10-K 1 slnm20170331_10k.htm FORM 10-K slnm20170331_10k.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, 2017

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.)

 

870 Market Street

San Francisco, CA 94102

(Address of principal executive offices)

(415) 870-7566

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value

(Title of Class)

 

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

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “and emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐     Accelerated filer ☐    Non-accelerated filer ☐    Smaller reporting company ☑

Emerging Growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 $2,954,000 based on the closing sale price of the registrant’s Common Stock on June 1, 2017. Shares of Common Stock held by each then current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to have been affiliates of Salon Media Group, Inc. This determination of affiliate status is not a conclusive determination for other purposes.

 

The number of outstanding shares of the Registrant's Common Stock, par value $0.001 per share, on June 1, 2017 was 150,000,000 shares.

 



 

 

 

 


FORM 10-K

SALON MEDIA GROUP, INC.

INDEX


 

PART I

 

Page

Number

     

ITEM 1.

Business

3

     

ITEM 1A.

Risk Factors

12

     

ITEM 1B.

Unresolved Staff Comments

21

     

ITEM 2.

Properties

21

     

ITEM 3.

Legal Proceedings

21

     

ITEM 4.

Mine Safety Disclosures

21

     

PART II

 

 

     

ITEM 5.

Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity Securities

21

     

ITEM 6.

Selected Financial Data

23

     

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

     

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

32

     

ITEM 8.

Financial Statements and Supplementary Data

33

     

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

55

     

ITEM 9A.

Controls and Procedures

55

     

ITEM 9B.

Other Information

56

     

PART III

 

 

     

ITEM 10.

Directors, Executive Officers and Corporate Governance

57

     

ITEM 11.

Executive Compensation

61

     

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

69

     

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

71

     

ITEM 14.

Principal Accountant Fees and Services

73

   

 

PART IV

 

 

     

ITEM 15.

Exhibits, Financial Statement Schedules

74

     

SIGNATURES

 

77

 

 
2

 

 

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, social media and other non-web opportunities and revenue sources. Although Salon Media Group, Inc. (“Salon”, the “Company”, “Our” or “We”) 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 except as required by law.

 

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 in Risk Factors. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are elsewhere in this Annual Report. In this Annual 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

 

The Salon Media Group is a technology-based advertising media business that wholly owns and operates an online news website called salon.com (“Salon.com”) that is committed to fearless journalism.  Our award-winning journalism combines original investigative stories and provocative personal essays along with quick-take commentary, articles, podcasts, and original video about politics, culture, entertainment, sustainability, innovation, technology and business.

 

Salon was originally incorporated in July 1995 in the State of California and reincorporated in Delaware in June 1999. In 1999, we had our initial public offering. In 2001, we adopted the name Salon Media Group, Inc. Our common stock is traded in the over-the-counter market and our stock symbol is SLNM.PK.

 

Highlights from Fiscal Year 2017

 

During the fiscal year ended March 31, 2017 (“fiscal year 2017”), we continued to execute our business strategy (see “Salon Strategy” below) to refine and broaden our editorial products in order to attract a premier audience that should attract more advertising, and increase our revenues. Our focus on high quality editorial attracted a continued robust audience to our Website in fiscal year 2017. However, we faced increased competition from both new and larger websites for online advertising campaigns, while industry trends continued a shift toward increased use of agency and software-based approaches to buying online advertising. As a result, we have re-focused our advertising sales to rely on the rapidly growing programmatic advertising business where we directly sell audience packages based on real time advertising demand as well as engaging third-party agencies to sell ads on our Website through programmatic advertising open marketplaces, and placed less emphasis on a traditional media sales effort. The highlights of our fiscal year 2017 are listed below:

 

 

In the fiscal year ended March 31, 2017, our financial results continued to be impacted by industry trends that have prevailed over the past year; direct advertising revenue continued to decline and software-based “programmatic” advertising sales and video advertising products have dominated the digital advertising landscape. As a result of the continued decline in direct advertising, our total revenue in the fiscal year 2017 decreased 34% to $4.6 million. Following the market trend, 84% of our advertising revenue in fiscal year 2017 was generated by programmatic selling, and 16% by our direct sales team which focused mostly on high impact and higher cost-per-thousand-impression (“CPM”) custom video advertising. We have been making changes to our infrastructure to capture the greater programmatic opportunity for our display and video advertising inventory, and will continue to focus our efforts to allow better management of our advertising inventory and targeting for our advertisers. This has allowed us to improve our CPMs from our programmatic advertising by 25% in the March 2017 quarter as compared to the March 2016 quarter. However, the higher programmatic CPMs were offset by a decline in traffic from the same period last year, which led to a smaller inventory of ad products to sell, and a decline in revenues.

 

 
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Net loss for the fiscal year 2017 was $10.4 million, a 432% increase from $2.0 million in the fiscal year ended March 31, 2016 (“fiscal year 2016.”) The increase in net loss was mainly attributed to a $5.6 million increase in non-cash interest expense from the prior year and an approximate $0.9 million in non-cash preferred deemed dividends, both recorded for the beneficial conversion feature of capital raising transactions during the fiscal year 2017. Operating expenses of $8.5 million for the fiscal year 2017 decreased 4% from the prior year.

 

 

We have continued to roll out our strategy to produce original video content focused on news, politics, and entertainment under the banner of “Salon Talks.” Our goal is to add high quality diversified content to our Website, and to attract premium video advertising that commands higher CPMs as compared to display advertising. We achieved nearly 30 million video views in the December 2016 quarter, and about 15 million in the March 2017 quarter, a short-term decline as we shifted our video technology to allow better monetization of these video view with high CPM pre-roll advertising. As a result of our efforts, we received positive critical acclaim as we were selected as a finalist for Magazine Industry Newsletter’s (“min”) 2016 Best of the Web Awards in the category of Scripted/Unscripted Video or Series for our Salon Talk video series, and again in min’s 2017 Magazine Media Awards for Video Excellence - original video.

 

 

Our focus on growing traffic has shifted from volume to quality, in order to maximize our ability to monetize our page views with higher CPM video and display advertising. Average monthly unique visitors to the Salon.com Website during the fiscal year 2017 was 12.7 million, compared to the average number of monthly users in fiscal year 2016 of 16.6 million, which is a decrease of 23%. We attribute the decline primarily to the changes in the algorithms used by Facebook to promote news content, which led to lower referral traffic from Facebook. We also had a decline in referral traffic from major sites like Yahoo and Twitter, and implemented software to remove non-human traffic, which also contributed to the decline. The traffic low point during the fiscal year 2017 was the month of September 2016, when the site attracted 9.6 million unique visitors and 28.6 million page views. Since September 2016, we have returned to growth, with Google referrals in the six months to March 2017 increasing 21%, Facebook referrals increasing 17% and unique visitors increasing 8%.

 

 

We continued collective bargaining with the Writers Guild of America, East, Inc. (“WGAE”) during the year. As we do not yet have an agreement with our union employees, we remain uncertain how it will impact our financial status, or if it will have a negative impact on our ability to obtain additional financing, if necessary.

 

 

 
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We were proud to be honored for our excellence in journalism during the fiscal year. In April 2017, Salon was named an honoree for the 2016 Webby Awards for its Online Film & Video, Video Remixes and Mashups category, for our Donald Trump/Big Lebowski mashup. We received further positive critical recognition for our video as we were selected as a finalist for min’s 2016 Best of the Web Awards in the category of scripted/unscripted video or series for our Salon Talks video series, and again in min’s 2017 Magazine Media Awards for Video Excellence - original video. Life essay contributor Susan Shapiro won an American Society for Journalists and Authors award for her 2016 Yom Kippur essay, “The Foregiveness Tour.” And, we are proud that our Editor-at-Large, D. Watkins has collaborated on the new season of the podcast “Undisclosed” which dives into the case of Freddie Gray and the Baltimore police.

 

 

Mobile users accounted for 60% of all users as of March 2017, which is down slightly from 62% at March 2016. We continue to have a company-wide focus on our users’ mobile needs, especially quick and easy access to fast-loading content optimized for better readability on smaller screens. We also have increased focus on monetization of mobile traffic through implementation of native and other mobile-optimized advertising.

 

 

Social media continues to be a major source of referral traffic, at approximately 27.6% of Website visitors as of March 31, 2017, and a significant focus across the Company. We make regular updates to the Website to optimize content to be shared on social media with a special focus on our mobile platforms. In March 2017, we had approximately 965,000 Facebook “likes,” and 953,000 Twitter followers.

 

 

We restructured our advertising team during the fiscal year to focus our efforts on programmatic advertising, while continuing to pursue on a selective basis high value direct campaigns that incorporate custom creative applications, pre-roll video advertising and seamless video integrations. As a result of changes we have made to the composition of our sales team, we have added expertise in programmatic marketplaces that should allow us to optimize the sale of our advertising inventory.

 

 

We continually work toward leaner, more efficient technological systems through automation, improved architecture and adoption of emerging best practices. Throughout the year, we began a process to redesign our Website, made technological updates to our browser, tablet, mobile, and watch platforms with a focus on video, mobile and advertising and ad blocking.

 

Salon Strategy

 

In May 2016, we adopted a new strategy alongside the appointment of Jordan Hoffner as Chief Executive Officer (“CEO”). Our strategy focuses on improving monetization of our user base by innovating our ad technology in order to better match our highly educated and affluent users with advertisers. In the past few years, we have successfully attracted a sizeable user base, which in fiscal year 2017 averaged 12.7 million users per month who consumed an average of 35.5 million page views per month. Our number of page views translates to our number of viewer impressions that can be sold to our advertisers, and offers opportunities to develop business relationships with companies that want access to our attractive user base. We currently sell our impressions to advertisers programmatically based on Run of Site private marketplaces, or at times, based on editorial content that falls in a particular vertical such as “Movies” or “Innovation.” The CPM is driven by market demand for our content, and the general demographics of our audience. Going forward, the CPM that we can charge our advertisers will increasingly be based on our ability to deliver highly targeted and defined users to our advertiser, and we expect to achieve higher CPMs as we can deliver more detailed information about our users.

 

Our strategy is predicated on the following core principles: (1) create high quality diversified content that meets our users’ and advertisers’ interests; (2) hire the best possible talent to create centers of excellence and (3) innovate to bring great products to our users and advertisers. Our focus on these core principles underpins our goal to continue to grow our user base, and to develop new strategies around Website monetization that will provide opportunity for future growth.

 

 

 
5

 

 

In fiscal year 2018, our goal is to continue our mission of creating fearless journalism and making the conversation smarter, while anticipating continued shifts in the online advertising market to better monetize our Website. To reach our goals, and to achieve profitability, we will push ahead in the following areas:

 

 

Develop a broader mix of provocative content in addition to the core areas of news and politics, building off the original definition of a “salon” as a center of intellectual discussion

 

Deepen our editorial coverage by adopting a broader array of story-telling methods, such as continuing to expand our video content, audio podcasts and other visual products, with an unwavering commitment to high quality content and fearless journalism

 

Integrate into our advertising approach a deeper focus on new advertising products that match our high-quality user with appropriate advertisers using data and innovative ad products

 

Develop a Broader Mix of Provocative Content

 

We target an educated, culturally engaged audience interested in original thinking and smart commentary. We pursue that audience by featuring a diverse array of voices and perspectives, and covering a wide range of topics including News, Politics, Business, Technology, Life, Entertainment, Sustainability and Innovation. Twenty-four hours a day, 365 days per year, Salon invites users to immerse themselves in thought-provoking content that impassions and empowers them to be the intellectual and cultural leaders of our time.

 

In fiscal year 2017, we continued to expand our breaking news coverage with a focus on the 2016 Presidential Election. Using data analytics in real-time, we can assess where our users’ interests are shifting, and respond by determining content, site layout and structure to best suit their needs in the moment. In fiscal year 2018, we intend to respond to users’ interests by hosting more dynamic content, such as increased numbers of video, slideshows and images, as well as by expanding further into content areas such as innovation and lifestyle. We will expand into new content areas by reallocating internal resources, as well as continue to have content partnerships to diversify our content offerings across various verticals.

