SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
 ________________
  FORM
10-Q
 
 [X]           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
the quarterly period ended June 30, 2009
 or
 
 [   ]           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
the transition period
from                to
 
 Commission
file number 0-26395
 
 SALON
MEDIA GROUP, INC.
 (Exact
name of Registrant as specified in its charter)
 
 Delaware
              94-3228750(State
      or other jurisdiction of
              (IRS
      Employerincorporation
      or organization)
              Identification
      Number)
 
 101
Spear Street, Suite 203
 San
Francisco, CA 94105
 (Address
of principal executive offices)
 
 (415)
645-9200
 (Registrant's
telephone number, including area code)
  Securities
registered pursuant to Section 12(b) of the Act:
 None
  Securities
registered pursuant to Section 12(g) of the Act:
 Common
Stock, $0.001 Par Value
 (Title
of Class)
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]  No [  ]
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
  Large
accelerated filer o   Accelerated
filer oNon-accelerated filer oSmaller reporting
company þ
  Indicate
by check mark whether the Registrant is a shell company as defined by Rule 12b-2
of the act.
 Yes [
]  No [X]
  The
number of outstanding shares of the Registrant's Common Stock, par value $0.001
per share, on August 7, 2009 was 2,021,276 shares.
 
 FORM
10-Q
 SALON
MEDIA GROUP, INC.
 INDEX
 PART
      I
                                  FINANCIAL
      INFORMATION
                                  PageNumberITEM
      1:
                                  Condensed
      Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of
      June 30, 2009 (unaudited) and March 31, 2009
                                  3Condensed
      Consolidated Statements of Operations for the three months ended June 30,
      2009 and 2008 (unaudited)
                                  4Condensed
      Consolidated Statements of Cash Flows for the three months ended June 30,
      2009 and 2008 (unaudited)
                                  5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                  6ITEM
      2:
                                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                  18ITEM
      3:
                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                  24ITEM
      4:
                                  Controls
      and Procedures
                                  24PART
      II
                                  OTHER
      INFORMATIONITEM
      1:
                                  Legal
      Proceedings
                                  25ITEM
      1A:
                                  Risk
      Factors
                                  25ITEM
      2.
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  35ITEM
      3.
                                  Defaults
      upon Senior Securities
                                  35ITEM
      4.
                                  Submission
      of Matters to a Vote of Security Holders
                                  35ITEM
      5.
                                  Other
      Information
                                  35ITEM
      6:
                                  Exhibits
                                  35Signatures
                                  36
   2
 
 PART
I:  FINANCIAL INFORMATION
 ITEM
1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SALON
      MEDIA GROUP, INC.CONDENSED
      CONSOLIDATED BALANCE SHEETS(in
      thousands, except share and per share
amounts)  June
      30,
                              
                              
                              March
      31,2009
                              
                              
                              2009Assets
                              
                              (Unaudited)Current
      assets:Cash
      and cash equivalents
                              
                              $
                              301
                              
                              
                              $
                              371Accounts
      receivable, net
                              
                              
                              562
                              
                              
                              
                              886Prepaid
      advertising rights
                              
                              
                              1,225
                              
                              
                              
                              -Prepaid
      expenses and other current assets
                              
                              
                              59
                              
                              
                              
                              53Total
      current assets
                              
                              
                              2,147
                              
                              
                              
                              1,310Property
      and equipment, net
                              
                              
                              404
                              
                              
                              
                              445Prepaid
      advertising rights
                              
                              
                              -
                              
                              
                              
                              1,225Goodwill
                              
                              
                              200
                              
                              
                              
                              200Other
      assets
                              
                              
                              150
                              
                              
                              
                              150Total
      assets
                              
                              $
                              2,901
                              
                              
                              $
                              3,330Liabilities
      and Stockholders' DeficitCurrent
      liabilities:Short-term
      borrowing
                              
                              $
                              1,800
                              
                              
                              $
                              1,250Accounts
      payable and accrued liabilities
                              
                              
                              1,313
                              
                              
                              
                              1,324Deferred
      revenue
                              
                              
                              452
                              
                              
                              
                              470Total
      current liabilities
                              
                              
                              3,565
                              
                              
                              
                              3,044Long-term
      liabilities:Convertible
      notes payable
                              
                              
                              2,612
                              
                              
                              
                              2,500Other
      long-term liabilities
                              
                              
                              243
                              
                              
                              
                              172Capital
      leases, less current portion
                              
                              
                              26
                              
                              
                              
                              34Total
      liabilities
                              
                              
                              6,446
                              
                              
                              
                              5,750Stockholders’
      deficit:Preferred
      stock, $0.001 par value, 5,000,000 sharesauthorized,
      9,467 shares issued and outstandingat
      June 30, 2009 and March 31, 2009 (liquidationvalue
      of $24,448 at June 30, 2009)
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, $0.001 par value, 30,000,000 sharesauthorized,
      2,021,276 shares issued and outstandingat
      June 30, 2009 and March 31, 2009
                              
                              
                              2
                              
                              
                              
                              2Additional
      paid-in-capital
                              
                              
                              98,694
                              
                              
                              
                              98,564Accumulated
      deficit
                              
                              
                              (102,241
                              )
                              
                              
                              (100,986
                              )Total
      stockholders' deficit
                              
                              
                              (3,545
                              )
                              
                              
                              (2,420
                              )Total
      liabilities and stockholders' deficit
                              
                              $
                              2,901
                              
                              
                              $
                              3,330
  The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 
 3
 SALON
      MEDIA GROUP, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(in
      thousands, except per share data)(Unaudited)  Three
      Months EndedJune
      30,2009
                    
                    
                    2008Net
      revenues
                    
                    $
                    989
                    
                    
                    $
                    1,907Operating
      expenses:Production
      and content
                    
                    
                    1,110
                    
                    
                    
                    1,354Sales
      and marketing
                    
                    
                    350
                    
                    
                    
                    511Information
      technology support
                    
                    
                    207
                    
                    
                    
                    183General
      and administrative
                    
                    
                    517
                    
                    
                    
                    402Total
      operating expenses
                    
                    
                    2,184
                    
                    
                    
                    2,450Loss
      from operations
                    
                    
                    (1,195
                    )
                    
                    
                    (543
                    )Interest
      and other expenses
                    
                    
                    (60
                    )
                    
                    
                    (39
                    )Net
      loss
                    
                    $
                    (1,255
                    )
                    
                    $
                    (582
                    )Basic
      and diluted net loss per share
                    
                    $
                    (0.62
                    )
                    
                    $
                    (0.30
                    )Weighted
      average shares of common stock used in computing basicand
      diluted net loss per share
                    
                    
                    2,021
                    
                    
                    
                    1,941
  The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 
 4
 SALON
      MEDIA GROUP, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(in
      thousands)(Unaudited)  Three
      Months EndedJune
      30,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (1,255
                          )
                          
                          $
                          (582
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Loss
      from retirement of assets, net
                          
                          
                          1
                          
                          
                          
                          -Depreciation
      and amortization
                          
                          
                          57
                          
                          
                          
                          35Share-based
      compensation
                          
                          
                          98
                          
                          
                          
                          100Changes
      in assets and liabilities:Accounts
      receivable
                          
                          
                          324
                          
                          
                          
                          (346
                          )Prepaid
      expenses, other current assets and other assets
                          
                          
                          (6
                          )
                          
                          
                          (63
                          )Accounts
      payable, accrued liabilities and other long-term
    liabilities
                          
                          
                          204
                          
                          
                          
                          (110
                          )Deferred
      revenue
                          
                          
                          (18
                          )
                          
