10-K 1 smgi_10k-033112.htm FORM 10-K smgi_10k-033112.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2012
or
[   ]           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 0-26395

SALON MEDIA GROUP, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
94-3228750
(State of Incorporation)
(IRS Employer Identification No.)

101 Spear Street, Suite 203
San Francisco, CA 94105
(Address of principal executive offices)
(415) 645-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [  ]  No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [  ]  No [X]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 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 [  ]

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  [  ]  No  [x]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [  ]

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined by Exchange Act Rule 12b-2).Yes [X] No

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $152,000 based on the closing sale price of the registrant’s common stock on June 1, 2012.  Shares of common stock held by each then current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to have been affiliates of Salon Media Group, Inc. This determination of affiliate status is not a conclusive determination for other purposes.

The number of outstanding shares of the Registrant's Common Stock, par value $0.001 per share, on June 1, 2012 was 3,282,576 shares.



 
 
 
 
 

FORM 10-K
SALON MEDIA GROUP, INC.
INDEX

 
PART I
 
Page Number
     
ITEM 1.
Business
4
     
ITEM 1A.
Risk Factors
15
     
ITEM 1B.
Unresolved Staff Comments
23
     
ITEM 2.
Properties
23
     
ITEM 3.
Legal Proceedings
24
     
PART II
   
     
ITEM 5.
Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity Securities
24
     
ITEM 6.
Selected Consolidated Financial Data
27
     
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
     
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
36
     
ITEM 8.
Financial Statements and Supplementary Data
37
     
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
62
     
ITEM 9A.
Controls and Procedures
62
     
ITEM 9B.
Other Information
63
     
PART III
   
     
ITEM 10.
Directors, Executive Officers and Corporate Governance
64
     
ITEM 11.
Executive Compensation
67
     
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
76
     
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
82
     
ITEM 14.
Principal Accountant Fees and Services
84
 
 
 

 
 

FORM 10-K
SALON MEDIA GROUP, INC.
INDEX

 
PART IV
   
     
ITEM 15.
Exhibits, Financial Statement Schedules
85
     
SIGNATURES
95
 
 
3

 
 
PART I
 
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties, including but not limited to statements regarding our strategy, plans, objectives, expectations, intentions, financial performance, cash-flow breakeven timing, financing, economic conditions, Internet advertising market performance, subscription service plans, non-web opportunities and revenue sources.  Although Salon Media Group, Inc. (“Salon” or the “Company”) believes its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved.  Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth above and in Salon’s public filings.  Salon assumes no obligation to update any forward-looking statements as circumstances change.
 
Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Factors That May Affect Salon’s Future Results and Market Price of Stock."  In this report, the words “anticipates,” “believes,” “expects,” “estimates,” “intends,” “future,” and similar expressions identify forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

ITEM 1.  Business
 
Introduction

Salon was originally incorporated in July 1995 in the State of California and reincorporated in Delaware in June 1999.  On June 22, 1999, Salon had its initial public offering, with its common stock quoted on the NASDAQ National Market under the symbol SALN.  Effective May 16, 2001, Salon adopted the name Salon Media Group, Inc.  Due to Salon’s inability to meet the continued listing requirements of the NASDAQ Market, on November 21, 2002, Salon’s common stock began trading in the OTC (Over-The-Counter) Bulletin Board marketplace under the symbol SALN.OB.   Following a 20:1 reverse split on November 15, 2006, the Company’s stock ticker symbol became SLNM.OB.  The stock symbol for the Company has since been updated to SLNM.PK.

Salon is an online news and social networking company and an Internet publishing pioneer providing high quality journalism and a forum for discussing current events and contemporary social political issues.  Salon’s award-winning content combines breaking news, original investigative stories and provocative personal essays along with quick-take commentary and staff-written blogs about politics, technology, culture and entertainment. Among its many quality offerings, Salon sponsors daily blogs by well-known staff and freelance writers, plus an evolving group of new voices who are regular contributors to the site.   In its editorial product, Salon balances two crucial missions: (1) providing original and provocative content on topics that the mainstream media overlook, and (2) filtering through the media chatter and clutter to help readers find the stories that matter, (3) providing the best coverage of breaking news, and (4) providing readers with the best from around the web.
 
Salon generates revenue from display advertising, 3rd party network advertising, and other services.
 
 
4

 
 
Highlights from Fiscal Year 2012
 
· 
Complete redesign of the website and site architecture which improved usability, ease of use and reduced page load times
 
· 
Expanded Salon’s Partner network to include a growing list of 20, including The GlobalPost, Alternet, The Nation Institute, LA Review of Books, which increased the amount of high-quality content to our readers.
 
· 
Salon personalities expanded brand awareness on TV. Writers Steve Kornacki and Joan Walsh became regular contributors to MSNBC.  Mr. Kornacki is a co-host for the MSNBC afternoon show, “The Cycle.” Irin Carmon, Alex Pareene, Justin Elliott, Mary Elizabeth Williams all made extensive media appearances representing Salon.
 
· 
Senior writers Alex Pareene and Irin Carmon named to Forbes Magazine’s “30 Under 30” list of media stars.  Salon was the only publication with more than one staff member named to this award.
 
· 
Successfully recruited top names from competing publications (New York, Newsweek, Gawker) to fill critical roles.
 
· 
Launched two ebooks, both by Alex Pareene, “A Tea People’s History” and “A Rude Guide to Mitt,” capitalizing on Mr. Pareene’s popularity with Salon readers.
 
· 
Aggressive reporting of the ongoing Occupy Wall Street movement by Salon staff and contributors, which was acknowledged by many of Salon’s reporting peers and lead to increased traffic growth.
 
· 
Regular “shoutouts” from fellow media, such as Rachel Maddow, who called Salon’s coverage of a political donor prone to lawsuits, “a brave act”; from New York Times columnist David Carr, who called Salon’s redesign “sexy,” and said the company is now part of his morning reading list, and to MSNBC host Tamron Hall, who called Irin Carmon “the most important blogger of the 2012 election.”
 
· 
Contributor Rebecca Traister won a 2012 Mirror Award for her Salon media commentary.
 
· 
Staff writer love and sex columnist Tracy Clark-Flory was included in “Best Sex Writing of 2011” anthology.
 
· 
Salon exposed two new advertising categories, luxury and insurance, which better positioned the company to close more business in those categories in the future.
 
· 
The company reduced server costs by moving to a shared hosted hardware and cloud-based computing architecture.
 
 
5

 
 
Strategic Review
 
In May 2012, the company embarked on a plan to grow revenue by focusing on its core strengths in news coverage, which will include focusing Salon’s resources on building its audience on Salon.com, mobile phones and tablets, social media networks, and direct advertising revenue. Using real-time data insights, the company will deliver content in a timely manner and ensure readers find what they seek to read. Salon will continue to grow its unique visitors through a combination of editorial enhancements, new site features, and continual technological innovation.
 
Content Divisions
 
Salon targets an educated, culturally engaged audience interested in original thinking and reporting on the day’s big stories, and pursues that audience by tightly focusing on three key areas -- Politics, Culture, and Lifestyle, and through definitive, agenda-setting writers , original stories and essays.
 
Politics
Salon’s political coverage revolves around its big name writers such as Glenn Greenwald, Joan Walsh, Steve Kornacki, Alex Pareene and Irin Carmon. All are frequent cable-news show regulars.  Ms. Walsh and Mr. Kornacki are contract MSNBC contributors.  Mr. Kornacki co-hosts MSNBC’s “The Cycle”. Mr. Greenwald, possibly the leading civil liberties voice in the country, is the author of three New York Times bestsellers; Ms. Walsh is the former Editor-in-Chief of Salon.  New additions to the writer core, Ms. Carmon and Mr. Pareene were both named to Forbes “30 under 30” list last year.
   
Arts & Entertainment
Salon’s cultural coverage focuses on enthusiastic, extremely literate takes and high-energy discussions about the entertainment world, and frequently interviews major cultural figures including Meryl Streep, Robert DeNiro, Martin Scorsese, George Clooney, Jon Stewart and David Simon. Willa Paskin (TV), Andrew O’Hehir (film), Laura Miller (books) are all experts in their respective fields with established reputations and large followings.
 
Life
Covered primarily through first-person essays, Salon’s lifestyle coverage explores passionately personal accounts of modern life, from best-selling writers such as Anne Lamott, David Rakoff, Samantha Bee, Dan Savage, Alan Lightmann, Dave Eggers, Curtis Sittenfeld, and Augusten Burroughs to unknowns with electric personal tales. Often, such stories are plucked from Open Salon, Salon’s blog network. Other featured writers in this section include Will Doig who writes the Dream City column, which explores urban ideas and sustainability; Tracy Clark-Flory (love, sex and relationships columnist), and Cary Tennis (advice columnist).
   
Open Salon
During fiscal year 2009, Salon launched Open Salon.com, a social network for bloggers, with content curated by Salon staff. It allows bloggers to post user profiles, contribute blogs and other content. Open Salon attracts unique users, resulting in increased advertising inventory and lowering its incremental editorial costs.
 
 
6

 
 
Expanded Contributor Network
 
Salon supplements its staff-driven, original work with a burgeoning partnership program with other producers of original, high quality journalism such as GlobalPost, The Nation Institute, ProPublica, Alternet, Print Magazine, MinnPost, The Crime Report, LA Review of Books, Guernica, “Bill Moyers & Co.,” carefully selecting stories with the greatest appeal to Salon readers. The company also relies on the frequent, high-quality contributions of its reader-writers on Open Salon, who write regularly on meaningful, news-driven stories, and have contributed heavily to ongoing Salon series, including “Interview with my Bully” (writers interviewing their childhood bullies); “Pinched” (first-person accounts of recession-era living);  “My Brilliant Second Career” (tales of career reinvention) and “Made” (“the virtue of making stuff”).
 
Breaking News Division
 
Salon will continue its award-winning thought leadership and reporting in Politics, Arts & Entertainment and Life, but in fiscal year 2013, the company will be investing in a News division to bring readers the latest news on important topics. The company will be utilizing wires content, images and video, expanded partnerships, and aggregation to curate the best from around the web and deliver engaging content. Through these key content areas, Salon continues to enhance or create new content and features for its users.
 
Mobile phones and tablets
 
Web browsers and applications on mobile platforms are a significant area of audience growth and ad revenue in the online news industry. Salon plans to be accessible to users through enhancement of its mobile browser site and launch of mobile phone and tablet apps. The company is developing a mobile content strategy to address mobile content needs that may differ from readers’ needs on desktop computers.
 
Social media
 
With the global growth of social networking platforms, their emergence as news innovators, sources of traffic referrals, and distribution platforms, Salon plans to grow its delivery of content to, presence on and integration with social platforms. The company plans to integrate social networking features into the Website, more easily facilitate the sharing of content on social networks, and develop partnerships with social networks.
 
Content Partnerships
 
Salon believes it needs fresh content and new ideas to continue to attract readers to its Website.  To this end, Salon has made efforts to initiate partnerships to create content particularly in areas where Salon does not have facilities or experience, such as video content, and various content verticals.  Additionally, Salon has made efforts to identify bloggers who might have a strong affinity with its readers, and who might be interested in moving their sites to Salon in order to gain a greater reach of readership and infrastructure support.
 
Display Advertising Revenue
 
Since the end of fiscal year 2007, Salon has increased emphasis on display advertising revenues.  In fiscal year 2013, Salon plans to continue to build out its suite of advertising offerings, improve the technological orientation of the site to attract custom advertising solutions and expand into additional advertising categories. The company will also better optimize the use of ad networks to fully monetize any unsold remnant inventory.
 
 
7

 
 
Website Design and Architecture
 
During the last three years, Salon has improved the look and feel of its Website to increase appeal to its audience.  In April 2012, Salon launched a completely re-designed Website in an effort to accelerate its audience growth, gave increased attention to search engine optimization and referral traffic, improved page loading to deliver news to users faster, improved the company’s Google page rank, improved usability to make it easier for users to find the stories they're looking for, integrated social networking to increase referral traffic from social networks and added modules to better circulate traffic around the site.
 
The Well
 
Salon operates The Well, a subscription member-only discussion community. As other online communities and social networks emerged over the years, The Well’s subscriber base dwindled to 2,693, which did not bear financial promise. As a result Salon decided to narrow the company focus and laid-off The Well staff and began to look for a buyer for the property. In addition, discussions with parties interested in potentially buying the domain name have been initiated.
 
Premium Subscriptions
 
Salon operates Premium and Core, a subscription service that provides ad-free viewing of the Website. As Salon increased its number of readers to its advertising supported Website, its primary source of revenue was from direct advertising sales. As a result of a continued decline in Premium and Core subscribers, Salon’s subscription service will be terminated and, as of June 2012, new subscriptions and renewals will no longer be accepted. Salon recognizes that its subscription model will continue to be preferred by a small minority of its readers, and will therefore continue the subscription program during this winding down process.
 
Expanding Gross Margins
 
Salon has made substantial strides in the past fiscal year to better realign its production costs with its revenue potential in an effort to reach profitability.  Among other measures, the company reduced full-time headcount from 45 in March 2010 to 40 in May 2012 and is continually aiming to match personnel resources to overall business needs given the prevailing advertising market. Additionally, Salon is evaluating opportunities to reduce the expense of its high-quality content by focusing on reducing cost per page and seeking less costly sources of content, including news wires, greater content aggregation and the use of popular articles and blogs from Open Salon.
 
Revenue Sources
 
Central to Salon’s strategy is to capitalize on the expected continued shift in spending of advertising budgets to the Web in response to increased desktop computer, mobile and tablet usage. According to the eMarketer, online advertising surpassed newspaper advertising for the first time in 2010. Total online advertising was $32 billion in 2011, which was a 23% increase from 2010, according to the Pew Research Center.
 
