UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, DC 20549 

**FORM 10-Q/A**

**Amendment No. 1**

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

For the quarterly period ended March 31, 2010 

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

For the transition period from ________ to ____________

Commission file number 001-33842

|                                                   |   |                |
|--------------------------------------------------------|--------|---------------------|
| **KEYON COMMUNICATIONS HOLDINGS, INC.**                |
| (Exact Name of Registrant as Specified in Its Charter) |
|                                                   |   |                |
| Delaware                                               |   | 74-3130469          |
| (State or Other Jurisdiction of                        |   | (I.R.S. Employer    |
| Incorporation or Organization)                         |   | Identification No.) |
|                                                        |        |                     |  |  |

 

|                                                                               |                                     |   |       |   |
|------------------------------------------------------------------------------------|------------------------------------------|--------|------------|--------|
|                                                                               | 11742 Stonegate Circle                   |   |       |   |
|                                                                               | Omaha, Nebraska 68164                    |   | 68164      |   |
|                                                                               | (Address of Principal Executive Offices) |   | (Zip Code) |   |
|                                                                               |                                     |   |       |   |
| (402) 998-4000                                                                     |
| (Registrant’s Telephone Number, Including Area Code)                         |
|                                                                               |                                     |   |       |   |
| (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes        xNo o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such        files.) Yes oNo x

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):        

|   |                                     |                                                                                                                      |   |
|--------|------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|   | Large accelerated filer o                | Accelerated filer                  o |   |
|   |                                     |                                                                                                                      |   |
|   | Non-accelerated filer   o | Smaller reporting company x                                                                                               |   |

(Do not check if a smaller reporting company) 

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

As of May 17, 2010, 21,582,383 shares of the issuer’s common stock, $0.001 par value per share, were outstanding. 

 

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**EXPLANATORY NOTE**

 

          This Amendment No. 1 to Form 10-Q on Form 10-Q/A (this “Amendment”) amends the Quarterly Report on Form 10-Q of KeyOn Communications Holdings, Inc., for the quarter ended March 31, 2010, previously filed with the Securities and Exchange Commission (the “SEC”) on May 17, 2010 (the “Original        Filing”). 

 

          On August 6, 2010, our board of directors, after consultation with and upon recommendation from executive management, concluded that the financial statements for the three months ended March 31, 2010, that were included in the Original Filing, did not properly account for the embedded derivative feature of our $15,000,000 secured        convertible promissory note that was issued on February 5, 2010 (the “Note”), in accordance with United States generally accepted accounting principles, and as a result, could not be relied upon. This conclusion was previously disclosed in a Current Report on Form 8-K that was filed on August 11, 2010. Additionally, on November 3, 2010, we received a comment letter from the staff of the SEC relating to the staff’s review of the Original Filing. 

 

          The purpose of this Amendment is to: (i) properly account for the embedded derivative feature of the Note in accordance with the United States generally accepted accounting principles and (ii) respond to the SEC’s comment letter by providing conformed signature pages to Exhibits 31.1, 31.2, 32.1, 32.2 and revising disclosure        relating to our financial condition and liquidity outlook. 

 

          Except as set forth above, we have not modified or updated any other disclosure contained in the Original Filing. 

 

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**KEYON COMMUNICATIONS HOLDINGS, INC.**

**Table of Contents**

|     |                                                                                                                            |     |   |
|----------|---------------------------------------------------------------------------------------------------------------------------------|----------|--------|
|     |                                                                                                                            | **Page** |
|     |                                                                                                                            |          |
| PART I   | FINANCIAL INFORMATION                                                                                                           |     |   |
|     |                                                                                                                            |     |   |
| Item 1.  | Financial Statements                                                                                                            | 1        |   |
|     |                                                                                                                            |     |   |
|     | Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009                                    | 2        |   |
|     |                                                                                                                            |     |   |
|     | Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (Unaudited)                  | 3        |   |
|     |                                                                                                                            |     |   |
|     | Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2010 (Unaudited) | 4        |   |
|     |                                                                                                                            |     |   |
|     | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (Unaudited)                  | 5        |   |
|     |                                                                                                                            |     |   |
|     | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                | 7        |   |
|     |                                                                                                                            |     |   |
| Item 2.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                     | 24       |   |
|     |                                                                                                                            |     |   |
| Item 4T. | Controls and Procedures                                                                                                         | 26       |   |
|     |                                                                                                                            |     |   |
| PART II  | OTHER INFORMATION                                                                                                               |     |   |
|     |                                                                                                                            |     |   |
| Item 6.  | Exhibits                                                                                                                        | 27       |   |
|          |                                                                                                                                 |          |        |  |

i

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**PART I – FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

1

 

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                       |   | **March 31, 2010**                                   |        | **December 31, 2009** |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|-------------|-----------------------|--------|
|                                                                                                       |   | **(Unaudited)                        (As Restated)** |        |                  |   |   |
| **ASSETS**                                                                                                 |   |                                                 |        |                  |   |   |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| CURRENT ASSETS:                                                                                            |   |                                                 |        |                  |   |   |   |
| Cash and cash equivalents                                                                                  |   | $                                                    | 9,727,636   |                  | $      | 125,083 |   |
| Accounts receivable, net                                                                                   |   |                                                 | 108,411     |                  |   | 155,228 |   |
| Inventories                                                                                                |   |                                                 | 108,873     |                  |   | 114,150 |   |
| Prepaid expenses and other current assets                                                                  |   |                                                 | 97,646      |                  |   | 114,296 |   |
| Total current assets                                                                                       |   |                                                 | 10,042,566  |                  |   | 508,757 |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| PROPERTY AND EQUIPMENT, Net                                                                                |   |                                                 | 1,538,933   |                  |   | 1,614,454 |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| OTHER ASSETS                                                                                               |   |                                                 |        |                  |   |   |   |
| Goodwill                                                                                                   |   |                                                 | 1,628,831   |                  |   | 1,341,816 |   |
| Subscriber base, net                                                                                       |   |                                                 | 180,098     |                  |   | 182,669 |   |
| Trademarks                                                                                                 |   |                                                 | 16,667      |                  |   | 16,667 |   |
| Deposits                                                                                                   |   |                                                 | 70,416      |                  |   | 70,416 |   |
| Debt issuance costs, net                                                                                   |   |                                                 | 346,350     |                  |   | 117,548 |   |
| Total other assets                                                                                         |   |                                                 | 2,242,362   |                  |   | 1,729,116 |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| TOTAL ASSETS                                                                                               |   | $                                                    | 13,823,861  |                  | $      | 3,852,327 |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ (DEFICIT)**                                                          |   |                                                 |        |                  |   |   |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| CURRENT LIABILITIES:                                                                                       |   |                                                 |        |                  |   |   |   |
| Accounts payable and accrued expenses (including accrued interest expense)                                 |   | $                                                    | 1,747,170   |                  | $      | 1,955,257 |   |
| Revolving line of credit - related party                                                                   |   |                                                 | —     |                  |   | 100,000 |   |
| Term loan payable - related party                                                                          |   |                                                 | —     |                  |   | 147,016 |   |
| Current portion of notes payable                                                                           |   |                                                 | 26,486      |                  |   | 28,713 |   |
| Current portion of capital lease obligations                                                               |   |                                                 | 700,296     |                  |   | 643,039 |   |
| Deferred rent                                                                                              |   |                                                 | 64,706      |                  |   | 63,665 |   |
| Deferred revenue                                                                                           |   |                                                 | 196,856     |                  |   | 213,674 |   |
| Derivative liability                                                                                       |   |                                                 | 10,450,642  |                  |   | — |   |
| Total current liabilities                                                                                  |   |                                                 | 13,186,156  |                  |   | 3,151,364 |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| LONG-TERM LIABILITIES:                                                                                     |   |                                                 |        |                  |   |   |   |
| Term loan payable - related party                                                                          |   |                                                 | —     |                  |   | 3,902,984 |   |
| Notes payable, less current maturities                                                                     |   |                                                 | 1,980       |                  |   | 7,842 |   |
| Convertible note (net of a $14,669,024 discount)                                                           |   |                                                 | 330,976     |                  |   | — |   |
| Capital lease obligations, less current maturities                                                         |   |                                                 | 375,110     |                  |   | 503,477 |   |
| Deferred rent liability, less current portion                                                              |   |                                                 | 64,593      |                  |   | 80,094 |   |
| Total long term liabilities                                                                                |   |                                                 | 772,659     |                  |   | 4,494,397 |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS                                                            |   |                                                 |        |                  |   |   |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| STOCKHOLDERS’ (DEFICIT):                                                                             |   |                                                 |        |                  |   |   |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| Preferred Stock - 60,000,000 shares authorized with 60,000,000 shares designated in the following classes: |   |                                                 |        |                  |   |   |   |
| Series Cal Cap preferred stock, 30,000,000 shares authorized; 0 shares issued                              |   |                                                 | —     |                  |   | — |   |
| Series KIP preferred stock, 0.0001 par value; 30,000,000 shares authorized; 0 shares issued                |   |                                                 | —     |                  |   | — |   |
| Common stock, $0.001 par value; 115,000,000 shares authorized; 21,181,439 and 20,755,588                   |   |                                                 |        |                  |   |   |   |
| shares issued and outstanding at March 31, 2010 and December 21, 2009, respectively                        |   |                                                 | 21,181      |                  |   | 20,756 |   |
| Additional paid-in capital                                                                                 |   |                                                 | 25,895,140  |                  |   | 24,490,534 |   |
| Accumulated deficit                                                                                        |   |                                                 | (26,051,275 | )                     |   | (28,304,724 | ) |
| Total stockholders’ (deficit)                                                                        |   |                                                 | (134,954)   |                  |   | (3,793,434 | ) |
|                                                                                                       |   |                                                 |        |                  |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)                                                        |   | $                                                    | 13,823,861  |                  | $      | 3,852,327 |   |
|                                                                                                       |   |                                                 |        |                  |   |   |   |

See notes to condensed consolidated financial statements.