                          
                          (79
                          )Net
      cash used in operating activities
                          
                          
                          (595
                          )
                          
                          
                          (1,045
                          )Cash
      flows from investing activities:Purchase
      of property and equipment
                          
                          
                          (17
                          )
                          
                          
                          (129
                          )Purchase
      of intangible assets
                          
                          
                          -
                          
                          
                          
                          (5
                          )Net
      cash used in investing activities
                          
                          
                          (17
                          )
                          
                          
                          (134
                          )Cash
      flows from financing activities:Net
      proceeds from long-term borrowings
                          
                          
                          -
                          
                          
                          
                          1,000Net
      proceeds from short term borrowings
                          
                          
                          550
                          
                          
                          
                          -Capital
      lease payments
                          
                          
                          (8
                          )
                          
                          
                          (7
                          )Net
      proceeds from issuance of common stock option exercise
                          
                          
                          -
                          
                          
                          
                          1Net
      cash provided by financing activities
                          
                          
                          542
                          
                          
                          
                          994Net
      decrease in cash and cash equivalents
                          
                          
                          (70
                          )
                          
                          
                          (185
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          371
                          
                          
                          
                          818Cash
      and cash equivalents at end of period
                          
                          $
                          301
                          
                          
                          $
                          633Supplemental
      schedule of non-cash financing activity:Amount
      paid for interest
                          
                          $
                          -
                          
                          
                          $
                          -
  The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 
 5
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 1.
              The
      Company and Significant Accounting
Policies
  The Company:
  Salon
Media Group, Inc (“Salon” or the “Company”) is an internet news and social
networking company that produces Salon.com, a content Website, and related
online communities.  Salon was originally incorporated in July 1995 in
the State of California and reincorporated in Delaware in June
1999.  Salon operates in one business segment.
  Basis
of Presentation:
 
 These
interim condensed consolidated financial statements are unaudited and have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments necessary to present fairly Salon's consolidated financial
position, consolidated results of operations and consolidated cash flows for the
periods presented.  The condensed consolidated balance sheet data as
of March 31, 2009 is derived from and should be read in conjunction with the
audited financial statements, which are included in Salon’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission.  Pursuant
to the rules of the Securities and Exchange Commission, these financial
statements do not include all disclosures required by generally accepted
accounting principles. The results for the three month period ended June 30,
2009 are not necessarily indicative of the expected results for any other
interim period or for the fiscal year ending March 31, 2010.
  These
condensed consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of
business.  Salon has incurred losses and negative cash flows from
operations since inception and has an accumulated deficit at June 30, 2009 of
$102,241.  In addition, Salon expects to incur a net loss from
operations for its year ending March 31, 2010.
  The
Company’s operating forecast for the remainder of the fiscal year ending March
31, 2010 anticipates continued operating losses.  Salon estimates it
will require between $1.75 and $2.5 million in additional funding to meet its
operating needs for the balance of its fiscal year.  If planned
revenues are less than expected, or if planned expenses are more than expected,
the cash shortfall may be higher, which will result in a commensurate increase
in required financing. To reduce cash outflows, the Company began implementing
various cost-cutting initiatives in the quarter ended September 30, 2008, and is
continuing to examine ways to bring its costs more in line with expected
revenues.  Salon will continue to be dependent on funds from related
parties, whom thus far this year provided $930 in cash advances, as well as seek
external financing from potential investors in the form of additional
indebtedness or through the sale of equity securities in a private placement. In
July, the Company engaged an investment banker to assist in these efforts.
However, Salon does not currently have an agreement in place to provide such
financing, and there is no certainty that Salon will be able to enter into
definitive agreements for such financing on commercially reasonable
terms.
  6
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
  Cash
& Cash Equivalents
  Cash and
cash equivalents consist of cash on deposit with banks and investments that are
readily convertible into cash and have original maturities of three months or
less.
  Concentration
of Credit Risk
  Financial
instruments that potentially subject Salon to concentration of credit risk
consist primarily of trade accounts receivable.  Salon performs ongoing
credit evaluations of its customers, but does not require collateral. 
Salon provides an allowance for credit losses that it periodically adjusts to
reflect management’s expectation of future losses.
 
 One
customer accounted for approximately 11% of total revenue for the three month
period ended June 30, 2009.  No customer accounted for more than 10%
of total revenue for the three month period ended June 30,
2008.  Three customers accounted for 10% or more of total accounts
receivable as of June 30, 2009 and one customer accounted for 10% of total
accounts receivable as of June 30, 2008.
  Stock-Based
Compensation
  Salon
accounts for stock-based compensation expenses pursuant to the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS
123R, which requires that all share-based payments, including grants of employee
stock options, be recognized as an expense in the statement of operations based
on their grant date fair values and vesting periods, which is 4
years.
  The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions and fair value
per share:
  Three
      months ended June 30,2009
                  
                  2008Risk-free
      interest rates
                  
                  1.54%
                  
                  3.09%Expected
      term (in years)
                  
                  4
                  
                  4Expected
      volatility
                  
                  156%
                  
                  92%Dividend
      yield
                  
                  0%
                  
                  0%
  
 7
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
  The
expected term of the options of four years represents the estimated period of
time until exercise and is based on historical experience of similar awards,
including the contractual terms, vesting schedules and expectations of future
employee behavior.  The expected stock price volatility is based on
historical volatility of Salon’s stock.  The risk-free interest rate
is based on the implied yield available on U.S. Treasury securities with a term
equivalent to the service period of the stock options, or four
years.  Salon has not paid dividends in the past.
  Stock-based
compensation expense recognized under SFAS 123R for the three months ended June
30, 2009 and June 30, 2008 was $98 and $100, respectively.  As of June
30, 2009, the aggregate stock compensation remaining to be amortized to expenses
was $713.  Salon expects this stock compensation balance to be
amortized as follows: $278 during the remainder of fiscal 2010; $231 during
fiscal 2011; $135 during fiscal 2012; $65 during fiscal 2013; and $4 during
fiscal 2014.  The expected amortization reflects only outstanding
stock option awards as of June 30, 2009.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “Business Combinations,” (“SFAS 141R”) and No. 160,
“Noncontrolling Interests in Consolidated Financial Statements,”an
amendment of ARB No. 51(“SFAS
160”.) SFAS 141R establishes principles and requirements during business
combinations for how the acquirer:
 
 a.
              Recognizes
      and measures in its financial statements the identifiable assets acquired,
      the liabilities assumed, and any noncontrolling interest in the
      acquiree,
 b.
              Recognizes
      and measures the goodwill acquired in the business combination or a gain
      from a bargain purchase, and
 c.
              Determines
      what information to disclose to enable users of the financial statements
      to evaluate the nature and financial effects of the business
      combination.
 
 SFAS 160
sets parameters as to how to report noncontrolling interest in consolidated
financial statements.  SFAS 141R and SFAS 160 are effective for fiscal
years beginning after December 15, 2008. Salon believes that the adoption of
SFAS 141R and SFAS 160 did not impact Salon’s results of operations, financial
position, or cash flows.
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
157, “Fair Value Measurements,” (SFAS 157).  SFAS 157 addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted
accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007.  Salon adopted SFAS 157 as of April 1,
2007.  It did not have a material impact on its results of operations,
financial position or cash flows.
 
