This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties, including but not limited to statements regarding our strategy, plans, objectives, expectations, intentions, financial performance, cash-flow breakeven timing, financing, economic conditions, Internet advertising market performance, social media and other non-web opportunities and revenue sources. Although Salon Media Group, Inc. (“Salon”, the “Company”, “Our” or “We”) believes its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth above and in Salon’s public filings. Salon assumes no obligation to update any forward-looking statements except as required by law.
Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth in
“
Risk Factors.
”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” are elsewhere in this Annual Report. In this Annual Report, the words “anticipates”, “believes”, “expects”, “estimates”, “intends”, “future,” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
ITEM 1. Business
OVERVIEW
Salon is a technology-based advertising media business that wholly owns and operates an online news website, salon.com (“Salon.com”). Our award-winning journalism 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.
Salon was originally incorporated in July 1995 in the State of California and reincorporated in Delaware in June 1999. In 1999, we had our initial public offering. In 2001, we adopted the name Salon Media Group, Inc. In March 2019, we entered into an asset purchase agreement to sell substantially all of our assets. Our common stock is quoted on the OTC Markets and our stock symbol is SLNM.
Material Agreements Entered into during Fiscal 2019 and First Quarter of Fiscal 2020
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) $550,000 in payable in cash at closing; (ii) $100,000 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) $500,000 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) $3,850,000 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 $5,000 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 $10,000 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 $10,000 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.
Second Amendment to Asset Purchase Agreement
On June 30, 2019, we entered into a Second Amendment to Asset Purchase Agreement with Buyer under which the parties revised the Asset Purchase Agreement to provide that amounts delivered into escrow upon execution would not be used to compensate any Buyer Indemnified Parties for any losses under the Asset Purchase Agreement.
Settlement Agreements with Jordan Hoffner and Elizabeth Hambrecht
On July 1, 2019, we entered into a Settlement Agreement and Release with each of Jordan Hoffner, our former CEO and Elizabeth Hambrecht, our former CFO. Under the terms of each agreement, we agreed to pay Mr. Hoffner and Ms. Hambrecht, as applicable, the total sum of Thirty Thousand dollars ($30,000.00) (the “Settlement Payment”) on the earlier of (i) 2 business days after the Closing of that certain Asset Purchase Agreement and (ii) December 31, 2019 (the “Payment Date”). Each of Mr. Hoffner and Ms. Hambrecht Claimant acknowledges that, upon receipt of the Settlement Payment, they will have been paid all wages, severance, all unreimbursed business expenses, and all accrued but unused vacation pay due and owing to them further waived any additional claims for unpaid salary or wage amounts, unreimbursed business expenses, and accrued but unused vacation pay. Each of Mr. Hoffner and Ms. Hambrecht executed a general release of all claims under their respective agreements.
Advances/Secured Notes from Related Parties
From June 2018 through August 2018, we received $114,500 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 $118,899. 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 $1,000 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.
Highlights from Fiscal Year 201
9
During the fiscal year ended March 31, 2019 (“fiscal year 2019”), we continued to execute our business strategy to refine and broaden our editorial products in order both to attract an engaged audience and premium advertising, which would increase revenues. However, now that the landscape for publishers has permanently changed, we faced increased competition from both new and larger websites for online advertising campaigns during the year, and in the quarter ended March 31, 2018, significant changes to the algorithms used by Google and Facebook led to sharp decreases in traffic. Despite changes to our advertising footprint to capture the greater programmatic opportunity for our display and video advertising inventory, and resulting higher CPMs from our programmatic advertising compared to the fiscal year ended March 31, 2018 (“fiscal year 2018”), the reduced traffic led to a smaller ad footprint and suppressed our revenues. In addition, in March 2019, we entered into an agreement to sell substantially all of our assets. Upon consummation of this transaction, if consummated, we will cease to be an operating company. The highlights of our fiscal year 2019 relating to current operations are listed below:
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Total revenue in the fiscal year 2019, as it related to discontinued operations, decreased 33% to $3.0 million, compared to $4.5 million in the fiscal year 2018. We have been working on strategies to better monetize our Website and increase advertising revenues per session. A continued significant industry shift in online advertising from advertising sold by a direct sales team to advertising being sold through software-based “programmatic” technology has taken place. Our advertising sold through networks that access these programmatic buys accounted for 72% of our advertising revenue for the fiscal year 2019. We have been making changes to our advertising footprint to capture the greater programmatic opportunity for our display and video advertising inventory, and we will continue to focus our efforts to allow better management of our advertising inventory and targeting for our advertisers.
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Net loss for the fiscal year 2019 was $2.7 million, a 13% decrease from $3.1 million in the fiscal year 2018. This included a net loss from continuing operations for the fiscal year 2019 of $2.8 million, a 4% increase from $2.7 million in the fiscal year 2018. Net income from discontinue operations for the fiscal year 2019 was $0.2 million compared to a net loss from discontinued operations of $0.4 million for fiscal year 2018.
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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
have included Senator Doug Jones, Janet Napolitano, Stacey Abrams, Matthew Broderick, Kathy Griffin, Jesse Eisenberg and Tina Brown. Furthermore, to monetize our growing library of nearly one thousand episodes of original video programming, we have been distributing our video programming across key Over-the-Top (OTT) channels such as Apple TV, Amazon and Roku.
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Our peak monthly users for Salon.com traffic in fiscal year 2019 was in November 2018 when we recorded 7 million users, as measured by Google Analytics. In total, the average number of monthly users in fiscal year 2019 was 6.2 million, compared to 10.6 million in fiscal year 2018, a decrease of 41%. We attribute the decline in overall traffic to a combination of events, including the changes in the algorithms used by Facebook to promote news content, which led to lower referral traffic from Facebook, and reduced referral traffic from other major websites like Yahoo and Twitter. Our focus on growing traffic has shifted from volume to quality, in order to maximize our ability to monetize our page views with higher CPM video and display advertising. In order to achieve that, we made changes to our editorial mix in order to publish more content in the categories of Food, Science, Innovation and Health that attract higher CPMs, such as pre-roll video and native advertising.
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Social media platforms such as Twitter and Facebook and referral traffic from other websites continue to be major drivers of traffic, at approximately 34.6% of Website visitors as of March 2019. In fiscal year 2019, we made a concerted effort to increase the number of platforms to distribute Salon content so that we can be less reliant on Facebook’s volatility in traffic. New traffic partners include Quora, LinkedIn, Smartnews, News360 and Flipboard. As a result, we increased our social media followers 9% from 2.0 million in 2018 to 2.2 million in 2019.
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In August 2015, Salon initially recognized the Writers Guild of America, East, Inc. (“WGAE”) as the collective bargaining representative of our non-supervisory editorial staff. 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.
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We expanded our paid subscription program in October 2018 that is targeted at our users who prefer not to see advertisements on both mobile applications as well as the web browser. We offer a monthly or yearly subscription plan in exchange for an ad-free experience using a Salon app for the phone or through the browser on both the phone and desktop. In March of 2019, we began our program of gated premium content, initially in the Sex and Love category.
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Mobile users accounted for 74% of all users in March 2019, which is up slightly from 66% in March 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. During the fiscal year 2019, we rebuilt our backend and content management systems in order to keep pace with the industry and reduce site latency.
