10-K 1 salon_10k-033109.htm ANNUAL REPORT salon_10k-033109.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, 2008
 
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 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 [  ] No [X]

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $125,000 based on the closing sale price of the registrant’s common stock on June 10, 2009.  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. 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 10, 2009 was 2,021,276 shares.
 



 

FORM 10-K
SALON MEDIA GROUP, INC.
INDEX

 
PART I
Page
Number
     
ITEM 1.
3
     
ITEM 1A.
10
     
ITEM 1B.
19
     
ITEM 2.
20
     
ITEM 3
20
     
ITEM 4
 20
     
PART II
 
     
ITEM 5.
20
     
ITEM 6.
23
     
ITEM 7.
24
     
ITEM 7A.  
33
     
ITEM 8. 
34
     
ITEM 9.
63
     
ITEM 9A.
63
     
ITEM 9B.
64
     
PART III
 
     
ITEM 10.   
65
     
ITEM 11.       
69
     
ITEM 12
79
     
ITEM 13.    
86
     
ITEM 14.    
89
     
PART IV    
     
ITEM 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K
90
     
SIGNATURES 99
 
 
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
 
Overview

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.

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 two online communities, Table Talk and The Well, as well as Open Salon, a blogging social network launched in August, 2008.  Among its many quality offerings, Salon sponsors a daily blog by the independent blogger Glenn Greenwald, a monthly column by culture writer Camille Paglia, and a daily blog by Editor-in-Chief Joan Walsh.   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.
 
 
The main entry and navigation point to Salon's  primary subject-specific sections is Salon's home page at www.salon.com.  Built around multiple daily features – War Room,  Five Things,  Since you Asked, Broadsheet, How the World Works, Beyond the Multiplex, Video Dog and daily blogs by Glenn Greenwald and Joan Walsh, Salon provides a constantly updated array of news, features, interviews, columnists and blogs, including the following:

News & Politics
Salon News & Politics features breaking stories, investigative journalism and commentary, as well as interviews with newsmakers, politicians and pundits.  News features Salon’s War Room, a daily politics blog.
 
Opinion
Opinion features provocative commentary on timely issues, including daily blogs by Glenn Greenwald and Joan Walsh, and weekly columns by Gary Kamiya, Joe Conason and Garrison Keillor, and a monthly column by Camille Paglia.
 
Technology &
Business
Technology & Business provides smart, opinionated coverage of Internet news and digital culture from today's best technology writers, along with in-depth features about the business world and the economy. It features Patrick Smith's regular Ask the Pilot column, Andrew Leonard’s How the World Works blog, and shared content from the GigaOM network.
 
Arts &
Entertainment
Arts & Entertainment stages music and television reviews and interviews. The section includes frequent television and music features, as well as Video Dog, a video blog comprised of user generated video clips, as well as regular podcasts.  It is anchored by television critic Heather Havrilesky.
 
Movie Page
Salon’s Movie Page spotlights film reviews, especially critics’ picks, and provides readers an ability to check movie show times, buy tickets or rent DVDs. Starting in 2008, Salon also offers I Like to Watch, featuring film critics Andrew O’Hehir and Stephanie Zacharek.
 
Life
Life features articles by thought-provoking writers about family life, motherhood and women's lives and issues, as well as the women’s news digest Broadsheet. Cary Tennis' popular advice column, Since You Asked, appears daily.
 
Books
Books includes ahead-of-the-curve daily book reviews and interviews with today's most interesting writers. Nationally renowned critics Laura Miller and Andrew O’Hehir anchor this site, which often includes insightful freelance reviews.
 
Comics
The Comics section features the works of comic luminaries Tom Tomorrow, Ruben Bolling, Carol Lay and Keith Knight.
 
Environment &
Science
News and opinion articles on issues related to science and the environment, with topics ranging from global warming to the relationship between science and religion.

 
Salon has two online communities, The Well and Table Talk, which allow users to discuss Salon content and interact with other users.  The Well, a subscription member-only discussion community in which members use their real names to post and only members can view the postings, had approximately 2,500 paying subscribers as of May 31, 2009.  Table Talk is available to all Internet users.
 
Salon believes that its original, award-winning content allows Salon to attract and retain users who are more affluent, better educated and more likely to make online purchases than typical Internet users. Salon believes its user profile makes its Website a valuable media property for advertisers and retailers who are allocating marketing resources to target consumers online.
 
During fiscal year 2009, Salon launched Open Salon.com, a social network for bloggers, with content curated by Salon staff.  Open Salon functions like a real-time magazine cover, where the best content is spotlighted.  Blogs from Open Salon may be posted on the Salon.com website.  Open Salon’s audience has grown consistently since its launch, and is expected to contribute to revenues in fiscal 2010.
 
Revenue Sources
 
One customer accounted for over 13% of advertising revenue for the year ended March 31, 2009. No customer accounted for over 10% of either total revenue or advertising revenue for the year ended March 31, 2008, or March 31, 2007, which were as follows (in thousands):

   
Year Ended March 31,
 
   
2009
   
2008
   
2007
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Advertising
  $ 5,195       76 %   $ 5,434       72 %   $ 5,409       70 %
Salon Premium
    994       14 %     1,333       18 %     1,546       20 %
All Other
    685       10 %     746       10 %     793       10 %
Total
  $ 6,874       100 %   $ 7,513       100 %   $ 7,748       100 %

Salon has generated Internet advertising revenues since its inception.  To offset the precipitous drop in advertising revenues experienced in 2000 from the downturn in the economy, the company launched Salon Premium, a subscription service, in April 2001.  Since that time, the market for Internet advertising has improved; according to the Interactive Advertising Bureau, online advertising revenues have grown from $9.6 billion in 2004 to $23.4 billion in 2008. According to industry analysts, online advertising revenues are experiencing year over year declines during the first half of 2009 due to the deep recession, although to a lesser extent than traditional media, especially print.  However, long-term industry trends are expected to remain favorable.  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.

An important factor in increasing advertising revenues in future periods, including Salon’s peak third quarter ending December 31, is growing 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.  Due to various factors, including concerted efforts to make Salon’s content more accessible to readers by automatically launching its Site Pass advertisement, formatting content to maximize the potential for Salon’s content to show up in search engine results, and marketing campaigns with a select few Websites, the average number of unique monthly Website visitors for the year ended March 31, 2009 increased 10% to approximately 4.8 million from the year ended March 31, 2008.   Additionally, monthly unique visitors have grown by 123% 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 in the following page reflects unique monthly visitors to Salon’s Website.
 
