Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties, including but not limited to statements regarding our strategy, plans, objectives, expectations, intentions, financial performance, cash-flow breakeven timing, financing, economic conditions, Internet advertising market performance, social media and other non-web opportunities and revenue sources. Although Salon believes its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth above and in Salon’s public filings. Salon assumes no obligation to update any forward-looking statements except as required by law.
Salon’s actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors That May Affect Salon’s Future Results and Market Price of Stock." In this report, the words “anticipates,” “believes,” “expects,” “estimates,” “intends,” “future,” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q should be considered in conjunction with the audited financial statements, which are included in Salon’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019 (the “Fiscal 2019 Annual Report”) filed with the Securities and Exchange Commission. Matters of interest therein include, but are not limited to, our disclosure of critical accounting policies.
Overview
Salon is a technology-based advertising media business that wholly owns and operates an online news website, salon.com (“Salon.com”). Our award-winning website is committed to fearless journalism and combines original investigative stories and provocative personal essays along with quick-take commentary, articles, podcasts and original video about politics, culture, entertainment, sustainability, innovation, technology and business.
We have a history of significant losses and expect to incur a loss from operations for our fiscal year ending March 31, 2019 and potentially for future years. M&K CPA’s, PLLC, Salon’s independent registered public accounting firm for the fiscal years ended March 31, 2019 and 2018, included a “going-concern” audit opinion on the financial statements for those years. The audit opinions report substantial doubt about our ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability. As a result of the factors noted in the going-concern opinions, our stock price and investment prospects have been and will continue to be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations. In March 2019, we entered into an asset purchase agreement to sell substantially all of our assets. Upon consummation of this transaction, if consummated, we will cease to be an operating company.
We are in the midst of satisfying the conditions to close on the Asset Purchase Agreement discussed under “Material Agreements entered into during Fiscal Year 2020” below. We expect to complete such transaction in the last week of August 2019. Following the Asset Sale, if consummated, 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
During the quarter ended June 30, 2019, we continued to execute our business strategy to refine and broaden our editorial products in order to attract an engaged audience and premium advertising, which would increase revenues. We face increased competition, however, from both new and larger websites for traffic and online advertising campaigns, while industry trends continue a shift toward increased use of agency and software-based approaches to buying online advertising. As a result, we have re-focused our advertising sales to rely on the rapidly growing programmatic advertising business. Through our programmatic advertising efforts, we directly sell audience packages based on real-time advertising demand and engage third-party agencies to sell advertisements on our Website through programmatic advertising open marketplaces, thereby placing less emphasis on a traditional media sales effort. The highlights of our June 2019 quarter are listed below:
Highlights from Quarter ended
June 30, 2019
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Net revenues increased 17% to $0.7 million in the quarter ended June 30, 2019 versus $0.6 million in the same period in 2018. The increase in revenue was a result of a continued significant industry shift in online advertising from advertising sold by a direct sales team to advertising increasingly being sold through software-based “programmatic” technology. Our advertising sold through networks that access these programmatic buys accounted for 79% of our advertising revenues for the June 2019 quarter. We have been making changes to our advertising footprint to capture the greater programmatic opportunity for our display and video advertising inventory and will continue to focus our efforts to allow better management of our advertising inventory and targeting for our advertisers.
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Net loss for the quarter ended June 30, 2019 was $0.4 million, a 60% decrease from $1.0 million for the quarter ended June 30, 2018. This included a net loss from continuing operations for the quarter ended June 30, 2019 of $0.5 million, a 29% decrease from $0.7 million for the quarter ended June 30, 2018. Net income from discontinue operations for the quarter ended June 30, 2019 was $0.2 million compared to a net loss from discontinued operations of $0.2 million for the quarter ended June 30, 2018.
