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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, DC 20549
 
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 
Commission file number 001-33842
 
KEYON COMMUNICATIONS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
74-3130469
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
7548 West Sahara Ave #102
     
 
Las Vegas, NV
 
89117
 
 
(Address of principal executive offices)
 
(Zip Code)
 
         
(702) 403-1246
(Registrant’s Telephone Number, Including Area Code)
 
 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
       
 
Large accelerated filer o
Accelerated filer                   o
 
       
 
Non-accelerated filer   o
Smaller reporting company x
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
 
As of, November 10, 2011, 25,768,211 shares of the issuer’s common stock, $0.001 par value per share, were outstanding.
 
 
 

 
 
KEYON COMMUNICATIONS HOLDINGS, INC.
 
Table of Contents
 
PART I – FINANCIAL INFORMATION
Page No.
     
ITEM 1.
FINANCIAL STATEMENTS
3
     
 
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2011 (UNAUDITED) AND DECEMBER 31, 2010
3
     
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
4
     
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
5
     
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
6
     
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS FO FIANCIAL CONDITION AND RESULTS OF OPERATIONS
25
     
ITEM 4.
CONTROLS AND PROCEDURES
31
 
PART II – FINANCIAL INFORMATION
 
ITEM 1A.
RISKS FACTORS
32
     
ITEM 6.
EXHIBITS
36
 
 
2

 
PART I – FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
   
September 30,
2011
(Unaudited)
   
December 31,
2010
 
ASSETS
           
             
Current assts:
           
Cash and cash equivalents
  $ 593,606     $ 766,264  
Accounts receivable, net
    503,026       282,951  
Marketable securities
    -       5,746,612  
Prepaid expenses and other current assets
    510,122       278,671  
Total current assets
    1,606,754       7,074,498  
                 
Property and equipment, net
    6,829,082       3,406,340  
                 
Other assets:
               
Goodwill
    2,302,999       1,815,095  
Subscriber base, net
    4,169,265       864,867  
Trademarks
    16,567       16,567  
Deposits
    43,981       85,386  
Debt issuance costs, net
    254,125       278,880  
      6,786,937       3,060,795  
                 
Total assets
  $ 15,222,773     $ 13,541,633  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 2,054,268     $ 2,017,896  
Accrued liabilities
    929,395       186,481  
Accrued interest expenses
    40,599       1,096,787  
Revolving line of credit
    -       1,215,938  
Convertible note, net of discount of $10,530 at September 30, 2011
    2,589,450       -  
Current portion of notes payable
    2,048,639       396,847  
Current obligations under capital leases
    324,960       644,119  
Deferred rent
    37,353       66,835  
Deferred revenue
    259,264       253,596  
Derivative liabilities
    167       2,390,515  
Total current liabilities
    8,284,095       8,269,014  
                 
Convertible note, net of discount of $13,041,549 at December 31, 2010
    -       1,958,451  
Notes payable, less current portion
    2,255,747       505,312  
Obligations under capital leases, less current obligations
    388,807       145,605  
Deferred rent, less current portion
    -       16,147  
Deferred tax liability
    208,743       165,471  
Total liabilities
    11,137,392       11,060,000  
                 
Commitments and contingencies
               
                 
Stockholders' equity
               
    Series A preferred stock, 30,000,000 shares authorized; 16,811,225 shares issued, liquidation
preference of $25,216,838
16,811,225
      -  
    Common stock, $.001 par value: 115,000,000 shares authorized; 25,768,211 and 23,668,211
shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
25,768       23,668  
Additional paid-in capital
    35,511,380       28,718,581  
Accumulated deficit
    (48,262,992 )     (26,261,840 )
Accumulated other comprehensive income
    -       1,224  
Total stockholders' equity
    4,085,381       2,481,633  
Total liabilities and stockholders' equity
  $ 15,222,773     $ 13,541,633  
 
See accompanying notes to condensed consolidated financial statements
 
3

 
 
 KEYON COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
REVENUES:
                       
Service and installation revenue
  $ 3,361,132     $ 2,060,831     $ 8,502,947     $ 5,309,355  
Support and other revenue
    38,028       15,621       101,167       90,905  
                                 
Total revenues
    3,399,160       2,076,452       8,604,114       5,400,260  
                                 
OPERATING COSTS AND EXPENSES:
                         
Payroll, bonuses and taxes
    1,463,423       1,377,493       5,452,051       3,740,142  
Network operating costs
    1,514,228       952,479       3,676,328       2,378,161  
Professional fees
    265,243       286,577       495,682       1,759,397  
Depreciation and amortization
    1,032,990       570,721       2,541,192       1,460,518  
Other general and administrative expense
    469,593       493,265       1,337,029       1,128,445  
Gain on disposal of equipment
    -       (462 )     (246,197 )     (1,921 )
Installation expense
    130,826       85,164       304,033       185,786  
Marketing and advertising
    297,044       82,516       497,934       210,779  
Total operating costs and expenses
    5,173,347       3,847,753       14,058,052       10,861,307  
                                 
LOSS FROM OPERATIONS
    (1,774,187 )     (1,771,301 )     (5,453,938 )     (5,461,047 )
                                 
OTHER INCOME (EXPENSE):
                               
Other income (expense)
    (94,460 )     (3,195 )     13,771       150,161  
Interest income
    850       3,087       2,006       3,940  
Interest expense
    (83,862 )     (1,161,142 )     (13,493,704 )     (2,445,229 )
Debt conversion inducement
    -       -       (2,292,059 )     -  
Change in fair value of derivative instruments
    12,374       4,458,953       173,880       12,207,767  
Total other income (expense)
    (165,098 )     3,297,703       (15,596,106 )     9,916,639  
                                 
PROVISION FOR INCOME TAXES
    (15,036 )     -       (43,722 )     -  
                                 
NET INCOME (LOSS)
  $ (1,954,321 )   $ 1,526,402     $ (21,093,766 )   $ 4,455,592  
                                 
Series A Preferred Stock Dividends
    (411,229 )     -       (907,386 )     -  
OTHER COMPREHENSIVE INCOME (LOSS)
                         
Net income (loss) available to common stockholders
    (2,365,550 )     1,526,402       (22,001,152 )     4,455,592  
                                 
Total comprehensive income (loss)
  $ (2,365,550 )   $ 1,526,402     $ (22,001,152 )   $ 4,455,592  
                                 
Net income (loss) per common share, basic
  $ (0.09 )   $ 0.06     $ (0.89 )   $ 0.20  
                                 
Net income (loss) per common share, diluted
  $ (0.09 )   $ (0.04 )   $ (0.89 )   $ (0.12 )
                                 
Weighted average common shares outstanding, basic
    25,768,211       23,662,019       24,645,500       22,304,595  
                                 
Weighted average common shares outstanding, diluted
    25,768,211       44,535,260       24,645,500       44,834,836  

See accompanying notes to condensed consolidated financial statements
 
 
4

 

KEYON COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDHERS’ EQUITY
(UNAUDITED)
 
   
Class A Preferred Stock
   
Common Stock
    Additional Paid-     Accumulated    
Accumulated Other
Comprehensive
   
Total
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
    in Capital    
Deficit
    Income     Equity  
Balance, January 1, 2011
    -     $ -       23,668,211     $ 23,668     $ 28,718,581     $ (26,261,840 )   $ 1,224     $ 2,481,633  
Employee stock option compensation expense
    -       -       -       -       1,465,144       -               1,465,144  
Purchase of ERF Wireless for stock
    -       -       100,000       100       31,900       -               32,000  
Warrants issued with conversion of debt
    -       -       -       -       2,292,059       -               2,292,059  
Elimination of fair value market of derivative liability
    -       -       -       -       2,231,405       -               2,231,405  
Preferred stock issued upon conversion of note
    16,315,068       16,315,068       -       -       -       -               16,315,068  
Dividends issued on Series A preferred stock
    496,157       496,157       -       -       -       (907,386 )             (411,229 )
Purchase of CommX for common stock
    -       -       2,000,000       2,000       678,000       -               680,000  
Warrants issued with purchase of CommX
    -       -       -       -       94,291       -               94,291  
Elimination of unrealized gain upon sales of marketable securities
    -       -       -       -       -       -       (1,224 )     (1,224 )
Net loss
    -       -       -       -       -       (21,093,766 )             (21,093,766 )
                                                                 