 

  
Salon has evaluated the balance between its subscription and advertising businesses and has shifted emphasis toward advertising.  Until recently, a Website visitor was given a choice of: (1) becoming a Salon Premium subscriber to avoid having to view advertisements on future visits to Salon’s Website or (2) viewing an advertisement to gain access to all of Salon’s content.  This strategy has been found to impede access to Salon’s Website and its ability to generate advertising impressions.  During fiscal 2007, Salon changed its Site Pass model to automatically serve advertisements, enabling a Website visitor to gain more seamless access to Salon’s content.  This change has produced an increase in the number of ad impressions that Salon can serve and improved Salon’s potential to generate an even greater amount of advertising revenues, offsetting a drop in Salon Premium subscriptions that traditionally were solicited from the Site Pass and the relatively smaller amount of revenue they generate.

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 $30 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, free access to the Table Talk on-line discussion forum, and the ability to download content in text or PDF format.

Salon Premium revenue is recognized ratably over the period that services are provided.  For the year ended March 31, 2009, Salon received $0.8 million in cash and recognized $1.0 million of revenue for this service primarily from approximately 17,600 paid new and renewed one year subscriptions and from approximately 7,000 monthly subscriptions.  For the year ended March 31, 2008, Salon received $1.2 million in cash and recognized $1.3 million of revenue for this service primarily from approximately 27,900 paid new and renewed one year subscriptions and from approximately 4,400 monthly subscriptions.  For the year ended March 31, 2007, Salon received $1.5 million in cash and recognized $1.5 million of revenue for this service primarily from approximately 44,200 paid new and renewed one year subscriptions and from approximately 5,000 monthly subscriptions.  Since peaking at 89,100 subscribers in December 2004, paid subscriptions have continued to decline to 33,900 as of March 31, 2008 and approximately 23,500 as of March 31, 2009.  The drop is expected to continue during the next year, following longstanding industry trends away from paid Web content.
 
The other sources of revenue are primarily from The Well, an on-line discussion forum.  Revenue is recognized ratably over the subscription period.  The revenues recognized were $0.4 million each for the years ended March 31, 2009, March 31, 2008 and March 31, 2007.   Salon generates nominal revenue from the licensing of content that previously appeared in Salon and for providing links to a third party’s Website offering personals/dating services.

Sales and Marketing
 
Salon has sales offices in New York City, Los Angeles and San Francisco with eight advertising sales and operations employees as of March 31, 2009, of which four actively solicit orders.  As of March 31, 2009, Salon has one employee associated with Salon Premium membership activities.
 
Salon incurred advertising expenses of $0.9 million, $1.1 million and $0.4 million for the years ended March 31, 2009, 2008, and 2007, respectively.  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 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 March 31, 2009, Salon has $1.8 million in advertising credits, of which approximately $1.0 million remain with NBC and approximately $0.8 million are with Rainbow, all of which will expire in December 2009. Since their acquisition, Salon has used the advertising credits for cable television and online advertisements.  Salon intends to utilize the NBC and Rainbow credits to continue to promote its website as well as its new social network, Open Salon.  Salon expects to recover the full value of all the advertising credits through usage or settlement in cash, per the terms of the agreement, but there can be no absolute assurance as to any potential cash settlement.
 
 
Competition
 
Salon competes for advertising revenues with numerous Websites, with the 50 largest companies attracting an estimated 91% 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, major search engines such as Google, major social networks such as Facebook and MySpace, and major online media publications such as CNN.com.
 
Salon also competes with many news–oriented Websites.  In addition to traditional news-oriented Websites such as CNN, NBC, ABC and CBS, Salon also competes with sites such as the Huffington Post, Slate, Mother Jones, Daily Beast and Politico for staff, audience and ad sales.
 
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.
 
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 continued to add new writers, and enhance or create new content areas and features for its readers.  The Company plans to invest in major site improvements in fiscal 2010 to accelerate its continued growth.
 
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 more profitable for Salon to drive its readers to its advertising supported Website rather than to a subscription, without-ads Website.  Salon recognizes that its subscription model will continue to be preferred by a minority of its readers, and will therefore continue the subscription program, with emphasis on “Premium with ads” as a means of increasing potential ad impressions.  Additionally, Salon will continue efforts to increase the average value per subscriber by bundling third-party services with subscriptions, and intends to offer other products and services to current subscribers.
 
 
Salon increased emphasis on advertising revenues during FY08 and has continued to do so in FY09 and beyond.  In FY10, 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.  It will also expand the use of ad networks to fully monetize any unsold remnant inventory.
 
Enhanced Website Design

In fiscal 2010, Salon plans to launch 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. It is anticipated that the site will be more dynamic and interactive, and that its new modular architecture will allow 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. Salon is also exploring additional ways to exploit the changing media landscape.
 
Expanding Gross Margins

Salon has made substantial strides in the past several months to better realign its production costs with its revenue potential in an effort to reach profitability. Among other measures, we reduced full-time headcount from 67 in November 2008 to 52 at year end and we are continually aiming to match personnel resources to overall business need given the prevailing advertising market.  Additionally, we are evaluating opportunities to reduce the expense of our high-quality content by focusing on reducing cost per page, seeking less costly sources of content, including greater content aggregation and the use of highly-rated 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.

New Channels of Content Distribution

To meet the growing demand for mobile content, Salon has revamped its presence on AvantGo, the largest mobile content platform.  Salon’s new AvantGo presence will be featured on the top level of the service’s Technology channel, one of its most popular feeds.   Even though increased mobile usage is expected to generate minimal additional revenue, this channel is primarily an opportunity for Salon to extend its presence beyond a Web browser.
 

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 two 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 FY10, Salon plans to make significant investments in this area 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.

Software to maintain and manage Salon Premium was created in-house and upgraded in 2003, again during the year ended March 31, 2007, and a major reprogramming is planned for fiscal year 2010.

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 is securing a registered trademark on 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, 2009, Salon has 52 full-time and two part-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.

If Salon forecasts or experiences periods of limited, or diminishing cash resources, Salon may need to issue additional securities.  These newly issued securities could be highly dilutive to existing common shareholders.  However, there is no guarantee that Salon will be able to issue additional securities in future periods to meet cash needs and, if it is unable to raise additional cash, Salon’s ability to continue as a going concern may be adversely affected.

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, 2009, related parties provided approximately $1.8 million in new loans.