 8
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” (SFAS 161).  SFAS 161 amends and expands the
disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and requires entities to provide enhanced qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair values and amounts of gains and losses on derivative
contracts, and disclosures about credit-risk-related contingent features in
derivative agreements.  This statement applies to all entities and all
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15,
2008.   It did not have a material impact on its results of
operations, financial position or cash flows.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (SFAS 162).  SFAS 162 establishes the GAAP
hierarchy and identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial
statements. The GAAP hierarchy sets forth the level of authority attributed
to a given accounting pronouncement or document, and presents the sources of
GAAP according to document type.  SFAS 162 is effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles.  Salon adopted SFAS 162 as of June 30, 2009.  It
did not have a material impact on its results of operations, financial position
or cash flows.
  In May
2008, the FASB also issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (SFAS
163).  SFAS 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default (insured event) when there is evidence
that credit deterioration has occurred in an insured financial obligation. 
This Statement also clarifies how Statement 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities.  Those
clarifications will increase comparability in financial reporting of financial
guarantee insurance contracts by insurance enterprises.  This
Statement requires expanded disclosures about financial guarantee insurance
contracts. The accounting and disclosure requirements of the Statement will
improve the quality of information provided to users of financial
statements.  SFAS 163 will be effective for financial statements issued for
fiscal years beginning after December 15, 2008. It did not have a material
impact on its results of operations, financial position or cash
flows.
 
 
 9
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 
 Emerging
Issues Task Force Issue No. 07-5, “Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entity’s Own Stock” (EITF 07-5) became
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Therefore, the adoption of this EITF by the Company was
effective April 1, 2009. The adoption of this EITF’s requirements can affect the
accounting for warrants and many convertible instruments containing provisions
that protect holders from a decline in the stock price (or “down round”
provisions). We evaluated whether our warrants or convertible preferred stock
contain provisions that protect holders from declines in our stock price or
otherwise could result in modification of the exercise price and/or shares to be
issued under the respective warrant or preferred stock agreements based on a
variable that is not an input to the fair value of a “fixed-for-fixed” option.
The Company determined that the outstanding warrants at March 31, 2009 to
purchase 121,106 shares of common stock previously treated as equity were no
longer afforded equity treatment and would have to be reclassified to a
liability.  Under SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities” ( SFAS 133), the fair value of this
liability  would be re-measured at the end of each reporting period
with the change in value reported in the consolidated statement of operations.
Based on the Company’s evaluation of the fair value of these warrants from issue
date through June 30, 2009, the Company determined that the fair value amounts
were not material and therefore, did not record any adjustments for these
warrants under EITF 07-5 in the accompanying consolidated financial statements.
The Company also determined that while its convertible preferred stock
contains certain down-round provision features, the conversion feature embedded
within its convertible preferred stock does not require bifurcation under the
guidance of SFAS 133. Accordingly, the requirements of EITF 07-5 are not
applicable to the conversion features of the Company’s preferred
stock.
 
 Reclassifications
  Certain
reclassifications, not affecting previously reported net income or loss, have
been made to the previously issued condensed consolidated financial statements
to conform to the current period presentation.
 
 2.
              Goodwill
      Amortization and Intangible Assets
 
 In
accordance with FASB No. 142, “Goodwill and Other Intangible Assets” (SFAS No.
142), goodwill amortization was discontinued as of March 31,
2002.  The carrying value of goodwill at June 30, 2009 and June 30,
2008 was $200 and has been found not to be impaired.
  
 10
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
  3.
              Borrowing
      Agreements
  Short-term
borrowings
  In May
2007, Salon finalized a borrowing agreement with Deutsche Bank Securities, Inc.
that allows Salon to borrow up to $1,000 at a rate of prime less
0.25%.  Salon’s obligations under this agreement are guaranteed in
their entirety by Salon’s Chairman.  The line of credit has been fully
drawn as of June 30, 2009 and June 30, 2008.  Salon and its Chairman
have agreed to lift previously agreed restrictions on the timing of borrowing to
permit borrowing to continue under the agreement with the guarantee of the
Chairman.  Deutsche Bank Securities may demand repayment of amounts
borrowed at any time.   Additionally, the Chairman may also
choose to terminate his guarantee, which would trigger a demand for
repayment.  As of June 30, 2009, accrued interest on bank debt totals
$86. As of June 30, 2009 and 2008, the weighted average interest rate on the
Company’s short-term borrowings was 5% and 7%,
respectively.
  Convertible
notes payable
  On April
4, 2008, Salon issued to each of its Chairman and the father of Salon’s then CEO
a convertible promissory note in exchange for loans with a principal amount of
$500, an aggregate of $1,000.  Each note bears an interest rate of
7.50 percent per annum, payable annually, in cash or in kind, and matures on
March 31, 2012.  Each note issued on April 4, 2008 may convert at the
election of the holder at any time into a number of shares of Salon’s
common stock equal to the aggregate amount of the note obligations divided
by $1.68.   In addition, in the event the Company obtains
third-party financing in excess of $500, the holders of this $1,000 convertible
notes payable have a right to exchange these notes for the same instrument
issued in such third-party financing. The value of this embedded derivative was
determined to be insignificant and no amount has been
recorded.
  On May
15, 2008, Salon sold and issued to another investor a convertible promissory
note with a principal amount of $500 as part of the above-referenced financing
transaction.  The note bears an interest rate of 7.50 percent per
annum, payable semi-annually, in cash or in kind, and matures on March 31,
2012.  The note may convert at the election of the holder at any time
into a number of shares of Salon’s common stock equal to the aggregate amount of
the note obligations divided by $1.45.
 
 On
October 31, 2008, Salon issued to each of its Chairman and the father of
Salon’s  then CEO a convertible promissory note in exchange for loans
with a principal amount of $500, an aggregate of $1,000, as part of the above
financing transactions in which Salon generated gross proceeds of approximately
$2,500 as of March 31, 2009.  Each note bears an interest rate of 7.50
percent per annum, payable annually, in cash or in kind, and matures on October
31, 2012.  Each note issued on October 31, 2008 may convert at the
election of the holder at any time into a number of shares of Salon’s common
stock equal to the aggregate amount of the note obligations divided by
$0.6746.
 
 On April
4, 2009 Salon issued to each of its Chairman and the father of Salon’s then CEO
a convertible promissory interest note in exchange for loans with a principal
amount of $38, an aggregate of $75.  Each note bears an interest rate
of 7.50 percent per annum, payable annually, in cash or in kind, and matures on
March 31, 2012.  Each note issued on April 4, 2009 may convert at the
election of the holder at any time into a number of shares of Salon’s common
stock equal to the aggregate amount of the note obligations divided
by $1.68.
 
 11
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 
 On May
15, 2009 Salon issued to another investor a convertible promissory interest note
in exchange for loans with a principal amount of $38.  The note bears
an interest rate of 7.50 percent per annum, payable annually, in cash or in
kind, and matures on March 31, 2012.  The note issued on May 15, 2009
may convert at the election of the holder at any time into a number of shares of
Salon’s common stock equal to the aggregate amount of the note obligations
divided by $1.45.
 
 As of
June 30, 2009, aggregate accrued interest on convertible debt totals
$74.
 
 In the
event Salon, at any time prior to the payment in full of the notes, or
conversion thereof, shall (a) issue and sell shares of its common or preferred
stock or an instrument convertible into its common or preferred stock or (b)
issue and sell debentures or enter into any new indebtedness, then the holders
of the first $1,000 in principal of the notes may choose to exchange the
outstanding principal balance and accrued interest due under the notes for new
securities issued on the same terms and conditions of the
financing.  If Salon completes a financing in excess of $500, then
this right of exchange will terminate 30 days following notice of such financing
being given to the holders.
 
 As of June 30, 2009, total aggregate
related party interest expense was $69 and outstanding debt was
$2,875.
 