 
8

 
 
No customer accounted for over 10% of total revenue for the years ended March 31, 2012 and March 31, 2010 with one customer over 10% of total revenue accounted for year ended March 31, 2011, which were as follows (in thousands):

   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Advertising
  $ 3,010       79%     $ 3,584       78%     $ 2,967       69%  
Salon Premium
    355       9%       472       10%       701       16%  
All Other
    464       12%       517       12%       623       15%  
Total
  $ 3,829       100%     $ 4,573       100%     $ 4,291       100%  

Salon has generated Internet advertising revenues since its inception in 1995, and this accounted for 79% of revenues in fiscal year 2012.  The Company launched Salon Premium, a subscription service, in April 2001.  Salon Premium was re-branded as Salon Core in fiscal year 2012, and due to a tepid response from readers, was restructured in June 2012.  The Company acquired The Well, its primary source of other revenue, in 1999.  The Well's declining subscriber base, and aging technology led to a decision in June 2012 to restructure the service.  As a result, The Well staff were laid off and current subscriptions will be honored but not renewed upon expiration. On May 29, 2012, Salon entered an Indication of Intent and Confidentiality Agreement with a company that has expressed interest in acquiring the Well.   In addition, discussions with parties interested in potentially buying the domain name have been initiated.

Online advertising, which accounts for the bulk of Salon’s revenue, is subject to broader economic fluctuations, like other forms of advertising, but with a consistent upward bias.  According to the Interactive Advertising Bureau, United States online advertising revenues have grown from $9.6 billion in 2004 to $31.7 billion in 2011 with further double digit gains anticipated in 2012.  That milestone represents a 22 percent increase over 2010’s full-year number, which itself had been a record-breaker at $26 billion.

Central to Salon’s strategy is to capitalize on the expected continued shift in spending of advertising budgets to the Web in response to increased online usage. According to the eMarketer, online advertising surpassed newspaper advertising for the first time in 2010.

An important factor in increasing advertising revenues in future periods is growth in Salon’s audience.  Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements.  Ultimately, Salon charges advertisers for a set number of ad impressions viewed by a Website visitor. During fiscal year 2010, management launched a new strategy to increase traffic, including a fresh new site design, more aggressive and timely news coverage and expanded lifestyle coverage in areas such as food, film and books. The strategy began to bear fruit in the fourth quarter ended March 31, 2010, as unique monthly visitors averaged 5.4 million, a 22% increase over the same quarter in the prior fiscal year.  In the fourth quarter ended March 31, 2011, further gains brought average unique monthly visitors to 5.6 million, a 4% increase over the same quarter in the prior fiscal year.  In the fourth quarter ended March 31, 2012, additional gains brought average unique monthly visitors to 7.3 million, a 30% increase over the same quarter in the prior fiscal year.  In fiscal 2011, full year average monthly unique visitors grew by 12% compared to fiscal 2010.  In fiscal 2012, full year average monthly unique visitors grew by 18% compared to fiscal 2011.  Additionally, monthly unique visitors have grown by a cumulative 10% over the past four years.  Aiding the continued growth in unique visitors to Salon’s Website is the general migration of readers to the Internet from print newspapers.  The table below reflects unique monthly visitors to Salon’s Website.

 
9

 



Advertising is Salon’s primary source of revenue.  Most advertising campaigns are of short duration, generally less than ninety days.  Salon’s obligations may include a guaranteed minimum number of impressions, or views by Website visitors of an advertisement, a set number of “Site Pass” advertisements viewed by Website visitors or a set number of days that a Site Pass advertisement is to run.  To the extent the minimum guaranteed amounts are not achieved, Salon defers recognition of the corresponding revenue until the remaining guaranteed amounts are provided, if mutually agreeable with an advertiser.  If these “make good” amounts are not agreeable with an advertiser, no further revenue is recognized.  Salon has also successfully made greater use of ad networks to better monetize unsold ad inventory.

Generally, subscriptions to Salon Premium cost between $20 and $45 annually, depending on any associated bundles of promotional items offered.  Benefits of Salon Premium include unrestricted access to Salon’s content with no banners, pop-ups or site pass advertisements, free magazine subscriptions, or other premiums, and the ability to download content in text or PDF format.

Over the past few years, subscriptions have been de-emphasized and this revenue has been declining.  Subscriptions were de-emphasized because trends in Internet media have been away from paid content and the cost of generating a subscriber and maintaining the Premium service did not justify the declining revenue stream.  In June 2012, the service was restructured.  Current memberships will be honored, but not renewed upon expiration. 
 
 
10

 
 
Salon Premium revenue is recognized ratably over the period that services are provided.  For the year ended March 31, 2012, Salon received $0.3 million in cash and recognized $0.4 million of revenue for this service primarily from approximately 5,900 paid new and renewed one year subscriptions and from approximately 9,900 monthly subscriptions.  For the year ended March 31, 2011, Salon received $0.4 million in cash and recognized $0.5 million of revenue for this service primarily from approximately 7,700 paid new and renewed one year subscriptions and from approximately 9,900 monthly subscriptions.  For the year ended March 31, 2010, Salon received $0.6 million in cash and recognized $0.7 million of revenue for this service primarily from approximately 12,000 paid new and renewed one year subscriptions and from approximately 10,600 monthly subscriptions. Since peaking at 89,100 subscribers in December 2004, paid subscriptions have continued to decline to approximately 10,900 as of March 31, 2011 and approximately 8,100 as of March 31, 2012.  As a result of the continued decline in subscribers, as of June 2012, new subscriptions and renewals will no longer be accepted, in anticipation of winding down the Company’s subscription service in fiscal 2013.
 
The other sources of revenue are primarily membership and data storage fees from The Well, an on-line discussion forum.  Revenue is recognized ratably over the subscription period.  The revenues recognized were approximately $0.3 million for each of the years ended March 31, 2012 and 2011, and approximately $0.4 million for the year ended March 31, 2010. On May 29, 2012, Salon entered an Indication of Intent and Confidentiality Agreement with a company that has expressed interest in acquiring the Well.   In addition, discussions with parties interested in potentially buying the domain name have been initiated. Salon also generates nominal revenue from the licensing of content that previously appeared in Salon, for providing links to a third party’s Website offering personals/dating services and from its limited e-commerce activities.

Sales and Marketing
 
Salon aims to distinguish itself in the marketplace by offering custom, innovative and integrated advertising products that appeal to readers and to seamlessly and organically incorporate the client and their objectives into the site. As such, the company will be building out its suite of ad products, especially in the areas of custom content areas, sponsored content and engagement through social media. These products will allow Salon’s clients to speak to and engage with its passionate, educated and influential audience in a way they have never been able to before. These new ad offerings will allow the company to grow its business without drastically increasing costs.
 
In 2012, Salon reorganized the Sales team to focus on display advertising and remnant inventory advertising.  In March 2012, Matt Sussberg was appointed Vice President of Sales.
 
Salon has sales offices in New York City and Los Angeles, with eight advertising sales and operations employees as of March 31, 2012, of which four actively solicit orders.  As of March 31, 2012, Salon has one employee associated with Salon Premium membership activities.
 
Salon did not incur any advertising expenses for the years ended March 31, 2012 and 2011.  Salon, however, had incurred advertising expenses of $1.2 million for the year ended March 31, 2010.  These advertising expenses primarily represent non-cash expenses from the utilization of advertising credits which Salon acquired in January 2000 from the sale of common stock to Rainbow Media Holdings (“Rainbow”).  During the year ended March 31, 2003, Rainbow transferred a portion of its obligation to provide Salon with advertising credits to National Broadcasting Company (NBC)’s Bravo channel, while still retaining a portion of the overall obligation.  The transfer occurred due to the sale by Cablevision, which owns Rainbow Media Holdings, of its Bravo channel to NBC.  As of December 31, 2009, Salon has fully utilized the ad credits with NBC and Rainbow.
 
 
11

 
 
Product Development
 
Salon recognizes that readers come to the site for online news, reporting, opinion and an engaging, active community of writers, readers and commenters. Users engage with the site through desktop computers, mobile phones and social networking platforms. To meet users’ rapidly evolving online media needs, Salon is continually innovating and developing its website, mobile website and social media presence, by adding new features, design updates and technologies that improve the user experience, speed and search engine optimization. The company is developing an internal culture of innovation where the Edit, Technology and Sales teams collaborate on product development. Salon is currently exploring mobile application development.
 
Infrastructure and Operations
 
Salon has created a flexible publishing structure that enables editors to quickly respond to news events and take advantage of the ease of distribution provided by the Internet.  Salon content is deployed on the WordPress publishing platform and captured in a database for reuse in Web and other formats.  The content on Salon’s Website has been structured to facilitate being found by search engines, a key driver in increasing traffic to Salon’s Website.

In fiscal year 2011, Salon migrated from an older proprietary content management system (“CMS”) to WordPress, a newer, faster, easier to use, proprietary CMS that positioned editors to more quickly tell more engaging stories with new tools and features. The new CMS allowed engineers to more quickly build new site features and iterate on existing features more easily.
 
Salon's systems are designed to handle traffic growth through a tiered content delivery model, leveraging both internal systems and external vendors to maximize uptime.  By delivering most content through a partnership with a large external Content Delivery Network, Salon reduces the load on its own servers by nearly 85%.  A combination of regular automated backups and distributed servers protect the integrity of Salon's data.  By utilizing popular Cloud computing services as the infrastructure for the web servers, Salon is able to dynamically respond to traffic levels, ensuring timely content delivery while minimizing hosting costs.  In addition, the use of dedicated physical hardware maintained at a third-party facility in Sacramento allows for optimal database performance at a fixed, low price point.
 
Changes to Executive Leadership
 
In May 2012 there were several changes in Salon’s executive leadership.  Effective May 30, 2012 David Talbot and Norman Blashka resigned. The Board of Directors (“The Board”) appointed Cynthia Jeffers, who had been the Chief Technology Officer, to the position of Chief Executive Officer and a member of The Board. Alex Fernandez, Salon’s Corporate Controller, was appointed to the position of Interim Chief Financial Officer. In April 2012, Matthew Sussberg joined Salon as Vice President of Sales.
 
Competition
 
Salon competes for advertising revenues with numerous Websites, with the 50 largest companies attracting an estimated 90% of all the internet advertising dollars according to a recent study by PricewaterhouseCoopers LLC and sponsored by the Interactive Advertising Bureau.  These companies have Websites that include major portals such as Yahoo and AOL, major search engines such as Google and Bing, major social networks such as Facebook and Twitter, and major online media publications such as CNN.com, MSNBC, The Huffington Post, The New York Times, and The Washington Post. Salon also competes with many smaller news and politics–oriented Websites, such as Slate, Gawker, The Daily Beast, Buzzfeed, The Atlantic, Talking Points Memo & Mother Jones and Politico for staff, audience and ad sales.
 
 
12

 
 
Salon’s Strategy
 
Continued focus on growing Salon’s audience
 
Increasing unique visitors to Salon’s Website and the resulting page views that serve as a platform for advertising impressions is key to Salon’s revenue growth. In addition to the revenue generated from advertising, an increase in unique visitors could increase revenue from subscriptions as each new visitor to Salon’s Website is a potential new subscriber to Salon Premium.  As a result, audience growth will continue to be a primary business goal for Salon.
 
During fiscal 2010, Salon launched a re-designed architecture and Website in an effort to accelerate its growth and gave increased attention to search engine optimization and referral traffic.  Salon plans to continue to focus on developing its audience growth through a combination of editorial enhancements, new products, and more effective use of technology.  Salon has broadened its content by reclassifying its content in five key contents areas.  These are: News, Politics, Arts & Entertainment, Life and Open Salon. Through these five key content areas, Salon continues to enhance or create new content and features for its readers. Further changes are in the process of being implemented.
 
Salon launched a new social networking service in August 2008 for its users, “Open Salon,” which allows them to post user profiles; contribute blogs and other content; and collect all their contributions to Salon, including Letters to the Editor, in one place.  Management believes Open Salon will attract and retain unique users, increase advertising inventory and lower its incremental editorial costs.   Salon’s strategy to continue to grow its audience also encompasses partnership formation to deliver Salon’s content to a broader audience, a search engine optimization plan, and an integrated marketing plan that includes mostly online advertising.  In the last several years Salon has not allocated, and does not currently contemplate in its next fiscal year allocating any significant cash resources towards such efforts; however, Salon has formed and continues to form partnerships and alliances to deliver Salon’s award-winning, unique, and compelling content to a broader audience.
 
Focus on advertising revenue opportunity while Premium subscriber base declines
 
Salon generates most of its revenue from advertising on its Website, as well as through subscribers who pay to read its content without ads.  However, as Salon increased its number of readers to its Website, Salon has determined that if its advertising sales team can sell most of its inventory, it will be far more profitable for Salon to drive its readers to its advertising supported Website rather than to a subscription, without-ads Website.  As a result of the continued decline in subscribers, as of June 2012, new subscriptions and renewals will no longer be accepted, in anticipation of winding down the Company’s subscription service.  Salon recognizes that its subscription model will continue to be preferred by a minority of its readers, and will therefore continue the subscription program during this winding down process.
 
Since the end of fiscal year 2007, Salon has increased emphasis on advertising revenues.  In fiscal year 2013, Salon plans to continue to provide more creative advertising offerings, improve the technological orientation of the site to attract more non-standard advertising and expand into additional advertising categories, such as video, music and the visual arts. It will also expand and better optimize the use of ad networks to fully monetize any unsold remnant inventory.
 
 
13

 
 
Enhanced Website Design
 
In fiscal 2010, Salon launched a re-designed architecture and Website to improve the presentation of timely and relevant content through a compelling and dynamically tuned interface. Salon expects this redesign to result in greater user satisfaction, and therefore, higher utilization, higher search rankings that will drive new users to the site and a higher proportion of repeat engagement, as users return throughout the day to obtain timely news and information. The site has been dynamic and interactive, and its new modular architecture has allowed editors to manage a real time flow of content presented in a graphically compelling fashion, while also servicing multiple platforms and devices, and dynamic usability experiments.
 
Expanding Gross Margins
 
Salon has made substantial strides in the past fiscal year to better realign its production costs with its revenue potential in an effort to reach profitability.  Among other measures, the company reduced full-time headcount from 45 in March 2010 to 41 in March 2011 and is continually aiming to match personnel resources to overall business need given the prevailing advertising market.  The company has increased full-time headcount to 45 as of March 2012.  Additionally, Salon is evaluating opportunities to reduce the expense of its high-quality content by focusing on reducing cost per page and seeking less costly sources of content, including greater content aggregation and the use of popular articles and blogs from Open Salon.
 
