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, 2013

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)

870 Market Street, Suite 528

San Francisco, CA 94102

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,528,000 based on the closing sale price of the registrant’s common stock on June 3, 2013. Shares of common stock held by each then current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to have been affiliates of Salon Media Group, Inc. This determination of affiliate status is not a conclusive determination for other purposes.

The number of outstanding shares of the Registrant's Common Stock, par value $0.001 per share, on June 3, 2013 was 76,157,942 shares.

FORM 10-K SALON MEDIA GROUP, INC. INDEX

 

PART I		Page Number
ITEM 1.	Business	4
ITEM 1A.	Risk Factors	15
ITEM 1B.	Unresolved Staff Comments	23
ITEM 2.	Properties	23
ITEM 3.	Legal Proceedings	24
ITEM 4.	Mine Safety Disclosures	24
PART II
ITEM 5.	Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity Securities	24
ITEM 6.	Selected Consolidated Financial Data	27
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	36
ITEM 8.	Financial Statements and Supplementary Data	37
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	60
ITEM 9A.	Controls and Procedures	60
ITEM 9B.	Other Information	61
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	62
ITEM 11.	Executive Compensation	65
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	73
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	75
ITEM 14.	Principal Accountant Fees and Services	77

FORM 10-K SALON MEDIA GROUP, INC. INDEX – (continued)

 

PART IV
ITEM 15.	Exhibits, Financial Statement Schedules	78
SIGNATURES		88

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. The stock symbol for the Company has since been updated to SLNM.PK.

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

Salon generates revenue from display advertising, third-party network advertising, content licensing, referral fees and other services.

Highlights from Fiscal Year 2013

 

●

Changed ad-serving platforms to Google's industry standard platform. This change coupled with an increase in pageviews increased remnant revenue by 23% from the prior fiscal year.

Strategic Review

In May 2012, the Company embarked on a plan to grow revenue by developing its online news coverage, integrating with social media networks, enhancing stickiness on the website, developing a robust mobile platform and maintaining an overriding focus on growing traffic.

Content Divisions

Salon targets an educated, culturally engaged audience interested in original thinking and reporting on the day’s big stories, and pursues that audience by offering seven key content areas listed below:

Expanded Contributor Network

Salon supplements its staff-driven, original work with a burgeoning partnership program with other producers of original, high quality journalism such as GlobalPost, The Nation Institute, ProPublica, Alternet, Print Magazine, MinnPost, The Crime Report, LA Review of Books, Guernica, Bill Moyers & Co., carefully selecting stories with the greatest appeal to Salon readers. The Company also relies on the frequent, high-quality contributions of its reader-writers on Open Salon, who write regularly on meaningful, news-driven stories, and have contributed heavily to ongoing Salon series, including “Interview with my Bully” (writers interviewing their childhood bullies); “Pinched” (first-person accounts of recession-era living);  “My Brilliant Second Career” (tales of career reinvention) and “Made” (the virtue of making stuff).

Mobile phones and tablets

Web browsers and applications on mobile platforms are a significant area of audience growth and ad revenue in the online news industry. In fiscal year 2013, Salon implemented its mobile content strategy to address mobile content needs that may differ from readers’ needs on desktop computers. Specifically, the company enhanced its mobile browser site, launching a responsive mobile design site, as well as Apple and Android mobile phone and tablet applications.

Social media

With the global growth of social networking platforms, their emergence as news innovators, sources of traffic referrals, and distribution platforms, Salon plans to grow its delivery of content to, presence on and integration with social platforms. In fiscal year 2013, the Company integrated social networking features into the Website, which facilitated the sharing of content on social networks, and developed partnerships with social networks.

Content Partnerships

Salon believes it needs fresh content and new ideas to continue to attract readers to its Website.  To this end, Salon has made efforts to initiate partnerships to diversify the content offerings across various content verticals, as well as dynamic content, such as video, slideshows and images.   Additionally, Salon has made efforts to identify bloggers who might have a strong affinity with its readers, and who might be interested in moving their sites to Salon in order to gain a greater reach of readership and infrastructure support.

Display Advertising Revenue

Since the end of fiscal year 2007, Salon has increased emphasis on display advertising revenues.  In fiscal year 2013, Salon built out its suite of advertising offerings, improve the technological orientation of the site to attract custom advertising solutions and expand into additional advertising categories. The Company also better optimized the use of ad networks to fully monetize any unsold remnant inventory. In fiscal 2014, we will continue to grow and develop this strategy.

Website Design and Architecture

In April 2012, Salon launched a completely re-designed website in an effort to accelerate its audience growth, gave increased attention to social networks and search engine optimization and referral traffic, improved page loading to deliver news to users faster, improved the company’s Google page rank, improved usability to make it easier for users to find the stories they're looking for, integrated social networking to increase referral traffic from social networks and added modules to better circulate traffic around the site.

The Well

Salon also operated The Well. On September 20, 2012, Salon entered into and consummated an Asset Sale Agreement in which The Well Group, Inc, a California corporation, purchased all assets of the Company related to The Well, including, without limitation (i) the domain name “well.com” and all associated URLs, (ii) certain contracts and agreements with certain third parties, including member agreements and (iii) other property and materials as are required to operate the business as a going concern, for a purchase price of $400,000 (“The Well Asset Sale”).

Premium Subscriptions

Salon operated Premium and Core, a subscription service that provides ad-free viewing of the Website. As Salon increased its number of readers to its advertising supported website, its primary source of revenue was from direct and third-party advertising sales. As a result of a continued decline in Premium and Core subscribers, Salon’s subscription service was terminated and, as of June 2012, new subscriptions and renewals are no longer accepted. Salon recognizes that its subscription model will continue to be preferred by a small minority of its readers, and will therefore continue the subscription program during this winding down process and anticipates ending the subscription service in fiscal year 2015.

Production and Content

Salon has made substantial strides in the past fiscal year to better realign its production costs with its revenue potential in an effort to reach profitability.  Among other measures, the Company reduced total freelance costs 23% from $367,000 in fiscal year 2012 to $281,000 in fiscal year 2013 and is continually aiming to match personnel resources to overall business needs.

Revenue Sources

No customer accounted for over 10% of total net revenue for the years ended March 31, 2013 and 2012 with one customer accounting for over 10% of total net revenue for the year ended March 31, 2011, which were as follows (in thousands):

Salon has generated Internet advertising revenues since its inception in 1995, and this accounted for 91% of net revenues in fiscal year 2013. The Company launched Salon Premium, a subscription service, in April 2001. Salon Premium was re-branded as Salon Core in fiscal year 2012, and due to a tepid response from readers, was restructured in June 2012. As a result of the continued decline in subscribers, as of June 2012, new subscriptions and renewals are no longer accepted, in anticipation of winding down the subscription service in fiscal year 2015.

The Company acquired The Well, its primary source of other net revenue, in 1999. The Well's declining subscriber base, and aging technology led to a decision in June 2012 to restructure the service. As a result, The Well staff was laid off and current subscriptions were honored but not renewed upon expiration. On September 20, 2012, Salon entered into and consummated The Well Asset Sale.

Online advertising, which accounts for the bulk of Salon’s net revenue, is subject to broader economic fluctuations, like other forms of advertising, but with a consistent upward bias. According to the eMarketer, online advertising [revenue in the United States] surpassed newspaper advertising [revenue in the United States] for the first time in 2010. Total online advertising [revenue] was $32 billion in 2011, a 23% increase from 2010, according to the Pew Research Center. Total online advertising [revenue in the United States] was $36.6 billion in 2012, which was a 15% increase from 2011, according to a recent study by PricewaterhouseCoopers LLC and sponsored by the Interactive Advertising Bureau (the “IAB Study”). Internet advertising revenues in the United States totaled $10.31 billion in the fourth quarter of 2012, an increase of 12% from the 2012 third quarter total of $9.24 billion and an increase of 15% from the 2012 fourth quarter total $8.97 billion.