 

As we continue to focus our editorial to our users’ needs, we seek to grow unique visitors to our Website since the resulting page views serve as a platform for advertising impressions, a key driver of our revenue growth.

 

Develop Innovative, User-Oriented Products

 

We continually need fresh content and new ideas to attract readers to our Website. We plan to continue to focus on developing our audience through a combination of editorial enhancements, increased dynamic content and new user-focused functionalities and products. We are continually evaluating the needs of our users and trying to adjust and create new solutions to meet their needs.  

 

Video is popular with our users, and as a result in fiscal year 2017 we continued to develop more Salon-branded video content. In fiscal year 2018, in order to achieve widespread video integration, we have expanded our video editorial team, and will trial partnerships to gain access to premium video content, and implement new technology to improve viewability. Video is in high demand with our advertisers. In fiscal year 2017, we took initial steps to monetize our original video with pre-roll programmatic and direct advertising campaigns. We plan to expand the monetization of video through improved technology, wider advertising demand sources, and premium video ad products.

 

 

 
6

 

 

Web browsers and applications on mobile platforms are a significant area of audience growth and ad revenue in the online news industry, in particular as social media users have increasingly adopted usage on their mobile phones. Our users continue to move to mobile at record rates, and as of March 2017, mobile browsers accounted for 60%, of our unique visitors. Social media has also become a key driver of users for us, consistent with trends for other online news sites. The importance in Website traffic from social media was underpinned by the significant increases in the number of Facebook “likes” to more than 965,000, and Twitter followers to 953,000. Although social media traffic can be variable due to changes in their approach to news content, the large number of “likes” and “followers” ensures that Salon content is pushed out to a large audience of readers on a daily basis. In fiscal year 2018, we plan to continue our efforts to build our audience on social media, and place more emphasis on other emerging platforms, through a continuation of the strategies we have employed in the past two years.

 

In fiscal year 2018, we are working on a Website and advertising architecture redesign aimed at improving the user experience. As part of this effort, we will continue exploring new products that meet the immediate needs of our mobile users, building out new advertising products for video and mobile and improving our security and scaling capabilities.

 

A Deeper Focus on New Advertising Products that Match our User with Appropriate Advertisers

 

In order to expand our base of advertisers and increase our advertising revenues, we plan to integrate into our advertising approach a deeper focus on new advertising products that match our high-quality user with appropriate advertisers using data and innovative ad products. This includes adding software and data capabilities to understand our users better and match their interests with advertisers more closely. Once these mechanisms are fully in place, we plan to leverage our capabilities beyond Salon.com.

 

Path to Profitability

 

Our operating losses in fiscal year 2017 increased compared to fiscal year 2016 despite continued attempts to make adjustments to our revenue model in order to increase advertising revenues. Due to an industry shift in advertising dollars toward programmatic and video advertising, and a decline in traffic during the year, our direct advertising declined 71% and programmatic advertising decreased 26% leading to total advertising revenues decreasing 41% in fiscal year 2017. At the same time, our production costs remained constant from a year ago, which resulted in higher losses.

 

Entering fiscal year 2018, we plan to build off of the progress we made in increasing CPMs in our advertising through programmatic marketplaces, and take advantage of an active news cycle to increase our page views and video views. We will also further increase our popular video products, to optimize the higher CPMs achieved by pre-roll advertising. Furthermore, in April 2017, we took steps to reduce further our expense base and shift resources to content that will generate higher CPM advertising. Given these changes, we anticipate that fiscal year 2018 will better align production costs with our revenue potential in an effort to reach profitability.

 

 

OUR BUSINESS

 

We target an educated, culturally engaged audience interested in original thinking and reporting on the day’s big stories. We pursue that audience by featuring a diverse array of voices and perspectives, and covering a wide range of topics including politics, race, religion, culture, entertainment, sustainability, innovation, technology and business.

 

 
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Salon.com Website

 

Video

 

Launched in July 2016, video is our fastest growing product, with more than 200 videos produced for our Salon Talks interview series since its launch. Airing first on Facebook Live, the interviews are cut into approximately 2 minute highlights that are shown on the Salon website. Interview highlights include TV personality and chef Anthony Bourdain, satirist PJ O’Rourke, academy award winner Jeffrey Rush, musician David Byrne among others.

News

 

Breaking news fast – and what it means. Whether it's the U.S. presidential election, Black Lives Matters, the firing of FBI Director James Comey, or analysis about Supreme Court nominations, we surround stories as they happen – with dedicated writers, extensive videos, podcasts and smart columnists who put important news into immediate context.

Politics

 

Fearless, independent and sophisticated coverage of the most important stories from Washington and around the world, delivered by respected veterans like Amanda Marcotte and D. Watkins, and the brightest analysts on the Web (Heather Digby Parton, Bob Cesca, Lucian Truscott III, and more.) Our political coverage starts early in the morning and is updated all day with new pieces, all designed to drive the conversation and keep our readers ahead of it.

Entertainment

 

Our writers and critics are just as obsessed with the latest offerings on Netflix, Amazon and HBO, and the coolest and hottest new books and movies as our readers are. Our entertainment coverage is edgy, exhaustive, fast as we mine the intersections between culture and politics.  Our writers include Andrew O’Hehir (film), Melanie McFarland (TV), and Mary Beth Williams and Gabriel Bell (pop culture).

Life

 

Our popular life essays go in-depth on the most complicated and deeply personal topics sex, parenting, family, relationships, religion, work and so many more and are written both by famous writers as well as the most daring and interesting new voices. A recent Life story titled “The Craziest OKCupid Date Ever” was recently optioned as a major motion picture.

Innovation

 

Our innovation section combines the personal and political issues of climate change, the future of energy and transportation, organic food, and politicization of science all receive authoritative coverage. Innovation is all about thinking differently and cultivating those ideas to make progress. This is where users find the latest big ideas, both inside and outside the world of technology, and other amazing stories designed to make readers go wow.

Podcasts

 

Launched in 2017, our podcast series offers a new platform for our journalists to tell stories, and our users to get access to Salon coverage on audio. Anchored by the weekly “Chauncey De Vega Show,” twice weekly “Bob Cesca Show,” and the twice monthly “Salon Mix,” these podcasts explore a range of topics from RuPaul and the power of drag, to Cuban tourism, the Sioux tribe defending Standing Rock, and beyond.

 

 
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Revenue Sources

 

Advertising is our primary source of revenue. Internet advertising revenues accounted for 78% of revenues in fiscal year 2017. Revenue from referring users to third party websites primarily accounted for the remainder 22% of revenues in fiscal year 2017.

 

Internet advertising is affected by broad economic conditions, like other forms of advertising, but overall it has continued its upward trend even through the Great Recession. According to the 2016 IAB Internet Advertising Revenue Report conducted by PricewaterhouseCoopers, the compound annual growth rate (“CAGR”) over the past ten years for Internet advertising in the United States was 16%, which has significantly outpaced the U.S. current dollar GDP growth of 3% over the same period. Furthermore, since 2012, Internet advertising growth was fueled by an 87% CAGR in mobile, compared to a 6% growth in non-mobile revenues. Internet advertising revenue in the United States totaled $72.5 billion in 2016, a 21.8% increase from $59.6 billion 2015. In the quarter ended December 2016, the sources for advertising revenues were non-mobile search (22%), mobile (including search, display and video formats) (53%), non-mobile display advertising (19%) and other (including classifieds, lead generation and other unspecified) (6%). Notably, mobile advertising grew 68% in 2016, jumping to the largest ad format. Within the non-mobile display advertising segment, banner ads accounted for 12% and digital video accounted for 7% of advertising revenues. Also, according to an eMarketer report from April 2017, U.S. based programmatic advertising spending will be over $32.5 billion, a 27% increase from $25.5 billion in 2016.

 

The bulk of online advertising remains concentrated in a relatively small number of dominant Internet companies, with the top ten companies accounting for 73% of online advertising in the December 2016 quarter, and another 10% captured by the next tier of companies ranked 11th through 25th. Therefore, we believe our market opportunity falls roughly at 17% of the online advertising market, or $12.3 billion.

 

The primary factor in our ability to increase our advertising revenues in future periods is growth in our audience. Attracting more unique visitors to our Website is important because these users generate additional page views, and each page view becomes a potential platform for advertisements. Advertising comprises video, banners, rich media, and other interactive ads across our desktop, tablet, mobile browser and apps platforms. Advertisers pay for advertising based on a CPM, and different platforms attract different CPMs. CPMs for mobile have been less than for desktop. Videos and sponsored content on mobile devices continue to grow in popularity and can demand a higher CPM. We believe that continuing to add videos and sponsored content to our mobile platform and improving and optimizing the platform’s design will help increase revenues from our mobile platform. 

 

Overall, monthly unique visitors to our Website have grown from 6.3 million in March 31, 2011 to a peak of 19.6 million in June 30, 2015, and has reverted to 10.4 million in March 31, 2017. Our full year average monthly unique visitors were 5.4 million, 6.4 million, 10.6 million, 11.2 million, 16.9 million, 16.6 million and 12.7 million in fiscal years 2011, 2012, 2013, 2014, 2015, 2016 and 2017, respectively. These fluctuations overall reflect changes in content areas on our Website over this period, improved search engine optimization, and adjustments in social media algorithms. The table below reflects unique monthly visitors to our Website from fiscal year 2011 through fiscal year 2017. Unique visitors in the period from March 2011 to May 2013 included traffic to an affiliated website that has since been shut down. 

 

 
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Source: Google Analytics

 

Sales and Marketing

 

As a news and lifestyle Website that competes against much larger websites, we have sought to distinguish ourselves in the marketplace by offering customized, innovative and integrated advertising products that appeal to users and seamlessly and organically incorporate our advertising clients and their objectives into our Website. We work with our programmatic advertising partners to launch advertisements that match our high-quality audience, and innovate with new products as they become available.

 

Our sales and marketing office is located in both San Francisco and New York, with three advertising sales and operations employees who actively solicit orders as of March 31, 2017.

 

Product Development

 

We recognize that users come to the site for online news, reporting, opinion and an engaging, active community of writers, users and commenters. Users engage with the site through desktop computers, mobile phones and social networking platforms and other referral partners. To meet users’ rapidly evolving online media needs, we are continually innovating and developing our Website, mobile Website and social media presence – by adding new features, design updates and technologies that improve the user experience, speed and search engine optimization. We have developed an internal culture of innovation where the Edit, Technology and Sales teams collaborate on product development.

 

In fiscal year 2015 we continued to make technological updates to our browser, tablet and mobile platforms with a focus on video presentation, mobile, advertising technologies and analytics integrations. We continued to make updates to our site recirculation and integrated with messaging app. We optimized the site content for social media platforms, mobile and search engine optimization. We increased our site security and stability, by adding internal tools that provide powerful new techniques for site management, troubleshooting, and internal analytics. We began the process of shifting our browser site to utilize an API that provides comprehensive data source for all platforms.

 

 

 
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In fiscal year 2016, we worked on a Website redesign focused primarily on our article pages, aimed at improving our users’ experience. As part of this effort, we continued building out new advertising products for video and mobile, expanded our social media integration, improved our security and scaling capabilities, and explored new products that meet the immediate needs of our mobile users.

 

In fiscal year 2017, we launched a Website redesign that will put in place a publishing infrastructure that can better take advantage of current technologies. The redesign will allow a better user experience as a result of quicker load time, and improved re-circulation of Salon content on each page, and improved monetization due to improved viewability of ads on our website. As a part of this redesign, we will continue to build new products for video and mobile, expand our social media integration, and improve security and scaling capabilities.

 

Competition

 

The bulk of online advertising remains concentrated in a relatively small number of dominant Internet companies, with the top ten companies accounting for 73% of online advertising in the December 2016 quarter, and another 10% captured by the next tier of companies ranked 11th through 25th. Therefore, we believe our market opportunity falls roughly at 17% of the online advertising market, or $12.3 billion. We compete for advertising revenues with numerous websites, including major portals such as Yahoo/AOL, major search engines such as Google, major social networks such as Facebook and Twitter, and other online large media publications such as Buzzfeed, Huffington Post, New York Times, Washington Post, MSNBC and CNN.com. We also compete with many smaller news and politics-oriented Websites, such as Slate, The Daily Beast, The Atlantic, Talking Points Memo, Politico and Axios for staff, audience and advertising sales.

