Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties, including but not limited to statements regarding our strategy, plans, objectives, expectations, intentions, financial performance, cash-flow breakeven timing, financing, economic conditions, Internet advertising market performance, social media and other non-web opportunities and revenue sources. Although Salon believes its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth above and in Salon’s public filings. Salon assumes no obligation to update any forward-looking statements except as required by law.
Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk 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.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q should be considered in conjunction with the audited financial statements, which are included in Salon’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018 (the “Fiscal 2018 Annual Report”) filed with the Securities and Exchange Commission. Matters of interest therein include, but are not limited to, our disclosure of critical accounting policies.
Overview
Salon is a technology-based advertising media business that wholly owns and operates an online news website, salon.com (“Salon.com”). Our award-winning website is committed to fearless journalism and combines original investigative stories and provocative personal essays along with quick-take commentary, articles, podcasts and original video about politics, culture, entertainment, sustainability, innovation, technology and business.
We have a history of significant losses and expect to incur a loss from operations for our fiscal year ending March 31, 2018 and potentially for future years. M&K CPA’s, PLLC, Salon’s independent registered public accounting firm for the fiscal years ended March 31, 2018 and 2017, included a “going-concern” audit opinion on the financial statements for those years. The audit opinions report substantial doubt about our ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability. As a result of the factors noted in the going-concern opinions, our stock price and investment prospects have been and will continue to be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations.
During the quarter ended December 31, 2018, we continued to execute our business strategy to refine and broaden our editorial products in order to attract both a premier audience and additional advertising, which would increase revenues. We face increased competition, however, from both new and larger websites for traffic and online advertising campaigns, while industry trends continue a shift toward increased use of agency and software-based approaches to buying online advertising. As a result, we have re-focused our advertising sales to rely on the rapidly growing programmatic advertising business. Through our programmatic advertising efforts, we directly sell audience packages based on real-time advertising demand and engage third-party agencies to sell advertisements on our Website through programmatic advertising open marketplaces, thereby placing less emphasis on a traditional media sales effort. The highlights of our December 2018 quarter are listed below:
Highlights from Quarter ended
December 31
, 2018
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Net revenues decreased 17% to $1.0 million in the quarter ended December 31, 2018 versus $1.2 million in the same period in 2017. For the nine-month period ended December 31, 2018, net revenues decreased 41% to $2.3 million, versus $3.9 million in the same period in 2017. The decrease in revenue was a result of a continued significant industry shift in online advertising from advertising sold by a direct sales team to advertising increasingly being sold through software-based “programmatic” technology. Our advertising sold through networks that access these programmatic buys accounted for 59% of our advertising revenues for the December 2018 quarter. We have been making changes to our advertising footprint to capture the greater programmatic opportunity for our display and video advertising inventory and will continue to focus our efforts to allow better management of our advertising inventory and targeting for our advertisers.
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Net losses from operations were $0.3 million during the three months ended December 31, 2018, and $1.9 million for the nine months ended December 31, 2018, a decrease from $0.5 million during the three months ended December 31, 2017 and a decrease from $1.6 million, during the nine months ended December 31, 2017. The overall decrease in losses resulted from decreases in revenues offset by a decrease in operating expenses. Operating expense in the December 2018 quarter was $1.3 million as compared to $1.8 million in the December 2017 quarter, and $4.1 million for the nine months ended December 31, 2018 as compared to $5.4 million for the corresponding period in 2017. We will continue to look for ways to reduce expenses in areas that we expect can help reduce losses and accelerate a path to profitability.
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Average unique visitors to the Salon.com Website during the quarter ended December 31, 2018 was 6.0 million, a 47% decrease compared to the quarter ended December 31, 2017, and an increase of 4.7% compared to the quarter ended September 30, 2018, according to data compiled by Google Analytics. Our continued focus on more breaking news and new categories attributed to the quarter over quarter increase along with the ongoing strategy of growing quality traffic, in order to maximize our ability to monetize our page views with higher CPM video and display advertising. We attribute the year over year decreased traffic to a combination of events, including the changes in the algorithms used by Facebook to promote news content, changed Google search algorithms which led to lower referral traffic from Facebook and Google, respectively, increased competition from other sites for breaking political news and reduced referral traffic from other major websites like Yahoo and Twitter.