Balance, September 30, 2011
    16,811,225     $ 16,811,225       25,768,211     $ 25,768     $ 35,511,380     $ (48,262,992 )   $ -     $ 4,085,381  
 
See accompanying notes to condensed consolidated financial statements
 
 
5

 

KEYON COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 
   
For the Nine Months Ended September 30,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ (21,093,766 )   $ 4,455,592  
Adjustment to reconcile net income (loss) to net cash used in operating activities:
         
Depreciation and amortization
    2,541,192       1,460,518  
Provision for doubtful accounts
    259,082       149,044  
Deferred income tax
    43,272       -  
Gain on disposal of equipment
    (246,197 )     (1,921 )
Stock based compensation expense
    1,465,144       1,369,507  
Change in fair value of derivative liability
    (173,880 )     (12,207,767 )
Non-cash interest expense
    13,070,691       1,470,788  
Debt conversion Inducement Expense
    2,292,059       -  
Change in assets and liabilities, net of effect of acquisitions:
               
Accounts receivable
    (322,784 )     (197,820 )
Prepaid expenses and other current assets
    (231,451 )     18,676  
Refundable deposits
    41,405       (14,930 )
Accounts payable and accrued expenses
    769,239       (179,309 )
Accrued interest expense
    258,880       711,887  
Deferred rent liability
    (45,629 )     (43,838 )
Deferred revenue
    (70,420 )     (59,937 )
Net cash used in operating activities
    (1,443,163 )     (3,069,510 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures for property and equipment
    (1,690,901 )     (919,049 )
Capital expenditures for investment in acquisitions
    (3,294,733 )     -  
Proceeds on disposal of equipment
    252,500       1,800  
Proceeds from sales of marketable securities
    7,249,900       -  
Investment in marketable securities
    (1,504,512 )     (6,243,270 )
Deposit, proposed aquisition     -       (400,000 )
Net cash provided by (used in) investing activities
    1,012,254       (7,560,519 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment on revolving line of credit-related parties
    -       (100,000 )
Proceeds (payment) on revolving line of credit
    (1,215,938 )     1,121,374  
Payments on term note payable - related parties
    -       (4,050,000 )
Deposits for future financing
    -       (250,000 )
Payments on notes payable
    (582,048 )     (606,874 )
Proceeds from issuance of convertible note
    2,600,000       15,000,000  
Payments on capital lease obligations
    (543,763 )     (419,274 )
Proceeds from exercise of common stock purchase warrants
    -       456,110  
Net cash  provided by financing activities
    258,251       11,151,336  
                 
Net (decrease)  increase in cash and cash equivalents
    (172,658 )     521,307  
                 
Cash and cash equivalents at beginning of period
    766,264       125,083  
Cash and cash equivalents at end of period
  $ 593,606     $ 646,390  
                 
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 769,245     $ 262,612  
Cash paid for income taxes
  $ -     $ -  
                 
Supplemental Disclosures of Noncash Investing and Financing Activities:
               
                 
Stock issued for acquisition - Affinity:
               
Network equipment
  $ -     $ 118,205  
Customer premise equipment
    -       20,150  
Subscriber base
    -       51,860  
Vehicles
    -       9,840  
Office equipment
    -       5,795  
Prepaid expenses
    -       2,580  
Accounts receivable
    -       3,401  
Accounts payable and accrued expenses
    -       (11,342 )
Loan payable
    -       (69,487 )
Obligation to subscribers
    -       (7,607 )
Goodwill
    -       287,016  
    $ -     $ 410,411  
                 
Stock issued for acquisition - RidgeviewTel:
               
Network equipment
  $ -     $ 14,650  
Customer premise equipment
    -       71,475  
Customer base
    -       26,714  
Accounts receivable
    -       1,589  
Obligations to subscribers
    -       (539 )
Goodwill
    -       37,970  
    $ -     $ 151,859  
                 
Stock issued for acquisition - Dynamic Broadband:
               
Network equipment
  $ -     $ 674,711  
Customer premise equipment
    -       746,153  
Customer base
    -       658,487  
Vehicles
    -       18,925  
Office equipment
    -       29,178  
Prepaid expenses
    -       8,308  
Accounts receivable
    -       18,075  
Accounts payable and accrued expenses
    -       (208,621 )
Loan payable
    -       (380,617 )
Obligations to subscribers
    -       (86,912 )
Goodwill
    -       50,495  
    $ -     $ 1,528,182  
                 
Stock and cash issued for acquisition - Technology Specialists Group:
               
Network equipment
  $ -     $ 4,489  
Customer premise equipment
    -       62,028  
Inventory
    -       2,278  
Subscriber base
    -       113,260  
Office equipment
    -       1,327  
Prepaid expenses
    -       7,372  
Accounts receivable
    -       1,627  
Accounts payable and accrued expenses
    -       (900 )
Obligations to subscribers
    -       (10,356 )
Goodwill
    -       56,610  
    $ -     $ 237,735  
                 
Cash for acquisition - Southwest Wireless Net:
               
Network equipment
  $ -     $ 160,000  
Customer premise equipment
    -       75,000  
Inventory
    -       30,000  
Subscriber base
    -       87,000  
Vehicles
            4,000  
Office equipment
    -       13,000  
Prepaid expenses
    -       3,884  
Obligations to subscribers
    -       (42,763 )
Goodwill
    -       9,879  
    $ -     $ 340,000  
                 
Wells Rural Electric:
               
Subscriber base
  $ 125,642     $ -  
Network equipment
    23,348       -  
Customer premise equipment
    195,298       -  
Goodwill
    34,648       -  
    $ 378,936     $ -  
                 
ERF Wireless
               
Subscriber base
  $ 1,339,851     $ -  
Network equipment
    1,219,081       -  
Vehicles
    40,575       -  
Network equipment not deployed
    54,435       -  
Goodwill
    378,058       -  
    $ 3,032,000     $ -  
            Total paid in Stock
  $ 32,000     $ -  
            Total cash consideration
  $ 3,000,000     $ -  
                 
                 
CommX VOIP
               
Subscriber base
  $ 2,502,109     $ -  
Network equipment
    120,379       -  
Software licenses
    1,641,348       -  
Furniture and fixtures
    9,940       -  
Customer premises equipment
    315,473       -  
Accounts receivable
    143,836       -  
Obligations to subscribers
    (46,535 )     -  
Goodwill
    87,741       -  
    $ 4,774,291     $ -  
            Total paid in Stock
  $ 680,000     $ -  
            Total warrants to purchase common stock
  $ 94,291     $ -  
            Total cash and debt consideration
  $ 4,000,000     $ -  
                 
Common stock payable subscription sales
  $ -     $ 456,108  
Common stock issued for common stock payable
  $ -     $ 391,822  
Common stock issued for professional services
  $ -     $ 123,834  
Capital lease obligations for property and equipment
  $ 543,763     $ 234,350  
 
See accompanying notes to condensed consolidated financial statements
 
 
6

 
 
KEYON COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
 
1.      ORGANIZATION AND DESCRIPTION OF BUSINESS
 
Organization
        
On August 9, 2007, KeyOn Communications, Inc. (“KeyOn”) became a publicly-traded company upon its completion of a reverse merger and recapitalization with Grant Enterprises, Inc. (“Grant”), a publicly-traded company with no operations (the “Merger”). Grant subsequently changed its name to KeyOn Communications Holdings, Inc. (the “Company”). KeyOn was incorporated on December 16, 2004, under the laws of the State of Nevada.
 