2

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

|                                                      |   | **For the Three Months Ended March 31,** |        |
|-----------------------------------------------------------|--------|------------------------------------------|-------------|
|                                                      |   |                                     |        |
|                                                      |   | **2010**                                 |        | **2009** |   |
|                                                      |   | **(As Restated)**                        |        |   |   |
| REVENUES:                                                 |   |                                     |        |   |   |   |   |
| Service and installation revenue                          |   | $                                        | 1,554,428   |   | $ | 1,831,991 |   |
| Support and other revenue                                 |   |                                     | 40,531      |   |   | 34,181 |   |
|                                                      |   |                                     |        |   |   |   |   |
| Total revenues                                            |   |                                     | 1,594,959   |   |   | 1,866,172 |   |
|                                                      |   |                                     |        |   |   |   |   |
| OPERATING COSTS AND EXPENSES:                             |   |                                     |        |   |   |   |   |
| Payroll, bonuses and taxes                                |   |                                     | 1,077,292   |   |   | 872,570 |   |
| Network operating costs                                   |   |                                     | 904,649     |   |   | 37,093 |   |
| Professional fees                                         |   |                                     | 665,274     |   |   | 708,186 |   |
| Depreciation and amortization                             |   |                                     | 470,495     |   |   | 639,457 |   |
| Other general and administrative expense                  |   |                                     | 290,040     |   |   | 308,385 |   |
| Installation expense                                      |   |                                     | 51,575      |   |   | 47,353 |   |
| Marketing and advertising                                 |   |                                     | 50,652      |   |   | 15,353 |   |
| Total operating costs and expenses                        |   |                                     | 3,509,977   |   |   | 2,628,397 |   |
|                                                      |   |                                     |        |   |   |   |   |
| LOSS FROM OPERATIONS                                      |   |                                     | (1,915,018  | ) |   | (762,225 | ) |
|                                                      |   |                                     |        |   |   |   |   |
| OTHER INCOME (EXPENSE):                                   |   |                                     |        |   |   |   |   |
| Gain/(loss) on disposal of equipment                      |   |                                     | 1,459       |   |   | — |   |
| Other income (expense)                                    |   |                                     | 151,897     |   |   | — |   |
| Fair value of derivative in excess of debt proceeds  |   |                                     | (29,792,150 | ) |   | — |   |
| Change in fair value of derivative instruments            |   |                                     | 34,341,508  |   |   | — |   |
| Interest income                                           |   |                                     | 853         |   |   | 1 |   |
| Interest expense                                          |   |                                     | (535,100    | ) |   | (260,354 | ) |
| Total other income (expense)                              |   |                                     | 4,168,467   |   |   | (260,353 | ) |
|                                                      |   |                                     |        |   |   |   |   |
| PROVISION FOR INCOME TAXES                                |   |                                     | —     |   |   | — |   |
|                                                      |   |                                     |        |   |   |   |   |
| NET INCOME (LOSS)                                         |   | $                                        | 2,253,449   |   | $ | (1,022,578 | ) |
|                                                      |   |                                     |        |   |   |   |   |
| Net income (loss) per common share, basic                 |   | $                                        | 0.11        |   | $ | (0.12) |   |
|                                                      |   |                                     |        |   |   |   |   |
| Net loss per common share, diluted                        |   | $                                        | (0.05       | ) | $ | (0.12 | ) |
|                                                      |   |                                     |        |   |   |   |   |
| Weighted average common shares outstanding, basic         |   |                                     | 20,382,567  |   |   | 8,828,837 |   |
|                                                      |   |                                     |        |   |   |   |   |
| Weighted average common shares outstanding, diluted       |   |                                     | 34,719,514  |   |   | 8,828,837 |   |

See notes to condensed consolidated financial statements

3

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT)**

|                                                           |   | **Common Stock** |       |       |   |                               |   |                       |       | **Total****Stockholders’****Deficit** |   |
|----------------------------------------------------------------|--------|------------------|------------|------------|--------|------------------------------------|--------|----------------------------|------------|---------------------------------------------|--------|
|                                                           |   | **Shares**       |       | **Amount** |   | **Additional Paid-****In Capital** |   | **Accumulated****Deficit** |       |                                        |
|                                                           |   |             |       |       |   |                               |   |                       |       |                                        |   |   |   | **(As Restated)** |   |
| BALANCE, January 1, 2010                                       |   |             | 20,755,588 |       | $      | 20,756                             |   | $                          | 24,490,534 |                                        | $      | (28,304,724 | )  | $ | (3,793,434 | ) |
|                                                           |   |             |       |       |   |                               |   |                       |       |                                        |   |   |   |   |   |   |
| Common Stock issued to non-employees for professional services |   |             | 55,556     |       |   | 55                                 |   |                       | 123,835    |                                        |   |   |   |   | 123,890 |   |
| Employee stock option compensation expense                     |   |             |       |       |   |                               |   |                       | 232,056    |                                        |   |   |   |   | 232,056 |   |
| Amortization of non-employee stock based compensation          |   |             |       |       |   |                               |   |                       | 182,574    |                                        |   |   |   |   | 182,574 |   |
| Purchase of Affinity Wireless, LLC for Stock                   |   |             | 141,521    |       |   | 141                                |   |                       | 410,269    |                                        |   |   |   |   | 410,410 |   |
| Common Stock Issued for exercised warrants                     |   |             | 228,774    |       |   | 229                                |   |                       | 455,872    |                                        |   |   |   |   | 456,101 |   |
| Net income for the three months ended March 31, 2010           |   |             |       |       |   |                               |   |                       |       |                                        |   | 2,253,449 |   |   | 2,253,449 |   |
|                                                           |   |             |       |       |   |                               |   |                       |       |                                        |   |   |   |   |   |   |
| BALANCE, March 31, 2010 (As Restated)                          |   |             | 21,181,439 |       | $      | 21,181                             |   | $                          | 25,895,140 |                                        | $      | (26,051,275 | )  | $ | (134,954 | )  |
|                                                           |   |             |       |       |   |                               |   |                       |       |                                        |   |   |   |   |   |   |

See notes to condensed consolidated financial statements.

4

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**KEYON COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)**

 

|                                                                          |   | **2010**          |       | **2009** |   |
|-------------------------------------------------------------------------------|--------|-------------------|------------|----------|--------|
|                                                                          |   | **(As Restated)** |       |     |   |
| **CASH FLOWS FROM OPERATIONS:**                                               |   |              |       |     |   |   |   |
| Net income/(loss)                                                             |   | $                 | 2,253,449  |     | $      | (1,022,577 | ) |
| Adjustments to reconcile net income/(loss) to net cash flows from operations: |   |              |       |     |   |   |   |
| Depreciation and amortization                                                 |   |              | 470,495    |     |   | 639,457 |   |
| Provision for doubtful account                                                |   |              | 37,632     |     |   | 35,907 |   |
| Stock based compensation expense                                              |   |              | 538,520    |     |   | 187,482 |   |
| Change in fair value of derivative liability                                  |   |              | (4,549,358 | )        |   | — |   |
| Non-cash interest expense                                                     |   |              | 352,174    |     |   | 36,798 |   |
| Gain on sale of asset                                                         |   |              | (1,459     | )        |   | — |   |
|                                                                          |   |              |       |     |   |   |   |
| Change in assets and liabilities, net of effect of acquisitions:              |   |              |       |     |   |   |   |
| Accounts receivable                                                           |   |              | 12,586     |     |   | (89,347 | ) |
| Inventory                                                                     |   |              | 5,277      |     |   | 6,703 |   |
| Prepaid expenses and other current assets                                     |   |              | 19,230     |     |   | (8,021 | ) |
| Refundable deposits                                                           |   |              | —    |     |   | (7,732 | ) |
| Accounts payable and accrued expenses (excluding interest expense)            |   |              | (238,781   | )        |   | 19,019 |   |
| Accrued interest expense                                                      |   |              | 19,350     |     |   | 26,112 |   |
| Accrued interest expense - related party                                      |   |              | —    |     |   | 26,925 |   |
| Deferred rent liability                                                       |   |              | (14,460    | )        |   | (14,205 | ) |
| Deferred revenue                                                              |   |              | (24,425    | )        |   | 27,136 |   |
|                                                                          |   |              |       |     |   |   |   |
| **Net cash flows used in operating activities**                               |   |              | (1,119,770 | )        |   | (136,343 | ) |
|                                                                          |   |              |       |     |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                     |   |              |       |     |   |   |   |
|                                                                          |   |              |       |     |   |   |   |
| Capital expenditures for property and equipment                               |   |              | (103,770   | )        |   | — |   |
| Proceeds on disposal of equipment                                             |   |              | 1,800      |     |   | 791 |   |
|                                                                          |   |              |       |     |   |   |   |
| **Net cash flows used in investing activities**                               |   |              | (101,970   | )        |   | 791 |   |
|                                                                          |   |              |       |     |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                     |   |              |       |     |   |   |   |
| Proceeds/(payment) from revolving line of credit - related parties            |   |              | (100,000   | )        |   | 50 |   |
| Payment on term loan payable - related parties                                |   |              | (4,050,000 | )        |   | — |   |
| Deposits for future financing                                                 |   |              | (250,000   | )        |   | — |   |
| Payments on notes payable                                                     |   |              | (77,576    | )        |   | (27,711 | ) |
| Proceeds from issuance of convertible note                                    |   |              | 15,000,000 |     |   | — |   |
| Proceeds from notes payable                                                   |   |              | —    |     |   | 154,639 |   |
| Proceeds from exercise of common stock purchase warrants                      |   |              | 456,101    |     |   | — |   |
| Payments on capital lease obligations                                         |   |              | (154,232   | )        |   | (74,962 | ) |
| Proceeds from notes payable - related party                                   |   |              | —    |     |   | 1003094 |   |
|                                                                          |   |              |       |     |   |   |   |
| **Net cash flows provided by financing activities**                           |   |              | 10,824,293 |     |   | 155,110 |   |
|                                                                          |   |              |       |     |   |   |   |
| **NET INCREASE IN CASH**                                                      |   |              | 9,602,553  |     |   | 19,558 |   |
|                                                                          |   |              |       |     |   |   |   |
| **CASH AND CASH EQUIVALENTS - Beginning of period**                           |   |              | 125,083    |     |   | 28,032 |   |
|                                                                          |   |              |       |     |   |   |   |
| **CASH AND CASH EQUIVALENTS - End of period**                                 |   | $                 | 9,727,636  |     | $      | 47,590 |   |
|                                                                          |   |              |       |     |   |   |   |

