pronouncements have been issued by the Financial Accounting StandardsBoard (the “FASB”):

 

InJuly 2006, the FASB issued Financial Accounting Standards Interpretation No. 48(“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109.” This interpretation prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a company’sincome tax return, and also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. This interpretation utilizes a two-step approach for evaluating taxpositions. Step one, Recognition, occurs when a company concludes that a taxposition is more likely than not to be sustained upon examination, Step two,Measurement, is based on the largest amount of benefit, which is more likelythan not to be realized on ultimate settlement. This interpretation iseffective for fiscal years beginning after December 15, 2006, with thecumulative effect of the change in accounting principle to be recorded as anadjustment to the beginning balance of retained earnings; and, therefore, iseffective for us in the first quarter of fiscal 2008. We are currently in theprocess of evaluating the effects of adopting this interpretation and theimpact of adoption out consolidated financial position, results of operationsor cash flows.

 

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair

 

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value measurements. SFAS 157 applies to otheraccounting pronouncements that require or permit fair value measurements, theFASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Accordingly, this statement doesnot require any new fair value measurements. However, for some entities, the applicationof SFAS 157 will change current practice. The provisions of SFAS 157 areeffective as of the beginning of our 2009 fiscal year. We are currentlyevaluating the impact of SFAS 157, but do not expect the adoption of SFAS 157to have a material impact on our consolidated financial position, results ofoperations or cash flows.

 

InSeptember 2006, the Securities and Exchange Commission issued Staff AccountingBulletin No. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in the Current Year Financial Statements” (“SAB 108”).SAB 108 addresses how the effects of prior-year uncorrected misstatementsshould be considered when quantifying misstatements in current-year financialstatements. SAB 108 requires an entity to quantify misstatements using abalance sheet and income-statement approach and to evaluate whether eitherapproach results in quantifying an error that is material in light of relevantquantitative and qualitative factors. The guidance is applicable for fiscalyears ending after November 15, 2006. We currently do not believe that SAB 108will have a material impact on our financial statements.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS159”), which expands opportunities to use fair value measurements in financialreporting and permits entities to choose to measure many financial instrumentsand certain other items at fair value. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. We are currently evaluating SFAS 159 todetermine its impact on its consolidated financial position, results ofoperations or cash flows.

 

**Item 3.  Controls and Procedures.**

** **

Wecarried out an evaluation, under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by an issuer inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the issuer’s management, including its principal executive andprincipal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure. Based uponour evaluation, our chief executive officer and chief financial officerconcluded that our disclosure controls and procedures are effective, as of theend of the period covered by this Report (September 30, 2007), in ensuring thatmaterial information that we are required to disclose in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission rules and forms.

 

Therewere no changes in our internal control over financial reporting during thethree month period ended September 30, 2007 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II**

**OTHER INFORMATION**

** **

**Item 4.  Submissionof Matters to a Vote of Security Holders**

 

On July 12, 2007, ourstockholders, acting by majority written consent, approved a 5-for-1 forwardstock split of our outstanding common stock pursuant to an amendment to ourcertificate of incorporation. The majority written consent was executed byholders of 1,005,000 shares of our common stock, which represented 71.79% ofour outstanding shares of common stock then entitled to vote.

 

On July 26, 2007, ourstockholders, acting by majority written consent, approved a 0.925-for-1reverse stock split of our outstanding common stock pursuant to an amendment toour certificate of incorporation. The majority written consent was executed byholders of 5,025,000 shares of our common stock, which represented 71.79% ofour outstanding shares of common stock then entitled to vote.

 

On August 9, 2007, ourstockholders, acting by majority written consent, approved the merger of KeyOnAcquisition Corp., our wholly subsidiary, with and into KeyOn Communications,Inc. (“KeyOn”), pursuant to which each outstanding share of KeyOn commonstock was exchanged for 60.44288 shares of our common stock, resulting in KeyOnbecoming our wholly owned subsidiary. The majority written consent was executedby holders of 5,025,500 shares of our common stock, which represented 71.79% ofour outstanding shares of common stock then entitled to vote.

 

On August 9, 2007, ourstockholders, acting by majority written consent, approved the adoption of ouramended and restated certificate of incorporation and our 2007 Stock and AwardsPlan. The majority written consent was executed by holders of 8,244,507 sharesof our common stock, which represented 50.88% of our outstanding shares ofcommon stock then entitled to vote.

 

**Item 6.  Exhibits**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------|
|                |       |                                                                                       |
| 31.1*               |       | Section  302 Certification of Principal Executive Officer                                  |
| 31.2*               |       | Section  302 Certification of Principal Financial Officer                                  |
| 32.1*               |       | Section  906 Certification of Principal Executive Officer and Principal Financial  Officer |

 

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*                    Filedherewith.

 

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**SIGNATURES**

** **

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                      |   | KEYON  COMMUNICATIONS HOLDINGS, INC. |
|---------------------------|--------|--------------------------------------|
|                      |   |                                 |
|                      |   |                                 |
| Dated:  November 14, 2007 |   | By:                                  | /s/  Jonathan Snyder |
|                      |   |                                 | Jonathan  Snyder |
|                      |   |                                 | Chief  Executive Officer |

 

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**EXHIBIT INDEX**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------|
| 31.1*               |       | Section  302 Certification of Principal Executive Officer                                  |
| 31.2*               |       | Section  302 Certification of Principal Financial Officer                                  |
| 32.1*               |       | Section  906 Certification of Principal Executive Officer and Principal Financial  Officer |

 

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*                    Filedherewith.

 

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