Develop Content Partnerships
 
Salon believes it needs fresh content and new ideas to continue to attract readers to its Website.  To this end, Salon has made efforts to initiate partnerships to create content particularly in areas where Salon does not have facilities or experience, such as video content, and various content verticals.  Additionally, Salon has made efforts to identify bloggers who might have a strong affinity with its readers, and who might be interested in moving their sites to Salon in order to gain a greater reach of readership, and to gain infrastructure support.
 
Infrastructure and Operations
 
Salon has created a flexible publishing structure that enables it to develop its content while responding quickly to news events and take advantage of the ease of distribution provided by the Internet. Salon content is deployed on its proprietary software platform and captured in a database for reuse in Web and other formats.  The content on Salon’s Website has been structured to facilitate being found by search engines, a key driver in increasing traffic to Salon’s Website.  During the last three years, Salon has improved the look and feel of its Website to increase appeal to its audience and contemplates continued changes to its Website.  In fiscal year 2010, Salon made significant investments in this area with a re-designed architecture and website to help drive traffic to its site.

Salon’s Website is supported by a variety of servers using the Solaris and Linux operating systems.  Salon’s top technical priority is the fast delivery of pages to its users.  Salon’s systems are designed to handle traffic growth by balancing the amount of traffic among multiple servers.  Salon relies on server redundancy to help achieve its goal of 24 hours, seven-days-a-week Website availability.  Regular automated backups protect the integrity of Salon’s data.   Salon servers are maintained at a third-party facility in Sacramento, in a building capable of withstanding a major earthquake.  The third-party facility provides continuous monitoring of the servers.  In fiscal 2011, Salon has decided to explore a possible move to a cloud-based infrastructure.
 
 
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Software to maintain and manage Salon Premium was created in-house and upgraded in 2003, again during fiscal year 2007, and a major reprogramming effort was conducted in fiscal year 2010.  A full migration to Aria, an open source content management system was completed in fiscal 2012.

Proprietary Rights
 
Salon’s success and ability to compete is dependent in part on the goodwill associated with its trademarks, trade names, service marks and other proprietary rights and on its ability to use U.S. laws to protect its intellectual property, including its original content, content provided by third parties, and content provided by columnists.  Salon has a registered trademark on its name and its logo.

Salon owns the Internet address www.salon.com.  Because www.salon.com is the address of the main home page to Salon’s Website and incorporates Salon’s company name, it is a vital part of Salon’s intellectual property assets.  Salon does not have a registered trademark on the address, and therefore it may be difficult for Salon to prevent a third party from infringing its intellectual property rights to the address.

Employees
 
As of March 31, 2012, Salon has 45 full-time employees.  Salon believes its employee relations are good.  No employees of Salon are represented by a labor union or are subject to a collective bargaining agreement.  Salon’s future success is highly dependent on the ability to attract, hire, retain and motivate qualified personnel.
 
 
ITEM 1A.  Risk Factors
 
Factors That May Affect Salon’s Future Results and Market Price of Stock

Salon’s business faces significant risks.  The risks described below may not be the only risks Salon faces.  Additional risks that are not yet known or that are currently immaterial may also impair its business operations or have a negative impact on its stock price.  If any of the events or circumstances described in the following risks actually occurs, its business, financial condition or results of operations could suffer, and the trading price of its common stock could decline.

Salon’s projected cash flows may not meet expectations

Salon relies on cash projections to run its business and changes such projections as new information is made available or events occur.  The most significant component of Salon’s cash projections is cash to be generated from advertising sales and, to a lesser extent, cash to be generated from Salon Premium.  Forecasting advertising revenues and resulting cash receipts for an extended period of time is problematic due to the short duration of most advertising sales.  If projected cash inflows and outflows do not meet expectations, Salon’s ability to continue as a going concern may be adversely affected.
 
 
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If Salon forecasts or experiences periods of limited, or diminishing cash resources, Salon may need to issue additional securities or borrow additional funds.  These newly issued securities could be highly dilutive to existing common stockholders.  However, there is no guarantee that Salon will be able to issue additional securities in future periods or borrow additional funds on commercially reasonable terms to meet its cash needs.  Salon’s ability to continue as a going concern will be adversely affected if it is unable to raise additional cash from sources it had relied upon in the past or new sources.

Salon has relied on related parties for significant investment capital

Salon has been relying on cash infusions primarily from related parties to fund operations.  The related parties are generally John Warnock, Chairman of the Board of Salon, and William Hambrecht.  William Hambrecht is the father of Salon’s former President and Chief Executive Officer, Elizabeth Hambrecht, a Director of the Company.  During the year ended March 31, 2012, related parties provided approximately $3.1 million in cash advances to fund Salon’s operations.

Curtailment of cash investments and borrowing guarantees by related parties could detrimentally impact Salon’s cash availability and its ability to fund its operations.
 
Salon’s principal stockholders can exercise a controlling influence over Salon’s business affairs and may make business decisions with which non-principal stockholders disagree and may affect the value of their investment
 
Based on information available to Salon, the holders of Salon’s Series A, B, C and D preferred stock collectively own approximately 95% of all voting securities. These stockholders therefore own a controlling interest in Salon.  Of this amount, approximately 20% is controlled directly or indirectly by William Hambrecht and approximately 37% by Chairman and Director John Warnock.  Therefore, related parties by themselves own a controlling interest in Salon.
 
If these stockholders were to act together, they would be able to exercise control over all matters requiring approval by other stockholders, including the election of Directors and approval of significant corporate transactions. This concentration of ownership could also have the effect of accelerating, delaying or preventing a change in control of Salon, which could cause Salon’s stock price to decline.
 
Future sales of significant number of shares of Salon’s common stock by principal stockholders could cause its stock price to decline

Salon’s preferred stockholders can convert their 9,404 shares of preferred stock to approximately 10.0 million shares of common stock at any time.  As Salon’s common stock is normally thinly traded, if these stockholders were to convert their shares of preferred stock to common stock and sell the resulting shares, the per share price of Salon’s common stock may be adversely affected.
 
Salon’s stock has been and will likely continue to be subjected to substantial price and volume fluctuations due to a number of factors, many of which will be beyond its control and may prevent its stockholders from reselling its common stock at a profit
 
The securities markets have experienced significant price and volume fluctuations.  This market volatility, as well as general economic, market or political conditions, have and may continue to reduce the market price of its common stock, regardless of its operating performance.  In addition, Salon’s stock is thinly traded and operating results could be below the expectations of public market analysts and investors, and in response, the market price of its common stock could decrease significantly.
 
 
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Salon’s preferred stockholders are entitled to potentially significant liquidation preferences of Salon’s assets over common stockholders in the event of such an occurrence
 
Salon’s Series A, B, C and D preferred stockholders have liquidation preferences over common stockholders of the first approximately $26.1 million in potential sales proceeds as of March 31, 2012, which includes the effect of undeclared dividends of $7.2 million.  If a liquidation event were to occur, and preferred stock dividends were declared, the holders of preferred stock would be entitled to the first $26.1 million of cash distributions, while the holders of common stock would receive none of this amount.  If a liquidation event were to occur in excess of $26.1 million and if preferred stock dividends were to be declared, the holders of preferred stock would be entitled to receive a relatively larger distribution than the holders of common stock would be entitled to receive.

Salon has historically lacked significant revenues and has a history of losses
 
Salon has a history of significant losses and expects to incur an operating loss, based on generally accepted accounting principles, for its fiscal year ending March 31, 2013.  Salon expects to turn cash flow positive during fiscal year 2013.  Once Salon attains profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis in the future.  If revenues grow slower than Salon anticipates or operating expenses exceed expectations, financial results will most likely be severely harmed and the ability of Salon to continue its operations will be seriously jeopardized.
 
Burr Pilger Mayer, Inc., Salon’s independent registered public accounting firm for the years ended March 31, 2010, 2011 and 2012, included a “going-concern” audit opinion on the consolidated financial statements for those years.  The audit opinions report substantial doubt about Salon’s ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability.  As a result of the “going-concern” opinions, Salon’s stock price and investment prospects have been and will continue to be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations.

Salon has depended on advertising sales for much of its revenues, and its inability to maintain or increase advertising revenues could harm its business
 
Maintaining or increasing Salon’s advertising revenues depends upon many factors, including whether it will be able to:
 
 
·
successfully sell and market its Website auto start Site Pass or other rich media advertisements;
 
 
·
entice non-Salon Premium Website visitors to view and advertisers to sell new ad units and formats;
 
 
·
maintain a significant number of unique Website visitors and corresponding significant reach of Internet users;
 
 
·
maintain a significant number of sellable impressions generated from Website visitors available to advertisers;
 
 
·
successfully sell and market its network to advertisers;
 
 
·
increase the dollar amount of the advertising orders it receives;
 
 
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·
maintain pricing levels of the advertising it sells;
 
 
·
increase awareness of the Salon brand;
 
 
·
improve the technology for serving advertising on its Website;
 
 
·
handle temporary high volume traffic spikes to its Website;
 
 
·
accurately measure the number and demographic characteristics of its users; and
 
 
·
attract and retain key sales personnel.

Legislative action and potential new accounting pronouncements are likely to cause its general and administrative expenses and other operating expenses to increase
 
To comply with the Sarbanes-Oxley Act of 2002 and proposed accounting changes by the Securities and Exchange Commission, Salon ultimately may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which will cause its general and administrative costs to increase.

Hackers may attempt to penetrate Salon’s security system; online security breaches could harm its business

Consumer and supplier confidence in Salon’s Website depends on maintaining relevant security features.  Security breaches also could damage its reputation and expose it to a risk of loss or litigation.  Experienced programmers or “hackers” have successfully penetrated sectors of its systems and Salon expects that these attempts will continue to occur from time to time.  Because a hacker who is able to penetrate network security could misappropriate proprietary information or cause interruptions in its products and services, Salon may have to expend significant capital and resources to protect against or to alleviate problems caused by these hackers.  Additionally, Salon may not have a timely remedy against a hacker who is able to penetrate its network security.  Such security breaches could materially affect Salon.  In addition, the transmission of computer viruses resulting from hackers or otherwise could expose it to significant liability.  Salon’s insurance policies may not be adequate to reimburse it for losses caused by security breaches.  Salon also faces risks associated with security breaches affecting third parties with whom it has relationships.
 
With a volatile share price, Salon may be the target of securities litigation, which is costly and time-consuming to defend
 
In the past, following periods of market volatility in the price of a company’s securities, security holders have instituted class action litigation. Salon’s share price has in the past experienced price volatility, and may continue to do so in the future.  Many companies have been subjected to this type of litigation. If the market value of its common stock experiences adverse fluctuations and it becomes involved in this type of litigation, regardless of the merits or outcome, Salon could incur substantial legal costs and its management’s attention could be diverted, causing its business, financial condition and operating results to suffer.  To date, Salon has not been subjected to such litigation.
 
 
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Salon’s quarterly operating results are volatile and may adversely affect its common stock price
 
Salon’s future revenues and operating results, in accordance with both generally accepted accounting principles in the United States (“GAAP”) and non-GAAP, are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside Salon’s control, and any of which could severely harm Salon’s business. These factors include:
 
 
·
Salon’s ability to attract and retain advertisers and subscribers;
 
 
·
Salon’s ability to attract and retain a large number of users;
 
 
·
the introduction of new Websites, services or products by Salon or by its competitors;
 
 
·
the timing and uncertainty of Salon’s advertising sales cycles;
 
 
·
the mix of advertisements sold by Salon or its competitors;
 
 
·
the economic and business cycle;
 
 
·
Salon’s ability to attract, integrate and retain qualified personnel;
 
 
·
technical difficulties or system downtime affecting the Internet generally or the operation of Salon’s Website; and
 
 
·
the amount and timing of operating costs.
 
Due to the factors noted above and the other risks discussed in this section, one should not rely on quarter-to-quarter comparisons of Salon’s results of operations as an indication of future performance.  It is possible that some future periods’ results of operations may be below the expectations of public market analysts and investors.  If this occurs, the price of its common stock may decline.
 
The controversial content of Salon’s Website may limit its revenues
 
Salon’s Website contains, and will continue to contain, content that is politically and culturally controversial.  As a result of this content, current and potential advertisers, potential Salon Premium subscribers, or third parties who contemplate aggregating content, may refuse to do business with Salon.  Salon’s outspoken stance on political issues has and may continue to result in negative reactions from some users, commentators and other media outlets.  From time to time, certain advocacy groups have successfully targeted Salon’s advertisers in an attempt to persuade such advertisers to cease doing business with Salon.  These efforts may be a material impediment to Salon’s ability to grow and maintain advertising revenue.
 
Salon’s promotion of the Salon brand must be successful to attract and retain users as well as advertisers and strategic partners
 
The success of the Salon brand depends largely on its ability to provide high quality content and services.  If Internet users do not perceive Salon’s existing content and services to be of high quality, or if Salon introduces new content and services or enters into new business ventures that are not favorably perceived by users, Salon may not be successful in promoting and maintaining the Salon brand.  Any change in the focus of its operations creates a risk of diluting its brand, confusing consumers and decreasing the value of its user base to advertisers.  If Salon is unable to maintain or grow the Salon brand, its business could be severely harmed.
 
 
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Salon needs to hire, integrate and/or retain qualified personnel because these individuals are important to its growth
 
Salon’s success significantly depends on key personnel.  In addition, because Salon’s users must perceive the content of Salon’s Website as having been created by credible and notable sources, Salon’s success also depends on the name recognition and reputation of its editorial staff.  Due to Salon’s history of losses, Salon may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications.  Salon may be unable to retain its current key employees or attract, integrate or retain other qualified employees in the future.  If Salon does not succeed in attracting new personnel or retaining and motivating its current personnel, its business could be harmed.

Salon may expend significant resources to protect its intellectual property rights or to defend claims of infringement by third parties, and if Salon is not successful it may lose rights to use significant material or be required to pay significant fees
 
Salon’s success and ability to compete are significantly dependent on its proprietary content.  Salon relies exclusively on copyright law to protect its content.  While Salon actively takes steps to protect its proprietary rights, these steps may not be adequate to prevent the infringement or misappropriation of its content, which could severely harm its business.  Salon also licenses content from various freelance providers and other third-party content providers.  While Salon attempts to ensure that such content may be freely licensed to it, other parties may assert claims of infringement against it relating to such content.