 

Infrastructure and Operations

 

We have created a flexible publishing structure that enables us to develop our content while responding quickly to news events and to take advantage of the ease of distribution provided by the Internet. Our content is deployed on our proprietary software platform and captured in a database for reuse in Web and other formats. The content on our Website has been structured to facilitate being found by search engines, a key driver in increasing traffic to our Website, and optimized for sharing on social networks. In fiscal year 2018, we are working on a Website and advertising architecture redesign aimed at improving the user experience. As part of this effort, we will continue exploring new products that meet the immediate needs of our mobile users, building out new advertising products for video and mobile and improving our security and scaling capabilities

 

Our Website is hosted on cloud-based virtual servers running open-source Linux operating systems and various open-source web and network software packages. Our top technical priority is the fast and reliable delivery of pages to our users. Our systems are designed to handle traffic growth and network failures by balancing the requests among several pools of servers across the globe that automatically scale to match traffic demands. We rely on multiple tiers of redundancy/failover and third-party Content Delivery Network to achieve our goal of 24 hours, seven-days-a-week Website uptime. Regular automated backups protect the integrity of our data. Our servers are continuously monitored by numerous third-party and open-source monitoring and alerting tools.

 

Proprietary Rights

 

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

 

 

 
11

 

 

Employees

 

As of March 31, 2017, Salon has 39 full-time employees, and 5 part-time employees. We believe our relations with our employees are good. We started collective bargaining with our non-supervisory editorial employees in November 2015, and the results of this process are uncertain. Our future success is highly dependent on our ability to attract, hire, retain and motivate talented personnel.

 

ITEM 1A. Risk Factors

 

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 shares of common stock (the “Common Stock”) could decline. The Risk Factors set forth below have not materially changed from those included in our Fiscal 2016 Annual Report.

 

Salon has historically lacked significant revenues and has a history of losses

 

We have a history of significant losses and expect to incur a loss from operations, based on accounting principles generally accepted in the United States of America, for our fiscal year ending March 31, 2018 and to be determined in future years. Even if we attain profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If revenues grow more slowly than we anticipate or operating expenses exceed expectations, financial results will most likely be severely harmed and our ability to continue operations will be seriously jeopardized.

 

BPM LLP, Salon’s independent registered public accounting firm for the fiscal years ended March 31, 2012 through 2017 included a “going-concern” audit opinion on the financial statements for each of those years. The audit opinions report substantial doubt about our 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, our 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.

 

The Company has operated in the past principally with the assistance of interest free advances from related parties, and more recently by financing rounds in fiscal year 2017. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Salon’s projected cash flows may not meet expectations

 

We rely on cash projections to run our business and change such projections as new information is made available or events occur. The most significant component of our cash projections is cash to be generated from advertising sales. Forecasting advertising revenues and resulting cash receipts for an extended period of time is problematic due to the short duration of most advertising sales contracts. If projected cash inflows and outflows do not meet expectations, our ability to continue as a going concern may be adversely affected.

 

If we forecast or experience periods of limited, or diminishing cash resources, we may need to sell additional securities or borrow additional funds. There is no guarantee that we will be able to issue additional securities in future periods or borrow additional funds on commercially reasonable terms to meet our cash needs. Our ability to continue as a going concern will be adversely affected if we are unable to raise additional cash from sources we have relied upon in the past or new sources.

 

 

 
12

 

 

We have relied on related parties for significant investment capital

 

We have relied on cash infusions from related parties to fund operations for many years. The related parties are primarily John Warnock, former Chairman of the Board who resigned subsequent to December 31, 2016, and William Hambrecht. William Hambrecht is a Director and the father of our current Chief Financial Officer (“CFO”), Elizabeth Hambrecht. During the fiscal year ended March 31, 2017, Mr. Warnock and Mr. Hambrecht have contributed $0.35 million and $0.10 million, respectively, in cash advances to fund our operations.  

 

On January 24, 2017, Salon entered into a Purchase Agreement (the “Purchase Agreement”) with purchasers identified therein (each, a “Purchaser” and together, the “Purchasers”) to issue and sell to the Purchasers in a private placement (the “Private Placement”) shares of Salon’s Series A Mandatorily Convertible Voting Preferred Stock (the “Series A Preferred Stock”). As a condition to issuance of the Series A Preferred Stock, all related-party cash advances from Mr. Warnock and Mr. Hambrecht, $5,428,000 and $2,913,000 respectively, were to be converted into a total of 83,410,000 shares of Common Stock at a conversion price of $0.10 per share. Mr. Warnock received 54,280,000 shares of Common Stock. Due to the Company’s insufficient authorized shares of Common Stock, Mr. Hambrecht further agreed to receive 2,246,017 shares of Common Stock and 268,840 shares of Series A Preferred Stock which will automatically convert into 26,883,983 shares of Common Stock upon the filing of the Amendment and resulting increase in authorized shares of Common Stock, which is expected to occur during the quarter ending September 30, 2017. As reported in Salon’s Current Reports on Form 8-K, filed with the Securities and Exchange Commission (the “Commission”) on January 27, 2017 and March 27, 2017, the initial Closing (the “Initial Closing”) of $1 million and the second closing of $0.2 million were completed on January 26, 2017 and March 23, 2017, respectively.

 

Mr. Hambrecht, Elizabeth Hambrecht, Jordan Hoffner and Larry Hoffner, the father of our CEO Jordan Hoffner, were purchasers in the Initial Closing of the Private Placement. Mr. Jordan Hoffner, CEO, Ryan Nathanson, Chief Operating Officer, and Jordana Brondo, Chief Revenue Officer, were also purchasers in the second closing of the Private Placement.

 

Curtailment of cash investments and borrowing guarantees by related parties would detrimentally impact our cash availability and our ability to fund our operations.

 

We started collective bargaining with our non-supervisory editorial employees, and the results of this process are uncertain

 

On August 3, 2015, the WGAE became the collective bargaining representative of Salon’s non-supervisory editorial employees. We commenced collective bargaining with the WGAE in November 2015. Should this collective bargaining process result in an agreement that would not permit us to obtain additional funding, there can be no assurance that we will be able to continue our current business.

 

Our principal stockholders exercise a controlling influence over our business affairs and may make business decisions with which non-principal stockholders disagree, which may affect the value of non-principal stockholders’ investments

 

As of March 31, 2017, after completion of the initial and second closings of the Private Placement of an aggregate principal amount of $1.2 million of the Series A Preferred Stock, approximately 68% of our voting securities are controlled, directly or indirectly by John Warnock, William Hambrecht and Spear Point Capital Fund, LP. These three investors, if aligned, could combine to make business decisions with which non-principal stockholders disagree, and which may affect the value of the non-principal stockholders’ investments.

 

 
13

 

 

Future sales of significant number of shares of our Common Stock by principal stockholders could cause our stock price to decline

 

As of March 31, 2017, our directors and officers owned approximately 136 million shares of Common Stock, on an as converted basis, and upon the increase in authorized share capital upon the filing with the Secretary of State of the State of Delaware of the Certificate of Amendment of Restated Certificate of Incorporation (the “Amendment”) after the final closing of the Private Placement. The increased authorized share capital will allow the shares of Series A Preferred Stock to convert into shares of Common Stock, pursuant to the terms of the Purchase Agreement. The 136 million shares, as converted, represent approximately 47% of post-offering fully diluted ownership, following the Initial and second closing of the Private Placement. As our shares of Common Stock are normally thinly traded, if our principal stockholders were to sell their shares of Common Stock, the price per share of our shares of Common Stock could be adversely affected. 

 

Our 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 are beyond our control and which may prevent our stockholders from reselling Common Stock at a profit

 

The securities markets can experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could affect the market price of our shares of Common Stock, regardless of our operating performance. In addition, our stock is thinly traded. Even a few transactions, whether in response to disappointment in our expected operating results or for any other reason, could cause the market price of our shares of Common Stock to decrease significantly.

 

Holders of our shares of Series A Preferred Stock are entitled to potentially significant liquidation preferences of Salon’s assets over holders of our shares of Common Stock in the event of a liquidation event

 

Holders of shares of Series A Preferred Stock have liquidation preferences over holders of shares of Common Stock of the first approximately $3.5 million in potential sales proceeds as of March 31, 2017. If a liquidation event were to occur, the holders of shares of Series A Preferred Stock would be entitled to receive the first $3.5 million of cash distributions. Holders of shares of Series A Preferred Stock are not entitled to receive dividends, pursuant to the Certificate Designation of Preferences, Rights and Limitations of the Series A Preferred Stock. Upon the filing of the Amendment and resulting increase in our authorized share capital, the shares of Series A Preferred Stock will automatically convert into shares of Common Stock. The filing of the Amendment and the resulting automatic conversion are expected to occur during the quarter ending September 30, 2017.

 

 
14

 

  

We depend on advertising sales for substantially all of our revenues, and our inability to maintain or increase advertising revenues would harm our business

 

Our ability to maintain or increase our advertising revenues depends upon many factors, including whether we will be able to:

 

 

attract and maintain additional visitors to our Website and increase brand awareness;

 

 

sell and market our Website or other rich media advertisements;

 

 

maintain a significant number of sellable impressions generated from Website visitors available to advertisers;

 

 

increase the dollar amount of our advertising orders;

 

 

improve our Website’s technology for serving advertising;

 

 

handle temporary high volume traffic spikes to our Website;

 

 

measure accurately the number and demographic characteristics of our users; and

 

 

attract and retain key sales personnel.

 

As more of our users access our Website using mobile devices rather than PCs, if we do not continue to grow our mobile users and revenue, our business will be adversely impacted.

 

Internet users increasingly use mobile devices rather than PCs to access the Internet.  Approximately 60% of our monthly users are now visiting our Website on mobile devices.  As mobile platforms encompass a larger share of our readers, our ability to grow advertising revenue is increasingly dependent on our ability to generate revenue from ads displayed on mobile devices.  While we plan to continue to devote technology resources to support our mobile browser product and advertising products, if our mobile browser product and advertising products for mobile devices do not attract and retain users and advertisers to generate mobile revenue, our operating and financial results will be adversely impacted. We are dependent upon our products operating on mobile operating systems we do not control. The mobile phone manufacturer and its operating systems might block access to our Website or make it hard for users to find our Website through their devices, or block certain ads or charge us for delivery of ads, all of which would harm our operations and suppress revenue potential.

 

Technologies and software applications could block our advertisements, which could harm our operating results.

 

Technologies and software applications have been developed for PC and mobile devices that can block or allow users to opt out of display advertising, delete or block cookies used to deliver advertising, or move advertising to less optimal placements to suppress view-ability. Most of our advertising revenue is derived from display or video advertisements on our Website. As a result, ad-blocking technologies or software could reduce the number of display or video advertisements, which could result in decreased revenue.

 

If we cannot increase referrals from social media platforms, our ability to attract new unique visitors and maintain the engagement of existing unique visitors could be adversely affected.

 

As the behavior of internet consumers continues to change, distribution of our content, products and services via traditional methods may become less effective, and new distribution strategies may need to be developed. Consumers are increasingly using social networking sites such as Facebook and Twitter, to communicate and to acquire and disseminate information. As consumers migrate towards social networks, we continue to build social elements into our content, products and services in order to make them available on social networks and to attract and engage consumers on our Website and mobile platforms. There is no guarantee that we will be able to successfully integrate our content with such social networking or other new consumer trends. Even if we are able to distribute our content, products and services effectively through social networking or other new or developing distribution channels, this does not assure that we will be able to attract new unique visitors or generate additional pageviews that can be monetized by our advertising sales team.