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During 2019, we recognized the desirability to either merger with another company or pursue other strategic options. In this regard, we engaged the services of an investment bank and opened discussions with other interested parties. Changes in the overall digital publishing industry required us to make investments in technology that were beyond our financial capability. In the absence of making those investments, and following the substantial adjustments we had already implemented, it was clear we could not continue in our present form.
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Consistent with this view we entered into technology and advertising relationships with Proper Media and PubLife. The impact of these changes confirmed our belief that improving our advertising technology platform would improve our revenues and user experience.
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Following a three month trial period of working closely with Proper Media and PubLife, and after considering other strategic options, we decided to sell all of the operating assets of the company to Salon, LLC, a company related to Proper Media and PubLife.
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Salon Strategy
Our strategy has focused on improving monetization of our user base by innovating our ad technology in order to better match our highly educated and affluent users with advertisers. In the past few years, we have successfully attracted a sizeable user base, which in fiscal year 2019 averaged 6.2 million users per month who consumed an average of 15.2 million page views per month. Our number of page views translates to our number of viewer impressions that can be sold to our advertisers and offers opportunities to develop business relationships with companies that want access to our attractive user base. We currently sell our impressions to advertisers programmatically based on Run of Site private marketplaces, or at times, based on editorial content that falls in a particular category such as “Movies” or “Innovation.” The CPM is driven by market demand for each category of content we offer and the demographics of our audience. During the 2019 fiscal year we have continued to shift our focus to growing higher value traffic that maximizes our ability to monetize our page views with higher CPM video and display advertising. As a result, we have continued to adjust our editorial mix and products in order to publish more content to attract a wider universe of advertising clients and products. Going forward, the CPM that we can charge our advertisers will increasingly be based on our ability to deliver highly targeted and defined users to our advertiser. In addition, in March 2019, we signed the Asset Purchase Agreement to consummate the Asset Sale. If we consummate the Asset Sale, we will cease to be an operating company. The strategies discussed in this section only apply prior to consummation of the Asset Sale (and upon any failure to close the Asset Sale).
Our strategy is predicated on the following core principles: (1) create high quality diversified content that meets our users’ and advertisers’ interests; (2) hire the best possible talent to create centers of excellence and
(3) innovate to bring great products to our users and advertisers. Our focus on these core principles underpins our goal to continue to grow our user base, and to develop new strategies around Website monetization that will provide opportunity for future growth.
In fiscal year 2020, our goal is to continue our mission of creating fearless journalism and making the conversation smarter, while anticipating continued shifts in the online advertising market to better monetize our Website until consummation of the Asset Sale discussed above. Following the Asset Sale, we intend to cease to do business and intend to not engage in any business activities except for dealing with post-closing matters (in the event the Asset Sale is consummated) and for the purpose of liquidating our remaining assets, paying any debts and obligations, distributing the remaining assets to stockholders, and doing other acts required to liquidate and wind up our business and affairs. We will pay or make provision for payment of our known or reasonably ascertainable liabilities that have been incurred or are expected to be incurred prior to liquidation. After that, we will distribute the remaining assets to our stockholders in proportion to their respective stockholder interest in the Company. To reach our goals, and to achieve profitability in advance of the Asset Sale, we will push ahead in the following areas:
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Develop a broader mix of provocative content in addition to the core areas of news and politics, building off the original definition of a “salon” as a center of intellectual discussion
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Develop new strategies to attract new readers, and decrease reliance on specific social media websites or search engines
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Integrate into our advertising approach a deeper focus on new advertising products that match our high-quality user with appropriate advertisers using data and innovative ad products
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Continue to drive new revenue streams, including subscription, TV programming, e-commerce and book publishing to supplement advertising revenues, while keeping a keen eye on costs.
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Develop a Broader Mix of Provocative Content
We target an educated, culturally engaged audience interested in original thinking and smart commentary. We pursue that audience by featuring a diverse array of voices and perspectives, and by covering a wide range of topics including News & Politics, Life Stories, the Economy & Innovation, Culture, Health & Science, and Food. Twenty-four hours a day, 365 days per year, Salon invites users to immerse themselves in thought-provoking content that impassions and empowers them to be the intellectual and cultural leaders of our time
.
While we continue to focus on breaking news coverage with a focus on politics, culture and world events, our new categories have been building up to a critical mass of content over the past year. These new categories include Food, Health & Science, and Economy & Innovation, and aim to give our users a wider variety of topics to choose from. The focus on these categories gave our advertisers more category-focused inventory, which has shown a year over year increase in our revenue per thousand pageviews (“RPM”) of 36.6% in March 2019 from March 2018.
As we continue to focus our editorial to our users’ needs, our primary goal is to grow visitors to our Website since the resulting page views serve as a platform for advertising impressions, a key driver of our revenue generation. Using data analytics in real-time, we can assess where our users’ interests are shifting, and respond by determining content, site layout and structure to best suit their needs in the moment. In fiscal year 2020, we intend to respond to users’ interests by expanding our news coverage in Washington DC for the upcoming Presidential election and key Senate races. We will expand into Washington by reallocating internal resources, making some key hires as well as continuing to have content partnerships to diversify our content offerings across various verticals. We are continually evaluating the needs of our users and trying to adjust and create new solutions to meet their needs.
Attract New Readers
We continually need fresh content and new ideas to attract readers to our Website. We plan to continue to focus on developing our audience through a combination of editorial enhancements, increased dynamic content and new user-focused functionalities and products.
One area of growth will be to attract more female users. As of March 2019, women accounted for 37.2% of our readership, down from 37.9% in March of 2018. We believe that our overall tone of the site, our community and social audience has begun to change to embrace more female readers and that will be a continued area of focus in the next year.
The importance in Website traffic from social media and third party distribution platforms was underpinned by the significant number of Facebook “likes” at more than 995,000, and Twitter followers at 1,005,000 as of March 2018. However, social media traffic can be variable due to changes in each platform’s approach to news content, a high number of fake accounts on these platforms, and the large number of “likes” and “followers” lost some of its prior ability to drive traffic to our website. Therefore, we have focused on building audience segments on other distribution platforms in order to diversify away from Facebook. In fiscal year 2020, we plan to continue our efforts to build our audience on social media, and place more emphasis on other emerging platforms such as Quora, Flipboard and Reddit, through a continuation of the strategies we have employed in the past two years.
Develop New Revenue Streams
In March 2018, we launched a subscription product that allows users to pay for ad-free content. We offer a monthly or yearly subscription plan in exchange for an ad-free experience using a Salon app for the phone. In October 2018, we added onto our subscription product a browser-based offering for those users who did not want to download an app and can see the full Salon offering off of their web browsers. In March 2019, we added on premium content in the Love and Sex category that is only offered through the paid service.
Also, as a result of solid conversion ratios in e-commerce, we have also made our Salon e-commerce partnership more prominent on our Website by placing it on our top navigation bar in order to drive additional revenues. We have expanded our product categories to CBD products and productivity software and plan to add more product categories that are in line with some of our editorial strategies such as food and health.
In addition to these existing initiatives, we are exploring possible business opportunities in other areas such as podcasting, book publishing and a possible Salon TV show.