5

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**KEYON COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)**

 

|                                                   |   | **2010** |    | **2009** |   |
|--------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                   |   |     |    |     |   |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:** |   |     |    |     |   |   |   |
|                                                   |   |     |    |     |   |   |   |
| Stock issued for acquisition - Affinity:               |   |     |    |     |   |   |   |
| Network equipment                                      |   | $        | 118,205 |     | $      | — |   |
| Customer premise equipment                             |   |     | 20,150  |     |   | — |   |
| Subscriber base                                        |   |     | 51,860  |     |   | — |   |
| Vehicles                                               |   |     | 9,840   |     |   | — |   |
| Office equipment                                       |   |     | 5,795   |     |   | — |   |
| Prepaid expenses                                       |   |     | 2,580   |     |   | — |   |
| Accounts receivable                                    |   |     | 3,401   |     |   | — |   |
| Accounts payable and accrued expenses                  |   |     | (11,342 | )        |   | — |   |
| Loan payable                                           |   |     | (69,487 | )        |   | — |   |
| Obligations to subscribers                             |   |     | (7,607  | )        |   | — |   |
| Goodwill                                               |   |     | 287,016 |     |   | — |   |
|                                                   |   |     |    |     |   |   |   |
|                                                   |   | $        | 410,411 |     | $      | — |   |
|                                                   |   |     |    |     |   |   |   |
| Warrant interest expense                               |   | $        | — |     | $      | 39,798 |   |
| Common stock payable subscription sales                |   | $        | 456,108 |     | $      | — |   |
| Common stock issued for common stock payable           |   | $        | 370,041 |     | $      | — |   |
| Common stock issued for professional services          |   | $        | 123,834 |     | $      | — |   |
| Capital lease obligations for property and equipment   |   | $        | 83,122  |     | $      | 50,794 |   |
|                                                   |   |     |    |     |   |   |   |
| **Cash payments for:**                                 |   |     |    |     |   |   |   |
| Interest                                               |   | $        | 241,004 |     | $      | 234,241 |   |
|                                                   |   |     |    |     |   |   |   |
| Tax                                                    |   | $        | — |     | $      | — |   |
|                                                   |   |     |    |     |   |   |   |

See notes to condensed consolidated financial statements.

6

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

        On August 9, 2007, KeyOn Communications, Inc.(“KeyOn”) became a publicly-traded company upon its completion of a merger with Grant Enterprises, Inc. (“Grant”), a publicly-traded company with nominal operations (the “Merger”). KeyOn was incorporated on December 16, 2004, under the laws of the State of        Nevada. In connection with the Merger, a newly formed subsidiary of KeyOn merged with and into KeyOn, and KeyOn, as the surviving corporation, became a wholly-owned subsidiary of Grant. Grant subsequently changed its name to KeyOn Communications Holdings, Inc. (the “Company”). The former of stockholders of KeyOn became the majority stockholders of the Company upon completing the merger and the Company continued to operate the business of Keyon. Accordingly, the Merger was        accounted for as a reverse merger and recapitalization of KeyOn. 

        The Company provides wireless broadband, satellite video and voice-over-IP (VoIP) services primarily to small and rural markets in the Western and Midwestern United States. KeyOn’s markets are located in twelve (12) Western and Midwestern states: Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Nevada, Ohio, South        Dakota, and Texas. The Company has the following nine wholly-owned subsidiaries: KeyOn Communications, Inc., KeyOn Communications, LLC; KeyOn SIRIS, LLC; KeyOn Grand Junction, LLC; KeyOn Idaho Falls, LLC; KeyOn Pahrump, LLC; KeyOn Pocatello, LLC, KeyOn SpeedNet LLC and KeyOn Spectrum Holdings, LLC.

 

**Restatement of Previously Issued Financial Statements**

 

        On August 6, 2010, the Board of Directors of the Company, after consultation with and upon recommendation from management, concluded that the Company’s financial statements for the three months ended March 31, 2010, which were included in its Form 10-Q for the quarter ended March 31, 2010, did not properly account for the embedded derivative feature of        its $15,000,000 secured convertible promissory note that was issued to The California Capital Limited Partnership on February 5, 2010 (Note 7) in accordance with United States generally accepted accounting principles and, as a result, cannot be relied upon. 

 

        During the course of an internal evaluation, our accounting staff evaluated the Company’s accounting treatment of the note in light of EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (FASB ASC 815-40-15-5) (“***ASC        815***”) effective as of January 1, 2009, which outlines new guidance for instruments indexed to an entity’s own stock and the resulting liability or equity classification based on that conclusion. ASC 815 should have been adopted as of January 1, 2009 by classifying the conversion feature embedded in the Note as a liability measured at fair value with changes in fair value recognized in earnings in each subsequent reporting period and recording a        cumulative-effect adjustment to the opening balance of retained earnings. After discussions with the Board of Directors, management determined that the Company would file an amended Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31, 2010 to reflect the corrections made in response to this accounting error.

 

        The effect of the restatement on the Company's previously issued financial statements is as follows:

 

|                                                              | **As Restated** |        | **As Originally Reported** |   | **Difference** |   |
|--------------------------------------------------------------|-----------------|-------------|----------------------------|--------|----------------|--------|
| **Condensed Consolidated Balance Sheet:**                    |            |             |                       |   |                |   |   |  |   |
| Derivative Liability                                         | $               | 10,450,642  |                       |   |                |   | $ | 10,450,642 |   |
| Current Liabilities                                          |            | 13,186,156  |                       |   | 2,735,514      |   |   | 10,450,642 |   |
|                                                              |            |             |                       |   |                |   |   |  |   |
| Convertible Note                                             |            | 330,976     |                       |   | 15,000,000     |   |   | (14,669,024 | ) |
| Total Long Term Liabilities                                  |            | 772,659     |                       |   | 15,441,683     |   |   | (14,669,024 | ) |
|                                                              |            |             |                       |   |                |   |   |  |   |
| Total Liabilities                                            |            | 13,958,815  |                       |   | 18,177,197     |   |   | (4,218,382 | ) |
|                                                              |            |             |                       |   |                |   |   |  |   |
| Accumulated Deficit                                          |            | (26,051,275 | )                          |   | (30,269,657    | )      |   | 4,218,382 |   |
| Total Stockholders' Deficit                                  |            | (134,954    | )                          |   | (4,353,336     | )      |   | 4,218,382 |   |
|                                                              |            |             |                       |   |                |   |   |  |   |
| **Condensed Consolidated Statement of Operations:**          |            |             |                       |   |                |   |   |  |   |
|                                                              |            |             |                       |   |                |   |   |  |   |
| Fair value of derivative in excess of debt offering proceeds |            | (29,792,150 | )                          |   |                |   |   | (29,792,150 | ) |
| Change in fair value of derivative                           |            | 34,341,508  |                       |   |                |   |   | 34,341,508 |   |
|                                                              |            |             |                       |   |                |   |   |  |   |
| Net income (loss available to common stockholders)           |            | 2,253,449   |                       |   | (1,964,933     | )      |   | 4,218,382 |   |
|                                                              |            |             |                       |   |                |   |   |  |   |
| Net income (loss) per common share                           |            |             |                       |   |                |   |   |  |   |
| Basic                                                        | $               | .11         |                       | $      | (.09           | )      | $ | .20 |   |
| Diluted                                                      | $               | (.05        | )                          | $      | (.09           | )      | $ | .04 |   |
|                                                              |            |             |                       |   |                |   |   |  |   |
| Weighted Average number of common shares outstanding         |            |             |                       |   |                |   |   |  |   |
| Basic                                                        |            | 20,382,567  |                       |   | 20,994,853     |   |   | (612,286 | ) |
| Diluted                                                      |            | 34,719,514  |                       |   | 20,994,853     |   |   | 13,724,661 |   |

 

**Note 2 – Liquidity and Financial Condition**

        The Company incurred an operating loss of $1,915,018 for the three months ended March 31, 2010. At March 31, 2010, the Company’s accumulated deficit amounted to $26,051,275. During the three months ended March 31, 2010, net cash used in operating activities amounted to $1,119,770. At March 30, 2010, the Company’s working capital        amounted to a deficit of $3,143,590, which includes a liability for the fair value of a derivative financial instrument which, if exercised, will result in a net share settlement of 20,000,000 shares. 

        On February 1, 2010, the Company and an institutional investor (the “Buyer”) entered into a Note Purchase Agreement (the “Note Purchase Agreement”). On February 5, 2010, pursuant to the Note Purchase Agreement, the Company issued the Buyer a secured convertible note for the principal sum of $15,000,000 (the        “Note”), which Note is convertible into shares of Series Cal Cap Preferred Stock, of the Company (the “Series Cal Cap Preferred Stock”) and shares of common stock, of the Company pursuant to the terms more fully described in Note 7. 

        The Company currently anticipates that its cash and cash equivalents will be sufficient to meet its working capital requirements to continue its sales and marketing and research and development through at least October, 2011. However, in order to execute the Company’s long-term strategy and penetrate new and existing markets, the        Company may need to raise additional funds, through public or private equity offerings, debt financings, corporate collaborations or other means. We have not secured any commitments for new financing at this time, nor can we provide any assurance that new financing will be available on commercially acceptable terms, if needed. If the Company is unable to secure additional capital, it may be required to curtail its business development initiatives and take additional measures to reduce        costs in order to conserve its cash. 