 4.
              Stock-Based
      Compensation
 
 Salon has
adopted certain equity incentive plans as described in Note 7, “Employee Stock
Option Plan,” of the notes to consolidated financial statements in Salon’s
Annual Report on Form 10-K for the fiscal year ended March 31,
2009.
 
 On May 4,
2009, the Board of Directors of Salon, subject to shareholder approval,
increased the shares authorized under the 2004 Stock Option Plan by 4.5 million,
from 3.2 million to 7.7 million, such shares eligible for either incentive stock
options, non-qualified options, or restricted stock.
 
 
 12
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
  The
following table summarizes activity under Salon’s plans for the three months
ended June 30, 2009:
  WeightedOutstanding
                      
                      
                      Average
                      
                      
                      AggregateStock
                      
                      
                      Exercise
                      
                      
                      IntrinsicOptions
                      
                      
                      Price
                      
                      
                      ValueBalance
      as of April 1, 2009
                      
                      
                      2,440,000
                      
                      
                      
                      $0.35Options
      granted under all plans
                      
                      
                      1,475,000
                      
                      
                      
                      $0.20Exercised
                      
                      
                      -
                      
                      
                      
                      -Expired
      and forfeited
                      
                      
                      (46,000
                      )
                      
                      
                      $0.39Outstanding
      at June 30, 2009
                      
                      
                      3,869,000
                      
                      
                      
                      $0.29
                      
                      
                      
                      -Exercisable
      at June 30, 2009
                      
                      
                      1,442,000
                      
                      
                      
                      $0.36
                      
                      
                      
                      -Expected
      to vest
                      
                      
                      2,193,000
                      
                      
                      
                      $0.27
                      
                      
                      
                      -
  The
weighted average fair value per share of the stock option awards in the three
months ended June 30, 2009 and 2008 was $0.18 and $0.63,
respectively.  The weighted average fair value of options vested
during the three months ended June 30, 2009 was $0.66 per share.  No
options were exercised during the three months ended June 30, 2009.
 
 5.
              Net
      Loss Per Share
  Basic
loss per share is computed using the weighted average number of shares of common
stock outstanding during the period.  Diluted loss per share is
computed using the weighted average number of common stock and common stock
equivalents outstanding during the period, as follows:
  Three
      Months EndedJune
      302009
                    
                    
                    2008Numerator:Net
      loss attributable to common stockholders
                    
                    $
                    (1,255
                    )
                    
                    $
                    (582
                    )Denominator:Weighted
      average shares used in computingbasic
      and diluted net loss per share attributableto
      common stockholders
                    
                    
                    2,021,000
                    
                    
                    
                    1,941,000Basic
      and diluted net loss per share attributableto
      common stockholders
                    
                    $
                    (0.62
                    )
                    
                    $
                    (0.30
                    )Antidilutive
      securities including options,warrants
      and convertible notes and preferredstock
      not included in net loss per share calculation
                    
                    
                    17,078,000
                    
                    
                    
                    13,651,000
  13
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 6.
              Warrants
  During
the three months ended June 30, 2009, no warrants expired.  The
following are the remaining outstanding warrants as of June 30,
2009:
 
 Warrant
                                                
                                                
                                                Exercise
                                                
                                                Grant
                                                
                                                ExpirationWarrant
      Holder
                                                
                                                Shares
                                                
                                                
                                                Price
                                                
                                                Date
                                                
                                                DateThe
      Hambrecht 1980 Revocable Trust
                                                
                                                
                                                9,097
                                                
                                                
                                                
                                                
                                                $2.485
                                                
                                                
                                                07/27/06
                                                
                                                
                                                07/27/09John
      Warnock
                                                
                                                
                                                6,040
                                                
                                                
                                                
                                                
                                                $2.485
                                                
                                                
                                                07/27/06
                                                
                                                
                                                07/27/09John
      Warnock
                                                
                                                
                                                3,056
                                                
                                                
                                                
                                                
                                                $2.768
                                                
                                                
                                                07/27/06
                                                
                                                
                                                07/27/09The
      Hambrecht 1980 Revocable Trust
                                                
                                                
                                                17,599
                                                
                                                
                                                
                                                
                                                $2.056
                                                
                                                
                                                09/21/06
                                                
                                                
                                                09/21/09John
      Warnock
                                                
                                                
                                                17,494
                                                
                                                
                                                
                                                
                                                $2.056
                                                
                                                
                                                09/21/06
                                                
                                                
                                                09/21/09Silicon
      Valley Bank
                                                
                                                
                                                2,214
                                                
                                                
                                                
                                                
                                                $0.862
                                                
                                                
                                                10/17/02
                                                
                                                
                                                10/17/09John
      Warnock
                                                
                                                
                                                8,244
                                                
                                                
                                                
                                                
                                                $1.410
                                                
                                                
                                                12/18/06
                                                
                                                
                                                12/18/09John
      Warnock
                                                
                                                
                                                24,536
                                                
                                                
                                                
                                                
                                                $1.410
                                                
                                                
                                                12/18/06
                                                
                                                
                                                12/18/09The
      Hambrecht 1980 Revocable Trust
                                                
                                                
                                                35,040
                                                
                                                
                                                
                                                
                                                $1.672
                                                
                                                
                                                11/19/07
                                                
                                                
                                                11/19/10123,320
 
  
 14
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
  7.
              Preferred
      Stock
  The
conversion rate and common equivalent shares of Salon’s preferred stock as of
June 30, 2009 are as follows:
  Per
      share
                      
                      
                      CommonShares
                      
                      
                      Purchase
                      
                      
                      Conversion
                      
                      
                      EquivalentPreferred
      Stock
                      
                      Outstanding
                      
                      
                      Price
                      
                      
                      Rate
                      
                      
                      SharesSeries
      A
                      
                      
                      675
                      
                      
                      
                      $4,000
                      
                      
                      
                      1.810
                      
                      
                      
                      1,491,930Series
      B
                      
                      
                      125
                      
                      
                      
                      $4,000
                      
                      
                      
                      1.495
                      
                      
                      
                      334,471Series
      C
                      
                      
                      6,582
                      
                      
                      
                      $800
                      
                      
                      
                      0.788
                      
                      
                      
                      6,685,091Series
      D-1
                      
                      
                      417
                      
                      
                      
                      $1,200
                      
                      
                      
                      1.706
                      
                      
                      
                      293,266Series
      D-2
                      
                      
                      417
                      
                      
                      
                      $1,200
                      
                      
                      
                      1.974
                      
                      
                      
                      253,496Series
      D-3Issued
      on 12/21/05
                      
                      
                      209
                      
                      
                      
                      $1,200
                      
                      
                      
                      1.706
                      
                      
                      
                      146,985Issued
      on 07/27/06
                      
                      
                      208
                      
                      
                      
                      $1,200
                      
                      
                      
                      2.189
                      
                      
                      
                      114,014Series
      D-4Issued
      on 07/27/06
                      
                      
                      42
                      
                      
                      
                      $1,200
                      
                      
                      
                      2.189
                      
                      
                      
                      23,022Issued
      on 09/21/06
                      
                      
                      333
                      
                      
                      
                      $1,200
                      
                      
                      
                      1.585
                      
                      
                      
                      252,111Issued
      on 12/18/06
                      
                      
                      42
                      
                      
                      
                      $1,200
                      
                      
                      
                      0.893
                      
                      
                      
                      56,429Series
      D-5Issued
      on 12/18/06
                      
                      
                      125
                      
                      
                      
                      $1,200
                      
                      
                      
                      0.893
                      
                      
                      
                      167,944Issued
      on 11/19/07
                      
                      
                      292
                      
                      
                      
                      $1,200
                      
                      
                      
