Thursday, March 4, 2010

High Flyer KeyOn Communications Drops in Value on Broadband Stimulus Rejection

When Did Feds Reject KeyOn, and When Did KeyOn Know It? 03/04/2010 San Francisco - KeyOn Communications Holdings, Inc. (OTCBB: KEYO) announced yesterday morning, at 8:30 AM (ET), in a press release that all of its eleven applications, for $152 million in capital subsidies in Round I of the federal broadband stimulus program, were rejected by the U.S. Department of Agriculture (USDA).

The Rural Utilities Service (RUS) arm of USDA is one of two federal agencies managing the $7.2 billion broadband stimulus program, part of the overall $787 billion stimulus package signed by President Obama on February 17, 2009.

Half of Value Lost in Two Days
Over the two full trading days since that announcement, the company, which bet heavily on the broadband stimulus program, has lost 46% of its value.

Shares of the company closed yesterday at $0.95, down $0.80 (- 45.71%) per share on the day, from the previous day's close of $1.75. KEYO saw unusually high trading volume yesterday, with 697,511 shares traded, a figure equal to nearly 10 times its average daily volume of 69,800 shares. Today trading of the company returned to near normal daily volume, as shares opened and closed at $0.95.

The 46% decline in the firm's traded value means KeyOn has lost $16.5 million in market capitalization since the press release issuance of Wednesday morning. The firm has 20.6 million outstanding shares. (source: MarketWatch, Inc.).

2009 Growth Rate of 5,000% in 6 Months
As reported in detail in a BusinessWeek article of last November by reporter Ben Steverman, for several months in 2009 KeyOn Communciations was the American publicly traded equity which had the single highest level of share appreciation. Steverman reported that the per share value of KEYO rose from $0.04 to $2.10 in the 6 months from May 1 to November 1 of 2009, "an increase of more than 5,000%."

The company announced in a press release of August 19, which we ran on September 8, that it had filed an unspecified number of broadband stimulus project applications.

BusinessWeek, a Bloomberg L.P. publication, advanced the opinion, as did analysts quoted in the article that the primary reason for KeyOn's spectacular growth was an aggressive public relations and investor relations strategy which focused on its applications for broadband stimulus funds. Steverman's piece put the spotlight on two individuals, each owning their own stock advisory / marketing firm that KeyOn retained in exchange for restricted shares of the company.

One individual, Joe Noel, head of the San Francisco based firm Emerging Growth Research, is particularly active in technology microcap stocks in what a Steverman quoted analyst identifies as the "paid-for-research industry."

Noel's most recent posting on his website relative to KeyOn was that of February 22 in which he wrote:

"KEYO – We are on stimulus watch this week!!!! The feds have indicated that all award notifications will be made this week. As we have said many times over the past 6 months – We believe KEYO will get a significant award. We are clearly not the only ones believing this – take a look at the recent SEC filings. Investors have committed over $50 mm in financing to the company. If KEYO get its stimulus grants and awards this week, look for these shares to be up 50% to 100% in just a few days."

BusinessWeek published a response from Jonathan Snyder, CEO of KeyOn in which the wireless executive pointed to other factors for the phenomenal growth of his company's traded position. Mr. Snyder wrote, "In focusing on the recent rise in KeyOn's stock price, Steverman neglects to discuss the company's many accomplishments - including operational performance, balance sheet restructurings, federal stimulus application submissions and a $3 million contingent grant from the State of Illinois - all of which have bolstered the company's' image among investors and competitors alike."

Applications in 11 States, Itemized
The holding company, headquartered in Omaha, NE had, through its operating company KeyOn Communications, Inc. of Las Vegas, NV, applied in the first broadband stimulus funding cycle for a total of $151,816,743 in federal funds to the Broadband Initiatives Program (BIP). Of that total, $56,258,265 (37%) was for grant monies, while $95,558,478 (63%) was for loan funding.

KeyOn Communications applied for funding to extend its wireless, WiMAX delivered, broadband services in the 11 states of: Arkansas, Illinois, Iowa, Kansas, Minnesota, Missouri, Oklahoma, Nebraska, Nevada, South Dakota, and Wisconsin. Requested funds by state ranged from a high of $20.5 million in Iowa, to $5.9 million in South Dakota.

KeyOn Targeted Rural Areas for Federal Funding The BIP component of the overall $7.2 billion federal broadband stimulus program is managed solely by RUS. The National Telecommunications and Information Administration (NTIA) of the U.S. Department of Commerce manages the other portion of the federal effort, under its Broadband Technology Opportunities Program (BTOP). Under the rules for the program's funding Round I, applicants like KeyOn Communications had the choice to apply solely to BIP, or to BTOP, or to both programs.