**Note 3 – Summary of Significant Accounting Policies**

**        Basis of Presentation**

        The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not contain all the information and        footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying condensed consolidated 

7

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financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to make the financial position of the Company as of March 31, 2010 and the results of operations for the three months ended March 31, 2010 and 2009 and cash flows for the three months ended March 31, 2010 and 2009 not misleading. The unaudited condensed consolidated financial statements for the three        months ended March 31, 2010, and March 31, 2009 should be read in conjunction with the audited financial statements for the years ended December 31, 2009 and 2008 as contained in the Forms 10K and 10K/A filed on April 16, 2010 and the 10K/A No. 2 filed on December 1, 2010. 

 

**        Estimates**

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the condensed consolidated        financial statements and the reported amounts of revenues and expenses during the reporting periods. Periodically, the Company evaluates and adjusts estimates accordingly. The Company’s significant estimates include accounts receivable and inventory valuation allowances, goodwill and intangible assets, acquisition accounting, valuation of stock options and derivative financial instruments. Actual results could vary from the estimates that were used, and such variances could be        significant. 

**        Consolidation Policy**

        The accompanying consolidated balance sheets and consolidated statements of operations, stockholders’ equity (deficit), and cash flows, include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 

**        Revenue Recognition**

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

        The Company charges a recurring subscription fee for providing its various Internet access services to its subscribers and recognizes revenues when they are earned, which generally occurs as the service is provided. Subscriptions to the services are in the form of one or two year contracts and are billed monthly, quarterly, semiannually or        annually in advance. Payments received in advance for subscriptions are deferred and recognized as the services are provided. Deferred revenues for payments received in advance of subscription services amounted to $196,856 and $213,674 at March 31, 2010 and December 31, 2009, respectively. For the satellite video business in which the Company is a retailer of video services from DISH Network Corporation (“DISH”), the Company recognizes revenues at the time of installation.        

**        Cash and Cash Equivalents**

        The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. For financial statement purposes, investments in money market funds are considered a cash equivalent and are included in cash and cash equivalents. The Company maintains it cash and cash equivalents at high credit        quality institutions. 

8

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        **Inventories**

        Inventories consist of customer premise equipment, installation supplies, tower replacement parts and goods that the Company sells as a retailer of satellite video service from DISH. Inventories are stated at the lower of cost determined on first in first out or net realizable value. 

**Intangible Assets**

        Intangible assets, including goodwill, are accounted for under the provisions of Accounting Standards Codification (“ASC”) 350, “Intangibles—Goodwill and Other”. Under ASC 350, intangible assets, other than goodwill, are identified and segregated between amortizable and non-amortizable assets. Goodwill and other        non-amortizable assets are reviewed, at least annually, for impairment in the carrying value of the intangible asset. If impairment is deemed to have occurred, a loss for such impairment is recorded as part of current operations. We test goodwill and other intangible assets with indefinite lives for impairment annually or in interim periods if certain events or changes in circumstances indicate that the carrying value of amount of the assets may not be fully recoverable. 

        Intangible assets with definite lives (e.g., subscriber lists and non-compete agreements) are amortized over their estimated useful lives and tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. Amortization has been calculated using the straight-line method over the        estimated useful lives of the intangible assets which range from 3 years to 7 years. An asset begins to be amortized once that asset has been placed into service. Impairment occurs when the undiscounted cash flows over the remaining useful life of the asset exceed the carrying amount and the fair value of the asset is less than its carrying amount. If impaired, the asset is written down to its fair value. 

        The Company evaluated the carrying amounts of intangible assets as of March 31, 2010 and determined that no impairment charge is necessary.

**        Income Taxes**

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

        The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized in future periods. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax        planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company was to determine that it would realize the benefits of deferred income tax assets in the future in excess of their net recorded amounts, an adjustment would be made to reduce the valuation allowance to an appropriate amount. 

        The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet        a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. 

**Net Income (Loss) Per Share**

        The Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share includes the dilution that 

9

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would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. 

 

        The table of all of our common stock equivalents is as follows (in thousands):

 

|                           |   | **March 31,** |   |
|--------------------------------|--------|---------------|--------|
|                           |   | **2010**      |   | **2009** |   |
| Common stock purchase warrants |   |          | 3,944  |   |   | 0 |   |
| Stock options                  |   |          | 2,290  |   |   | 307 |   |
| Convertible notes              |   |          | 20,000 |   |   | 0 |   |
|                           |   |          | 26,234 |   |   | 307 |   |
|                           |   |          |   |   |   |   |   |

        The numerator in the EPS calculation for the three months ended March 31, 2010 gives effect to addbacks of (i) $90,411 of contractual interest expense under our convertible notes, and (ii) $330,976 of accretion of discount under the convertible notes (recorded as interest expense) and (iii) the elimination of the $4,549,358 change in the fair        value of the derivative liability associated with the conversion option embedded in our convertible notes. The number of shares included in the presentation of diluted loss per share for the three months ended March 31, 2010 includes (i) 1,454,630 employee stock options and (ii) 1,221,205 common stock purchase warrants, each with exercises prices that are less than the average share price of $1.91 per share for the three months ended March 31, 2010 and (iii) 11,111,111 shares of common        stock underlying the conversion option embedded in our convertible notes described in Note 7. 

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

**        Stock-Based Compensation**

        The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes option pricing model to        calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement. The Company recorded total stock-based compensation of $538,520 for the three month period ended March 31, 2010, compared to $187,482 for the same period in 2009. 

**        Common Stock Purchase Warrants and Derivative Financial Instruments**

        The Company classifies all of its common stock purchase warrants and derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies        as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or 

10

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(iii) contracts that contain reset provisions. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. 

        The Company determined that the embedded conversion option included in its convertible notes more fully described in Note 7 meets the definition of derivative financial instruments that must be bifurcated from the host and accounted for as a freestanding derivative at fair value. 

**        Fair Value of Financial Assets and Liabilities**

        Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts as a market rate of interest is        attached to their repayment. 

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

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

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

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

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

|                 |   | **Fair value measurements at March 31, 2010** |       |
|----------------------|--------|-----------------------------------------------|------------|
|                 |   | **March 31,****2010**                         |       | **Quoted prices in****active markets for****identical assets****(Level 1)** |   | **Significant****other****observable****inputs****(Level 2)** |   | **Significant****unobservable****inputs****(Level 3)** |   |
| Derivative liability |   | $                                             | 10,450,642 |   |   |   |   |   |   |   | $ | 10,450,642 |   |

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

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

|                                                                 |   | **March****31, 2010****(unaudited)** |        | **December 31,****2009** |   |
|----------------------------------------------------------------------|--------|--------------------------------------|-------------|--------------------------|--------|
| Beginning Balance                                                    |   | $                                    | —     |                     | $      | — |   |
| Aggregate fair value of derivative issued                            |   |                                 | 44,792,150  |                     |   | — |   |
| Change in fair value of derivative included in results of operations |   |                                 | (34,341,508 | )                        |   | — |   |
|                                                                 |   |                                 | —     |                     |   | — |   |
| Ending Balance                                                       |   | $                                    | 10,450,642  |                     | $      | — |   |
|                                                                 |   |                                 |        |                     |   |   |   |

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        **Recent Accounting Pronouncements**

        In August 2009, the FASB issued ASU No. 2009-05 – Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. This ASU clarifies the fair market value measurement of liabilities. In circumstances where a quoted price in an active market for the identical liability is not available, a reporting entity is required to        measure fair value using one or more of the following techniques: a technique that uses quoted price of the identical or a similar liability or liabilities when traded as an asset or assets, or another valuation technique that is consistent with the principles of Topic 820 such as an income or market approach. ASU No. 2009-05 was effective upon issuance and it did not result in any significant financial impact on the Company upon adoption. 

        In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers. Further,        this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU does not have a material impact on our consolidated financial statements. 

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

**Note 4 - Business Combinations**

**        Affinity Wireless, LLC**

        On February 3, 2010, the Company purchased the assets of Affinity Wireless, LLC, pursuant to an Asset Purchase Agreement, including subscriber contracts, accounts, and fixed assets for 141,521 shares of common stock for a total purchase price of $410,411. This acquisition enables the Company to expand its business into the geographical region in and around        Ottumwa, Iowa. The purchase price breakdown is as follows: 

| Network equipment                     |   | $      | 118,205 |   |
|---------------------------------------|--------|--------|---------|--------|
| Customer premise equipment            |   |   | 20,150  |   |
| Subscriber base                       |   |   | 51,861  |   |
| Vehicles                              |   |   | 9,840   |   |
| Office equipment                      |   |   | 5,795   |   |
| Prepaid expenses                      |   |   | 2,580   |   |
| Accounts receivable                   |   |   | 3,401   |   |
| Accounts payable and accrued expenses |   |   | (11,342 | )      |
| Loan payable                          |   |   | (69,487 | )      |
| Obligations to subscribers            |   |   | (7,607  | )      |
| Goodwill                              |   |   | 287,015 |   |
|                                  |   | $      | 410,411 |   |
|                                  |   |   |    |   |

**        Pro forma financials**

        The Company accounted for these business combinations using the acquisition method of accounting. The results of operations for the three months ended March 31, 2010, including the revenues and expenses of these acquired businesses since their respective dates of acquisition. 

        The unaudited pro-forma financial results for the three months ended March 31, 2010 and March 31, 2009, combines the historical results of Affinity, LLC with those of the Company as if these acquisitions had been completed as of the beginning of each of the periods presented. The pro-forma weighted average number of shares outstanding also assumes that the        shares issued as purchase consideration were outstanding as of the beginning of each of the periods presented.

