SALON MEDIA GROUP INC - FORM 10-K

Attached files

file	filename
EX-23.1 - SALON MEDIA GROUP INC	ex23-1.htm
EX-32.2 - SALON MEDIA GROUP INC	ex32-2.htm
EX-32.1 - SALON MEDIA GROUP INC	ex32-1.htm
EX-31.1 - SALON MEDIA GROUP INC	ex31-1.htm
EX-31.2 - SALON MEDIA GROUP INC	ex31-2.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, 2010

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-26395

SALON MEDIA GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	94-3228750
(State of Incorporation)	(IRS Employer Identification No.)

101 Spear Street, Suite 203

San Francisco, CA 94105

(Address of principal executive offices)

(415) 645-9200

(Registrant's telephone number, including area code)

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

None

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

Common Stock, $0.001 Par Value

(Title of Class)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [x]

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

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined by Exchange Act Rule 12b-2).Yes [ ] No [X]

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $184,000 based on the closing sale price of the registrant’s common stock on June 11, 2010. Shares of common stock held by each then current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to have been affiliates of Salon. This determination of affiliate status is not a conclusive determination for other purposes.

The number of outstanding shares of the Registrant's Common Stock, par value $0.001 per share, on June 11, 2010 was 2,437,956 shares.

FORM 10-K

SALON MEDIA GROUP, INC.

INDEX

		Page Number
PART I

ITEM 1.	Business	3

ITEM 1A.	Risk Factors	10

ITEM 1B.	Unresolved Staff Comments	19

ITEM 2.	Properties	19

ITEM 3.	Legal Proceedings	19

PART II

ITEM 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	19

ITEM 6.	Selected Consolidated Financial Data	22

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	33

ITEM 8.	Financial Statements and Supplementary Data	34

ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	61

ITEM 9A.	Controls and Procedures	61

ITEM 9B.	Other Information	62

PART III

ITEM 10.	Directors and Executive Officers of the Registrant	62

ITEM 11.	Executive Compensation	65

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	75

ITEM 13.	Certain Relationships and Related Transactions	83

ITEM 14.	Principal Accountant Fees and Services	84

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	85

	SIGNATURES	94

PART I

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties, including but not limited to statements regarding our strategy, plans, objectives, expectations, intentions, financial performance, cash-flow breakeven timing, financing, economic conditions, Internet advertising market performance, subscription service plans, non-web opportunities and revenue sources. Although Salon Media Group, Inc. (“Salon” or the “Company”) believes its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth above and in Salon’s public filings. Salon assumes no obligation to update any forward-looking statements as circumstances change.

Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Factors That May Affect Salon’s Future Results and Market Price of Stock." In this report, the words “anticipates,” “believes,” “expects,” “estimates,” “intends,” “future,” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

ITEM 1. Business

Overview

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

Salon is an online news and social networking company and an Internet publishing pioneer providing high quality journalism and a forum for discussing current events and contemporary social political issues. Salon’s award-winning content combines breaking news, original investigative stories and provocative personal essays along with quick-take commentary and staff-written blogs about politics, technology, culture and entertainment. Committed to interactivity, the Website also hosts two online communities, Table Talk and The Well, as well as Open Salon, an innovative blogging social network. Among its many quality offerings, Salon sponsors daily blogs by Editor-in Chief Joan Walsh and independent bloggers Glenn Greenwald and Joe Conason, plus an evolving group of new voices who are regular contributors to the site. In its editorial product Salon balances two crucial missions: (1) providing original and provocative content on topics that the mainstream media overlook, and (2) filtering through the media chatter and clutter to help readers find the stories that matter.

The main entry and navigation point to Salon's primary subject-specific sections is Salon's home page at www.salon.com. Built around multiple daily features such as War Room, Since you Asked, Broadsheet, How the World Works, Ask the Pilot and daily blogs by Glenn Greenwald and Joan Walsh, Salon provides a constantly updated array of news, features, interviews, columnists and blogs, including the following:

News & Politics	Salon News & Politics features breaking stories, investigative journalism and commentary, as well as interviews with newsmakers, politicians and pundits. News features Salon’s War Room, a daily politics blog.
Opinion	Opinion features provocative commentary on timely issues, including daily blogs by Glenn Greenwald, Joan Walsh and Joe Conason, and periodic columns by authoritative voices of the blogosphere.
Technology & Business	Technology & Business provides smart, opinionated coverage of Internet news and digital culture from today's best technology writers, along with in-depth features about the business world and the economy. It features Patrick Smith's regular Ask the Pilot column, Andrew Leonard’s How the World Works blog, and shared content from the GigaOM network.
Movies	Salon’s Movie Page spotlights film reviews, especially critics’ picks, and provides readers an ability to check movie show times, buy tickets or purchase DVDs, and features reviews from film critics Andrew O’Hehir and Mary Elizabeth Williams.
Life	Life features articles by thought-provoking writers about family life, motherhood and women's lives and issues, as well as the women’s news digest Broadsheet. Cary Tennis' popular advice column, Since You Asked, appears daily.
Books	Books includes ahead-of-the-curve daily book reviews and interviews with today's most interesting writers. Nationally renowned critic Laura Miller anchors this site, which often includes insightful freelance reviews.
Food	Salon's new Food section, headed by award winning writer Francis Lam, is rooted in the belief that every recipe has a story to tell. It aims to be an enlightening, unpretentious and fun resource where readers are treated to an array of fascinating and sometimes unexpected food topics, stories, recipes and personal experiences.
Comics	The Comics section features the works of comic luminary Tom Tomorrow, and other independent artists.
Store	The Salon Store was launched in December 2009, as an e-commerce test. Product selection is curated with the unique tastes of the Salon reader in mind. Offerings are currently focused primarily on videos and books, with planned expansion into food, wines and eclectic items of interest.
Open Salon	Open Salon provides a smart home for reader’s work where they can publish and share their work, generate advertising revenue, and potentially have their works be published on Salon.com.

Salon has two online communities, The Well and Table Talk, which allow users to discuss Salon content and interact with other users. The Well, a subscription member-only discussion community in which members use their real names to post and only members can view the postings, had approximately 2,300 paying subscribers as of March 31, 2010. Table Talk is available to all Internet users.

Salon believes that its original, award-winning content allows Salon to attract and retain users who are more affluent, better educated and more likely to make online purchases than typical Internet users. Salon believes its user profile makes its Website a valuable media property for advertisers and retailers who are allocating marketing resources to target consumers online.

During fiscal year 2009, Salon launched Open Salon.com, a social network for bloggers, with content curated by Salon staff. Open Salon functions like a real-time magazine cover, where the best content is spotlighted. Blogs from Open Salon may be posted on the Salon.com website. Open Salon’s audience has grown consistently since its launch, and has become a reliable source of content and audience traffic.

Revenue Sources

No customer accounted for over 10% of total revenue for the year ended March 31, 2010, 2009 and 2008, which were as follows (in thousands):

	Year Ended March 31,
	2010					2009					2008
	Amount		%			Amount		%			Amount		%
Advertising	$	2,967		69	%	$	5,195		76	%	$	5,434		72	%
Salon Premium		701		16	%		994		14	%		1,333		18	%
All Other		623		15	%		685		10	%		746		10	%
Total	$	4,291		100	%	$	6,874		100	%	$	7,513		100	%

Salon has generated Internet advertising revenues since its inception. To offset the precipitous drop in advertising revenues experienced in 2000 from the downturn in the economy, the company launched Salon Premium, a subscription service, in April 2001. Since that time, the market for Internet advertising has improved; according to the Interactive Advertising Bureau, United States online advertising revenues have grown from $9.6 billion in 2004 to $22.7 billion in 2009. However, during this period of deep recession, online advertising revenues declined by 3.4% in 2009, and contributed to a decline in Salon’s ad revenues in fiscal 2010. According to industry analysts, online advertising revenues began to pick up in the fourth quarter of 2009, indicating a bottom has been reached. According to market research firm IDC, U.S. online advertising is expected to grow 12.6% in 2010. Central to Salon’s strategy is to capitalize on the expected continued shift in spending of advertising budgets to the Web in response to increased online usage.

An important factor in increasing advertising revenues in future periods is growth in Salon’s audience. Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements. Ultimately, Salon charges advertisers for a set number of ad impressions viewed by a Website visitor. During fiscal 2010, management launched a new strategy to increase traffic, including a fresh new site design, more aggressive and timely news coverage, and expanded lifestyle coverage in areas such as food, film and books. The strategy began to bear fruit in the fourth quarter ending March 31, 2010, as unique monthly visitors averaged 5.4 million, a 22% increase over the same quarter in the prior fiscal year. Additionally, monthly unique visitors have grown by 43% over the past four years. Aiding the continued growth in unique visitors to Salon’s Website is the general migration of readers to the Internet from print newspapers. The table in the following page reflects unique monthly visitors to Salon’s Website.

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

Subscriptions have been de-emphasized and are a secondary source of revenue. Generally, subscriptions to Salon Premium cost between $29 and $45 annually, depending on any associated bundles of promotional items offered. Benefits of Salon Premium include unrestricted access to Salon’s content with no banners, pop-ups or site pass advertisements, free magazine subscriptions, free access to the Table Talk on-line discussion forum, and the ability to download content in text or PDF format.