A Deeper Focus on New Advertising Products that Match our User with Appropriate Advertisers
In order to expand our base of advertisers and increase our advertising revenues, we plan to integrate into our advertising approach a deeper focus on new advertising products that match our high-quality user with appropriate advertisers using data and innovative ad products. This includes entering possible partnerships with advertising technology companies that can offer highly tailored products that leverage new advertising technology and add software and data capabilities to understand our users better. This will allow us to match our readers’ interests with advertisers more closely.
Path to Profitability
Our operating losses in fiscal year 2019 decreased compared to fiscal year 2018, a result of our continued attempts to make adjustments to our revenue model in order to increase advertising revenues, and keep costs low in order to get closer to profitability. Due to an industry shift in advertising dollars toward programmatic and video advertising, and a decline in traffic during the year, our direct advertising increased 76% and programmatic advertising decreased 43% leading to total decrease in advertising revenues of 30% in fiscal year 2019 as compared to fiscal year 2018. At the same time, our production costs decreased 24% from a year ago, which resulted in smaller losses.
Entering fiscal year 2020, we plan to build on the progress we made in increasing CPMs and advertising rates at programmatic marketplaces, and take advantage of marketing opportunities and an active news cycle to increase our page views and video views. Furthermore, in October 2018, we took steps to reduce further our expense base and shift resources to create content that will generate higher CPM advertising. Given these changes, we anticipate that fiscal year 2020 will better align production costs with our revenue potential in an effort to reach profitability.
OUR BUSINESS
We target an educated, culturally engaged audience interested in original thinking and reporting on the day’s big stories. We pursue that audience by featuring a diverse array of voices and perspectives, and covering a wide range of topics including politics, race, religion, culture, entertainment, sustainability, innovation, technology and business. In addition, in March 2019, we executed the Asset Purchase Agreement relating to the Asset Sale. If the Asset Sale is consummated, we will cease to be an operating company.
Salon.com Website
News & Politics
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Breaking news fast – and what it means. Whether it's the mid-term Congressional election, the #MeToo movement, the Mueller investigation, or analysis about Supreme Court nominations, we surround stories as they happen – with dedicated writers, videos, and smart columnists who put important news into immediate context. Fearless, independent and sophisticated coverage of the most important stories from Washington and around the world, delivered by respected veterans like Amanda Marcotte and D. Watkins, and the brightest analysts on the Web (Heather Digby Parton, Lucian Truscott III, and more.) Our political coverage starts early in the morning and is updated all day with new pieces, all designed to drive the conversation – and keep our readers ahead of it.
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Life Stories
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Our popular life essays go in-depth on the most complicated and deeply personal topics – sex, parenting, family, relationships, religion, work and so many more – and are written both by famous writers as well as the most daring and interesting new voices.
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Culture
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Our writers and critics are just as obsessed with the latest offerings on Netflix, Amazon and HBO, and the coolest and hottest new books and movies as our readers are. Our entertainment coverage is edgy, exhaustive, fast as we mine the intersections between culture and politics. Our writers include Matt Rozsa (film), Melanie McFarland (TV), and Mary Beth Williams.
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Economy & Innovation
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Our Economy & Innovation section explores the world of commerce and global financial trends. Innovation is all about thinking differently and cultivating those ideas to make progress. This is where users find the latest big ideas, both inside and outside the world of technology, and other amazing stories designed to make readers go wow.
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Science & Health
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Our Science & Health section combines the personal and political – issues of climate change, the future of energy and transportation, and politicization of science all receive authoritative coverage.
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Food
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From the best recipes for pizza or potato salad, cultural food trends, and confessions of a Kombucha obsession, we cover what’s trendy and tasty with celebrity chefs and critics.
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Salon TV
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Launched in July 2016, Salon TV includes our
Salon Talks
interview series,
Salon Stage
musical performances, and our current events oriented
Salon Series
and
Salon Now
. Airing first on Facebook Live, the interviews and shows are cut into approximately 2 minute highlights that are shown on the Salon website. Featured guests on
Salon Talks
have included Senators Doug Jones and Sheldon Whitehouse, Deepak Chopra, Katie Couric, Tina Brown, Dan Rather, Stacey Abrams and Mark Bittman, Matthew Broderick, Jeffrey Wright, among others.
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Revenue Sources
, From Discontinue Operations
Most of Salon’s revenues are derived from advertising from the sale of promotional space on its Website. Internet advertising revenues accounted for 79% of revenues in fiscal year 2019. Revenue from referring users to third party websites primarily accounted for the remaining 15% of revenues in fiscal year 2019.
Internet advertising is affected by broad economic conditions, like other forms of advertising, but overall it has continued its upward trend even through economic turbulence. According to the 2018 IAB Internet Advertising Revenue Report conducted by PwC Advisory Services LLC, the compound annual growth rate (“CAGR”) over the past ten years for Internet advertising in the United States was 16.8%, which over the past few years has been largely driven by the growth of mobile. The rapid growth of the mobile advertising platform has resulted in a CAGR of 53.8% over the past five years. Internet advertising revenue in the United States totaled $107.5 billion in 2018, a 21.8% increase from $88.3 billion in 2017. In 2018, the sources for advertising revenues were search (45%), banner (including banners, sponsorships, and rich media) (31%), video (15%) and other (9%).
The bulk of online advertising remains concentrated in a relatively small number of dominant Internet companies, with the top ten companies accounting for 75% of online advertising in the December 2018 quarter, and another 7% captured by the next tier of companies ranked 11
th
through 25
th
. Therefore, we believe our market opportunity falls roughly at 18% of the online advertising market, or $19.3 billion.
The primary factors in our ability to increase our advertising revenues in future periods are growth in our audience and the addition of higher CPM ad products, such as pre-roll video. Attracting more unique visitors to our Website is important because these 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 across our desktop, tablet, mobile browser and apps platforms. Advertisers pay for advertising based on a CPM, and different platforms attract different CPMs. CPMs for mobile have been less than for desktop. Videos and sponsored content on mobile devices continue to grow in popularity and can demand a higher CPM. We believe that continuing to add videos and sponsored content to our mobile platform and improving and optimizing the platform’s design will help increase revenues from our mobile platform.
Overall, monthly unique visitors to our Website have grown from 6.3 million in March 31, 2011 to a peak of 19.6 million in June 30, 2015, and has reverted to 6.6 million in March 31, 2019. Our full year average monthly unique visitors were 6.4 million, 10.6 million, 11.2 million, 16.9 million, 16.6 million, 12.7 million, 10.6 million and 6.2 million in fiscal years 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019, respectively. These fluctuations reflect changes in content areas on our Website over this period, and adjustments to search engine optimization and social media algorithms.
Sales and Marketing
As a news and lifestyle Website that competes against much larger websites, we have sought to distinguish ourselves in the marketplace by offering customized, innovative and integrated advertising products that appeal to users and seamlessly and organically incorporate our advertising clients and their objectives into our Website. We work with our programmatic advertising partners to launch advertisements that match our high-quality audience, and innovate with new products as they become available. In addition, we also offer sponsorships of content that come through direct sales.
Our sales and marketing operation are located in New York, with one advertising sales and operations employee who actively solicits orders as of March 31, 2019.