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 94% of all voting securities. These stockholders therefore own a controlling interest in Salon.  Of this amount,  approximately 22% is controlled directly or indirectly by William Hambrecht and approximately 41% 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 9,467 shares of preferred stock to approximately 10.1 million shares of common stock.  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 may not be able to receive the full value of its advertising credits

As of March 31, 2009, Salon has $1.8 million of advertising credits which Salon has valued at $1.2 million that expire on December 31, 2009.  Of the $1.8 million, approximately $0.8 million are the obligation of Rainbow Media Holdings (“Rainbow”) and approximately $1.0 million are the obligation of NBC.  Salon feels that it should be able to fully utilize the credits with both Rainbow and NBC, but may not be able to fully utilize the credits prior to expiration.  Salon expects to recover the full value of all the advertising credits through usage or settlement in cash, per the terms of the agreement, but there can be no absolute assurance as to any potential cash settlement.
 
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.

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 $24.3 million in potential sales proceeds as of March 31, 2009, which includes the effect of undeclared dividends of $5 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 $24.3 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 $24.3 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 a loss from operations, based on generally accepted accounting principals, for its fiscal year ending March 31, 2010 and potentially in future years.  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 LLP, Salon’s independent registered public accounting firm for the years ended March 31, 2007, March 31, 2008, and March 31, 2009, 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 Premium memberships have been declining and may continue to decline, adversely affecting revenues and available cash

Salon has been relying on the revenues and cash generated from Salon Premium subscriptions since its implementation in April 2002.  Salon Premium subscriptions grew from nothing to a high of approximately 89,100 as of December 31, 2004.  However, since that time, subscriptions have been declining to approximately 23,500 as of March 31, 2009.  Salon forecasts that these memberships will continue to decline to approximately 15,000 as of March 31, 2010.  If the decline were to be in excess of anticipated amounts, Salon’s operations and available cash could be adversely affected.
 
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;
 
 
·
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 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.
 
Salon’s quarterly operating results are volatile and may adversely affect its common stock price
 
Salon’s future revenues and operating results, 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.
 
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 Salon Premium subscribers

Salon is constantly upgrading its technology to manage its Website and its Salon Premium program, and during the last year redesigned its Website homepage.  In addition, it is creating technology for new products that Salon hopes 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.

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.

Concerns about transactional security may hinder electronic commerce on Salon’s Website and may expose Salon to potential liability

A significant barrier to sale of subscriptions and electronic commerce is the secure transmission of confidential information over public networks.  Any breach in Salon’s security could expose it to a risk of loss or litigation and possible liability.  Salon relies on encryption and authentication technology licensed from third parties to provide secure transmission of confidential information.  As a result of advances in the capabilities of Internet hackers, or other developments, a compromise or breach of the algorithms Salon uses to protect customer transaction data may occur.  A compromise of Salon’s security could severely harm its business.  A party who is able to circumvent Salon’s security measures could misappropriate proprietary information, including customer credit card information, or cause interruptions in the operation of its Website.

Salon may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by these breaches.  Protection may not be available at a reasonable price or at all.
 
Salon’s internally developed software and software platforms provided by a third party to manage Salon’s subscription business might fail resulting in lost subscription income

Salon’s software to manage its subscription business was developed internally to interface with the software provided by a third party.  The third party’s software provides a gateway to authenticate credit card transactions.  Even though Salon’s system to manage its Salon Premium program is Payment Card Industry (PCI) compliant, if this system were to fail or not function as intended, credit card transactions might not be processed and Salon’s cash resources and revenues would therefore be harmed.
 

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.

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.

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. Salon also leases 4,200 square feet of office space at 15 West 37th Street, 8th Floor, New York, NY, through August 2011, and smaller offices at 1130 Connecticut Ave. NW, Washington, DC, expiring December 31, 2009, and 300 Manhattan Beach Blvd, Manhattan Beach, CA, terminating August 30, 2009. 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.
 
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.
 
ITEM 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 2009.
 
 
PART II
 
ITEM 5.    Market for Registrant’s Common Equity and Related Stockholder Matters
 
Information with respect to the quarterly high and low sales prices for Salon’s common stock, ticker symbol SLNM.OB, for its fiscal years 2009 and 2008, based on sales transactions reported by the OTC (Over-The-Counter) Bulletin Board is provided below:
 
     
Fiscal Year Ended
 
Fiscal Year Ended
     
March 31, 2009
 
March 31, 2008
For the quarter ended
 
High
 
Low
 
High
 
Low
June 30
1.68
 
1.10
 
1.70
 
1.10
September 30
1.98
 
1.00
 
1.70
 
1.20
December 31
1.10
 
0.16
 
2.00
 
1.50
March 31
0.40
 
0.20
 
1.90
 
1.40
 
There were 169 holders of record of Salon common stock as of June 3, 2009.  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 3, 2009 was $0.16 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.
 
 
Equity Compensation Plan Information
 
The following table provides information about Salon’s common stock that may be issued upon the exercise of options, warrants and rights under all of Salon’s existing equity compensation plans as of March 31, 2009, 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,
warrants and rights
(a)
 
 
Weighted-average
exercise price of
outstanding options,
warrants 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
 
 2,390,375
 
$0.35
 
293,052
             
Equity compensation plans not approved by security holders
 
50,000
 
$0.35
 
None
             
Total
 
  2,440,375
 
N/A
 
293,052
 
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.
 
Stock Performance Graph
 
The graph below matches Salon Media Group Inc.'s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index, and a customized peer group of six companies that includes: Answers Corp., CNET Network Inc, PlanetOut Inc, Quepasa Corp., TheStreet.com Inc and Tucows Inc. The graph tracks the performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestment of all dividends) from March 31, 2004 to March 31, 2009.
 