Salon Premium revenue is recognized ratably over the period that services are provided. For the year ended March 31, 2010, Salon received $0.6 million in cash and recognized $0.7 million of revenue for this service primarily from approximately 12,000 paid new and renewed one year subscriptions and from approximately 10,600 monthly subscriptions. For the year ended March 31, 2009, Salon received $0.8 million in cash and recognized $1.0 million of revenue for this service primarily from approximately 17,600 paid new and renewed one year subscriptions and from approximately 7,000 monthly subscriptions. For the year ended March 31, 2008, Salon received $1.2 million in cash and recognized $1.3 million of revenue for this service primarily from approximately 27,900 paid new and renewed one year subscriptions and from approximately 4,400 monthly subscriptions. Since peaking at 89,100 subscribers in December 2004, paid subscriptions have continued to decline to 23,500 as of March 31, 2009 and approximately 15,800 as of March 31, 2010. The drop is expected to continue during the next year, following longstanding industry trends away from paid Web content.

The other sources of revenue are primarily membership and data storage fees from The Well, an on-line discussion forum. Revenue is recognized ratably over the subscription period. The revenues recognized were $0.4 million each for the years ended March 31, 2010, March 31, 2009 and March 31, 2008. Salon generates nominal revenue from the licensing of content that previously appeared in Salon, for providing links to a third party’s Website offering personals/dating services, and from its nascent e-commerce activities.

Sales and Marketing

Salon has sales offices in New York City and Los Angeles, with eight advertising sales and operations employees as of March 31, 2010, of which five actively solicit orders. As of March 31, 2010, Salon has one employee associated with Salon Premium membership activities.

Salon incurred advertising expenses of $1.2 million, $0.9 million and $1.1 million for the years ended March 31, 2010, 2009, and 2008, respectively. These advertising expenses primarily represent non-cash expenses from the utilization of advertising credits which Salon acquired in January 2000 from the sale of common stock to Rainbow Media Holdings (“Rainbow”). During the year ended March 31, 2003, Rainbow transferred a portion of its obligation to provide Salon with advertising credits to NBC’s Bravo channel, while still retaining a portion of the overall obligation. The transfer occurred due to the sale by Cablevision, which owns Rainbow Media Holdings, of its Bravo channel to NBC. As of December 31, 2009, Salon has fully utilized the ad credits with NBC and Rainbow.

Competition

Salon competes for advertising revenues with numerous Websites, with the 50 largest companies attracting an estimated 89% of all the internet advertising dollars according to a recent study by PricewaterhouseCoopers LLC and sponsored by the Interactive Advertising Bureau. These companies have Websites that include major portals such as Yahoo, major search engines such as Google, major social networks such as Facebook and MySpace, and major online media publications such as CNN.com.

Salon also competes with many news–oriented Websites. In addition to traditional news-oriented Websites such as CNN, NBC, ABC and CBS, Salon also competes with sites such as the Huffington Post, Slate, Mother Jones, Daily Beast and Politico for staff, audience and ad sales.

Salon’s Strategy

Continued focus on growing Salon’s audience

Increasing unique visitors to Salon’s Website and the resulting page views that serve as a platform for advertising impressions is key to Salon’s revenue growth. In addition to the revenue generated from advertising, an increase in unique visitors could increase revenue from subscriptions as each new visitor to Salon’s Website is a potential new subscriber to Salon Premium. As a result, audience growth will continue to be a primary business goal for Salon.

Salon plans to continue to focus on developing its audience growth through a combination of editorial enhancements, new products, and more effective use of technology. Salon has broadened its content by adding, for example, a new food section, and continues to enhance or create new content areas and features for its readers. During fiscal 2010, Salon launched a re-designed architecture and Website in an effort to accelerate its continued growth, with increased attention to search engine optimization and referral traffic.

Salon launched a new social networking service in August 2008 for its users, “Open Salon,” which allows them to post user profiles; contribute blogs and other content; and collect all their contributions to Salon, including Letters to the Editor, in one place. Management believes Open Salon will attract and retain unique users, increase advertising inventory and lower its incremental editorial costs. Salon’s strategy to continue to grow its audience also encompasses partnership formation to deliver Salon’s content to a broader audience, a search engine optimization plan, and an integrated marketing plan that includes mostly online advertising. In the last several years Salon has not allocated, and does not currently contemplate in its next fiscal year allocating any significant cash resources towards such efforts; however, Salon has formed and continues to form partnerships and alliances to deliver Salon’s award-winning, unique, and compelling content to a broader audience.

Focus on advertising revenue opportunity while Premium subscriber base declines

Salon generates most of its revenue from advertising on its Website, as well as through subscribers who pay to read its content without ads. However, as Salon increased its number of readers to its Website, Salon has determined that if its advertising sales team can sell most of its inventory, it will be far more profitable for Salon to drive its readers to its advertising supported Website rather than to a subscription, without-ads Website. Salon recognizes that its subscription model will continue to be preferred by a minority of its readers, and will therefore continue the subscription program, with emphasis on “Premium with ads” as a means of increasing potential ad impressions. Additionally, Salon will continue efforts to increase the average value per subscriber by bundling third-party services with subscriptions, and intends to offer other products and services to current subscribers.

Since the end of fiscal year 2007, Salon has increased emphasis on advertising revenues. In fiscal year 2011 , Salon plans to continue to provide more creative advertising offerings, improve the technological orientation of the site to attract more non-standard advertising and expand into additional advertising categories. It will also expand the use of ad networks to fully monetize any unsold remnant inventory.

Enhanced Website Design

In fiscal 2010, Salon launched a re-designed architecture and Website to improve the presentation of timely and relevant content through a compelling and dynamically tuned interface. Salon expects this redesign to result in greater user satisfaction, and therefore, higher utilization, higher search rankings that will drive new users to the site and a higher proportion of repeat engagement, as users return throughout the day to obtain timely news and information. It is anticipated that the site will be more dynamic and interactive, and that its new modular architecture will allow editors to manage a real time flow of content presented in a graphically compelling fashion, while also servicing multiple platforms and devices, and dynamic usability experiments.

Expanding Gross Margins

Salon has made substantial strides in the past fiscal year to better realign its production costs with its revenue potential in an effort to reach profitability. Among other measures, we reduced full-time headcount from 63 in March 2008, to 53 in March 2009, to 45 in March 2010, and we are continually aiming to match personnel resources to overall business need given the prevailing advertising market. Additionally, we are evaluating opportunities to reduce the expense of our high-quality content by focusing on reducing cost per page, seeking less costly sources of content, including greater content aggregation and the use of popular articles and blogs from Open Salon.

Develop Content Partnerships

Salon believes it needs fresh content and new ideas to continue to attract readers to its Website. To this end, Salon has made efforts to initiate partnerships to create content particularly in areas where Salon does not have facilities or experience, such as video content, and various content verticals. Additionally, Salon has made efforts to identify bloggers who might have a strong affinity with its readers, and who might be interested in moving their sites to Salon in order to gain a greater reach of readership, and to gain infrastructure support.

Infrastructure and Operations

Salon has created a flexible publishing structure that enables it to develop its content while responding quickly to news events and take advantage of the ease of distribution provided by the Internet. Salon content is deployed on its proprietary software platform and captured in a database for reuse in Web and other formats. The content on Salon’s Website has been structured to facilitate being found by search engines, a key driver in increasing traffic to Salon’s Website. During the last two years, Salon has improved the look and feel of its Website to increase appeal to its audience and contemplates continued changes to its Website. In fiscal year 2010, Salon made significant investments in this area with a re-designed architecture and website to help drive traffic to its site.

Salon’s Website is supported by a variety of servers using the Solaris and Linux operating systems. Salon’s top technical priority is the fast delivery of pages to its users. Salon’s systems are designed to handle traffic growth by balancing the amount of traffic among multiple servers. Salon relies on server redundancy to help achieve its goal of 24 hours, seven-days-a-week Website availability. Regular automated backups protect the integrity of Salon’s data. Salon servers are maintained at a third-party facility in Sacramento, in a building capable of withstanding a major earthquake. The third-party facility provides continuous monitoring of the servers.

Software to maintain and manage Salon Premium was created in-house and upgraded in 2003, again during fiscal 2007, and a major reprogramming effort was conducted in fiscal year 2010.

Proprietary Rights

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

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

Employees

As of March 31, 2010, Salon has 45 full-time and two part-time employees. Salon believes its employee relations are good. No employees of Salon are represented by a labor union or are subject to a collective bargaining agreement. Salon’s future success is highly dependent on the ability to attract, hire, retain and motivate qualified personnel.

ITEM 1A. Risk Factors

Factors That May Affect Salon’s Future Results and Market Price of Stock

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

Salon’s projected cash flows may not meet expectations

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

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

Salon has relied on related parties for significant investment capital

Salon has been relying on cash infusions primarily from related parties to fund operations. The related parties are generally John Warnock, Chairman of the Board of Salon, and William Hambrecht. William Hambrecht is the father of Salon’s former President and Chief Executive Officer, Elizabeth Hambrecht, a Director of the Company. During the year ended March 31, 2010, related parties provided approximately $2.6 million in new loans.

Curtailment of cash investments and borrowing guarantees by related parties could detrimentally impact Salon’s cash availability and its ability to fund its operations.

Salon’s principal stockholders can exercise a controlling influence over Salon’s business affairs and may make business decisions with which non-principal stockholders disagree and may affect the value of their investment

Based on information available to Salon, the holders of Salon’s Series A, B, C and D preferred stock collectively own approximately 94% of all voting securities. These stockholders therefore own a controlling interest in Salon. Of this amount, approximately 21% is controlled directly or indirectly by William Hambrecht and approximately 39% by Chairman and Director John Warnock. Therefore, related parties by themselves own a controlling interest in Salon.

If these stockholders were to act together, they would be able to exercise control over all matters requiring approval by other stockholders, including the election of Directors and approval of significant corporate transactions. This concentration of ownership could also have the effect of accelerating, delaying or preventing a change in control of Salon, which could cause Salon’s stock price to decline.