Central to Salon’s strategy is to capitalize on the expected continued shift in spending of advertising budgets to the Web and mobile platforms in particular, in response to increased mobile and tablet usage. According to the IAB Study, mobile advertising revenue in the United States totaled $3.4 billion in 2012, a 111% increase from the 2011 mobile advertising revenue total of $1.6 billion. While still small, mobile advertising is growing rapidly. According to eMarketer, the mobile ad market now accounts for approximately 7% of total digital ad spending. eMarketer projects it will hit 21% by 2016. The growth of mobile advertising is slowing spending directed toward desktop ad formats faster than expected, according to new figures from eMarketer, raising the question of whether spending on desktop formats like search and banners will ever grow again," eMarketer said in a statement. Recognizing this paradigm shift, in fiscal year 2013 Salon developed and launched Apple and Android mobile applications for its website content.

An important factor in increasing advertising revenues in future periods is growth in Salon’s audience. Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements. Ultimately, Salon charges advertisers for a set number of ad impressions viewed by a Website visitor. During fiscal year 2011, management expanded lifestyle coverage in areas such as food, film and books. The strategy began to bear fruit in the second quarter ended September 30, 2010, as unique monthly visitors averaged 5.4 million, a 14% increase over the same quarter in the prior fiscal year. Monthly unique visitors in the third quarter ended December 31, 2010 averaged 5.2 million, a 13% increase over the same period in the prior fiscal year. In fiscal year 2011, full year average monthly unique visitors averaged 5.4 million, a 12.4% increase over the full year average for fiscal year 2010. In the third and fourth quarters ended December 31, 2011 and March 31, 2012, respectively, additional gains brought average unique monthly visitors to 6.7 million, a 28% increase over the third quarter in the prior fiscal year, and 7.3 million, a 30% increase over the fourth quarter in the prior fiscal year, respectively. In fiscal year 2012, full year average monthly unique visitors averaged 6.4 million, an increase of 18% compared to fiscal year 2011.

In an effort to continue the trend of audience growth, during fiscal year 2013, management added business and technology coverage to the content available on the Website. Once again the strategy of increasing online content demonstrated positive results. Monthly unique visitors in the third quarter ended December 31, 2012, averaged 11.8 million, a 77% increase over the same quarter in the prior fiscal year. Monthly unique visitors in the fourth quarter ended March 31, 2013 averaged 14.1 million, a 93% increase over the same quarter in the prior fiscal year. In fiscal year 2013, full year average monthly unique visitors averaged 10.7 million, an increase of 68% compared to the full year average for fiscal year 2012. Additionally, monthly unique visitors have grown from 4.7 million as of March 31, 2009, to 14.3 million as of March 31, 2013, a cumulative growth rate of 203% over the past four fiscal years. The table below reflects unique monthly visitors to Salon’s Website from fiscal year 2011 through fiscal year 2013.

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. 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.

Over the past few years, subscriptions to Salon Core have been de-emphasized and this revenue has been declining.  Subscriptions were de-emphasized because trends in Internet media have been away from paid content and the cost of generating a subscriber and maintaining the Salon Core subscription service did not justify the declining revenue stream.  Salon Core revenue is recognized ratably over the period that services are provided. For the year ended March 31, 2013, Salon received $0.05 million in cash and recognized $0.2 million of revenue for this service primarily from less than 1,000 paid one year subscriptions and from approximately 7,000 monthly subscriptions. For the year ended March 31, 2012, Salon received $0.3 million in cash and recognized $0.4 million of revenue for this service primarily from approximately 5,900 paid new and renewed one year subscriptions and from approximately 9,900 monthly subscriptions. In June 2012, the service was restructured.  Current memberships will be honored, but not renewed upon expiration, in anticipation of winding down the subscription service in fiscal year 2015.

Other sources of revenue include membership and data storage fees from The Well, an on-line discussion forum. Revenue is recognized ratably over the subscription period. The revenues recognized were approximately $0.3 million for each of the years ended March 31, 2012 and 2011. On September 20, 2012, Salon entered into and consummated The Well Asset Sale.

Salon also generates nominal revenue from the licensing of content that previously appeared in Salon, for referring users to third party websites, for providing links to a third party’s Website offering personals/dating services and from its limited e-commerce activities.

Sales and Marketing

Salon has distinguished itself in the marketplace by offering custom, innovative and integrated advertising products that appeal to readers and to seamlessly and organically incorporate the client and their objectives into the site. As such, the Company has built out its suite of ad products, especially in the areas of custom content areas, sponsored content and engagement through social media. These products allowed Salon’s clients to speak to and engage with its passionate, educated and influential audience in a way they have never been able to before. It is anticipated that these ad offerings have allowed the Company to grow its business without drastically increasing costs.

Salon has sales offices in New York and Los Angeles, with eight advertising sales and operations employees as of March 31, 2013, of which five actively solicit orders.

Salon did not incur any advertising expenses for the years ended March 31, 2013, 2012 and 2011.

Product Development

Salon recognizes that readers come to the site for online news, reporting, opinion and an engaging, active community of writers, readers and commenters. Users engage with the site through desktop computers, mobile phones and social networking platforms. To meet users’ rapidly evolving online media needs, Salon is continually innovating and developing its Website, mobile Website and social media presence, by adding new features, design updates and technologies that improve the user experience, speed and search engine optimization. The Company has developed an internal culture of innovation where the Edit, Technology and Sales teams collaborate on product development. In fiscal year 2013, Salon implemented its mobile application strategy with the launch of its responsive mobile browser site and release of Apple and Android mobile applications.

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 four 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 2012, 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 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 and a third party Content Delivery Network 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 on a third-party cloud computing platform, with some legacy equipment at a third-party colocation facility in Sacramento, California.  Continuous monitoring of the cloud systems is provided by both the cloud platform, as well as a third party specialized service.  For the legacy hardware, the third-party facility provides continuous monitoring of relevant servers.  In fiscal year 2012, Salon decided to explore a possible move to multiple redundant cloud computing centers.

Competition

Salon competes for advertising revenues with numerous Websites, with the 50 largest companies attracting an estimated 90% of all the Internet advertising dollars according to a recent study by PricewaterhouseCoopers LLP and sponsored by the Interactive Advertising Bureau (“IAB”). Per the IAB Study, 72% of total revenues in the fourth quarter of 2012, were concentrated with the 10 leading ad-selling companies, up slightly from the 71% reported in the fourth quarter of 2011. These companies have Websites that include major portals such as Yahoo and AOL, major search engines such as Google and Bing, major social networks such as Facebook, Twitter and LinkedIn, and major online media publications such as CNN.com, MSNBC, The Huffington Post, The New York Times, and The Washington Post. Salon also competes with many smaller news and politics–oriented Websites, such as Slate, Gawker, The Daily Beast, Buzzfeed, The Atlantic, Talking Points Memo and Mother Jones 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 content licensing and referral fees. As a result, audience growth will continue to be a primary business goal for Salon.

During fiscal year 2011, Salon launched a re-designed architecture and Website in an effort to accelerate its growth and gave increased attention to search engine optimization and referral traffic. Salon plans to continue to focus on developing its audience growth through a combination of editorial enhancements, new products, and more effective use of technology. Salon has broadened its content by reclassifying its content in seven key contents areas. These are: News, Politics, Arts & Entertainment, Life, Open Salon, Technology and Business. Through these seven key content areas, Salon continues to enhance or create new content and features for its readers. Salon is continually evaluating, adjusting and creating new solutions to grow its audiences.