 
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
 
ITEM 6.   Selected Consolidated Financial Data
 
   
Dollar amounts in thousands, except per share
 
Year Ended March 31,
 
2009
   
2008
   
2007
   
2006
   
2005
 
Net revenues
  $ 6,874     $ 7,513     $ 7,748     $ 6,516     $ 6,628  
Net loss
  $ 4,699     $ 3,409     $ 1,566     $ 1,122     $ 518  
Net loss attributable to common
                                       
       stockholders (1)
  $ 4,699     $ 3,463     $ 1,861     $ 1,349     $ 358  
Basic and diluted net loss per share
                                       
       attributable to common
                                       
       stockholders (2)
  $ 2.34     $ 1.79     $ 1.10     $ 1.67     $ 0.50  
Weighted average common shares
                                       
outstanding used in computing
                                       
per share amounts (thousands)(2)
    2,008       1,940       1,692       809       720  
Cash and cash equivalents
  $ 371     $ 818     $ 829     $ 441     $ 686  
Prepaid advertising rights
  $ 1,225     $ 2,131     $ 3,267     $ 3,718     $ 3,970  
Total assets
  $ 3,330     $ 4,616     $ 5,605     $ 5,304     $ 6,069  
Capital leases – long-term portion
  $ 34     $ 56     $ -     $ -     $ -  
Total long-term liabilities
  $ 2,706     $ 600     $ 85     $ 120     $ 82  
 
(1)            The net loss attributable to common stockholders for the year ended March 31, 2009 does not include a preferred deemed dividend, as there were no issuances of preferred stock. 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.  The net loss attributable to common stockholders for the year ended March 31, 2007 includes a preferred deemed dividend charge of $295 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. The net loss attributable to common stockholders for the year ended March 31, 2006 includes a preferred deemed dividend charge of $227 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. The net loss attributable to common stockholders for the fiscal year ended March 31, 2005 includes a net preferred deemed dividend benefit of $160 derived from a benefit of $470 from a decrease in value of warrants previously issued to preferred stockholders and a charge of $310 from the issuance of Series D-1 and D-2 preferred stock during the year.  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.
 

(2)           The share and per share results for the years ended prior to March 31, 2007 reflect a reverse stock split effective as of November 15, 2006.  In the reverse stock split, each 20 outstanding shares common stock (“old common stock”) was automatically reduced into one share of new common stock.
 
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 two online communities, Table Talk and The Well, and is developing 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.  Prior to March 2007, subscriptions to Salon Premium were generally $35 for one year with no ads, and during March 2007, the rate was increased to $45. Salon Premium revenue is recognized ratably over the period that services are provided.  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 23,450 as of March 31, 2009.  Salon expects this downward trend to continue, as it is placing greater emphasis on its advertising sales to generate revenue. Revenue from the online discussion forum 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 and for hosting links to a third party’s personals/dating Websites.
 
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.
 
 
 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 prepaid advertising rights are the most critical to Salon’s financial statements.  Future results may differ from current estimates if different assumptions or conditions were to prevail.
 
Share Based Compensation
 
On April 1, 2006 Salon adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, which requires companies to expense their stock option awards.  Salon adopted SFAS 123R using the modified prospective transition method and therefore did not restate results for prior periods.  Salon’s expenses include stock-based expenses related to stock option grants to employees, non-employee Directors and consultants.

Liquidity
 
Salon has incurred significant net losses and negative cash flows from operations since its inception.  As of March 31, 2009, Salon had an accumulated deficit of $101.0 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 LLP, Salon’s independent accountants for the years ended March 31, 2009, March 31, 2008 and March 31, 2007 have 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.
 
Income Taxes
 
Salon has not recorded a provision for federal or state income taxes since inception due to recurring operating losses.  At March 31, 2009, Salon had net operating loss carryforwards of $73.4 million for federal income tax purposes that begin to expire in March 2016, and $34.2 million for California income tax purposes.  As Salon has been incurring tax losses, $2.3 million of California net operation loss carryforwards expired as of March 31, 2009, and if Salon were to incur a tax loss for the year ending March 31, 2010, an additional $7.1 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 $1.5 million during the year ended March 31, 2009 to $28.0 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 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.

Advertising revenues, derived from the sale of promotional space on its Website, comprised 76%, 72% and 70% of Salon’s revenues, respectively for the years ended March 31, 2009, 2008 and 2007.  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, 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.
 
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, 2009, Salon has $1.8 million advertising credits resulting from the transaction, valued at $1.2 million for financial reporting purposes.  Of the $1.8 million of advertising credits, approximately $0.8 million remain with Rainbow and approximately $1.0 million are with NBC.  Salon believes that it should be able to utilize all the credits with Rainbow and NBC before they expire on December 31, 2009. Salon is currently exploring ways of fully utilizing the credits, including supporting the launch of Open Salon, before they expire.  Salon expects to recover the full value of all the advertising credits through usage or settlement in cash, per the terms of the agreement, but there can be no absolute assurance as to any potential cash settlement or full utilization thereof.

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 in March 1999.  This asset is tested for impairment at least annually and has been found not to be impaired.
 
Results of Operations
 
Fiscal Years Ended March 31, 2009 and 2008

Net Revenues

Salon’s net revenue decreased 9% to $6.9 million in the year ended March 31, 2009 from $7.5 million in the year ended March 31, 2008.

Advertising revenues decreased 4% to $5.2 million for the year ended March 31, 2009 from $5.4 million for the year ended March 31, 2008, as overall sales declined in the third and fourth quarters, due to the economic recession.

Salon Premium subscription revenues decreased by 25% to $1.0 million for the year ended March 31, 2009 from $1.3 million for the year ended March 31, 2008.  The drop in Salon Premium revenues recognized for the year ended March 31, 2009 compared to the year ended March 31, 2008 is attributable to a substantial reduction in the number of new subscribers.  Salon acquired approximately 17,600 paid one-year subscriptions for the year ended March 31, 2009 compared to approximately 27,900 for the year ended March 31, 2008.  As a result, the number of paid subscribers decreased from approximately 33,900 at March 31, 2008 to approximately 23,450 at March 31, 2009.  As of June 1, 2009, Salon had approximately 22,000 paid subscribers. Another contributing factor to the decline in Premium subscriptions is Salon’s continued emphasis on increasing advertising income over promoting Premium subscriptions.

An important factor in increasing advertising revenues in future periods, including Salon’s 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 marketing campaigns with select Websites, the average number of unique monthly Website visitors for the year ended March 31, 2009 increased 10% to 4.8 million from the year ended March 31, 2008, and attained a record high for fiscal year 2009 of 6.3 million in October 2008.  Aiding the continued growth in unique visitors to Salon’s Website is the migration of readers to the Internet from print newspapers.