Future sales of significant number of shares of Salon’s common stock by principal stockholders could cause its stock price to decline

Salon’s preferred stockholders can convert their 9,467 shares of preferred stock to approximately 10.1 million shares of common stock. As Salon’s common stock is normally thinly traded, if these stockholders were to convert their shares of preferred stock to common stock and sell the resulting shares, the per share price of Salon’s common stock may be adversely affected.

Salon’s stock has been and will likely continue to be subjected to substantial price and volume fluctuations due to a number of factors, many of which will be beyond its control and may prevent its stockholders from reselling its common stock at a profit

The securities markets have experienced significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, have and may continue to reduce the market price of its common stock, regardless of its operating performance. In addition, Salon’s stock is thinly traded and operating results could be below the expectations of public market analysts and investors, and in response, the market price of its common stock could decrease significantly.

Salon’s preferred stockholders are entitled to potentially significant liquidation preferences of Salon’s assets over common stockholders in the event of such an occurrence

Salon’s Series A, B, C and D preferred stockholders have liquidation preferences over common stockholders of the first approximately $25.1 million in potential sales proceeds as of March 31, 2010, which includes the effect of undeclared dividends of $6 million. If a liquidation event were to occur, and preferred stock dividends were declared, the holders of preferred stock would be entitled to the first $25.1 million of cash distributions, while the holders of common stock would receive none of this amount. If a liquidation event were to occur in excess of $25.1 million and if preferred stock dividends were to be declared, the holders of preferred stock would be entitled to receive a relatively larger distribution than the holders of common stock would be entitled to receive.

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

Salon has a history of significant losses and expects to incur an operating loss, based on generally accepted accounting principals, for its fiscal year ending March 31, 2011. Once Salon attains profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow slower than Salon anticipates or operating expenses exceed expectations, financial results will most likely be severely harmed and the ability of Salon to continue its operations will be seriously jeopardized.

Salon Premium memberships have been declining and may continue to decline, adversely affecting revenues and available cash

Salon has been relying on the revenues and cash generated from Salon Premium subscriptions since its implementation in April 2002. Salon Premium subscriptions grew from nothing to a high of approximately 89,100 as of December 31, 2004. However, since that time, subscriptions have been declining to approximately 15,800 as of March 31, 2010. Salon forecasts that these memberships will continue to decline to approximately 10,000 as of March 31, 2011. If the decline were to be in excess of anticipated amounts, Salon’s operations and available cash could be adversely affected.

Salon has depended on advertising sales for much of its revenues, and its inability to maintain or increase advertising revenues could harm its business

Maintaining or increasing Salon’s advertising revenues depends upon many factors, including whether it will be able to:

·	successfully sell and market its Website auto start Site Pass or other rich media advertisements;

·	entice non-Salon Premium Website visitors to view and advertisers to sell new ad units and formats;

·	maintain a significant number of unique Website visitors and corresponding significant reach of Internet users;

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

·	successfully sell and market its network to advertisers;

·	increase the dollar amount of the advertising orders it receives;

·	maintain pricing levels of the advertising it sells;

·	increase awareness of the Salon brand;

·	improve the technology for serving advertising on its Website;

·	handle temporary high volume traffic spikes to its Website;

·	accurately measure the number and demographic characteristics of its users; and

·	attract and retain key sales personnel.

Legislative action and potential new accounting pronouncements are likely to cause its general and administrative expenses and other operating expenses to increase

To comply with the Sarbanes-Oxley Act of 2002 and proposed accounting changes by the Securities and Exchange Commission, Salon may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which will cause its general and administrative costs to increase.

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

Consumer and supplier confidence in Salon’s Website depends on maintaining relevant security features. Security breaches also could damage its reputation and expose it to a risk of loss or litigation. Experienced programmers or “hackers” have successfully penetrated sectors of its systems and Salon expects that these attempts will continue to occur from time to time. Because a hacker who is able to penetrate network security could misappropriate proprietary information or cause interruptions in its products and services, Salon may have to expend significant capital and resources to protect against or to alleviate problems caused by these hackers. Additionally, Salon may not have a timely remedy against a hacker who is able to penetrate its network security. Such security breaches could materially affect Salon. In addition, the transmission of computer viruses resulting from hackers or otherwise could expose it to significant liability. Salon’s insurance policies may not be adequate to reimburse it for losses caused by security breaches. Salon also faces risks associated with security breaches affecting third parties with whom it has relationships.

With a volatile share price, Salon may be the target of securities litigation, which is costly and time-consuming to defend

In the past, following periods of market volatility in the price of a company’s securities, security holders have instituted class action litigation. Salon’s share price has in the past experienced price volatility, and may continue to do so in the future. Many companies have been subjected to this type of litigation. If the market value of its common stock experiences adverse fluctuations and it becomes involved in this type of litigation, regardless of the merits or outcome, Salon could incur substantial legal costs and its management’s attention could be diverted, causing its business, financial condition and operating results to suffer. To date, Salon has not been subjected to such litigation.

Salon’s quarterly operating results are volatile and may adversely affect its common stock price

Salon’s future revenues and operating results, both Generally Accepted Accounting Principles in the United States (“GAAP”) and non-GAAP, are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside Salon’s control, and any of which could severely harm Salon’s business. These factors include:

·	Salon’s ability to attract and retain advertisers and subscribers;

·	Salon’s ability to attract and retain a large number of users;

·	the introduction of new Websites, services or products by Salon or by its competitors;

·	the timing and uncertainty of Salon’s advertising sales cycles;

·	the mix of advertisements sold by Salon or its competitors;

·	the economic and business cycle;

·	Salon’s ability to attract, integrate and retain qualified personnel;

·	technical difficulties or system downtime affecting the Internet generally or the operation of Salon’s Website; and

·	the amount and timing of operating costs.

Due to the factors noted above and the other risks discussed in this section, one should not rely on quarter-to-quarter comparisons of Salon’s results of operations as an indication of future performance. It is possible that some future periods’ results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of its common stock may decline.

The controversial content of Salon’s Website may limit its revenues

Salon’s Website contains, and will continue to contain, content that is politically and culturally controversial. As a result of this content, current and potential advertisers, potential Salon Premium subscribers, or third parties who contemplate aggregating content, may refuse to do business with Salon. Salon’s outspoken stance on political issues has and may continue to result in negative reactions from some users, commentators and other media outlets. From time to time, certain advocacy groups have successfully targeted Salon’s advertisers in an attempt to persuade such advertisers to cease doing business with Salon. These efforts may be a material impediment to Salon’s ability to grow and maintain advertising revenue.

Salon’s promotion of the Salon brand must be successful to attract and retain users as well as advertisers and strategic partners

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

Salon needs to hire, integrate and/or retain qualified personnel because these individuals are important to its growth

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

Salon may expend significant resources to protect its intellectual property rights or to defend claims of infringement by third parties, and if Salon is not successful it may lose rights to use significant material or be required to pay significant fees

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

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

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

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

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

Salon relies on software, purchased from an independent supplier, to deliver and report some of its advertising, the failure of which could impair its business

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

Salon may be held liable for content or third party links on its Website or content distributed to third parties

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

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

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

Salon may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by these breaches. Protection may not be available at a reasonable price or at all.

Salon’s internally developed software and software platforms provided by a third party to manage Salon’s subscription business might fail resulting in lost subscription income

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

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

Substantially all of Salon’s communications hardware and computer hardware operations for its Website are in a facility in Sacramento, California that has been extensively retrofitted to withstand a major earthquake. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, supplier failure to meet commitments, and similar events could damage these systems and cause interruptions in its services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting Salon’s Website and could cause advertisers to terminate any agreements with Salon. In addition, Salon could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable. If any of these circumstances occurred, Salon’s business could be harmed. Salon’s insurance policies may not adequately compensate it for losses that may occur due to any failures of or interruptions in its systems. Salon does not presently have a formal disaster recovery plan.

Salon’s Website must accommodate a high volume of traffic and deliver frequently updated information. It is possible that Salon will experience systems failures in the future and that such failures could harm its business. In addition, its users depend on Internet service providers, online service providers and other Website operators for access to its Website. Many of these providers and operators have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to its systems. Any of these system failures could harm its business.

Privacy concerns could impair Salon’s business

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

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

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

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

Salon is subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Delaware corporations from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s assets unless:

·	the Board of Directors approved the transaction in which the stockholder acquired 15% or more of the corporation’s assets;

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

·	on or after this date, the merger or sale is approved by the Board of Directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

A Delaware corporation may opt out of the Delaware anti-takeover laws if its certificate of incorporation or bylaws so provide. Salon has not opted out of the provisions of the anti-takeover laws. As such, these laws could prohibit or delay mergers or other takeover or change of control of Salon and may discourage attempts by other companies to acquire Salon.

Salon’s certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include:

·	Salon’s Board is classified into three classes of Directors as nearly equal in size as possible with staggered three year-terms; and

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

These provisions may have the effect of delaying or preventing a change of control.

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

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

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

Salon leases 8,623 square feet of office space at 101 Spear Street, San Francisco, California, where it is headquartered. The lease for the San Francisco office will terminate in February 2014. Salon also leases 4,200 square feet of office space at 15 West 37th Street, 8th Floor, New York, NY, through August 2011, and smaller offices at 1130 Connecticut Ave. NW, Washington, DC, expiring December 31, 2010, and 300 Manhattan Beach Blvd, Manhattan Beach, CA, terminating August 31, 2010. Salon also rents minimal space to host its servers in Sacramento, California.

Salon believes that its existing properties are in good condition and are suitable for the conduct of its business.