                      1.418
                      
                      
                      
                      247,169Total
                      
                      
                      9,467
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,065,928
  The
Series A, B, C and D preferred stock conversion rates are subject to a downward
adjustment anti-dilution provision under certain circumstances related to
subsequent Salon securities issuances. The Company determined that the
accounting for such conversion features does not require bifurcation under SFAS
133, and accordingly, the requirements of EITF 07-5 are not
applicable.
  15
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 Warrants
outstanding as of June 30, 2009 that have been issued to holders of Series D
preferred stock are as follows:
 
 Exercise
                  
                  
                  WarrantPrice
                  
                  
                  SharesSeries
      D-3Issued
      on 07/27/06
                  
                  
                  $2.768
                  
                  
                  
                  15,137Series
      D-4Issued
      on 07/27/06
                  
                  
                  $2.768
                  
                  
                  
                  3,056Issued
      on 09/21/06
                  
                  
                  $2.056
                  
                  
                  
                  35,093Issued
      on 12/18/06
                  
                  
                  $1.410
                  
                  
                  
                  8,244Series
      D-5Issued
      on 12/18/06
                  
                  
                  $1.410
                  
                  
                  
                  24,536Issued
      on 11/19/07
                  
                  
                  $1.672
                  
                  
                  
                  35,040121,106
 
 The
exercise price of warrants issued in conjunction with the issuance of Series D
preferred stock are subject to a downward adjustment anti-dilution provision
under certain circumstances related to subsequent Salon securities
issuances.
 
 The
holders of the Series D preferred stock are entitled to dividends of 5.0%, as
and if declared by the Board of Directors.  In event of a liquidation,
the holders of Series D preferred stock and the holders of the Series C
preferred stock rank in parity, and are entitled to receive, prior and in
preference to any distribution of any assets or property of Salon to the holders
of common stock, and the holders of Series A and B preferred
stock,  and in the case of the Series D preferred stock, an amount per
share equal to $1,200 plus an amount equal to all declared but unpaid dividends,
and in the case of the Series C preferred stock, $1,600 per share, plus an
amount equal to all declared but unpaid dividends, based on an annual rate of
8%.  If the assets and funds available for distribution are
insufficient to permit the payment to the holders of Series C and D preferred
stock of their full preferential amounts, then the entire assets and funds of
Salon legally available for distribution to stockholders will be distributed
among the holders of Series C and D preferred stock ratably in proportion to the
full preferential amounts which they are entitled to receive.  After
an initial distribution to the holders of Series C and D preferred stock, the
holders of the Series A and B preferred stock, who rank in parity, are entitled
to receive, prior and in preference to any distribution of any assets or
property of Salon to the holders of common stock, an amount per share equal to
$8,000 plus an amount equal to all declared but unpaid dividends, based on an
annual rate of 8%.  If, after the initial distribution to holders of
Series C and D preferred stock, the remaining assets and funds available for
distribution are insufficient to permit the payment to the holders of Series A
and B preferred stock of the full preferential amounts, then the entire
remaining assets and funds of Salon legally available for distribution to
stockholders will be distributed among the holders of Series A and B preferred
stock ratably in proportion to the full preferential amounts which they
are
  16
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 entitled
to receive. As of June 30, 2009, no dividend has been declared to the holders of
preferred stock.
  If, after
initial preferential liquidation payments to the holders of Series A, B, C and D
preferred stock, any assets remain available for distribution, such assets are
to be distributed ratably among the holders of common stock and preferred stock,
based on the shares of common stock then held by them and issuable upon
conversion of the shares of preferred stock then held by them, until aggregate
distributions per share reach $12,000 for the holders of Series A and B
preferred stock, $2,400 for the holders of Series C Preferred Stock and $3,600
for the holders of Series D preferred stock.  Salon has currently
outstanding 675 shares of Series A preferred stock, 125 shares of Series B
preferred stock, 6,582 shares of Series C preferred stock and 2,085 shares of
Series D preferred stock.
  If, after
payment has been made to the holders of common stock and holders of preferred
stock mentioned above, any assets remain available for distribution, such assets
are to be distributed ratably among the holders of common stock and the holders
of Series C preferred stock, based on the number of shares of common stock then
held by them and issuable upon conversion of the Series C preferred stock then
held by them.  Based on available information, Salon estimates that
the holders of Series C preferred stock account for approximately 89% of this
group of shareholders.
  The
holders of preferred stock are entitled to vote together with the holders of
Salon’s common stock as though part of that class, and are entitled to vote on
all matters and to that number of votes equal to the largest number of whole
shares of common stock into which the shares of preferred stock could be
converted.  Preferred stockholders as a group own approximately 90% of
the outstanding shares of common stock and common stock issuable upon conversion
of the shares of preferred stock, all with voting rights.
  The
aggregate liquidation preferences of all preferred stockholders as of June 30,
2009 were $19,433 excluding the effect of undeclared dividends, and $24,448
including the effect of undeclared dividends.
  Neither
the Series A, B, C or D preferred stock, the associated warrants, nor the
underlying shares of common stock have been registered for sale under the
Securities Act of 1933, as amended, and may not be offered or sold in the United
States absent registration under such act or an applicable exemption from
registration requirements.
  8.
              Subsequent
      Event
  On August 10, 2009, the Company
received a cash advance of $330,000 from its Chairman.
  17
 Item
2.    Management’s Discussion and Analysis of Financial
Condition and Results of Operations
  This
section and other parts of this Form 10-Q contain “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 (“Exchange Act”) that involve
risks and uncertainties, including, but not limited to, statements regarding our
strategy, plans, objectives, expectations, forecasts, intentions, financial
performance, cash-flow breakeven timing, financing, economic conditions, on-line
advertising, market performance, subscription service plans, and revenue
sources.  Although Salon Media Group, Inc. (“Salon” or the “Company”)
believes its plans, intentions and expectations reflected in such
forward-looking statements are reasonable, Salon gives no assurance those plans,
intentions or expectations will be achieved.  Our actual results may
differ significantly from those anticipated or implied in these forward-looking
statements as a result of the factors set forth above and in Salon’s public
filings.  Salon assumes no obligation to update any forward-looking
statements as circumstances change.
  Salon’s
actual results may differ significantly from those anticipated or implied in
these forward-looking statements as a result of the factors set forth below and
in “Management's Discussion and Analysis of Financial Conditions and Results of
Operations” and "Factors That May Affect Our Future Results and Market Price of
Stock."  In this report, the words “anticipates,” “believes,”
“expects,” “estimates,” “forecast,” “projection,” “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.
 
 Overview
  Salon is
an online news and social networking company and an Internet publishing
pioneer.  Salon’s award-winning journalism combines original
investigative stories and provocative personal essays along with quick-take
commentary and staff-written Weblogs about politics, technology, culture and
entertainment.  Committed to interactivity, the Website also hosts two
online communities, Table Talk and The Well, and launched Open Salon, a social
network for bloggers.  In its editorial product Salon balances two
crucial missions: (1) providing original and provocative content on topics that
the mainstream media overlook, and (2) filtering through the media chatter and
clutter to help readers find the stories that matter.
  This
section 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 filed with the Securities and Exchange
Commission.  Matters of interest therein include, but are not limited
to, Salon’s disclosure of critical accounting policies.
 
 Sources
      of Revenue
  The most
significant portion of Salon’s revenues is derived from advertising from the
sale of promotional space on its Website.  The sale of promotional
space is generally less than ninety days in duration.  Advertising
units sold include “rich media” streaming advertisements, as well as traditional
banner and pop-up advertisements.
 