 

 
15

 

  

Hackers may attempt to penetrate our security system and online security breaches could harm our business

 

Consumer and supplier confidence in our Website depends on maintaining strong security features. Experienced programmers or “hackers” have penetrated sectors of our systems, and we expect that these attempts will continue to occur from time to time. To our knowledge, there has been no outward harm to us or our users as a result of hacking attempts. Furthermore, Salon has engaged the services of a third-party web application security-testing company, which conducts regular comprehensive searches for any vulnerabilities that may exist, allowing us to address and fix any issues before they can be exploited. This minimizes the risk of damage; however, because a hacker who is able to penetrate network security could misappropriate proprietary information or cause interruptions in our products and services, we may have to expend significant capital and resources to protect against or to alleviate problems caused by hackers. Additionally, we may not have a timely remedy against a hacker who is able to penetrate our network security. Such security breaches could materially affect our operations, damage our reputation and expose us to risk of loss or litigation. In addition, the transmission of computer viruses resulting from hackers or otherwise could expose us to significant liability. Our insurance policies may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties with whom we have relationships.

 

We must promote the Salon brand to attract and retain users, advertisers and strategic partners

 

The success of the Salon brand depends largely on our ability to provide high quality content and services. If Internet users do not perceive our existing content and services to be of high quality, or if we introduce new content and services or enter into new business ventures that are not favorably perceived by users, we may not be successful in promoting and maintaining the Salon brand. Any change in the focus of our operations creates a risk of diluting our brand, confusing consumers and decreasing the value of our user base to advertisers. If we are unable to maintain or grow the Salon brand, our business would be severely harmed.

 

We must hire, integrate and/or retain qualified personnel to support our business plans

 

Our success significantly depends on key personnel. In addition, because our users must perceive the content of our Website as having been created by credible and notable sources, our success also depends on the name recognition and reputation of our editorial staff. Due to our history of losses, we may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. We may be unable to retain our current key employees or attract, integrate or retain other qualified employees in the future. If we do not succeed in attracting new personnel or retaining and motivating our current personnel, our business would be harmed.

 

Our success depends on our key personnel, including our executive officers, and the loss of key personnel, including our CEO, could disrupt our business

 

Our success greatly depends on the continued contributions of our senior management and other key sales, marketing and operations personnel. While we have employment agreements with some key management, these employees may voluntarily terminate their employment at any time. We may not be able to successfully retain existing personnel or identify, hire and integrate new personnel. We do not have key person insurance policies in place for these employees.

 

We may expend significant resources to protect our intellectual property rights or to defend claims of infringement by third parties, and if we are not successful we may lose rights to use significant material or be required to pay significant fees

 

Our success and ability to compete are dependent on our proprietary content. We rely exclusively on copyright law to protect our content. While we actively take steps to protect our proprietary rights, these steps may not be adequate to prevent the infringement or misappropriation of our content, which could severely harm our business. We also license content from various freelance providers and other third-party content providers. While we attempt to ensure that such content may be freely licensed to us, other parties may assert claims of infringement against us relating to such content.

 

We may need to obtain licenses from others to refine, develop, market and deliver new services. We 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.

 

 

 
16

 

 

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

 

Our technology development efforts may not be successful in improving the functionality of our network, which could result in reduced traffic on our Website or reduced advertising revenues

 

We are constantly upgrading our technology to manage our Website. During the last several years, we redesigned our Website homepage and vertical sections. In addition, we are creating new technology for new products that we expect to launch on an ongoing basis. If these systems do not work as intended, or if we are unable to continue to develop these systems to keep up with the rapid evolution of technology for content delivery, our Website may not operate properly, which could harm our 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 our business. Moreover, complex software products such as our online publishing platform frequently contain undetected errors or shortcomings, and may fail to perform or scale as expected. Although we have tested and will continue to test our systems, errors or deficiencies may be found in these systems that could adversely impact our business.

 

We rely on third parties to provide the technologies necessary to deliver content, advertising and services to our users, and any change in the licensing terms, costs, availability, or acceptance of these formats and technologies could adversely affect our business

 

We rely on third parties to provide the technologies that we use to deliver content, advertising, and services to our users. There can be no assurance that these providers will continue to license their technologies or intellectual property to us on reasonable terms, or at all. Providers may change the fees they charge users or otherwise change their business models in a manner that slows the widespread acceptance of their technologies. In order for our services to be successful, there must be a large base of users of the technologies to deliver our content, advertising, and services. We have limited or no control over the availability or acceptance of those technologies, and any change in licensing terms, costs, availability, or user acceptance of these technologies could adversely affect our business.

 

We may be held liable for content or third party links on our Website or content distributed to third parties

 

As a publisher and distributor of content over the Internet, including links to third-party websites that may be accessible through our Website, or content that includes links or references to a third-party’s website, we face 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 our 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 we carry general liability and media insurance, our insurance may not be adequate to indemnify us for all liabilities imposed. Any liability that is not covered by our insurance or is in excess of our insurance coverage could severely harm our financial condition and business. Implementing measures to reduce our exposure to these forms of liability may require us to spend substantial resources and limit the attractiveness of our service to users.

 

 

 
17

 

 

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

 

Our Website, Salon.com, and content management system run on cloud computing hosted by Amazon Web Services, which are in a facility in Herndon, Virginia. Any disruption of Amazon’s cloud computing platform could result in a service outage. 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 our services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting our Website and could cause advertisers to terminate any agreements with us. In addition, we 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, our business could be harmed. Our insurance policies may not adequately compensate us for losses that may occur due to any failures of or interruptions in our systems. We do not presently have a formal disaster recovery plan.

 

Our Website must accommodate a high volume of traffic and deliver frequently updated information. It is possible that we will experience systems failures in the future and that such failures could harm our business. In addition, our users depend on Internet service providers, online service providers and other website operators for access to our 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 our systems. Any of these system failures could harm our business.

 

Privacy concerns could impair our business

 

We have a policy against using personally identifiable information obtained from users of our 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 we use personal information without permission or in violation of our policy, we may face potential liability for invasion of privacy for compiling and providing information to our 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 in the future. If consumer privacy concerns are not adequately addressed, our business, financial condition and results of operations could be materially harmed.

 

Due to the volatility of the price of our Common Stock, we may be the target of securities litigation, which is costly and time-consuming to defend

 

The price of our Common Stock has experienced volatility in the past, and may continue to do so in the future. In the past, following volatility in the price of a company’s securities, securities holders have instituted class action litigation against such company. Many companies have been subjected to this type of litigation. If the market value of our Common Stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the merits or outcome, we could incur substantial legal costs and our management’s attention could be diverted, causing our business, financial condition and operating results to suffer. To date, we have not been subject to such litigation.

 

 
18

 

 

Our quarterly operating results are volatile and may adversely affect the price of our Common Stock

 

Our future revenues and operating results are likely to fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control, and any of which could severely harm our business. These factors include:

 

 

Our ability to attract and retain advertisers;

 

 

Our ability to attract and retain a large number of users;

 

 

Our ability to increase referrals from our social media presence;

 

 

The introduction of new websites, services or products by us or by our competitors;

 

 

Our ability to maximize our mobile presence;

 

 

The timing and uncertainty of our advertising sales cycles;

 

 

The mix of advertisements sold by us or our competitors;

 

 

Economic and business cycles;

 

 

Our ability to attract, integrate and retain qualified personnel;

 

 

Technical difficulties or system downtime affecting the Internet generally or the operation of our Website; and

 

 

The amount and timing of operating costs.

 

Due to the factors noted above and the other risks discussed in this section and throughout this Annual Report on Form 10-K (the “Form 10-K”), one should not rely on quarter-to-quarter comparisons of our 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 our Common Stock may decline.

 

 

 
19

 

 

Provisions in Delaware law and our charter, stock option agreements and offer letters to executive officers may prevent or delay a change of control

 

We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent a Delaware corporation 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 of Salon (the “Board”) 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 such date, the merger or sale is approved by the Board 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. We have not opted out of the provisions of the anti-takeover laws. As such, these laws could prohibit or delay mergers or other takeovers or changes of control of Salon and may discourage attempts by other companies to acquire us.

 

Our certificate of incorporation and bylaws include a provision relating to special meetings of our shareholders that may deter or impede hostile takeovers or changes of control or management. Special meetings of stockholders may be called only by the Board pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) or by the holders of not less than 10% of all of the shares entitled to cast votes at the meeting. This provision may have the effect of delaying or preventing a change of control.

 

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.

 

 

 
20

 

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties  

On October 17, 2012, we signed an office lease agreement to relocate our San Francisco headquarters to 870 Market Street, San Francisco, California. The five-year lease for approximately 2,405 square feet, commenced on December 1, 2012 and will terminate on November 30, 2017.

 

On April 16, 2014, we entered into an office lease for corporate offices at 132 West 31st Street, New York, New York consisting of 6,523 square feet in rentable space. The lease commenced on July 1, 2014 and will expire on September 30, 2019. In August 2016, we informed our landlord of our intention to move out of the office space at 132 West 31st Street, and we engaged a property agent to find a sub-tenant for this space. In January 2017, we were asked to vacate the office space at 132 West 31st Street due to nonpayment of our monthly rent, and on January 30, 2017 we released the letter of credit of $204 to the landlord to settle the unpaid rent. We continue to be in discussions with the landlord of 132 West 31st Street to mitigate any future liabilities associated with this lease.

 

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. Mine Safety Disclosures

 

None.

 

 

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

Information with respect to the quarterly high and low sales prices for Salon’s Common Stock, ticker symbol SLNM.PK, for its fiscal years 2017 and 2016, based on sales transactions reported by the OTC (Over-The-Counter) Bulletin Board is provided below:

 

   

Fiscal Year Ended

   

Fiscal Year Ended

 
   

March 31, 2017

   

March 31, 2016

 

For the quarter ended

 

High

   

Low

   

High

   

Low

 

June 30

  $ 0.24     $ 0.10     $ 0.16     $ 0.13  

September 30

    0.34       0.12       0.20       0.13  

December 31

    0.29       0.06       0.19       0.10  

March 31

  $ 0.35     $ 0.08     $ 0.16     $ 0.10  

 

Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

There were 78 top stockholders of record of Salon Common Stock as of June 1, 2017. This number was derived from Salon’s stockholder records, and does not include beneficial owners of Salon’s voting Common Stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries. The closing price of Salon’s Common Stock on June 1, 2017 was $0.10 per share.

 

 

 
21

 

 

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 and rights under all of Salon’s existing equity compensation plans as of March 31, 2017, including the Salon Media Group, Inc. 2004 Stock Plan (the “2004 Stock Plan”), the Salon Media Group, Inc. 2014 Stock Incentive Plan (the “2014 Stock Incentive Plan”) and the Salon Media Group, Inc. Non Plan Stock Option agreement (“Non-Plan”.)

 

 

 

Plan category

 

Number of securities to

   

Weighted-average

   

Number of securities

 
   

be issued upon exercise

   

exercise price of

   

remaining available for

 
   

of outstanding options

   

outstanding options

   

future issuance under

 
   

and rights

   

and rights

   

equity compensation

 
               

plans, excluding

 
               

securities reflected in

 
               

column (a)

 
                   
   

(a)

   

(b)

   

(c)

 
                   

Equity compensation plans approved by security holders

  6,522,967     $0.15     9,546,681  
                   

Equity compensation plans not approved by security holders

  12,654,318     $0.24    

None

 
                   

Total

  19,177,285     $0.21     9,546,681  

 

 

Equity Compensation Plans Not Approved by Security Holders

 

We have granted options pursuant to plans not approved by shareholders. On June 9, 2016, we granted to our CEO an option to purchase 12,654,318 shares of Common Stock pursuant to the terms and conditions of the Salon Media Group, Inc. Non Plan Stock Option agreement, with vesting in equal monthly installments over a four-year period commencing with the grant date. We did not grant any subsequent Non-Plan options for the remaining fiscal year ended March 31, 2017.