Salon has evaluated the balance between its subscription and advertising businesses and has shifted emphasis toward advertising.  Until recently, a Website visitor was given a choice of: (1) becoming a Salon Premium subscriber to avoid having to view advertisements on Salon’s Website or (2) viewing an advertisement to gain access to all of Salon’s content.  This strategy was found to impede access to Salon’s Website and its ability to generate advertising impressions.  During the quarter ended December 31, 2006, Salon changed its Site Pass model to automatically serve advertisements, enabling a Website visitor to gain a more seamless access to Salon’s content.  This change has produced an increase in the number of ad impressions that Salon can serve and improved Salon’s potential to generate an even greater amount of advertising revenues, offsetting a drop in Salon Premium subscriptions that traditionally were solicited from the Site Pass and the relatively small revenue they generate.
 

All other sources of revenue were $0.7 million for the year ended March 31, 2009 and $0.8 million for the year ended March 31, 2008.  Approximately half of this revenue was derived from the Well, an online discussion forum.

Production and Content Expenses
 
Production and content expenses during the year ended March 31, 2009 was $5.3 million versus $5.5 million for the year ended March 31, 2008, a decrease of $0.2 million.  The 4% decrease primarily reflects a decrease in staff and benefit costs.

Sales and Marketing Expenses

Sales and marketing expenses during the year ended March 31, 2009 were $2.9 million versus $2.8 million for the year ended March 31, 2008, an increase of $0.1 million.  The minimal increase results from lower usage of advertising credits being offset by higher ad sales salaries, commissions and travel expenses.

Information Technology Support Expenses
 
Information technology support expenses during the year ended March 31, 2009 remained flat from one year ago at $0.8 million.  The 13% decrease in salary costs was primarily due to the reduction in headcount and the capitalization of development costs for the Open Salon project.

General and Administrative Expenses
 
General and administrative expenses during the year ended March 31, 2009 remained flat from one year ago at $1.8 million.  The minimal increase was primarily attributed to stock-based compensation expenses from restricted stock vesting, as well as an increase in allowance for doubtful accounts.
 
Separation Expenses
 
Separation expenses were $0.6 million for the year ended March 31, 2009 and consisted of one-time charges of $0.6 million related to the resignation of Salon’s former CEO, including $0.3 million in non-cash stock-based compensation from the accelerated vesting of options.
 
Interest and Other Expenses
 
Interest and other expenses for the year ended March 31, 2009 consisted primarily of accrued interest costs of $194,000 for Salon’s outstanding debts and financial obligations, including a borrowing agreement, several convertible promissory notes, and computer equipment capital leases.
 
 
Fiscal Years Ended March 31, 2008 and 2007

Net Revenues

Salon’s net revenue decreased 3% to $7.5 million in the year ended March 31, 2008 from $7.7 million in the year ended March 31, 2007.

Advertising revenues remained flat from one year ago at $5.4 million for the year ended March 31, 2008, as sales trailed off in the fourth quarter, despite record audiences, due to sales force turnover.

Salon Premium subscription revenues decreased by 14% to $1.3 million for the year ended March 31, 2008 from $1.5 million for the year ended March 31, 2007.  The drop in Salon Premium revenues recognized for the year ended March 31, 2008 compared to the year ended March 31, 2007 is attributable to a substantial reduction in the number of new subscribers.  Salon acquired approximately 27,900 paid one-year subscriptions for the year ended March 31, 2008 compared to approximately 44,200 for the year ended March 31, 2007.  As a result, the number of paid subscribers decreased from approximately 47,200 at March 31, 2007 to approximately 33,900 at March 31, 2008.  As of June 1, 2008, Salon had approximately 32,000 paid subscribers.

An important factor in increasing advertising revenues in future periods, including Salon’s 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 a Website visitor.  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 marketing campaigns with select Websites, the average number of unique monthly Website visitors for the year ended March 31, 2008 increased 33% to 4.4 million from the year ended March 31, 2007, and attained a record high of 6.5 million in March 2008.  Aiding the continued growth in unique visitors to Salon’s Website is the migration of readers to the Internet from print newspapers.

Salon has evaluated the balance between its subscription and advertising businesses and has shifted emphasis toward advertising.  Until recently, a Website visitor was given a choice of: (1) becoming a Salon Premium subscriber to avoid having to view advertisements on Salon’s Website or (2) viewing an advertisement to gain access to all of Salon’s content.  This strategy was found to impede access to Salon’s Website and its ability to generate advertising impressions.  During the quarter ended December 31, 2006, Salon changed its Site Pass model to automatically serve advertisements, enabling a Website visitor to gain a more seamless access to Salon’s content.  This change has produced an increase in the number of ad impressions that Salon can serve and improved Salon’s potential to generate an even greater amount of advertising revenues, offsetting a drop in Salon Premium subscriptions that traditionally were solicited from the Site Pass and the relatively small revenue they generate.

All other sources of revenue were $0.8 million each for the years ended March 31, 2008 and March 31, 2007.  Approximately half of this revenue was derived from the Well, an online discussion forum.
 
 
Production and Content Expenses
 
Production and content expenses during the year ended March 31, 2008 were $5.5 million versus $5.2 million for the year ended March 31, 2007, an increase of $0.3 million.  The 6% increase primarily reflects an increase in staff and benefit costs.

Sales and Marketing Expenses

Sales and marketing expenses during the year ended March 31, 2008 were $2.8 million versus $2.0 million for the year ended March 31, 2007, an increase of $0.8 million.  The 40% increase primarily reflects utilizing an additional $0.7 million advertising credits this year compared to last year.
 
Information Technology Support Expenses
 
Information technology support expenses during the year ended March 31, 2008 remained flat from one year ago at $0.8 million.  The 29% increase in salary costs was offset by capitalized development costs for the Open Salon project.

General and Administrative Expenses
 
General and administrative expenses during the year ended March 31, 2008 were $1.8 million versus $1.3 million for the year ended March 31, 2007, an increase of $0.5 million.  The 38% increase is primarily attributable to increased staff salaries, stock-based compensation expenses, professional fees, severance costs and directors fees.
 
Preferred Deemed Dividend

Salon sold 292 shares of Series D-5 preferred stock on November 19, 2007.  All the shares sold are convertible to common stock at an effective price less than the fair market value of Salon’s common stock on the commitment date of the respective transaction.  Salon valued the beneficial conversion feature of these shares of preferred stock at $0.05 million.  As the shares of preferred stock sold were immediately convertible, Salon recorded a total of $0.05 million non-cash preferred deemed dividend for the year ended March 31, 2008, representing the value of the beneficial conversion feature of the shares issued.