ITEM 3. Legal Proceedings

Salon is not a party to any pending legal proceedings that it believes will materially affect its financial condition or results of operations.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Information with respect to the quarterly high and low sales prices for Salon’s common stock, ticker symbol SLNM.OB, for its fiscal years 2010 and 2009, based on sales transactions reported by the OTC (Over-The-Counter) Bulletin Board is provided below:

	Fiscal Year Ended		Fiscal Year Ended
	March 31, 2010		March 31, 2009
For the quarter ended	High	Low	High	Low
June 30	0.40	0.11	1.68	1.10
September 30	0.20	0.11	1.98	1.00
December 31	0.65	0.11	1.10	0.16
March 31	0.35	0.06	0.40	0.20

There were 173 holders of record of Salon common stock as of June 1, 2010. This number was derived from Salon’s stockholder records, and does not include beneficial owners of Salon’s voting common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers, and other fiduciaries. The closing price of Salon’s common stock on June 3, 2010 was $0.30 per share.

Salon has never declared or paid any cash dividends on its capital stock and does not expect to pay any cash dividends in the foreseeable future.

Salon has never repurchased any of its equity securities.

Equity Compensation Plan Information

The following table provides information about Salon’s common stock that may be issued upon the exercise of options, warrants and rights under all of Salon’s existing equity compensation plans as of March 31, 2010, including the Salon Internet, Inc. 1995 Stock Option Plan, the Salon Media Group, Inc. 2004 Stock Plan, the Salon Media Group, Inc. Non-Plan Stock Agreement and the 1999 Employee Stock Purchase Plan.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans, excluding securities reflected in column (a)

	(a)	(b)		(c)

Equity compensation plans approved by security holders	5,460,615	$	0.23	1,589,156

Equity compensation plans not approved by security holders	50,000	$	0.35	None
Total	5,510,615		N/A	1,589,156

Equity Compensation Plans Not Approved by Security Holders

In February 2005, Salon entered into a Non-Plan Stock Agreement with its then Chairman, pursuant to which Salon granted such person non-qualified options to purchase 50,000 shares of common stock at an exercise price of $2.80 per share. Such option grant did not receive stockholder approval. 50% of the shares subject to the option vested on the date of grant and 50% of the shares subject to the option vested in February 2006. On December 4, 2008, these and substantially all other options then outstanding were repriced to $0.35, the fair market value of the Company’s common stock on that date.

In June 2006, Salon entered into a Non-Plan Stock Agreement with its then Senior Vice President – Publisher, pursuant to which Salon granted such person non-qualified options to purchase 50,000 shares of common stock at an exercise price of $3.20 per share. Such option grant did not receive stockholder approval. 25% of the shares subject to the option vested after one year and 1/48th vests per month thereafter. In December 2006, Salon entered into another Non-Plan Stock Agreement with its then Senior Vice President – Publisher, pursuant to which Salon granted such person non-qualified options to purchase 25,000 shares of common stock at an exercise price of $1.05 per share. Such option grant did not receive stockholder approval. 25% of the shares subject to the option vested after one year and 1/48th vests per month thereafter. These options have been forfeited following the departure of the executive.

Stock Performance Graph

The graph below matches Salon Media Group Inc.'s cumulative 5-year total stockholder return on common stock with the cumulative total returns of the NASDAQ Composite index, and a customized peer group of four companies that includes: Answers Corp., Quepasa Corp., Thestreet.com Inc. and Tucows Inc. The graph tracks the performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestment of all dividends) from March 31, 2005 to March 31, 2010.

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

ITEM 6. Selected Consolidated Financial Data

	Dollar amounts in thousands, except per share
Year Ended March 31,	2010			2009			2008			2007			2006

Net revenues	$	4,291		$	6,874		$	7,513		$	7,748		$	6,516
Net loss	$	(4,861	)	$	(4,699	)	$	(3,409	)	$	(1,566	)	$	(1,122	)
Net loss attributable to common stockholders (1)	$	(4,861	)	$	(4,699	)	$	(3,463	)	$	(1,861	)	$	(1,349	)

Basic and diluted net loss per share attributable to common stockholders (2)	$	(2.30	)	$	(2.34	)	$	(1.79	)	$	(1.10	)	$	(1.67	)
Weighted average common shares outstanding used in computing per share amounts (thousands)(2)		2,116			2,008			1,940			1,692			809
Cash and cash equivalents	$	216		$	371		$	818		$	829		$	441
Prepaid advertising rights	$	-		$	1,225		$	2,131		$	3,267		$	3,718
Total assets	$	1,627		$	3,330		$	4,616		$	5,605		$	5,304
Capital leases – long-term portion	$	4		$	34		$	56		$	-		$	-
Total long-term liabilities	$	3,076		$	2,706		$	600		$	85		$	120

(1) The net losses attributable to common stockholders for the years ended March 31, 2010 and 2009, do not include a preferred deemed dividend, as there was no issuances of preferred stock. The net loss attributable to common stockholders for the year ended March 31, 2008 includes a preferred deemed dividend charge of $54 from the issuance of Series D preferred stock. The charge represents the difference between the offering price of Salon’s Series D preferred stock and the fair value of Salon’s common stock into which the preferred stock was convertible on the date of the transaction and the value of the warrants issued in the transaction. The net loss attributable to common stockholders for the year ended March 31, 2007 includes a preferred deemed dividend charge of $295 from the issuance of Series D preferred stock. The charge represents the difference between the offering price of Salon’s Series D preferred stock and the fair value of Salon’s common stock into which the preferred stock was convertible on the date of the transaction and the value of the warrants issued in the transaction. The net loss attributable to common stockholders for the year ended March 31, 2006 includes a preferred deemed dividend charge of $227 from the issuance of Series D preferred stock. The charge represents the difference between the offering price of Salon’s Series D preferred stock and the fair value of Salon’s common stock into which the preferred stock was convertible on the date of the transaction and the value of the warrants issued in the transaction.

(2) The share and per share results for the year ended prior to March 31, 2007 reflects a reverse stock split effective as of November 15, 2006. In the reverse stock split, each 20 outstanding shares common stock (“old common stock”) was automatically reduced into one share of new common stock.

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

Overview

Salon is an online news and social networking company and an Internet publishing pioneer. Salon’s award-winning journalism combines original investigative stories and provocative personal essays along with quick-take commentary and staff-written Weblogs about politics, technology, culture and entertainment. Committed to interactivity, the Website also hosts two online communities, Table Talk and The Well, and has launched Open Salon, a social network for bloggers. In its editorial product Salon balances two crucial missions: (1) providing original and provocative content on topics that the mainstream media overlook, and (2) filtering through the media chatter and clutter to help readers find the stories that matter.

Sources of Revenue

The most significant portion of Salon’s revenues is derived from advertising from the sale of promotional space on its Website. The sale of promotional space is generally less than ninety days in duration. Advertising units sold include “rich media” streaming advertisements, as well as traditional banner and pop-up advertisements.

Salon also derives a significant portion of its revenues from its Salon Premium subscription program. This source of revenue has been decreasing since Salon’s quarter ended December 31, 2004 when paid subscriptions peaked at approximately 89,100 and have since decreased to approximately 15,800 as of March 31, 2010. Salon expects this downward trend to continue, as it is placing greater emphasis on its advertising sales to generate revenue. Revenue from membership to the online discussion forum The Well has been recognized ratably over the subscription period. Salon also generates nominal revenue from the licensing of content that previously appeared in Salon’s Website, for hosting links to a third party’s personals/dating Websites, and operating its emerging e-commerce activities.

Operating Expenses

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

Sales and marketing expenses consist primarily of salaries, commissions and related personnel costs, travel, and other costs associated with Salon’s sales force, business development efforts and its subscription service. It also includes advertising, promotions and the amortization of prepaid advertising rights.

Information technology support expenses consist primarily of salaries and related personnel costs associated with the development, testing and enhancement of Salon’s software to manage its Website, and to maintain and enhance the software utilized in managing Salon Premium, as well as supporting marketing and sales efforts.

General and administrative expenses consist primarily of salaries and related personnel costs, accounting and legal fees, and other fees associated with operating a publicly traded company. Certain shared overhead expenses are allocated to other departments.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires Salon to utilize accounting policies and make estimates and assumptions that affect our reported amounts. Salon’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements. Salon believes accounting policies and estimates related to revenue recognition and prepaid advertising rights are the most critical to Salon’s financial statements. Future results may differ from current estimates if different assumptions or conditions were to prevail.

Share Based Compensation

Salon accounts for share-based compensation under 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.

Salon recognized stock-based compensation expense of $379,000 and $1,025,000 during the twelve months ended March 31, 2010 and March 31, 2009, respectively. As of March 31, 2010, Salon had an aggregate of $569,000 of stock compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. Salon currently expects this stock compensation balance to be amortized as follows: $278,000 during fiscal 2011; $176,000 during fiscal 2012; $97,000 during fiscal 2013; and $18,000 during fiscal 2014. The expected amortization reflects only outstanding stock option awards as of March 31, 2010. Salon expects to continue to issue share-based awards to its employees in future periods.

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

Liquidity

Salon has incurred significant net losses and negative cash flows from operations since its inception. As of March 31, 2010, Salon had an accumulated deficit of $105.8 million. These losses have been funded primarily through the issuance of common stock from Salon’s initial public offering in June 1999, issuances of preferred stock, bank debt, from the issuance of convertible notes payable and other advances from related parties.

Burr Pilger Mayer, Inc., Salon’s independent accountants for the years ended March 31, 2010, March 31, 2009 and March 31, 2008 have included a paragraph in their report indicating that substantial doubt exists as to Salon’s ability to continue as a going concern because of Salon’s recurring operating losses, negative cash flow and accumulated deficit.