 

 

 
22

 

 

ITEM 6. Selected Financial Data

 

   

Amounts in thousands, except per share amounts

 

Year Ended March 31,

 

2017

   

2016

   

2015

   

2014

   

2013

 
                                         

Net revenues

  $ 4,570     $ 6,959     $ 4,946     $ 6,004     $ 3,641  

Gain from discontinued operations

  $ -     $ -     $ -     $ -     $ 233  

Net loss

  $ (10,430 )   $ (1,960 )   $ (3,940 )   $ (2,186 )   $ (3,936 )

Basic and diluted net loss per share

  $ (0.10 )   $ (0.03 )   $ (0.05 )   $ (0.03 )   $ (0.72 )

Weighted average common shares outstanding used in computing per share amounts (thousands)

    103,935       76,245       76,245       73,923       5,443  

Cash and cash equivalents

  $ 183     $ 189     $ 229     $ 119     $ 96  

Total assets

  $ 1,343     $ 2,034     $ 1,605     $ 2,033     $ 1,299  

Total long-term liabilities

  $ 58     $ 69     $ 73     $ 2     $ 12  

 

 
23

 

 

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Salon is a technology-based advertising media business that wholly owns and operates an online news website called Salon.com. We are committed to fearless journalism.  Our award-winning journalism combines original investigative stories and provocative personal essays along with quick-take commentary, articles, podcasts, and original video about politics, culture, entertainment, sustainability, innovation, technology and business. In our editorial product we balance 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

 

Most of Salon’s net revenues are derived from advertising from the sale of promotional space on its Website. The sale of promotional space is generally for less than ninety days in duration. Advertisers pay for advertising on a CPM. The primary factors in our ability to increase our advertising revenues in future periods are growth in our audience and the addition of higher CPM ad products, such as pre-roll video. Attracting more unique visitors to our Website is important because these returning users generate additional page views, and each page view becomes a potential platform for advertisements. Advertising comprises banners, video, rich media and other interactive ads. CPM varies by platform and CPMs for mobile have been less than for desktop, however in the recent quarter they have been increasing. Videos and sponsored content on mobile devices continue to grow in popularity and can demand a higher CPM. We believe that continuing to add videos and sponsored content to our mobile platform and improving and optimizing the platform’s design will help increase revenues from our mobile platform.

 

In addition, Salon generates revenue from referring users to third party websites. For fiscal year 2017, referral fees totaled $1.0 million, a 6% increase from $0.94 million in fiscal year 2016. We also generated nominal revenue from the licensing of content that previously appeared in Salon.

 

Our total net revenue and the sources thereof for the years ended March 31, 2017, 2016 and 2015 were as follows (in thousands):

 

   

Year Ended March 31,

 
   

2017

   

2016

   

2015

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Advertising

  $ 3,542       78 %   $ 5,988       86 %   $ 4,518       91 %

Subscription Program

    6       <1 %     7       <1 %     12       <1 %
                                                 

Referral and Other

    1,022       22 %     964       13 %     416       8 %

Total

  $ 4,570       100 %   $ 6,959       100 %   $ 4,946       100 %

 

 

 
24

 

 

Operating Expenses

 

Production and content expenses consist primarily of salaries and related expenses for Salon’s editorial and production staff, payments to freelance writers and artists, bandwidth costs associated with serving pages on our Website and ad serving costs.

 

Sales and marketing expenses consist primarily of salaries, commissions, bonuses and related personnel costs, travel, and other costs associated with Salon’s sales force and our business development efforts. It also includes marketing promotions.

 

Technology expenses consist primarily of salaries and related personnel costs associated with the development, testing and enhancement of our software to manage our Website, as well as to support our marketing and sales efforts.

 

General and administrative expenses consist primarily of salaries and related personnel costs, accounting and legal fees, rents, 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 (“GAAP”) 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 financial statements included elsewhere in this Form 10-K. We believe accounting policies and estimates related to revenue recognition and accounting for debt and equity are the most critical to our financial statements. Future results may differ from current estimates if different assumptions or conditions were to prevail.

 

Stock Based Compensation

 

Salon accounts for stock-based compensation under Accounting Standards Codification (“ASC”) 718, “Stock Compensation” (ASC 718) and recognizes the fair value of stock awards on a straight-line basis over the requisite service period of the award, which is the standard vesting term of four years.

 

We recognized stock-based compensation expense of $525,000, $302,000 and $285,000 during the years ended March 31, 2017, 2016 and 2015, respectively. As of March 31, 2017, we had an aggregate of $1,325,000 of stock-based compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. We currently expect this stock-based compensation balance to be amortized as follows: $439,000 during fiscal year 2018; $419,000 during fiscal year 2019; $395,000 during fiscal year 2020; and $72,000 during fiscal year 2021. The expected amortization reflects only outstanding stock option awards as of March 31, 2017. We expect to continue to issue stock-based awards to our employees in future periods. 

 

Due to insufficient authorized shares of Common Stock as of November 11, 2016, the vested options as of this date with a fair value of $818,000, were reclassified from equity to liabilities and re-measured at fair value and are presented under accounts payable and accrued liabilities. The balance of the option liability was $931,000 as of March 31, 2017. We expect the Amendment to be filed during the quarter ending September 30, 2017 and the liabilities to be reclassified back to equity, upon the resulting increased authorization of shares of Common Stock. 

 

 
25

 

 

The full impact of stock-based compensation in the future is dependent upon, among other things, the timing of when we hire additional employees, the effect of new long-term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock-awards granted, achievement of specific goals for performance-based grants, the fair value of the stock awards at the time of grant and the tax benefit that we may or may not receive from stock-based expenses. Additionally, stock-based compensation requires the use of an option-pricing model to determine the fair value of stock option awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards.

 

Liquidity

 

Salon has incurred significant net losses and negative cash flows from operations since its inception. As of March 31, 2017, Salon had an accumulated deficit of $135.0 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, the issuance of convertible notes payable and other advances from related parties.

 

BPM LLP, Salon’s independent registered public accounting firm for the years ended March 31, 2017, 2016 and 2015 has included a paragraph in their report indicating that substantial doubt exists as to Salon’s ability to continue as a going concern because of Salon’s recurring operating losses, negative cash flow and accumulated deficit.

 

Income Taxes

 

Salon has not recorded a provision for federal or state income taxes since inception due to recurring operating losses. As of March 31, 2017, Salon had net operating loss carryforwards of $93.3 million for federal income tax purposes that begin to expire in March 2019, and $29.7 million for California income tax purposes. As Salon has been incurring tax losses, $1.2 million of California net operating loss carryforwards expired as of March 31, 2017, and if Salon were to incur a tax loss for the fiscal year ending March 31, 2018, an additional $0.9 million of California net operating loss carryforwards 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 $1.3 million during the year ended March 31, 2017 to $34.1 million. Salon believes that, based on a number of factors, the availability of objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that a full valuation allowance has been recorded. These factors include Salon’s history of net losses since inception and expected near-term future losses.

 

Revenue Recognition

 

Salon recognizes revenues once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Revenues are recognized ratably over the period which Salon’s obligations are fulfilled. Payments received before Salon’s obligations are fulfilled are classified as “deferred revenue” in Salon’s balance sheets.

 

Advertising revenues, derived from the sale of promotional space on its Website, comprised 78%, 86% and 91% of Salon’s net revenues for the fiscal years ended March 31, 2017, 2016 and 2015 respectively. 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. 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 the advertiser. If these “make good” impressions are not agreeable to the advertiser, no further revenue is recognized. 

 

 
26

 

 

Results of Operations

 

Fiscal Years Ended March 31, 2017 and 2016

 

Net Revenues

 

Salon’s net revenue from continuing operations decreased 34% to $4.6 million for the fiscal year ended March 31, 2017, from $7.0 million for the fiscal year ended March 31, 2016. The decrease is primarily due to a 41% decrease in overall advertising revenue offset by a 6% increase in referral fees.

 

Advertising revenues decreased 42% to $3.5 million for the fiscal year ended March 31, 2017, from $6.0 million for the fiscal year ended March 31, 2016. The decrease is primarily due to a decrease in programmatic advertising, which declined approximately 28% to $2.9 million for the fiscal year ended March 31, 2017, from $4.0 million for the fiscal year ended March 31, 2016. Direct advertising sales for the fiscal year ended March 31, 2017 also decreased 70% to $0.6 million from $2.0 million one year ago.

 

Two primary factors in our ability to increase advertising revenues in future periods are growth in our audience, and an increase in targeted advertising products that attract a higher CPM. Attracting more unique visitors to our Website is important because these users generate additional page views, and each page view becomes a potential platform for serving advertisements. Offering a targeted advertising product allows us to charge more for ad placement on our website. Advertisers pay for advertising based on a CPM, and different platforms attract different CPMs.

 

Due to various factors mainly attributed to shifts in how news media is promoted in the social media landscape, the annual average number of monthly unique Website visitors during fiscal year ended March 31, 2017 decreased 23% from one year ago to approximately 13 million. We reached an all-time high of approximately 17 million annual average number of monthly unique Website visitors during fiscal years ended March 31, 2015 and 2016. Aiding the growth in unique visitors to Salon’s Website during prior fiscal years is the migration of users to the Internet from print newspapers.

 

All other sources of revenue remained constant at approximately $1.0 million for each of the fiscal years ended March 31, 2017 and March 31, 2016.

 

Production and Content Expenses

 

Production and content expenses increased 8% to $4.2 million during the fiscal year ended March 31, 2017, compared to $3.9 million for the fiscal year ended March 31, 2016. The increase was primarily attributed to our focus on producing new editorial content, such as video, during the year.

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased 47% to $0.9 million during the fiscal year ended March 31, 2017, compared to $1.7 million for the fiscal year ended March 31, 2016. The decrease was primarily attributed to savings from personnel costs associated to the reorganization of our sales team and the elimination of social media advertising spend.

 

 
27

 

  

Information Technology Support Expenses

 

Information technology support expenses decreased 17% to approximately $1.2 million during the fiscal year ended March 31, 2017, compared to $1.4 million in the fiscal year ended March 31. 2016. The decrease was primarily attributed to savings from departmental personnel changes and the cancellation of consultant work.  

 

General and Administrative Expenses 

 

General and administrative expenses increased 18% to approximately $2.2 million during the fiscal year ended March 31, 2017, compared to $1.9 million in the fiscal year ended March 31, 2016. The increase was primarily attributed to non-cash stock-based compensation for new options granted to our CEO during the year and the fair value re-measurement of vested options due to insufficient total authorized shares of our Common Stock as of March 31, 2017. 

 

Interest Expense 

 

Interest expense increased significantly to $5.6 million during the fiscal year ended March 31, 2017, compared to $0.04 million for the fiscal year ended March 31, 2016. The increase was primarily attributed to non-cash charges from the beneficial conversion features of investor advances converted into shares of Common Stock and convertible debts converted into shares of the Series A Preferred Stock pursuant to the Private Placement.

 

Preferred Deemed Dividend

 

In connection with the January 24, 2017 private placement of shares of the Company’s Common Stock, the conversion price of the Series C Preferred Stock was reduced effective November 14, 2016, from $0.15 to $0.10 per share of Series C Preferred Stock. Following this adjustment, each share of Series C Preferred Stock was convertible into the number of shares of Common Stock obtained by dividing two (2) times the Series C original issue price, $800, by the adjusted conversion price of $0.10 per share, resulting in each share of Series C Preferred Stock being convertible into approximately 17,200,000 Common Stock. The adjusted conversion price generated additional value to the convertibility feature of the Series C Preferred Stock. Accordingly, the Company recorded a non-cash preferred deemed dividend of approximately $0.86 million for the additional value of the beneficial conversion feature in December 2016, the period of the adjustment.

 

 

Fiscal Years Ended March 31, 2016 and 2015

 

Net Revenues

 

Salon’s net revenue from continuing operations increased 41% to $7.0 million for the fiscal year ended March 31, 2016, from $4.9 million for the fiscal year ended March 31, 2015. The increase was primarily due to a significant increase in programmatic advertising revenue and referral fees.

 

Advertising revenues increased 33% to $6.0 million for the fiscal year ended March 31, 2016, from $4.5 million for the fiscal year ended March 31, 2015. The increase was primarily due to an increase in programmatic advertising which grew 60% to $4.0 million for the fiscal year ended March 31, 2016, from $2.5 million for the fiscal year ended March 31, 2015. Direct advertising sales for the fiscal year ended March 31, 2016 remained constant at approximately $2.0 million from one year ago.