During the year ended March 31, 2007, Salon sold 208 shares of Series D-3 preferred stock and 42 shares of Series D-4 preferred stock on July 27, 2006, 333 shares of Series D-4 preferred on September 21, 2006, and 42 shares of Series D-4 preferred stock and 125 shares of Series D-5 preferred stock on December 18, 2006 that were convertible to common stock at an effective price less than the fair market value of Salon’s common stock on the commitment date.  Salon valued the beneficial conversion feature of the preferred stock sold at $0.3 million.  As the shares of preferred stock were immediately convertible, for its year ended March 31, 2007, Salon recorded a $0.3 million non-cash preferred deemed dividend, representing the value of the beneficial conversion feature of the shares issued.
 

Liquidity and Capital Resources

Net cash used in operations was $2.4 million for the year ended March 31, 2009, $1.5 million for the year ended March 31, 2008, and $1.2 million for the year ended March 31, 2007.  The principal use of cash during the years ended March 31, 2009 and March 31, 2008 was to meet its operating deficit.  The principal use of cash during the year ended March 31, 2007 was to fund the $1.6 million net loss and reflects accounts receivable increasing by $0.5 million, less $0.8 million of non-cash charges.

Net cash used in investing activities for the years ended March 31, 2009 and March 31, 2008 was $0.3 million to fund the acquisition of computer equipment and internal software development.  Net cash used in investing activities was immaterial for the year ended March 31, 2007.

For the year ended March 31, 2009, net cash provided from financing activities was $2.2 million, which included $2.0 million in long-term borrowing and $0.2 million in short-term borrowing.  For the year ended March 31, 2008, net cash provided from financing activities was $1.9 million, which included $1.0 million in short-term borrowings, $0.5 million in long-term borrowing and $0.4 million from the issuance of 292 shares of preferred stock.   For the year ended March 31, 2007, net cash provided from financing activities was $1.7 million, which included $0.8 million from the exercise of warrants and $0.9 million from the issuance of 750 shares of preferred stock.

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.

As of March 31, 2009, Salon has four outstanding capital leases on computer equipment and does not anticipate entering into similar debt instruments during its year ending March 31, 2010.  The following summarizes Salon’s contractual obligations as of March 31, 2009, 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
   
Less than 1 Year
   
1 - 3 Years
   
3 - 5 Years
   
More than 5 Years
 
Operating leases
  $ 2,000     $ 254     $ 977     $ 769     $ -  
Capital leases
    67       33       34       -       -  
Capital lease interest
    12       9       3       -       -  
Short-term borrowing
    1,250       1,250       -       -       -  
Short-term borrowing interest
    78       78       -       -       -  
Convertible notes
    2,500       -       2,500       -       -  
Convertible notes interest
    767       326       441       -       -  
Total
  $ 6,674     $ 1,950     $ 3,955     $ 769     $ -  
 
 
Capital requirements

Salon has a history of significant losses and expects to incur a net loss from operations for its year ending March 31, 2010.  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, 2009, March 31, 2008 and March 31, 2007 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, related party advances, and from the exercise of warrants 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 $0.6 million in related party advances  received subsequent to year end, Salon estimates it will require at least  an additional $1.8 million in additional funding to meet operating needs.  If planned revenues are less than expected, the 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.
 
Recent Accounting Pronouncements
 
In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141 (revised 2007), “Business Combinations,” (“SFAS 141R”) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” an amendment of ARB No. 51 (“SFAS 160”.) SFAS 141R establishes principles and requirements during business combinations for how the acquirer:

 
a.
Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree,
 
b.
Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and
 
c.
Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

SFAS 160 sets parameters as to how to report noncontrolling interest in consolidated financial statements.  SFAS 141R and SFAS 160 are effective for fiscal years beginning after December 15, 2008. Salon believes that the adoption of SFAS 141R and SFAS 160 will not impact Salon’s results of operations, financial position, or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements,” (SFAS 157).  SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  Salon adopted SFAS 157 as of April 1, 2007.  It did not have a material impact on its results of operations, financial position or cash flows.
 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (SFAS 161).  SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and requires entities to provide enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and disclosures about credit-risk-related contingent features in derivative agreements.  This statement applies to all entities and all derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company is currently evaluating the impact of SFAS 161 and does not expect this statement to have a material impact on its financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (SFAS 162).  SFAS 162 establishes the GAAP hierarchy and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements.  SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.  We have not yet determined the impact, if any, that implementation of SFAS 162 will have on our results of operations and financial condition.

In May 2008, the FASB also issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60,” (SFAS 163).  SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation.  This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities.  Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises.  This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements.  SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.

In June 2008, the Financial Accounting Standards Board Emerging Issues Task Force (EITF) reached a consensus on EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.”  This EITF will be effective for fiscal years beginning after December 15, 2008.  We are currently evaluating the disclosure requirements under EITF 07-5.

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 at a rate of prime less 0.25% which will subject Salon to interest rate risk.  This line of credit is fully drawn.  Rates declined throughout most of fiscal 2009.  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.
 

ITEM 8.  Consolidated Financial Statements and Supplementary Data
 
 
Page
Consolidated Balance Sheets as of March 31, 2009 and 2008
35
 
 
Consolidated Statements of Operations for the years ended March 31, 2009, 2008, and 2007
36
 
 
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended March 31, 2009, 2008, and 2007
37
 
 
Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2008, and 2007
38
 
 
Notes to Consolidated Financial Statements
39
 
 
Selected Quarterly Financial Data (unaudited)
63
 
 
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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended March 31, 2009.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the of the three years in the period ended March 31, 2009, 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 $101.0 million at March 31, 2009. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also 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 LLP
   
 
 
San Francisco, California
June 25, 2009
   
 
 

SALON MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
   
March 31,
 
   
2009
   
2008
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 371     $ 818  
Accounts receivable, net
    886       864  
Prepaid advertising rights
    1,225       -  
Prepaid expenses and other current assets
    53       185  
Total current assets
    2,535       1,867  
                 
Property and equipment, net
    445       412  
Prepaid advertising rights
    -       2,131  
Other assets
    150       6  
Goodwill
    200       200  
Total assets
  $ 3,330     $ 4,616  
Liabilities and stockholders’ (Deficit) Equity
               
Current liabilities:
               
Short-term borrowings
  $ 1,250     $ 1,000  
Accounts payable and accrued liabilities
    1,324       1,294  
Deferred revenue
    470       705  
Total current liabilities
    3,044       2,999  
                 
Long-term liabilities:
               
Convertible notes payable
    2,500       500  
Other long-term liabilities
    172       44  
Capital lease,  less current portion
    34       56  
Total liabilities
    5,750       3,599  
Commitments and contingencies (Note 9)
               
                 
Stockholders’ (deficit) equity:
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 9,467 shares
               
issued and outstanding at March 31, 2009 and 9,475 shares issued and
               
outstanding at March 31, 2008  (liquidation value of
               
$24,246 at March 31, 2009 and $23,498 at March 31, 2008)
    -       -  
Common stock, $0.001 par value, 30,000,000 shares authorized, 2,021,276
               
shares issued and outstanding at March 31, 2009 and 1,940,172 shares
               
issued and outstanding at March 31, 2008
    2       2  
Additional paid-in capital
    98,564       97,302  
Accumulated deficit
    (100,986 )     (96,287 )
Total stockholders’ (deficit) equity
    (2,420 )     1,017  
Total liabilities and stockholders’ (deficit) equity
  $ 3,330     $ 4,616  
 
See accompanying notes to consolidated financial statements.