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 subscription service winds down

Salon generates most of its revenue from advertising on its Website, and, historically, Salon offered a subscription services allowing subscribers to pay to read its content without ads. However, as Salon increased its number of readers to its Website, Salon determined that its advertising sales team could sell most of its inventory, and it thus would be far more profitable for Salon to drive its readers to its advertising supported Website rather than to a subscription, without-ads Website. As a result, and in addition to the continued decline in subscribers, as of June 2012, new subscriptions and renewals are no longer accepted, in anticipation of winding down the Company’s Salon Core subscription service in fiscal year 2015.

Since the end of fiscal year 2007, Salon has increased emphasis on advertising revenues. In fiscal year 2014, Salon plans to continue to provide more creative advertising offerings, improve the technological orientation of the site to attract more non-standard advertising and expand into additional advertising categories, such as video, slideshows and live coverage through live blogs. It will also expand and better optimize the use of ad networks to fully monetize any unsold remnant inventory.

Enhanced Website Design

Salon is continually evaluating the needs of its users and adjusting and creating new solutions to meet their needs. As a result, Salon users have experienced greater user satisfaction, and therefore, higher utilization, higher search rankings that will drive new users to the site and a higher proportion of repeat engagement, as users return throughout the day to obtain timely news and information. The site is dynamic and interactive, and its architecture has allowed editors to manage a real time flow of content presented in a graphically compelling fashion, while also servicing multiple platforms and devices, and dynamic usability experiments.

Expanding Gross Margins 

Salon has made substantial strides in the past fiscal year to better realign its production costs with its revenue potential in an effort to reach profitability. Among other measures, the Company reduced total freelance costs 23% from $367,000 in fiscal year 2012 to $281,000 in fiscal year 2013, and is continually aiming to match personnel resources to overall business need given the prevailing advertising market. Additionally, Salon is evaluating opportunities to reduce the expense of its high-quality content by focusing on reducing cost per page and seeking less costly sources of content, including greater content aggregation and the use of popular articles and blogs from Open Salon.

Operating Expense Reductions

Salon has also placed significant emphasis in the past fiscal year on more effectively aligning operating expenses with operating margins in an effort to achieve an operating profit. Among various measures, the Company’s office rent declined 27% from $434,000 in fiscal year 2012 to $316,000 in fiscal year 2013, as a result of the sublet of approximately 8,600 square feet of office space starting in December 2012.

Recapitalization 

Salon has made significant progress in simplifying its capital structure and increasing its liquidity in an effort to make the Company a more compelling investment to current and new investors. With this goal in mind, at a meeting of the Board of Directors (“Board”) on February 1, 2013, the Board approved a private offering of Common Stock to the holders of its related party advances, convertible notes, certain accrued consulting fees and Preferred Stock in exchange for the cancellation of such related party advances, convertible notes, accrued consulting fees and Preferred Stock, at an exchange price of $0.35 per share of Common Stock (the “Recapitalization”). The primary purpose of this voluntary Recapitalization was to simplify the Company’s capital structure through the exchange of indebtedness and Preferred Stock, thereby increasing the Company’s potential to enter into capital transactions with new investors.  In addition, the Board believed that the Recapitalization offered holders a potentially more liquid asset in the form of the Company’s Common Stock and could also result in increased overall liquidity in the market for the Company’s Common Stock

All of the holders of related party advances, accrued consulting fees and convertible notes and the holders of all the outstanding Preferred Stock other than holders of 1,075 shares of Series C Preferred Stock, agreed to participate in the Recapitalization, which resulted in 72.88 million shares of Common Stock being issued in connection with the Recapitalization, which closed on March 1, 2013.  Outstanding convertible notes plus interest at February 28, 2013 was approximately $3,504,000, all of which was exchanged for an aggregate of approximately 10,012,372 shares of Common Stock.  Outstanding related party advances at February 28, 2013, including accrued consulting fees of $158,000, were approximately $12,146,000, all of which was exchanged for an aggregate of 34,704,143 shares of Common Stock. All outstanding Preferred Stock other than 1,075 shares of Series C at February 28, 2013 in the amount of 9,404 shares was exchanged for an aggregate of approximately 28,158,853 shares of Common Stock.

On March 1, 2013, 25% of related party advances and accrued consulting fees as of February 28, 2013 were exchanged for an aggregate of 8,676,034 shares of common stock and all convertible notes plus interest and Preferred stock holdings of non affiliates other than 1,075 shares of Series C of Preferred Stock were exchanged for an aggregate of 17,614,655 shares of Common Stock. This issuance of shares represented substantially all of the available authorized common stock. Due to an insufficient number of common stock authorized as of February 28, 2013, a special meeting of the stockholders of the Company was held on April 18, 2013, at which Company Stockholders voted to increase the authorized Common Stock of the Company from 30 million to 150 million shares. A Certificate of Amendment (the “Certificate of Amendment”) to the Company's Restated Certificate of Incorporation was filed with the Delaware Secretary of State to increase the number of authorized common stock from 30 million to 150 million shares. Following the April 18, 2013 vote of the Company's stockholders and the filing of the Certificate of Amendment, the remaining 75% of the balance of related party advances and accrued consulting fees as of February 28, 2013 was exchanged for an aggregate of 26,028,108 shares of Common Stock and all the Preferred Stock holdings of affiliates of 7,066 shares as of February 28, 2013 was exchanged for an aggregate of 20,556,571 shares of Common Stock.

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 diversify the content offerings across various content verticals, as well as dynamic content, such as video, slideshows and images. Additionally, Salon has made efforts to identify bloggers who might have a strong affinity with its readers, and who might be interested in moving their sites to Salon in order to gain a greater reach of readership, and to gain infrastructure support.

Infrastructure and Operations

Salon has created a flexible publishing structure that enables it to develop its content while responding quickly to news events and take advantage of the ease of distribution provided by the Internet. Salon content is deployed on its proprietary software platform and captured in a database for reuse in Web and other formats. The content on Salon’s Website has been structured to facilitate being found by search engines, a key driver in increasing traffic to Salon’s Website. During the last three years, Salon has improved the look and feel of its Website to increase appeal to its audience and contemplates continued changes to its Website. In fiscal year 2012, 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 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 and a third party Content Delivery Network 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 on a third-party cloud computing platform, with some legacy equipment at a third-party colocation facility in Sacramento, CA.  Continuous monitoring of the cloud systems is provided by both the cloud platform, as well as a third party specialized service.  For the legacy hardware, the third-party facility provides continuous monitoring of relevant servers.  In fiscal year 2012, Salon decided to explore a possible move to multiple redundant cloud computing centers.

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.

Employees

As of March 31, 2013, Salon has 48 full-time employees. Salon believes its employee relations are good. No employees of Salon are represented by a labor union or are subject to a collective bargaining agreement. Salon’s future success is highly dependent on the ability to attract, hire, retain and motivate qualified personnel.

ITEM 1A. Risk Factors

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

Salon’s business faces significant risks. The risks described below may not be the only risks Salon faces. Additional risks that are not yet known or that are currently immaterial may also impair the Company's business operations or have a negative impact on the Company's stock price. If any of the events or circumstances described in the following risks actually occurs, the Company's 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 content licensing and referral fees. 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 or borrow additional funds. These newly issued securities could be highly dilutive to existing common stockholders. However, there is no guarantee that Salon will be able to issue additional securities in future periods or borrow additional funds on commercially reasonable terms to meet its cash needs. Salon’s ability to continue as a going concern will be adversely affected if it is unable to raise additional cash from sources it had relied upon in the past or new sources.

