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EX-31.1 - EXHIBIT 31.1 - SALON MEDIA GROUP INCex31-1.htm
EX-32.1 - EXHIBIT 32.1 - SALON MEDIA GROUP INCex32-1.htm
EX-32.2 - EXHIBIT 32.2 - SALON MEDIA GROUP INCex32-2.htm
EX-31.2 - EXHIBIT 31.2 - SALON MEDIA GROUP INCex31-2.htm

 



SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2015

or

 

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

 

For the transition period from to

 

Commission file number 0-26395

 

SALON MEDIA GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

94-3228750

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

 

870 Market Street

San Francisco, CA 94102

(Address of principal executive offices)

 

(415) 275-3911

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

 

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

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ 

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☑

   

Indicate by check mark whether the Registrant is a shell company as defined by Rule 12b-2 of the act.

Yes [ ] No [X]

 

The number of outstanding shares of the Registrant's Common Stock, par value $0.001 per share, on August 1, 2015 was 76,245,442 shares.

 

 

 
 

 

   


FORM 10-Q

SALON MEDIA GROUP, INC.

INDEX


 

 

 

Page 

Number

PART I

FINANCIAL INFORMATION  
     

ITEM 1:

Condensed Consolidated Financial Statements  
     

 

Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and March 31, 2015 1
     

 

Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014 (unaudited) 2
     

 

Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2015 and 2014 (unaudited) 3
     

 

Notes to Condensed Consolidated Financial Statements (unaudited) 4
     

ITEM 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
     

ITEM 3:

Quantitative and Qualitative Disclosures About Market Risk 18
     

ITEM 4:

Controls and Procedures 18
     

PART II

OTHER INFORMATION  
     

ITEM 1:

Legal Proceedings 19
     

ITEM 1A:

Risk Factors 19
     

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds 27
     

ITEM 3.

Defaults upon Senior Securities 27
     

ITEM 4.

Mine Safety and Disclosures 27
     

ITEM 5.

Other Information 27
     

ITEM 6:

Exhibits 28

 

 

 
 i

 


PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 

SALON MEDIA GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value amounts)

 

   

June 30,

   

March 31,

 
   

2015

    2015 (1)  

Assets

 

(Unaudited)

         

Current assets:

               

Cash and cash equivalents

  $ 536     $ 229  

Accounts receivable, net of allowance of $55

    1,197       874  

Prepaid expenses and other current assets

    127       141  

Total current assets

    1,860       1,244  

Property and equipment, net

    59       60  

Other assets, principally deposits

    301       301  

Total assets

  $ 2,220     $ 1,605  

Liabilities and Stockholders' Deficit

               

Current liabilities:

               

Short-term borrowings

  $ 1,000     $ 1,000  

Related party advances

    6,926       5,826  

Accounts payable and accrued liabilities

    1,374       1,331  

Deferred revenue

    5       -  

Total current liabilities

    9,305       8,157  
                 

Deferred rent

    73       73  

Total liabilities

    9,378       8,230  
Commitments and contingencies (See Note 5)                

Stockholders’ deficit:

               

Preferred Stock, $0.001 par value, 5,000,000 shares authorized, 1,075 shares issued and outstanding as of June 30, 2015 and March 31, 2015 (liquidation value of $2,512 as of June 30, 2015 and $2,495 as of March 31, 2015)

    -       -  

Common stock, $0.001 par value, 150,000,000 shares authorized, 76,245,442 shares issued and outstanding as of June 30, 2015 and March 31, 2015

    76       76  

Additional paid-in capital

    116,001       115,890  

Accumulated deficit

    (123,235 )     (122,591 )

Total stockholders' deficit

    (7,158 )     (6,625 )

Total liabilities and stockholders' deficit

  $ 2,220     $ 1,605  

 

(1)Derived from the Company’s audited consolidated financial statements.

 
   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

    

 

 
1

 

  

SALON MEDIA GROUP, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except per share data)

 

(Unaudited)

 

 

   

Three Months Ended

 
   

June 30,

 
   

2015

   

2014

 
                 

Net revenues

  $ 1,694     $ 1,243  
                 

Operating expenses:

               

Production and content

    976       938  

Sales and marketing

    446       406  

Information technology support

    366       398  

General and administrative

    540       377  

Total operating expenses

    2,328       2,119  
                 

Loss from operations

    (634 )     (876 )

Interest expense

    (10 )     (10 )

Net loss

  $ (644 )   $ (886 )
                 

Basic and diluted net loss per share

  $ (0.01 )   $ (0.01 )
                 

Weighted-average shares of Common Stock used in computing basic and diluted net loss per share

    76,245       76,245  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  

 

 
2

 

  

SALON MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

   

Three Months Ended

 
   

June 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net loss

  $ (644 )   $ (886 )
                 

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

               

Bad debt expense

    6       -  

Depreciation

    8       8  

Stock-based compensation

    111       46  

Changes in assets and liabilities:

               
                 

Accounts receivable

    (329 )     211  

Prepaid expenses and other assets

    14       (99 )

Accounts payable, accrued liabilities and deferred rent

    43       (131 )

Deferred revenue

    5       12  

Net cash used in operating activities

    (786 )     (839 )
                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (7 )     (1 )

Net cash used in investing activities

    (7 )     (1 )
                 

Cash flows from financing activities:

               

Proceeds from related party advances

    1,100       860  

Net cash provided by financing activities

    1,100       860  
                 

Net increase in cash and cash equivalents

    307       20  

Cash and cash equivalents as of beginning of period

    229       119  

Cash and cash equivalents as of end of period

  $ 536     $ 139  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

    

 
3

 

 

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

1.