Salon may need to obtain licenses from others to refine, develop, market and deliver new services.  Salon may not be able to obtain any such licenses on commercially reasonable terms or at all or rights granted pursuant to any licenses may not be valid and enforceable.

In April 1999 Salon acquired the Internet address www.salon.com.  Because www.salon.com is the address of the main home page to its Website and incorporates its company name, it is a vital part of its intellectual property assets.  Salon does not have a registered trademark on the address, and therefore it may be difficult for it to prevent a third party from infringing on its intellectual property rights to the address.  If Salon fails to adequately protect its rights to the Website address, or if a third party infringes its rights to the address, or otherwise dilutes the value of www.salon.com, its business could be harmed.

Salon’s technology development efforts may not be successful in improving the functionality of its network, which could result in reduced traffic on its Website, reduced advertising revenues, or a loss of Premium subscribers

Salon is constantly upgrading its technology to manage its Website, and during the last year redesigned its Website homepage and vertical sections.  In addition, it is creating technology for new products that Salon expects to launch during its next fiscal year.  If these systems do not work as intended, or if Salon is unable to continue to develop these systems to keep up with the rapid evolution of technology for content delivery and subscription management, its Website or subscription management systems may not operate properly, which could harm Salon’s business.  Additionally, software product design, development and enhancement involve creativity, expense and the use of new development tools and learning processes.  Delays in software development processes are common, as are project failures, and either factor could harm Salon’s business.  Moreover, complex software products such as its online publishing and subscription management systems frequently contain undetected errors or shortcomings, and may fail to perform or scale as expected.  Although Salon has tested and will continue to test its systems, errors or deficiencies may be found in these systems that may adversely impact its business.
 
 
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Salon relies on software, purchased from an independent supplier, to deliver and report some of its advertising, the failure of which could impair its business

Salon uses software, purchased from an independent supplier, to manage and measure the delivery of advertising on its Website.  The software is essential to Salon whenever an advertiser does not stipulate ad serving from a third party such as Doubleclick.  This type of software may fail to perform as expected.  If this software malfunctions, advertisements may not be served correctly on its Website, or if the software does not accurately capture impression information, then Salon’s advertising revenues could be reduced, and its business could be harmed.
 
Salon may be held liable for content or third party links on its Website or content distributed to third parties

As a publisher and distributor of content over the Internet, including user-generated content, links to third party Websites that may be accessible through Salon.com, or content that includes links or references to a third party’s Website, Salon faces potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature, content or ownership of the material that is published on or distributed from its Website.  These types of claims have been brought, sometimes successfully, against online services, Websites and print publications in the past.  Other claims may be based on errors or false or misleading information provided on linked Websites, including information deemed to constitute professional advice such as legal, medical, financial or investment advice.  Other claims may be based on links to sexually explicit Websites.  Although Salon carries general liability and media insurance, its insurance may not be adequate to indemnify Salon for all liabilities imposed.  Any liability that is not covered by its insurance or is in excess of its insurance coverage could severely harm its financial condition and business.  Implementing measures to reduce its exposure to these forms of liability may require Salon to spend substantial resources and limit the attractiveness of Salon’s service to users.

Salon’s systems may fail due to natural disasters, telecommunications failures and other events, any of which would limit user traffic

Substantially all of Salon’s communications hardware and computer hardware operations for its Website are in a facility in Sacramento, California that has been extensively retrofitted to withstand a major earthquake.  Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, supplier failure to meet commitments, and similar events could damage these systems and cause interruptions in its services.  Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting Salon’s Website and could cause advertisers to terminate any agreements with Salon.  In addition, Salon could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable.  If any of these circumstances occurred, Salon’s business could be harmed.  Salon’s insurance policies may not adequately compensate it for losses that may occur due to any failures of or interruptions in its systems.  Salon does not presently have a formal disaster recovery plan.
 
 
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Salon’s Website must accommodate a high volume of traffic and deliver frequently updated information.  It is possible that Salon will experience systems failures in the future and that such failures could harm its business.  In addition, its users depend on Internet service providers, online service providers and other Website operators for access to its Website.  Many of these providers and operators have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to its systems.  Any of these system failures could harm its business.

Privacy concerns could impair Salon’s business
 
Salon has a policy against using personally identifiable information obtained from users of its Website and services without the user’s permission.  In the past, the Federal Trade Commission has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy.  If Salon uses personal information without permission or in violation of its policy, Salon may face potential liability for invasion of privacy for compiling and providing information to its corporate customers and electronic commerce merchants.  In addition, legislative or regulatory requirements may heighten these concerns if businesses must notify Internet users that the data may be used by marketing entities to direct product promotion and advertising to the user.  Other countries and political entities, such as the European Union, have adopted such legislation or regulatory requirements. The United States may adopt similar legislation or regulatory requirements.  If consumer privacy concerns are not adequately addressed, its business, financial condition and results of operations could be materially harmed.

Possible state sales and other taxes could adversely affect Salon’s results of operations

Salon does not collect sales or other taxes from individuals who sign up for Salon subscriptions.  During the year ended March 31, 2003, the State of California audited Salon’s sales tax returns and found Salon in compliance with its filings and did not object to the fact that it did not collect sales tax on subscriptions.  However, one or more other states may seek to impose sales tax collection obligations on out-of-state companies, including Salon, which engage in or facilitate electronic commerce.  State and local governments have discussed and made proposals imposing taxes on the sale of goods and services through the Internet.  Such proposals, if adopted, could substantially impair the growth of electronic commerce and could reduce Salon’s ability to derive revenue from electronic commerce.  Moreover, if any state or foreign country were to assert successfully that Salon should collect sales or other taxes on the exchange of merchandise on its network or to tax revenue generated from Salon subscriptions, its financial results could be harmed.

Provisions in Delaware law and Salon’s charter, stock option agreements and offer letters to executive officers may prevent or delay a change of control
 
Salon is subject to the Delaware anti-takeover laws regulating corporate takeovers.  These anti-takeover laws prevent Delaware corporations from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s assets unless:
 
 
·
the Board of Directors approved the transaction in which the stockholder acquired 15% or more of the corporation’s assets;

 
·
after the transaction in which the stockholder acquired 15% or more of the corporation’s assets, the stockholder owned at least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or

 
·
on or after this date, the merger or sale is approved by the Board of Directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.
 
 
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A Delaware corporation may opt out of the Delaware anti-takeover laws if its certificate of incorporation or bylaws so provide. Salon has not opted out of the provisions of the anti-takeover laws. As such, these laws could prohibit or delay mergers or other takeover or change of control of Salon and may discourage attempts by other companies to acquire Salon.
 
Salon’s certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include:
 
 
·
Salon’s Board is classified into three classes of Directors as nearly equal in size as possible with staggered three year-terms; and

 
·
special meetings of the stockholders may be called only by the Chairman of the Board, the Chief Executive Officer or the Board of Directors.

These provisions may have the effect of delaying or preventing a change of control.
 
Salon’s Certificate of Incorporation and Bylaws provide that it will indemnify officers and Directors against losses that they may incur in investigations and legal proceedings resulting from their services to Salon, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in Salon’s management.

In addition, employment agreements with certain executive officers provide for the payment of severance and acceleration of the vesting of options and restricted stock in the event of termination of the executive officer following a change of control of Salon.  These provisions could have the effect of discouraging potential takeover attempts.

ITEM 1B.  Unresolved Staff Comments
 
None.
 
ITEM 2.   Properties
 
Salon leases 8,623 square feet of office space at 101 Spear Street, San Francisco, California, where it is headquartered.  The lease for the San Francisco office will terminate in February 2014.  In September 2011, part of the office space was sub-leased to a third party entity through September 2012.  Salon also leases 4,000 square feet of office space at 260 West 36th Street, 9th Floor, New York, NY through July 2014 and a smaller office at 300 Manhattan Beach Blvd., Manhattan Beach, CA, through May 2013.  In addition, Salon sublets 150 square feet of office space at 1666 Connecticut Avenue, NW, Washington, DC. The sublease for the Washington office will terminate in December 2012. Salon also rents minimal space to host its servers in Sacramento, California.
 
Salon believes that its existing properties are in good condition and are suitable for the conduct of its business.
 
 
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ITEM 3.   Legal Proceedings
 
Salon is not a party to any pending legal proceedings that it believes will materially affect its financial condition or results of operations.
 
PART II
 
ITEM 5.    Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
 
Information with respect to the quarterly high and low sales prices for Salon’s common stock, ticker symbol SLNM.PK, for its fiscal years 2012 and 2011, based on sales transactions reported by the OTC (Over-The-Counter) Bulletin Board is provided below:
 
   
Fiscal Year Ended
March 31, 2012
 
Fiscal Year Ended
March 31, 2011
For the quarter ended
 
High
 
Low
 
High
 
Low
June 30
 
0.11
 
0.10
 
0.34
 
0.03
September 30
 
0.47
 
0.10
 
0.80
 
0.03
December 31
 
0.50
 
0.02
 
0.79
 
0.10
March 31
 
0.50
 
0.05
 
0.50
 
0.10
 
Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
There were 53 active holders of record of Salon common stock as of June 1, 2012.  This number was derived from Salon’s stockholder records, and does not include beneficial owners of Salon’s voting common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.  The closing price of Salon’s common stock on June 1, 2012 was $0.10 per share.
 
Salon has never declared or paid any cash dividends on its capital stock and does not expect to pay any cash dividends in the foreseeable future.
 
Salon has never repurchased any of its equity securities.
 
 
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Equity Compensation Plan Information
 
The following table provides information about Salon’s common stock that may be issued upon the exercise of options and rights under all of Salon’s existing equity compensation plans as of March 31, 2012, including the Salon Internet, Inc. 1995 Stock Option Plan, the Salon Media Group, Inc. 2004 Stock Plan, the Salon Media Group, Inc. Non-Plan Stock Agreement and the 1999 Employee Stock Purchase Plan.
 
 
Plan category
Number of securities to
be issued upon exercise
of outstanding options
and rights
 
 
 
 
(a)
Weighted-average
exercise price of
outstanding options
and rights
 
 
 
 
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans, excluding
securities reflected in
column (a)
 
(c)
       
Equity compensation plans approved by security holders
5,038,925
$0.25
1,089,778
       
       
Equity compensation plans not approved by security holders
50,000
$0.35
None
       
Total
5,088,925
N/A
1,089,778


Equity Compensation Plans Not Approved by Security Holders

In February 2005, Salon entered into a Non-Plan Stock Agreement with its then Chairman, pursuant to which Salon granted such person non-qualified options to purchase 50,000 shares of common stock at an exercise price of $2.80 per share.  Such option grant did not receive stockholder approval.  50% of the shares subject to the option vested on the date of grant and 50% of the shares subject to the option vested in February 2006. On December 4, 2008, these and substantially all other options then outstanding were repriced to $0.35, the fair market value of the Company’s common stock on that date.
 
In June 2006, Salon entered into a Non-Plan Stock Agreement with its then Senior Vice President – Publisher, pursuant to which Salon granted such person non-qualified options to purchase 50,000 shares of common stock at an exercise price of $3.20 per share.  Such option grant did not receive stockholder approval.  25% of the shares subject to the option vested after one year and 1/48th vests per month thereafter.  In December 2006, Salon entered into another Non-Plan Stock Agreement with its then Senior Vice President – Publisher, pursuant to which Salon granted such person non-qualified options to purchase 25,000 shares of common stock at an exercise price of $1.05 per share.  Such option grant did not receive stockholder approval.  25% of the shares subject to the option vested after one year and 1/48th vests per month thereafter.  These options have been forfeited following the departure of the executive.
 
 
25

 
 
Stock Performance Graph
 
The following graph compares the cumulative 5-year total return to shareholders on Salon Media Group Inc.'s common stock relative to the cumulative total returns of the NASDAQ Composite index, and a customized peer group of four companies that includes: Edgar Online Inc., Quepasa Corp., TheStreet Inc. and Tucows Inc.  The graph assumes that the value of the investment in the company's common stock, in the peer group and the index (including reinvestment of dividends) was $100 on March 31, 2007 and tracks it through March 31, 2012.



 
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
 
26

 
 
ITEM 6.   Selected Consolidated Financial Data
 
   
Dollar amounts in thousands, except per share
 
Year Ended March 31,
 
2012
   
2011
   
2010
   
2009
   
2008
 
                               
Net revenues
  $ 3,829     $ 4,573     $ 4,291     $ 6,874     $ 7,513  
Net loss
  $ (4,098 )   $ (2,584 )   $ (4,861 )   $ (4,699 )   $ (3,409 )
Net loss attributable to common stockholders (1)
  $ (4,098 )   $ (2,584 )   $ (4,861 )   $ (4,699 )   $ (3,463 )
Basic and diluted net loss per shareattributable to common stockholders
  $ (1.25 )   $ (0.84 )   $ (2.30 )   $ (2.34 )   $ (1.79 )
Weighted average common shares outstanding used in computing per share amounts (thousands)
    3,283       3,086       2,116       2,008       1,940  
Cash and cash equivalents
  $ 130     $ 386     $ 216     $ 371     $ 818  
Prepaid advertising rights
  $ -     $ -     $ -     $ 1,225     $ 2,131  
Total assets
  $ 1,557     $ 1,636     $ 1,627     $ 3,330     $ 4,616  
Total long-term liabilities
  $ 122     $ 1,380     $ 3,030     $ 2,706     $ 600  
 
(1)            The net losses attributable to common stockholders for the years ended March 31, 2012, 2011, 2010 and 2009 do not include a preferred deemed dividend as there were no deemed dividend changes. The net loss attributable to common stockholders for the year ended March 31, 2008 includes a preferred deemed dividend charge of $54 from the issuance of Series D preferred stock.  The charge represents the difference between the offering price of Salon’s Series D preferred stock and the fair value of Salon’s common stock into which the preferred stock was convertible on the date of the transaction and the value of the warrants issued in the transaction.
 
 
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
 
Salon is an online news and social networking company and an Internet publishing pioneer.  Salon’s award-winning journalism combines original investigative stories and provocative personal essays along with quick-take commentary and staff-written Weblogs about politics, technology, culture and entertainment.  Committed to interactivity, the Website also hosts Open Salon, a social network for bloggers.  In its editorial product Salon balances two crucial missions: (1) providing original and provocative content on topics that the mainstream media overlook, and (2) filtering through the media chatter and clutter to help readers find the stories that matter.
 