Income Taxes

Salon has not recorded a provision for federal or state income taxes since inception due to recurring operating losses. At March 31, 2010, Salon had net operating loss carryforwards of $78.1 million for federal income tax purposes that begin to expire in March 2016, and $31.1 million for California income tax purposes. As Salon has been incurring tax losses, $7.1 million of California net operation loss carryforwards expired as of March 31, 2010, and if Salon were to incur a tax loss for the year ending March 31, 2011, an additional $7.1 million operating loss carryforward will expire. Utilization of Salon’s net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar California State provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. A valuation allowance has been established and, accordingly, no benefit has been recognized for such operating losses and other deferred tax assets. The net valuation allowance increased $1.6 million during the year ended March 31, 2010 to $29.6 million. Salon believes that, based on a number of factors, the availability of objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that a full valuation allowance has been recorded. These factors include Salon’s history of net losses since inception and expected near-term future losses.

Revenue Recognition

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

Advertising revenues, derived from the sale of promotional space on its Website, comprised 69%, 76%, and 72% of Salon’s revenues, respectively for the years ended March 31, 2010, 2009 and 2008. The duration of the advertisements are generally short term, usually less than ninety days. Revenues derived from such arrangements are recognized during the period the advertising space is provided. Salon’s obligations typically include a guaranteed minimum number of impressions, a set number of Site Pass advertisements viewed, or a set number of days that a Site Pass advertisement will run. To the extent minimum guaranteed amounts are not achieved, Salon defers recognition of the corresponding revenue until the remaining guaranteed amounts are provided, if mutually agreeable to an advertiser. If these “make good” impressions are not agreeable to an advertiser, no further revenue is recognized.

Salon Premium, a pay-for-online content service, provides unrestricted access to Salon’s content with no banners, pop-ups or site pass advertisements, and includes free magazine subscriptions, free access to Table Talk, an online forum, and the ability to easily download content in text or PDF format, a convenience that enables readers to view Salon’s content when not connected to the Internet. The subscription duration for Salon Premium is generally one year. Non-Salon Premium subscribers can gain access to Salon’s content after viewing some form of advertisement.

Salon offers The Well as a monthly subscription service for access to online discussion forums. Revenue is recognized ratably over the subscription period.

Prepaid Advertising Rights

In January 2000, Salon sold 1,125,000 shares of common stock to Rainbow Media Holdings (“Rainbow”) and received $11.8 million of advertising credits that were to be utilized by December 2009. As the per share price of Salon’s common stock declined from the time the agreement was made and the date the agreement was finalized and signed, the advertising credits were valued for financial reporting purposes at $8.1 million. As of March 31, 2010, Salon has fully utilized the advertising credits of Rainbow and NBC.

Reclassifications

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

Goodwill

Salon has $0.2 million of goodwill remaining from a purchase in March 1999. This asset is tested for impairment at least annually and has not been found to be impaired.

Results of Operations

Fiscal Years Ended March 31, 2010 and 2009

Net Revenues

Salon’s net revenue decreased 38% to $4.3 million in the year ended March 31, 2010 from $6.9 million in the year ended March 31, 2009.

Advertising revenues decreased 43% to $3.0 million for the year ended March 31, 2010 from $5.2 million for the year ended March 31, 2009, as overall sales declined in the first and fourth quarters, during the economic recession.

Salon Premium subscription revenues decreased by 29% to $0.7 million for the year ended March 31, 2010 from $1.0 million for the year ended March 31, 2009. The drop in Salon Premium revenues recognized for the year ended March 31, 2010 compared to the year ended March 31, 2009 is attributable to a substantial reduction in the number of new subscribers. Salon acquired approximately 12,000 paid one-year subscriptions for the year ended March 31, 2010 compared to approximately 17,600 for the year ended March 31, 2009. As a result, the number of paid subscribers decreased from approximately 23,450 at March 31, 2009 to approximately 15,755 at March 31, 2010. As of June 1, 2010, Salon had approximately 14,700 paid subscribers. As a result, Salon has continued to emphasize increasing advertising income over promoting Premium subscriptions.

An important factor in increasing advertising revenues in future periods, including Salon’s typically peak third quarter ending December 31, is attracting more unique visitors to Salon’s Website. Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements. Ultimately, Salon charges advertisers based on a set number of impressions viewed by Website visitors. Due to various factors, including concerted efforts to make Salon’s content more accessible to readers by auto launching the site pass, a better optimized Website to facilitate appearance in search engine results, and marketing campaigns with select Websites, the average number of unique monthly Website visitors began to grow in the fourth quarter, up 22% over the prior period, although flat for the full year. Aiding the continued growth in unique visitors to Salon’s Website is the migration of readers to the Internet from print newspapers.

All other sources of revenue were $0.6 million for the year ended March 31, 2010 and $0.7 million for the year ended March 31, 2009. Approximately half of this revenue was derived from the Well, an online discussion forum.

Production and Content Expenses

Production and content expenses during the year ended March 31, 2010 were $3.7 million versus $5.3 million for the year ended March 31, 2009, a decrease of $1.6 million. The 31% decrease primarily reflects a decrease in staff and related salary and benefit costs, as well as a reduction in freelance costs.

Sales and Marketing Expenses

Sales and marketing expenses during the year ended March 31, 2010 were $2.7 million versus $2.9 million for the year ended March 31, 2009, a decrease of $0.2 million. The 7% decrease results from higher usage of advertising credits being offset by lower ad sales salaries, commissions and travel expenses.

Information Technology Support Expenses

Information technology support expenses during the year ended March 31, 2010 remained flat from one year ago at $0.8 million.

General and Administrative Expenses

General and administrative expenses during the year ended March 31, 2010 were $1.6 million versus $1.7 million for the year ended March 31, 2009, a decrease of $0.1 million. The 6% decrease was primarily attributed to lower stock-based compensation expenses, executive bonuses and bad debt expenses.

Separation Expenses

Separation expenses were nil for the year ended March 31, 2010 versus $0.6 million for the year ended March 31, 2009, which consisted of one-time charges related to the resignation of Salon’s former CEO, including $0.3 million in non-cash stock-based compensation from the accelerated vesting of options.

Interest and Other Expenses

Interest and other expenses for the year ended March 31, 2010 remained flat at approximately $0.2 million from one year ago which consisted primarily of accrued interest costs for Salon’s outstanding debts and financial obligations, including bank debt, several convertible promissory notes, and computer equipment capital leases.

Fiscal Years Ended March 31, 2009 and 2008

Net Revenues

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

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

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

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

An important factor in increasing advertising revenues in future periods, including Salon’s typically peak third quarter ending December 31, is attracting more unique visitors to Salon’s Website. Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements. Ultimately, Salon charges advertisers based on a set number of impressions viewed by Website visitors. After Salon made concerted efforts to make Salon’s content more accessible to readers by auto launching the site pass, a better optimized Website to facilitate appearance in search engine results, and completed marketing campaigns with select Websites, the average number of unique monthly Website visitors for the year ended March 31, 2009 increased 10% to 4.8 million from the year ended March 31, 2008, and attained a record high for fiscal year 2009 of 6.3 million in October 2008. Aiding the continued growth in unique visitors to Salon’s Website is the migration of readers to the Internet from print newspapers.

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

Production and Content Expenses

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

Sales and Marketing Expenses

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

Information Technology Support Expenses

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

General and Administrative Expenses

General and administrative expenses during the year ended March 31, 2009 remained flat from one year ago at $1.8 million. The minimal increase was primarily attributed to stock-based compensation expenses from restricted stock vesting, as well as an increase in allowance for doubtful accounts.

Separation Expenses

Separation expenses were $0.6 million for the year ended March 31, 2009 and consisted of one-time charges of $0.6 million related to the resignation of Salon’s former CEO, including $0.3 million in non-cash stock-based compensation from the accelerated vesting of options.

In addition, the Company incurred approximately $35,000 of severance expenses associated with the layoffs of nine employees during the second half of fiscal 2009.

Interest and Other Expenses

Interest and other expenses for the years ended March 31, 2009 and 2008, consisted primarily of accrued interest costs of $194,000 and $37,000, respectively, for Salon’s outstanding debts and financial obligations, including a borrowing agreement, several convertible promissory notes, and computer equipment capital leases.

Liquidity and Capital Resources

Net cash used in operations was $2.6 million for the year ended March 31, 2010, $2.4 million for the year ended March 31, 2009, and $1.5 million for the year ended March 31, 2008. The principal use of cash during the years ended March 31, 2010, March 31, 2009 and March 31, 2008 was to meet its operating deficits.

Net cash used in investing activities was immaterial for the year ended March 31, 2010. Net cash used in investing activities for the years ended March 31, 2009 and March 31, 2008 was $0.3 million to fund the acquisition of computer equipment and internal software development.

For the year ended March 31, 2010, net cash provided from financing activities was $2.5 million, consisting primarily of short-term advances from related parties. For the year ended March 31, 2009, net cash provided from financing activities was $2.2 million, which included $2.0 million in long-term borrowing and $0.2 million in short-term borrowing. For the year ended March 31, 2008, net cash provided from financing activities was $1.9 million, which included $1.0 million in short-term borrowings, $0.5 million in long-term borrowing and $0.4 million from the issuance of 292 shares of preferred stock.