The Company and Significant Accounting Policies

 

The Company

 

Salon Media Group, Inc. (“Salon”, the “Company”, “We”, “Our”, or “Us”) is an internet news and social networking company that produces Salon.com, a content Website, and related online communities. Salon was originally incorporated in July 1995 in California and reincorporated in Delaware in June 1999. Salon operates in one business segment.

  

Basis of Presentation

 

These interim condensed consolidated financial statements are unaudited and have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly Salon's condensed consolidated financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements for the fiscal year ended March 31, 2015, which are included in Salon’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015 filed with the Securities and Exchange Commission on June 19, 2015. Pursuant to the rules of the Securities and Exchange Commission, these financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. The results for the three month period ended June 30, 2015 are not necessarily indicative of the expected results for any other interim period or for the fiscal year ending March 31, 2016.

 

These condensed consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred losses and negative cash flows from operations since inception and had an accumulated deficit as of June 30, 2015 of $123,235. In addition, we expect to incur a net loss from operations for the fiscal year ending March 31, 2016. The Company has operated principally with the assistance of interest free advances from related parties. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Our operating forecast for the remainder of the fiscal year ending March 31, 2016 anticipates continued operating losses. We estimate we will require approximately $700 - $800 in additional funding to meet our operating needs for the balance of our fiscal year; however, we expect to commence collective bargaining with the Writers Guild of America, East, Inc. and until the negotiations are finalized we will not have a clear idea of any potential increase in our budget.  If planned revenues continue to be less than expected, or if planned expenses are more than expected, the cash shortfall may be higher, which will result in a commensurate increase in required financing.

 

 
4

 

 

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

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.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject Salon to concentration of credit risk consist primarily of trade accounts receivable.  We perform ongoing credit evaluations of our customers, but do not require collateral.  We provide an allowance for credit losses that we periodically adjust to reflect our management’s expectation of future losses.

 

One customer accounted for approximately 31% of net revenues for the three months ended June 30, 2015 and one customer accounted for approximately 15% of net revenues for the three months ended June 30, 2014. Two customers accounted for approximately 21% and 19% of total accounts receivable as of June 30, 2015. Two customers accounted for approximately 20% and 19% of total accounts receivable as of March 31, 2015.

 

Stock-Based Compensation

 

We account for stock-based compensation using the fair value method of accounting. The estimated fair value of the stock options granted is amortized on a straight-line basis over the vesting period of the stock.

 

We granted options to acquire a total of 28,065 shares during the quarter ended June 30, 2015. 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:

  

   

Three months ended June 30,

 
   

2015

   

2014

 

Risk-free interest rates

    1.36 %     1.25 %

Expected term (in years)

    4       4  

Expected volatility

    388 %     425 %

Dividend yield

    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. The expected stock price volatility is based on historical volatility of Salon’s stock over a period equal to the expected term of the options. The risk-free interest rate is based on the implied yield available on U.S. Treasury securities with a term equivalent to the service period of the stock options, or four years. We have not paid dividends in the past.

 

 

 
5

 

 

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

As of June 30, 2015, the aggregate stock compensation remaining to be amortized to expense was $364. Salon expects this stock compensation balance to be amortized as follows: $166 during the remainder of fiscal 2016; $88 during fiscal 2017; $71 during fiscal 2018 and $39 during fiscal 2019. The expected amortization reflects outstanding stock option awards as of June 30, 2015 expected to vest.

 

Reclassifications

 

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

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not believe adoption will have a material impact on its consolidated financial statements.

 

In June 2014, the FASB Emerging Issues Task issued Update No.2014-12, Compensation —Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. Effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015, an entity may apply the standards (1) prospectively to all share-based payment awards that are granted or modified on or after the effective date, or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. Earlier application is permitted. The Company is currently evaluating the new guidance and does not believe adoption will have a material impact on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15. This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

 

 
6

 

    

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

2. Borrowing Agreements

 

Short-term Borrowings

 

In May 2007, we finalized a borrowing agreement with Deutsche Bank Securities, Inc. that allows us to borrow up to $1,000 at a rate of prime less 0.25%. Our obligations under this agreement are guaranteed in their entirety by our Chairman. The line of credit has been fully drawn as of June 30, 2015. Deutsche Bank Securities may demand repayment of amounts borrowed at any time. Additionally, our Chairman may also choose to terminate his guarantee, which would trigger a demand for repayment. As of June 30, 2015, accrued interest on short-term borrowings totaled approximately $304.

 

As of June 30, 2015 and March 31, 2015, the weighted-average interest rate on the Company’s short-term borrowings remained constant at 3.5%.

 

Related Party Advances

 

During the three months ended June 30, 2015 and 2014, we received unsecured, interest-free cash advances totaling $1,100 and $860, respectively, to fund operations from our Chairman. These advances are payable on demand, and are exchangeable into securities on the same terms as those to be issued in the next financing raised by the Company from non-related parties.