 

A primary factor in our ability to increase advertising revenues in future periods is growth in our audience. Attracting more unique visitors to our Website is important because these users generate additional page views, and each page view becomes a potential platform for serving advertisements. Advertisers pay for advertising based on a CPM, and different platforms attract different costs-per-thousand impressions. Due to various factors, including concerted efforts to make Salon’s content more accessible to users, a better optimized Website to facilitate appearance in search engine results, and increasing the quantity of content, the annual average number of monthly unique Website visitors during fiscal year ended March 31, 2016 remained constant from a year ago at approximately 17 million. Aiding the continued growth in unique visitors to Salon’s Website is the migration of users to the Internet from print newspapers.

 

All other sources of revenue were approximately $1.0 million for the fiscal year ended March 31, 2016 and $0.4 million for the fiscal year ended March 31, 2015. This $0.6 million increase was mainly attributed to a growth of approximately 150% in referral fees revenue during the fiscal year ended March 31, 2016.

 

Production and Content Expenses

 

Production and content expenses for the fiscal year ended March 31, 2016 remained constant at $3.9 million from a year ago. 

 

 
28

 

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased 6% to $1.7 million during the fiscal year ended March 31, 2016 compared to $1.8 million for the fiscal year ended March 31, 2015. This 6% net decrease was primarily attributed to savings from the elimination of social media advertising spend.

 

Information Technology Support Expenses

 

Information technology support expenses increased 8% to approximately $1.4 million during the fiscal year ended March 31, 2016 compared to $1.3 million in the fiscal year ended March 31. 2015. The increase was primarily attributed to departmental personnel changes.

 

General and Administrative Expenses

 

General and administrative expenses increased 3% to approximately $1.9 million during the fiscal year ended March 31, 2016 compared to $1.8 million in the fiscal year ended March 31, 2015. The increase was primarily attributed to departmental personnel changes.

 

Interest Expense

 

Interest expense remained constant at approximately $0.04 million during the fiscal years ended March 31, 2016 and 2015.

 

Liquidity and Capital Resources 

 

Net cash used in operations was $1.5 million for the fiscal year ended March 31, 2017, $2.2 million for the fiscal year ended March 31, 2016 and $2.9 million for the fiscal year ended March 31, 2015. The principal use of cash during each of the fiscal years ended March 31, 2017, 2016 and 2015 was to meet the Company’s operating deficits.

 

Net cash used in investing activities was immaterial for each of the fiscal years ended March 31, 2017, 2016 and 2015 and was used primarily to fund the re-design of our Website and, to a lesser extent, purchase of computing equipment. 

 

Net cash provided from financing activities was $1.8 million, $2.2 million and $3.0 million in proceeds from convertible promissory notes, issuance of preferred stock and short-term advances from related parties for each of the fiscal years ended March 31, 2017, 2016 and 2015 respectively.

 

Indemnification of Officers and Directors

 

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 maintains 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.

 

 

 
29

 

 

Contractual Obligations

 

As of March 31, 2017, Salon has no outstanding convertible notes or capital leases and does not anticipate entering into similar debt instruments during its fiscal year ending March 31, 2018. The following table summarizes Salon’s contractual obligations as of March 31, 2017, and the effect these contractual obligations are expected to have on Salon’s liquidity and cash flows in future periods (in thousands):

 

   

Total

   

1 Year or less

   

1 - 3 Years

 

Operating leases

  $ 891     $ 388     $ 503  

Short-term borrowing

    1,000       1,000       -  

Short-term borrowing interest

    382       382       -  

Total

  $ 2,273     $ 1,770     $ 503  

 

Capital Requirements

 

Salon has a history of significant losses and expects to incur a net loss from operations for its fiscal year ending March 31, 2018. 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 each of the years ended March 31, 2017, 2016 and 2015 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 related party advances to meet its cash requirements.  

 

Based on current cash projections, which contemplate a smaller operating loss and take into account $0.2 million in related party advances received subsequent to year end, Salon estimates that it will require approximately $1.0 to $1.5 million in additional funding to meet operating needs. Operating costs in fiscal year 2017 were stable compared to fiscal year 2016. Subsequent to the end of fiscal year 2017, we took steps to reduce our operating expenses by reducing headcount and not rehiring positions in which we had attrition, and ending certain non-core contracts. However, if planned revenues are less than expected, then we will not meet our operating targets and the projected cash shortfall may be higher. Salon is in discussions with potential investors, including related parties, to obtain additional funding.

 

There can be no assurance that the Company will be able to raise additional funds on commercially reasonable terms, if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

Salon has no off-balance sheet arrangements. 

 

 
30

 

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, “Business Combinations – Clarifying the Definition of a Business,” which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of ASU 2017-01 to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.

 

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323)” which amends the Codification to incorporate SEC staff views regarding recently issued accounting standards and investments in qualified affordable housing projects. The guidance requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. ASU 2017-03 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We do not expect the adoption of ASU 2017-03 to have a material impact our financial position, results of operations, cash flows, or presentation thereof.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of the testing. ASU 2017-04 is effective for interim and annual testing dates after January 1, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position, results of operations, cash flows, or presentation thereof.

 

 

In February 2017, the FASB issued ASU 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20)”, which clarifies the scope and application of ASC Topic 610-20 on accounting for the sale or transfer of nonfinancial assets, that is an asset with physical value such as real estate, equipment, intangibles or similar property. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position, results of operations, cash flows, or presentation thereof.  

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU No. 2016-13 will be effective for the Company as of January 1, 2020. The Company is currently reviewing the impact of this new guidance and does not believe adoption will have a material impact on its financial statements.

 

 
31

 

 

In February 2016, the FASB issued authoritative guidance intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance should be applied under a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company is evaluating the full impact this guidance will have on its financial statements.

 

In May 2014, the FASB issued authoritative guidance related to new accounting requirements for the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services. Subsequent to the release of this guidance, the FASB has issued additional updates intended to provide interpretive clarifications and to reduce the cost and complexity of applying the new revenue recognition standard both at transition and on an ongoing basis. The new standard and related amendments are effective for annual reporting periods beginning after December 15, 2017, and interim periods. The Company is evaluating the full impact this guidance will have on its financial statements. 

 

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Salon maintains all of its cash in immediately available cash deposits at its bank. These funds are not subject to market risk and no interest is paid on such funds. In May 2007, Salon entered into a credit agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1.0 million, plus accrued interest, at a rate of prime less 0.25% which will subject Salon to interest rate risk. In September 2016, this credit agreement was transferred to Raymond James and Associates, Inc. (“Raymond James”) after Deutsche Bank Securities, Inc. sold its accounts. Our obligations under this agreement are guaranteed in their entirety by former Chairman of the Board, John Warnock. The line of credit has been fully drawn as of March 31, 2017. Rates remained at a constant level throughout most of fiscal year 2017. 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.

 

 
32

 

 

ITEM 8. Financial Statements and Supplementary Data

 

  Page
   

Report of Independent Registered Public Accounting Firm

34

   

Balance Sheets as of March 31, 2017 and 2016

35

   

Statements of Operations for the years ended March 31, 2017, 2016 and 2015

36

   

Statements of Stockholders’ Deficit for the years ended March 31, 2017, 2016 and 2015

37

   

Statements of Cash Flows for the years ended March 31, 2017, 2016 and 2015

38

   

Notes to Financial Statements

39

 

 
33

 

  

Report Of Independent Registered Public Accounting Firm

 

 

 

To the Board of Directors and Stockholders

Salon Media Group, Inc. 

 

We have audited the accompanying balance sheets of Salon Media Group, Inc. (“the Company”) as of March 31, 2017 and 2016, and the related statements of operations, stockholders’ deficit and cash flows for each of the three years in the period ended March 31, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Salon Media Group, Inc. as of March 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations and has an accumulated deficit of $135.0 million as of March 31, 2017. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ BPM LLP

San Francisco, California

June 23, 2017

 

 
34

 

 

 SALON MEDIA GROUP, INC.

BALANCE SHEETS

(in thousands, except share and per share amounts)

  

   

March 31,

 
   

2017

   

2016

 

Assets

               

Current assets:

               

Cash

  $ 183     $ 189  

Accounts receivable, net of allowance of $15 and $20

    663       1,348  

Prepaid expenses and other current assets

    159       127  

Total current assets

    1,005       1,664  
                 

Property, software development and equipment, net

    305       69  

Other assets, principally intangibles and deposits

    33       301  

Total assets

  $ 1,343     $ 2,034  

Liabilities and Stockholders' Deficit

               

Current liabilities:

               

Short-term borrowings

  $ 1,000     $ 1,000  

Related party advances

    -       7,991  

Accounts payable and accrued liabilities

    3,194       1,257  

Deferred revenue

    7       -  

Total current liabilities

    4,201       10,248  
                 

Deferred rent

    58       69  

Total liabilities

    4,259       10,317  

Commitments and contingencies (Note 8)

               
                 

Series A convertible preferred stock, $0.001 par value, 5,000,000 shares authorized, 1,427,229 and 0 shares issued and outstanding as of March 31, 2017 and March 31, 2016 (liquidation value of $3,540 as of March 31, 2017 and $0 as of March 31, 2016, respectively)

    6,862       -  
                 

Stockholders’ deficit:

               

Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 and 1,075 shares outstanding as of March 31, 2017 and March 31, 2016 (liquidation value of $0 and $2,564 as of March 31, 2017 And March 31, 2016, respectively)

    -       -  

Common stock, $0.001 par value, 150,000,000 shares authorized, 150,000,000 shares issued and outstanding as of March 31, 2017 and 76,245,442 shares issued and outstanding as of March 31, 2016

    150       76  

Additional paid-in capital

    125,053       116,192  

Accumulated deficit

    (134,981 )     (124,551 )

Total stockholders’ deficit

    (9,778 )     (8,283 )

Total liabilities, mezzanine equity and stockholders' deficit

  $ 1,343     $ 2,034  

 

See accompanying notes to financial statements.

 

 
35

 

 

SALON MEDIA GROUP, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

   

Year Ended March 31,

 
   

2017

   

2016

   

2015

 
                         

Net revenue

  $ 4,570     $ 6,959     $ 4,946  
                         

Operating expenses:

                       

Production and content

    4,250       3,927       3,942  

Sales and marketing

    878       1,672       1,783  

Technology

    1,181       1,417       1,309  

General and administrative

    2,194       1,862       1,813  

Total operating expenses

    8,503       8,878       8,847  
                         

Loss from operations

    (3,933 )     (1,919 )     (3,901 )

Interest expense, net

    (5,637 )     (41 )     (39 )

Net loss

    (9,570 )     (1,960 )     (3,940 )

Preferred deemed dividend

    (860 )     -       -  

Net loss attributable to common stockholders

  $ (10,430 )   $ (1,960 )   $ (3,940 )
                         

Basic and diluted net loss per share

  $ (0.10 )   $ (0.03 )   $ (0.05 )
                         

Weighted average shares used in computing basic and diluted net loss per share

    103,935       76,245       76,245  

 

See accompanying notes to financial statements.

 

 
36

 

 

 SALON MEDIA GROUP, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands, except preferred stock shares)

 

   

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

    Accumulated    

Total

Stockholders’

 
    Shares     Amount     Shares     Amount     Capital     (Deficit)     Deficit  

Balance, March 31, 2014

    1,075     $ -       76,245     $ 76     $ 115,605     $ (118,651 )   $ (2,970 )
                                                         

Stock-based compensation

    -       -       -       -       285       -       285  

Net loss

    -       -       -       -       -       (3,940 )     (3,940 )

Balance, March 31, 2015

    1,075       -       76,245       76       115,890       (122,591 )     (6,625 )
                                                         

Stock-based compensation

    -       -       -       -       302       -       302  

Net loss

    -       -       -       -       -       (1,960 )     (1,960 )

Balance, March 31, 2016

    1,075       -       76,245       76       116,192       (124,551 )     (8,283 )
                                                         

Shares converted from preferred stock

    (1,075 )     -       17,200       17       (17 )     -       -  

Shares converted from related party advances

    -       -       56,526       57       5,596       -       5,653  

Shares converted from convertible notes

    -       -       -       -       2,826       -       2,826  

Preferred deemed dividend on conversion of Series C convertible preferred stock

    -       -       -       -       860       (860 )     -  

Shares from options exercise

    -       -       29       -       2       -       2  

Stock-based compensation

    -       -       -       -       412       -       412  

Reclassification of options to liabilities

    -       -       -       -       (818 )     -       (818 )

Net loss

    -       -       -       -       -       (9,570 )     (9,570 )

Balance, March 31, 2017

    -       -       150,000     $ 150     $ 125,053     $ (134,981 )   $ (9,778 )

 

See accompanying notes to financial statements. 