 

**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES**

 

| **PRO FORMA COMBINED STATEMENT OF OPERATIONS**         |   |                                     |       |   |                                     |   |      |
|--------------------------------------------------------|--------|------------------------------------------|------------|--------|------------------------------------------|--------|-----------|
|                                                   |   | **Three Months Ended****March 31, 2010** |       |   | **Three Months Ended****March 31, 2009** |   |      |
| Total revenues                                         |   | $                                        | 1,617,329  |   |                                     | $      | 1,940,670 |   |   |
| Loss from operations                                   |   | $                                        | (1,908,697 | )      |                                     | $      | (738,161  | ) |   |
| Net income/(loss) available to common stockholders     |   | $                                        | 2,259,770  |   |                                     | $      | (998,514  | ) |   |
| Net income/(loss) per share, basic                     |   | $                                        | 0.11       |   |                                     | $      | (0.11     | ) |   |
| Net income/(loss) per share, diluted                   |   | $                                        | (0.04      | )      |                                     | $      | (0.11     | ) |   |
| Pro forma weighted average shares outstanding, basic   |   |                                     | 20,996,744 |   |                                     |   | 8,828,837 |   |   |
| Pro forma weighted average shares outstanding, diluted |   |                                     | 43,591,745 |   |                                     |   | 8,828,837 |   |   |

 

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**Note 5 – Property and Equipment**

 

        Property and equipment consists of the following:

|                                |   | **March 31, 2010** |       | **December 31, 2009** |   |
|-------------------------------------|--------|--------------------|------------|-----------------------|--------|
|                                |   |               |       |                  |   |   |   |
| Subscriber equipment                |   | $                  | 6,260,808  |                  | $      | 6,206,078 |   |
| Fixed wireless tower site equipment |   |               | 2,990,272  |                  |   | 2,816,295 |   |
| Software and consulting costs       |   |               | 623,202    |                  |   | 594,170 |   |
| Computer and office equipment       |   |               | 532,393    |                  |   | 459,089 |   |
| Vehicles                            |   |               | 232,649    |                  |   | 242,574 |   |
| Leasehold improvements              |   |               | 312,100    |                  |   | 312,100 |   |
|                                |   |               | 10,951,424 |                  |   | 10,630,306 |   |
| Less: accumulated depreciation      |   |               | (9,412,491 | )                     |   | (9,015,852 | ) |
|                                |   |               |       |                  |   |   |   |
| Property and equipment, net         |   | $                  | 1,538,933  |                  | $      | 1,614,454 |   |
|                                |   |               |       |                  |   |   |   |

        Depreciation expense for the three months ended March 31, 2010 and March 31, 2009 was $416,064 and $538,946 respectively.

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**Note 6 – Intangible Assets**

 

        Intangible assets at March 31, 2010 and December 31, 2009, consisted of the following:

 

| **Goodwill**                         |   |   |       |   |
|--------------------------------------|--------|--------|------------|--------|
| Goodwill-December 31, 2009           |   | $      | 1,341,816  |   |
| Affinity Acquisition Goodwill        |   |   | 287,015    |   |
| Goodwill-March 31, 2010              |   | $      | 1,628,831  |   |
|                                 |   |   |       |   |
| **Subscriber Base**                  |   |   |       |   |
| Subscriber Base-December 31, 2009    |   | $      | 1,313,415  |   |
| Affinity Acquisition Subscriber Base |   |   | 51,861     |   |
| Subscriber Base-March 31, 2010       |   | $      | 1,365,276  |   |
| Less accumulated amortization        |   |   | (1,185,178 | )      |
| Subscriber Base, net                 |   | $      | 180,098    |   |
|                                 |   |   |       |   |

 

        Amortization expense for the three months ended March 31, 2010 and March 31, 2009 was $54,431 and $100,511, respectively.

 

        Estimated amortization expense for the remainder of 2010 and future fiscal years is as follows:

 

| For the period of April 1, 2010 through December 31, 2010 |   | $      | 78,485  |   |
|-----------------------------------------------------------|--------|--------|---------|--------|
| For the years ending December,                            |   |   |    |   |
| 2011                                                      |   |   | 45,985  |   |
| 2012                                                      |   |   | 45,359  |   |
| 2013                                                      |   |   | 10,269  |   |
|                                                      |   | $      | 180,098 |   |
|                                                      |   |   |    |   |

**Note 7 – Notes, Loans and Derivative Liabilities**

**        Installment Obligations:**

        On February 1, 2010, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with The California Capital Limited Partnership (“CCLP”). On February 5, 2010, pursuant to the Note Purchase Agreement, the Company issued to CCLP a secured convertible promissory note for the principal sum of 

14

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$15,000,000 (the “Note”). The Note bears interest at the rate of 8% per annum. However, prior to September 30, 2010, interest under the Note shall accrue on the outstanding principal amount, at the election of CCLP, at the rate of 4% per annum and be payable in cash or at the rate of 8% per annum and be payable in shares of Series Cal Cap Preferred Stock, with such shares of Series Cal Cap        Preferred Stock issued at a price per share of $1.50. After September 30, 2010, interest shall accrue on the outstanding principal amount at the rate of 8% per annum and is payable in cash. The Note matures on February 5, 2015, unless accelerated by CCLP upon an event of default. 

        The Note is convertible into shares of Series Cal Cap Preferred Stock as well as common stock, at the option of CCLP, upon maturity or mandatorily under certain circumstances. Pursuant to the terms of the Note, if the Company had been successful in any of its Round One ARRA applications, the Note would have mandatorily converted into shares        of Series Cal Cap Preferred Stock. This mandatory conversion feature expired as a result of the Company’s announcement on March 3, 2010 that none of the Round One ARRA applications advanced to an award as fully described on Current Report on Form 8-K. The Company also entered into a Registration Rights Agreement, a Security Agreement (the “Security Agreement”) and various ancillary certificates, dated February 5, 2010. Pursuant to the Security Agreement between CCLP        and the Company, the Company’s obligations under the Note are secured by a perfected security interest in all of the assets and properties of the Company, including the stock of its subsidiaries. 

       The Note provides for the conversion at the lesser of (i) $0.75 per share or (ii) the average VWAP for the 40 trading days following the earlier of an ARRA negative funding announcement or September 30, 2010. On March 3, 2010, the Company received a negative funding announcement. The VWAP calculated was $0.83 per share which is greater than $0.75        per share. The fair valuation of the embedded derivative was based upon 20,000,000 preferred shares issued upon a conversion of the Note. The bifurcation of the derivative discounted the Note to $0 to be accreted over five years. Accretion expense recognized for the three month period ended March 31, 2010 was $330,976. 

        The Company executed a loan agreement with Sun West Bank on February 8, 2008, totaling $4.5 million (the “Loan”). On June 18, 2009, the Company entered into a Change in Terms Agreement with Sun West Bank, whereby the Company made a principal reduction payment of $450,000. Pursuant to the Change in Terms Agreement, the payment        reduced the Loan to $4.05 million with Sun West Bank and extended its maturity until June 4, 2015. Payments for the first year are interest only at a 7.25% fixed interest rate. A shareholder in the Company is also a minority shareholder and Board member of the lending institution. As a member of the bank’s Board and Loan Committee, the shareholder abstained from voting on this transaction as required under the appropriate banking regulations. The Loan was guaranteed by three        shareholders of the Company, one being an officer of the Company. The interest is payable monthly. The loan and all accrued interest were repaid in full on February 5, 2010. 

**        Derivative Financial Instrument**

        The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815 “Derivative and Hedging” which requires issuers of financial statements to make a determination as to whether (i) an embedded conversion meets the definition of a derivative in its entirety and (ii) would        qualify for a scope exception to derivative accounting, which further includes evaluating whether the embedded derivative would be considered indexed to the issuers own stock. 

        ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as separate derivatives in the event such derivatives would not be classified in stockholders’ equity if they were free standing. These three criteria include circumstances in which        (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other applicable GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative        instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides for an exception to this rule if a debt host instrument is deemed to be a conventional debt instrument. 

        The Company evaluated the conversion option embedded in its convertible notes issued in February 2010 in accordance with the provisions of ASC 815 and determined that the conversion option has all of the characteristics of a derivative in its entirety that does not qualify for an exception to the derivative accounting rules. Specifically, the        exercise price of the conversion option is not fixed at any time during the term of the note based on 

15

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the occurrence or non-occurrence of certain events and also entitles the counterparty to an adjustment of the exercise price in the event that the Company subsequently issues equity securities or equity linked securities at prices more favorable than the exercise price of the conversion option embedded in the notes. Accordingly, the conversion option is not considered indexed to the Company’s own        stock. 

        As a result of the above, the Company recorded a derivative liability on February 5, 2010, the commitment date of the transaction, in the amount of $44,792,150 and a corresponding charge of $29,792,150 for the difference between the issuance date fair value of the derivative and the $15,000,000 of proceeds received from the investor in the        note transaction. The Company also adjusts the carrying amount the derivative to its fair value at each reporting date with the changes in fair value reported as a component of results of operations under the heading of other income and expense. The fair value of the derivative liability was reduced to $10,450,642 as of March 31, 2010 principally due to reduction in our stock price as of March 31, 2010. 

        The Company computed the fair value of the derivative liability at the date of issuance and the reporting date of March 31, 2010 using the Black-Scholes option pricing model with the following assumptions: 

| **Input**                     |   | **February 5, 2010****(Issuance Date)** |       | **March 31, 2010****(Reporting Date)** |   |
|-------------------------------|--------|-----------------------------------------|------------|----------------------------------------|--------|
| Fair value of common stock    |   | $                                       | 2.90       |                                   | $      | .94 |   |
| Exercise Price of Option      |   | $                                       | .75        |                                   | $      | .75 |   |
| Term (years)                  |   |                                    | 5          |                                   |   | 4.83 |   |
| Volatility                    |   |                                    | 55         | %                                      |   | 55 | % |
| Risk Free Interest Rate       |   |                                    | 2.23       | %                                      |   | 3.12 | % |
| Dividend Yield                |   |                                    | 0          | %                                      |   | 0 | % |
| Unit fair value               |   | $                                       | 2.24       |                                   | $      | 0.52 |   |
| Shares issuable upon exercise |   |                                    | 20,000,000 |                                   |   | 20,000,000 |   |
| Aggregate fair value          |   | $                                       | 44,792,150 |                                   | $      | 10,450,642 |   |
|                          |   |                                    |       |                                   |   |   |   |

          The Company recorded a net credit of $4,549,358 for the change in fair value of the derivative for the three months ended March 31, 2010, which includes the effects of having recorded (i) the issuance date charge of $29,792,150 for the difference between the issuance date fair value of the derivative and the proceeds in the note transaction and        (ii) a subsequent credit of $34,341,508 for the change between the issuance date fair value of the derivative, which amounted to $44,792,150 and the reporting date fair value of the derivative which amounted to $10,450,642. The change in the fair value of the derivative is included in other income and expense in the accompanying condensed consolidated statement of operations for the three month period ended March 31, 2010. 