 

3. Stock Option Plans

 

We have two equity incentive plans, the Salon Media Group, Inc. 2004 Stock Plan and the Salon Media Group, Inc. 2014 Stock Incentive Plan, as described in Note 7, “Employee Stock Option Plan,” of the notes to consolidated financial statements in Salon’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015. The Salon Media Group, Inc. 2004 Stock Plan expired on November 17, 2014 and no additional options may be issued under this Plan.

 

The following table summarizes activities under the Salon Media Group, Inc. 2004 Stock Plan and the Salon Media Group, Inc. 2014 Stock Incentive Plan for the three months ended June 30, 2015:

   

           

Weighted-

         
   

Outstanding

   

Average

   

Aggregate

 
   

Stock

   

Exercise

   

Intrinsic

 
   

Options

   

Price

   

Value

 

Balance as of March 31, 2015

    8,101,000     $ 0.16          

Options granted under all plans

    28,000     $ 0.16          

Exercised

    -       -          

Expired and forfeited

    (169,000 )   $ 0.34          

Outstanding as of June 30, 2015

    7,960,000     $ 0.15     $ 176  

Vested as of June 30, 2015

    5,326,000     $ 0.13     $ 161  

Vested and expected to vest as of June 30, 2015

    7,088,000     $ 0.15     $ 174  

 

 
7

 

 

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

  

Options totaling 28,065 shares were awarded during the three months ended June 30, 2015. Options totaling 29,850 shares were awarded during the three months ended June 30, 2014. The weighted-average fair value of options granted during each of the three month periods ended June 30, 2015 and 2014 was $0.16 per share and $0.25 per share, respectively. The weighted-average fair value of options vested during each of the three month periods ended June 30, 2015 and 2014 was $0.15 per share and $0.09 per share, respectively. There were no option exercises during the three months ended June 30, 2015.

 

Our Board of Directors also approved a resolution on June 12, 2014 to amend the Salon Media Group, Inc. 2014 Stock Incentive Plan (the “2014 Plan”) to comply with certain California Code of Regulations and Internal Revenue Service regulations. For the three months ended June 30, 2015, options totaling 28,065 were awarded under the 2014 Plan.

 

We recognized stock-based compensation expense of $111 and $46 during the three months ended June 30, 2015 and 2014, respectively.

 

4.     Net Loss Per Share

 

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

   

   

Three Months Ended

 
   

June 30,

 
   

2015

   

2014

 

Numerator:

               

Net loss attributable to common stockholders

  $ (644 )   $ (886 )
                 

Denominator:

               

Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders

    76,245,000       76,245,000  
                 

Basic and diluted net loss per share attributable to common stockholders

  $ (0.01 )   $ (0.01 )
                 

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

    9,056,000       7,115,000  

    

 

 
8

 

 

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

5.     Commitments and Contingencies

 

On October 17, 2012, we signed an office lease agreement to relocate our San Francisco headquarters to 870 Market Street, Suite 528, San Francisco, California. The five-year lease for approximately 2,405 square feet, commenced on December 1, 2012 and will terminate on November 30, 2017.

 

On April 16, 2014, we entered into an office lease for our new corporate offices at 132 West 31st Street, New York, New York consisting of 6,523 square feet in rentable space. The lease commenced on July 1, 2014 and will expire on September 30, 2019. Upon execution of the lease, a deposit in the form of a letter of credit of $204 was required. The term of the lease is five years with an effective base monthly rent expense of approximately $26, and a 2014 base year to be utilized in allocating future excess direct expenses. The rent expense associated with the office lease is straight-lined over the term of the agreement. As a result, deferred rent increased to approximately $73 as of March 31, 2015 and has remained constant as of June 30, 2015.

 

The following summarizes our office lease commitments and short-term borrowings as of June 30, 2015:

 

   

Payments Due By Period

 
   

Total

   

1 Year or Less

   

1 - 3 Years

   

3 - 5 Years

   

More Than 5 Years

 
                                         

Operating leases

  $ 1,593     $ 401     $ 1,106     $ 86     $ -  

Short-term borrowing

    1,000       1,000       -       -       -  

Interest on short-term borrowing

    304       304       -       -       -  

Related party advances

    6,926       6,926       -       -       -  

Total

  $ 9,823     $ 8,631     $ 1,106     $ 86     $ -  

  

6. Preferred Stock

 

The conversion rate and common equivalent shares of our Preferred Stock as of June 30, 2015 are as follows:

 

           

Per share

   

Common

 
   

Shares

   

Purchase

   

Conversion

   

Equivalent

 

Preferred Stock

 

Outstanding

   

Price

   

Rate

   

Shares

 

Series C

    1,075     $ 800       0.785       1,096,676  

Total

    1,075                       1,096,676  

  

The Series C Preferred Stock conversion rate is subject to a downward adjustment anti-dilution provision under certain circumstances related to subsequent Salon securities issuances. The Company determined that the accounting for such conversion features does not require bifurcation under “Accounting for Derivative Instruments and Hedging Activities” (Accounting Standards Codification ASC 815) and, accordingly, the requirements of ASC 815 are not applicable.