 

 
37

 

  

SALON MEDIA GROUP, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

 

   

Year Ended March 31,

 
   

2017

   

2016

   

2015

 

Cash flows from operating activities:

                       

Net loss

  $ (9,570 )   $ (1,960 )   $ (3,940 )
                         

Adjustments to reconcile net loss to net cash used in operating activities:

                       

Loss from retirement of fixed assets, net

    11       -       -  

Bad debt expense and change in allowance for doubtful accounts

    (5 )     35       14  

Stock-based compensation

    525       302       285  

Depreciation

    35       34       35  

Changes in assets and liabilities:

                       

Accounts receivable

    690       (509 )     587  

Prepaid expenses and other assets

    236       14       (57 )

Accounts payable, accrued liabilities and deferred rent

    995       (78 )     192  

Non-cash interest expense

    5,585       -       -  

Deferred revenue

    7       -       -  

Net cash used in operating activities

    (1,491 )     (2,162 )     (2,884 )
                         

Cash flows from investing activities:

                       

Purchase of property and equipment

    (282 )     (43 )     (41 )

Net cash used in investing activities

    (282 )     (43 )     (41 )
                         

Cash flows from financing activities:

                       

Proceeds from short-term borrowings and advances

    450       2,165       3,035  

Proceeds from issuance of common stock

    2       -       -  

Proceeds from issuance of preferred stock

    515       -       -  

Proceeds from convertible promissory notes

    800       -       -  

Net cash provided by financing activities

    1,767       2,165       3,035  
                         

Net increase (decrease) in cash

    (6 )     (40 )     110  

Cash, beginning of year

    189       229       119  

Cash, end of year

  $ 183     $ 189     $ 229  
                         

Supplemental schedule of non-cash financing activities:

                       

Conversion of unsecured advances into preferred stock

  $ 2,788     $ -     $ -  

Conversion of unsecured advances into common shares

  $ 5,653     $ -     $ -  

Preferred deemed dividend in connection with preferred stock financing

  $ 860     $ -     $ -  

Conversion of stock options to liabilities

  $ 818     $ -     $ -  

Mark to market adjustment of options liability

  $ 113     $ -     $ -  

 

 See accompanying notes to financial statements.

 

 
38

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

Note 1.  The Company

 

Salon Media Group, Inc. (“Salon”, “the Company” or “We”) is an Internet media company that produces a content Website with various subject-specific sections. 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 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 as of March 31, 2017 of $134,981. In addition, Salon expects to incur a net loss from operations for its year ending March 31, 2018. During the last three years, Salon has relied on cash from related-party advances to meet its cash requirements. Based on current cash projections, which contemplate a smaller operating loss and take into account $0.2 million in related party advances received subsequent to year end, Salon estimates it will require between $1.0 and $1.5 million in additional funding to meet operating needs. Operating costs in fiscal year 2017 were stable compared to fiscal year 2016. Subsequent to the end of fiscal year 2017, we took steps to reduce our operating expenses by reducing headcount and not rehiring positions in which we had attrition, and ending certain non-core contracts. However, if planned revenues are less than expected, then we will not meet our operating targets and our projected cash shortfall may be higher. Salon is in discussions with potential investors, including related parties, to obtain additional funding. There can be no assurance that the Company will be able to raise additional funds on commercially reasonable terms, if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Segment and enterprise-wide reporting 

 

Salon discloses segment enterprise-wide information in accordance with ASC 280, “Segment Reporting.” Based upon definitions contained within ASC 280, management has determined that Salon operates in one segment. In addition, substantially all revenues are in the United States, and all of the long-lived assets are located within the United States.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on deposit with banks and investments that are readily convertible into cash and have original maturities of three months or less. There were no cash equivalents as of March 31, 2017 and 2016.

  

 
39

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data) 

 

Accounts receivable, net

 

Accounts receivable are stated net of doubtful accounts. Salon estimates the collectibility 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. Amortization 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 and amortization are relieved from the accounts and the net gain or loss is included in the determination of income or loss.

 

Software and website development costs 

 

The Company accounts for website development costs in accordance with “ASC” 350-50 “Website Development Costs”. Accordingly, all costs incurred in the planning stage are expensed as incurred, costs incurred in the website application and infrastructure development stage that meet specific criteria are capitalized and costs incurred in the day-to-day operation of the website are expensed as incurred. Information technology support expenses to develop new product offerings for internal use are capitalized as software and website development costs and are amortized over the expected useful live. Expenses supporting our Website re-design, which is still in progress, were capitalized during fiscal year 2017, the aggregate of which would be amortized upon the launch of the redesigned Website. 

 

Revenue recognition

 

Salon’s revenues are primarily from the sale of advertising space on its Website. Salon recognizes revenue once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Revenues are recognized ratably in the period over which Salon’s obligations are fulfilled. Payments received before Salon’s obligations are fulfilled are classified as “Deferred revenue” in Salon’s balance sheets.

 

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 the guarantee of a minimum number of times that an advertisement appears in a page viewed by a visitor to Salon’s Website. 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.

 

 
40

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

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, 2017, 2016 and 2015 and comprehensive loss for those periods.

 

Stock-based compensation

 

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. Salon uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. Salon recognizes compensation cost related to options granted on a straight-line basis over the applicable vesting period.  

 

Net loss per share attributable to common shareholders

 

Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net 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,

 
   

2017

   

2016

   

2015

 

Numerator:

                       

Net loss

  $ (10,430 )   $ (1,960 )   $ (3,940 )
                         

Denominator:

                       

Weighted average shares used in computing basic and diluted net loss per share

    103,935,000       76,245,000       76,245,000  
                         

Basic and diluted net loss per share

  $ (0.10 )   $ (0.03 )   $ (0.05 )
                         

Antidilutive securities including options, convertible debts and preferred stock not included in net loss per share calculation

    161,900,000       8,338,000       9,198,000  

 

Financial instruments

 

The carrying amounts of Salon’s financial instruments, including cash, accounts receivable, and accounts payable and accrued liabilities, approximate fair value because of their short maturities.

 

 
41

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data) 

Income taxes

 

Salon recognizes deferred taxes using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

Concentrations of credit risk 

 

Financial instruments that potentially subject Salon to concentrations of credit risk consist principally of trade accounts receivable. Salon performs ongoing credit evaluations of its customers, but does not require collateral. Salon provides an allowance for credit losses that it periodically adjusts to reflect management’s expectations of future losses. Three customers accounted for approximately 35%, 18% and 15% of trade accounts receivable as of March 31, 2017. Five customers accounted for approximately 17%, 14%, 12%, 11% and 10% of trade accounts receivable as of March 31, 2016. Two customers accounted for approximately 23% and 10% of net revenue for the fiscal year ended March 31, 2017. Two customers accounted for approximately 26% and 13% of net revenue for the fiscal year ended March 31, 2016. One customer accounted for approximately 23% of net revenue for the fiscal year ended March 31, 2015.

 

Recent accounting pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, “Business Combinations – Clarifying the Definition of a Business,” which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of ASU 2017-01 to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.

 

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323)” which amends the Codification to incorporate SEC staff views regarding recently issued accounting standards and investments in qualified affordable housing projects. The guidance requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. ASU 2017-03 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We do not expect the adoption of ASU 2017-03 to have a material impact our financial position, results of operations, cash flows, or presentation thereof.

 

 
42

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data) 

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of the testing. ASU 2017-04 is effective for interim and annual testing dates after January 1, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position, results of operations, cash flows, or presentation thereof.

 

In February 2017, the FASB issued ASU 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20)”, which clarifies the scope and application of ASC Topic 610-20 on accounting for the sale or transfer of nonfinancial assets, that is an asset with physical value, such as real estate, equipment, intangibles or similar property. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position, results of operations, cash flows, or presentation thereof.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU No. 2016-13 will be effective for the Company as of January 1, 2020. The Company is currently reviewing the impact of this new guidance and does not believe adoption will have a material impact on its financial statements.

 

In February 2016, the FASB issued authoritative guidance intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance should be applied under a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company is evaluating the full impact this guidance will have on its financial statements.

 

In May 2014, the FASB issued authoritative guidance related to new accounting requirements for the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services. Subsequent to the release of this guidance, the FASB has issued additional updates intended to provide interpretive clarifications and to reduce the cost and complexity of applying the new revenue recognition standard both at transition and on an ongoing basis. The new standard and related amendments are effective for annual reporting periods beginning after December 15, 2017, and interim periods. The Company is evaluating the full impact this guidance will have on its financial statements.

 

 
43

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

 

Reclassifications

 

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

 

Note 3. Property, Software Development and Equipment

   

March 31,

 
   

2017

   

2016

 

Property, software development and equipment, net

               

Computer hardware and software

  $ 898     $ 1,153  

Software and website development

    499       236  

Furniture and office equipment

    37       126  

Leasehold improvements

    -       15  
      1,434       1,530  

Less accumulated depreciation

    (1,129 )     (1,461 )
    $ 305     $ 69  

 

Qualifying website development costs incurred during the application development stage, which consist primarily of outside services and design of our website, are capitalized. Our website is in its development stage, therefore, no amortization was recorded during the years ended March 31, 2017, 2016 and 2015.

 

Depreciation expense for the fiscal years ended March 31, 2017, 2016 and 2015 was $35, $34 and $35 respectively.

 

Note 4. Borrowing Agreements

 

Short-term borrowings

 

In May 2007, Salon entered into a borrowing agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1,000, plus accrued interest, at a rate of prime less 0.25%. In September 2016, this credit agreement was transferred to Raymond James and Associates, Inc. (“Raymond James”) after Deutsche Bank Securities Inc. sold its accounts. The agreement is guaranteed in its entirety by Salon’s former Chairman, John Warnock. The line of credit has been fully drawn as of March 31, 2017 and 2016. Salon and its former 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 former Chairman. Raymond James may demand repayment of amounts borrowed at any time. Additionally, Mr. Warnock may also choose to terminate his guarantee, which would trigger a demand for repayment. As of March 31, 2017 and 2016, accrued interest on bank debt totaled $382 and $335, respectively. During the fiscal years ended March 31, 2017 and 2016, the weighted average interest rate on the Company’s short-term borrowings remained constant at approximately 3.5%. 

 

 
44

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data) 

 

Convertible promissory notes (bridge financing agreement)

 

During the fiscal year ended March 31, 2017, we issued $200 in interest-bearing convertible promissory notes, $100 of which was issued to a related party, that were converted into 179,312 shares of Series A Preferred Stock, in a series of related transactions, resulting in aggregate additional proceeds to the Company of $1,200. The notes bear interest on the outstanding principal at the rate of two percent (2%) per annum. These 179,312 shares of Series A Preferred Stock will automatically be converted into 17.9 million shares of Common Stock upon the filing of the Amendment and resulting increase to our authorized shares of Common Stock, which is expected to occur during the quarter ending September 30, 2017.

 

Additionally, all of the bridge financing convertible promissory notes contained a conversion price that is deemed beneficial to the holders of the notes. Accordingly, the Company recorded non-cash interest expense aggregating $200 for the additional value of the beneficial conversion feature.

 

Demand promissory notes

 

During the fiscal year ended March 31, 2017, we issued $600 in interest bearing demand promissory notes that were converted into 483,494 shares of Series A Preferred Stock. The notes bear interest on the outstanding principal at the rate of four percent (4%) per annum. These 483,494 shares of Series A Preferred Stock will automatically be converted into 48.3 million shares of Common Stock upon the filing of the Amendment and resulting increase to our authorized shares of Common Stock, which is expected to occur during the quarter ending September 30, 2017.