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**Note 8 - Operating and Capital Leases**

 

**        Capital Leases:**

        The Company leases equipment from certain parties under various capital leases expiring in 2008 through 2011. The Company has entered into four additional capital leases that total, in aggregate $83,122 in the three months ended March 31, 2010. Future minimum lease payments under the capital leases, which are stated at their principal amounts        with initial or remaining terms of one year or more consist of the following as of March 31, 2010: 

|                                |   |   |      |   |
|-------------------------------------|--------|--------|-----------|--------|
| 2010                                |   |   | 661,713   |   |
| 2011                                |   |   | 607,637   |   |
| 2012                                |   |   | 55,171    |   |
| 2013                                |   |   | 6,909     |   |
| 2014                                |   |   | 179       |   |
| Total minimum lease payments        |   |   | 1,331,609 |   |
| Less amounts representing interest  |   |   | (256,203  | )      |
|                                |   |   | 1075,406  |   |
|                                |   |   |      |   |
| Less current portion                |   |   | (700,296  | )      |
|                                |   |   |      |   |
| Long term capital lease obligations |   | $      | 375,110   |   |
|                                |   |   |      |   |

          Pursuant to two master lease agreements, the Company has an aggregate lease borrowing limit of that totals $2 million. No funding is available as of March 31, 2010 under these two master lease agreements. 

**        Operating Leases:**

        In addition, the Company leases tower and roof-top space under operating leases with terms that are typically for 5 years and contain automatic renewals for 2 or 3 additional 5 year terms. Finally, the Company also has various operating leases for office space, equipment, and vehicles that generally are for 3 to 5 year terms. Future minimum        lease payments under the operating leases with initial or remaining terms of one year or more consist of the following at March 31, 2010: 

|                                                      |   |   |      |   |
|-----------------------------------------------------------|--------|--------|-----------|--------|
| For the period of April 1, 2010 through December 31, 2010 |   | $      | 694,633   |   |
| For the years ending December,                            |   |   |      |   |
| 2011                                                      |   |   | 772,079   |   |
| 2012                                                      |   |   | 444,008   |   |
| 2013                                                      |   |   | 235,135   |   |
| 2014                                                      |   |   | 48,391    |   |
| Thereafter                                                |   |   | 15,604    |   |
|                                                      |   |   |      |   |
|                                                      |   | $      | 2,209,850 |   |
|                                                      |   |   |      |   |

          The total rental expense included in operating expenses for operating leases included above is $353,676 and $351,031 for the three months ended March 31, 2010 and 2009, respectively. 

**Note 9 – Stockholder Equity (Deficit)**

**        Preferred Stock**

        Pursuant to the Company’s Amended and Restated Certificate of Incorporation (the “Restated Certificate”), the Company is now authorized to issue up to 175,000,000 shares of stock, of which 115,000,000 have been designated as Common Stock and 60,000,000 have been designated as preferred stock. Of the 60,000,000 shares of        Preferred Stock, 30,000,000 shares have been designated as Series Cal Cap Preferred Stock and 30,000,000 shares have been designated as Series KIP Preferred Stock. Each of the Series Cal Cap Preferred Stock and Series KIP Preferred Stock are entitled to certain powers, preferences and other special rights that are summarized below: 

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        **Dividends**

        The holders of shares of Series Cal Cap Preferred Stock and Series KIP Preferred Stock are entitled to receive dividends, on a pari passu basis, out of any assets legally available therefore, prior and in preference to any declaration or payment of any dividend (payable other than in common stock or other securities and rights convertible        into or entitling the holder thereof to receive, directly or indirectly, additional shares of common stock) on the common stock, at the rate of 10% of the Original Series Cal Cap Issue Price (as defined below) per share per annum for the Series Cal Cap Preferred Stock and 10% of the Original Series KIP Issue Price (as defined below) per share per annum for the Series KIP Preferred Stock, payable within thirty (30) days following the last day of each fiscal quarter. During the first two        years following the initial issuance of either the Series Cal Cap Preferred Stock or Series KIP Preferred Stock, such dividends shall, at the option of the Company, be payable in either cash or additional shares of Series Cal Cap Preferred Stock or Series KIP Preferred Stock, as applicable (with such shares being valued consistently with the common stock). Following such two year period, dividends shall be paid in cash unless otherwise elected by the holder. 

**        Liquidation Preference**

        In the event of the liquidation, dissolution or winding up of the Company, the acquisition of the Company by another entity as a result of which the Company’s stockholders have less than 50% control of the acquiring entity’s voting power following such acquisition or the sale of all or substantially all of the assets of the        Company, the holders of Series Cal Cap Preferred Stock and Series KIP Preferred Stock shall be entitled to receive, on a pari passu basis, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock, (i) for the Series Cal Cap Preferred Stock, an amount per share equal to greater of (I) the sum of (A) the product of (1) 1.5 and (2) the aggregate amount paid to, or deemed to be paid to, the Company in connection with the issuance of such        shares of Series Cal Cap Preferred Stock divided by the number of shares of Series Cal Cap Preferred Stock issued by the Company (the “Original Series Cal Cap Issue Price”) for each outstanding share of Series Cal Cap Preferred Stock and (B) an amount equal to all accrued but unpaid dividends on such share and (II) the amount of cash, securities or other property which such holder would be entitled to receive in such sale, liquidation, dissolution or winding up of the        Company with respect to such shares if such shares had been converted to common stock immediately prior to such sale, liquidation, dissolution or winding up of the Company and (ii) for the Series KIP Preferred Stock, an amount per share equal to the greater of (I) the sum of (A) the product of (1) 1.5 and (2) the aggregate amount paid to the Company in connection with the issuance of such shares of Series KIP Preferred Stock divided by the number of shares of Series KIP Preferred Stock        issued by the Company (the “Original Series KIP Issue Price”) for each outstanding share of Series KIP Preferred Stock and (B) an amount equal to all accrued but unpaid dividends on such share and (II) the amount of cash, securities or other property which such holder would be entitled to receive in such sale, liquidation, dissolution or winding up of the Company with respect to such shares if such shares had been converted to common stock immediately prior to such sale,        liquidation, dissolution or winding up of the Company. Upon completion of these distributions, the holders of Series Cal Cap Preferred Stock and Series KIP Preferred Stock shall not be entitled to any further participation as such in any distribution of the assets or funds of the Company. 

**        Optional Conversion**

        Each share of Series Cal Cap Preferred Stock or Series KIP Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share into such number of fully paid and nonassessable shares of common stock as is determined by dividing the Original Series Cal Cap Issue Price and Original        Series KIP Issue Price, as the case may be, by the then applicable conversion price. The initial conversion price per share for shares of Series Cal Cap Preferred Stock and Series KIP Preferred Stock shall be the Original Series Cal Cap Issue Price and Original Series KIP Issue Price, respectively. 

**Anti-Dilution Protection**

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

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        **Mandatory Conversion**

        If the volume weighted average price for any 10 consecutive trading days exceeds, with respect to the Series Cal Cap Preferred Stock, the product of (i) 5 and (ii) the Original Series Cal Cap Issue Price, the Company may require any holder of shares of Series Cal Cap Preferred Stock to convert such shares, and any accrued but unpaid dividends        thereon, into such number of shares of common stock as provided above. In addition, if the volume weighted average price for any 10 consecutive trading days exceeds the product of (i) 5 and (ii) the Original Series KIP Issue Price, the Company may require any holder of shares of Series KIP Preferred Stock to convert such shares, and any accrued but unpaid dividends thereon, into such number of shares of common stock as provided above. 

**        Voting Rights**

        The holders of Series Cal Cap Preferred Stock and Series KIP Preferred Stock are entitled to vote, together with holders of common stock as a single class, on any matter upon which holders of common stock have the right to vote, and shall have the right to one vote for each share of common stock into which the shares of Series Cal Cap        Preferred Stock or Series KIP Preferred Stock held by such holders could then be converted. 

**        Election of Directors**

        So long as no shares of Series Cal Cap Preferred Stock or Series KIP Preferred Stock have been issued, the holders of shares of common stock shall be entitled to elect all directors of the Company. In the event that any shares of Series Cal Cap Preferred Stock or Series KIP Preferred Stock are outstanding, the holders of the Series Cal Cap        Preferred Stock and Series KIP Preferred Stock are entitled, voting together as a single class, to elect such number of directors of the Company as is consistent with their pro rata ownership of the Company’s outstanding common stock assuming the full conversion of all outstanding shares of Series Cal Cap Preferred Stock and Series KIP Preferred Stock. In such event, the holders of shares of common stock shall be entitled, voting separately as a single class, to elect all        remaining directors of the Company. 

**        Issuances of Common Stock**

        During the three month period ended March 31, 2010, 425,851 shares of common stock were issued which includes the following: 

        55,556 shares of common stock valued at $123,890 were issued as payment for contractual agreements for professional services on January 4 and February 4, 2010, 

        228,774 shares of common stock were issued upon the exercise of common stock purchase warrants.