Description of Business
 
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 12 Western and Midwestern states: Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Nevada, Ohio, South Dakota, Texas, and Utah. As of June 1, 2011, KeyOn provides VoIP services directly utilizing its own facility acquired with the assets purchased from entities doing business as CommX. In an effort to generate additional accounting and operational efficiencies, the Company consolidated its eight wholly-owned subsidiaries: KeyOn Communications, LLC; KeyOn SIRIS, LLC; KeyOn Grand Junction, LLC; KeyOn Idaho Falls, LLC; KeyOn Pahrump, LLC; KeyOn Pocatello, LLC; KeyOn SpeedNet LLC and KeyOn Spectrum Holdings, LLC (which had previously been referred to as the “related entities”), into one, wholly-owned operating subsidiary: KeyOn Communications, Inc.  For the acquisition of CommX assets, KeyOn formed a new operating subsidiary, KeyOn CommX LLC, which is wholly-owned by KeyOn Communications Holdings, Inc.
 
2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they may not contain all information and notes required by GAAP for complete financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  The condensed balance sheet as of December 31, 2010 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and notes required by GAAP for complete financial statements.  For further information refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2011, and updated, as necessary, in this Quarterly Report on Form 10-Q.
 
Consolidation Policy
 
The accompanying consolidated balance sheets and consolidated statements of operations, stockholders’ equity, and cash flows for the quarter ended September 30, 2011, include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 
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Use of Estimates
 
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued as consideration in business combinations and/or in financing transactions and in share based payment arrangements, accounts receivable reserves, deferred taxes and related valuation allowances, allocating the purchase price to the fair values of assets acquired and liabilities assumed in business combinations (including separately identifiable intangible assets and goodwill) and estimating the fair values of long lived assets to assess whether impairment charges may be necessary. Certain of the Company’s estimates, including accounts receivable and the carrying amounts of intangible assets could be affected by external conditions including those unique to our industry and general economic conditions. It is reasonably possible that these external factors could have an effect on its estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments, when necessary.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents. The Company places its cash with one financial institution. Accounts are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. At times, balances may exceed federally insured limits.

Goodwill and Intangible Assets
 
The Company accounts for goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
 
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. GAAP requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment. Upon consideration of our operations, the Company has determined that it operates a single reporting unit.
 
The Company’s business includes one goodwill reporting unit. It annually reviews goodwill for possible impairment by comparing the fair value of the reporting unit to the carrying value of the assets. If the fair value exceeds the carrying value of net asset, no goodwill impairment is deemed to exist. If the fair value does not exceed the carrying value, goodwill is tested for impairment and written down to its implied fair value if it is determined to be impaired.  We determined that goodwill was not impaired as of September 30, 2011.
 
The Company’s amortizable intangible assets consist of acquired subscriber bases. These costs are being amortized using the straight-line method over their estimated useful lives. The Company amortizes customer relationships on a straight line basis over a 36 to 48 month estimated useful life.
 
 
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The Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. The Company intends to re-evaluate the carrying amounts of our amortizable intangibles at least quarterly to identify any triggering events. As described above, if triggering events require the Company to undertake an impairment review, it is not possible at this time to determine whether it would be necessary to record a charge or if such charge would be material.
 
Revenue Recognition
 
The Company’s revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery or performance has occurred, (3) the fee is fixed or determinable, and (4) collectability of the sale is reasonably assured.
 
The Company charges a recurring subscription fee for providing its various Internet access and VoIP 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, two, three and five year contracts and are billed monthly, quarterly, semi-annually or annually in advance. Payments received in advance for subscriptions are deferred and recognized as the services are provided. Deferred revenues for payments received in advance of subscription services amounted to $259,264 and $253,596 at September 30, 2011 and December 31, 2010, respectively. For the satellite video business in which the Company is a retailer of video services from DISH Network Corporation (“DISH”), the Company recognizes revenues at the time of installation.

Income Taxes
 
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
 
As of December 31, 2010, the Company had approximately $23,238,000 and $17,377,000 of federal and state net operating loss carryovers (“NOLS”) which begin to expire in 2025. The net operating loss carryovers may be subject to limitation under Section 382 of the Internal Revenue Code should there be a greater than 50% ownership change as determined under the applicable regulations.
 
Management prepared an analysis of the Company’s stock ownership activity from November 2007 through March 2011 and concluded that no ownership change occurred prior to December 31, 2010, but an ownership change did occur in March 2011 with the result being that our ability to use $23,000,000 of federal and state NOL carryforwards is subject to an annual limitation.
 
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax strategies in making this assessment. Based on this assessment, management has established a full valuation allowance against all of the deferred tax assets for every period, since it is more likely than not that all of the deferred tax assets will not be realized.
 
The Company accounts for uncertain tax positions based upon authoritative guidance that prescribes a recognition and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return (ASC 740-10). The guidance also provides direction on derecognition and classification of interest and penalties.  Management has evaluated and concluded that there are no material uncertain tax positions requiring recognition in the financial statements for any of the periods presented. The Company files a federal income tax return as well as income tax returns in eight state jurisdictions in the United States. The tax years ended December 31, 2007 through 2009 remain subject to examination for federal, state and local income tax purposes as of Decembers 31, 2010.
 
 
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The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as tax expense
 
Net Loss per Common Share
 
Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income, if any, by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of the weighted average number of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock, and shares issuable upon conversion of convertible debt. If the Company generates net income and these potential common share equivalents are dilutive, the Company computes diluted net income per share using the treasury stock method.  

Due to the fact that the Company has incurred net losses for the three and nine months ended September 30, 2011, weighted average common share equivalents of 58,835,166 and 51,169,685, respectively, are not included in the calculation of diluted net loss per common share because they are anti-dilutive.
 
The table of all of our common stock equivalents is as follows:
 
   
September 30,
 
   
2011
   
2010
 
             
Common stock purchase warrants
    4,750,494       3,657,161  
Warrants to purchase convertible Series A preferred stock - convertible into common stock on a 1 for 1 basis
    10,300,000       -  
Stock options
    2,484,344       1,245,723  
Convertible note convertible into Series A Preferred Stock - convertible into common stock on a 1 for 1 basis
    3,466,667       -  
Convertible Series A preferred stock-  convertible into common stock on a 1 for 1 basis
    16,811,225       20,000,000  
      37,812,730       24,902,884  
 
The numerator in the diluted loss per share calculation for the three months ended September 30, 2010 gives effect to addbacks of (1) $542,466 of contractual interest expense under our convertible notes, and (2) $542,566 of accretion of discount under the convertible notes (recorded as interest expense) and (3) the elimination of the $4,458,953 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 September 30, 2010 includes (1) 641,456 employee stock options and (2) 231,785 common stock purchase warrants, each with exercises prices that are less than the average share price of $0.51 per share for the three months ended September 30, 2010 and (3) 20,000,000 shares of common stock underlying the conversion option embedded in our convertible notes described in Note 7.
  
The numerator in the diluted loss per share calculation for the nine months ended September 30, 2010 gives effect to addbacks of (1) $782,466 of contractual interest expense under our convertible notes, and (2) $1,392,868 of accretion of discount under the convertible notes (recorded as interest expense) and (3) the elimination of the $12,207,767 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 nine months ended September 30, 2010 includes (1) 1,873,785 employee stock options and (2) 656,456 common stock purchase warrants, each with exercises prices that are less than the average share price of $1.04 per share for the nine months ended September 30, 2010 and (3) 20,000,000 shares of common stock underlying the conversion option embedded in our convertible notes as described in Note 7.
 
 
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The adjustment for employee stock options was calculated using the treasury stock method and the adjustment for the conversion option embedded in our notes was calculated using the “if converted” method.
 