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We have continued to roll out our strategy to produce original video content focused on news, politics, and entertainment under the banner of
Salon TV
,
Salon Talks
and
Salon Stage
. Our goal is to add high quality diversified content to our Website, and to attract premium video advertising that commands higher CPMs as compared to display advertising. Featured guests on
Salon Talks
this quarter have included Kathy Griffin, Oscar winners Mira Sorvino, Melissa Leo and Cuba Gooding, Jr., Parkland student Delaney Tarr, and former HUD Secretary Julian Castro, among others.
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We continue to offer a paid subscription program that is targeted at our mobile users who prefer not to see advertisements. The offering is a Salon ad-free app for mobile and tablet, available on Apple, Google Play, Amazon Fire and Roku. In October 2018, we furthered our paid content strategy when we launched a browser-based subscription offering for both mobile and desktop as well as a feature where a user has an option to pay per piece of content.
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The quarter ended December 31, 2018 featured great journalism — including original reporting and analysis — as Salon covered in-depth the top stories in news, politics and entertainment. Our daily coverage of the 2018 Congressional and gubernatorial races, the Trump Administration, the economy, continued investigation of the alleged Russian interference in the U. S. Presidential race, mass shootings, immigration and the fall television season generated the most interest. We have also continued our broadened, thoughtful and smart coverage on relationships, lifestyle, food and business that have been popular with our users.
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In October 2018, we entered into an agreement with the WGAE for a three-year period. As a result of the ongoing negotiations and accompanying legal fees as well as the higher cost structure per the negotiated agreement, the effect was detrimental to the company’s financial standing as we had to endure layoffs of management and operations staff in order to accommodate the editorial staff.
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Social media and referral traffic from other websites continue to be major drivers of traffic, at approximately 37% of Website visitors as of December 31, 2018, and are a significant focus across the Company. We make regular updates to the Website to optimize content to be shared on social media with a special focus on our mobile platforms. Across all social platforms, we average over 2 million followers.
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Mobile users accounted for 69% of all users in December 2018, which is slightly up from 66% from September 2018. We continue to have a company-wide focus on our users’ mobile needs, especially quick and easy access to fast-loading content optimized for better readability on smaller screens. We also have increased focus on monetization of mobile traffic through implementation of native and other mobile-optimized advertising.
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We continually work toward leaner, more efficient technological systems through automation, improved architecture and adoption of emerging best practices.
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Material Agreements entered into during Fiscal 2019
Advances/Secured Notes from Related Parties
From June 2018 through August 2018, we received $114.5 in advances from related parties. These advances accrued interest at a rate of 10% per annum and payable on the one-year anniversary of such advances. On December 7, 2018, these advances and all accrued interest were exchanged for secured notes in the amount of approximately $118.9. These notes bear a 10% interest rate and are payable on June 30, 2019. In addition, on December 7, 2018, we issued warrants to the secured note holders to purchase 11,312,600 shares of our common stock at an exercise price of $0.01 per share. The warrants expire five years from the issuance date and can be exercised with cash or cancellation of the secured notes referenced above.
Technology Support Agreement
On October 25, 2018 we entered into a Technology Support Agreement (the "Technology Agreement") with PubLife LLC under which PubLife agreed to provide certain technology support to us, including all web development activities for a six month term in consideration of $1 per month. The payment terms under this agreement were amended under the terms of the Asset Purchase Agreement (as set forth below).
General Advertising Services Agreement
On October 25, 2018, we entered into a General Advertising Services Agreement (the "Advertising Agreement") with Proper Media LLC ("Agent") under which we retained Agent to provide advertisement sales and trafficking services for our websites, including salon.com and related sites. The term of this agreement is for one -year, which term shall be extended for successive one-year periods under terminated by either party within 30 days’ notice prior to the end of any term. We agreed to pay agent its revenue share of all revenue invoiced by Agent in connection with Agent's performance of the services under this agreement. In addition, if we refer a 3rd party publishing partner and Agent executes an advertising services agreement with such 3rd party, Agent agrees to pay us 25% of the monthly revenue earned by Agent due to such 3rd party agreement for the first six-months of any such agreement. The payment terms under this agreement were amended under the terms of the Asset Purchase Agreement (as set forth below).