 

 
9

 

 

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

In event of a liquidation, the holders of the Series C Preferred Stock are entitled to receive, prior and in preference to any distribution of any assets or property of Salon to the holders of Common Stock, $1,600 per share, plus an amount equal to all declared but unpaid dividends, based on an annual rate of 8%. If the assets and funds available for distribution are insufficient to permit the payment to the holders of Series C Preferred Stock of their full preferential amounts, then the entire assets and funds of Salon legally available for distribution to stockholders will be distributed among the holders of Series C Preferred Stock ratably in proportion to the full preferential amounts which they are entitled to receive. As of June 30, 2015, no dividend has been declared to the holders of Preferred Stock.

 

If, after initial preferential liquidation payments to the holders of Series C Preferred Stock, any assets remain available for distribution, such assets are to be distributed ratably among the holders of Common Stock and Preferred Stock, based on the shares of Common Stock then held by them and issuable upon conversion of the shares of Preferred Stock then held by them, until aggregate distributions per share reach $2,400 for the holders of Series C Preferred Stock. Salon has currently outstanding 1,075 shares of Series C Preferred Stock.

 

If, after payment has been made to the holders of Common Stock and holders of Preferred Stock mentioned above, any assets remain available for distribution, such assets are to be distributed ratably among the holders of Common Stock and the holders of Series C Preferred Stock, based on the number of shares of Common Stock then held by them and issuable upon conversion of the Series C Preferred Stock then held by them. Based on available information, Salon estimates that the Series C Preferred Stock would account for approximately 1% of outstanding shares on an as converted basis.

 

The holders of Preferred Stock are entitled to vote together with the holders of Salon’s Common Stock as though part of that class, and are entitled to vote on all matters and to that number of votes equal to the largest number of whole shares of Common Stock into which the shares of Preferred Stock could be converted. Preferred Stockholders as a group own approximately 6% of the outstanding shares of Common Stock and Common Stock issuable upon conversion of the shares of Preferred Stock, all with voting rights.

 

The aggregate liquidation preferences of all Preferred Stockholders as of June 30, 2015 were $1,720 excluding the effect of undeclared dividends, and $2,512 including the effect of undeclared dividends. We have never declared a dividend and do not expect to declare a dividend in the future.

 

Neither the Series C Preferred Stock nor the underlying shares of Common Stock have been registered for sale under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration under such act or an applicable exemption from registration requirements.

 

7. Subsequent Events

 

From July 1, 2015 through August 14, 2015, we received unsecured interest-free cash advances totaling $215 from our Chairman.

 

On August 3, 2015, we announced that approximately twenty-five of our editorial employees have agreed that the Writers Guild of America, East, Inc. will serve as the collective bargaining representative of these editorial employees. We expect to commence negotiations of a collective bargaining agreement in the near future.

 

 
10

 

 

SALON MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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, non-web opportunities and revenue sources. Although Salon Media Group, Inc. (“Salon”, the “Company” or “We”) believes its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth above and in Salon’s public filings. Salon assumes no obligation to update any forward-looking statements except as required by law.

 

Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth in "Risk Factors" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q should be considered in conjunction with the audited consolidated financial statements, which are included in Salon’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (the “Fiscal 2015 Annual Report”) filed with the Securities and Exchange Commission. Matters of interest therein include, but are not limited to, our disclosure of critical accounting policies.

 

Overview

 

Salon is an online news website committed to fearless journalism and to making the conversation smarter. Our award-winning journalism combines original investigative stories and provocative personal essays along with quick-take commentary and staff-written articles about politics, culture, entertainment, sustainability, innovation, technology and business. Our editorial product seeks to balance two crucial missions: (1) providing original and provocative content on topics that the mainstream media overlook, and (2) filtering through the media chatter and clutter to help readers find the stories that matter. 

 

We focus on excellence in our core editorial product so we can attract a high demographic audience and deliver value to our advertising clients. Our readership consists of a global community that is demanding and engaged. They are considered influencers in public policy, culture, art, technology and fashion. We believe our user profile makes our Website a valuable media property for advertisers and retailers who are allocating marketing resources to target consumers online. 

 

We have a history of significant losses and expect to incur a loss from operations, based on generally accepted accounting principles, for our fiscal year ending March 31, 2015 and potentially for future years. Burr Pilger Mayer, Inc., Salon’s independent registered public accounting firm for the years ended March 31, 2015, 2014, and 2013, included a “going-concern” audit opinion on the consolidated financial statements for those years. The audit opinions report substantial doubt about our ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability. Our stock price and investment prospects have been and could continue to be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations.

 

 

 
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In May 2012, we adopted a strategy that has led to the most significant period of user growth in our history. In June 2015, we reached our all-time high of 19.6 million unique users as measured by Google Analytics. Our strategy focuses on growing our user base, which in turn increases our attractiveness to advertisers, leading to growth in revenue. Our strategy is predicated on the following core principals: (1) create high quality content that meets our users’ interests; (2) make strategic hires to bring in new editorial talent and online news business expertise; and (3) innovate to bring great products to our users. Our focus on these core principals provides opportunity for future growth.