Share-Based Payments
 
The Company accounts for all share based payments in accordance with ASC 718, Compensation — Stock Payments which results in the recognition of expense under applicable GAAP and requires measurement of compensation cost for all share based payment awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. The Company calculates the fair value of stock options using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the fair value of our common stock on date of grant. The recognized expense is net of expected forfeitures.
 
Common Stock Purchase Warrants and Derivative Financial Instruments
 
The Company classifies all of its common stock purchase warrants and derivative financial instruments as equity if the contracts (1) require physical settlement or net-share settlement or (2) 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 (1) 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), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) contracts that contain reset provisions. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
 
Fair Value Measurements        
 
As defined in Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, FASB ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 
Level 1
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

 
Level 2
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.
 
 
 
Level 3
Unobservable inputs that are used when little or no market data is available, which requires the Company to develop its own assumptions about how market participants would value the assets or liabilities.
  
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosure each quarter. Assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 are summarized as follows:

 
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Fair Value as of September 30, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Liabilities
                       
Derivative liability
  $ -     $ -     $ 167     $ 167  
Total
  $ -     $ -     $ 167     $ 167  
 
   
Fair Value as of December 30, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                 
Assets
                               
Marketable Securities
  $ 5,746,612     $ -     $ -     $ 5,746,612  
Total
  $ 5,746,612     $ -     $ -     $ 5,746,612  
                                 
Liabilities
                               
Derivative liability
  $ -     $ -     $ 2,390,515     $ 2,390,515  
Total
  $ -     $ -     $ 2,390,515     $ 2,390,515  
 
The following table presents the fair value reconciliation of Level 3 liabilities measured at fair value on a recurring basis during the nine months ended September 30, 2011and for the year ended December 31, 2010:
 
   
September 30,
   
December 31,
 
     2011      2010  
Beginning Balance
  $ 2,390,515     $ -  
Aggregate fair value of derivative issued
    14,937       44,792,150  
Issuance date charge for difference between fair value of Derivative Instrument
    -       (29,792,150 )
Change in fair value of derivative
    (173,880 )     (12,609,485 )
Elimination of derivative upon the  conversion of related Note into Series A Preferred Stock to paid in capital
    (2,231,405 )     -  
Ending Balance
  $ 167     $ 2,390,515  
 
The significant assumptions and valuation methods that we used to determine fair value and the change in fair value of the derivative financial instrument at issue are discussed in Note 7.
 
 Recent Accounting Pronouncements
 
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles-Goodwill and Other that will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The guidance is effective for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company does not expect that the adoption of this update will have a material impact on its consolidated financial statements at this time.

 
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In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income that improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from other comprehensive income (“OCI”) to net income, in both net income and OCI. The standard does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, the standard does not affect the calculation or reporting of earnings per share. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In May 2011, FASB issued ASU No. 2011-04, Fair Value Measurements (ASC Topic 820). This ASU provides additional guidance on fair value disclosures. This guidance contains certain updates to the measurement guidance as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for “Level 3” measurements including enhanced disclosure for: (1) the valuation processes used by the reporting entity; and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. Other than requiring additional disclosures on the Company’s “Level 3” disclosures, the adoption of this new guidance will not have a material impact on the Company’s consolidated results of operations and financial position.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (ASC Topic 805). The amendment affects any public entity as defined by Topic 805, Business Combinations that enters into business combinations that are material on an individual or aggregate basis. The comparative financial statements should present and disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.
 
In December 2010, the FASB issued ASU 2010-28, Intangibles — Goodwill and Other (Topic 350).  ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.
 
Other accounting standards that have been issued or proposed by the FASB, SEC and/or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
 
Reclassification
 
Certain reclassifications have been made to the 2010 information to conform to the 2011 presentation.
 
3.      LIQUIDITY AND FINANCIAL CONDITION
 
The Company’s net loss amounted to $21,093,766 for the nine months ended September 30, 2011, and includes a non-cash interest charge to the statement of operations, principally relating to the acceleration of the discount of our convertible note upon its conversion into Series A Preferred Stock on March 11, 2011 (the “Conversion”), and a debt conversion inducement charge of $2,292,059 from the issuance of warrants as a part of the Conversion (see Note 7).  The Company’s accumulated deficit amounted to $48,262,992 at September 30, 2011. During the nine months ended September 30, 2011, net cash used in operating activities amounted to $1,443,163.  At September 30, 2011, the Company’s working capital amounted to a deficit of $6,677,341. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.   
 
 
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On June 14, 2011, the Company entered into a note purchase agreement with an institutional investor pursuant to which it  issued a secured convertible note for the principal sum of $2,600,000, which note is convertible into shares of Series A Preferred Stock, par value $0.001 per share, of the Company.  On June 27, 2011, the Company used $500,000 to fund the initial payment due in respect of its acquisition of the VoIP assets from CommX.
 
The Company has continued to take measures during the nine months ended September 30, 2011 to increase our overall base of subscribers by completing several acquisitions (See Note 4) in order to take advantage of scale economies resident in the telecommunications industry.  In addition, the Company has maintained its fixed operating costs by previously streamlining our operations and working to control operating costs.  Management believes that these operational initiatives have been effective as the Company has significantly increased revenues with its operating costs remaining the same or lower percentage of revenues than in past quarters.  Management believes the company will begin to report positive operating cash flow from operations in the first quarter of 2012.
 
In support of our strategy of growing revenues by increasing our subscriber base, the Company received an award under ARRA, specifically, Round Two of the Broadband Initiatives Program (BIP) administered by the Rural Utilities Service (“RUS”). On September 13, 2010, the Company was announced as a $10,200,000 award winner to build and operate networks throughout rural Nevada to nearly 100,000 rural residents. The Company is expected to contribute approximately $2,000,000 in matching funds during the project’s three year construction period.  The Company anticipates commencing its project in the first quarter of 2012 and expects that it will be substantially complete within two years from the commencement date.  The Company is currently working with its third-party contractors and applicable RUS personnel to begin requisitioning funds pursuant to the award.
 
The Company’s plans to address its liquidity issues and to execute its strategy of continued acquisitions of wireless broadband companies and penetrate new and existing markets, including the BIP stimulus award is to raise additional funds, through public, debt financings, or other means. Management believes that it has access to capital resources through possible public or private equity offerings, debt financings or other means; however, the Company has not secured any commitments for new financing at this time, nor can it 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 business development initiatives and take additional measures to reduce costs in order to conserve our cash.

4.      BUSINESS COMBINATION
 
Wells Rural Electric Company
 
On January 31, 2011, KeyOn Communications Holdings, Inc. purchased the assets of Wells Rural Electric Company, pursuant to an Asset Purchase Agreement, including subscriber contracts, accounts, and fixed assets. As consideration for the acquired assets, the Company agreed to pay $363,888 in cash over a period of two years, subject to further adjustments. Upon the satisfaction of certain closing conditions, the Company initiated the Closing Payment of $94,734. The balance of the purchase price which amounts to $269,154 will be made in eight consecutive quarterly payments and will accrue interest at the rate of 5.25% per annum (See Note 7).
 
The purchase price breakdown is as follows:

Subscriber base
  $ 121,898  
Network equipment
    23,348  
Customer premise equipment
    195,298  
Accounts receivable
    1,239  
Goodwill
    22,105  
    $ 363,888  
 
 
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Grand Junction, Colorado market sale
 
On February 1, 2011, the Company entered into an agreement to sell substantially all of the wireless broadband assets and assign certain liabilities used in the operation of its Grand Junction, Colorado network to Skybeam, Inc. As consideration for the acquired assets, the Company agreed to accept an aggregate purchase price of $261,000 in cash, subject to a holdback in the amount of $52,200 with which to make post-closing purchase price adjustments based upon the number of broadband subscribers and monthly Internet service revenue. Also, on February 1, 2011, upon the satisfaction of certain closing conditions as described in the Asset Purchase Agreement, KeyOn completed the divesture, and received the initial closing payment of $208,800. The Company received the balance of the purchase price of $38,915 on May 2, 2011 after making certain purchase price adjustments as described in the Asset Purchase Agreement.
 