WGAE Agreement
In October 2018, we entered into an agreement with the WGAE for a three-year period. As a result of the ongoing negotiations and accompanying legal fees as well as the higher cost structure per the negotiated agreement, the effect was detrimental to the company’s financial standing as we had to endure layoffs of management in order to accommodate the editorial staff. In addition, the agreement with the union had a seemingly negative impact on our ability to obtain additional financing.
Asset Purchase Agreement
On March 6, 2019, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Salon.com, LLC (“Buyer”) under which we agreed to sell substantially all of our assets (the "Asset Sale"), including all pertinent intellectual property rights comprising the Company’s business of owning, operating and publishing the website known as Salon.com, (the “Business”), but excluding our cash, cash equivalents and marketable securities and certain contracts and right related to those contracts and tax refunds and insurance policies and rights related to excluded assets, to the Buyer for an aggregate Purchase Price of $5 million payable plus the amount of the Earn-Out Payment (as described below) and the assumption of certain assumed liabilities, all pursuant to the terms of the Asset Purchase Agreement. The purchase price is payable in cash as follows: (i) $550 in payable in cash at closing; (ii) $100 shall be deposited with the Escrow Agent, which amount shall be released to us in accordance with the terms of the Asset Purchase Agreement; (iii) $500 of which was previously paid to the Company as a deposit concurrent with execution of the term sheet for the Asset Purchase Agreement (the "Deposit") and (iv) $3,850 via issuance of a 10% secured promissory note, which note shall be paid in 2 equal installments on the 12 month and 24 month anniversary of the closing date. This note shall be secured by all of the assets being sold to Buyer under the Asset Purchase Agreement.
First Amendment to Asset Purchase Agreement
On April 15, 2019, we entered into a First Amendment to Asset Purchase Agreement ("First Amendment") with Buyer. The primary purpose of the First Amendment was to amend the payment terms under the Technology Agreement and the Advertising Agreement as set forth below:
(a) for the month of March 2019: (i) ad fees under the Advertising Agreement shall be payable at 6.5%, and (ii) tech management fees payable pursuant to the Technology Agreement shall be $5 plus costs per the Technology Agreement;
(b) for the month of April 2019: (i) ad fees under the Advertising Agreement shall be payable at 6.5%, and (ii) tech management fees payable pursuant to the Technology Agreement shall be $10 plus costs per the Technology Agreement; and
(c) for the month of May 2019 and for each month thereafter: (i) ad fees under the Advertising Agreement shall be payable at 6.5%, (ii) tech management fees payable pursuant to the Technology Agreement shall be $10 plus costs per the Technology Agreement and (iii) an amount equal to 10% APR applied to the Deposit.
We also amended Section 10.9 of the Asset Purchase Agreement to include the term sheet related to the acquisition for the documents related to the entire agreement of the parties.
Sources of Revenue
Most of Salon’s revenues are derived from advertising from the sale of promotional space on its Website. The sale of promotional space is generally for less than ninety days in duration. Advertisers pay for advertising on a CPM basis. The primary factors in our ability to increase our advertising revenues in future periods are the addition of higher CPM ad products, such as pre-roll video, and growth in our audience. Attracting more unique visitors to our Website is important because these returning users generate additional page views, and each page view becomes a potential platform for advertisements. Advertising comprises banners, video, rich media and other interactive ads. CPMs vary by platform and CPMs for mobile have been less than those for desktop; however, in the recent quarter they have been increasing. Videos and sponsored content on mobile devices continue to grow in popularity and can demand a higher CPM. We believe that continuing to add videos and sponsored content to our mobile platform and improving and optimizing the platform’s design will help increase revenues from our mobile platform.
In addition, Salon generates revenue from referring users to third-party websites, and we also generate nominal revenue from the licensing of content that previously appeared in our Website.
Expenses
Production and content expenses consist primarily of salaries and related expenses for Salon’s editorial and production staff, payments to freelance writers and artists, bandwidth costs associated with serving pages on our Website and ad serving costs.
Sales and marketing expenses consist primarily of salaries and related personnel costs associated with Salon’s sales team and our business development efforts.