Infrastructure and Product Development
We recognize that users come to the site for online news, reporting, opinion and an engaging, active community of writers, users and commenters. Users engage with the site through desktop computers, mobile phones and social networking platforms and other referral partners. To meet users’ rapidly evolving online media needs, we are continually innovating and developing our Website, mobile Website and social media presence – by adding new features, design updates and technologies that improve the user experience, speed and search engine optimization. We have developed an internal culture of innovation where the Edit, Technology and Sales teams collaborate on product development.
Our Website is hosted on cloud-based virtual servers running open-source Linux operating systems and various open-source web and network software packages. Our top technical priority is the fast and reliable delivery of pages to our users. Our systems are designed to handle traffic growth and network failures by balancing the requests among several pools of servers across the globe that automatically scale to match traffic demands. We rely on multiple tiers of redundancy/failover and third-party Content Delivery Network to achieve our goal of 24 hours, seven-days-a-week Website uptime. Regular automated backups protect the integrity of our data. Our servers are continuously monitored by numerous third-party and open-source monitoring and alerting tools.
In fiscal year 2017, we launched a Website redesign that put in place a publishing infrastructure that better takes advantage of current technologies. The redesign allows a better user experience as a result of quicker load time, and improved re-circulation of Salon content on each page, and improved monetization due to improved viewability of ads on our website. As a part of this redesign, we continued building new products for video and mobile, expanded our social media integration, and improved security and scaling capabilities.
In fiscal year 2018, we completed our Website and advertising architecture redesign from the previous year aimed at improving the user experience. As part of this effort, we will continue to explore new products that meet the immediate needs of our mobile users, build out new advertising products for video and mobile and improve our security and scaling capabilities.
In fiscal year 2019, we completed our backend systems and content management system upgrade to allow for faster speeds that allow us to be more competitive for programmatic advertising fill rates and prices as latency time decreased by 75%.
Competition
The bulk of online advertising remains concentrated in a relatively small number of dominant Internet companies, with the top ten companies accounting for 75% of U.S. online advertising in 2018 and another 8% captured by the next tier of companies ranked 11
th
through 25
th
. Therefore, we believe our market opportunity falls roughly at 18% of the online advertising market, or $19.3 billion. We compete for advertising revenues with numerous websites, including major portals such as Yahoo/AOL, major search engines such as Google, major social networks such as Facebook and Twitter, and other online large media publications such as Buzzfeed, Huffington Post, New York Times, Washington Post, MSNBC and CNN.com. We also compete with many smaller news and politics-oriented websites, such as Slate, The Daily Beast, The Atlantic, Talking Points Memo, Politico and Axios for staff, audience and advertising sales.
Proprietary Rights
Our success and ability to compete is dependent in part on the goodwill associated with our trademarks, trade names, service marks and other proprietary rights and on our ability to use U.S. laws to protect our intellectual property, including our original content, content provided by third parties, and content provided by columnists. We have a registered trademark on our Salon name and logo.
Employees
As of March 31, 2019, Salon has 24 full-time employees and 1 part-time employee. We believe our relations with our employees are good. We commenced collective bargaining with our non-supervisory editorial employees in November 2015, and signed a three-year agreement with the Writers Guild of America East (WGAE) in October 2018. Our future success is highly dependent on our ability to attract, hire, retain and motivate talented personnel.
ITEM 1A. Risk Factors
Salon’s business faces significant risks. The risks described below may not be the only risks Salon faces. Additional risks that are not yet known or that are currently immaterial may also impair its business operations or have a negative impact on its stock price. If any of the events or circumstances described in the following risks actually occurs, its business, financial condition or results of operations could suffer, and the trading price of its
shares of common stock (the “
Common Stock
”)
could decline.
The Risk Factors set forth below have not materially changed from those included in our Fiscal
20
18
Annual Report
filed with the Securities and Exchange Commission on June 10, 2019.
Salon has historically lacked significant revenues and has a history of losses
.
We have a history of significant losses and expect to incur a loss from operations, based on accounting principles generally accepted in the United States of America, for our fiscal year ending March 31, 2019 and to be determined in future years. Even if we attain profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If revenues grow more slowly than we anticipate or operating expenses exceed expectations, financial results will most likely be severely harmed and our ability to continue operations will be seriously jeopardized.
M&K CPA’s, PLLC, Salon’s independent registered public accounting firm for the fiscal years ended March 31, 2017 through 2019 included a “going-concern” audit opinion on the financial statements for each of those years. The audit opinions report substantial doubt about our ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability. As a result of the going-concern opinions, our stock price and investment prospects have been and will continue to be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations.
The Company has operated in the past principally with the assistance of interest-free advances from related parties, and more recently by financing rounds in fiscal year 2019. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Salon’s
projected cash flows may not meet expectations
.
We rely on cash projections to run our business and change such projections as new information is made available or events occur. The most significant component of our cash projections is cash to be generated from advertising sales. Forecasting advertising revenues and resulting cash receipts for an extended period of time is problematic due to the short duration of most advertising sales contracts. If projected cash inflows and outflows do not meet expectations, our ability to continue as a going concern may be adversely affected.
If we forecast or experience periods of limited, or diminishing cash resources, we may need to sell additional securities or borrow additional funds. There is no guarantee that we will be able to issue additional securities in future periods or borrow additional funds on commercially reasonable terms to meet our cash needs. Our ability to continue as a going concern will be adversely affected if we are unable to raise additional cash from sources we have relied upon in the past or new sources.
We have
relied on related parties for significant investment capital
.
On January 24, 2017, Salon entered into a Purchase Agreement (the “Purchase Agreement”) with purchasers identified therein (each, a “Purchaser” and together, the “Purchasers”) to issue and sell to the Purchasers in a private placement (the “Private Placement”) shares of Salon’s Series A Mandatorily Convertible Voting Preferred Stock (the “Series A Preferred Stock”). As reported in Salon’s Current Reports on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on January 27, 2017, March 27, 2017 and July 26, 2017, the Initial Closing of $1 million, the Second Closing of $0.215 million and the Final Closing of $0.275 million were completed on January 26, 2017, March 23, 2017 and July 20, 2017, respectively.
William Hambrecht, Elizabeth Hambrecht, Jordan Hoffner and Larry Hoffner, the father of our former CEO Jordan Hoffner, were purchasers in the Initial Closing of the Private Placement. Jordan Hoffner, former CEO, Ryan Nathanson, former Chief Operating Officer, and Jordana Brondo, former Chief Revenue Officer, were also purchasers in the Second Closing of the Private Placement. William Hambrecht, Elizabeth Hambrecht and Jordan Hoffner were purchasers in the Final Closing of the Private Placement.
Curtailment of cash investments and borrowing guarantees by related parties would detrimentally impact our cash availability and our ability to fund our operations.
We
completed
a
collective bargaining
agreement
with our non-supervisory editorial employees
.
On August 3, 2015, the WGAE became the collective bargaining representative of Salon’s non-supervisory editorial employees. We commenced collective bargaining with the WGAE in November 2015. In October 2018, the Company 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. In addition, the agreement with the union had a seemingly negative impact on our ability to obtain additional financing.
Our
principal stockholders exercise a controlling influence over
our
business affairs and may make business decisions with which non-principal stockholders disagree, which may affect the value of non-principal stockholders’ investments
.