Sources of Revenue
 
The most significant portion of Salon’s revenues is derived from advertising from the sale of promotional space on its Website.  The sale of promotional space is generally less than ninety days in duration.  Advertising units sold include “rich media” streaming advertisements, as well as traditional banner and pop-up advertisements.

Salon also derives a significant portion of its revenues from its Salon Premium subscription program.  This source of revenue has been decreasing since Salon’s quarter ended December 31, 2004 when paid subscriptions peaked at approximately 89,100 and have since decreased to approximately 8,100 as of March 31, 2012.  Salon expects this downward trend to continue, as it is placing greater emphasis on its advertising sales to generate revenue. In June 2012, Salon refocused its strategy on its core Salon.com website, and made the decision to restructure and eliminate certain non core initiatives.  As a result, Salon laid-off Well staff associated with its online discussion forum, The Well and began to look for a buyer for the property and stopped accepting renewals and new subcriptions for its premium subscription business.
 
Revenue from membership to The Well has been recognized ratably over the subscription period.  Salon also generates nominal revenue from the licensing of content that previously appeared in Salon’s Website, for hosting links to a third party’s personals/dating Websites, and operating its emerging e-commerce activities.
 
Operating Expenses
 
Production and content expenses consist primarily of salaries and related expenses for Salon’s editorial, artistic, and production staff, online communities’ staff, payments to freelance writers and artists, bandwidth costs associated with serving pages and hosting our online communities on our Website, credit card transaction costs and ad serving costs.
 
Sales and marketing expenses consist primarily of salaries, commissions and related personnel costs, travel, and other costs associated with Salon’s sales force, business development efforts and its subscription service.  It also includes advertising, promotions and the amortization of prepaid advertising rights.
 
Information technology support expenses consist primarily of salaries and related personnel costs associated with the development, testing and enhancement of Salon’s software to manage its Website, and to maintain and enhance the software utilized in managing Salon Premium, as well as supporting marketing and sales efforts.
 
 
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 General and administrative expenses consist primarily of salaries and related personnel costs, accounting and legal fees, and other fees associated with operating a publicly traded company.  Certain shared overhead expenses are allocated to other departments.
 
Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires Salon to utilize accounting policies and make estimates and assumptions that affect our reported amounts.  Salon’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements.  Salon believes accounting policies and estimates related to revenue recognition and accounting for debt and equity are the most critical to Salon’s financial statements.  Future results may differ from current estimates if different assumptions or conditions were to prevail.
 
Stock Based Compensation
 
Salon recognizes the fair value of stock awards on a straight-line basis over the requisite service period of the award, which is the standard vesting term of four years.

Salon recognized stock-based compensation expense of $311,000 and $295,000 during the years ended March 31, 2012 and 2011, respectively.  As of March 31, 2012, Salon had an aggregate of $145,000 of stock-based compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards.  Salon currently expects this stock-based compensation balance to be amortized as follows: $103,000 during fiscal 2013; $27,000 during fiscal 2014; $10,000 during fiscal 2015 and $5,000 during fiscal 2016.  The expected amortization reflects only outstanding stock option awards as of March 31, 2012.  Salon expects to continue to issue stock-based awards to its employees in future periods.
 
The full impact of stock-based compensation in the future is dependent upon, among other things, the timing of when Salon hires additional employees, the effect of new long-term incentive strategies involving stock-based awards in order to continue to attract and retain employees, the total number of stock-based awards granted, the fair value of the stock awards at the time of grant and the tax benefit that Salon may or may not receive from stock-based expenses.  Additionally, stock-based compensation requires the use of an option-pricing model to determine the fair value of stock option awards.  This determination of fair value is affected by Salon’s stock price as well as assumptions regarding a number of highly complex and subjective variables.  These variables include, but are not limited to, Salon’s expected stock price volatility over the term of the awards.

Liquidity
 
Salon has incurred significant net losses and negative cash flows from operations since its inception.  As of March 31, 2012, Salon had an accumulated deficit of $112.5 million.  These losses have been funded primarily through the issuance of common stock from Salon’s initial public offering in June 1999, issuances of preferred stock, bank debt, from the issuance of convertible notes payable and other advances from related parties.

Burr Pilger Mayer, Inc., Salon’s independent registered public accounting firm for the years ended March 31, 2012, March 31, 2011 and March 31, 2010 has included a paragraph in their report indicating that substantial doubt exists as to Salon’s ability to continue as a going concern because of Salon’s recurring operating losses, negative cash flow and accumulated deficit.
 
 
29

 
 
Income Taxes
 
Salon has not recorded a provision for federal or state income taxes since inception due to recurring operating losses.  At March 31, 2012, Salon had net operating loss carryforwards of $81.5 million for federal income tax purposes that begin to expire in March 2016, and $22.0 million for California income tax purposes.  As Salon has been incurring tax losses, $2.1 million of California net operating loss carryforwards expired as of March 31, 2012, and if Salon were to incur a tax loss for the year ending March 31, 2013, an additional $1.8 million operating loss carryforward will expire.  Utilization of Salon’s net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar California State provisions.  Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization.  A valuation allowance has been established and, accordingly, no benefit has been recognized for such operating losses and other deferred tax assets.  The net valuation allowance increased $0.3 million during the year ended March 31, 2012 to $29.4 million.  Salon believes that, based on a number of factors, the availability of objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that a full valuation allowance has been recorded.  These factors include Salon’s history of net losses since inception and expected near-term future losses.
 
Revenue Recognition
 
Salon recognizes revenues once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured.  Revenues are recognized ratably in the period over which Salon’s obligations are fulfilled.  Payments received before Salon’s obligations are fulfilled are classified as “Deferred revenue” in Salon’s consolidated balance sheet.

Advertising revenues, derived from the sale of promotional space on its Website, comprised 79%, 78%, and 69% of Salon’s revenues, respectively for the years ended March 31, 2012, 2011 and 2010.  The duration of the advertisements are generally short term, usually less than ninety days.  Revenues derived from such arrangements are recognized during the period the advertising space is provided.  Salon’s obligations typically include a guaranteed minimum number of impressions, a set number of Site Pass advertisements viewed, or a set number of days that a Site Pass advertisement will run.  To the extent minimum guaranteed amounts are not achieved, Salon defers recognition of the corresponding revenue until the remaining guaranteed amounts are provided, if mutually agreeable to an advertiser.  If these “make good” impressions are not agreeable to an advertiser, no further revenue is recognized.

Salon Premium, a pay-for-online content service, provides unrestricted access to Salon’s content with no banners, pop-ups or site pass advertisements, and includes free magazine subscriptions and other promotional items including books and merchandise, free access to Table Talk, an online forum, and the ability to easily download content in text or PDF format, a convenience that enables readers to view Salon’s content when not connected to the Internet.  The subscription duration for Salon Premium is generally one year.  Non-Salon Premium subscribers can gain access to Salon’s content after viewing some form of advertisement.
 
Salon offers The Well as a monthly subscription service for access to online discussion forums.  Revenue is recognized ratably over the subscription period. The Well's declining subscriber base, and aging technology led to a decision in June 2012 to restructure the service.  As a result, The Well staff were laid off and current subscriptions will be honored but not renewed upon expiration.  On May 29, 2012, Salon entered an Indication of Intent and Confidentiality Agreement with a company that has expressed interest in acquiring the Well.   In addition, discussions with parties interested in potentially buying the domain name have been initiated.
 
 
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Prepaid Advertising Rights
 
In January 2000, Salon sold 1,125,000 shares of common stock to Rainbow Media Holdings (“Rainbow”) and received $11.8 million of advertising credits that were to be utilized by December 2009.  As the per share price of Salon’s common stock declined from the time the agreement was made and the date the agreement was finalized and signed, the advertising credits were valued for financial reporting purposes at $8.1 million.  As of March 31, 2010, Salon has fully utilized the advertising credits of Rainbow and NBC.

Reclassifications
 
Certain reclassifications, not affecting previously reported net income or loss, have been made to the previously issued consolidated financial statements to conform to the current period presentation.

Goodwill

Salon has $0.2 million of goodwill remaining from a purchase of The Well in March 1999.  This asset is tested for impairment at least annually and has not been found to be impaired.
 
Results of Operations
 
Fiscal Years Ended March 31, 2012 and 2011

Net Revenues

Salon’s net revenue decreased 16% to $3.8 million in the year ended March 31, 2012 from $4.6 million in the year ended March 31, 2011.

Advertising revenues decreased 16% to $3.0 million for the year ended March 31, 2012 from $3.6 million for the year ended March 31, 2011, mainly due to stronger online presence from other competitive companies.

Salon Premium subscription revenues decreased by 25% to $0.4 million for the year ended March 31, 2012 from $0.5 million for the year ended March 31, 2011.  The drop in Salon Premium revenues recognized for the year ended March 31, 2012 compared to the year ended March 31, 2011 is attributable to a substantial reduction in the number of new subscribers.  Salon acquired approximately 5,900 paid one-year subscriptions for the year ended March 31, 2012 compared to approximately 7,700 for the year ended March 31, 2011.  As a result, the number of paid subscribers decreased from approximately 10,900 at March 31, 2011 to approximately 8,100 at March 31, 2012.  As a result of this trend, Salon has continued to emphasize increasing advertising income over promoting Premium subscriptions.

An important factor in increasing advertising revenues in future periods, including Salon’s typically peak third quarter ending December 31, is attracting more unique visitors to Salon’s Website.  Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements.  Ultimately, Salon charges advertisers based on a set number of impressions viewed by Website visitors.  Due to various factors, including concerted efforts to make Salon’s content more accessible to readers by auto launching the site pass, a better optimized Website to facilitate appearance in search engine results, and increasing the quantity of content, the average number of unique monthly Website grew by 18% for the full year, to approximately 6.4 million.  Aiding the continued growth in unique visitors to Salon’s Website is the migration of readers to the Internet from print newspapers.
 
 
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All other sources of revenue were $0.5 million for each of the years ended March 31, 2012 and March 31, 2011.  Approximately 76% of this revenue was derived from subscriptions to the Well, an online discussion forum.

Production and Content Expenses

Production and content expenses during the year ended March 31, 2012 were $3.5 million versus $3.2 million for the year ended March 31, 2011, an increase of $0.3 million.  The 9% increase primarily reflects costs for launching the new Salon Studio platform which features original video, music and art contents.

Sales and Marketing Expenses

Sales and marketing expenses during the year ended March 31, 2012 remained flat from one year ago at approximately $1.5 million.

Information Technology Support Expenses
 
Information technology support expenses during the year ended March 31, 2012 were $1.0 million, an increase of $0.1 million.  The 7% increase is primarily attributed to higher consulting fees, increased wages and recruiting fees and the additional costs of software.

General and Administrative Expenses
  
General and administrative expenses during the year ended March 31, 2012 were $1.6 million versus $1.3 million for the year ended March 31, 2011, an increase of $0.3 million.  The 22% increase was primarily attributed to sales taxes and higher consulting and legal fees.
 
Interest Expense
 
Interest expense during the year ended March 31, 2012 remained flat from one year ago at approximately $0.3 million.  The minimal increase was due to higher accrued interest costs for Salon’s bank debt, convertible promissory notes and sales taxes.
 
Fiscal Years Ended March 31, 2011 and 2010

Net Revenues

Salon’s net revenue increased 7% to $4.6 million in the year ended March 31, 2011 from $4.3 million in the year ended March 31, 2010.

Advertising revenues increased 21% to $3.6 million for the year ended March 31, 2011 from $3.0 million for the year ended March 31, 2010, due to greater traffic and an improved economy.
 
 
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Salon Premium subscription revenues decreased by 33% to $0.5 million for the year ended March 31, 2011 from $0.7 million for the year ended March 31, 2010.  The drop in Salon Premium revenues recognized for the year ended March 31, 2011 compared to the year ended March 31, 2010 is attributable to a substantial reduction in the number of new subscribers.  Salon acquired approximately 7,700 paid one-year subscriptions for the year ended March 31, 2011 compared to approximately 12,000 for the year ended March 31, 2010.  As a result, the number of paid subscribers decreased from approximately 15,800 at March 31, 2010 to approximately 10,900 at March 31, 2011.  As a result of this trend, Salon has continued to emphasize increasing advertising income over promoting Premium subscriptions.

An important factor in increasing advertising revenues in future periods, including Salon’s typically peak third quarter ending December 31, is attracting more unique visitors to Salon’s Website.  Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements.  Ultimately, Salon charges advertisers based on a set number of impressions viewed by Website visitors.  Due to various factors, including concerted efforts to make Salon’s content more accessible to readers by auto launching the site pass, a better optimized Website to facilitate appearance in search engine results, and increasing the quantity of content, the average number of unique monthly Website grew by  12% for the full year, to approximately 5.4 million.  Aiding the continued growth in unique visitors to Salon’s Website is the migration of readers to the Internet from print newspapers.

All other sources of revenue were $0.5 million for the year ended March 31, 2011 and $0.6 million for the year ended March 31, 2010.  Approximately 71% of this revenue was derived from subscriptions to the Well, an online discussion forum.

Production and Content Expenses
 
Production and content expenses during the year ended March 31, 2011 were $3.2 million versus $3.7 million for the year ended March 31, 2010, a decrease of $0.5 million.  The 14% decrease primarily reflects a decrease in staff and related salary and benefit costs, as well as a reduction in freelance costs.

Sales and Marketing Expenses

Sales and marketing expenses during the year ended March 31, 2011 were $1.5 million versus $2.7 million for the year ended March 31, 2010, a decrease of $1.2 million.  The 47% decrease primarily reflects the cessation of utilization of advertising credits in the prior year.

Information Technology Support Expenses
 
Information technology support expenses during the year ended March 31, 2011 remained flat from one year ago at approximately $0.9 million.

General and Administrative Expenses
 
General and administrative expenses during the year ended March 31, 2011 were $1.3 million versus $1.6 million for the year ended March 31, 2010, a decrease of $0.3 million.  The 17% decrease was primarily attributed to lower stock-based compensation expenses, executive bonuses, consulting fees and bad debt expenses.
 
Interest Expense
 
Interest expense for the year ended March 31, 2011 increased slightly to approximately $0.3 million from $0.2 million one year ago, due to higher accrued interest costs for Salon’s bank debt, convertible promissory notes and state taxes.
 