All of KeyOn's applications were made only for BIP programmatic grants and loans, for "proposed service areas" in rural counties of the 11 states.

USDA Identifies When KeyOn Rejection Data Posted
According to the authorized spokesperson of RUS, the agency posted the notice of KeyOn's funding rejection "within 24 hours" previous to 1:00 PM (ET) yesterday.

Spokesman Bart Kendrick answered in writing questions about the notice disclosure asked of him by Thus, KeyOn Holdings appears to have issued its press release of Wednesday morning during the first full business day during which the federal public notice of funding rejection was published.

KeyOn states in its press release that all 11 applications had "advanced to the due diligence phase in Round One." This phase is the second major review step of the application vetting process, into which an unknown minority of the 2,167 Round I applications were placed.

We take the statement of a publicly traded company at its word, although there is not a dispositive way to validate that statement of fact, unless the firm releases the RUS notification letters. This is so, given the manner in which RUS issues updates to the program's Application Database, and the non-release to date by either the company or RUS of the final rejection letter.

RUS and NTIA have not published updated application processing pipeline data at any point during the program. Those of us reporting on the program have published the best estimates of pipeline data when we are able to gather it.

In answer to our direct question on December 17, for example, NTIA Administrator Lawrence E. Strickling, gave a rough estimate of the number applications in due diligence at that time as "300 - 400." As we noted then, Mr. Strickling's statement made during a media call in answer to our question was the "first time a federal official has made a direct statement estimating how many applications are in the final evaluation pipeline as agencies scramble to issue funding Round I awards by an unspecified time in February 2010."

When Was KeyOn Given Notice?
We have not been able to determine when KeyOn Holdings received notice from RUS of the agency's rejections of all of its 11 applications.

When we asked in writing "When was KeyOn Communications notified by RUS that its applications were rejected," Mr. Kendrick stated to us in writing the agency's reply, "That is a question for the applicant." Yesterday we further asked USDA, through Mr. Kendrick, if the federal agency considers the notice letter(s) sent to KeyOn to be non-public documents, and if so what element of federal code or regulation the agency is using to keep the notice(s) non-public. As of this posting, we have not received a statement from the agency in this regard.

While posting of data relative to application rejections, partial rejections, and awards to the jointly maintained federal website has consistently run days and sometimes weeks behind the actual mailing of notices, it is the only official source for tracking the stimulus pipeline.

In an email to the corporate officers of KeyOn Communications on February 19, asked 6 detailed questions about the status of the firm's applications for broadband stimulus funds. As we stated to KeyOn management we were inquiring at that time based on reports we had from around the nation of rejection notices being received by applicants which we believed to have been in the due diligence phase.

We received no response from the company.

Conference Call of March 8
KeyOn states in its press release issued today that it "will host a conference call on March 8, 2010 at 4:15 pm EST during which KeyOn's CEO, Jonathan Snyder, will provide an update on the Round One process and announce its intentions for Round Two of the BIP. There will be a Q & A session at the end of the presentation." According to the company's press release, registration for the conference call is available here.

Our Take: Transparency Matters to U.S. Capital Markets
We have been reporting the best public information we have been able to lever from the federal agencies managing the broadband stimulus program, as Round I awards and rejections have been announced "on a rolling basis" since we broke the story nationally that the first award group would be announced on December 17.

Many of us have been critical of the management of the program, irrespective of how much we fully support its the goals and the clear thinking American President who created it. We join other participants in the program in our strong criticism of the nearly total lack of transparent data about the application process, the pipeline processing numbers, or these specific reasons for application rejections.

Was there a period of delay between the issuance of the private notices to KeyOn Communications and the posting of the "Application Not Funded by BIP" status of the federal public database? We do not know, and neither do investors in KeyOn know.

Efficient capital markets require the highest level of transparency about traded corporations possible. Government should play a role in leveling the playing field, and in adding to the degree of transparency enjoyed by all investors. When government enters the marketplace -- as it has in the broadband stimulus program -- it has an even higher level obligation to ensure the most open and transparent view of how and where tax dollars are being spent.

No one is claiming any federal official manipulated a process in favor or against KeyOn or its investors. No one is claiming that KeyOn management kept information from the marketplace.

We are however flagging the potential for mischief that arises when so much public money is at stake with little or no visibility. This potential is exaclty what the Government Accountability Office (GAO), and the Inspector General of the Commerce Department, among others, have pointed out for months: Without a greater degree of public and transparent information about the broadband stimulus program, the potential for "waste, fraud, and abuse" within the program is high.
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