As of July 1, 2019, approximately 66% of our outstanding common stock are controlled, directly or indirectly by John Warnock, William Hambrecht, a director and Humilis Capital Fund, LP, an entity controlled by Trevor Colhoun, our acting Chief Financial Officer and director. These three investors, if aligned, could combine to make business decisions with which non-principal stockholders disagree, and which may affect the value of the non-principal stockholders’ investments.
Future sales of significant number of shares of
our
Common Stock by principal stockholders could cause
our
stock price to decline
.
As of July 1, 2019, our directors and officers beneficially owned approximately 200 million shares of Common Stock, including 24 million shares of Common Stock upon exercise of presently exercisable options,11 million shares of Common Stock upon exercise of presently exercisable warrants and 27 million shares of common stock upon conversion of convertible notes. The approximate 200 million shares of Common Stock represent beneficial ownership of approximately 52% of our Common Stock. As our shares of Common Stock are normally thinly traded, if our principal stockholders were to sell their shares of Common Stock, the price per share of our shares of Common Stock could be adversely affected.
There can be no guarantees that the Asset Sale will be completed and, if not completed, we may have to file for bankruptcy and liquidation.
The consummation of the Asset Sale is subject to the satisfaction or waiver of various conditions, including the approval of the Asset Sale by our stockholders. We cannot guarantee that the closing conditions set forth in the Asset Purchase Agreement will be satisfied. If we are unable to satisfy the closing conditions in Buyer’s favor or if other mutual closing conditions are not satisfied, Buyer will not be obligated to complete the Asset Sale. If the Asset Sale is not completed, our board of directors, in discharging its fiduciary obligations to our stockholders, will evaluate other strategic alternatives that may be available, which alternatives may not be as favorable to our stockholders as the Asset Sale and may include a bankruptcy and liquidation of the Company.
There can be no guarantee that Buyer will make its payments under the $3.8 million secured note delivered to us at closing, the failure of it do so which will reduce any amounts available for distribution to our stockholders.
A substantial portion of the consideration to be received in connection with Asset Sale is the issuance by the Buyer thereunder of $3.8 million in secured notes, which amounts are due to be paid in equal installments on the 12- and 24-month anniversary of closing. Failure of the Buyer to make either of these payments will substantially reduce the amounts payable to our stockholders. While these notes are secured by our assets being sold in the Asset Sale, there is no guarantee that Buyer will make such payments.
Even if the Asset Sale is consummated, we cannot assure you the amount of liquidating distributions, if any, that will be made to our stockholders or the exact timing of distributions.
Our liquidation, dissolution and winding up process will be subject to uncertainties. The amount and timing of any liquidating distribution to our stockholders will depend on the following factors, among others:
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whether any potential claimants against us and currently unknown to us could present claims relating to our pre-dissolution operations that we may ultimately have to satisfy;
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the costs we may have to incur to defend new claims and claims existing as of the date of this proxy statement, including possible claims against us relating to our dissolution and possible tax audits;
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the payment of expenses incurred in connection with the Asset Sale and transaction expenses;
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the amounts that we will need to pay for general administrative and overhead costs and expenses as an operating company before our dissolution and the amounts that we will need to pay in connection with our post-dissolution survival period;
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the expenses that we may incur to terminate the leases for our offices;
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the costs attendant on us as a publicly held reporting company under SEC regulations, including legal and auditing fees, especially if we are unable to obtain relief from requirements to continue preparing and filing our annual, quarterly and current reports; and
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how much of our funds we will be required to reserve to provide for contingent liabilities, and how long it may take to finally determine whether and how much of those liabilities may have to be paid.
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We may continue to incur expenses that will reduce any amounts available for distribution to our stockholders
.
Claims, liabilities and expenses from operations, such as operating costs, salaries, directors’ and officers’ insurance, payroll and local taxes, legal, accounting and consulting fees and offices expenses will continue to be incurred by us pursuant to the terms of the asset purchase agreement and as we wind down. We cannot estimate what the aggregate of these expenses will be, but they will reduce the amount of funds available for distribution to our stockholders.
While the Asset Sale is pending, it creates uncertainty about our future, which could materially and adversely affect our business, financial condition and results of operations.
While the Asset Sale is pending, it creates uncertainty about our future. Therefore, our current or potential business partners may decide to delay, defer or cancel entering into new business arrangements with us pending consummation of the Asset Sale or termination of the Asset Purchase Agreement. In addition, while the Asset Sale is pending, we are subject to a number of risks, including:
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the diversion of management and employee attention from our day-to-day business, which impacts our ability to operate our business in the ordinary course and generate revenues;
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the loss of employees who may depart due to their concern about losing their jobs following the Asset Sale or a shift in loyalty of employees of the Company who see the Buyer as their de facto employer even before the consummation of the Asset Sale; and
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our inability to respond effectively to competitive pressures, industry developments and future opportunities.
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The occurrence of any of these events individually or in combination could materially and adversely affect our business, financial condition and results of operations. We have also incurred substantial transaction costs in connection with the Asset Sale, and we will continue to do so until the consummation of the Asset Sale. Following the consummation of the Asset Sale, we will continue to incur substantial operating expenses to comply with our obligations to perform transition services pursuant to the terms of the asset purchase agreement.
The Asset Purchase Agreement limits our ability to pursue alternatives to the Asset Sale.
The Asset Purchase Agreement contains provisions that make it substantially more difficult for us to sell the Company’s assets to a party other than the Buyer. Specifically, we agreed not to solicit any acquisition proposals until the date of closing or the proper termination of the Asset Purchase Agreement except that, in response to a superior proposal or a highly material intervening event, our board may, among other actions, withdraw or materially modify its recommendation contained in this proxy statement to adopt the Asset Purchase Agreement or recommend the adoption of an alternative acquisition proposal, if our board concludes in good faith (after consultation with outside legal and financial advisors) that the failure to take such action would reasonably be expected to cause our board to breach its fiduciary duties under applicable law.
The failure to consummate the Asset Sale may materially and adversely affect our business, financial condition and results of operations.
The Buyer’s obligation to close the Asset Sale is subject to a number of conditions, including our stockholders’ approval of the Asset Sale Proposal. We cannot control some of these conditions and we cannot assure you that they will be satisfied or that the Buyer will waive any that are not satisfied. If the Asset Sale is not consummated, we may be subject to a number of risks, including the following:
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we may not be able to identify an alternate transaction, or if an alternate transaction is identified, such alternate transaction may not result in an equivalent price to what is proposed in the Asset Sale;
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the trading price of our common stock may decline to the extent that the then current market price reflects a market assumption that the Asset Sale will be consummated;
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our relationships with our customers, suppliers and employees may be damaged beyond repair and the value of our assets will likely significantly decline; and
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The occurrence of any of these events individually or in combination will likely materially and adversely affect our business, financial condition and results of operations, cause the market value of our common stock to significantly decline or become worthless and force us to file for bankruptcy protection, liquidate and windup our operations.
The failure to consummate the Asset Sale by the prescribed deadline will likely result in the Asset Sale being abandoned.