Technology expenses consist primarily of salaries and related personnel costs, and contractor fees, associated with the development, testing and enhancement of our software to manage our Website, as well as to support our marketing and sales efforts.
General and administrative expenses consist primarily of salaries and related personnel costs, accounting and legal fees, rents, and other fees associated with operating a publicly traded company. Certain shared overhead expenses are allocated to other departments.
Interest expense includes accrued interest on our outstanding debt and non-cash charges from the beneficial conversion feature of convertible debt.
In accordance with Accounting Standards Codification (“ASC”) 718, “Stock Compensation” (ASC 718), our expenses include stock-based compensation expenses related to stock option and restricted stock grants to employees, non-employee directors and consultants. These costs are included in the various departmental expenses.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires Salon to utilize accounting policies and make estimates and assumptions that affect our reported amounts. Salon’s significant accounting policies are described in Note 2 to the financial statements in our Fiscal 2018 Annual Report. We believe accounting policies and estimates related to revenue recognition and accounting for debt and equity are the most critical to our financial statements. Future results may differ from current estimates if different assumptions are used or different conditions were to prevail.
Revenue Recognition
Salon recognizes revenues once persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, and collectability is reasonably assured. Revenues are recognized ratably over the period in which our obligations to deliver advertisement impressions are fulfilled. The duration of the advertisements is generally short-term and frequently have cancellation clauses. Payments received before our obligations are fulfilled are classified as “deferred revenues” in Salon’s balance sheet.
We generate advertising revenue from advertisements displayed on our Website. Advertising revenue comprised 78% and 79% of our revenues for the nine months ended December 31, 2018 and December 31, 2017, respectively. Salon’s advertising revenue is principally dependent on the number of visits to our Website and the corresponding advertisement unit rates. Articles, videos and other forms of content generate advertising revenue from a diverse mix of advertising methods including display advertisements, where revenue is dependent upon the number of advertising impressions delivered; pre-roll video advertisements, where revenue is dependent on the number of video views; native advertisements, which are advertisements created to match the form and function of the platform on which they appear and sponsored content, in which advertisers pay for adjacency to specific content. In the past two years, industry trends have shifted toward increased use of agency and software-based approaches to buying online advertising. As a result, we have re-focused our advertising sales to rely on the rapidly growing programmatic advertising business in which we directly sell audience packages based on real-time advertising demand and engage third-party agencies to sell advertisement on our Website through programmatic advertising open marketplaces, and we place less emphasis on a traditional media sales effort.
Accounting for Stock-Based Compensation
Salon accounts for stock-based compensation under ASC 718 and recognize the fair value of stock awards on a straight-line basis over the requisite service period of the award, which is the standard vesting term of four years.
We recognized stock-based compensation expense of $1,186 and $880 during the nine months ended December 31, 2018 and December 31, 2017, respectively. As of December 31, 2018, we had an aggregate of $3,209 of stock-based compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. We currently expect this stock-based compensation balance to be amortized as follows: $235 during the remainder of fiscal 2019; $1,411 during fiscal 2020; $1,127 during fiscal 2021; and $436 during fiscal 2022. The expected amortization reflects only outstanding stock option awards as of December 31, 2018. We expect to continue to issue stock-based awards to our employees in future periods.
The full impact of stock-based compensation in the future is dependent upon, among other things, the timing of when we hire additional employees, the effect of new long-term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock-awards granted, achievement of specific goals for performance-based grants, the fair value of the stock awards at the time of grant and the tax benefit that we may or may not receive from stock-based expenses. Additionally, stock-based compensation requires the use of an option-pricing model to determine the fair value of stock option awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards.
Results of Operations for the Three and Nine Months Ended December 31, 2018 Compared to the Three and Nine Months Ended December 31, 2017
Revenues
Revenues decreased 17% to approximately $1.0 million for the three months ended December 31, 2018 from approximately $1.2 million for the three months ended December 31, 2017. Revenues decreased 41% to approximately $2.3 million for the nine months ended December 31, 2018 from approximately $3.9 million for the nine months ended December 31, 2017.
Advertising revenues decreased 11% to approximately $0.8 million for the three months ended December 31, 2018 from approximately $0.9 million for the three months ended December 31, 2017. Direct advertisement sales were approximately 41% and programmatic advertisement sales were approximately 59% of total advertising revenue for the three months ended December 31, 2018.