 Salon
also derives a significant portion of its revenues from its Salon Premium
subscription program.  Prior to March 2007, subscriptions to Salon
Premium were generally $35 for one year with no ads, and during March 2007, the
rate was increased to $45. Salon Premium revenue is recognized ratably over the
period that services are provided.  This source of revenue has been
decreasing since Salon’s quarter ended December 31, 2004 when paid subscriptions
peaked at approximately 89,100 and have since decreased to approximately 21,710
as of June 30, 2009.  Salon expects this downward trend to continue,
as it is placing greater emphasis on its advertising sales to generate
revenue.
 
 18
  Salon
offers The Well online discussion forums as a monthly subscription
service.  Revenue is recognized ratably over the subscription
period.  Salon also generates nominal revenue from the licensing of
content that previously appeared in Salon’s Website and for hosting links to a
third party’s personals/dating Website.
  Expenses
  Production
and content expenses consist primarily of salaries and related expenses for
Salon’s editorial, artistic, and production staff, online communities’ staff,
payments to freelance writers and artists, bandwidth costs associated with
serving pages and hosting our online communities on our Website, credit card
transaction costs andadserving
costs.
  Sales and
marketing expenses consist primarily of salaries, commissions and related
personnel costs, travel, and other costs associated with Salon’s sales force,
business development efforts and its subscription service.  It also
includes advertising, promotions and the amortization of prepaid advertising
rights.
  Information
technology support expenses consist primarily of salaries and related personnel
costs associated with the development, testing and enhancement of Salon’s
software to manage its Website, and to maintain and enhance the software
utilized in managing Salon Premium, as well as supporting marketing and sales
efforts.
  General
and administrative expenses consist primarily of salaries and related personnel
costs, accounting and legal fees, and other fees associated with operating a
publicly traded company.  Certain shared overhead expenses are
allocated to other departments.
  Interest
and other expenses consist primarily of accrued interest on Salon’s outstanding
debt.
  In
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based
Payment, or SFAS 123R, Salon’s expenses include stock-based compensation
expenses related to stock option and restricted stock grants to employees,
non-employee Directors and consultants.
 
 Salon has
incurred significant net losses and negative cash flows from operations since
its inception.  As of June 30, 2009, Salon had an accumulated deficit
of $102.2 million.  These losses have been funded primarily through
the issuance of common stock from Salon’s initial public offering in June 1999,
issuances of preferred stock and convertible notes, bank debt, and advances from
related parties.
 
 Burr,
Pilger & Mayer LLP, Salon’s independent accountants for the year ended March
31, 2009, has included a paragraph in its report indicating that substantial
doubt exists as to Salon’s ability to continue as a going concern because of
Salon’s recurring operating losses, negative cash flow and accumulated
deficit.
 
 Critical
Accounting Policies
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires Salon to utilize accounting policies and make
estimates and assumptions that affect our reported amounts.  Salon’s
significant accounting policies are described in Note 2 to the consolidated
financial statements of Salon’s Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.  Salon believes accounting
policies and estimates related to revenue recognition, prepaid advertising
rights and share-based compensation are the most critical to Salon’s financial
statements.  Future results may differ from current estimates if
different assumptions or conditions were to
prevail.
 
 19
 Revenue
Recognition
 
 Salon
recognizes revenues once persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable and collectibility is reasonably
assured.  Revenues are recognized ratably in the period over which
Salon’s obligations are fulfilled.  Payments received before Salon’s
obligations are fulfilled are classified as “Deferred revenue” in Salon’s
consolidated balance sheet.
 
 Advertising
revenues, derived from the sale of promotional space on its Website, comprised
64%, and 76% of Salon’s revenues, respectively for the three month periods ended
June 30, 2009 and 2008.  The duration of the advertisements are
generally short term, usually less than ninety days.  Revenues derived
from such arrangements are recognized during the period the advertising space is
provided.  Salon’s obligations typically include a guaranteed minimum
number of impressions, a set number of Site Pass advertisements viewed, or a set
number of days that a Site Pass advertisement will run.  To the extent
minimum guaranteed amounts are not achieved, Salon defers recognition of the
corresponding revenue until the remaining guaranteed amounts are provided, if
mutually agreeable to an advertiser.  If these “make good” impressions
are not agreeable to an advertiser, no further revenue is
recognized.
 
 Salon
Premium, a pay-for-online content service, provides unrestricted access to
Salon’s content with no banners, pop-ups or site pass advertisements, and
includes free magazine subscriptions, free access to Table Talk, an online
forum, and the ability to easily download content in text or PDF format, a
convenience that enables readers to view Salon’s content when not connected to
the Internet.  The subscription duration for Salon Premium is
generally one year.  Non-Salon Premium subscribers can gain access to
Salon’s content after viewing some form of advertisement.
  Salon
offers The Well as a monthly subscription service for access to on-line
discussion forums.  Revenue is recognized ratably over the
subscription period.
  Prepaid
Advertising Rights
 
 In
January 2000, Salon sold 1,125,000 shares of common stock to Rainbow Media
Holdings (“Rainbow”) and received $11.8 million of advertising credits that were
to be utilized by December 31, 2009.  As the per share price of
Salon’s common stock declined from the time the agreement was made and the date
the agreement was finalized and signed, the advertising credits were valued for
financial reporting purposes at $8.1 million.  As of June 30, 2009,
Salon has $1.8 million advertising credits resulting from the transaction,
valued at $1.2 million for financial reporting purposes.  Of the $1.8
million of advertising credits, approximately $0.8 million remain with Rainbow
and approximately $1.0 million are with NBC.  Salon believes that it
should be able to utilize all the credits before they expire on December 31,
2009.  It has delayed substantial current usage of the remaining
credits in anticipation of a major marketing campaign in our fiscal third
quarter.  Salon expects to recover the full value of all the
advertising credits through usage or settlement in cash, per the terms of the
agreement, but there can be no absolute assurance as to any potential cash
settlement or full utilization thereof.
 
 
 20
  Accounting
for Share-Based Compensation
  Salon
accounts for share-based compensation under SFAS 123R and recognizes the fair
value of stock awards on a straight-line basis over the requisite service period
of the award, which is the vesting term of four years.
 
 Salon
recognized stock-based compensation expense of $98,000 and $100,000 during the
three months ended June 30, 2009 and June 30, 2008, respectively.  As
of June 30, 2009, Salon had an aggregate of $713,000 of stock compensation
remaining to be amortized to expense over the remaining requisite service period
of the underlying awards.  Salon currently expects this stock
compensation balance to be amortized as follows: $278,000 during the remainder
of fiscal 2010; $231,000 during fiscal 2011; $135,000 during fiscal 2012;
$65,000 during fiscal 2013; and $4,000 during fiscal 2014.  The
expected amortization reflects only outstanding stock option awards as of June
30, 2009.  Salon expects to continue to issue share-based awards to
our employees in future periods.
 
 The full
impact of SFAS 123R in the future is dependent upon, among other things, the
timing of when Salon hires additional employees, the effect of new long-term
incentive strategies involving stock awards in order to continue to attract and
retain employees, the total number of stock awards granted, the fair value of
the stock awards at the time of grant and the tax benefit that Salon may or may
not receive from stock-based expenses.  Additionally, the application
of SFAS 123R requires the use of an option-pricing model to determine the fair
value of stock option awards.  This determination of fair value is
affected by Salon’s stock price as well as assumptions regarding a number of
highly complex and subjective variables.  These variables include, but
are not limited to, Salon’s expected stock price volatility over the term of the
awards.
 