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Average unique monthly visitors to the Salon.com Website during the quarter ended June 30, 2019 was 6.3 million, a 13% increase compared to the quarter ended March 31, 2019, and a decrease of 19% compared to the quarter ended June 30, 2018, according to data compiled by Google Analytics. Our focus on expanding the tone of our news coverage to attract more millennials and our efforts in the food and culture categories attributed to the quarter over quarter increase, along with the ongoing strategy of growing quality traffic, in order to maximize our ability to monetize our page views with higher CPM video and display advertising. We attribute the year over year decreased traffic to a combination of events, including the changes in the algorithms used by Facebook to promote news content, changed Google search algorithms which led to lower referral traffic from Facebook and Google, respectively, increased competition from other sites for breaking political news and reduced referral traffic from other major websites like Yahoo and Twitter.
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We have continued to roll out our strategy to produce original video content focused on news, politics, and entertainment under the banner of
Salon TV
,
Salon Talks
and
Salon Stage
. Our goal is to add high quality diversified content to our Website, and to attract premium video advertising that commands higher CPMs as compared to display advertising. Featured guests on
Salon Talks
this quarter have included Oscar winner Aaron Sorkin, Emmy winners Paula Pell and Sherri Shepherd, Nobel Prize winner Joseph Stiglitz, MSNBC’s Joy Ann Reid, Rep. Ted Lieu, Washington state Gov. and 2020 presidential candidate Jay Inslee, and a series of acclaimed chefs, among others.
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The Salon Premium subscription program that removes advertisement for paying users, as well as unlocks exclusive content to them, has seen impressive growth year over year. In the quarter ended June 30, 2019, subscription revenues had increased 114% from the quarter ended June 30, 2018. Subscription revenues had decreased 28% from the quarter ended March 31 2019, however a boom in subscription growth was experience in the month of February 2019 when new premium content was offered for the first time to our audience.
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The quarter ended June 30, 2019 featured great journalism — including original reporting and analysis — as Salon covered in-depth the top stories in news, politics and entertainment. Our daily coverage of the 2020 Democratic presidential primary campaigns, the Trump Administration, media analysis, Special Counsel Robert Mueller’s investigation and report, Senate Majority Leader Mitch McConnell, and the spring TV and blockbuster early-summer movie season generated the most interest. Original investigative reports by Salon exposed a culture of sexual harassment and assault cover-ups at the annual Burning Man festival, and put public pressure on a stalled Warner Brothers internal investigation into sexual misconduct by a TV host to finally conclude. We have also continued our broadened, thoughtful and smart coverage on relationships, lifestyle, food and health that have been popular with our users.
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Social media and referral traffic from news aggregation platforms and apps continue to be major drivers of traffic, with healthy growth shown in these Channels. Social Media & Referral traffic accounted for 37% of website visitors in the quarter ended June 30, 2019, an increase of 4% over the quarter ended March 31, 2019, and an increase of 20% beyond the Social Media & Referral traffic in the quarter ended June 30, 2018. Expanded partnerships with distribution and syndication partners has contributed to this positive trend. Content shared to social media by our editorial team is strategically set with different imagery and headlines for each platform in an effort to maximize click through traffic.
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Mobile traffic accounted for 67% of all pageviews in the quarter ended June 30 2019, which is an increase of 7% in mobile traffic from the quarter ended March 31 2019, and a 24% increase in mobile traffic from the quarter ended June 30, 2018. We have striven to increase the load time of our site, through intensive efforts to reduce bloating in the website code. We also carefully adjusted our monetization strategy on mobile to be most appropriate for those devices, which lead to a faster site and a better mobile experience for our users.
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We continually work toward leaner, more efficient technological systems through automation, improved architecture and adoption of emerging best practices.
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Material Agreements entered into during Fiscal
Year
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Asset Purchase Agreement
On March 6, 2019, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Salon.com, LLC (“Buyer”) under which we agreed to sell substantially all of our assets (the "Asset Sale"), including all pertinent intellectual property rights comprising the Company’s business of owning, operating and publishing the website known as Salon.com, (the “Business”), but excluding our cash, cash equivalents and marketable securities and certain contracts and right related to those contracts and tax refunds and insurance policies and rights related to excluded assets, to the Buyer for an aggregate Purchase Price of $5 million payable plus the amount of the Earn-Out Payment (as described below) and the assumption of certain assumed liabilities, all pursuant to the terms of the Asset Purchase Agreement. The purchase price is payable in cash as follows: (i) $550 in payable in cash at closing; (ii) $100 shall be deposited with the Escrow Agent, which amount shall be released to us in accordance with the terms of the Asset Purchase Agreement; (iii) $500 of which was previously paid to the Company as a deposit concurrent with execution of the term sheet for the Asset Purchase Agreement (the "Deposit") and (iv) $3,850 via issuance of a 10% secured promissory note, which note shall be paid in 2 equal installments on the 12 month and 24 month anniversary of the closing date. This note shall be secured by all of the assets being sold to Buyer under the Asset Purchase Agreement.