Either the Buyer or the Company may terminate the Asset Purchase Agreement without penalty if (i) our stockholders do not approve the Asset Sale Proposal or (ü) if the Asset Sale is otherwise not completed by September 2, 2019 (unless such deadline is missed due to a breach by the party seeking termination of a representation, warranty, covenant or agreement in the Asset Purchase Agreement). In the event the Asset Purchase Agreement is terminated, the potential adverse effects from failing to consummate the Asset Sale discussed above would be implicated.
Our executive officers and directors may have interests in the Asset Sale other than, or in addition to, the interests of our stockholders generally.
Members of our board of directors and our executive officers may have interests in the Asset Sale that are different from, or are in addition to, the interests of our stockholders generally. Our board of directors was aware of these interests and considered them, among other matters, in approving the Asset Purchase Agreement.
We will no longer be an operating company following the closing of the Asset Sale.
If the stockholders approve the Asset Purchase Agreement and we complete the Asset Sale, we intend to cease to do business and intend to not engage in any business activities except for dealing with post-closing matters (in the event the Asset Sale is consummated) and for the purpose of liquidating our remaining assets, paying any debts and obligations, distributing the remaining assets to stockholders, and doing other acts required to liquidate and wind up our business and affairs. We will pay or make provision for payment of our known or reasonably ascertainable liabilities that have been incurred or are expected to be incurred prior to liquidation. After that, we will distribute the remaining assets to our stockholders in proportion to their respective stockholder interest in the Company. In considering how to vote on the Asset Sale Proposal, stockholders should not assume that they will receive any distributions from the Company.
The tax treatment of the Asset Sale or any liquidating distributions may vary from stockholder to stockholder, and the discussions in this proxy statement regarding such tax treatment are general in nature.
You should consult your own tax advisor instead of relying on the discussions of tax treatment in this proxy statement for tax advice.
We have not requested a ruling from the Internal Revenue Service (“IRS”) with respect to the anticipated tax consequences of the Asset Sale, and we will not seek an opinion of counsel with respect to the anticipated tax consequences of the Asset Sale or any liquidating distributions. If any of the anticipated tax consequences described in this proxy statement proves to be incorrect, the result could be increased taxation at the corporate and/or stockholder level, thus reducing the benefit to our stockholders and us from the liquidation and distributions. Tax considerations applicable to particular stockholders may vary with and be contingent upon the stockholder’s individual circumstances.
The recent resignation of Jordan Hoffner as our Chief Executive Officer may affect our ability to successfully close the Asset Sale.
Jordan Hoffner resigned as our Chief Executive Officer on May 3, 2019. This may affect our ability to successfully close the Asset Sale, the failure of which may materially and adversely affect our business, financial condition and results of operations.
We may be subject to securities litigation, which is expensive and could divert our attention.
We may be subject to securities class action litigation in connection with the Asset Sale. Securities litigation against us could result in substantial costs and divert our management’s attention from closing the Asset Sale, which could harm our business and increase our expenses, which could decrease the amount available for distribution to our stockholders.
Following consummation of the Asset Sale, we may no longer be required to file reports with the SEC.
We may file a notice terminating our reporting obligations under the Exchange Act following completion of the Asset Sale. Once effective, we may no longer be required to file any annual, quarterly or other current reports with the SEC. If we are no longer required to file reports with the SEC, stockholders will have very little public information available about us and our operations which will further affect the trading and liquidity of our Common Stock.
Existing stockholders may experience significant dilution from the issuance of our
C
ommon
S
tock pursuant to our recently issued convertible notes
, Series A Preferred Stock, and warrants
.
As of July 1, 2019, we have $845,000 in convertible notes issued as part of a bridge note financing. These notes will convert at a discount into shares of Common Stock upon a qualified financing by the Company of at least $1 million. The conversion price will equal to 70% of the price per share paid in the qualified financing if such financing occurs within four months from the date of the Securities Purchase Agreement, or 70% less 2% per each month after the fourth month anniversary; provided however that the Conversion Price will never be less than the greater of (A) sixty percent (60%) of the purchase price paid in the qualified financing and (B) the price per share paid by investors in the most recently consummated offering of the Company’s Common Stock, or $0.0124 per share, the conversion price in the Series A Mandatorily Convertible Preferred Private Placement, if the financing occurs more than four months after the date of the Securities Purchase Agreement. The issuance and sale of our Common Stock to these bridge note holders for any conversions may have a dilutive impact on our shareholders.
As of July 1, 2019, we have $118,899 in convertible notes from related parties. These notes bear a 10% interest rate and are payable on June 30, 2019. In addition, 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.
In addition, if we fail to close the Asset Purchase Agreement or breach the term sheet related to such Asset Purchase Agreement, the $500,000 advanced by PubLife, LLC will convert into a senior secured convertible promissory note, which note would bear interest and be due 90 days from issue and at the election of the PubLife, the outstanding principal amount and all accrued unpaid interest on the note would be convertible into fully paid and non-assessable shares of the our Common Stock at a price per share equal to $0.03.
Our
stock has been
,
and will likely continue to be
,
subjected to substantial price and volume fluctuations due to a number of factors,
many of which
are
beyond our control and
which
may prevent our
stockholders from reselling Common Stock at a profit
.
The securities markets can experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could affect the market price of our shares of Common Stock, regardless of our operating performance. In addition, our stock is thinly traded. Even a few transactions, whether in response to disappointment in our expected operating results or for any other reason, could cause the market price of our shares of Common Stock to decrease significantly.
We depend
on
advertising sales for
substantially all of
our revenues, and our
inability to maintain or increase adv
ertising revenues w
ould harm our
business
.
Our ability to maintain or increase our advertising revenues depends upon many factors, including whether we will be able to:
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attract and maintain additional visitors to our Website and increase brand awareness;
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sell and market our Website or other rich media advertisements;
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maintain a significant number of sellable impressions generated from Website visitors available to advertisers;
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increase the dollar amount of our advertising orders;
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improve our Website’s technology for serving advertising;
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handle temporary high-volume traffic spikes to our Website;
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measure accurately the number and demographic characteristics of our users; and
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attract and retain key sales personnel.
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As more of our users access our Website using mobile devices rather than PCs, if we do not continue to grow our mobile users and revenue, our business will be adversely impacted.
Internet users increasingly use mobile devices rather than PCs to access the Internet. Approximately 75% of our monthly users are now visiting our Website on mobile devices. As mobile platforms encompass a larger share of our readers, our ability to grow advertising revenue is increasingly dependent on our ability to generate revenue from advertisements displayed on mobile devices. While we plan to continue to devote technology resources to support our mobile browser product and advertising products, if our mobile browser product and advertising products for mobile devices do not attract and retain users and advertisers to generate mobile revenue, our operating and financial results will be adversely impacted. We are dependent upon our products operating on mobile operating systems we do not control. The mobile phone manufacturer and its operating systems might block access to our Website or make it hard for users to find our Website through their devices, or block certain advertisements or charge us for delivery of advertisements, all of which would harm our operations and suppress revenue potential.
Technologies and software applications could block our advertisements, which could harm our operating results.
Technologies and software applications have been developed for PC and mobile devices that can block or allow users to opt out of display advertising, delete or block cookies used to deliver advertising, or move advertising to less optimal placements to suppress view-ability. Most of our advertising revenue is derived from display or video advertisements on our Website. As a result, ad-blocking technologies or software could reduce the number of display or video advertisements, which could result in decreased revenue.