**        Warrants**

        A roll-forward of the Company’s common stock purchase warrants for the three months ended March 31, 2010 is as follows:

| Outstanding at January 1, 2010 |   |   | 3,936,291 |   |
|--------------------------------|--------|--------|-----------|--------|
| Issued                         |   |   | 400,000   |   |
| Exercised                      |   |   | (228,774  | )      |
| Cancelled                      |   |   | (150,000  | )      |
| Expired unexercised            |   |   | (13,875   | )      |
| Outstanding at March 31, 2010  |   |   | 3,943,642 |   |

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        All warrants outstanding are exercisable and feature strike prices ranging from $0.50 to $8.00 per share.

        In February 2010, the Company issued 400,000 common stock purchase warrants to non-employees for services being performed through December 31, 2010. The aggregate grant date fair value of these warrants amounted to $572,247, which is being amortized over the contractual service periods. The Company calculated the grant fair value of these        warrants using the Black Scholes option pricing model with the following assumptions: fair value of common stock $2.57, exercise price $1.50, risk free interest rate 2.46%, volatility 55%, dividend yield 0%. The Company recorded $156,068 of stock based compensation expense with respect to these warrants during the three month period ended March 31, 2010, net of 150,000 common stock purchase warrants for which performance conditions were not met. 

        Non-employee stock based compensation relating to the issuance of common stock and common stock purchase warrants amounted to $306,464 and none for the three months ended March 31, 2010 and 2009, respectively, which is included as a component of professional fees in the accompanying condensed consolidated statements of operations. 

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        **Stock Option Plans**

        On August 9, 2007, our Board of Directors and stockholders adopted the 2007 Incentive Stock and Awards Plan (the “2007 Plan”). The purpose of the 2007 Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of        proprietorship and to stimulate an active interest of such persons into our development and financial success. Under the 2007 Plan, we are authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986 as amended, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2007 Plan is administered by the Board of Directors. 

        As of December 31, 2009, all 2,440,000 options authorized under the 2007 Plan were outstanding. During the three months ended March 31, 2010, the Company did not grant any options to purchase shares of common stock, pursuant to the 2007 Plan. For the three months ended March 31, 2010, 150,000 options were forfeited. As of March 31, 2010,        2,290,000 options were outstanding and 830,128 are exercisable. Based upon the stock price of $0.94 on March 31, 2010, there are 231,675 options that are exercisable that have a strike price of $0.25. The Company has 1,632,575 stock options outstanding that are exercisable at $0.25 per share. The aggregate intrinsic value amounts to approximately $1,126,000. Such options include 231,675 options currently exercisable at $0.25 per share with an intrinsic value of approximately $160,000.        All other exercisable options have a strike price above $0.94. 

       Compensation expense recorded for stock options during the three months ended March 31, 2010, amounted to $232,056. The range of strike price for outstanding options is $0.25 to $5.00 and the weighted average strike price is $1.04 per share. 

        Unamortized stock compensation expense as of March 31, 2010 amounted to $2,710,882 and is being recognized as compensation expense through August 31, 2013. 

**Note 10 – Subsequent Events**

**        Acquisitions**

        On April 30, 2010, the Company entered into an agreement to acquire substantially all of the wireless broadband assets and assume certain liabilities from Dynamic Broadband Corporation, an Iowa corporation. The assets to be acquired are used in the businesses of operating wireless broadband networks that provide high-speed Internet access and        other related services to subscribers in Iowa and Minnesota. The wireless broadband assets exclude DYBB’s managed service business known as “X-Wires.” 

        As consideration for the acquired assets, the Company has agreed to issue shares of common stock as well as assume certain obligations of DYBB. The total purchase price of the transaction is $2,520,000, subject to further adjustments as described in the Asset Purchase Agreement. The Asset Purchase Agreement contains customary representations        and warranties by the Company and DYBB. 

        On December 21, 2009, we entered into an agreement to acquire certain assets and assume certain liabilities from RidgeviewTel, LLC, a Colorado limited liability company. The acquired assets are used in the businesses of operating wireless broadband networks that provide high-speed Internet access and other related services to both residential        and commercial subscribers in, and around, certain markets in Illinois. 

        On April 1, 2010, upon the satisfaction of certain closing conditions as described in the Ridgeview Tel, LLC Asset Purchase Agreement, we completed the purchase of the assets and assumed certain liabilities. At Closing, as partial consideration for these acquired assets, we issued 150,944 shares of common stock of the Company. The balance of        the consideration consists of up to 16,772 shares of common stock, based upon the final calculation of net working capital as described in the RVT Asset Purchase Agreement. The Company has not yet completed the purchase valuation on this acquisition. 

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

 

**Overview**

        We provide wireless broadband services primarily to rural and other underserved markets under the "KeyOn," "SpeedNet," and "SIRIS" brands. We offer our broadband services along with VoIP and DISH video services to both residential and business subscribers. Our markets are located in the following 12 Western and Midwestern states: Colorado,        Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Nevada, Ohio, South Dakota, and Texas. We have principally grown our business through the acquisition of wireless broadband companies operating in areas contiguous or adjacent to our existing operations as well as through the organic growth of our subscriber base. Over the past four years, we have acquired the assets of eleven companies, which has increased our subscriber base and expanded our network footprint. In September        of 2009, we launched “Rural UniFi”, which formalized our strategic acquisition of wireless broadband companies and Rural UniFi continues to be one of our core growth strategies. From December 2009 continuing through today, we completed seven acquisitions of wireless broadband assets, including subscribers and related equipment, located in Texas, Iowa, Illinois and Minnesota. We are engaged in ongoing discussions with numerous potential acquisition candidates and believe we        are well positioned to continue to make additional acquisitions and grow our revenue and cash flow. 

        In February of 2010, we raised $15 million through the issuance of a secured convertible promissory note. We believe that this financing provided us with sufficient capital to execute our business plan, which consists of: Rural UniFi, overall organic subscriber growth and other strategic initiatives, including the participation in government        programs. Specifically, our working capital position has improved by approximately $17 million as compared to the first quarter in 2009. 

        The passage of the American Recovery and Reinvestment Act of 2009 (ARRA) and specifically, the Broadband Initiatives Program (BIP) created a unique opportunity for us to potentially access federal grants and loans for the deployment of next-generation wireless broadband networks using WiMAX technology (4G WiMAX) in qualified rural markets.        The receipt of such funding would allow us to greatly expand our network footprint and service offerings. Under BIP, there are two rounds during which applicants may seek grants and loans from the federal government. In the first round of BIP (“Round One”), we submitted eleven applications for grants and loans totaling approximately $150 million in order to build out networks across 11 states. These applications were all denied in March 2010. The second and final round of        BIP (Round Two) commenced in January 2010 with applications due on March 29, 2010. 

        In Round Two, the definitions of eligible areas were expanded to include a greater number of eligible communities and the amount of capital for “last-mile” projects, such as KeyOn’s, was increased from $1.2 billion to $1.7 billion. In light of those changes, as well as the fact that only approximately $910 million of the        $1.2 billion was allocated to applicants in Round One, management continues to believe that participation in ARRA through BIP is a significant opportunity for growth. As a result, on March 29, 2010, we submitted sixteen applications under Round Two of the BIP. Pursuant to our applications, KeyOn is seeking approximately $374 million of federal grants and loans to bring 4G WiMAX broadband to as many as 22 states and 9.6 million people in rural America. In addition, in the event our        applications are awarded, we would be required to contribute up to $163 million of third-party financing.  

**Characteristics of Our Revenues and Operating Costs and Expenses**

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

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

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

 

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

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

**Results of Operations**

*Three-Month Period Ended March 31, 2010 as Compared to the Three-Month Period Ended March 31, 2009*

        *Revenues*. During the three month period ended March 31, 2010, we recognized revenues of $1,594,959, as compared to revenues of $1,866,172 during the three month period ended March 31, 2009, representing a decrease of approximately 14.5%. This decrease was the result of a net decline in        subscribers. During 2009, in an effort to reduce operating costs, we reduced our marketing and other corporate expenses, electing to focus principally on subscriber retention. As a result, during this period we experienced reduced gross subscriber additions and ordinary course subscriber churn. These factors were magnified by the general economic downturn experienced across many sectors of the economy in 2009. In the fourth quarter of 2009 and continuing into the first quarter of 2010,        we began to increase our marketing expenses in an effort to grow our subscriber base. Although we have begun to experience an increase in subscribers, we have not yet received the full financial benefit of such subscriber growth during the first quarter. In addition, we did not receive a full quarter of revenues from the acquisition completed during the first quarter of 2010. 

        *Operating Loss*. Operating expenses, which consist of payroll, bonuses, taxes and stock based compensation, depreciation and amortization, other general and administrative costs, network operating costs, marketing and advertising, installation expense, and professional fees totaled $3,509,977        for the three month period ended March 31, 2010, as compared to $2,628,397 for the three month period ended March 31, 2009, representing a increase of approximately 33.5%. The majority of this increase, 98.4%, was due to professional fees expenses during the three month period ended March 31, 2010, as compared to the three month period ended March 31, 2009. These professional fees were almost entirely due to expenses incurred in connection with our Round Two ARRA applications. The        remaining 1.6% of the increase in operating expenses was an increase in payroll expenses and marketing expenses that was offset by a reduction in depreciation and network operating costs. Our operating loss margin increased by 79 percentage points from a total operating loss of $1,915,018 for the three month period ended March 31, 2010 as compared to a loss of $762,225 for the three month period ended March 31, 2009. By removing ARRA stimulus application expenses and non-cash stock        compensation expense from payroll and professional fees of $1,162,641 for the three month period ended March 31, 2010, and $187,482 for the three month period ended March 31, 2009, our operating expenses decreased by $93,579. Using these normalized expenses, our operating loss margin increased by only 16 percentage points from a total normalized operating loss of $752,377 for the three month period ended March 31, 2010 as compared to a loss of $574,743 for the three month period ended        March 31, 2009. 