First Amendment to Asset Purchase Agreement
On April 15, 2019, we entered into a First Amendment to Asset Purchase Agreement ("First Amendment") with Buyer. The primary purpose of the First Amendment was to amend the payment terms under the Technology Agreement and the Advertising Agreement as set forth below:
(a) for the month of March 2019: (i) ad fees under the Advertising Agreement shall be payable at 6.5%, and (ii) tech management fees payable pursuant to the Technology Agreement shall be $5 plus costs per the Technology Agreement;
(b) for the month of April 2019: (i) ad fees under the Advertising Agreement shall be payable at 6.5%, and (ii) tech management fees payable pursuant to the Technology Agreement shall be $10 plus costs per the Technology Agreement; and
(c) for the month of May 2019 and for each month thereafter: (i) ad fees under the Advertising Agreement shall be payable at 6.5%, (ii) tech management fees payable pursuant to the Technology Agreement shall be $10 plus costs per the Technology Agreement and (iii) an amount equal to 10% APR applied to the Deposit.
We also amended Section 10.9 of the Asset Purchase Agreement to include the term sheet related to the acquisition for the documents related to the entire agreement of the parties.
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.
Sources of Revenue from Discontinued Operations
Most of Salon’s revenues were derived from advertising from the sale of promotional space on its Website, which as a result of our executing the Asset Purchase Agreement have been characterized as “Discontinued Operations” in our financial statements. The sale of promotional space is generally for less than ninety days in duration. Advertisers pay for advertising on a CPM basis. The primary factors in our ability to increase our advertising revenues in future periods are the addition of higher CPM ad products, such as pre-roll video, and growth in our audience. Attracting more unique visitors to our Website is important because these returning users generate additional page views, and each page view becomes a potential platform for advertisements. Advertising comprises banners, video, rich media and other interactive ads. CPMs vary by platform and CPMs for mobile have been less than those for desktop; however, in the recent quarter they have been increasing. Videos and sponsored content on mobile devices continue to grow in popularity and can demand a higher CPM. We believe that continuing to add videos and sponsored content to our mobile platform and improving and optimizing the platform’s design will help increase revenues from our mobile platform.
In addition, Salon generates revenue from referring users to third-party websites, and we also generate nominal revenue from the licensing of content that previously appeared in our Website.
Continuing Operating Expenses
General and administrative expenses consist primarily of salaries and related personnel costs, accounting and legal fees, rents, and other fees associated with operating a publicly traded company. Certain shared overhead expenses are allocated to other departments.
Interest expense includes accrued interest on our outstanding debt and non-cash charges from the beneficial conversion feature of convertible debt.
In accordance with Accounting Standards Codification (“ASC”) 718, “Stock Compensation” (ASC 718), our expenses include stock-based compensation expenses related to stock option and restricted stock grants to employees, non-employee directors and consultants. These costs are included in the various departmental expenses.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires Salon to utilize accounting policies and make estimates and assumptions that affect our reported amounts. Salon’s significant accounting policies are described in Note 2 to the financial statements in our Fiscal 2019 Annual Report. We believe accounting policies and estimates related to revenue recognition and accounting for debt and equity are the most critical to our financial statements. Future results may differ from current estimates if different assumptions are used or different conditions were to prevail.
Revenue Recognition
We recognize advertising revenue from a diverse mix of advertising methods including display advertisements, where revenue is dependent upon the number of advertising impressions delivered; native advertisements, which are advertisements created to match the form and function of the platform on which they appear; or sponsored content.