The final sales price breakdown is as follows:
 
Network equipment
  $ 272,510  
Customer premise equipment
    226,757  
Software
    461  
Computer equipment
    2,460  
Accumulated depreciation
    (495,885 )
Gain on sale of assets
    246,197  
    $ 252,500  

ERF Wireless, Inc
 
On February 10, 2011, the Company entered into an agreement to acquire certain wireless broadband assets and assume certain liabilities used to provide wireless Internet access and other related services from ERF Wireless, Inc., (“ERF”). The assets to be acquired are used in the business of operating wireless networks that provide high-speed Internet access and other related services to residential and commercial subscribers in East Central Texas. As consideration for the acquired assets, the Company paid $3,000,000 in cash, subject to further adjustments as described in the Asset Purchase Agreement and issue 100,000 shares of the Company’s common stock. The Asset Purchase Agreement contains customary representations and warranties by the Company and ERF. On February 15, 2011, upon the satisfaction of the closing conditions, the Company consummated this transaction by delivering $2,700,000 in cash and issued 100,000 restricted shares of its common stock. On July 1, 2011 the Company made the final payment to the balance of the final purchase price of $215,120 (see Note 7) after making certain price adjustments as described in the Asset Purchase Agreement.
 
The final allocation of the purchase price breakdown is as follows:
 
Network equipment
  $ 1,219,082  
Vehicles
    40,575  
Subscriber base
    1,339,851  
Network equipment not deployed
    54,434  
Goodwill
    378,058  
Accounts receivable
    11,298  
Accounts payable
    (66,624 )
Obligations to subscribers
    (29,553 )
    $ 2,947,121  

CommX, Inc.
 
On June 1, 2011, a wholly owned subsidiary of KeyOn Communications Holdings, Inc., KeyOn CommX, LLC, a Nevada limited liability company, acquired from CommX Holdings, Inc., a Florida corporation, CommX, Inc., a Florida corporation and Communications Xchange, LLC, a Florida limited liability company, (“Xchange” and together with CommX Holdings and CommX Inc., “CommX”) pursuant to an asset purchase agreement. Substantially, all of the CommX’s assets are used in providing services commonly known as hosted VoIP to commercial and residential customers as well as certain other assets related to Internet addresses and, as a continuation of our core business strategy, they will serve to integrate horizontally into our product line-up and services provided to the same geographical locations and customers.
 
 
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As consideration for the acquired assets, we initiated the closing payment of $500,000 in cash at closing, upon satisfaction of certain closing conditions, issued a promissory note in the principal amount of $3.5 million, 2,000,000 shares of our common stock with a fair value of $0.34 a share or $680,000 and a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $0.40 per share with a fair value of $94,291.
 
The promissory note accrues interest at the rate of 5.0% per annum and is payable in 10 equal quarterly installments of $374,511 commencing August 31, 2011. However, in the event that the Company completes an equity financing or series of equity financings that result in gross proceeds of at least $5,000,000, the Company is required to make a mandatory prepayment of $1,500,000 under the Note. The Note contains a variety of events of default that are typical for transactions of this type (See Note 7).
 
The final purchase price is subject to adjustments for net working capital and qualified subscribers as described in the asset purchase agreement and it is not expected to exceed $80,000.

The table showing the fair value warrants issued in consideration is as follows:
 
Fair value of warrants to purchase common stock
     
Exercise price of option
  $ 0.40  
Term (years)
    5  
Volatility
    53 %
Risk free interest rate
    0.74 %
Dividend yield
    0.00 %
Unit fair value
  $ 0.34  
Shares issued upon exercise
    1,000,000  
Aggregate fair value
  $ 94,291  
 
The preliminary allocation of the purchase price breakdown is as follows:
 
Subscriber base
  $ 2,502,109  
Network equipment
    120,379  
Software licenses
    1,641,348  
Furniture and fixtures
    9,940  
Customer premises equipment
    315,473  
Accounts receivable
    143,836  
Obligations to subscribers
    (46,535 )
Goodwill
    87,741  
    $ 4,774,291  
Total stock consideration
  $ 680,000  
Total warrant to purchase common stock consideration
  $ 94,291  
Total cash and debt consideration
  $ 4,000,000  

Pro forma financials
 
The Company accounted for the business combinations using the acquisition method of accounting. The results of operations for the three and nine months ended September 30, 2011, include the revenues and expenses of these acquired businesses since their respective dates of acquisition.
 
 
16

 
 
The unaudited pro-forma financial results for the three and nine months ended September 30, 2011 and 2010, combines the historical results of Dynamic Broadband Corporation, RidgeviewTel, LLC, Affinity Wireless, ERF Wireless, Inc., Wells Rural Electric Company and Commx VOIP with those of the Company as if these acquisitions had been completed as of the beginning of each of the periods presented. The pro-forma weighted average number of shares outstanding also assumes that the shares issued as purchase consideration were outstanding as of the beginning of each of the periods presented.
  
As described in Note 2, the Company adopted ASU 2010-29 relating to pro forma disclosures effective January 1, 2011. There were no material non-recurring pro forma adjustments directly attributable to these acquisitions.
 
Pro Forma Combined Statement of Operations
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Total revenues
  $ 3,399,160     $ 3,458,930     $ 10,184,993     $ 10,655,293  
Loss from operations
  $ (1,774,187 )   $ (1,470,942 )   $ (5,196,505 )   $ (4,469,604 )
Net income (loss) available to common stockholders
  $ (2,365,550 )   $ 1,826,761     $ (21,743,719 )   $ 5,447,035  
Net income (loss) per share, basic
  $ (0.09 )   $ (0.06 )   $ (0.89 )   $ (0.19 )
Net income (loss) per share, diluted
  $ (0.09 )   $ (0.03 )   $ (0.89 )   $ (0.10 )
Pro forma weighted average shares outstanding, basic
    25,768,211       23,668,211       24,645,500       23,505,674  
Pro forma weighted average shares outstanding, diluted
    25,768,211       44,541,452       24,645,500       46,035,915  

Digital Bridge Spectrum Corp.
 
On July 22, 2011, the Company entered into an agreement to acquire certain wireless broadband assets and assume certain liabilities from Digital Bridge Communications Corp, a Delaware corporation, Digital Bridge Spectrum Corp., a Delaware corporation, and Digital Bridge Spectrum II a Delaware limited liability company (collectively, the “Digital Bridge”), The assets to be acquired are used in the businesses of operating wireless broadband networks that provide broadband Internet access and other related services in certain markets in the Northwest and Midwest.
 
As consideration for the acquired assets, the Company has agreed to pay $17,434,874 in cash subject to further adjustments as described in the Asset Purchase Agreement. The Asset Purchase Agreement contains customary representations and warranties by the Company and Digital Bridge.

5      PROPERTY AND EQUIPMENT
 
Property and equipment at September 30, 2011 and December 31, 2010, consisted of the following:

   
September 30, 2011
   
December 31, 2010
 
Subscriber equipment
  $ 7,841,356     $ 7,027,318  
Fixed wireless tower site equipment
    7,253,013       5,280,354  
Software and consulting costs
    2,298,669       633,704  
Computer and office equipment
    938,234       676,210  
Vehicles
    299,939       243,107  
Leasehold improvements
    348,550       315,013  
      18,979,761       14,175,706  
Accumulated depreciation
    (12,150,679 )     (10,769,366 )
    $ 6,829,082     $ 3,406,340  
 
Depreciation expense for the three and nine months ended September 30, 2011 was $761,434 and $1,881,732 respectively.  For the three and nine months ended September 30, 2010 depreciation expense was $478,439 and $1,262,935, respectively.
 