If we cannot increase referrals from social media platforms, our ability to attract new unique visitors and maintain the engagement of existing unique visitors could be adversely affected.
As the behavior of internet consumers continues to change, distribution of our content, products and services via traditional methods may become less effective, and new distribution strategies may need to be developed. Consumers are increasingly using social networking sites, such as Facebook and Twitter, to communicate and to acquire and disseminate information. As consumers migrate towards social networks, we continue to build social elements into our content, products and services in order to make them available on social networks and to attract and engage consumers on our Website and mobile platforms. There is no guarantee that we will be able to successfully integrate our content with such social networking or other new consumer trends. Even if we are able to distribute our content, products and services effectively through social networking or other new or developing distribution channels, this does not assure that we will be able to attract new unique visitors or generate additional pageviews that can be monetized by our advertising sales team.
Hackers may attempt to penet
rate our
security system
and
online
security breaches could harm our
business
.
Consumer and supplier confidence in our Website depends on maintaining strong security features. Experienced programmers or “hackers” have penetrated sectors of our systems, and we expect that these attempts will continue to occur from time to time. To our knowledge, there has been no outward harm to us or our users as a result of hacking attempts. Furthermore, Salon has engaged the services of a third-party web application security-testing company, which conducts regular comprehensive searches for any vulnerabilities that may exist, allowing us to address and fix any issues before they can be exploited. This minimizes the risk of damage; however, because a hacker who is able to penetrate network security could misappropriate proprietary information or cause interruptions in our products and services, we may have to expend significant capital and resources to protect against or to alleviate problems caused by hackers. Additionally, we may not have a timely remedy against a hacker who is able to penetrate our network security. Such security breaches could materially affect our operations, damage our reputation and expose us to risk of loss or litigation. In addition, the transmission of computer viruses resulting from hackers or otherwise could expose us to significant liability. Our insurance policies may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties with whom we have relationships.
We
must promote the Salon brand to attract and retain users
,
advertisers and strategic partners
.
The success of the Salon brand depends largely on our ability to provide high quality content and services. If Internet users do not perceive our existing content and services to be of high quality, or if we introduce new content and services or enter into new business ventures that are not favorably perceived by users, we may not be successful in promoting and maintaining the Salon brand. Any change in the focus of our operations creates a risk of diluting our brand, confusing consumers and decreasing the value of our user base to advertisers. If we are unable to maintain or grow the Salon brand, our business would be severely harmed.
We
must hire, integrate and/or retain qu
alified personnel to support our
business plans
.
Our success significantly depends on key personnel. In addition, because our users must perceive the content of our Website as having been created by credible and notable sources, our success also depends on the name recognition and reputation of our editorial staff. Due to our history of losses, we may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. We may be unable to retain our current key employees or attract, integrate or retain other qualified employees in the future. If we do not succeed in attracting new personnel or retaining and motivating our current personnel, our business would be harmed.
Our success depends on our key personnel, including our executive officers, and the loss of key personnel, including our
CEO
, could disrupt our business
.
Our success greatly depends on the continued contributions of our senior management and other key sales, marketing and operations personnel. While we have employment agreements with some key management, these employees may voluntarily terminate their employment at any time. We may not be able to successfully retain existing personnel or identify, hire and integrate new personnel. We do not have key person insurance policies in place for these employees.
We
may expend sign
ificant resources to protect our
intellectual property rights or to defend claims of infringemen
t by third parties, and if we are not successful we
may lose rights to use significant material or be required to pay significant fees
.
Our success and ability to compete are dependent on our proprietary content. We rely exclusively on copyright law to protect our content. While we actively take steps to protect our proprietary rights, these steps may not be adequate to prevent the infringement or misappropriation of our content, which could severely harm our business. We also license content from various freelance providers and other third-party content providers. While we attempt to ensure that such content may be freely licensed to us, other parties may assert claims of infringement against us relating to such content.
We may need to obtain licenses from others to refine, develop, market and deliver new services. We may not be able to obtain any such licenses on commercially reasonable terms or at all or rights granted pursuant to any licenses may not be valid and enforceable.
In April 1999, we acquired the Internet address www.salon.com. Because www.salon.com is the address of the main home page to our Website and incorporates Salon’s name, it is a vital part of our intellectual property assets. We do not have a registered trademark on the address, and therefore it may be difficult for us to prevent a third party from infringing on our intellectual property rights to the address. If we fail to adequately protect our rights to the Website address, or if a third party infringes our rights to the address, or otherwise dilutes the value of www.salon.com, our business could be harmed.
Our
technology development efforts may not be successful in im
proving the functionality of our
network, which could result in reduced t
raffic on our
Website or reduced advertising revenues
.
We are constantly upgrading our technology to manage our Website. During the last several years, we redesigned our Website homepage and vertical sections. In addition, we are creating new technology for new products that we expect to launch on an ongoing basis. If these systems do not work as intended, or if we are unable to continue to develop these systems to keep up with the rapid evolution of technology for content delivery, our Website may not operate properly, which could harm our business. Additionally, software product design, development and enhancement involve creativity, expense and the use of new development tools and learning processes. Delays in software development processes are common, as are project failures, and either factor could harm our business. Moreover, complex software products such as our online publishing platform frequently contain undetected errors or shortcomings, and may fail to perform or scale as expected. Although we have tested and will continue to test our systems, errors or deficiencies may be found in these systems that could adversely impact our business.
We rely on third parties to provide the technologies necessary to deliver content, advertising and services to our users, and any change in the licensing terms, costs, availability, or acceptance of these formats and technologies could adversely affect our business
.
We rely on third parties to provide the technologies that we use to deliver content, advertising, and services to our users. There can be no assurance that these providers will continue to license their technologies or intellectual property to us on reasonable terms, or at all. Providers may change the fees they charge users or otherwise change their business models in a manner that slows the widespread acceptance of their technologies. In order for our services to be successful, there must be a large base of users of the technologies to deliver our content, advertising, and services. We have limited or no control over the availability or acceptance of those technologies, and any change in licensing terms, costs, availability, or user acceptance of these technologies could adversely affect our business.
We
may be held liable for content or
third-party
links on our
Website or content distributed to third parties
.
As a publisher and distributor of content over the Internet, including links to third-party websites that may be accessible through our Website, or content that includes links or references to a third-party’s website, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature, content or ownership of the material that is published on or distributed from our Website. These types of claims have been brought, sometimes successfully, against online services, websites and print publications in the past. Other claims may be based on errors or false or misleading information provided on linked websites, including information deemed to constitute professional advice such as legal, medical, financial or investment advice. Other claims may be based on links to sexually explicit websites. Although we carry general liability and media insurance, our insurance may not be adequate to indemnify us for all liabilities imposed. Any liability that is not covered by our insurance or is in excess of our insurance coverage could severely harm our financial condition and business. Implementing measures to reduce our exposure to these forms of liability may require us to spend substantial resources and limit the attractiveness of our service to users.
Our
systems may fail due to natural disasters, telecommunications failures and other events
,
any of which would limit user traffic
.