 
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Liquidity and Capital Resources
 
Net cash used in operations was $3.2 million for the year ended March 31, 2012, $2.0 million for the year ended March 31, 2011 and $2.6 million for the year ended March 31, 2010.  The principal use of cash during the years ended March 31, 2012, 2011 and 2010 was to meet the Company’s operating deficits.

Net cash used in investing activities was immaterial for each of the years ended March 31, 2012, 2011 and 2010.  The approximately $0.1 million net cash used during the year ended March 31, 2012 was to fund the acquisition of computers, video and office equipment for Salon Studio.
 
                For each of the respective years ended March 31, 2012, 2011 and 2010, net cash provided from financing activities was $3.0 million, $2.2 million and $2.5 million, consisting primarily of long-term borrowings from related parties and convertible promissory notes.

Salon, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer is or was serving at Salon’s request in such capacity.  The term of the indemnification period is for the officer's, or director's lifetime.  The maximum amount of potential future indemnification is unlimited; however, Salon does have a Director and Officer Insurance Policy that limits Salon's exposure and enables Salon to recover a portion of any future amounts paid.  As a result of the insurance policy coverage, Salon believes the fair value of these indemnification agreements is minimal.
 
 
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As of March 31, 2012, Salon has one outstanding capital lease on computer equipment and does not anticipate entering into similar debt instruments during its year ending March 31, 2013.  The following summarizes Salon’s contractual obligations as of March 31, 2012, and the effect these contractual obligations are expected to have on Salon’s liquidity and cash flows in future periods (in thousands):
 
   
Payments Due By Period
 
   
Total
   
1 Year or less
   
1 - 3 Years
   
3 - 5 Years
   
More than 5 Years
 
Operating leases
  $ 1,045     $ 522     $ 523     $ -     $ -  
Short-term borrowing
    1,000       1,000       -       -       -  
Short-term borrowing interest
    182       182       -       -       -  
Related party advances
    8,105       8,105       -       -       -  
Convertible notes principal
    3,106       3,106       -       -       -  
Convertible notes interest
    92       92       -       -       -  
Total
  $ 13,530     $ 13,007     $ 523     $ -     $ -  

Capital requirements

Salon has a history of significant losses and expects to incur a net loss from operations for its year ending March 31, 2013.  Because of past losses, an anticipated loss next year and a history of negative cash flows from operations, Salon’s independent registered public accounting firm for the years ended March 31, 2012, March 31, 2011 and March 31, 2010 have included a paragraph in its reports indicating substantial doubt as to Salon’s ability to continue as a going concern.  During the last three years, Salon has relied on cash from bank debt, the issuance of convertible notes and preferred stock, and related party advances to meet its cash requirements.

 Based on current cash projections for next year, which contemplate a smaller operating loss, positive cash flow generation in the second half of the year, and takes into account $1.5 million in related party advances received subsequent to year end, Salon estimates it will require approximately $1.5 to $2.5 million in additional funding to meet its operating needs.  During fiscal 2010, in the face of reduced revenues resulting from the recession’s impact on advertising budgets, the Company implemented significant organizational changes that lowered its breakeven level.  Additional cost savings achieved in fiscal years 2011 and 2012 have further reduced fixed costs.  On May 31, 2012, after a thorough analysis of operations, a total of six staff from The Well, Salon Studio and Core were laid off. Total severance costs are estimated to be $0.2 million.  However, if planned revenues are less than expected, then Salon will not meet its operating targets and the projected cash shortfall may be higher.  Salon is in discussions with potential investors, including related parties, to obtain additional funding, and has engaged an investment banker to facilitate these efforts.  There can be no assurance that the Company will be able to raise additional funds on commercially reasonable terms, if at all.
 
Off-Balance Sheet Arrangements

Salon has no off-balance sheet arrangements.
 
 
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Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1)).  ASU 2009-13 superseded EITF 00-21 and addresses criteria for separating the consideration in multiple-element arrangements.  ASU 2009-13 requires companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price.  The Company adopted this guidance during fiscal year 2012, and it did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08 Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 provides companies with guidance to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards.   These qualitative factors include macroeconomic conditions (such as limitations on accessing capital, developments in equity and credit markets, etc.), industry and market conditions (such as increased competitive environment, change in regulatory environment, change in market for a product, etc.), cost factors (such as increase in cost of labor and materials), overall financial performance, litigation, changes in key personnel, and sustained decrease in share price.  For the year ended March 31, 2012, the Company adopted this guidance and did not identify any potential impairment to its goodwill.

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
Salon maintains all of its cash in immediately available cash deposits at its bank.  These funds are not subject to market risk and no interest is paid on such funds.  In May 2007, Salon entered into a credit agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1.0 million, plus accrued interest, at a rate of prime less 0.25% which will subject Salon to interest rate risk. The line of credit has been fully drawn as of March 31, 2012 and is guaranteed by Salon’s Chairman.  Rates remained at a constant level throughout most of fiscal year 2012.  Salon feels that the impact of the risk of future rate increases will not have a material impact.  As Salon conducts all of its business in the United States, Salon is not subject to foreign exchange risk.
 
 
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ITEM 8.  Consolidated Financial Statements and Supplementary Data
 
  Page
   
Report of Independent Registered Public Accounting Firm 38
   
Consolidated Balance Sheets as of March 31, 2012 and 2011 39
   
Consolidated Statements of Operations for the years ended March 31, 2012, 2011 and 2010 40
   
Consolidated Statements of Stockholders’ (Deficit) for the years ended March 31, 2012, 2011 and 2010 41
   
Consolidated Statements of Cash Flows for the years ended March 31, 2012, 2011 and 2010 42
   
Notes to Consolidated Financial Statements 43
   
Selected Quarterly Financial Data (unaudited) 62
 
 
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Report Of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders
Salon Media Group, Inc.

We have audited the accompanying consolidated balance sheets of Salon Media Group, Inc. and its subsidiaries (“the Company”) as of March 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ (deficit), and cash flows for each of the three years in the period ended March 31, 2012.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor have we been engaged to perform an audit of the Company’s internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Salon Media Group, Inc. and its subsidiaries as of March 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations and has an accumulated deficit of $112.5 million at March 31, 2012.  These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Burr Pilger Mayer, Inc.
San Francisco, California
June 28, 2012
 
 
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SALON MEDIA GROUP, INC.
 
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except share and per share amounts)
 
             
   
March 31,
 
   
2012
   
2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 130     $ 386  
Accounts receivable, net of allowance of $62 and $57
    783       728  
Prepaid expenses and other current assets
    194       73  
Total current assets
    1,107       1,187  
                 
Property and equipment, net
    92       127  
Other assets, principally deposits
    158       122  
Goodwill
    200       200  
Total assets
  $ 1,557     $ 1,636  
Liabilities and Stockholders’ Deficit
               
Current liabilities:
               
Short-term borrowings
  $ 1,000     $ 1,000  
Advances from related parties
    8,105       5,055  
Convertible notes
    3,106       1,733  
Accounts payable and accrued liabilities
    1,847       1,237  
Deferred revenue
    165       233  
Total current liabilities
    14,223       9,258  
                 
Convertible notes payable, less current portion
    -       1,156  
Deferred rent
    123       224  
Total liabilities
    14,346       10,638  
Commitments and contingencies (Note 9)
               
                 
Stockholders’ (deficit):
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 9,404 shares issued and outstanding at March 31, 2012 and March 31, 2011 (liquidation value of $26,149 at March 31, 2012 and and $25,356 at March 31, 2011)
    -       -  
Common stock, $0.001 par value, 30,000,000 shares authorized, 3,282,576 shares issued and outstanding at March 31, 2012 and March 31, 2011
    3       3  
Additional paid-in capital
    99,737       99,426  
Accumulated deficit
    (112,529 )     (108,431 )
Total stockholders’ (deficit)
    (12,789 )     (9,002 )
Total liabilities and stockholders’ (deficit)
  $ 1,557     $ 1,636  
 
See accompanying notes to consolidated financial statements.
 
 
39

 
 
SALON MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
                   
Net revenues
  $ 3,829     $ 4,573     $ 4,291  
                         
Operating expenses:
                       
Production and content
    3,466       3,182       3,698  
Sales and marketing
    1,517       1,463       2,738  
Information technology support
    974       914       861  
General and administrative
    1,638       1,343       1,613  
Total operating expenses
    7,595       6,902       8,910  
                         
Loss from operations
    (3,766 )     (2,329 )     (4,619 )
                         
Interest expense
    (332 )     (255 )     (242 )
Net loss
  $ (4,098 )   $ (2,584 )   $ (4,861 )
                         
                         
Basic and diluted net loss per share attributable to common stockholders
  $ (1.25 )   $ (0.84 )   $ (2.30 )
                         
Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders
    3,283       3,086       2,116  
 
See accompanying notes to consolidated financial statements.
 
 
40

 
 
SALON MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)
(in thousands, except preferred stock shares)
 
    Preferred     Common     Additional           Total  
    Stock     Stock     Paid-In     Accumulated     Stockholders’  
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
(Deficit)
 
Balance, March 31, 2009
    9,467     $ -       2,021     $ 2     $ 98,564     $ (100,986 )   $ (2,420 )
                                                         
Shares issued under restricted stock plans
    -       -       526       -       -       -       -  
Shares of common stock cancelled
    -       -       (109 )     -       -       -       -  
Stock-based compensation
    -       -       -       -       441       -       441  
Net loss and comprehensive loss
    -       -       -       -       -       (4,861 )     (4,861 )
Balance, March 31, 2010
    9,467       -       2,438       2       99,005       (105,847 )     (6,840 )
                                                         
Preferred shares surrendered
    (63 )     -       -       -       -       -       -  
Shares issued under restricted stock plans
    -       -       845       1       126       -       127  
Stock-based compensation
    -       -       -       -       295       -       295  
Net loss and comprehensive loss
    -       -       -       -       -       (2,584 )     (2,584 )
Balance, March 31, 2011
    9,404       -       3,283       3       99,426       (108,431 )     (9,002 )
                                                         
Stock-based compensation
    -       -       -       -       311       -       311  
Net loss and comprehensive loss
    -       -       -       -       -       (4,098 )     (4,098 )
Balance, March 31, 2012     9,404     $ -       3,283     $ 3     $ 99,737     $ (112,529   $ (12,789

See accompanying notes to consolidated financial statements.
 
 
41

 
 
SALON MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
    Year Ended March 31,  
   
2012
   
2011
   
2010
 
Cash flows from operating activities:
                 
Net loss   $ (4,098 )   $ (2,584 )   $ (4,861 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Loss from retirement of assets, net     -       2       1  
Stock-based compensation     311       295       379  
Depreciation and amortization     92       207       227  
Prepaid advertising rights usage     -       -       1,225  
Changes in assets and liabilities:                        
Accounts receivable     (55 )     (22 )     180  
Prepaid expenses, other assets     (156 )     11       (3 )
Accounts payable, accrued liabilities and deferred rent     725       152       391  
Deferred revenue     (68 )     (105 )     (132 )
Net cash used in operating activities     (3,249 )     (2,044 )     (2,593 )
                         
Cash flows from investing activities:
                       
Purchase of property and equipment     (57 )     (37 )     (82 )
Net cash used in investing activities     (57 )     (37 )     (82 )
                         
Cash flows from financing activities:
                       
Proceeds from short-term borrowings and advances     3,050       2,255       2,550  
Capital lease payments     -       (4 )     (30 )
Net cash provided by financing activities     3,050       2,251       2,520  
Net (decrease) increase in cash
    (256 )     170       (155 )
Cash at beginning of year
    386       216       371  
                         
Cash at end of year
  $ 130     $ 386     $ 216  
Amount paid for interest
  $ -     $ 3     $ 9  
Supplemental schedule of non-cash investing and financing activities:
                       
Conversion of accrued interest for convertible notes payable
  $ 217     $ 202     $ 187  
 
See accompanying notes to consolidated financial statements.
 
 
42

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Note 1. The Company
 
Salon Media Group, Inc (“Salon” or “the Company”) is an Internet media company that produces a content Website with various subject-specific sections, which includes an online community and a social network.  The Website also allows for audio downloads and video clips.  Salon was originally incorporated in July 1995 in the State of California and reincorporated in Delaware in June 1999.  Salon operates in one business segment.
 
Note 2. Summary of Significant Accounting Policies
 
Basis of presentation
 
These consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.  Salon has incurred losses and negative cash flows from operations since inception and has an accumulated deficit at March 31, 2012 of $112,528.  In addition, Salon expects to incur a net loss from operations for its year ending March 31, 2013.  During the last three years, Salon has relied on cash from the issuance of bank debt, convertible notes and preferred stock, and related-party advances to meet its cash requirements.  Based on current cash projections for next year, which contemplate a smaller operating loss, positive cash flow generation in the second half of the year, and takes into account $1.5 million in related party advances received subsequent to year end, Salon estimates it will require between $1.5 to $2.5 million in additional funding to meet its operating needs. During fiscal year 2010, in the face of reduced revenues resulting from the recession’s impact on advertising budgets, the Company implemented significant organizational changes which lowered its breakeven level.  Additional cost savings achieved in fiscal years 2011 and 2012 have further reduced fixed costs.  However, if planned revenues are less than expected, then we will not meet our operating targets and our projected cash shortfall may be higher.  Salon is in discussions with potential investors, including related parties, to obtain additional funding, and has engaged an investment banker to facilitate these efforts.  There can be no assurance that the Company will be able to raise additional funds on commercially reasonable terms, if at all.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Principles of consolidation
 
The consolidated financial statements include the accounts of Salon and its wholly owned subsidiaries, which are not active.  All material intercompany accounts and transactions have been eliminated in the consolidated financial statements.
 
Segment and enterprise-wide reporting
 
Salon discloses segment enterprise-wide information in accordance with accounting standards codification (ASC) 280, Segment Reporting.  Based upon definitions contained within ASC 280, management has determined that Salon operates in one segment.  In addition, virtually all revenues are in the United States, and all of the long-lived assets are located within the United States.
 
 
43

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Use of estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.
 
Cash and cash equivalents
 
Cash and cash equivalents consist of cash on deposit with banks and investments that are readily convertible into cash and have original maturities of three months or less. There were no cash equivalents at March 31, 2012 and 2011.
 