 

Highlights from Quarter ended June 30, 2015

 

 

Net revenues increased 36% to $1.7 million in the quarter ended June 30, 2015 versus $1.2 million in the same period in 2014. The increase in revenue was a result of stronger programmatic advertising revenues. In the past year, there was a significant industry shift in online advertising from advertising sold by a direct sales team to advertising increasingly being sold through software based “programmatic” technology. As a result, our advertising sales have made a similar shift, resulting in a decline in direct advertising and an increase in advertising sold through networks that access these programmatic buys. The increase in revenue was also a result of new agreements with additional mobile and website ad providers, expanding our representation in Canada, the UK and Australia, which are our largest overseas markets, and seeking to increase the breadth of our advertiser base as well as increase the size of each advertising order. We believe these strategies should help us to increase our revenues in fiscal year 2016.

 

 

Net losses were $0.6 million during the quarter ended June 30, 2015, a decrease from $0.9 million during the same period last year. The decrease in losses resulted from an increase in revenues and a corresponding smaller increase in operating expenses to $2.3 million, compared to $2.1 million in the same period last year.

   

 

Average unique visitors to the Salon.com Website during the quarter ended June 30, 2015 increased 30% compared to the quarter ended June 30, 2014, and increased 5% compared to the quarter ended March 31, 2015, according to data compiled by Google Analytics. Unique visitors as measured by comScore increased 45% compared to the quarter ended June 30, 2014 and increased 8% compared to the quarter ended March 31, 2015. The difference between the two sources is that comScore uses a panel-centric method for counting unique visitors in the U.S. market rather than the tagging technology used by Google to measure global users.

   

 

In June 2015, we experienced our highest ever number of readers, with 19.6 million unique visitors coming to our Website and 61.5 million page views during the month, according to Google Analytics. As measured by comScore MediaMetrix (includes mobile), June 2015 monthly uniques were 13.8 million.

 

 

We have been developing a strategy to produce Salon editorial video content. We have begun to roll out original video programming focused on news, politics and entertainment, in order to add high quality diversified content to our Website, and to attract premium video advertising that commands higher cost-per-thousand-impression (CPMs) as compared to display advertising. These videos will complement Salon’s brand of fearless journalism that makes the conversation smarter, and be designed for maximum share-ability on social media sites.

 

 

The June 2015 quarter included three of the biggest traffic months in Salon's 20-year history. We reached these new heights with great journalism focused on the most compelling stories. Race, religion and politics led the way: Salon's exceptional coverage of the Baltimore unrest, the Duggar family scandal, Rachel Dolezal, and the rise of Bernie Sanders and Donald Trump surrounded the stories with an array of breaking news, media criticism, personal essays, political analysis, interviews and historical context, all of it pushed aggressively on social media. Our essays tying these complicated issues of race, sex and identity together, written by diverse voices, were widely read, shared, and set the agenda for commentary in other publications. We also mourned and celebrated with our readers as Mad Men and David Letterman left the stage.  Salon also broke the well-covered story about New York Times columnist David Brooks, discovering that he fabricated studies and numbers in his new best-selling book on morality and character. Also, an exclusive article by former Pink Floyd singer, Roger Waters, on why he won't play in Israel also ricocheted around the world and started many conversations after it was shared by Pink Floyd's Facebook page. We launched a new series with the goal of interviewing every former "Saturday Night Live" staffer. Lena Dunham and Wil Wheaton were among the many celebrities to tweet about our work this quarter. 

 

 

 
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Salon's life editor, Sarah Hepola, hit the New York Times best-seller list with her memoir Blackout, itself based on several Salon essays. And Lindsay Abrams was honored by the Audubon Society as one of its "Women Greening Journalism" at their annual Women in Conservation luncheon. The event recognized "a select group of outstanding women whose work has advanced public awareness of environmental issues," selected from a pool of nearly one hundred finalists.

 

 

On August 3, 2015, we announced that approximately twenty-five of our editorial employees have agreed that the Writers Guild of America, East, Inc. will serve as the collective bargaining representative of these editorial employees. The Company expects to commence negotiations of a collective bargaining agreement in the near future.

 

 

Social media continues to be a major source of referral traffic and a significant focus across the Company, although growth from this traffic source has slowed in the past year. We make regular updates to the Website to optimize content to be shared on social media with a special focus on our mobile platforms. In June 2015, we surpassed 750,000 Facebook “likes,” and 500,000 Twitter followers, and continued to expand on visual platforms Tumblr, Instagram and Snapchat.

 

 

Mobile browser users accounted for an average 58% of all users in June 2015 quarter, which is an increase from the 51% average in the June 2014 quarter. We continue to have a company-wide focus on our users’ mobile needs, especially quick and easy access to fast-loading content optimized for better readability on smaller screens. In the 2015 fiscal year we redesigned our mobile applications (“apps”) and iteratively integrated native advertising solutions to better monetize them. In April 2015 Salon entered the Internet of Things space with the launch of the Salon app for Apple Watch. The Apple Watch app pairs with our iPhone app and provides a timely and discrete experience. It increases the number of interactions with our users and provides a new platform for us to interact with our users.

 

 

Our direct advertising team continued to focus on high value-added campaigns that incorporated seamless video integrations, and as a result more than 75% of our direct ad campaigns included some video component. More than 90% of our advertising campaigns fell in three categories: branded consumer, “tune-in” television, and financial services. Advertisers included Mercedes, Panera, HBO, MSNBC, CNN, Google Droid, Ally Bank and ESPN.