Salon has relied on related parties for significant investment capital

Salon has been relying on cash infusions primarily from related parties to fund operations. The related parties are generally John Warnock, Chairman of the Board of Salon, and William Hambrecht. William Hambrecht, appointed as a Director of the Company in February 2012, is the father of Salon’s former President, Chief Executive Officer and Director, Elizabeth Hambrecht. During the year ended March 31, 2013, related parties provided approximately $4.1 million in cash advances to fund Salon’s operations.

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

Salon’s principal stockholders 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

On March 1, 2013, Salon completed the Recapitalization in which all of its convertible notes, related party advances and certain accrued consulting fees (aggregating $15.7 million, including interest on the convertible notes through February 28, 2013) and substantially all shares of its convertible preferred stock were exchanged for an aggregate of 72.9 million shares of Common Stock at a price of $0.35 per share. Of this 72.9 million shares of common stock, 26 million shares were issued on March 1, 2013. The remaining 47 million shares were issued immediately upon stockholder approval of an amendment to the Company’s Restated Certificate of Incorporation increasing the Company’s total authorized common shares on April 18, 2013 from 30 million to 150 million shares and the filing of such amendment with the Delaware Secretary of State on the same day. The amendment to the Company’s Restated Certificate Certificate of Incorporation increasing the Common Stock was previously adopted by Salon’s Board on February 1, 2013.

Based on 76,157,942 shares of Common Stock outstanding as of June 3, 2013, the recipients of the shares in the Recapitalization own a controlling interest in Salon. Of this amount, approximately 23% is controlled directly or indirectly by Director William Hambrecht and approximately 59% 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, subsequent to the Recapitalization, can convert their remaining 1,075 shares of preferred stock to approximately 1.1 million shares of Common Stock at any time. As Salon’s Common Stock is normally thinly traded, if these stockholders were to convert their shares of preferred stock to Common Stock and sell the resulting shares, the per share price of Salon’s Common Stock may be adversely affected.

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

The securities markets have experienced significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, have and may continue to reduce the market price of Salon's 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 $21.8 million in potential sales proceeds as of March 31, 2013, which includes the effect of undeclared dividends of $7.9 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 $21.8 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 $21.8 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.

Following the completion of the Recapitalization on April 18, 2013, Salon’s Series C preferred stockholders have liquidation preferences over common stockholders of the first approximately $9.7 million in potential sales proceeds, which includes the effect of undeclared dividends of $7.9 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 $9.7 million of cash distributions, while the holders of Common Stock would receive none of this amount.

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

Salon has a history of significant losses and expects to incur an operating loss, based on generally accepted accounting principles, for its fiscal year ending March 31, 2014. Salon expects to turn cash flow positive during fiscal year 2014. Once Salon attains profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow slower than Salon anticipates or operating expenses exceed expectations, financial results will most likely be severely harmed and the ability of Salon to continue its operations will be seriously jeopardized.

Burr Pilger Mayer, Inc., Salon’s independent registered public accounting firm for the years ended March 31, 2011, 2012 and 2013, included a “going-concern” audit opinion on the consolidated financial statements for those years. The audit opinions report substantial doubt about Salon’s ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability. As a result of the “going-concern” opinions, Salon’s stock price and investment prospects have been and will continue to be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations.

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

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

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

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

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

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

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

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

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

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

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 Premium subscribers

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

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

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

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

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

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

Substantially all of Salon’s communications hardware and computer hardware operations for its website are in a facility in Sacramento, California that has been extensively retrofitted to withstand a major earthquake. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, supplier failure to meet commitments, and similar events could damage these systems and cause interruptions in its services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting Salon’s website and could cause advertisers to terminate any agreements with Salon. In addition, Salon could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable. If any of these circumstances were to occur, 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

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. During the year ended March 31, 2013, the Texas State Comptroller determined that Salon had nexus in the state and was therefore subject to sales tax on the subscriptions of subscribers residing in the state of Texas retroactive to 2004. 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 begun to implement taxes on the sale of goods and services through the Internet. Such proposals, 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, 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:

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:

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 2,405 square feet of office space at 870 Market Street, Suite 528, San Francisco, California, where it has been headquartered since November 2012. The lease for the San Francisco office will terminate in November 2015. In December 2012, Salon’s former office headquarters at 101 Spear Street, San Francisco, California, covering 8,623 square feet, was sub-leased to a third party entity through February 2014. Salon also leases 4,000 square feet of office space at 260 West 36^th Street, 9^th Floor, New York, NY through July 2014 and a smaller office at 300 Manhattan Beach Blvd., Manhattan Beach, CA, through May 2013. Salon also rents minimal space to host its servers in Sacramento, California.

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

ITEM 3. Legal Proceedings

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

ITEM 4. Mine Safety Disclosures

Not applicable.

PART II

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

Information with respect to the quarterly high and low sales prices for Salon’s Common Stock, ticker symbol SLNM.PK, for its fiscal years 2013 and 2012, based on sales transactions reported by the OTC (Over-The-Counter) Bulletin Board is provided below:

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

There were 69 active holders of record of Salon Common Stock as of June 3, 2013. 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, 2013 was $0.11 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 and rights under all of Salon’s existing equity compensation plans as of March 31, 2013, 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.

Equity Compensation Plans Not Approved by Security Holders

None.

Stock Performance Graph

The following graph compares the cumulative 5-year total return to shareholders on Salon Media Group Inc.'s common stock relative to the cumulative total returns of the NASDAQ Composite index, and a customized peer group of three companies that includes: Meetme, Inc., Thestreet, Inc. and Tucows, Inc. The graph assumes that the value of the investment in the company's common stock, in the peer group and the index (including reinvestment of dividends) was $100 on March 31, 2008 and tracks it through March 31, 2013.

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

ITEM 6. Selected Consolidated Financial Data

 Not applicable.

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

Overview

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

Sources of Revenue

The most significant portion of Salon’s net 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 portion of its net 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 fewer than 8,000 as of March 31, 2013. As a result of the continued decline in subscribers, as of June 2012, new subscriptions and renewals are no longer accepted, in anticipation of winding down the Company’s subscription service in fiscal year 2014.

In June 2012, Salon refocused its strategy on its core Salon.com website, and made the decision to restructure and eliminate certain non-core initiatives.  As a result, Salon laid-off The Well staff associated with its online discussion forum. On September 20, 2012, Salon entered into and consummated The Well Asset Sale.

Salon also generates nominal revenue from the licensing of content that previously appeared in Salon’s Website, from traffic referrals for third party Websites, 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 and promotions.

Technology 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 GAAP requires Salon to utilize accounting policies and make estimates and assumptions that affect our reported amounts. Salon’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements. Salon believes accounting policies and estimates related to revenue recognition and accounting for debt and equity are the most critical to Salon’s financial statements. Future results may differ from current estimates if different assumptions or conditions were to prevail.

Stock Based Compensation

Salon recognizes the fair value of stock awards on a straight-line basis over the requisite service period of the award, which is the standard vesting term of four years.

Salon recognized stock-based compensation expense of $156,000, $311,000 and $295,000 during the years ended March 31, 2013, 2012 and 2011, respectively. As of March 31, 2013, Salon had an aggregate of $39,000 of stock-based compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. Salon currently expects this stock-based compensation balance to be amortized as follows: $24,000 during fiscal year 2014; $9,000 during fiscal year 2015; $5,000 during fiscal year 2016 and $1,000 during fiscal year 2017. The expected amortization reflects only outstanding stock option awards as of March 31, 2013. Salon expects to continue to issue stock-based awards to its employees in future periods.