 Results
of Operations for the Three Months Ended June 30, 2009 Compared to the Three
Months Ended June 30, 2008
  Net
      revenues:
  Net
revenues decreased 48% to $1.0 million for the three months ended June 30, 2009
from $1.9 million for the three months ended June 30, 2008.
 
 Advertising
revenues decreased 56% to $0.6 million for the three months ended June 30, 2009
from $1.4 million for the three months ended June 30, 2008.  The
decrease in advertising revenues reflects an industry-wide softening in the
market for online display advertising amidst a general recessionary economy,
which has made it difficult to capitalize on its high
value  audience.  The number of monthly unique Website
visitors for the three months ended June 30, 2009 averaged 4.4 million, a
decrease of 5% from the same time period a year ago.  A significant
factor contributing to advertisers’ willingness to advertise on Salon’s Website
is its ability to increase the  number of monthly unique Website
visitors. Increasing the number of unique Website visitors is critical to Salon,
as they facilitate the generation of ad impressions sold to
advertisers.
 
 Salon
Premium subscription revenues decreased to $0.2 million for the three months
ended June 30, 2009 from $0.28 million for the three months ended June 30, 2008,
or 30%.  Salon expects this trend to continue as the number of paid
subscriptions has declined from approximately 23,500 as of March 31, 2009 to
approximately 21,700 as of June 30, 2009.
 
 Revenues
from all other sources were $0.2 million each for the three months ended June
30, 2009 and the three months ended June 30, 2008.  Approximately 63%
of this revenue was derived from The Well, an on-line discussion
forum.
 
 21
 Production
      and content:
  Production
and content expenses were $1.1 million for the three months ended June 30, 2009
compared to $1.4 million for the three months ended June 30,
2008.  The $0.3 million decrease reflects a reduction in staff, travel
and entertainment expenses and freelance costs.
 
 Sales
      and marketing:
  Sales and
marketing expenses were $0.4 million for the three months ended June 30, 2009
compared to $0.5 million for the three months ended June 30,
2008.  The  $0.1 million decrease reflects a reduction in
staff.
 
 Information
      technology support:
  Information
technology support expenses for the three months ended June 30, 2009 remained
flat from the same period one year ago at $0.2 million.
 
 General
and administrative:
  General
and administrative expenses were $0.5 million for the three months ended June
30, 2009 compared to $0.4 million for the three months ended June 30,
2008.  The $0.1 million cost increase was primarily attributed to
consulting fees and executive compensation related to the hiring of a new chief
executive officer.
 
 Interest
and other expenses:
  Interest
and other expenses for the three months ended June 30, 2009 were $60,000, versus
$39,000 in 2008.  The increase was primarily attributable to accrued
interest on additional convertible promissory notes issued in the third quarter
of the prior year.
  Liquidity
and capital resources:
  Net
cash used in operations was $0.6 million for the three months ended June 30,
2009 and $1.0 million for the three months ended June 30, 2008.  The
principal uses of cash during the three months ended June 30 2009 were to fund
the $1.3 million net loss for the period, $0.3 million decrease in accounts
receivable, $0.2 million decrease in accounts payable, and $0.2 million of
various working capital items.  The principal uses of cash during the
three months ended June 30, 2008 were to fund the $0.6 million net loss for the
period, $0.3 million increase in accounts receivable and $0.1 million of various
working capital items.  The accounts receivable, net as of June 30,
2009 of $0.6 million, representing primarily advertising sales during the year,
are expected to be collected within the next four months.  As of June
30, 2009, allowance for doubtful accounts was decreased to $100,000 from
$112,000 to write-off a delinquent customer balance deemed
uncollectible.  The Company continues its efforts to reach repayment
terms with other delinquent customers.
 
 Net
cash used in investing activities was immaterial during the three months ended
June 30, 2009 and $0.1 million for the three months ended June 30,
2008.  The principal uses of cash during the three months ended June
30, 2008 were to fund the acquisition of computer equipment, furniture,
leasehold improvements and internal software development.
 
 22
 The
net cash from financing activities of $0.5 million for the three months ended
June 30, 2009 primarily reflects cash advances from related
parties.  The net cash from financing activities of $1.0 million for
the three months ended June 30, 2008 primarily reflects proceeds received from
convertible promissory notes issued and sold during the period.
 
 The
Company’s operating forecast for the remainder of the fiscal year ending March
31, 2010 anticipates continued operating losses.  Salon estimates it
will require between $1.75 and $2.5 million in additional funding to meet its
operating needs for the balance of its fiscal year.  If planned
revenues are less than expected, or if planned expenses are more than expected,
the cash shortfall may be higher, which will result in a commensurate increase
in required financing. To reduce cash outflows, the Company began implementing
various cost-cutting initiatives in the quarter ended September 30, 2008, and is
continuing to examine ways to bring its costs more in line with expected
revenues.  Salon will continue to be dependent on funds from related
parties, whom thus far this year provided $930 in cash advances, as well as seek
external financing from potential investors in the form of additional
indebtedness or through the sale of equity securities in a private placement. In
July, the Company engaged an investment banker to assist in these efforts.
However, Salon does not currently have an agreement in place to provide such
financing, and there is no certainty that Salon will be able to enter into
definitive agreements for such financing on commercially reasonable
terms.
  Off-Balance-Sheet
Arrangements
 
 Salon has
no off-balance-sheet arrangements.
 
 Contractual
Obligations
 
 As of
June 30, 2009, Salon has five outstanding capital leases on computer equipment
and does not anticipate entering into similar debt instruments during its
remaining fiscal year ending March 31, 2010.  During the quarter,
Salon entered into a real estate lease for its new office facility in
Washington, DC.  The following summarizes Salon’s contractual
obligations as of June 30 2009, and the effect these contractual obligations are
expected to have on Salon’s liquidity and cash flows in future periods (in
thousands):
 
 Payments
      Due By PeriodTotal
                  
                  
                  1
      Year or Less
                  
                  
                  1 -
      3 Years
                  
                  
                  3 -
      5 Years
                  
                  
                  More
      than 5 YearsOperating
      leases
                  
                  $
                  1,959
                  
                  
                  $
                  334
                  
                  
                  $
                  955
                  
                  
                  $
                  670
                  
                  
                  $
                  -Capital
      leases
                  
                  
                  61
                  
                  
                  
                  35
                  
                  
                  
                  26
                  
                  
                  
                  -
                  
                  
                  
                  -Capital
      lease interest
                  
                  
                  10
                  
                  
                  
                  8
                  
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  -Short-term
      borrowing
                  
                  
                  1,800
                  
                  
                  
                  1,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Short-term
      borrowing interest
                  
                  
                  86
                  
                  
                  
                  86
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Convertible
      notes
                  
                  
                  2,612
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,612
                  
                  
                  
                  -Convertible
      notes interest
                  
                  
                  614
                  
                  
                  
                  196
                  
                  
                  
                  374
                  
                  
                  
                  44
                  
                  
                  
                  -Total
                  
                  $
                  7,142
                  
                  
                  $
                  2,459
                  
                  
                  $
                  1,357
                  
                  
                  $
                  3,326
                  
                  
                  $
                  -
 
 
 23
  Item
3.  Quantitative and Qualitative Disclosure About Market
Risk
 
 Salon
maintains all of its cash in immediately available cash deposits at its
bank.  These funds are not subject to market risk and no interest is
paid on such funds.  In May 2007, Salon entered into a credit
agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to
$1.0 million at a rate of prime less 0.25% which will subject Salon to interest
rate risk.  Salon feels that the risk of a rate change is not material
as Salon contemplates having a maximum of only $1.0 million of variable rate
debt outstanding during its fiscal year ending March 31, 2010.  As of
June 30, 2009, Salon has $1.0 million plus accrued interest outstanding under
this agreement, payable on demand.  As Salon conducts all of its
business in the United States, Salon is not subject to foreign exchange
risk.
 