 

During the fiscal year ended March 31, 2017, we issued $400 in interest-free demand promissory notes that were converted into 322,330 shares of Series A Preferred Stock. These 322,330 shares of Series A Preferred Stock will automatically be converted into 32.2 million shares of Common Stock upon the filing of the Amendment.

 

During the fiscal year ended March 31, 2017, we also issued $215 in interest-free demand promissory notes that were converted into 173,253 shares of Series A Preferred Stock, in a series of second-stage related transactions closed on March 23, 2017, resulting in proceeds to the Company of $215. These 173,253 shares of Series A Preferred Stock will automatically be converted into 17.3 million shares of Common Stock upon the filing of the Amendment.

 

Additionally, $1,215 of the issued demand promissory notes contained a conversion price that is deemed beneficial to the holders of the notes. Accordingly, the Company recorded non-cash interest expense aggregating $1,215 for the additional value of the beneficial conversion feature during the fiscal year ended March 31, 2017.

 

As of March 31, 2017, Salon had no outstanding convertible notes and does not anticipate entering into similar debt instruments during its fiscal year ending March 31, 2018. 

 

 
45

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

Advances from related parties

 

During the fiscal year ended March 31, 2017, the Company received $350 and $100 in unsecured, interest-free cash advances from John Warnock and William Hambrecht, respectively, as working capital. During the fiscal year ended March 31, 2016, the Company received $2,165 in unsecured, interest-free cash advances from Mr. Warnock; Mr. Hambrecht did not provide any advances during this period. 

 

As of March 31, 2017, outstanding advances from related parties equal to $5,653 were exchanged into 56.53 million shares of Common Stock. Mr. Warnock received 54.28 million shares of Common Stock and Mr. Hambrecht agreed to receive 2.25 million shares of Common Stock. The Company also converted $2,688 in related party advances from Mr. Hambrecht in exchange for 268,840 shares of Series A Preferred Stock, which will automatically be converted into 26.88 million shares of Common Stock upon the filing of the Amendment.

 

Additionally, the conversion of advances contained a conversion price that is deemed beneficial to the related parties. Accordingly, the Company recorded non-cash interest expense aggregating $4,171 for the additional value of the beneficial conversion feature during the fiscal year ended March 31, 2017, of which $2,826 is attributed to conversion of related party advances to common stock and $1,345 is attributed to the conversion of related party advances to Series C Preferred Stock.

 

 
46

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

 

Note 5. Accounts Payable and Accrued Liabilities

 

   

March 31,

 
   

2017

   

2016

 

Accounts payable and accrued liabilities

               

Accounts payable

  $ 1,241     $ 393  

Salaries and wages payable

    390       449  

Accrued services

    126       14  

Accrued interest

    382       335  

Fair value of vested stock options

    931       -  

Other accrued expenses

    124       66  
    $ 3,194     $ 1,257  

 

Note 6. 401(k) Savings Plan

 

Salon’s 401(k) Savings Plan (the “401(k) Plan”) is a defined contribution retirement plan intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. All full-time employees of Salon are eligible to participate in the 401(k) Plan pursuant to its terms. Participants may contribute from 1% to 20% of compensation, subject to statutory limitations. Employer matching contributions are discretionary based on a certain percentage of a participant’s contributions as determined by management of Salon. Salon has not made any discretionary matching contributions to the 401(k) Plan through March 31, 2017.

 

Note 7. Employee Stock Option Plans

 

Salon has two stock option plans approved by stockholders: the Salon Media Group, Inc. 2004 Stock Plan (the “2004 Stock Plan) that was approved by Salon’s stockholders in November 2004 and the Salon Media Group, Inc. 2014 Stock Incentive Plan (the “2014 Stock Incentive Plan) that was approved by Salon’s stockholders in March 2014. The 2004 Stock Plan and the 2014 Stock Incentive Plan, each with an effective term of ten years following its approval by the stockholders of the Company, allow the issuance of incentive and non-statutory options to employees and non-employees of Salon. The 2004 Plan expired in November 2014 after which no further options are allowed to be granted.

 

Under the 2014 Stock Incentive Plan, the maximum aggregate number of shares which may be issued is 10,000,000 shares, plus an annual increase to be added on the first business day of the Company’s fiscal year beginning in 2015 equal to 1% of the number of shares outstanding as of such date or a lesser number of shares determined by the administrator.

 

Under the 2014 Stock Incentive Plan, incentive and nonqualified stock options may be granted to officers, employees, directors and consultants of Salon. Options generally vest over periods of four years. Options generally become exercisable as to 25% of the option shares one year from the date of grant and then ratably over the following 36 months (1/48 per month). The exercise price of options is determined by the Board and is equal to the fair market value of the stock on the grant date. Generally, Salon’s options expire, if not exercised, ten years after the date of grant.

 

 
47

 

 

SALON MEDIA GROUP, INC.

NOTES FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

 

Salon may grant restricted stock awards to officers that typically vest over an approximate four year period. Restricted stock awards are considered outstanding at the time of grant, as the stock award holders are entitled to dividends and voting rights.

 

Salon has granted options pursuant to plans not approved (“Non-Plan”) by stockholders. On June 9, 2016, we granted to our CEO an option to purchase 12,654,318 shares of Common Stock pursuant to the terms and conditions of the Salon Media Group, Inc. Non Plan Stock Option agreement, with vesting in equal monthly installments over a four-year period commencing with the grant date. We did not grant any subsequent Non-Plan options during the rest of fiscal year ended March 31, 2017.

 

As of March 31, 2017, Salon has approximately 11,524,000 shares authorized to be issued under the 2014 Stock Incentive Plan of which approximately 9,546,000 shares remain available for future grant.

 

Stock based compensation expense recognized for the years ended March 31, 2017, 2016 and 2015 was $525, $302 and $285, which consisted of stock-based compensation expense related to stock options. The significant increase in stock based compensation expense during the current fiscal year was mainly attributed to the above Non-Plan options granted to our CEO on June 9, 2016.

 

As of March 31, 2017, the aggregate stock compensation remaining to be amortized to expenses was $1,325. Salon expects this stock-based compensation balance to be amortized as follows: $439 during fiscal year 2018; $419 during fiscal year 2019; $395 during fiscal year 2020 and $72 during fiscal year 2021. The expected amortization reflects only outstanding stock option awards as of March 31, 2017.

 

No amounts were recorded relating to excess tax benefits from the exercise of stock-based compensation awards during the year ended March 31, 2017, 2016 and 2015 and as a result there were no differences in net cash used in operating and financing activities.

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions and fair value per share:

 

   

Year Ended March 31,

 
   

2017

   

2016

   

2015

 

Risk-free interest rates

    1.10 1.15%       1.10 1.30%       0.12  – 1.25%  

Expected lives (in years)

    4.0 6.3         4.0%           4.0    

Expected volatility

    206 393%       217 388%       354  – 425%  

Dividend yield

      0.0%           0.0%           0.0%    

 

We applied the expected term of 6.3 years during the fiscal year ended March 31, 2017, to more appropriately estimate expectations of exercise behavior of the options. The expected stock price volatility is based on historical volatility of Salon’s stock over a period equal to the expected term of the options. The risk-free interest rate is based on the implied yield available on U.S. Treasury securities with a term equivalent to the service period of the stock options. We have not paid dividends in the past.

 

 
48

 

 

SALON MEDIA GROUP, INC.

NOTES FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

Due to insufficient authorized shares of Common Stock as of November 14, 2016, the vested options as of this date with a fair value of $818, were reclassified from equity to liabilities and re-measured at fair value and are presented under accounts payable and accrued liabilities. The balance of the option liability was $931 as of March 31, 2017. We expect the Amendment to be filed during the quarter ending September 30, 2017 and the liabilities to be reclassified back to equity, upon the resulting increased authorization of shares of Common Stock.

 

The following table summarizes activity under Salon’s plans for the years ended March 31, 2015 2016 and 2017:

 

   

Outstanding

Stock Options

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual

Life

(Years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding as of April 1, 2014

    6,008,000     $ 0.13       7.8     $ 383  
                                 

Granted

    2,388,000     $ 0.24                  

Expired or forfeited

    (295,000 )   $ 0.27                  

Outstanding as of March 31, 2015

    8,101,000     $ 0.16       7.8     $ 328  
                                 

Granted

    95,000     $ 0.17                  

Expired or forfeited

    (954,000 )   $ 0.26                  

Outstanding as of March 31, 2016

    7,242,000     $ 0.15       7.3     $ 124  
                                 

Granted

    12,955,000     $ 0.24                  

Exercised

    (29,000 )   $ 0.05                  

Expired or forfeited

    (991,000 )   $ 0.18                  

Outstanding as of March 31, 2017

    19,177,000     $ 0.21       8.2     $ 223  
                                 

Exercisable as of March 31, 2017

    8,285,000     $ 0.17       7.0     $ 223  
                                 

Vested and expected to vest as of March 31, 2017

    12,991,000     $ 0.21       8.2     $ 223  

 

 

 
49

 

 

SALON MEDIA GROUP, INC.

NOTES FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

 

The following table summarizes information about stock options outstanding as of March 31, 2017:

 

           

Options Outstanding

   

Options Exercisable

 
                   

Weighted

                         
                   

Average

   

Weighted

           

Weighted

 
           

Number of

   

Remaining

   

Average

   

Number of

   

Average

 

Range of

   

Shares

   

Contractual

   

Exercise

   

Shares

   

Exercise

 

Exercise Prices

   

Outstanding

   

Life (Years)

   

Price

   

Exercisable

   

Price

 
  $0.01 - $0.01       1,056,000       5.3     $ 0.01       1,056,000     $ 0.01  
  $0.05 - $0.06       59,000       5.1     $ 0.05       59,000     $ 0.05  
  $0.10 - $0.13       3,250,000       6.0     $ 0.13       3,244,000     $ 0.13  
  $0.16 - $0.24       14,529,000       9.0     $ 0.24       3,842,000     $ 0.24  
  $0.25 - $0.35       276,000       7.4     $ 0.34       77,000     $ 0.34  
  $0.45 - $0.45       7,000       4.6     $ 0.45       7,000     $ 0.45  
              19,177,000       8.2     $ 0.21       8,285,000     $ 0.17  

 

The weighted average grant date fair value per share of the stock option awards granted in the years ended March 31, 2017, 2016 and 2015 was $0.23, $0.16, and $0.24, respectively. The weighted average fair value of options vested during the years ended March 31, 2017, 2016 and 2015 was $0.22, $0.18 and $0.12 per share, respectively.

 

The total intrinsic value of options exercised during the years ended March 31, 2017, 2016 and 2015 were nil. A total of 29,000 options were exercised during the year ended March 31, 2017. No options were exercised during the years ended March 31, 2016 and 2015.

 

 

 
50

 

 

SALON MEDIA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

 

 

 

Note 8. Commitments and Contingencies

 

Salon has an operating lease agreement for its San Francisco, California office headquarters that will expire in November 2017. 

 

In August 2016, we informed our landlord at our office space at 132 West 31st Street, New York, New York, of our intention to move out of the premises, and we engaged a property agent to find a sub-tenant for this space. The lease for this space commenced on July 1, 2014 and will expire on September 30, 2019. In January 2017, we were asked to vacate the office space at 132 West 31st Street due to nonpayment of our monthly rent, and on January 30, 2017 we released the letter of credit of $204 to the landlord to settle the unpaid rent. We continue to be in discussions with the landlord of 132 West 31st Street to mitigate any future liabilities associated with this lease.

 

Rent expense under operating lease agreements was $473, $410 and $412 for the years ended March 31, 2017, 2016 and 2015, respectively.

 

Total future minimum payments under operating leases and short-term borrowing in effect as of March 31, 2017 are as follows:

 

   

Payments Due By Period

 
   

Total

   

Year 1

   

Year 2

 

Operating leases

  $ 891     $ 388     $ 503  

Short-term borrowing

    1,000       1,000       -  

Short-term borrowing interest

    382       382       -  

Total

  $