 

 

We continued to make technological updates to our browser, tablet and mobile platforms with a focus on video presentation, mobile, advertising technologies and analytics integrations. Recent updates included the implementation of homepage rearchitecture of templating and layout that allowed us to improve website display across all devices and greatly improved the speed of the site.

 

 

We maintained 100% uptime for the site throughout the quarter, which was the longest period of uptime in Salon's history. We shifted parts of our browser site to utilize an application programming interface (API) that provides one comprehensive data source for all platforms, increases our site security and data protection and will make future development quicker and flexible, while helping to ensure that all supported platforms are in sync. We upgraded our Web server software and simplified our server setup, which improved both site performance and site security. We finalized migration of remaining hosted servers onto one cloud-based server and hosting provider and eliminated remaining legacy systems.

 

 

 
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Sources of Revenue

 

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

 

We also generate revenue from the licensing of content that previously appeared in our Website, and from traffic referrals to third party Websites.

 

Expenses

 

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

 

Sales and marketing expenses consist primarily of salaries, commissions, bonuses and related personnel costs, travel, and other costs associated with our sales force, and business development efforts. They also include marketing promotions.

 

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

 

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

 

Interest expense includes accrued interest on our outstanding debt.

 

In accordance with Accounting Standards Codification (“ASC”) 718, “Stock Compensation” (ASC 718), our expenses include stock-based compensation expenses related to stock option and restricted stock grants to employees, non-employee directors and consultants. These costs are included in the various departmental expenses.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires us to utilize accounting policies and make estimates and assumptions that affect our reported amounts. Our significant accounting policies are described in Note 2 to the consolidated financial statements in our Fiscal 2015 Annual Report. We believe accounting policies and estimates related to revenue recognition and stock-based compensation are the most critical to our financial statements. Future results may differ from current estimates if different assumptions are used or different conditions were to prevail.

 

 

 
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Revenue Recognition

 

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

 

Advertising revenues, derived from the sale of promotional space on our Website, comprised 82% and 90% of our revenues, respectively, for the three months ended June 30, 2015 and 2014. The duration of the advertisements is generally short-term, usually less than ninety days. Revenues derived from such arrangements are recognized during the period the advertising space is provided. Our obligations typically include a guaranteed minimum number of impressions. To the extent minimum guaranteed amounts are not achieved, we defer 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.

 

We previously offered a pay-for-online content service called Salon Premium, which provided unrestricted access to our Website with no advertisements, as well as other giveaways and benefits. As a result of the continued decline in subscribers, as of June 2012, new subscriptions and renewals were no longer accepted and the wind down of this subscription service was completed in fiscal year 2015.

 

Accounting for Stock-Based Compensation

 

We account for stock-based compensation under ASC 718 and recognize the fair value of stock awards on a straight-line basis over the requisite service period of the award, which is the vesting term of four years.

 

We recognized stock-based compensation expense of $111,000 and $46,000 during the three months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, we had an aggregate of $364,000 of stock compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. We currently expect this stock compensation balance to be amortized as follows: $166,000 during the remainder of fiscal 2016; $88,000 during fiscal 2017; $71,000 during fiscal 2018 and $39,000 during fiscal 2019. The expected amortization reflects only outstanding stock option awards as of June 30, 2015 expected to vest. We expect to continue issuing stock-based awards to our employees in future periods.

 

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

 

Results of Operations for the Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

 

Net revenue

 

Net revenue increased 36% to approximately $1.7 million for the three months ended June 30, 2015 from approximately $1.2 million for the three months ended June 30, 2014.

 

Advertising revenues increased 27% to approximately $1.4 million for the three months ended June 30, 2015 from approximately $1.1 million for the three months ended June 30, 2014. Direct ad sales captured approximately 33% and programmatic ad sales captured approximately 67% of total advertising revenue for the three months ended June 30, 2015. The increase in total advertising revenue was a result of stronger programmatic ad sales revenues due to an industry shift by advertisers from direct advertising to programmatic advertising, as well as improved mobile monetization due to newly launched mobile advertising products.

 

 
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Revenues from all other sources, mostly referral fees, remained immaterial for the three months ended June 30, 2015 and 2014 at $0.3 million and $0.1 million, respectively.

 

Expenses

 

Production and content

 

Production and content expenses remained relatively flat from a year ago at approximately $1.0 million for the three months ended June 30, 2015.

 

Sales and marketing

 

Sales and marketing expenses remained relatively flat from a year ago at approximately $0.4 million for the three months ended June 30, 2015.

 

Technology

 

Technology expenses remained relatively flat from a year ago at approximately $0.4 million for the three months ended June 30, 2015.

 

General and administrative

 

General and administrative expenses increased 43% to approximately $0.5 million for the three months ended June 30, 2015 from approximately $0.4 million for the three months ended June 30, 2014. The approximately $0.1 million increase primarily resulted from higher costs from personnel, stock compensation and monthly rents for our relocated New York office.

 

Interest expense

 

Interest expense for the three months ended June 30, 2015 and 2014 remained flat and immaterial at $0.01 million.

 

Liquidity and capital resources

 

Net cash used in operations was approximately $0.8 million for the three months ended June 30, 2015. The principal uses of cash during the three months ended June 30, 2015 were to fund the $0.6 million net loss and the net activities from various working capital and immaterial non-cash items for the period. The accounts receivable, net as of June 30, 2015 of approximately $1.2 million, represent primarily advertising sales during the period, and are expected to be collected within the next four months. Net cash used in investing activities was immaterial during each of the three months ended June 30, 2015 and 2014.