 
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6      INTANGIBLE ASSETS

   
Goodwill
   
Subscriber Base
   
Trademarks
 
Balance as of December 31, 2010
  $ 1,815,095     $ 2,290,464     $ 16,567  
Wells Electric acquisition
    22,104       121,899       -  
ERF acquisition
    378,059       1,339,851       -  
CommX acquisition
    87,741       2,502,108       -  
Balances as of September 30, 2011
    2,302,999       6,254,322       16,567  
Accumulated amortization
    -       (2,085,057 )     -  
    $ 2,302,999     $ 4,169,265     $ 16,567  
 
Amortization expense for the three and nine months ended September 30, 2011 was $271,555 and $659,460, respectively.  For the three and nine months ended September 30, 2010 amortization expense was $92,282 and $197,582, respectively.
 
7      NOTES, LOANS AND DERIVATIVE LIABILITIES
 
Notes Payable
 
   
September 30, 2011
   
December 31, 2010
 
                 
Note payable to a financial institution in monthly installments of $10,828 including interest at 7% through October 2014.
  $ 348,927       425,087  
                 
Note payable in connection with acquisition of assets and assumption of certain liabilities of Southwest Wireless, payable in quarterly non-interest bearing payments of $30,000 through August 1, 2012. (Note 4)
    120,000       210,000  
                 
Note payable in connection with acquisition of assets and assumption of certain liabilities of TS Wireless, payable in quarterly non-interest bearing payments of $18,750 through June 30, 2012. (Note 4)
    81,250       184,456  
                 
Note payable in connection with acquisition of assets and assumption of certain liabilities of On A Wave Wireless, Inc., payable in two semi-annually non-interest bearing payments of 53,000 through October 11, 2011. (Note 4)
    26,000       59,000  
                 
Note payable to a Blencoe State Bank assumed in connection with acquisition of On A Wave Wireless, Inc., payable in monthly installments of $450 including interest at 7.25% through May 2014. (Note 4)
    12,503       15,774  
                 
Note payable to Wells Rural Electric, payable in 8 quarterly installments including interest at 5.25%
    215,706       -  
                 
Note payable to CommX, payable in 10 quarterly installments including interest at 5.0%.
    3,500,000       -  
                 
Note payable to American National Bank, payable in 48 monthly installments including interest at 7.8%.
    -       7,842  
                 
      4,304,386       902,159  
                 
Current portion
    2,048,639       396,847  
                 
Non-current portion
  $ 2,255,747     $ 505,312  
 
 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 (1) an embedded conversion meets the definition of a derivative in its entirety and (2) the derivative would qualify for a scope exception to derivative accounting, which further includes evaluating whether the embedded derivative would be considered indexed to the issuer’s own stock.
 
ASC 815 generally provides three criteria that, if met, requires 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 remeasured 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.
 
 
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The Company evaluated the conversion option embedded in its Note 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 and 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 the occurrence or non-occurrence of certain events 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 Note. Accordingly, the conversion option is not considered indexed to the Company’s own stock.
 
On June 16, 2011 (date of issuance), the fair value of the derivative liability was $14,937.  The revaluation of the derivative liability as of September 30, 2011 resulted in the fair value of $167.  The decrease in the fair value resulted in a gain of $12,374 for the three months ended September 30, 2011.
 
The Company uses the Black-Scholes option-pricing model to estimate the value of its derivative liability. The assumptions used in the Black-Scholes option-pricing models are set forth in the following table. The expected volatility is based on the volatility of public companies that are similar to the Company's industry, size, financial leverage and stage of life cycle. The Company calculated the historical volatility of these companies using the daily closing total returns for a period of time equal to the expected term of the derivative liability as of the valuation date. The expected term represents the period of time that the derivative liability is expected to be outstanding. The risk free rate is based on the U.S. treasury securities constant maturity rate that corresponds to the expected term.
 
   
September 30, 2011
   
June 30, 2011
   
June 16, 2011
 
Fair value of common stock
  $ 0.20     $ 0.29     $ 0.30  
Exercise price of option
  $ 0.75     $ 0.75     $ 0.75  
Expected term (years)
    0.75       1.00       1.00  
Expected volatility
    49.62 %     53.25 %     53.25 %
Risk free interest rate
    0.13 %     0.19 %     0.19 %
Expected dividend yield on stock
    0.00 %     0.00 %     0.00 %
Unit fair value
  $ 0.00005     $ 0.00362     $ 0.00431  
Shares issuable upon exercise
    3,466,666       3,466,666       3,466,666  
Aggregate fair value
  $ 167     $ 12,541     $ 14,937  
 
Settlement of Convertible Note
 
On February 5, 2010, pursuant to the Note Purchase Agreement, the Company issued to CalCap a secured convertible promissory note for the principal sum of $15,000,000 (the “Note”).  On December 3, 2010, the Company entered into the Conversion Agreement with CalCap, subject to stockholder approval, pursuant to which CalCap agreed to convert all of the outstanding principal and accrued but unpaid interest under the Note into Preferred Stock at a conversion price of $1.00 per share. In addition, upon the conversion of the Note and in accordance with the Conversion, the Company agreed to issue CalCap a five year warrant to purchase 4,300,000 shares of Preferred Stock at an exercise price of $0.25 per share, a five year warrant to purchase 4,000,000 shares of Preferred Stock at an exercise price of $0.40 per share and a five year warrant to purchase 2,000,000 shares of Preferred Stock at an exercise price of $0.60 per share (collectively, the “Warrants”). Upon approval by vote of the stockholders, on March 11, 2011, the Company issued 16,315,068 shares of Preferred Stock in addition to 10,300,000 exercisable warrants to obtain Preferred Stock, thereby satisfying the Note.
 
 
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The conversion of the Cal Cap Note into Series A Preferred Stock has been accounted for as an induced conversion. The Company induced conversion of the Note through: (1) the issuance of warrants to purchase additional shares of Series A Preferred Stock at exercise prices not provided for in the original Note, (2) additional voting rights granted to Preferred Stock holders relative to those possessed by common stockholders and (3) control of the Board of Directors through the ability to appoint a majority of its members.
 
Under the induced conversion accounting rules, if a convertible debt instrument is converted to equity securities of the debtor pursuant to an inducement offer, the debtor recognizes an expense equal to the fair value of the securities and other consideration transferred in the transaction in excess of the fair market value of securities issuable pursuant to the original conversion terms. The fair value of the derivative liability, after giving the effect to the increase in the exercise price from $0.75 to $1.00 amounted to $2,231,405 immediately prior to the conversion of the rate. The fair value of the derivative liability amounted to $2,390,515 at December 31, 2010. Accordingly, the Company recorded a $159,110 credit to other income during the period January 1, 2011 to March 11, 2011. Upon the conversion of the Note, the derivative liability no longer exists and was therefore reclassified to additional paid in capital. The Company recorded accretion on the Note of $589,055 as interest expense during the period January 1, 2011 to March 11, 2011 to a value of $2,547,416 at the conversion date. After giving effect to the conversion, the unamortized discount on the Note of $12,452,584 was accelerated and has been charged to interest expense.
 
8      CAPITAL AND OPERATING LEASES
 
Capital Leases
 
The Company leases equipment from certain parties under various capital leases expiring in 2011 through 2015. 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 September 30, 2011:

2011
  $ 183,081  
2012
    330,175  
2013
    227,417  
2014
    148,333  
2015
    24,975  
Thereafter
    -  
Total minimum lease payments
    913,981  
Total amounts representing interest
    (200,214 )
      713,767  
Current portion of capital lease obligation
    (324,960 )
Capital lease obligation, less current portion
  $ 388,807  
 
Operating Leases
 
The Company leases tower and roof-top space under operating leases with terms that are typically for five years and contain automatic renewals for two or three additional five year terms. The Company also has various operating leases for office space, equipment, and vehicles that generally are for three to five 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 September 30, 2011:

For the period of October 1, 2011 through December 31, 2011
  $ 486,533  
2012
    618,175  
2013
    337,815  
2014
    208,579  
2015
    126,618  
Thereafter
    -  
    $ 1,777,720  
   
 
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The total rental expense included in operating expenses for operating leases was $954,081 and $436,489 for the three months ended September 30, 2011 and 2010, respectively and $1,482,510 and $1,160,279 for the nine months ended September 30, 2011 and 2010, respectively.
 