Accounts receivable, net
 
Accounts receivable are stated net of doubtful accounts.  Salon estimates the uncollectibility of the accounts receivable balance and maintains allowances for estimated losses.  Salon analyzes accounts receivable, historical bad debts, receivable aging, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.
 
Property and equipment, net
 
Property and equipment are recorded at cost.  Maintenance, repairs and minor renewals are expensed as incurred.  Depreciation is provided on a straight-line basis over the useful lives of the asset, principally three years for computer hardware and software, and five years for furniture and office equipment.  Depreciation of leasehold improvements is provided on a straight-line basis over the useful life of the asset or the term of the lease, whichever is shorter.  When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are relieved from the accounts and the net gain or loss is included in the determination of income or loss.
 
Software development costs

Information technology support expenses to develop new product offerings for internal use, such as Open Salon, are capitalized as software development costs and amortized over the expected useful live.  Salon has capitalized $95 of expenditures through March 31, 2009, the unamortized portion of which is included with property and equipment.  No expenses were capitalized in fiscal year 2011 or 2010.
 
 
44

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Goodwill
 
Goodwill is recorded at cost and tested for impairment annually during the quarter ending March 31, or earlier as warranted by events or changes in circumstances.
 
Impairment of long-lived assets
 
Salon periodically evaluates the potential impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  At the occurrence of an event or change in circumstances, Salon evaluates the potential impairment of an asset based on the estimated future undiscounted cash flows attributable to such assets.  In the event impairment exists, Salon will measure the amount of such impairment based on the present value of the estimated future cash flows using a discount rate commensurate with the risks involved.  No impairment was recorded for any period presented.
 
 Revenue recognition
 
Salon’s revenues are primarily from the sale of advertising space on its Website and the sale of subscriptions to individuals.  Salon recognizes revenue once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured.  Revenues are recognized ratably in the period over which Salon’s obligations are fulfilled.  Payments received before Salon’s obligations are fulfilled are classified as “Deferred revenue” in Salon’s consolidated balance sheet.

Advertisement sales agreements are generally short-term agreements, usually less than ninety days.  Revenues derived from such arrangements are recognized during the period the advertising space is provided, as long as no significant obligations remain at the end of the period.  Salon’s obligations may include a fixed number of days that a Salon Site Pass advertisement is run, the guarantee of a minimum number of times that an advertisement appears in a page viewed by a visitor to Salon’s Website, or a set number of Site Pass advertisements viewed by a Website visitor.  To the extent the minimum guaranteed amounts are not delivered, Salon defers recognition of the corresponding revenue until the remaining guaranteed amounts are achieved, if mutually agreeable with an advertiser.  If these “make good” impressions are not agreeable to an advertiser, no further revenue is recognized.

Revenue from Salon’s subscription services from Salon Premium and The Well are recognized ratably over their respective subscription periods.  Salon Premium subscriptions are generally for one year periods.  Well subscriptions are generally only for one month.

Comprehensive loss
 
Comprehensive loss is defined as the change in equity of a business enterprise during a period from non-owner sources.  There were no differences between the net loss for the years ended March 31, 2012, 2011 and 2010 and comprehensive loss for those periods.
 
 
45

 

SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Stock-based compensation
 
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period.  Salon uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards.  Salon recognizes compensation cost related to options granted on a straight-line basis over the applicable vesting period.
 
Net loss per share
 
Basic loss per share is computed using the weighted-average number of shares of common stock outstanding during the period.  Diluted loss per share is computed using the weighted-average number of common and common stock equivalents outstanding during the period, as follows:
 
   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
Numerator:
                 
Net loss attributable to common stockholders
  $ (4,098 )   $ (2,584 )   $ (4,861 )
                         
Denominator:
                       
Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders
    3,283,000       3,086,000       2,116,000  
                         
Basic and diluted net loss per share attributable to common stockholders
  $ (1.25 )   $ (0.84 )   $ (2.30 )
                         
Antidilutive securities including options, warrants and convertible notes and preferred stock not included in loss per share calculation
    18,015,000       18,142,000       18,238,000  
 
Financial instruments

The carrying amounts of Salon’s financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value because of their short maturities.  Fair value of capital lease obligations, if any, approximates carrying value since they bear interest at current market rates. The fair value of long- term convertible notes and advances is less than book value, but due to many factors, fair value is undeterminable at this time.
 
 
46

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Income taxes
 
Salon recognizes deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Concentrations of credit risk

Financial instruments that potentially subject Salon to concentrations of credit risk consist principally of trade accounts receivable. Salon performs ongoing credit evaluations of its customers, but does not require collateral.  Salon provides an allowance for credit losses that it periodically adjusts to reflect management’s expectations of future losses.  Two customers accounted for approximately 32% of trade accounts receivable at March 31, 2012.  Three customers accounted for approximately 46% of trade accounts receivable at March 31, 2011.  No customer accounted for 10% or more of total revenue for each of the fiscal years ended March 31, 2012 and March 31, 2010.  One customer accounted for more than 10% of total revenue for fiscal year ended March 31, 2011.

Recent accounting pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1)). ASU 2009-13 superseded EITF 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 requires companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. The Company adopted this guidance during fiscal year 2012, and it did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08 Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 provides companies with guidance to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards.   These qualitative factors include macroeconomic conditions (such as limitations on accessing capital, developments in equity and credit markets, etc.), industry and market conditions (such as increased competitive environment, change in regulatory environment, change in market for a product, etc.), cost factors (such as increase in cost of labor and materials), overall financial performance, litigation, changes in key personnel, and sustained decrease in share price.  For the year ended March 31, 2012, the Company adopted this guidance and did not identify any potential impairment to its goodwill.
 
 
47

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Reclassifications
 
Certain reclassifications, not affecting previously reported net loss, have been made to the previously issued consolidated financial statements to conform to the current period presentation.

Note 3. Goodwill

In accordance with Accounting Standards Codification (ASC) 360, Goodwill is not amortized but is tested for impairment annually during the Company’s fourth quarter, or when events and circumstance occur indicating that the asset might be impaired.  The carrying value of goodwill at March 31, 2012 and March 31, 2011 was $200 and was not found to be impaired. On May 29, 2012, Salon entered an Indication of Intent and Confidentiality Agreement with a company that has expressed interest in acquiring the Well.

Note 4. Property and Equipment

   
Year Ended March 31,
 
   
2012
   
2011
 
Property and equipment, net
           
Computer hardware and software
  $ 1,439     $ 1,404  
Leasehold improvements
    82       82  
Furniture and office equipment
    295       273  
      1,816       1,759  
Less accumulated depreciation and amortization
    (1,724 )     (1,632 )
    $ 92     $ 127  

Depreciation and amortization expense for the years ended March 31, 2012, 2011 and 2010 was $92, $207, and $227 respectively.
 
 
48

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)

Note 5.  Borrowing Agreements

Short-term borrowings

In May 2007, Salon entered into a borrowing agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1,000, plus accrued interest, at a rate of prime less 0.25%.  The agreement is guaranteed in its entirety by Salon’s Chairman.  The line of credit has been fully drawn as of March 31, 2012 and 2011.  Salon and its Chairman have agreed to lift previously agreed restrictions on the timing of borrowing to permit borrowing to continue under the agreement with the guarantee of the Chairman.  Deutsche Bank Securities may demand repayment of amounts borrowed at any time.  Additionally, the Chairman may also choose to terminate his guarantee, which would trigger a demand for repayment.  As of March 31, 2012, and 2011, accrued interest on bank debt totals $182 and $148, respectively.  During the fiscal years ended March 31, 2012 and 2011, the weighted average interest rate on the Company’s short-term borrowings was 3%.
 
Convertible notes payable

On April 4, 2008, Salon issued to each of its Chairman and the father of Salon’s then CEO a convertible promissory note in exchange for loans with a principal amount of $500, an aggregate of $1,000.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on March 31, 2012.  Each note issued on April 4, 2008 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.68.  In addition, in the event the Company obtains third-party financing in excess of $500, the holders of this $1,000 convertible notes payable have a right to exchange these notes for the same instrument issued in such third-party financing. The value of this embedded derivative was determined to be insignificant and no amount has been recorded.

On May 15, 2008, Salon sold and issued to another investor a convertible promissory note with a principal amount of $500 as part of the above-referenced financing transaction.  The note bears an interest rate of 7.50 percent per annum, payable semi-annually, in cash or in kind, and matures on March 31, 2012.  The note may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.45.

On October 31, 2008, Salon issued to each of its Chairman and the father of Salon’s then CEO a convertible promissory note in exchange for loans with a principal amount of $500, an aggregate of $1,000, as part of the above financing transactions in which Salon generated gross proceeds of approximately $2,500 as of March 31, 2009.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on October 31, 2012.  Each note issued on October 31, 2008 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $0.6746.

On April 4, 2009, Salon issued to each of its Chairman and the father of Salon’s then CEO a convertible promissory interest note in exchange for loans with a principal amount of $38, an aggregate of $75.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on March 31, 2012.  Each note issued on April 4, 2009 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.68.
 
 
49

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
On May 15, 2009, Salon issued to another investor a convertible promissory interest note in exchange for loans with a principal amount of $38.  The note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on March 31, 2012.  The note issued on May 15, 2009 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.45.

On October 31, 2009, Salon issued to each of its Chairman and the father of Salon’s former CEO and current Director a convertible promissory interest note in exchange for loans with a principal amount of $38, an aggregate of $75.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on March 31, 2012.  Each note issued on October 31, 2009 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $0.6746.

On April 4, 2010, Salon issued to each of its Chairman and the father of Salon’s former CEO and current Director a convertible promissory interest note in exchange for loans with a principal amount of $40, an aggregate of $81.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on October 31, 2012.  Each note issued on April 4, 2010 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.68.

On May 15, 2010, Salon issued to another investor a convertible promissory interest note in exchange for loans with a principal amount of $40.  The note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on March 31, 2012.  The note issued on May 15, 2010 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.45.

On October 31, 2010, Salon issued to each of its Chairman and the father of Salon’s former CEO and current Director a convertible promissory interest note in exchange for loans with a principal amount of $40, an aggregate of $81.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on October 31, 2012.  Each note issued on October 31, 2010 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $0.6746.

On April 4, 2011, Salon issued to both its Chairman and the father of Salon’s former CEO and current Director each a convertible promissory interest note in exchange for accrued interest with a principal amount of $43, an aggregate of $87.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on March 31, 2012.  Each note issued on April 4, 2011 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.68.

On May 15, 2011, Salon issued to another investor a convertible promissory interest note in exchange for accrued interest with a principal amount of $43.  The note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on March 31, 2012.  The note issued on May 15, 2011 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $1.45.

 
50

 

SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
On October 31, 2011, Salon issued to both its Chairman and the father of Salon’s former CEO and current Director each a convertible promissory interest note in exchange for accrued interest with a principal amount of $43, an aggregate of $87.  Each note bears an interest rate of 7.50 percent per annum, payable annually, in cash or in kind, and matures on October 31, 2012.  Each note issued on October 31, 2011 may convert at the election of the holder at any time into a number of shares of Salon’s common stock equal to the aggregate amount of the note obligations divided by $0.6746.

For all of the convertible notes described above with an original maturity date of March 31, 2012, the Company and each of the lenders agreed to extend the maturity dates therein to October 31, 2012. All other terms remained unchanged.

In the event Salon, at any time prior to the payment in full of the notes, or conversion thereof, shall (a) issue and sell shares of its common or preferred stock or an instrument convertible into its common or preferred stock or (b) issue and sell debentures or enter into any new indebtedness, then the holders of the first $1,000 in principal of the notes may choose to exchange the outstanding principal balance and accrued interest due under the notes for new securities issued on the same terms and conditions of the financing.  If Salon completes a financing in excess of $500, then this right of exchange will terminate 30 days following notice of such financing being given to the holders.

As of March 31, 2012 and 2011, convertible notes payable totaled $3,106 and $2,889, inclusive of $606 and $389, respectively, in notes issued as payment in kind of accrued interest thereon.  As of March 31, 2012 and 2011, related parties hold $2,485 and $2,311 of such notes and aggregate related party interest expense totaled $132 and $170, respectively.

Related Party Advances

As of March 31, 2012 and 2011, the Company has received $8.1 million and $5.1 million in unsecured, interest-free cash advances, including $6.1 million and $3.2 million from the Company’s Chairman and $2.0 million and $1.9 million, respectively, from the father of Salon’s former CEO.  Subsequent to year end, the Company’s Chairman advanced an additional $1.5 million, to be used for working capital.  This debt is payable on demand, and is exchangeable into securities to be issued in the next financing raised by the Company from non-related parties.
 
 
51

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Note 6. Accounts Payable and Accrued Liabilities

   
Year Ended March 31,
 
   
2012
   
2011
 
Accounts payable and accrued liabilities
           
Accounts payable
  $ 480     $ 337  
Salaries and wages payable
    265       230  
Accrued services
    11       22  
Capital lease, current portion
    -       4  
Accrued interest
    778       549  
Other accrued expenses
    313       95  
    $ 1,847     $ 1,237  
 
Note 7.  401(k) Savings Plan

Salon’s 401(k) Savings Plan (the “401(k) Plan”) is a defined contribution retirement plan intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. All full-time employees of Salon are eligible to participate in the 401(k) Plan pursuant to its terms.  Participants may contribute from 1% to 20% of compensation, subject to statutory limitations.  Employer matching contributions are discretionary based on a certain percentage of a participant’s contributions as determined by management of Salon.  Salon has not made any discretionary contributions to the 401(k) Plan through March 31, 2012.

Note 8. Employee Stock Option Plan
 
Salon has two stock option plans approved by stockholders.  The Salon Internet, Inc. 1995 Stock Option Plan (the 1995 Plan), which was terminated in November 2004, and the Salon Media Group, Inc. 2004 Stock Plan (the 2004 Plan) that was approved by Salon’s stockholders in November 2004.  The 2004 Plan allows the issuance of incentive and nonstatutory options to employees and non-employees of Salon.  In October 2005, Salon’s stockholders approved an amendment to the 2004 Plan to increase the maximum number of shares of common stock that may be issued under the plan by 800,000 to 2,300,000 shares.  In October 2007, Salon’s stockholders approved another amendment to the 2004 Plan to increase the maximum number of shares of common stock that may be issued under the plan by 875,000 to a total of 3,175,000 shares and to allow for grants of restricted stock awards.  In May 2009, Salon’s Board of Directors further approved an amendment to the 2004 Plan to increase the maximum number of shares of common stock that may be issued under the plan by 4,500,000 to 7,675,000 shares.
 