 

Net cash provided by financing activities was $1.1 million and $0.9 million for the three months ended June 30, 2015 and 2014, respectively, reflecting cash advances from related parties.

 

We estimate we will require approximately $0.7 - $0.8 million in additional funding to meet our operating needs for the remaining nine months ending March 31, 2016;  however, we are commencing collective bargaining with the Writers Guild of America, East, Inc. and until the negotiations are finalized we will not have a clear idea of any potential increase in our budget. If planned revenues are less than expected, or if planned expenses are more than expected, the cash shortfall may be higher, which will result in a commensurate increase in required financing.  During the current and previous fiscal years, we have relied on funding from related parties.  In this fiscal year through August 14, 2015, our chairman has provided $1.3 million in cash advances.

 

 
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Off-Balance-Sheet Arrangements

 

We have no off-balance-sheet arrangements.

 

Contractual Obligations

 

The following summarizes our contractual obligations as of June 30, 2015:

 

   

Payments Due By Period

 
   

Total

   

1 Year or Less

   

1 - 3 Years

   

3 - 5 Years

   

More than 5 Years

 

Operating leases

  $ 1,593     $ 401     $ 1,106     $ 86     $ -  

Short-term borrowing

    1,000       1,000       -       -       -  

Interest on short-term borrowing

    304       304       -       -       -  

Related party advances

    6,926       6,926       -       -       -  

Total

  $ 9,823     $ 8,631     $ 1,106     $ 86     $ -  

 

 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We maintain all of our 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, we entered into a credit agreement with Deutsche Bank Securities, Inc. that allows us to borrow up to $1.0 million at a rate of prime less 0.25% which subjects us to interest rate risk. We feel that the risk of a rate change is not material as we contemplate having a maximum of only $1.0 million of variable rate debt outstanding during our fiscal year ending March 31, 2016. As of June 30, 2015, we had $1.0 million plus accrued interest outstanding under this agreement, payable on demand. As we conduct all of our business in the United States, we are not subject to foreign exchange risk.

 

Item 4. Controls and Procedures

 

Evaluation of Our Disclosure Controls and Internal Controls

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly Form 10-Q report (June 30, 2015), as is defined in Rule 13a-15(e) promulgated under the Exchange Act. Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, respectively, to allow timely decisions regarding required disclosures.

 

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly Form 10-Q report, our disclosure controls and procedures were effective.

 

Our management has concluded that the financial statements included in this Form 10-Q present fairly, in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

 

Changes in Internal Controls Over Financial Reporting

 

There was no change in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

 
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PART II: OTHER INFORMATION


  

Item 1. Legal Proceedings.

 

Not applicable.

 

Item 1A. Risk Factors.

 

Salon’s business faces significant risks. The risks described below may not be the only risks Salon faces. Additional risks that are not yet known or that are currently immaterial may also impair its business operations or have a negative impact on its stock price. If any of the events or circumstances described in the following risks actually occurs, its business, financial condition or results of operations could suffer, and the trading price of its Common Stock could decline. The Risk Factors set forth below have not materially changed from those included in our Fiscal 2015 Annual Report.

 

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

 

We have a history of significant losses and expect to incur a loss from operations, based on generally accepted accounting principles, for our fiscal year ending March 31, 2015 and to be determined in future years. Even if we attain profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If revenues grow more slowly than we anticipate, or continue to decline as we saw in the quarter ended December 31, 2014, or operating expenses exceed expectations, financial results will most likely be severely harmed and our ability to continue operations will be seriously jeopardized.

 

Burr Pilger Mayer, Inc., Salon’s independent registered public accounting firm for the fiscal years ended March 31, 2012 through 2015 included a “going-concern” audit opinion on the consolidated financial statements for each of those years. The audit opinions report substantial doubt about our ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability. As a result of the “going-concern” opinions, our stock price and investment prospects have been and will continue to be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations.

 

The Company has operated principally with the assistance of interest free advances from related parties. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Salon’s projected cash flows may not meet expectations

 

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

 

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

 

 

 
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We have relied on related parties for significant investment capital

 

We have relied on cash infusions from related parties to fund operations for many years. The related parties are primarily John Warnock, Chairman of the Board of Salon, and, to a lesser extent in recent years, William Hambrecht. William Hambrecht is a Director and the father of our former CEO and current Chief Financial Officer, Elizabeth Hambrecht. During the current fiscal year, through August 14, 2015, Mr. Warnock has contributed $1.315 million in cash advances to fund our operations.

 

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

 

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

 

Approximately 58% of our voting securities are controlled, directly or indirectly by our Chairman, John Warnock, and approximately 22% is controlled, directly or indirectly, by William Hambrecht, a Director and the father of our Chief Financial Officer. We remain dependent upon Mr. Warnock and Mr. Hambrecht for continued financial support while we seek external financing from potential investors in the form of additional indebtedness or through the sale of equity securities in a private placement. While all outstanding, unsecured, interest-free cash advances from Mr. Warnock and Mr. Hambrecht at February 28, 2013 were exchanged for Common Stock in the Company’s Recapitalization (described in Note 4 to the consolidated financial statements included in the 2015 Annual Report), Mr. Warnock has continued to make unsecured, interest-free, cash advances to cover our operating expenses. These advances are payable on demand, and are exchangeable into securities on the same terms as those to be issued in our next financing from non-related parties.