        *Payroll, Bonuses and Taxes*. Payroll, bonuses and taxes totaled $1,077,292 for the three month period ended March 31, 2010, as compared to $872,570 for the three month period ended March 31, 2009, representing an increase of approximately 23.5%. A majority of this increase, 78.3%, was        primarily due to additional headcount in support of our expanded operations resulting from our Rural Unifi initiatives and in furtherance of our organic 

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

growth efforts for the three month period ended March 31, 2010. The remaining portion of this increase, 21.7%, was due to non-cash stock based compensation for the three month period ended March 31, 2010. 

        *Depreciation and Amortization*. Depreciation and amortization expenses totaled $470,493 for the three month period ended March 31, 2010, as compared to $639,457 for the three month period ended March 31, 2009, representing a decrease of approximately 26.4%. This decrease was primarily due to        fewer new equipment purchases stemming from slower growth during the three month period ended March 31, 2010 as compared to the three month period ended March 31, 2009. 

        *Network Operating Costs*. Network operating costs, which consist of tower rent, Internet transport costs and Internet termination expenses, totaled $665,274 for the three month period ended March 31, 2010, as compared to $708,186 for the three month period ended March 31, 2009, representing a        decrease of approximately 6.1%. The decrease was primarily due to our efforts to reduce costs by improving our tower equipment maintenance process which resulted in fewer tower service repairs, fewer replacement parts purchased and our rationalizing of unnecessary and underperforming transmission sites. This decrease, however, was partially offset by increased tower rent, along with Internet transport and termination expenses from acquired networks.

        *Other General and Administrative Expenses*. Other general and administrative expenses totaled $290,040 for the three month period ended March 31, 2010, as compared to $308,385 for the three month period ended March 31, 2009, representing a decrease of approximately 0.6%. This slight reduction        was due to a continued focus on reducing overall expenses. 

        *Installation Expense*. Installation expense, which consists primarily of expenses associated with installation supplies, third party installation costs and transportation expenses relating to the installations, totaled $51,575 for the three month period ended March 31, 2010, as compared to        $47,353 for the three month period ended March 31, 2009, representing an increase of approximately 8.9%. Installation volumes decreased by 23.9% during the three month period ended March 31, 2010 as compared to the three month period ended March 31, 2009. Fuel expense and automobile repair expenses, however, increased during the three month period ended March 31, 2010 as compared to the three month period ended March 31, 2009, more than offsetting the decrease in installation        volume.

        *Professional Fees*. Professional fees, which consist of legal, accounting, and other related expenses, totaled $904,649 for the three month period ended March 31, 2010, as compared to $37,093 for the three month period ended March 31, 2009, representing an increase of approximately 2,338.9%.        The majority of this increase, 90%, was due to expenses incurred in connection with our Round Two ARRA applications. The remaining 10% was due to expenditures related to our Rural Unifi initiative. Without these professional fees from the ARRA initiative, our professional fees expense for the three month period ended March 31, 2010 would have been $47,973 as compared to $37,093 during the three months ended March 31, 2009, an increase of approximately 29%. 

        *Marketing and Advertising Expenses*. Marketing and advertising expenses totaled $50,652 for the three month period ended March 31, 2010, as compared to $15,353 for the three month period ended March 31, 2009, representing an increase of approximately 229.9%. In an attempt to grow our        subscriber base organically, we began to increase our marketing initiatives during the three months ended March 31, 2010. Our marketing costs were 3.2% of revenue for the three month period ended March 31, 2010 and 0.8% of revenue for the three month period ended March 31, 2009, representing a 2 percentage point increase. We expect to see the full impact of our marketing efforts take hold in the second quarter of 2010. 

        *Other Income and Expense*. We incurred other income of $4,168,467 for the three month period ended March 31, 2010, as compared to an expense of $260,353 for the three month period ended March 31, 2009, representing an improvement of 1701.1%. The primary reason for the increase was the        derivative accounting of the Cal Cap Note, which included the following non-cash items: $4,529,358 of increase in fair value of derivative instruments and a $330,976 increase in interest expense. If the effects of the derivative accounting were removed, other expense for the three month period ended March 31, 2010 would have totaled $29,914 as compared to an expense of $260,353 for the three months ended March 31, 2009, an improvement of 88.5%. The primary reason for the decrease,        65.9%, resulted from the successful negotiation and settlement of an outstanding trade account payable. The remaining reason for the decrease, 34.1%, was the absence of any interest expense on our subordinated secured notes during the three month period ended March 31, 2010 as compared to the three month period ended March 31, 2009, as these subordinated secured notes were satisfied in full on September 30, 2009. 

        *Net Income (Loss)*. We had a net income of $2,253,449 for the three month period ended March 31, 2010, as compared to a net loss of $1,022,578 for the three month period ended March 31, 2009, representing an improvement of approximately 320.4%. The primary reason for the increase was        non-cash income relating to the fair valued derivative accounting of the Cal Cap Note of $4,549,358 and non-cash interest accretion expense of $330,976. If the effects of the derivative accounting were removed for the three months ended March 31, 2010, the net loss would be $1,964,932, as compared to a net loss of 1,022,578 for the three months ended March 31, 2009, an increase of 92.2%. The majority of this increase, 92.2%, was due to professional fees expenses during the three month        period ended March 31, 2010, as compared to the three month period ended March 31, 2009. Furthermore, most of these professional fees were incurred in connection with our Round Two ARRA applications. The remaining 7.8% of the increase resulted from higher payroll and marketing expenses, as offset by a reduction in depreciation and network operating costs. Our net loss margin increased by 68 percentage points from a net loss of $1,964,933 for the three month period ended March 31, 2010        as compared to a net loss of $1,022,578 for the three month period ended March 31, 2009. By removing the ARRA stimulus application expenses and non-cash stock compensation expense from payroll and professional fees of $1,162,640 for the three month period ended March 31, 2010, and $187,482 for the three month period ended March 31, 2009, our net loss improved by $32,804. Using the normalized net loss, our net loss margin increased by only 6 percentage points from a total normalized net        loss of $802,292 for the three month period ended March 31, 2010 as compared to a normalized net loss of $835,096 for the three month period ended March 31, 2009. 

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**Liquidity and Capital Resources**

*General*

        We incurred an operating loss of $1,195,018 for the three months ended March 31, 2010. At March 31, 2010, our accumulated deficit amounted to $26,051,275. During the three months ended March 31, 2010, net cash used in operating activities amounted to $1,119,770. At March 31, 2010, our working capital amounted to a deficit of $3,143,590,        which includes a liability for the fair value of a derivative financial instrument which, if exercised, will result in a net share settlement of 20,000,000 shares.

        On February 5, 2010, we issued the Cal Cap Note to an investor in exchange for gross proceeds of $15 million. The Cal Cap Note is convertible into shares of Series Cal Cap Preferred Stock and shares of common stock. We believe that this financing provided us with sufficient capital to execute our business plan, which consists of: Rural        UniFi, overall organic subscriber growth and other strategic initiatives, including the participation in government broadband programs. 

        We currently anticipate that our cash and cash equivalents will be sufficient to meet our working capital requirements to continue our sales and marketing and research and development through at least October, 2011. However, in order to execute our long-term strategy and penetrate new and existing markets, we may need to raise additional        funds, through public or private equity offerings, debt financings, corporate collaborations or other means. We have not secured any commitment for new financing at this time, nor can we provide any assurance that new financing will be available on commercially acceptable terms, if needed. If we are unable to secure additional capital, we may be required to curtail our business development initiatives and take additional measures to reduce costs in order to conserve our cash        needs.

        *Working Capital*. As of March 31, 2010, we had negative working capital of $3,143,590 that included a derivative liability balance of $10,450,462. As of March 31, 2009 we had negative working capital $2,237,873.

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| **Item 4 T.** | **Controls and Procedures.** |
|---------------|------------------------------|

          We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated and communicated to our executive officers to allow        timely decisions regarding required disclosure. As of March 31, 2010, our Chief Executive Officer, who acts in the capacity of principal executive officer and our Chief Financial Officer who acts in the capacity of principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer have concluded that our        disclosure controls and procedures were not effective as of September 30, 2010, based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

**Disclosure Controls and Internal Controls**

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

        As of December 31, 2009, management of our Company had reported at previous dates of assessment that we identified various deficiencies in our accounting processes and procedures that constitute a material weakness in internal control over financial reporting and disclosure controls. We took certain steps during the year ended December 31, 2009 to correct        previously reported material weaknesses that include, among other things, consolidating all legacy systems into a single unified accounting system, hiring additional personnel and undertaking the process of documenting our controls; however, we still need to make substantial progress in these areas before we can definitively conclude that we have remediated our material weaknesses.

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

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

 

**Changes in Internal Control over Financial Reporting**

 

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

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**PART II – OTHER INFORMATION**

|        |          |
|-------------|---------------|
| **Item 6.** | **Exhibits.** |

 

| **Exhibit No.** |   | **Description**                                              |
|-----------------|--------|--------------------------------------------------------------|
|            |   |                                                         |
| 31.1*           |   | Section 302 Certification by the Principal Executive Officer |
|            |   |                                                         |
| 31.2*           |   | Section 302 Certification by the Principal Financial Officer |
|            |   |                                                         |
| 32.1*           |   | Section 906 Certification by the Principal Executive Officer |
|            |   |                                                         |
| 32.2*           |   | Section 906 Certification by the Principal Financial Officer |

|             |   |
|------------------|--------|
| * Filed herewith |   |

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**SIGNATURES**

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

|                    |                                |                                                              |
|-------------------------|-------------------------------------|-------------------------------------------------------------------|
|                    | KEYON COMMUNICATIONS HOLDINGS, INC. |
|                    |                                |                                                              |
| Date: December 7 , 2010 | By:                                 | /s/ Jonathan Snyder                                               |   |
|                    |                                | Jonathan Snyder                                                   |
|                    |                                | President and Chief Executive Officer and Chief Financial Officer |
|                    |                                | (Principal Executive Officer and Principal Financial Officer)     |
|                    |                                |                                                              |

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