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

Liquidity

Salon has incurred significant net losses and negative cash flows from operations since its inception. As of March 31, 2013, Salon had an accumulated deficit of $116.5 million. These losses have been funded primarily through the issuance of common stock from Salon’s initial public offering in June 1999, issuances of preferred stock, bank debt, the issuance of convertible notes payable and other advances from related parties.

Burr Pilger Mayer, Inc., Salon’s independent registered public accounting firm for the years ended March 31, 2013, 2012 and 2011 has included a paragraph in their report indicating that substantial doubt exists as to Salon’s ability to continue as a going concern because of Salon’s recurring operating losses, negative cash flow and accumulated deficit.

Income Taxes 

Salon has not recorded a provision for federal or state income taxes since inception due to recurring operating losses. At March 31, 2013, Salon had net operating loss carryforwards of $83.9 million for federal income tax purposes that begin to expire in March 2016, and $24.7 million for California income tax purposes. As Salon has been incurring tax losses, $2.1 million of California net operating loss carryforwards expired as of March 31, 2013, and if Salon were to incur a tax loss for the year ending March 31, 2014, an additional $1.8 million operating loss carryforward will expire. Utilization of Salon’s net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar California State provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. A valuation allowance has been established and, accordingly, no benefit has been recognized for such operating losses and other deferred tax assets. The net valuation allowance increased $1.1 million during the year ended March 31, 2013 to $30.5 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 over the period which Salon’s obligations are fulfilled. Payments received before Salon’s obligations are fulfilled are classified as “Deferred revenue” in Salon’s consolidated balance sheets.

Advertising revenues, derived from the sale of promotional space on its Website, comprised 88%, 79% and 78% of Salon’s net revenues, respectively, for the years ended March 31, 2013, 2012 and 2011. The duration of the advertisements are generally short term, usually less than ninety days. Revenues derived from such arrangements are recognized during the period the advertising space is provided. Salon’s obligations typically include a guaranteed minimum number of impressions. To the extent minimum guaranteed amounts are not achieved, Salon defers recognition of the corresponding revenue until the remaining guaranteed amounts are provided, if mutually agreeable to an advertiser. If these “make good” impressions are not agreeable to an advertiser, no further revenue is recognized.

Salon Premium, a pay-for-online content service, provides unrestricted access to Salon’s content with no banners, pop-ups or site pass advertisements, and includes free magazine subscriptions and other promotional items including books and merchandise, free access to Table Talk, an online forum, and the ability to easily download content in text or PDF format, a convenience that enables readers to view Salon’s content when not connected to the Internet. The subscription duration for Salon Premium is generally one year. Non-Salon Premium subscribers can gain access to Salon’s content after viewing some form of advertisement. As a result of the continued decline in subscribers, as of June 2012, new subscriptions and renewals are longer be accepted, in anticipation of winding down the Company’s subscription service in fiscal year 2014.

Salon offered The Well as a monthly subscription service for access to online discussion forums until September 2012. Revenue was recognized ratably over the subscription period. The Well's declining subscriber base, and aging technology led to a decision in June 2012 to restructure the service. As a result, The Well staff were laid off and current subscriptions were honored but not renewed upon expiration. On September 20, 2012, Salon entered into and consummated The Well Asset Sale.

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

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination accounted for under the purchase method. 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. In connection with the sale of “The Well” the goodwill was written off in determining the gain from discontinued operations. As such, Salon has no goodwill as of March 31, 2013.

Results of Operations

Fiscal Years Ended March 31, 2013 and 2012

Net Revenues

Salon’s net revenue from continuing operations increased 5% to $3,641 for the year ended March 31, 2013 from $3,477 for the year ended March 31, 2012, primarily due to increases in remnant revenue and referral fees.

Advertising revenues increased 10% to $3,320 for the year ended March 31, 2013 from $3,010 for the year ended March 31, 2012, mainly due to an increase in third party sales which increased 23% to $1,572 for the year ended March 31, 2013 from $1,282 for the year ended March 31, 2012.

Salon Premium subscription revenues decreased by 36% to $226 for the year ended March 31, 2013 from $355 for the year ended March 31, 2012. The decline in Salon Premium revenues recognized for the year ended March 31, 2013 compared to the year ended March 31, 2012 is attributable to a substantial reduction in the number of new subscribers. Salon acquired approximately 860 paid one-year subscriptions for the year ended March 31, 2013 compared to approximately 5,900 for the year ended March 31, 2012. The number of paid subscribers decreased from approximately 8,100 at March 31, 2012 to less than 8,000 at March 31, 2013. As a result of the continued decline in subscribers, as of June 2012, new subscriptions and renewals ae no longer accepted, in anticipation of winding down the Company’s subscription service in fiscal year 2015.

An important factor in increasing advertising revenues in future periods, including Salon’s typically peak third quarter ending December 31, is attracting more unique visitors to Salon’s Website. Attracting more unique Website visitors is important to Salon as they generate page views, and each page view becomes a potential platform for serving advertisements. Ultimately, Salon charges advertisers based on a set number of impressions viewed by Website visitors. Due to various factors, including concerted efforts to make Salon’s content more accessible to readers by auto launching the site pass, a better optimized Website to facilitate appearance in search engine results, and increasing the quantity of content, the average number of unique monthly Website grew by 68% for the full year, to approximately 10.7 million. Aiding the continued growth in unique visitors to Salon’s Website is the migration of readers to the Internet from print newspapers.

All other sources of revenue were $95 for the year ended March 31, 2013 and $112 for the year ended March 31, 2012. Approximately 50% and 76% of this revenue was derived from subscriptions to The Well, an online discussion forum, for the respective fiscal year. The decrease was mainly attributed to the sale of The Well on September 20, 2012.

Production and Content Expenses

Production and content expenses increased to $3.3 million for the year ended March 31, 2013 from $3.2 million for the year ended March 31, 2012. The 4% increase primarily reflects editorial staff additions, increased ad serving and ad revenue shares costs, partially offset by reductions in freelance costs and staff reductions from the closure of Salon Studio on May 31, 2012.

Sales and Marketing Expenses

Sales and marketing expenses during the year ended March 31, 2013 remained flat from one year ago at approximately $1.5 million.

Information Technology Support Expenses

Information technology support expenses during the year ended March 31, 2013 were $1.3 million, an increase of $0.3 million as compared to the prior fiscal year. The 34% increase is primarily attributed to higher consulting fees for the development and implementation of new Apple and Android mobile applications and optimization needs and an overall increase in technical staff compensation.

General and Administrative Expenses

General and administrative expenses during the year ended March 31, 2013 were $1.2 million versus $1.6 million for the year ended March 31, 2012, a decrease of $0.4 million. The 24% decrease was primarily attributed to a reduction in compensation from the resignation of the former Chief Financial Officer on May 31, 2012, sales and franchise tax refunds and an overall overhead reduction from the sublet of the Company’s former corporate office in San Francisco on December 1, 2012. The reduction in General and administrative expense for the year ended March 31, 2013 was partially offset by increases in legal and audit fees resulting from the Company’s recapitalization and asset sale of The Well.

Separation Expenses

Separation expenses during the year ended March 31, 2013 were $0.2 million and were nil for the year ended March 31, 2012. The 100% increase was due to staff reductions for the closure of Salon Studio on May 31, 2012, the winding down of the Salon Core subscription service and the asset sale of The Well on September 20, 2012.