SALON MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
   
Year Ended March 31,
 
   
2009
   
2008
   
2007
 
                   
Net revenues
  $ 6,874     $ 7,513     $ 7,748  
                         
Operating expenses:
                       
Production and content
    5,314       5,544       5,223  
Sales and marketing
    2,925       2,756       1,978  
Information technology support
    763       829       828  
General and administrative
    1,746       1,756       1,286  
Separation expenses
    631       -       -  
Total operating expenses
    11,379       10,885       9,315  
                         
Loss from operations
    (4,505 )     (3,372 )     (1,567 )
                         
Interest and other income (expense)
    (194 )     (37 )     1  
Net loss
    (4,699 )     (3,409 )     (1,566 )
Preferred deemed dividend
    -       (54 )     (295 )
Net loss attributable to common stockholders
  $ (4,699 )   $ (3,463 )   $ (1,861 )
                         
Basic and diluted net loss per share attributable to
                       
common stockholders
  $ (2.34 )   $ (1.79 )   $ (1.10 )
                         
Weighted average shares used in computing basic
                       
and diluted net loss per share attributable
                       
to common stockholders
    2,008       1,940       1,692  
 
See accompanying notes to consolidated financial statements.


SALON MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(in thousands, except Preferred Stock Shares)

                           
Additional
               
Total
 
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Unearned
   
Accumulated
   
Stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Compensation
   
Deficit
   
Equity
 
Balance, March 31, 2006
    8,558     $ -       957     $ 1     $ 94,619     $ (40 )   $ (90,963 )   $ 3,617  
                                                                 
Shares issued under employee stock plans
    -       -       2       -       6       -       -       6  
Shares issued under warrant agreements
    -       -       730       1       778       -       -       779  
Preferred stock converted to common stock
    (125 )     -       251       -       -       -       -       -  
Share-based compensation
    -       -       -       -       190       40       -       230  
Series D convertible preferred stock and
                                                               
common stock warrants issued for cash
    750       -       -       -       900       -       -       900  
Preferred deemed dividend on issuance of
                                                               
Series D Convertible preferred stock
    -       -       -       -       295       -       (295 )     -  
Net loss
    -       -       -       -       -       -       (1,566 )     (1,566 )
Balance, March 31, 2007
    9,183       -       1,940       2       96,788       -       (92,824 )     3,966  
                                                                 
Shares issued under employee stock plans
    -       -       -       -       1       -       -       1  
Series D convertible preferred stock and
                                                               
common stock warrants issued for cash
    292       -       -       -       350       -       -       350  
Preferred deemed dividend on issuance of
                                                               
Series D Convertible preferred stock
    -       -       -       -       54       -       (54 )     -  
Share-based compensation
    -       -       -       -       109       -       -       109  
Net loss
    -       -       -       -       -       -       (3,409 )     (3,409 )
Balance, March 31, 2008
    9,475       -       1,940       2       97,302       -       (96,287 )     1,017  
                                                                 
Shares issued under employee stock plans
    -       -       63       -       1       -       -       1  
Preferred stock converted to common stock
    (8 )     -       18       -       -       -       -       -  
Share-based compensation
    -       -       -       -       1,261       -       -       1,261  
Net loss
    -       -       -       -       -       -       (4,699 )     (4,699 )
Balance, March 31, 2009
    9,467     $ -       2,021     $ 2     $ 98,564     $ -     $ (100,986 )   $ (2,420 )


See accompanying notes to consolidated financial statements.

 
SALON MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
Year Ended March 31,
 
   
2009
   
2008
   
2007
 
Cash flows from operating activities:
                 
Net loss
  $ (4,699 )   $ (3,409 )   $ (1,566 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Loss from retirement of assets, net
    4       -       -  
Share-based compensation
    1,025       313       230  
Depreciation and amortization
    210       102       89  
Prepaid advertising rights usage
    906       1,136       451  
Changes in assets and liabilities:
                       
Accounts receivable
    (22 )     143       (505 )
Prepaid expenses, other current assets and other assets
    (12 )     (4 )     101  
Accounts payable, accrued liabilities and other long-term liabilities
    410       262       (21 )
Deferred revenue
    (235 )     (87 )     (28 )
Net cash used in operating activities
    (2,413 )     (1,544 )     (1,249 )
Cash flows from investing activities:
                       
Purchase of property and equipment
    (247 )     (313 )     (48 )
Net cash used in investing activities
    (247 )     (313 )     (48 )
Cash flows from financing activities:
                       
Proceeds from short-term borrowings
    250       1,000       -  
Proceeds from long-term borrowings
    2,000       500       -  
Capital lease payments
    (38 )     (5 )     -  
Proceeds from issuance of preferred stock, net
    -       350       900  
Proceeds from issuance of common stock, net
    1       1       785  
Net cash provided by financing activities
    2,213       1,846       1,685  
Net (decrease) increase in cash and cash equivalents
    (447 )     (11 )     388  
Cash and cash equivalents at beginning of year
    818       829       441  
Cash and cash equivalents at end of year
  $ 371     $ 818     $ 829  
                         
Amount paid for interest
  $ 12     $ 3     $ -  
Amount paid for taxes
    -       -       -  
Supplemental schedule of non-cash investing and financing activities:
                       
Preferred deemed dividend
  $ -     $ 54     $ 295  
Property and equipment purchased with capital lease
  $ 12     $ 86     $ -  
Stock compensation liability
  $ -     $ 204     $ -  
 
See accompanying notes to consolidated financial statements.