  

We are entering a collective bargaining with our editorial employees, and the results of this process are uncertain

  

On August 3, 2015, we announced that approximately twenty-five of our editorial employees have agreed that Writers Guild of America, East, Inc. will serve as the collective bargaining representative of these editorial employees.  We expect to commence negotiations of a collective bargaining agreement in the near future.  Should this collective bargaining process result in an agreement that would not permit us to obtain additional funding, there can be no assurance that we will be able to continue our current business.

 

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

 

Our directors and officers own approximately 65 million shares, or 83% in the aggregate, of our Common Stock. As our Common Stock is normally thinly traded, if our principal stockholders were to sell their shares of Common Stock, the per share price of our Common Stock could be adversely affected. 

 

Our stock has been, and will likely continue to be, subjected to substantial price and volume fluctuations due to a number of factors, many of which will be beyond our control and which may prevent our stockholders from reselling Common Stock at a profit

 

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

  

 

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

 

Holders of our Series C Preferred Stock (“Preferred Stock”) have liquidation preferences over holders of Common Stock of the first approximately $2.5 million in potential sales proceeds as of June 30, 2015, which includes the effect of undeclared dividends, if granted, of about $0.8 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 $2.5 million of cash distributions. If a liquidation event were to occur in excess of $2.5 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.

 

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

 

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

 

 

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

  

 

sell and market our Website or other rich media advertisements;

 

 

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

 

 

increase the dollar amount of our advertising orders;

 

 

improve our Website’s technology for serving advertising;

 

 

handle temporary high volume traffic spikes to our Website;

 

 

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

 

 

attract and retain key sales personnel.

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

We are constantly upgrading our technology to manage our Website. During the last year we redesigned our Website homepage and vertical sections. In addition, we are creating new technology for new products that we expect to launch on an ongoing basis. If these systems do not work as intended, or if we are unable to continue to develop these systems to keep up with the rapid evolution of technology for content delivery, our Website may not operate properly, which could harm our business. Additionally, software product design, development and enhancement involve creativity, expense and the use of new development tools and learning processes. Delays in software development processes are common, as are project failures, and either factor could harm our business. Moreover, complex software products such as our online publishing frequently contain undetected errors or shortcomings, and may fail to perform or scale as expected. Although we have tested and will continue to test our systems, errors or deficiencies may be found in these systems that could adversely impact our business.

 

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

 

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

 

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

 

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

 

 

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

 

Our Website “salon.com”, and content management system run on cloud computing hosted by Amazon Web Services, which are in a facility in Herndon, Virginia. Any disruption of Amazon’s cloud computing platform could result in a service outage. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, supplier failure to meet commitments, and similar events could damage these systems and cause interruptions in our services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting our Website and could cause advertisers to terminate any agreements with us. In addition, we could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable. If any of these circumstances occurred, our business could be harmed. Our insurance policies may not adequately compensate us for losses that may occur due to any failures of or interruptions in our systems. We do not presently have a formal disaster recovery plan.

 

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

 

Privacy concerns could impair our business

 

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

 

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

 

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

 

 

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

 

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

 

 

Our ability to attract and retain advertisers;

 

 

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

 

 

Our ability to increase referrals from our social media presence;

 

 

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

 

 

Our ability to maximize our mobile presence;

 

 

The timing and uncertainty of our advertising sales cycles;

 

 

The mix of advertisements sold by us or our competitors;

 

 

Economic and business cycles;

 

 

Our ability to attract, integrate and retain qualified personnel;

 

 

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

 

 

The amount and timing of operating costs.

 

Due to the factors noted above and the other risks discussed in this section and in our Annual Report, one should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. If future periods’ results of operations are below the expectations of public market analysts and investors, the price of our Common Stock could decline. 

 

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

 

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

 

 

the board of directors approved the transaction in which the stockholder acquired 15% or more of the corporation’s assets;

 

 

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

 

 

on or after such date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

 

 

 
25

 

 

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

 

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

 

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

 

 

 
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6. Exhibits

 

(a) Exhibits.

 

31.1

Certification of Cynthia Jeffers, Chief Executive Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002

 

31.2

Certification of Elizabeth Hambrecht, Chief Financial Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002

 

32.1

Certification of Cynthia Jeffers, Chief Executive Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002

 

32.2

Certification of Elizabeth Hambrecht, Chief Financial Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002

 

101.INS**

XBRL Instance

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation

101.DEF**

XBRL Taxonomy Extension Definition

101.LAB**

XBRL Taxonomy Extension Labels

101.PRE**

XBRL Taxonomy Extension Presentation

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections

 

 

 
27

 

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    

 

 

SALON MEDIA GROUP, INC.

 

 

 

 

 

 

 

 

 

Dated: August 14, 2015

By:

/s/ Cynthia Jeffers

 

 

 

Cynthia Jeffers

 

 

 

Chief Executive Officer

 

  

 

Dated: August 14, 2015

By:

/s/ Elizabeth Hambrecht

 

 

 

Elizabeth Hambrecht

 

 

 

Chief Financial Officer

 

               

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