Gain on Discontinued Operations

Gain on discontinued operations during the year ended March 31, 2013 was $0.2 million, representing net profit from the sale of The Well, an online discussion group, on September 20, 2012 for a purchase price of $0.4 million. There was no such activity for the year ended March 31, 2012.

Interest Expense

Interest expense during the year ended March 31, 2013 decreased $0.1 million from one year ago from $0.3 million to approximately $0.2 million. The 39% decrease was primarily the result of the Company’s recapitalization on March 1, 2013 in which all outstanding convertible promissory notes plus interest were exchanged for common stock, and the refund of interest on sales and franchise taxes during the year.

Fiscal Years Ended March 31, 2012 and 2011

Net Revenues

Salon’s net revenue decreased 17% to $3.5 million in the year ended March 31, 2012 from $4.2 million in the year ended March 31, 2011.

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

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

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

All other sources of revenue were $0.1 million for each of the years ended March 31, 2012 and March 31, 2011. Approximately 76% of this revenue was derived from subscriptions to the Well, an online discussion forum.

Production and Content Expenses

Production and content expenses during the year ended March 31, 2012 were $3.2 million versus $2.9 million for the year ended March 31, 2011, an increase of $0.3 million. The 10% increase primarily reflects costs for launching the new Salon Studio platform which featured original video, music and art contents.

Sales and Marketing Expenses

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

Information Technology Support Expenses

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

General and Administrative Expenses

General and administrative expenses during the year ended March 31, 2012 were $1.6 million versus $1.3 million for the year ended March 31, 2011, an increase of $0.3 million. The 22% increase was primarily attributed to sales taxes and higher consulting and legal fees.

Separation Expenses

Separation expenses were nil for the years ended March 31, 2012 and 2011.

Interest Expense

Interest expense during the year ended March 31, 2012 remained flat from one year ago at approximately $0.3 million.

Liquidity and Capital Resources

Net cash used in operations was $4.3 million for the year ended March 31, 2013, $3.2 million for the year ended March 31, 2012 and $2.0 million for the year ended March 31, 2011. The principal use of cash during the years ended March 31, 2013, 2012 and 2011 was to meet the Company’s operating deficits.

Net cash used in investing activities was immaterial for each of the years ended March 31, 2013, 2012 and 2011 and was used primarily to fund the acquisition of computers and office equipment.

For the year ended March 31, 2013, net cash provided from financing activities was $4.1 million in short-term advances from related parties. For the years ended March 31, 2012 and 2011, net cash provided from financing activities was $3.1 million and $2.3 million, respectively, consisting primarily of long-term borrowings from related parties and convertible promissory notes.

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

On March 1, 2013, Salon completed the Recapitalization in which all of its outstanding convertible notes, related party advances and certain accrued consulting fees (aggregating approximately $15.7 million, including interest on the convertible notes through February 28, 2013) and substantially all shares of its convertible preferred stock were exchanged for an aggregate of 72.87 million shares of Common Stock at a price of $0.35 per share.

Outstanding convertible notes plus interest at February 28, 2013 were approximately $3.5 million, all of which were exchanged in the Recapitalization for an aggregate of approximately 10 million shares of common stock. Approximately 20.2% of the convertible notes were held by a non-affiliate of the Company. Outstanding related party advances at February 28, 2013, including accrued consulting fees of $158,000, were approximately $12.1 million, all of which was exchanged in the Recapitalization for approximately 34.7 million shares of Common Stock.

As of March 31, 2013, Salon has no outstanding convertible notes and capital leases and does not anticipate entering into similar debt instruments during its year ending March 31, 2014. The following summarizes Salon’s contractual obligations as of March 31, 2013, and the effect these contractual obligations are expected to have on Salon’s liquidity and cash flows in future periods (in thousands):

 Capital requirements

Salon has a history of significant losses and expects to incur a net loss from operations for its year ending March 31, 2014. 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, 2013, 2012 and 2011 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 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 approximately $1.5 to $2.8 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 that lowered its breakeven level. Additional cost savings achieved in fiscal years 2011 through 2013 have further reduced fixed costs. On May 31, 2012, after a thorough analysis of operations, a total of six staff from The Well, Salon Studio and Core were laid off. Total severance costs are estimated to be $0.2 million. On November 1, 2012, the Company reduced the square footage of its corporate office space in San Francisco, California by 6,218 square feet by subletting its former corporate office and leasing substantially smaller space in San Francisco. 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

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, 2013 and is guaranteed by Salon’s Chairman. Rates remained at a constant level throughout most of fiscal year 2012. Salon feels that the impact of the risk of future rate increases will not have a material impact. As Salon conducts all of its business in the United States, Salon is not subject to foreign exchange risk.

ITEM 8. Consolidated Financial Statements and Supplementary Data

 

	Page
Report of Independent Registered Public Accounting Firm	38
Consolidated Balance Sheets as of March 31, 2013 and 2012	39
Consolidated Statements of Operations for the years ended March 31, 2013, 2012 and 2011	40
Consolidated Statements of Stockholders’ (Deficit) for the years ended March 31, 2013, 2012 and 2011	41
Consolidated Statements of Cash Flows for the years ended March 31, 2013, 2012 and 2011	42
Notes to Consolidated Financial Statements	43

 

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, 2013 and 2012, and the related consolidated statements of operations, stockholders’ (deficit) and cash flows for each of the three years in the period ended March 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Salon Media Group, Inc. and its subsidiaries as of March 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2013 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 $116.5 million at March 31, 2013. 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 26, 2013

SALON MEDIA GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

		March 31,
		2013				2012
Assets
Current assets:
Cash and cash equivalents		$	96			$	130
Accounts receivable, net of allowance of $62			720				783
Prepaid expenses and other current assets			219				194
Total current assets			1,035				1,107
Property and equipment, net			58				92
Other assets, principally deposits			206				158
Goodwill			-				200
Total assets		$	1,299			$	1,557
Liabilities and Stockholders’ Deficit
Current liabilities:
Short-term borrowings		$	1,000			$	1,000
Advances from related parties			9,171				8,105
Convertible notes			-				3,106
Accounts payable and accrued liabilities			1,128				1,847
Deferred revenue			15				165
Total current liabilities			11,314				14,223
Deferred rent			12				123
Total liabilities			11,326				14,346
Commitments and contingencies (Note 9)
Stockholders’ (deficit):
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 8,141 shares issued and outstanding at March 31, 2013 and 9,404 shares issued and outstanding at March 31, 2012 (liquidation value of $21,803 at March 31, 2013 and $26,149 at March 31, 2012)			-				-
Common stock, $0.001 par value, 30,000,000 shares authorized, 29,573,265 shares issued and outstanding at March 31, 2013 and 3,282,576 shares issued and outstanding at March 31, 2012			30				3
Additional paid-in capital			106,408				99,737
Accumulated deficit			(116,465	)			(112,529	)
Total stockholders’ (deficit)			(10,027	)			(12,789	)
Total liabilities and stockholders’ (deficit)		$	1,299			$	1,557

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,
		2013				2012				2011
Net revenues		$	3,641			$	3,477			$	4,206
Operating expenses:
Production and content			3,308				3,174				2,886
Sales and marketing			1,521				1,517				1,464
Information technology support			1,310				974				914
General and administrative			1,249				1,638				1,343
Separation expenses			218				-				-
Total operating expenses			7,606				7,303				6,607
Loss from operations			(3,965	)			(3,826	)			(2,401	)
Interest expense			(204	)			(332	)			(255	)
Loss from continuing operations			(4,169	)			(4,158	)			(2,656	)
Gain from discontinued operations			233				60				72
Net loss		$	(3,936	)		$	(4,098	)		$	(2,584	)
Basic and diluted
Continuing operations		$	(0.77	)		$	(1.27	)		$	(0.86	)
Discontinued operations		$	0.05			$	0.02			$	0.02
Net loss		$	(0.72	)		$	(1.25	)		$	(0.84	)
Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders			5,443				3,283				3,086

See accompanying notes to consolidated financial statements.