Our Website, Salon.com, and content management system run on cloud computing hosted by Amazon Web Services, which are in facilities located in Los Angeles and Virginia. Any disruption of Amazon’s cloud computing platform could result in a service outage. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, supplier failure to meet commitments, and similar events could damage these systems and cause interruptions in our services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting our Website and could cause advertisers to terminate any agreements with us. In addition, we could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable. If any of these circumstances occurred, our business could be harmed. Our insurance policies may not adequately compensate us for losses that may occur due to any failures of or interruptions in our systems. We do not presently have a formal disaster recovery plan.
Our Website must accommodate a high volume of traffic and deliver frequently updated information. It is possible that we will experience systems failures in the future and that such failures could harm our business. In addition, our users depend on Internet service providers, online service providers and other website operators for access to our Website. Many of these providers and operators have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Any of these system failures could harm our business.
Privacy concerns could impair
our
busines
s
.
We have a policy against using personally identifiable information obtained from users of our Website and services without the user’s permission. In the past, the Federal Trade Commission has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy. If we use personal information without permission or in violation of our policy, we may face potential liability for invasion of privacy for compiling and providing information to our corporate customers and electronic commerce merchants. In addition, legislative or regulatory requirements may heighten these concerns if businesses must notify Internet users that the data may be used by marketing entities to direct product promotion and advertising to the user. Other countries and political entities, such as the European Union, have adopted such legislation or regulatory requirements. The United States may adopt similar legislation or regulatory requirements in the future. If consumer privacy concerns are not adequately addressed, our business, financial condition and results of operations could be materially harmed.
Due to the volatility of the price of our Common Stock, w
e may be the target of securities litigation, which is costly and time-consuming to defend
.
The price of our Common Stock has experienced volatility in the past, and may continue to do so in the future. In the past, following volatility in the price of a company’s securities, securities holders have instituted class action litigation against such company. Many companies have been subjected to this type of litigation. If the market value of our Common Stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the merits or outcome, we could incur substantial legal costs and our management’s attention could be diverted, causing our business, financial condition and operating results to suffer. To date, we have not been subject to such litigation.
We have secured debt outstanding. If we were unable to service our debt, our business would be adversely affected.
We currently have secured notes issued to certain of our directors in the amount of approximately $118,899 which is due on June 30, 2019. If we were unable obtain an extension or if we fail to pay our debt obligations in a timely fashion, we will be in default under these secured notes. If we default on these notes, such could exercise its rights and remedies under the secured notes, which could include seizing all of our assets. Any such action would have a material adverse effect on our business and prospects.
Our quarterly operating results are volatile and may adversely affect the price of our Common Stock.
Our future revenues and operating results are likely to fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control, and any of which could severely harm our business. These factors include:
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our ability to attract and retain advertisers;
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our ability to attract and retain a large number of users;
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our ability to increase referrals from our social media presence;
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the introduction of new websites, services or products by us or by our competitors;
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our ability to maximize our mobile presence;
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the timing and uncertainty of our advertising sales cycles;
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the mix of advertisements sold by us or our competitors;
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economic and business cycles;
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our ability to attract, integrate and retain qualified personnel;
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technical difficulties or system downtime affecting the Internet generally or the operation of our Website; and
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the amount and timing of operating costs.
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Due to the factors noted above and the other risks discussed in this section and throughout this Annual Report on Form 10-K (the “Form 10-K”), one should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that some future periods’ results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of our Common Stock may decline.
Our internal controls over financial reporting were determined to be ineffective at March 31, 2019 and we identified material weaknesses in our internal controls over financial reporting as of March 31, 2019, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. As a result of developing, improving and expanding our core information technology systems as well as implementing new systems to support our sales, engineering, supply chain and manufacturing activities, all of which require significant management time and support, we may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. For the period ended March 31, 2019, we identified material weaknesses in our internal control over financial reporting. As such we were unable to assert that our internal controls are effective. This could result in the loss of investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.
We have no immediate plans to pay dividends.
We have not paid any cash dividends to date and do not expect to pay dividends for the foreseeable future. We intend to retain earnings, if any, as necessary to finance the operation and expansion of our business.
There is a limited trading market for our
C
ommon
S
tock.
Our Common Stock is traded on the OTC Markets (QB Marketplace Tier) under the symbol “SLNM.” During the 30-days prior to filing of this Report, the average daily trading volume of our common stock was approximately 5,974 shares. There has been limited trading activity in our stock recently, and when it has traded, the price has fluctuated widely. We consider our Common Stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the Common Stock. A consistently active trading market for our stock may not develop at any time in the future. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our stock.
Our
C
ommon
S
tock is considered to be a “penny stock” and, as such, the market for our common stock may be further limited by certain SEC rules applicable to penny stocks.
As long as the price of our Common Stock remains below $5.00 per share or we have net tangible assets of $2,000,000 or less, our shares of Common Stock are likely to be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations make it more difficult for brokers to sell our shares of our Common Stock and limit the liquidity of our securities.
Transfers of our securities may be restricted by virtue of state securities “blue sky” laws which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.
Transfers of our Common Stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our Common Stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue-sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our Common Stock. Investors should consider the secondary market for our securities to be a limited one.
W
e have the ability to issue additional shares of our
C
ommon
S
tock and shares of
P
referred
S
tock without asking for stockholder approval, which could cause your investment to be diluted.
Our Certificate of Incorporation authorizes the Board to issue up to 900,000,000 shares of common stock and up to 5,000,000 shares of Preferred Stock. The power of the Board to issue shares of Common Stock, Preferred Stock or warrants or options to purchase shares of common stock or Preferred Stock is generally not subject to stockholder approval. Accordingly, any additional issuance of our Common Stock, or Preferred Stock that may be convertible into Common Stock, may have the effect of diluting your investment.
By issuing
P
referred
S
tock, we may be able to delay, defer or prevent a change of control.
Our Certificate of Incorporation permits us to issue, without approval from our shareholders, a total of 5,000,000 shares of Preferred Stock. Our Board can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of Preferred Stock and to fix the number of shares constituting any series and the designation of such series. It is possible that our Board, in determining the rights, preferences and privileges to be granted when the Preferred Stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our Common Stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our Common Stock.
Provisions in Delaware law and
our
charter, stock option agreements and offer letters to executive officers may prevent or delay a change of control
.
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent a Delaware corporation from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s assets unless:
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the Board approved the transaction in which the stockholder acquired 15% or more of the corporation’s assets;
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after the transaction in which the stockholder acquired 15% or more of the corporation’s assets, the stockholder owned at least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
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on or after such date, the merger or sale is approved by the Board and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.
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A Delaware corporation may opt out of the Delaware anti-takeover laws if its Certificate of Incorporation or bylaws so provide. We have not opted out of the provisions of the anti-takeover laws. As such, these laws could prohibit or delay mergers or other takeovers or changes of control of Salon and may discourage attempts by other companies to acquire us.
Our Certificate of Incorporation and bylaws include a provision relating to special meetings of our shareholders that may deter or impede hostile takeovers or changes of control or management. Special meetings of stockholders may be called only by the Board pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) or by the holders of not less than 10% of all of the shares entitled to cast votes at the meeting. This provision may have the effect of delaying or preventing a change of control.
In addition, employment agreements with certain executive officers provide for the payment of severance and acceleration of the vesting of options and restricted stock in the event of termination of the executive officer following a change of control of Salon. These provisions could have the effect of discouraging potential takeover attempts.