In February 2007, the Company entered into a lease agreement for its corporate offices in Omaha, Nebraska. The lease term commenced in February 2007 and terminates five years from the date of commencement with an option to renew for an additional five-year term. The Company’s annual rent payments totaled approximately $103,000 in 2010 and remained at that level through March 2011, before increasing to approximately $106,200 through March 2012. In May 2011 the Company has entered into a new lease agreement for approximately 6,500 square feet of office space for $6,825 per month in Las Vegas. This facility replaces the Company’s previous Las Vegas office and serves as its new headquarters. This lease commenced on May 1, 2011 and terminates on April 30, 2016.
 
The Omaha office’ landlord provided the Company with incentives as an inducement to enter the lease agreement. These incentives included (i) an allowance of $265,000 for leasehold improvements, (ii) an initial three-month rent-free period and (iii) a reduced initial monthly payment schedule from April 2007 through September 2007 with escalating monthly charges thereafter. The Las Vegas office’ landlord provided the Company with incentives as an inducement to enter the lease agreement. These incentives included (i) an allowance of $39,900 for leasehold improvements, (ii) a reduced initial monthly payment schedule from May 2011 through April 2012 with escalating monthly charges thereafter. Leasehold improvements funded by the landlord have been (i) capitalized and are being amortized over the remaining lease term and (ii) recognized as deferred rent and amortized ratably over the term of the lease. The economic value of the rent-free period and the reduced initial monthly payments are recognized as deferred rent and amortized ratably over the term of the lease. Current and long term balances totaled $37,353 and $0 at September 30, 2011.
 
9      STOCKHOLDERS’ EQUITY
 
Preferred Stock
 
The Company is authorized to issue up to 145,000,000 shares of stock, of which 115,000,000 have been designated as Common Stock and 30,000,000 have been designated as preferred stock. Of the 30,000,000 shares of preferred stock, 30,000,000 shares have been designated as Series A Preferred Stock. The Series A Preferred Stock is entitled to certain powers, preferences and other special rights that are summarized below. The Series A Preferred Stock is not redeemable.
 
Dividends
 
The holders of shares of Series A Preferred Stock are entitled to receive dividends, on a pari passu basis, out of any assets legally available therefore, prior and in preference to any declaration or payment of any dividend (payable other than in common stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of common stock) on the common stock, at the rate of 10% of the Original Issue Price ($1.00, subject to adjustment for any stock splits, stock dividends, combinations, recapitalizations or the like) per share per annum for the Series A Preferred Stock, payable within 30 days following the last day of each fiscal quarter. During the first two years following the initial issuance of the Series A Preferred Stock, such dividends shall, at the option of the Company, be payable in either cash or additional shares of Series A Preferred Stock (with such shares being valued consistently with the common stock). Following such two year period, dividends shall be paid in cash unless otherwise elected by the holder. The Company issued 496,157 shares of Series A Preferred Stock in connection with the dividend earned through the second quarter 2011 during July 2011.  The Company recorded a dividend on the Series A Preferred Stock of $411,229 and $907,386 for the three and nine months period ended September 30, 2011, respectively.
 
Liquidation Preference
 
In the event of the liquidation, dissolution or winding up of the Company, the acquisition of the Company by another entity as a result of which the Company’s stockholders have less than 50% control of the acquiring entity’s voting power following such acquisition or the sale of all or substantially all of the assets of the Company, the holders of Series A Preferred Stock shall be entitled to receive, on a pari passu basis, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock, an amount per share equal to the greater of (i) the sum of (A) $1.50 (subject to adjustment for any stock splits, stock dividends, combinations, recapitalizations or the like) and (B) an amount equal to all accrued but unpaid dividends on such share and (ii) the amount of cash, securities or other property which such holder would be entitled to receive in such sale, liquidation, dissolution or winding up of the Company with respect to such shares if such shares had been converted to common stock immediately prior to such sale, liquidation, dissolution or winding up of the Company. Accordingly, the Series A Preferred Stockholders and all security holders in classes equal to or subordinate to the Series A preferred are entitled to the same consideration upon any liquidation event.
 
 
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Upon completion of these distributions, the holders of Series A Preferred Stock shall not be entitled to any further participation as such in any distribution of the assets or funds of the Company.
 
Optional Conversion
 
Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share into such number of fully paid and nonassessable shares of common stock as is determined by dividing the Original Issue Price by the Conversion Price. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Issue Price, which means that the shares of Series A Preferred Stock are initially convertible into shares of common stock on a one-for-one basis.   In addition, each share of Series A Preferred Stock will automatically be converted into shares of common stock at the Conversion Price at the time in effect upon the written consent or agreement of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock.
 
Anti-Dilution Protection
 
The Series A Preferred Stock is subject to weighted-average anti-dilution adjustments in the event of an issuance of common stock below the then current conversion price of the Series A Preferred Stock, as the case may be, or the issuance of any securities convertible into common stock with an exercise or conversion price below such conversion prices, in each case subject to certain exemptions.
 
Mandatory Conversion
 
If the volume weighted average price for any 10 consecutive trading days exceeds, $5.00 (subject to adjustment for any stock splits, stock dividends, combinations, recapitalizations or the like), the Company may require any holder of shares of Series A Preferred Stock to convert such shares, and any accrued but unpaid dividends thereon, into such number of shares of common stock as provided above.
 
Voting Rights
 
The holders of Series A Preferred Stock are entitled to vote, together with holders of common stock as a single class, on any matter upon which holders of common stock have the right to vote, and shall have the right to three (3) votes for each share of common stock into which the shares of Series A Preferred Stock held by such holders could then be converted.
 
Election of Directors
 
So long as at least 10,000,000 shares of Series A Preferred Stock remain outstanding, the holders of the Series A Preferred Stock are entitled, voting together as a single class, to elect such number of directors at or pursuant to each meeting or consent of the Company’s stockholders for the election of directors equal to one-half of the then authorized number of directors plus one (1).  Any resulting fractional number of directors that the holders of Series A Preferred Stock are entitled to elect hereunder shall be rounded down to the nearest whole number.
 
 
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Protective Provisions
 
The consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock voting separately as a class is required in order for the Company to:

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

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

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

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

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

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

 
approve any transaction that would be required to be disclosed as a related party transaction by a corporation that is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
 
Issuances of Common Stock
 
During the nine month period ended September 30, 2011, the Company issued 2,100,000 shares of common stock with an aggregate value of $712,000 pursuant to the consummation of the ERF Wireless and CommX acquisitions (see Note 4).
 
Warrants
 
A roll-forward of the Company’s stock purchase warrants for the quarter ended September 30, 2011 is as follows:
 
   
Series A preferred stock purchase warrants
   
Common stock purchase warrants
   
Total
 
Outstanding at December 31, 2010
    -       3,750,494       3,750,494  
Issued
    10,300,000       1,000,000       11,300,000  
Exercised
    -       -       -  
Cancelled
    -       -       -  
Expired unexercised
    -       -       -  
Outstanding at September 31, 2011
    10,300,000       4,750,494       15,050,494  
 
As of September 30, 2011, there are 15,050,494 exercisable warrants outstanding that feature strike prices ranging from $0.25 to $8.00 per share. 4,300,000 exercisable warrants feature strike prices at or below $0.29 per share.
 