SALON MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)

(in thousands, except preferred stock shares)

		Preferred Stock								Common Stock								Additional Paid-In				Accumulated				Total Stockholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance, March 31, 2010			9,467			$	-				2,438			$	2			$	99,005			$	(105,847	)		$	(6,840	)
Preferred shares surrendered			(63	)			-				-				-				-				-				-
Shares issued under restricted stock plans			-				-				845				1				126				-				127
Stock-based compensation			-				-				-				-				295				-				295
Net loss			-				-				-				-				-				(2,584	)			(2,584	)
Balance, March 31, 2011			9,404				-				3,283				3				99,426				(108,431	)			(9,002	)
Stock-based compensation			-				-				-				-				311				-				311
Net loss			-				-				-				-				-				(4,098	)			(4,098	)
Balance, March 31, 2012			9,404				-				3,283				3				99,737				(112,529	)			(12,789	)
Shares converted from preferred stock			(1,263	)			-				7,602				8				(7	)			-				1
Shares converted from convertible notes			-				-				10,012				10				3,494				-				3,504
Shares converted from accrued liabilities			-				-				113				-				40				-				40
Shares converted from fund advances			-				-				8,563				9				2,988				-				2,997
Stock-based compensation			-				-				-				-				156				-				156
Net loss			-				-				-				-				-				(3,936	)			(3,936	)
Balance, March 31, 2013			8,141			$	-				29,573			$	30			$	106,408			$	(116,465	)		$	(10,027	)

See accompanying notes to consolidated financial statements.

 SALON MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Year Ended March 31,
		2013				2012				2011
Cash flows from operating activities:
Loss from continuing operations		$	(4,169	)		$	(4,158	)		$	(2,656	)
Gain from discontinued operations			233				60				72
Net loss			(3,936	)			(4,098	)			(2,584	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from retirement of assets, net			10				-				2
Stock-based compensation			156				311				295
Depreciation and amortization			57				92				207
Changes in assets and liabilities:
Accounts receivable			63				(55	)			(22	)
Prepaid expenses, other assets			(68	)			(156	)			11
Accounts payable, accrued liabilities and deferred rent			(392	)			725				152
Deferred revenue			(150	)			(68	)			(105	)
Net cash used in operating activities			(4,260	)			(3,249	)			(2,044	)
Cash flows from investing activities:
Purchase of property and equipment			(35	)			(57	)			(37	)
Purchase of intangible assets			(5	)			-				-
Proceeds from asset sales			2				-				-
Net cash used in investing activities			(38	)			(57	)			(37	)
Cash flows from financing activities:
Proceeds from short-term borrowings and advances			4,064				3,050				2,255
Capital lease payments			-				-				(4	)
Net cash provided by financing activities			4,064				3,050				2,251
Net cash provided by discontinued operations			200				-				-
Net (decrease) increase in cash and cash equivalents			(34	)			(256	)			170
Cash and cash equivalents at beginning of year			130				386				216
Cash and cash equivalents at end of year		$	96			$	130			$	386
Amount paid for interest		$	-			$	-			$	3
Supplemental schedule of non-cash investing and financing activities:
Conversion of preferred stock, convertible debts and unsecured advances to common stock		$	6,542			$	-			$	-
Conversion of accrued interest for convertible notes payable		$	233			$	217			$	202

  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 an online community. 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, 2013 of $116,465. In addition, Salon expects to incur a net loss from operations for its year ending March 31, 2014. 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 to $2.8 million in additional funding to meet its operating needs. During fiscal year 2010, in the face of reduced revenues resulting from the recession’s impact on advertising budgets, the Company implemented significant organizational changes which lowered its breakeven level. Additional cost savings achieved in fiscal years 2011 through 2013 have further reduced fixed costs. However, if planned revenues are less than expected, then we will not meet our operating targets and our projected cash shortfall may be higher. Salon is in discussions with potential investors, including related parties, to obtain additional funding, and has engaged an investment banker to facilitate these efforts. There can be no assurance that the Company will be able to raise additional funds on commercially reasonable terms, if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Principles of consolidation

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

Segment and enterprise-wide reporting

Salon discloses segment enterprise-wide information in accordance with Accounting Standards Codification (ASC) 280, Segment Reporting. Based upon definitions contained within ASC 280, management has determined that Salon operates in one segment. In addition, substantially all revenues are in the 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. There were no cash equivalents at March 31, 2013 and 2012.

Accounts receivable, net

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

Property and equipment, net

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

Software development costs

Information technology support expenses to develop new product offerings for internal use, such as Open Salon, are capitalized as software development costs and amortized over the expected useful live. Salon had capitalized $95 of expenditures through March 31, 2009 and fully amortized it as of March 31, 2012. No expenses were capitalized in fiscal years 2010 through 2013.

Goodwill

Goodwill is recorded at cost and tested for impairment annually during the quarter ending March 31, or earlier as warranted by events or changes in circumstances. As of March 31, 2013, Salon does not carry an outstanding goodwill balance as discussed under Note 3 below.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 the guarantee of a minimum number of times that an advertisement appears in a page viewed by a visitor to Salon’s Website. To the extent the minimum guaranteed amounts are not delivered, Salon defers recognition of the corresponding revenue until the remaining guaranteed amounts are achieved, if mutually agreeable with an advertiser. If these “make good” impressions are not agreeable to an advertiser, no further revenue is recognized.

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. As a result of The Well Asset Sale on September 20, 2012, as reported on the companies Form 8-K filed on September 25, 2012. The Well revenue is included in discontinued operations.

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, 2013, 2012 and 2011 and comprehensive loss for those periods.

Stock-based compensation

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

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Net loss per share

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

		Year Ended March 31,
		2013				2012				2011
Numerator:
Loss from continuing operations attributable to common stockholders		$	(4,169	)		$	(4,158	)		$	(2,656	)
Gain from discontinued operations		$	233			$	60			$	72
Net loss attributable to common stockholders		$	(3,936	)		$	(4,098	)		$	(2,584	)
Denominator:
Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders			5,443,000				3,283,000				3,086,000
Basic and diluted net loss per share
Loss from continuing operations		$	(0.77	)		$	(1.27	)		$	(0.86	)
Gain from discontinued operations		$	0.05			$	0.02			$	0.02
Net Loss		$	(0.72	)		$	(1.25	)		$	(0.84	)
Antidilutive securities including options, warrants and convertible debts and preferred stock not included in loss per share calculation			37,948,000				18,015,000				18,142,000

Financial instruments

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

Income taxes

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

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Concentrations of credit risk

Financial instruments that potentially subject Salon to concentrations of credit risk consist principally of trade accounts receivable. Salon performs ongoing credit evaluations of its customers, but does not require collateral. Salon provides an allowance for credit losses that it periodically adjusts to reflect management’s expectations of future losses. One customer accounted for approximately 13% of trade accounts receivable at March 31, 2013. Two customers accounted for approximately 32% of trade accounts receivable at March 31, 2012. Three customers accounted for approximately 46% of trade accounts receivable at March 31, 2011. No customer accounted for 10% or more of net revenue for each of the fiscal years ended March 31, 2013 and March 31, 2012. One customer accounted for more than 10% of net revenues for fiscal year ended March 31, 2011.