 
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 two online communities, 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, 2009 of $100,986.  In addition, Salon expects to incur a net loss from operations for its year ending March 31, 2010.  During the last three years, Salon has relied on cash from the issuance of bank debt, convertible notes and preferred stock and from the exercise of warrants 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 $0.6 million in related party advances  received subsequent to year end, Salon estimates it will require at least  an additional $1.8 million in additional funding to meet operating needs.  If planned revenues are less than expected, the 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.

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 Statement of Financial Accounting Standard (SFAS) No. 131 “Disclosures about Segments of Enterprises and Related Information.”  Based upon definitions contained within SFAS No. 131, management has determined that Salon operates in one segment.  In addition, virtually all revenues are in United States, and all of the long-lived assets are located within the United States.
 
 
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.
 
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.
 
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.  Salon has capitalized $95 of expenditures through March 31, 2009, which is included with property and equipment.
 
Prepaid advertising rights
 
Prepaid advertising rights are carried at cost less accumulated amortization, with amortization commensurate to the usage of such rights, and expire on December 31, 2009.  In the event that the rights are not fully utilized prior to their expiration, Salon has the right to receive cash for the unused value, but there can be no absolute assurance as to any potential cash settlement or full utilization thereof.
 
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.
 
Goodwill
 
Goodwill is not amortized, but instead is tested for impairment at least annually during the quarter ending March 31, or earlier as warranted by events or changes in circumstances.
 

SALON MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
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.
 
 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 the subscription period.  Salon Premium subscriptions are generally for one month or one year periods.  Well subscriptions are generally only for one month.

 Advertising costs

 Salon expenses advertising costs as they are incurred.  Advertising expense was $905, $1,136, and $448, for the fiscal years ended March 31, 2009, 2008, and 2007.

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, 2009, 2008 and 2007 and comprehensive loss for those periods.

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

The Company accounts for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 123 (revised 2004,) “Share Based Payment” (SFAS 123R).  Under the fair value provisions of this statement, 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 under SFAS 123R.  Salon recognizes compensation cost related to options granted subsequent to the adoption of SFAS 123R on a straight-line basis over the applicable vesting period.

 Stock based compensation expense recognized under SFAS 123R for the years ended March 31, 2009, 2008 and 2007 was $1,025, $313 and $230, which consisted of stock-based compensation expense related to stock options and restricted stock.  See Note 7: “Employee Stock Option Plan” to the financial statements for additional information.

As of March 31, 2009, the aggregate stock compensation remaining to be amortized to expenses was $668. Salon expects this stock compensation balance to be amortized as follows: $334 during fiscal 2010; $205 during fiscal 2011; $103 during fiscal 2012; and $26 during fiscal 2013.  The expected amortization reflects only outstanding stock awards as of March 31, 2009.

No amounts were recorded relating to excess tax benefits from the exercise of stock-based compensation awards during the year ended March 31, 2009, and as a result there were no differences in net cash used in operating and financing activities due to the implementation of SFAS 123R.
 
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,
   
2009
 
2008
 
2007
Risk-free interest rates
 
1.30 – 3.09%
 
2.16 – 5.00%
 
4.47 – 4.97%
Expected lives (in years)
 
4
 
4
 
4
Expected volatility
 
92 – 163 %
 
94 – 116 %
 
107 - 129 %
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.

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

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,
 
   
2009
   
2008
   
2007
 
Numerator:
                 
Net loss attributable to common stockholders
  $ (4,699 )   $ (3,463 )   $ (1,861 )
                         
Denominator:
                       
Weighted average shares used in
                       
computing basic and diluted net loss per
                       
share attributable to common stockholders
    2,008,000       1,940,000       1,692,000  
                         
Basic and diluted net loss per share attributable
                       
to common stockholders
  $ (2.34 )   $ (1.79 )   $ (1.10 )
                         
Antidilutive securities including options,
                       
warrants and convertible notes and preferred
                       
stock not included in loss per share calculation
    15,518,000       12,678,000       11,868,000  
 
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.

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.



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

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.  Three customers accounted for 10% or more of the trade accounts receivable at March 31, 2009. No customer accounted for 10% or more of the trade accounts receivable at March 31, 2008.   No customer accounted for 10% or more of total revenue for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.
 
Recent accounting pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141 (revised 2007), “Business Combinations,” (“SFAS 141R”) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” an amendment of ARB No. 51 (“SFAS 160”.) SFAS 141R establishes principles and requirements during business combinations for how the acquirer:

 
a.
Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree,
 
b.
Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and
 
c.
Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

SFAS 160 sets parameters as to how to report noncontrolling interest in consolidated financial statements.  SFAS 141R and SFAS 160 are effective for fiscal years beginning after December 15, 2008. Salon believes that the adoption of SFAS 141R and SFAS 160 will not impact Salon’s results of operations, financial position, or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements,” (“SFAS 157”).  SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  Salon, adopted SFAS 157 as of April 1, 2007. It did not have a material impact on its results of operations, financial position, or cash flows.


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

In March 2008, the FASB issued Statement of Financial Accounting Standard No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS 161”).  SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and requires entities to provide enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and disclosures about credit-risk-related contingent features in derivative agreements.  This statement applies to all entities and all derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company is currently evaluating the impact of SFAS 161 and does not expect this statement to have a material impact on its financial position and results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standard No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS 162”).  SFAS 162 establishes the GAAP hierarchy and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements.  SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.  We have not yet determined the impact, if any, that implementation of SFAS 162 will have on our results of operations and financial condition.

In May 2008, the FASB also issued Statement of Financial Accounting Standard No.  163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS 163”).  SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation.  This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities.  Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises.  This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements.  SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.

In June 2008, the Financial Accounting Standards Board Emerging Issues Task Force (EITF) reached a consensus on EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.”  This EITF will be effective for fiscal years beginning after December 15, 2008.  We are currently evaluating the disclosure requirements under EITF 07-5.

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.


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

Note 3.  Borrowing Agreements

In May 2007, Salon entered into a borrowing agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1,000 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, 2009 and 2008.  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, 2009, accrued interest on bank debt totals $79.  As of March 31, 2009 and 2008, the weighted average interest rate on the Company’s short-term borrowings was 5% and 7%, respectively.
 
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) $1.68 or (2) the subsequent closing price if the holder participated in a subsequent closing.

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.  As of March 31, 2009, aggregate accrued interest on convertible debt totals $138.

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, 2009,  total aggregate related party interest expense was $106 and outstanding debt was $2,106.