Advertising revenues decreased 42% to approximately $1.8 million for the nine months ended December 31, 2018 from approximately $3.1 million for the nine months ended December 31, 2017. Direct advertisement sales were approximately 31% and programmatic advertisement sales were approximately 69% of total advertising revenue for the nine months ended December 31, 2018.
Revenues from all other sources, mostly referral fees, decreased 67% to approximately $0.1 million for the three months ended December 31, 2018 from approximately $0.3 million for the three months ended December 31, 2017. Revenues from all other sources, decreased 43% to approximately $0.4 million for the nine months ended December 31, 2018 from approximately $0.7 million for the nine months ended December 31, 2017. The overall decreases were attributed to lower revenues from a renewed referral fee customer agreement.
Expenses
Production and content
Production and content expenses decreased 33% to approximately $0.5 million for the three months ended December 31, 2018 from approximately $0.8 million for the three months ended December 31 2017. Production and content expenses decreased 39% to approximately $1.7 million for the nine months ended December 31, 2018 from approximately $2.8 million for the nine months ended December 31, 2017. The decrease was mainly attributed to personnel changes and a decrease in internet hosting and ad serving fees.
Sales and marketing
Sales and marketing expenses decreased 86% to approximately $0.01 million for the three months ended December 31, 2018 from approximately $0.1 million for the three months ended December, 2017. Sales and marketing expenses decreased 96% to approximately $0.01 million for the nine months ended December 31, 2018 from approximately $0.4 million for the nine months ended December 31, 2017. The decrease was mainly attributed to personnel reductions.
Technology
Technology expenses decreased 48% to approximately $0.1 million for the three months ended December 31, 2018 from approximately $0.2 million for the three months ended December 31, 2017. Technology expenses decreased 32% to approximately $0.4 million for the nine months ended December 31, 2018 from approximately $0.6 million for the nine months ended December 31, 2017. The decrease was mainly attributed to personnel reductions.
General and administrative
General and administrative expenses remained relatively flat at approximately $0.6 million for the three months ended December 31, 2018 and 2017. General and administrative expenses increased 25% to approximately $2.0 million for the nine months ended December 31, 2018 from approximately $1.6 million for nine months ended December 31, 2017. The overall increase was mainly attributed to non-cash stock-based compensation.
Interest expense
Interest expense remained relatively flat at approximately $0.01 million for the three months ended December 31, 2018 and December 31, 2017. Interest expense decreased 66% to approximately $0.1 million for the nine months ended December 31, 2018 from approximately $0.04 million for the nine months ended December 31, 2017. The decrease was primarily attributed to the decrease of non-cash charges from the beneficial conversion feature of convertible promissory notes.
Liquidity and capital resources
Net cash used in operations was approximately $0.6 million for the nine months ended December 31, 2018. The principal uses of cash during the nine months ended December 31, 2018 were to fund the $1.9 million net loss, inclusive of $1.2 million stock-based compensation expense and the net activities from various working capital for the period. The accounts receivable, net as of December 31, 2018 of approximately $0.7 million, represent primarily advertising sales during the period, and are expected to be collected within the next four months.
Net cash provided by financing activities was approximately $0.7 million and $0.8 million for the nine months ended December 31, 2018 and December 31, 2017, reflecting proceeds from convertible promissory notes.
We estimate that we will require approximately $0.5 million in additional funding to meet our operating needs for the remaining nine months of fiscal year 2019, ending March 31, 2019. If planned revenues are less than expected, or if planned expenses are more than expected, the cash shortfall may be higher, which will result in a commensurate increase in required financing.
During the nine months ended December 31, 2018, we issued $0.11 million in 10% convertible promissory notes and $0.619 million in 10% senior secured notes payable. If we were not able to obtain additional funding from related parties or others, we would be required to curtail or discontinue operations, or consider other alternatives.
Off-Balance-Sheet Arrangements and Contractual Obligations
We have an operating lease primarily for office space facilities, this lease expires in less than 12 months and is not recorded on the balance sheet, we recognize lease expense for this lease on a straight-line basis over the lease term.