Under the 2004 Plan, incentive and nonqualified stock options may be granted to officers, employees, directors and consultants of Salon.  Options generally vest over periods of four years. Options generally became exercisable as to 25% of the option shares one year from the date of grant and then ratably over the following 36 months (1/48 per month).  However, in the case of 1,045,500 options granted on February 7, 2005 and 382,050 options granted on May 16, 2005, half vested on the date of grant, and the remaining half vested on February 7, 2006.  The exercise price of options is determined by the Board of Directors and is equal to the fair market value of the stock on the grant date.  Generally, Salon’s options expire, if not exercised, ten years after the date of grant.
 
 
52

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Salon may grant restricted stock awards to officers that typically vest over an approximate four year period.  Restricted stock awards are considered outstanding at the time of grant, as the stock award holders are entitled to dividends and voting rights.

On December 4, 2008, Salon granted non-plan restricted stock awards to certain officers.  These grants became fully vested on January 1, 2010.  Non-Plan restricted stock awards are considered outstanding at the time of vesting.

Salon has granted options pursuant to plans not approved by stockholders.  These grants include an option to purchase 25,000 shares of common stock issued in December 2006 and an option to purchase 50,000 shares of common stock issued in June 2006, both granted to Salon’s then Senior Vice President – Publisher, and an option to purchase 50,000 shares of common stock issued in February 2005 to Salon’s former Chairman. The 75,000 options granted to the then Senior Vice President – Publisher have been forfeited following the departure of the executive.
 
As of March 31, 2012, Salon has approximately 1,579,000 shares authorized to be issued under the 2004 Plan of which approximately 1,090,000 shares remain available for future grant.

Stock based compensation expense recognized for the years ended March 31, 2012, 2011 and 2010 was $311, $295 and $379, which consisted of stock-based compensation expense related to stock options and restricted stock.

As of March 31, 2012, the aggregate stock compensation remaining to be amortized to expenses was $145. Salon expects this stock-based compensation balance to be amortized as follows: $103 during fiscal 2013; $27 during fiscal 2014; $10 during fiscal 2015 and $5 during fiscal 2016.  The expected amortization reflects only outstanding stock option awards as of March 31, 2012.

No amounts were recorded relating to excess tax benefits from the exercise of stock-based compensation awards during the year ended March 31, 2012, and as a result there were no differences in net cash used in operating and financing activities.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
 
   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
Risk-free interest rates
    0.65 – 1.15%       1.25 – 1.70%       1.52 – 2.05%  
Expected lives (in years)
    4       4       4  
Expected volatility
    332 – 394%       254 – 279%       156 – 209%  
Dividend yield
    0.0%       0.0%       0.0%  

The expected term of the options of four years represents the estimated period of time until exercise and is based on historical experience of similar awards, including the contractual terms, vesting schedules and expectations of future employee behavior.  Expected stock price volatility is based on historical volatility of Salon’s stock.  The risk-free interest rate is based on the implied yield available on U.S. Treasury securities with a term equivalent to the vesting period of the stock options, or four years.  Salon has not paid dividends in the past.
 
 
53

 

SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
The following table summarizes activity under Salon’s plans for the years ended March 31, 2010, 2011 and 2012:
 
   
Outstanding
Stock Options
   
Weighted Average Exercise
Price
   
Weighted Average
Remaining Contractual Life (Years)
   
Aggregate Intrinsic
Value
 
                         
Outstanding as of April 1, 2009
    2,440,000     $ .035           $ 0  
Granted
    3.391,000     $ 0.15                
Expired or forfeited
    (321,000 )   $ 0.39                
Outstanding at March 31, 2010
    5,510,000     $ 0.23       8.2     $ 0  
Exercisable at March 31, 2010
    1,937,000     $ 0.31             $ 0  
Vested and expected to vest at March 31, 2010
    3,391,000     $ 0.22       8.8     $ 0  
                                 
Outstanding as of April 1, 2010
    5,510,000     $ 0.23             $ 0  
Granted
    304,000     $ 0.11                  
Expired or forfeited
    (442,000 )   $ 0.20                  
Outstanding at March 31, 2011
    5,372,000     $ 0.23       7.3     $ 1,459  
Exercisable at March 31, 2011
    3,280,000     $ 0.26       6.6     $ 799  
Vested and expected to vest at March 31, 2011
    3,394,000     $ 0.20       8.1     $ 1,019  
                                 
Outstanding as of April 1, 2011
    5,372,000     $ 0.23             $ 0  
Granted
    661,000     $ 0.35                  
Expired or forfeited
    (944,000 )   $ 0.20                  
Outstanding at March 31, 2012
    5,089,000     $ 0.25       6.7     $ 1,289  
Exercisable at March 31, 2012
    3,970,000     $ 0.26       6.2     $ 979  
Vested and Expected to vest at March 31, 2012
    4,843,000     $ 0.25       6.7     $ 1,214  
 
 
54

 

SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
The following table summarizes information about stock options outstanding at March 31, 2012:

       
Options Outstanding
   
Options Exercisable
 
             
Weighted
                   
             
Average
   
Weighted
         
Weighted
 
       
Number of
   
Remaining
   
Average
   
Number of
   
Average
 
Range of
   
Shares
   
Contractual
   
Exercise
   
Shares
   
Exercise
 
Exercise Prices
   
Outstanding
   
Life (Years)
   
Price
   
Exercisable
   
Price
 
$ 0.05 - $0.08         178,000       9.8     $ 0.05       3,000     $ 0.08  
$ 0.10 - $0.12         1,715,000       7.7     $ 0.12       1,181,000     $ 0.12  
$ 0.16 - $0.20         840,000       7.1     $ 0.20       831,000     $ 0.20  
$ 0.29 - $0.35         1,876,000       4.7     $ 0.35       1,752,000     $ 0.35  
$ 0.45 - $0.45         477,000       9.4     $ 0.45       200,000     $ 0.45  
$ 5.20 - $5.20         3,000       3.1     $ 5.20       3,000     $ 5.20  
            5,089,000       6.7     $ 0.25       3,970,000     $ 0.26  
 
The weighted average fair value per share of the stock option awards in the years ended March 31, 2012, 2011 and 2010 was $0.35, $0.11, and $0.14, respectively.  The weighted average fair value of options vested during the years ended March 31, 2012, 2011 and 2010 was $0.28, $0.31 and $0.33 per share, respectively.
 
The total intrinsic value of options exercised during the years ended March 31, 2012, 2011 and 2010 were nil as none were exercised.
 
Note 9.  Commitments and Contingencies

Salon has operating lease agreements for its office space in San Francisco, CA that expires in February 2014, and for its office in Manhattan Beach, CA that expires in May 2013.  In addition, Salon’s operating lease agreement for its office space in New York will expire in July 2014.  Salon also sublets office space in Washington, DC that expires in December 2012. Rent expense under operating lease agreements was $434, $463 and $488 for the years ended March 31, 2012, 2011 and 2010 respectively.
 
 
55

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Total future minimum payments under operating and capital leases, short-term borrowing and convertible notes in effect at March 31, 2012 are as follows:

     
Payments Due By Period

   
Payments Due By Period
 
   
Total
   
Year 1
   
Year 2
   
Year 3
   
Year 4
 
Operating leases
  $ 1,045     $ 522     $ 523     $ -     $ -  
Short-term borrowing
    1,000       1,000       -       -       -  
Short-term borrowing interest
    182       182       -       -       -  
Related party advances
    8,105       8,105       -       -       -  
Convertible notes principal
    3,106       3,106       -       -       -  
Convertible notes interest
    92       92       -       -       -  
Total
  $ 13,530     $ 13,007     $ 523     $ -     $ -  


Salon, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer is or was serving at Salon’s request in such capacity.  The term of the indemnification period is for the officer’s or director’s lifetime.  The maximum amount of potential future indemnification is unlimited; however, Salon does have a Director and Officer Insurance Policy that limits Salon’s exposure and enables Salon to recover a portion of any future amounts paid.  As a result of the insurance policy coverage, Salon believes the fair value of these indemnification agreements is minimal.

Salon has entered into employment agreements with certain key executives under which severance payments in the aggregate amount of approximately $100 would become due and payable in the event of their termination for other than cause or as a result of a change in control.
 
 
56

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Note 10. Income Taxes

Salon has not recorded a provision or benefit for federal or state income taxes for any period since inception due to incurred operating losses.  At March 31, 2012, Salon has net operating loss carry-forwards of $81,517 and $22,037 for Federal and California purposes, respectively, available to reduce future taxable income, if any.  During the year ended March 31, 2012, $2,094 of California net operating loss carry-forwards expired and additional $1,759 is due to expire as of March 31, 2013, with the balance expiring over time thereafter if not utilized beforehand.  The federal net operating loss carry-forwards begin to expire on March 31, 2016 if not utilized beforehand.

At March 31, 2012, Salon has research and development credit carry-forward of $9 for California income tax purposes.  The research and development credit carry-forward for Federal income tax purposes expired on March 31, 2012, and the California credits carry forward indefinitely.

The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carry-forwards in certain situations where changes occur in the stock ownership of a company.  In the event Salon has incurred a change in ownership, utilization of the carry-forwards could be significantly restricted.

Temporary differences and other sources of deferred tax assets that give rise to significant portions of deferred tax assets and liabilities are as follows:

   
March 31,
 
   
2012
   
2011
 
Net operating losses
  $ 29,001     $ 28,580  
Other
    432       512  
Total deferred tax assets
    29,433       29,092  
Valuation allowance
    (29,433 )     (29,092 )
Net deferred tax asset
  $ -     $ -  
 
 
57

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)

Due to the uncertainty of realizing the benefits attributable to the aforementioned deferred tax assets, Salon has provided a valuation allowance against the net deferred tax assets.  The difference between Salon’s effective income tax rate and the federal statutory (34%) rate is as follows:

   
Year Ended March 31,
   
   
2012
   
2011
   
2010
Statutory tax benefit
  $ (1,393 )   $ (879 )   $ (1,610 )
State taxes, net of federal benefit
    (239 )     (151 )     (276 )
Permanent differences
    102       93       179  
Other
    1,189       84       128  
Total
    (341 )     (853 )     (1,579 )
Change in valuation allowance
    341       853       1,579  
    $ -     $ -     $ -  

Note 11. Preferred Stock
 
During the year ended March 31, 2011, sixty-three shares of Series A preferred stock were surrendered by one stockholder in a non-cash transaction.
 
 
58

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
Following the above transactions and the 20:1 reverse stock split of November 15, 2006, the conversion rate and common equivalent shares of Salon’s preferred stock is as follows as of March 31, 2012:
 
         
Per share
   
Common
 
   
Shares
   
Purchase
   
Conversion
   
Equivalent
 
Preferred Stock  
Outstanding
   
Price
   
Rate
   
Shares
 
Series A
    612     $ 4,000       1.782       1,373,442  
Series B
    125     $ 4,000       1.476       338,651  
Series C
    6,582     $ 800       0.785       6,706,607  
Series D-1
    417     $ 1,200       1.682       297,454  
Series D-2
    417     $ 1,200       1.941       257,757  
Series D-3
                               
Issued on 12/21/05
    209     $ 1,200       1.682       149,084  
Issued on 07/27/06
    208     $ 1,200       2.150       116,112  
Series D-4
                               
Issued on 07/27/06
    42     $ 1,200       2.150       23,445  
Issued on 09/21/06
    333     $ 1,200       1.564       255,461  
Issued on 12/18/06
    42     $ 1,200       0.888       56,739  
Series D-5
                               
Issued on 12/18/06
    125     $ 1,200       0.888       168,868  
Issued on 11/19/07
    292     $ 1,200       1.401       250,099  
Total
    9,404                       9,993,719  
 
The Series A, B, C and D preferred stock conversion rate is subject to a downward adjustment anti-dilution provision under certain circumstances related to subsequent Salon stock issuances.
 
 
59

 
 
SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
The holders of the Series D preferred stock are entitled to dividends of 5.0%, as and if declared by the Board of Directors.  In event of a liquidation, the holders of Series D preferred stock and the holders of the Series C preferred stock rank in parity, and are entitled to receive, prior and in preference to any distribution of any assets or property of Salon to the holders of common stock, and the holders of Series A and B preferred stock,  and in the case of the Series D preferred stock, an amount per share equal to $1,200 plus an amount equal to all declared but unpaid dividends, and in the case of the Series C preferred stock, $1,600 per share, plus an amount equal to all declared but unpaid dividends, based on an annual rate of 8%.  If the assets and funds available for distribution are insufficient to permit the payment to the holders of Series C and D preferred stock of their full preferential amounts, then the entire assets and funds of Salon legally available for distribution to stockholders will be distributed among the holders of Series C and D preferred stock ratably in proportion to the full preferential amounts which they are entitled to receive.  After an initial distribution to the holders of Series C and D preferred stock, the holders of the Series A and B preferred stock, who rank in parity, are entitled to receive, prior and in preference to any distribution of any assets or property of Salon to the holders of common stock, an amount per share equal to $8,000 plus an amount equal to all declared but unpaid dividends, based on an annual rate of 8%.  If, after the initial distribution to holders of Series C and D preferred stock, the remaining assets and funds available for distribution are insufficient to permit the payment to the holders of Series A and B preferred stock of the full preferential amounts, then the entire remaining assets and funds of Salon legally available for distribution to stockholders will be distributed among the holders of Series A and B preferred stock ratably in proportion to the full preferential amounts which they are entitled to receive. As of March 31, 2012, no dividend has been declared to the holders of preferred stock.

If, after initial preferential liquidation payments to the holders of Series A, B, C and D preferred stock, any assets remain available for distribution, such assets are to be distributed ratably among the holders of common stock and preferred stock, based on the shares of common stock then held by them and issuable upon conversion of the shares of preferred stock then held by them, until aggregate distributions per share reach $12,000 for the holders of Series A a