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

As of March 31, 2010, Salon has five outstanding capital leases on computer equipment and does not anticipate entering into similar debt instruments during its year ending March 31, 2011. The following summarizes Salon’s contractual obligations as of March 31, 2010, and the effect these contractual obligations are expected to have on Salon’s liquidity and cash flows in future periods (in thousands):

	Payments Due By Period
	Total		1 Year or less		1 - 3 Years		3 - 5 Years		More than 5 Years
Operating leases	$	1,751	$	509	$	871	$	371	$	-
Capital leases		35		31		4		-		-
Capital lease interest		4		3		1		-		-
Short-term borrowing		3,800		3,800		-		-		-
Short-term borrowing interest		113		113		-		-		-
Convertible notes		2,500		-		2,500		-		-
Convertible notes interest		809		538		271		-		-
Total	$	9,012	$	4,994	$	3,647	$	371	$	-

Capital requirements

Salon has a history of significant losses and expects to incur a net loss from operations for its year ending March 31, 2011. Because of past losses, an anticipated loss next year and a history of negative cash flows from operations, Salon’s independent registered public accounting firm for the years ended March 31, 2010, March 31, 2009 and March 31, 2008 have included a paragraph in its reports indicating substantial doubt as to Salon’s ability to continue as a going concern. During the last three years, Salon has relied on cash from bank debt, the issuance of convertible notes and preferred stock, and related party advances to meet its cash requirements.

Based on current cash projections for next year, which contemplate a smaller operating loss, positive cash flow generation in the second half of the year, and takes into account $0.8 million in related party advances received subsequent to year end, Salon estimates it will require approximately $1.5-$2.0 million in additional funding to meet its operating needs. During fiscal 2010, in the face of reduced revenues resulting from the recession’s impact on advertising budgets, the Company implemented significant organizational changes that lowered its breakeven level. However, if planned revenues are less than expected, then Salon will not meet its operating targets and the projected cash shortfall may be higher. Salon is in discussions with potential investors, including related parties, to obtain additional funding, and has engaged an investment banker to facilitate these efforts. There can be no assurance that the Company will be able to raise additional funds on commercially reasonable terms, if at all.

Off-Balance Sheet Arrangements

Salon has no off-balance sheet arrangements.

Recent Accounting Pronouncements

Effective July 1, 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ” (“SFAS 68”), (Topic 105). The Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. This standard establishes two levels of GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, non-governmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. The Company adopted SFAS 168 (Topic 105) as of September 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our Condensed Consolidated Financial Statements. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to also refer to the appropriate topic of ASC.

In December 2007, the FASB issued ASC Topic 805 “Business Combinations” and ASC Topic 810 “Consolidation.” ASC Topic 805 establishes principles and requirements during business combinations for how the acquirer:

	a.	Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree,
	b.	Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and

Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

ASC Topic 810 sets parameters as to how to report noncontrolling interest in consolidated financial statements. Both standards are effective for fiscal years beginning after December 15, 2008. Salon believes that the adoption of both ASC standards did not impact Salon’s results of operations, financial position, or cash flows.

In January 2010, the FASBissued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements . ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons for and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). Other than requiring additional disclosures, adoption of this new guidance will not have a material impact on our financial statements.

In June 2008, FASB ratified the EITF consensus on EITF Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock (“EITF Issue 07-05”) (Topic 815) which applies to the determination of whether any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC, Topic 815, Accounting for Derivative Instruments and Hedging Activities , and to any freestanding financial instruments are potentially indexed to an entity’s own common stock. EITF Issue No. 07-05 (Topic 815) became effective for fiscal years beginning after December 15, 2008. The Company adopted EITF 07-05 (Topic 815) as of April 1, 2009. The adoption of the standard’s requirements can affect the accounting for warrants and many convertible instruments containing provisions that protect holders from a decline in the stock price (or “down round” provisions). We evaluated whether our warrants or convertible preferred stock contain provisions that protect holders from declines in our stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant or preferred stock agreements based on a variable that is not an input to the fair value of a “fixed-for-fixed” option. The Company determined that the outstanding warrants at March 31, 2009 to purchase 121,106 shares of common stock previously treated as equity were no longer afforded equity treatment and would have to be reclassified to a liability. Under ASC Topic 815, “Accounting for Derivative Instruments and Hedging Activities”, which was primarily codified into ASC Topic 815 “ Derivatives and Hedging,” the fair value of this liability would be re-measured at the end of each reporting period with the change in value reported in the consolidated statement of operations. Based on the Company’s evaluation of the fair value of these warrants from issue date through March 31, 2010, the Company determined that the fair value amounts were not material and therefore, did not record any adjustments for these warrants under ASC 815 in the accompanying consolidated financial statements. The Company also determined that while its convertible preferred stock contains certain down-round provision features, the conversion feature embedded within its convertible preferred stock does not require bifurcation under the guidance of ASC 815. Accordingly, the requirements of ASC 815 are not applicable to the conversion features of the Company’s preferred stock.

In September 2009, the FASB ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1)). ASU 2009-13 superseded EITF 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. While we are currently evaluating the potential impact, if any, of the adoption of ASU 2009-13, the Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS 165, “Subsequent Events,” which was primarily codified into ASC Topic 855, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. The standard also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This statement is effective for interim or annual reporting periods ending after June 15, 2009. The Company adopted the standard during the second quarter of fiscal year 2010, and it did not have a material impact on our interim consolidated financial statements or related footnotes.

In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, which amends the Subsequent Events Topic of the Accounting Standards Codification (ASC) to eliminate the requirement for public companies to disclose the date through which subsequent events have been evaluated. The Company will continue to evaluate subsequent events through the date of the issuance of the financial statements, however, consistent with the guidance, this date will no longer be disclosed. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements, financial condition or liquidity.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Salon maintains all of its cash in immediately available cash deposits at its bank. These funds are not subject to market risk and no interest is paid on such funds. In May 2007, Salon entered into a credit agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1.0 million, plus accrued interest, at a rate of prime less 0.25% which will subject Salon to interest rate risk. The line of credit has been fully drawn as of March 31, 2010 and 2009, and is guaranteed by Salon’s Chairman. Rates declined throughout most of fiscal 2010. Salon feels that the impact of the risk of future rate increases will not have a material impact. As Salon conducts all of its business in the United States, Salon is not subject to foreign exchange risk.

ITEM 8. Consolidated Financial Statements and Supplementary Data

	Page

Reports of Independent Registered Public Accounting Firm	35

Consolidated Balance Sheets as of March 31, 2010 and 2009	36

Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008	37

Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended March 31, 2010, 2009 and 2008	38

Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008	39

Notes to Consolidated Financial Statements	40

Selected Quarterly Financial Data (unaudited)	60

Report Of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Salon Media Group, Inc.

We have audited the accompanying consolidated balance sheets of Salon Media Group, Inc. and its subsidiaries (“the Company”) as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended March 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Salon Media Group, Inc. and its subsidiaries as of March 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations and has an accumulated deficit of $105.8 million at March 31, 2010. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Burr Pilger Mayer, Inc.

San Francisco, California

June 25, 2010

SALON MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

	March 31,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	216		$	371
Accounts receivable, net of allowance of $55 and $112		706			886
Prepaid advertising rights		-			1,225
Prepaid expenses and other current assets		58			53
Total current assets		980			2,535

Property and equipment, net		299			445
Other assets, principally deposits		148			150
Goodwill		200			200
Total assets	$	1,627		$	3,330
Liabilities and Stockholders’ Deficit
Current liabilities:
Short-term borrowings	$	1,000		$	1,000
Related party advances		2,800			250
Accounts payable and accrued liabilities		1,253			1,324
Deferred revenue		338			470
Total current liabilities		5,391			3,044

Convertible notes payable		2,687			2,500
Other long-term liabilities		385			172
Capital lease, less current portion		4			34
Total liabilities		8,467			5,750
Commitments and contingencies (Note 9)

Stockholders’ deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 9,467 shares issued and outstanding at March 31, 2010 and March 31, 2009 (liquidation value of $25,057 at March 31, 2010 and $24,246 at March 31, 2009)		-			-
Common stock, $0.001 par value, 30,000,000 shares authorized,
2,437,956 shares issued and outstanding at March 31, 2010 and 2,021,276 shares issued and outstanding at March 31, 2009		2			2
Additional paid-in capital		99,005			98,564
Accumulated deficit		(105,847	)		(100,986	)
Total stockholders’ deficit		(6,840	)		(2,420	)
Total liabilities and stockholders’ deficit	$	1,627		$	3,330

See accompanying notes to consolidated financial statements.

SALON MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended March 31,
	2010			2009			2008

Net revenues	$	4,291		$	6,874		$	7,513

Operating expenses:
Production and content		3,698			5,314			5,544
Sales and marketing		2,738			2,925			2,756
Information technology support		861			763			829
General and administrative		1,613			1,746			1,756
Separation expenses		-			631			-
Total operating expenses		8,910			11,379			10,885

Loss from operations		(4,619	)		(4,505	)		(3,372	)

Interest and other income (expense)		(242	)		(194	)		(37	)
Net loss		(4,861	)		(4,699	)		(3,409	)
Preferred deemed dividend		-			-			(54	)
Net loss attributable to common stockholders	$	(4,861	)	$	(4,699	)	$	(3,463	)

Basic and diluted net loss per share
attributable to common stockholders	$	(2.30	)	$	(2.34	)	$	(1.79	)

Weighted average shares used in computing basic and diluted net loss per share
attributable to common stockholders		2,116			2,008			1,940

See accompanying notes to consolidated financial statements.