Stock Option Plans
 
A summary of the status of our stock option plans and the changes during the nine months ended September 30, 2011, is presented in the table below:
 
 
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Number of options
   
Weighted Average Exercise Price
   
Weighted Average Contractual Term (Years)
   
Aggregate Intrinsic Value
 
Options outstanding as of December 31, 2010
    2,159,344     $ 0.96       4.42     $ 386,562  
Granted
    425,000       0.37                  
Exercised
    -       -                  
Cancelled
    (100,000 )     (0.35 )                
Forfeited
                               
Options outstanding as of September 30, 2011
    2,484,344       0.88       4.16     $ -  
Options exercisable as of September 30, 2011
    2,048,094       1.00       3.73     $ -  
 
The Company calculates the fair value of stock options using the Black-Scholes option-pricing model. The option-pricing model requires the input of subjective assumptions. The Company has historically priced its options using volatility rates that are based on historical stock prices of similarly situated companies and expectations of the future volatility of our common stock. The expected life of our options is based upon the average of the vesting periods and contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The total expense to be recorded in future periods will depend on several variables, including the number of share-based awards expected to vest.
 
Compensation expense for stock options during the three and nine month ended September 30, 2011 amounted to $24,019 and $1,465,144, respectively.
 
Unamortized stock compensation expense as of September 30, 2011 amounted to $187,268 and is being recognized as compensation expense through February 28, 2014.
 
 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

STATEMENT ON FORARD-LOOKING INFORMATION
 
This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulations. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. These uncertainties include factors that affect all businesses as well as matters specific to us, and other risks. We caution readers not to place undue reliance on any forward-looking statement, which speaks only as of the date made, and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011and in this Quarterly Report on Form 10-Q, as well as others that we may consider immaterial or do not anticipate at this time.
 
Forward-looking statements in this Quarterly Report on Form 10-Q are based on management’s beliefs and opinions at the time the statements are made. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.
 
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 voice-over-IP “VoIP”), under our CommX brand, and DISH Network Corporation (“DISH”) video services to both residential and business subscribers. We currently offer our broadband services to residential and business subscribers in a market footprint covering over 62,000 square miles in the following 12 Western and Midwestern states: Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Nevada, Ohio, South Dakota, Texas and Utah. We estimate our existing footprint covers approximately 2,700,000 people, as well as small to mid-sized businesses in these areas. In June 2011, we acquired the hosted VoIP assets from entities doing business as CommX, and we now provide VoIP services to small to mid-sized businesses as well as to our residential customers through wholesale partners and direct retail channels.

We have principally grown our business through the acquisition of wireless broadband companies operating in areas adjacent to our existing network operations as well as through the organic growth of our subscriber base. From 2007 through today, we have acquired the assets of thirteen companies, which has increased our subscriber base and expanded our network footprint.  We have completed one acquisition outside of the wireless broadband industry with our acquisition of CommX, which was our 14 acquisition overall.
 
Our present strategy is to achieve positive cash flow from operations by increasing our revenues through acquisitions, value-added services that increase our Average Revenue per User (“ARPU”) and growth in our subscriber base. In order to achieve this goal, we attempt to keep the rate of growth in normalized operating expenses less than the growth in revenues. Over the past several quarters, we believe we have executed and plan to continue to execute our principal growth strategies, which are described below and consist of: Rural UniFi, overall organic subscriber growth and strategic initiatives, including the participation in government broadband programs such as the Broadband Initiatives Program (BIP), the deployment of 4G networks and expansion of our VoIP services.
 
 
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Rural UniFi
 
In September of 2009, we launched “Rural UniFi”, which formalized our strategic acquisition of wireless broadband companies and Rural UniFi continues to be one of our core growth strategies. We integrate each acquired business into our existing infrastructure and achieve economies of scale through common management, customer service, sales and marketing and billing functions. We are engaged in ongoing discussions with numerous potential acquisition candidates and believe we are well positioned to continue to make additional acquisitions and grow our revenue and cash flow.
 
Organic Subscriber Growth
 
During the second half of 2010 and the first half of 2011, we increased our organic growth efforts through increased marketing expenses.  We continued to see effects of these efforts in the third quarter of 2011 as our new customer installations increased by 40.6% over the third quarter of 2010.
 
ARRA Stimulus Award
 
On September 13, 2010, we were announced as a $10,200,000 award recipient under the BIP to deliver 4G wireless broadband services to almost 40 communities throughout rural Nevada. Pursuant to the project’s design, we will make 4G, last-mile wireless broadband access and VoIP services available to approximately 93,000 people, 5,522 businesses and 849 critical community facilities in qualified rural communities throughout Nevada under Round Two of the BIP. We plan to offer broadband service at speeds up to 8 megabits per second (Mbps). We anticipate commencing our project in the first quarter of 2012 and expect to be substantially complete within two years. We are currently working with our third-party contractors and applicable RUS personnel to begin requisitioning funds pursuant to the award.
 
4G Wireless Network Deployment
 
We believe that the introduction of 4G networks will help increase both subscriber growth and ARPU.  In August 2010, we implemented a next-generation, 4G wireless network with the launch of our WiMAX network in Pahrump, Nevada. In addition, in December 2010 we launched 4G wireless services in eight markets in rural Nebraska, and in April, 2011, we launched another high-capacity, high-speed network in Wendover, Nevada
 
Expansion of VoIP Services
 
In June 2011, we acquired VoIP assets from entities doing business as CommX.  This acquisition allows us to provide hosted VoIP services to our residential and small to mid-sized business customers through independent wholesale partners who either sell it as a “private label” and through direct retail channels included value-added resellers, using the CommX brand.  Management expects that owning the assets will further our horizontal integration strategy, allowing us to leverage existing reserves and assets and thereby create higher overall operating margins.
 
Characteristics of Our Revenues and Operating Costs and Expenses
 
We offer our services under month-to-month, annual and two, three and five-year service agreements. These services are generally billed monthly, quarterly, semi-annually or annually in advance. Payments received in advance for subscriptions are deferred and recognized as the services are provided. Service initiation fees are recognized at the time of installation.
 
Operating costs and expenses consist of payroll and related expenses, network operating costs, marketing and advertising, professional fees, installation expense and general and administrative expenses. Payroll expenses consist of personnel costs, including salaries, benefits, employer taxes, bonuses and stock compensation expenses across our functional areas: executive, customer support, engineering, accounting and billing, marketing, and local market operational staff.
 
Network operating costs are comprised of costs directly associated with providing our services, including tower rent, circuits to transport data to the Internet termination point and Internet bandwidth.
 
 
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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 engage for functions that we do not perform internally. 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 and  taxes.
 
Summary of Significant Accounting Policies and Accounting Pronouncements
 
See Note 2 of the Notes to Condensed Consolidated Financial Statements for a full description of significant accounting policies and recent accounting pronouncements, including the anticipated dates of adoption and the effects on the Company’s consolidated financial position and results of operations.
 
Results of Operations
 
The following table summarizes our historical results of operations for the three and nine months ended September 30, 2011 and 2010.
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
REVENUES:
                       
Service and installation revenue
  $ 3,361,132     $ 2,060,831     $ 8,502,947     $ 5,309,355  
Support and other revenue
    38,028       15,621       101,167       90,905  
                                 
Total revenues
    3,399,160       2,076,452       8,604,114       5,400,260  
                                 
OPERATING COSTS AND EXPENSES:
                               
Payroll, bonuses and taxes
    1,463,423       1,377,493       5,452,051       3,740,142  
Network operating costs
    1,514,228       952,479       3,676,328       2,378,161  
Professional fees
    265,243       286,577       495,682       1,759,397  
Depreciation and amortization
    1,032,990       570,721       2,541,192       1,460,518  
Other general and administrative expense
    469,593       493,265       1,337,029       1,128,445  
Gain on disposal of equipment
    -       (462 )     (246,197 )     (1,921 )
Installation expense
    130,826       85,164       304,033       185,786  
Marketing and advertising
    297,044       82,516       497,934       210,779  
Total operating costs and expenses
    5,173,347       3,847,753       14,058,052