Recent accounting pronouncements

Reclassifications

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

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 3.    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, 2012 and March 31, 2011 was $200 and was not found to be impaired. On September 20, 2012, Salon consummated The Well Asset Sale. At March 31, 2013, Salon does not carry an outstanding goodwill balance.

Note 4.    Property and Equipment

		Year Ended March 31,
		2013				2012
Property and equipment, net
Computer hardware and software		$	1,466			$	1,439
Leasehold improvements			82				82
Furniture and office equipment			284				295
			1,832				1,816
Less accumulated depreciation and amortization			(1,774	)			(1,724	)
		$	58			$	92

Depreciation and amortization expense for the years ended March 31, 2013, 2012 and 2011 was $57, $92, and $207 respectively.

Note 5.    Borrowing Agreements

Short-term borrowings

In May 2007, Salon entered into a borrowing agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to $1,000, plus accrued interest, at a rate of prime less 0.25%. The agreement is guaranteed in its entirety by Salon’s Chairman. The line of credit has been fully drawn as of March 31, 2013 and 2012. 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, 2013 and 2012, accrued interest on bank debt totaled $217 and $182, respectively. During the fiscal years ended March 31, 2013 and 2012, the weighted average interest rate on the Company’s short-term borrowings was 3%.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Convertible notes payable

On March 1, 2013, Salon, as part of the Recapitalization, exchanged all of its convertible notes, related party advances and certain accrued consulting fees (aggregating approximately $15,700 including interest on the convertible notes through February 28, 2013) and substantially all shares of its non-affiliate convertible preferred stockholdings for an aggregate of approximately 72.9 million shares of common stock at a price of $0.35 per share. On March 1, 2013, the Company issued an aggregate of approximately 26.3 million shares of common stock in respect of all the preferred stock participating in the Recapitalization held by non-affiliates of the Company, all of its convertible notes and 25% of its related party advances (including the accrued consulting fees). This issuance of shares represented substantially all of the available authorized common stock. As a result, following the stockholder approval of the increase of authorized common stock on April 18, 2013 from 30 million to 150 million shares, and the filing of the Certificate of Amendment with the Delaware Secretary of State all remaining related party advances and certain accrued consulting fees as of February 28, 2013, (aggregating $9,110) and all preferred stockholdings of affiliates were exchanged for approximately 46.6 million shares of common stock.

Outstanding convertible notes plus interest at February 28, 2013 was approximately $3,500, all of which was exchanged for an aggregate of approximately 10.0 million shares of common stock. Approximately 20% of the convertible notes were held by a non-affiliate of the Company. Outstanding related party advances at February 28, 2013, including accrued consulting fees of $158, were approximately $12,100, all of which was exchanged for approximately 34.7 million shares of common stock.

As of March 31, 2013, Salon has no outstanding convertible notes and does not anticipate entering into similar debt instruments during its year ending March 31, 2014. As of March 31, 2012, convertible notes payable totaled $3,106, inclusive of $606 in notes issued as payment in kind of accrued interest thereon. As of March 31, 2012, related parties held $2,485 of such notes and aggregate related party interest expense totaled $132.

Related Party Advances

As of March 31, 2013 and 2012, the Company had received $12,200 and $8,100 respectively in unsecured, interest-free cash advances, including $10,100 and $6,100 from the Company’s Chairman and $2,000 from the father of Salon’s former CEO respectively. All such cash advances were converted into shares of common stock in the Recapitalization. Subsequent to year end, the Company’s Chairman advanced an additional $700 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.

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 6.    Accounts Payable and Accrued Liabilities

		Year Ended March 31,
		2013				2012
Accounts payable and accrued liabilities
Accounts payable		$	320			$	480
Salaries and wages payable			206				265
Accrued services			69				11
Accrued interest			-				778
Other accrued expenses			533				313
		$	1,128			$	1,847

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, 2013.

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). 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 MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

As of March 31, 2013, Salon has approximately 3,067,000 shares authorized to be issued under the 2004 Plan of which approximately 2,578,000 shares remain available for future grant.

Stock based compensation expense recognized for the years ended March 31, 2013, 2012 and 2011 was $156, $311 and $295, which consisted of stock-based compensation expense related to stock options and restricted stock.

As of March 31, 2013, the aggregate stock compensation remaining to be amortized to expenses was $39. Salon expects this stock-based compensation balance to be amortized as follows: $24 during fiscal year 2014; $9 during fiscal year 2015; $5 during fiscal year 2016 and $1 during fiscal year 2017. The expected amortization reflects only outstanding stock option awards as of March 31, 2013.

No amounts were recorded relating to excess tax benefits from the exercise of stock-based compensation awards during the year ended March 31, 2013, 2012 and 2011 and as a result there were no differences in net cash used in operating and financing activities.

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

		Year Ended March 31,
		2013						2012						2011
Risk-free interest rates			0.40	–	0.41%				0.65	–	1.15%				1.25	–	1.70%
Expected lives (in years)				4						4						4
Expected volatility			459	–	477%				332	–	394 %				254	–	279%
Dividend yield				0.0%						0.0%						0.0%

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

SALON MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table summarizes activity under Salon’s plans for the years ended March 31, 2011, 2012 and 2013:

		Outstanding Stock Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)				Aggregate Intrinsic Value
Outstanding as of April 1, 2010			5,510,000			$	0.23							$	0
Granted			304,000			$	0.11
Expired or forfeited			(442,000	)		$	0.20
Outstanding at March 31, 2011			5,372,000			$	0.23				7.3			$	1,459
Exercisable at March 31, 2011			3,280,000			$	0.26				6.6			$	799
Vested and expected to vest at March 31, 2011			3,394,000			$	0.20				8.1			$	1,019
Outstanding as of April 1, 2011			5,372,000			$	0.23							$	1,459
Granted			661,000			$	0.35
Expired or forfeited			(944,000	)		$	0.20
Outstanding at March 31, 2012			5,089,000			$	0.25				6.7			$	1,289
Exercisable at March 31, 2012			3,970,000			$	0.26				6.2			$	979
Vested and Expected to vest at March 31, 2012			4,843,000			$	0.25				6.7			$	1,214
Outstanding as of April 1, 2012			5,089,000			$	0.25							$	1,289
Granted			1.542,000			$	0.01
Expired or forfeited			(3,080,000	)		$	0.32
Outstanding at March 31, 2013			3,551,000			$	0.13				7.2			$	521
Exercisable at March 31, 2013			1,967,000			$	0.22							$	166
Vested and expected to vest at March 31, 2013			2,844,000			$	0.13				7.2			$	279

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, 2013:

						Options Outstanding												Options Exercisable
										Weighted
										Average				Weighted								Weighted
						Number of				Remaining				Average				Number of				Average
	Range of					Shares				Contractual				Exercise				Shares				Exercise
	Exercise Prices					Outstanding				Life (Years)				Price				Exercisable				Price
	$0.01	-	$0.01				1,439,000				9.3			$	0.01				176,000			$	0.01
	$0.05	-	$0.08				204,000				9.2			$	0.05				40,000			$	0.05
	$0.10	-	$0.12				967,000				6.7			$	0.12				826,000			$	0.12
	$0.16	-	$0.20				65,000				6.1			$	0.18				65,000			$	0.18
	$0.29	-	$0.35				851,000				3.6			$	0.35				850,000			$	0.35
	$0.45	-	$0.45				22,000				8.6			$	0.45				7,000			$	0.45
	$5.20	-	$5.20				3,000				2.1			$	5.20				3,000			$	5.20
							3,551,000				7.2			$	0.13				1,967,000			$	0.22