SALON MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands, except Preferred Stock Shares)

	Preferred Stock				Common Stock				Additional Paid-In		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity (Deficit)
Balance, March 31, 2007	9,183		$	-	1,940		$	2	$	96,788	$	(92,824	)	$	3,966

Shares issued under employee stock plans	-			-	-			-		1		-			1
Series D convertible preferred stock and common stock warrants issued for cash	292			-	-			-		350		-			350
Preferred deemed dividend on issuance of Series D Convertible preferred stock	-			-	-			-		54		(54	)		-
Share-based compensation	-			-	-			-		109		-			109
Net loss	-			-	-			-		-		(3,409	)		(3,409	)

Balance, March 31, 2008	9,475			-	1,940			2		97,302		(96,287	)		1,017

Shares issued under employee stock plans	-			-	63			-		1		-			1
Preferred stock converted to common stock	(8	)		-	18			-		-		-			-
Share-based compensation	-			-	-			-		1,261		-			1,261
Net loss	-			-	-			-		-		(4,699	)		(4,699	)

Balance, March 31, 2009	9,467			-	2,021			2		98,564		(100,986	)		(2,420	)

Shares issued under restricted stock plans	-			-	526			-		-		-			-
Shares of common stock cancelled	-			-	(109	)		-		-		-			-
Share-based compensation	-			-	-			-		441		-			441
Net loss	-			-	-			-		-		(4,861	)		(4,861	)

Balance, March 31, 2010	9,467		$	-	2,438		$	2	$	99,005	$	(105,847	)	$	(6,840	)

See accompanying notes to consolidated financial statements.

SALON MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Year Ended March 31,
		2010			2009			2008
Cash flows from operating activities:
Net loss		$	(4,861	)	$	(4,699	)	$	(3,409	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from retirement of assets, net			1			4			-
Share-based compensation			379			1,025			313
Depreciation and amortization			227			210			102
Prepaid advertising rights usage			1,225			906			1,136
Changes in assets and liabilities:
Accounts receivable			180			(22	)		143
Prepaid expenses, other current assets and other assets			(3	)		(12	)		(4	)
Accounts payable, accrued liabilities and other long-term liabilities			391			410			262
Deferred revenue			(132	)		(235	)		(87	)
	Net cash used in operating activities		(2,593	)		(2,413	)		(1,544	)

Cash flows from investing activities:
Purchase of property and equipment			(82	)		(247	)		(313	)
	Net cash used in investing activities		(82	)		(247	)		(313	)

Cash flows from financing activities:
Proceeds from short-term borrowings			2,550			250			1,000
Proceeds from long-term borrowings			-			2,000			500
Capital lease payments			(30	)		(38	)		(5	)
Proceeds from issuance of preferred stock, net			-			-			350
Proceeds from issuance of common stock, net			-			1			1
	Net cash provided by financing activities		2,520			2,213			1,846

Net decrease in cash and cash equivalents			(155	)		(447	)		(11	)
Cash and cash equivalents at beginning of year			371			818			829
Cash and cash equivalents at end of year		$	216		$	371		$	818

Amount paid for interest		$	9		$	12		$	3
Supplemental schedule of non-cash investing and financing activities:
Preferred deemed dividend		$	-		$	-		$	54
Property and equipment purchased with capital lease		$	-		$	12		$	86
Stock compensation liability		$	-		$	-		$	204
Conversion of accrued interest for convertible notes payable		$	187		$	-		$	-

See accompanying notes to consolidated financial statements.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1. The Company

Salon Media Group, Inc (“Salon” or “the Company”) is an Internet media company that produces a content Website with various subject-specific sections, which includes two online communities, and a social network. The Website also allows for audio downloads and video clips. Salon was originally incorporated in July 1995 in the State of California and reincorporated in Delaware in June 1999. Salon operates in one business segment.

Note 2. Summary of Significant Accounting Policies

Basis of presentation

These consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Salon has incurred losses and negative cash flows from operations since inception and has an accumulated deficit at March 31, 2010 of $105,847. In addition, Salon expects to incur a net loss from operations for its year ending March 31, 2011. During the last three years, Salon has relied on cash from the issuance of bank debt, convertible notes and preferred stock, and related-party advances to meet its cash requirements. Based on current cash projections for next year, which contemplate a smaller operating loss, positive cash flow generation in the second half of the year, and takes into account $0.7 million in related party advances received subsequent to year end, Salon estimates it will require between $1.5-$2.0 million in additional funding to meet its operating needs. During fiscal year 2010, in the face of reduced revenues resulting from the recession’s impact on advertising budgets, the Company implemented significant organizational changes which lowered its breakeven level. However, if planned revenues are less than expected, then we will not meet our operating targets and our projected cash shortfall may be higher. Salon is in discussions with potential investors, including related parties, to obtain additional funding, and has engaged an investment banker to facilitate these efforts. There can be no assurance that the Company will be able to raise additional funds on commercially reasonable terms, if at all.

Principles of consolidation

The consolidated financial statements include the accounts of Salon and its wholly owned subsidiaries, which are not active. All material intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Segment and enterprise-wide reporting

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

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Use of estimates

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

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.

Accounts receivable, net

Accounts receivable are stated net of doubtful accounts. Salon estimates the uncollectibility of the accounts receivable balance and maintains allowances for estimated losses. Salon analyzes accounts receivable, historical bad debts, receivable aging, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.

Prepaid advertising rights

Prepaid advertising rights are carried at cost less accumulated amortization, with amortization commensurate to the usage of such rights. All remaining credits were utilized prior to their December 31, 2009 expiration date.

Property and equipment, net

Property and equipment are recorded at cost. Maintenance, repairs and minor renewals are expensed as incurred. Depreciation is provided on a straight-line basis over the useful lives of the asset, principally three years for computer hardware and software, and five years for furniture and office equipment. Depreciation of leasehold improvements is provided on a straight-line basis over the useful life of the asset or the term of the lease, whichever is shorter. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are relieved from the accounts and the net gain or loss is included in the determination of income.

Software development costs

Information technology support expenses to develop new product offerings for internal use, such as Open Salon, are capitalized as software development costs. Salon has capitalized $95 of expenditures through March 31, 2009, which is included with property and equipment. No expenses were capitalized in the current fiscal year.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Goodwill

Goodwill is not amortized, but instead is tested for impairment at least annually during the quarter ending March 31, or earlier as warranted by events or changes in circumstances.

Impairment of long-lived assets

Salon periodically evaluates the potential impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. At the occurrence of an event or change in circumstances, Salon evaluates the potential impairment of an asset based on the estimated future undiscounted cash flows attributable to such assets. In the event impairment exists, Salon will measure the amount of such impairment based on the present value of the estimated future cash flows using a discount rate commensurate with the risks involved.

Revenue recognition

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

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

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

Comprehensive loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from non-owner sources. There were no differences between the net loss for the years ended March 31, 2010, 2009 and 2008 and comprehensive loss for those periods.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Stock-based compensation

The Company accounts for stock-based compensation in accordance with, ASC 718 Compensation – Stock Compensation (ASC 718). Under ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. Salon uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. Salon recognizes compensation cost related to options granted on a straight-line basis over the applicable vesting period.

Net loss per share

Basic loss per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share is computed using the weighted-average number of common and common stock equivalents outstanding during the period, as follows:

	Year Ended March 31,
	2010			2009			2008
Numerator:
Net loss attributable to common stockholders	$	(4,861	)	$	(4,699	)	$	(3,463	)

Denominator:
Weighted average shares used in
computing basic and diluted net loss per share attributable to common stockholders		2,116,000			2,008,000			1,940,000

Basic and diluted net loss per share attributable
to common stockholders	$	(2.30	)	$	(2.34	)	$	(1.79	)

Antidilutive securities including options,
warrants and convertible notes and preferred stock not included in loss per share calculation		18,238,000			15,518,000			12,678,000

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Financial instruments

The carrying amounts of Salon’s financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value because of their short maturities. Fair value of capital lease obligations, if any, approximates carrying value since they bear interest at current market rates.

Income taxes

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

Concentrations of credit risk

Financial instruments that potentially subject Salon to concentrations of credit risk consist principally of trade accounts receivable. Salon performs ongoing credit evaluations of its customers, but does not require collateral. Salon provides an allowance for credit losses that it periodically adjusts to reflect management’s expectations of future losses. Two and three customers accounted for 10% or more of trade accounts receivable at March 31, 2010 and 2009, respectively. No customer accounted for 10% or more of total revenue for the fiscal years ended March 31, 2010, 2009 and 2008, respectively.

Recent accounting pronouncements

Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ” (“SFAS 68”), (Topic 105). The Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. This standard establishes two levels of GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, non-governmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. The Company adopted SFAS 168 (Topic 105) as of September 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our Consolidated Financial Statements. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to also refer to the appropriate topic of ASC.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	a.	Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree,
	b.	Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and

Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

In June 2008, FASB ratified the EITF consensus on EITF Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock (“EITF Issue 07-05”) (Topic 815) which applies to the determination of whether any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities , and to any freestanding financial instruments are potentially indexed to an entity’s own common stock. EITF Issue No. 07-05 (Topic 815) became effective for fiscal years beginning after December 15, 2008. The Company adopted EITF 07-05 (Topic 815) as of April 1, 2009. The adoption of the standard’s requirements can affect the accounting for warrants and many convertible instruments containing provisions that protect holders from a decline in the stock price (or “down round” provisions). We evaluated whether our warrants or convertible preferred stock contain provisions that protect holders from declines in our stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant or preferred stock agreements based on a variable that is not an input to the fair value of a “fixed-for-fixed” option. The Company determined that the outstanding warrants at March 31, 2009 to purchase 121,106 shares of common stock previously treated as equity were no longer afforded equity treatment and would have to be reclassified to a liability. Under ASC Topic 815 “ Derivatives and Hedging,” the fair value of this liability would be re-measured at the end of each reporting period with the change in value reported in the consolidated statement of operations. Based on the Company’s evaluation of the fair value of these warrants from issue date through March 31, 2010, the Company determined that the fair value amounts were not material and therefore, did not record any adjustments for these warrants under ASC 815 in the accompanying consolidated financial statements. The Company also determined that while its convertible preferred stock contains certain down-round provision features, the conversion feature embedded within its convertible preferred stock does not require bifurcation under the guidance of ASC 815. Accordingly, the requirements of ASC 815 are not applicable to the conversion features of the Company’s preferred stock.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In September 2009, the FASB ratified ASU 2009-14 (ASU 2009-14) (previously EITF No. 09-3, Certain Revenue Arrangements That Include Software Elements) . ASU 2009-14 modifies the scope of Software Revenue Recognition to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 has an effective date that is consistent with ASU 2009-13. While we are currently evaluating the potential impact, if any, of the adoption of ASU 2009-13, the Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements . ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons for and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). Other than requiring additional disclosures, adoption of this new guidance will not have a material impact on our financial statements.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Reclassifications

Note 3. Borrowing Agreements

In May 2007, Salon entered into a borrowing agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1,000, plus accrued interest, at a rate of prime less 0.25%. The agreement is guaranteed in its entirety by Salon’s Chairman. The line of credit has been fully drawn as of March 31, 2010 and 2009. Salon and its Chairman have agreed to lift previously agreed restrictions on the timing of borrowing to permit borrowing to continue under the agreement with the guarantee of the Chairman. Deutsche Bank Securities may demand repayment of amounts borrowed at any time. Additionally, the Chairman may also choose to terminate his guarantee, which would trigger a demand for repayment. As of March 31, 2010, and 2009, accrued interest on bank debt totals $113 and $79, respectively. As of March 31, 2010 and 2009, the weighted average interest rate on the Company’s short-term borrowings was 3% and 5%, respectively.