We generate advertising revenue from advertisements displayed on our Website. Advertising revenue comprised 94% and 77% of our revenues for the three months ended June 30, 2109 and June 30, 2018, respectively. Salon’s advertising revenue is principally dependent on the number of visits to our Website and the corresponding advertisement unit rates. Articles, videos and other forms of content generate advertising revenue from a diverse mix of advertising methods including display advertisements, where revenue is dependent upon the number of advertising impressions delivered; pre-roll video advertisements, where revenue is dependent on the number of video views; native advertisements, which are advertisements created to match the form and function of the platform on which they appear and sponsored content, in which advertisers pay for adjacency to specific content. In the past two years, industry trends have shifted toward increased use of agency and software-based approaches to buying online advertising. As a result, we have re-focused our advertising sales to rely on the rapidly growing programmatic advertising business in which we directly sell audience packages based on real-time advertising demand and engage third-party agencies to sell advertisement on our Website through programmatic advertising open marketplaces, and we place less emphasis on a traditional media sales effort.
Stock-Based Compensation
Salon accounts for stock-based compensation under ASC 718 and recognize the fair value of stock awards on a straight-line basis over the requisite service period of the award, which is the standard vesting term of four years.
We recognized stock-based compensation expense of $139 and $390 during the three months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, we had an aggregate of $333 of stock-based compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. We currently expect this stock-based compensation balance to be amortized as follows: $142 during the remainder of fiscal 2020; $168 during fiscal 2021; and $23 during fiscal 2022. The expected amortization reflects only outstanding stock option awards as of June 30, 2019. We expect to continue to issue stock-based awards to our employees in future periods.
The full impact of stock-based compensation in the future is dependent upon, among other things, the timing of when we hire additional employees, the effect of new long-term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock-awards granted, achievement of specific goals for performance-based grants, the fair value of the stock awards at the time of grant and the tax benefit that we may or may not receive from stock-based expenses. Additionally, stock-based compensation requires the use of an option-pricing model to determine the fair value of stock option awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards.
Results of Operations for the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
Continued Operations
General and administrative
General and administrative expenses decreased 29% to approximately $0.5 million for the three months ended June 30, 2019 from approximately $0.7 million for the three months ended June 30, 2018. The overall decrease was mainly attributed to a decrease in non-cash stock-based compensation.
Interest expense
Interest expense increased 158% to approximately $0.1 million for the three months ended June 30, 2019 from approximately $0.04 million for the three months ended June 30, 2018. The increase was primarily attributed to the increase of non-cash charges from the amortization of the debt discount for stock warrants.
Discontinued Operations
Revenues
Revenues increased 17% to approximately $0.7 million for the three months ended June 30, 2019 from approximately $0.6 million for the three months ended June 30, 2018.
Advertising revenues increased 40% to approximately $0.7 million for the three months ended June 30, 2019 from approximately $0.5 million for the three months ended June 30, 2018. Direct advertisement sales were approximately 21% and programmatic advertisement sales were approximately 79% of total advertising revenue for the three months ended June 30, 2019.
Revenues from all other sources, mostly referral fees, decreased 50% to approximately $0.05 million for the three months ended June 30, 2019 from approximately $0.1 million for the three months ended June 30, 2018. The overall decreases were attributed to lower revenues from a renewed referral fee customer agreement.
Production and content
Production and content expenses decreased 8% to approximately $0.55 million for the three months ended June 30, 2019 from approximately $0.6 million for the three months ended June 30, 2018. The decrease was mainly attributed to personnel changes and a decrease in internet hosting and ad serving fees.
Sales and marketing
Sales and marketing expenses remained relatively flat at approximately $.008 for the three months ended June 30, 2019 and 2018.
Technology
Technology expenses decreased 65% to approximately $0.07 million for the three months ended June 30, 2019 from approximately $0.2 million for the three months ended June 30, 2018. The decrease was mainly attributed to personnel reductions.
Liquidity and capital resources
Net cash used in operations was approximately $0.2 million for the three months ended June 30, 2019. The principal use of cash during each of the quarters ended June 30, 2019 and 2018 was to meet the Company’s operating deficits.
Off-Balance-Sheet Arrangements and Contractual Obligations
Salon has an operating lease primarily for office space facilities, this operating lease was terminated as of June 30, 2019.