Convertible notes payable

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

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

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

As of March 31, 2010, convertible notes payable totaled $2,687, inclusive of $187 in notes issued as payment in kind of accrued interest thereon. Related parties hold $2,687 of such notes and aggregate related party interest expense totaled $149.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Related Party Advances

As of March 31, 2010, the Company has received $2.8 million in unsecured, interest-free cash advances, including $1.8 million from the Company’s Chairman and $1 million from the father of Salon’s former CEO. Subsequent to year end, the Company’s Chairman advanced an additional $845, to be used for working capital. This debt is payable on demand, and is exchangeable into securities to be issued in the next financing raised by the Company from non-related parties.

Note 4. Goodwill

In accordance with ASC 360, Goodwill is not amortized but is tested for impairment annually during the Company’s fourth quarter, or when events and circumstance occur indicating that the asset might be impaired. The carrying value of goodwill at March 31, 2010 and March 31, 2009 was $200 and was not found to be impaired.

Note 5. Property and Equipment

	Year Ended March 31,
	2010			2009
Property and equipment, net
Computer hardware and software	$	1,396		$	1,371
Leasehold improvements		82			82
Furniture and office equipment		279			276
		1,757			1,729
Less accumulated depreciation and amortization		(1,458	)		(1,284	)
	$	299		$	445

Depreciation and amortization expense for the years ended March 31, 2010, 2009 and 2008 was $227, $210, and $102 respectively.

Note 6. Accounts Payable and Accrued Liabilities

	Year Ended March 31,
	2010		2009
Accounts payable and accrued liabilities
Accounts payable	$	343	$	286
Salaries and wages payable		409		579
Accrued services		33		25
Capital lease, current portion		31		33
Other accrued expenses		437		401
	$	1,253	$	1,324

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 7. 401(k) Savings Plan

Salon’s 401(k) Savings Plan (the “401(k) Plan”) is a defined contribution retirement plan intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. All full-time employees of Salon are eligible to participate in the 401(k) Plan pursuant to its terms. Participants may contribute from 1% to 20% of compensation, subject to statutory limitations. Employer matching contributions are discretionary based on a certain percentage of a participant’s contributions as determined by management of Salon. Salon has not made any discretionary contributions to the 401(k) Plan through March 31, 2010.

Note 8. Employee Stock Option Plan

Salon has two stock option plans approved by stockholders. The Salon Internet, Inc. 1995 Stock Option Plan (the 1995 Plan), which was terminated in November 2004, and the Salon Media Group, Inc. 2004 Stock Plan (the 2004 Plan) that was approved by Salon’s stockholders in November 2004. The 2004 Plan allows the issuance of incentive and nonstatutory options to employees and non-employees of Salon. In October 2005, Salon’s stockholders approved an amendment to the 2004 Plan to increase the maximum number of shares of common stock that may be issued under the plan by 800,000 to 2,300,000 shares. In October 2007, Salon’s stockholders approved another amendment to the 2004 Plan to increase the maximum number of shares of common stock that may be issued under the plan by 875,000 to a total of 3,175,000 shares and to allow for grants of restricted stock awards. In May 2009, Salon’s Board of Directors further approved an amendment to the 2004 Plan to increase the maximum number of shares of common stock that may be issued under the plan by 4,500,000 to 7,675,000 shares.

Under the 2004 Plan, incentive and nonqualified stock options may be granted to officers, employees, directors and consultants of Salon. Options generally vest over periods of four years. Options generally became exercisable as to 25% of the option shares one year from the date of grant and then ratably over the following 36 months (1/48 per month). However, in the case of 1,045,500 options granted on February 7, 2005 and 382,050 options granted on May 16, 2005, half vested on the date of grant, and the remaining half vested on February 7, 2006. The exercise price of options is determined by the Board of Directors and is equal to the fair market value of the stock on the grant date. Generally, Salon’s options expire, if not exercised, ten years after the date of grant.

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

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

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Salon has granted options pursuant to plans not approved by stockholders. These grants include an option to purchase 25,000 shares of common stock issued in December 2006 and an option to purchase 50,000 shares of common stock issued in June 2006, both granted to Salon’s then Senior Vice President – Publisher, and an option to purchase 50,000 shares of common stock issued in February 2005 to Salon’s former Chairman. The 75,000 options granted to the then Senior Vice President – Publisher have been forfeited following the departure of the executive.

As of March 31, 2010, Salon has approximately 2,128,000 shares authorized to be issued under the 2004 Plan of which approximately 1,589,000 shares remain available for future grant.

During the quarter ended December 31, 2008, the Company repriced substantially all its outstanding options to $0.35, with no change in vesting. This resulted in a non-cash incremental cost of approximately $0.4 million. The total compensation cost measured at December 4, 2008 is the sum of (1) the portion of the grant-date value of the original option award for which the requisite service is expected to be rendered or already has been rendered on modification date; and (2) the incremental cost resulting from the modification. Incremental cost is the excess, if any, of the fair value of the modified option award immediately after the modification, over the fair value of the original option award immediately before the modification. Incremental cost is expensed over the remaining vesting period of each option, unless it is fully vested in which case it is immediately recognized.

Stock based compensation expense recognized for the years ended March 31, 2010, 2009 and 2008 was $379, $1,025 and $313, which consisted of stock-based compensation expense related to stock options and restricted stock.

As of March 31, 2010, the aggregate stock compensation remaining to be amortized to expenses was $569. Salon expects this stock compensation balance to be amortized as follows: $278 during fiscal 2011; $176 during fiscal 2012; $97 during fiscal 2013; and $18 during fiscal 2014. The expected amortization reflects only outstanding stock option awards as of March 31, 2010.

No amounts were recorded relating to excess tax benefits from the exercise of stock-based compensation awards during the year ended March 31, 2010, and as a result there were no differences in net cash used in operating and financing activities due to the implementation of ASC 718.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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,
	2010	2009	2008
Risk-free interest rates	1.52 – 2.05%	1.30 – 3.09%	2.16 – 5.00%
Expected lives (in years)	4	4	4
Expected volatility	156 – 209 %	92 – 163 %	94 – 116 %
Dividend yield	0.0%	0.0%	0.0%

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

The following table summarizes activity under Salon’s plans for the year ended March 31, 2010:

	Outstanding Stock Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding as of April 1, 2009		2,440,000		$	0.35		$	0
Granted		3,391,000		$	0.15
Exercised		-			-
Expired or forfeited		(321,000	)	$	0.39
Outstanding at March 31, 2010		5,510,000		$	0.23	8.2	$	0
Exercisable at March 31, 2010		1,937,000		$	0.31		$	0
Vested and Expected to vest at March 31, 2010		3,391,000		$	0.22	8.8	$	0

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table summarizes information about stock options outstanding at March 31, 2010:

		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
$	0.08 - $0.12		1,881,000		9.6	$	0.12		368,000	$	0.12
$	0.16 - $0.20		1,500,000		9.1	$	0.20		6,000	$	0.20
$	0.35 - $0.35		2,127,000		6.4	$	0.35		1,561,000	$	0.35
$	5.20 - $5.20		2,000		5.1	$	5.20		2,000	$	5.20
			5,510,000		8.2	$	0.23		1,937,000	$	0.31

The weighted average fair value per share of the stock option awards in the year ended March 31, 2010, 2009 and 2008 was $0.14, $0.41, and $0.94, respectively. The weighted average fair value of options vested during the year ended March 31, 2010, 2009 and 2008 was $0.33, $0.63 and $1.75 per share, respectively.

The total intrinsic value of options exercised during the year ended March 31, 2010 was nil as none were exercised during the fiscal year.

Note 9. Commitments and Contingencies

Salon has operating lease agreements for its office space in San Francisco, CA that expires in February 2014, and for its office in Manhattan Beach, CA that expires in August 2009. In addition, Salon has a sublease agreement for its office in Washington, D.C. that expires in December 2010. In addition, Salon’s operating lease for its office space in New York was signed for the period June 2008 through August 2011. Rent expense under operating lease agreements was $488, $457, and $530 for the years ended March 31, 2010, 2009, and 2008 respectively.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Salon has five capital leases as of March 31, 2010. Total future minimum payments under operating and capital leases, short-term borrowing and convertible notes in effect at March 31, 2010 are as follows:

Payments Due By Period

Total

Year 1

Year 2

Year 3

Year 4

Operating leases

1,751

SALON MEDIA GROUP INC - FORM 10-K - June 25, 2010

Attached files