 Item
4.  Controls and Procedures
 
 Evaluation
of Our Disclosure Controls and Internal Controls
  Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
quarterly Form 10-Q report (June 30, 2009), as is defined in Rule 13a-15(e)
promulgated under the Exchange Act.  Our disclosure controls and
procedures are intended to ensure that the information we are required to
disclose in the reports that we file or submit under the  Exchange Act
is (i) recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and (ii)
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as the principal executive and financial
officers, respectively, to allow timely decisions regarding required
disclosures.
 
 Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this quarterly Form 10-Q
report, our disclosure controls and procedures were effective.
 
 Our
management has concluded that the financial statements included in this Form
10-Q present fairly, in all material respects our financial position, results of
operations and cash flows for the periods presented in conformity with generally
accepted accounting principles.
 
 It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met.  In addition, the design of any control system is
based in part upon certain assumptions about the likelihood of future
events.
 
 Changes
in Internal Controls Over Financial Reporting
 
 There was
no change in our internal controls over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
 
 Item
4T.  Controls and Procedures
 
 See
disclosure in Item 4.
 
 24
 
 PART
II: OTHER INFORMATION
 
 Item 1.  Legal Proceedings.
 
 Not
applicable.
 
 Item
1A.  Risk Factors.
 
 Factors That May Affect Salon’s Future Results and Market Price of
Stock
 
 Salon’s
business faces significant risks.  The risks described below may not
be the only risks Salon faces.  Additional risks that are not yet
known or that are currently immaterial may also impair its business operations
or have a negative impact on its stock price.  If any of the events or
circumstances described in the following risks actually occurs, its business,
financial condition or results of operations could suffer, and the trading price
of its common stock could decline.
 
 Salon’s
projected cash flows may not meet expectations
 
 Salon
relies on cash projections to run its business and changes such projections as
new information is made available or events occur.  The most
significant component of Salon’s cash projections is cash to be generated from
advertising sales and, to a lesser extent, cash to be generated from Salon
Premium.  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, Salon’s ability to continue as a going concern may be
adversely affected.
 
 If Salon
forecasts or experiences periods of limited, or diminishing cash resources,
Salon may need to sell additional securities or borrow additional
funds.  There is no guarantee that Salon will be able to issue
additional securities in future periods or borrow additional funds on
commercially reasonable terms to meet its cash needs.  Salon’s ability
to continue as a going concern will be adversely affected if it is unable to
raise additional cash from sources it has relied upon in the past or new
sources.
 
 Salon
has relied on related parties for significant investment capital
 
 Salon has
been relying on cash infusions from related parties to fund
operations.  The related parties are primarily John Warnock, Chairman
of the Board of Salon, and William Hambrecht.  William Hambrecht is
the father of Salon’s Director, Elizabeth Hambrecht. During the current fiscal
year, these related parties have contributed $0.9 million in advance funding to
Salon’s operations.
 
 Curtailment
of cash investments and borrowing guarantees by related parties could
detrimentally impact Salon’s cash availability and its ability to fund its
operations.
  25
 Salon’s
principal stockholders can exercise a controlling influence over Salon’s
business affairs and may make business decisions with which non-principal
stockholders disagree and may affect the value of their investment
  Based on
information available to Salon, the holders of Salon’s Series A, B, C and D
preferred stock collectively own approximately 90% of all voting securities.
These stockholders therefore own a controlling interest in Salon.  Of
this amount, approximately 71% is held by former Directors and related parties,
of which approximately 22% is controlled directly or indirectly by William
Hambrecht and approximately 41% by Chairman and Director John
Warnock.  Therefore, related parties by themselves own a controlling
interest in Salon.
  If these
stockholders were to act together, they would be able to exercise control over
all matters requiring approval by other stockholders, including the election of
Directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of accelerating, delaying or preventing
a change in control of Salon, which could cause Salon’s stock price to
decline.
  Future
sales of significant number of shares of Salon’s common stock by principal
stockholders could cause its stock price to decline
 
 Salon’s
preferred stockholders can convert their 9,467 shares of preferred stock to
approximately 10.1 million shares of common stock at any time.  As
Salon’s common stock is normally thinly traded, if these stockholders were to
convert their shares of preferred stock to common stock and sell the resulting
shares, the per share price of Salon’s common stock may be adversely
affected.
 
 Salon
may not be able to receive the full value of its advertising
credits
 
 As of
June 30, 2009, Salon has $1.8 million of advertising credits for which it has
valued at $1.2 million that expire on December 31, 2009.  Of the $1.8
million, approximately $0.8 million are the obligation of Rainbow Media Holdings
(“Rainbow”) and approximately $1.0 million are the obligation of
NBC.  Based on ongoing discussions, Salon feels that it should be able
to fully utilize the credits with both Rainbow and NBC prior to their
expiration.  Salon expects to recover the full value of all the
advertising credits through usage or settlement in cash, per the terms of the
agreement, but there can be no absolute assurance as to any potential cash
settlement.
  Salon’s
stock has been and will likely continue to be subjected to substantial price and
volume fluctuations due to a number of factors, many of which will be beyond its
control and may prevent its stockholders from reselling its common stock at a
profit
  The
securities markets have experienced significant price and volume
fluctuations.  This market volatility, as well as general economic,
market or political conditions, have and may continue to reduce the market price
of its common stock, regardless of its operating performance.  In
addition, Salon’s stock is thinly traded and operating results could be below
the expectations of public market analysts and investors, and in response, the
market price of its common stock could decrease significantly.
 
 26
 Salon’s
preferred stockholders are entitled to potentially significant liquidation
preferences of Salon’s assets over common stockholders in the event of such an
occurrence
  Salon’s
Series A, B, C and D preferred stockholders have liquidation preferences over
common stockholders of the first approximately $24.5 million in potential sales
proceeds as of June 30, 2009, which includes the effect of undeclared dividends
of $5.0 million.  If a liquidation event were to occur, and preferred
stock dividends were declared, the holders of preferred stock would be entitled
to the first $24.5 million of cash distributions, while the holders of common
stock would receive none of this amount.  If a liquidation event were
to occur in excess of $24.5 million and if preferred stock dividends were to be
declared, the holders of preferred stock would be entitled to receive a
relatively larger distribution than the holders of common stock would be
entitled to receive.
 
 Salon
has historically lacked significant revenues and has a history of
losses
  Salon has
a history of significant losses and expects to incur a loss from operations,
based on generally accepted accounting principals, for its fiscal year ending
March 31, 2010 and potentially in future years.  Once Salon attains
profitability, it may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If revenues grow slower than Salon
anticipates or operating expenses exceed expectations, financial results will
most likely be severely harmed and the ability of Salon to continue its
operations will be seriously jeopardized.
  Burr,
Pilger & Mayer LLP, Salon’s independent registered public accounting firm
for the years ended March 31, 2007, March 31, 2008, and March 31, 2009, included
a “going-concern” audit opinion on the consolidated financial statements for
those years.  The audit opinions report substantial doubt about
Salon’s ability to continue as a going concern, citing issues such as the
history of losses and absence of current profitability.  As a result
of the “going-concern” opinions, Salon’s stock price and investment prospects
have been and will continue to be adversely affected, thus limiting financing
choices and raising concerns about the realization of value on assets and
operations.
  Salon
Premium memberships have been declining and will most likely continue to
decline, adversely affecting revenues and available cash
 
 Salon has
been relying on the revenues and cash generated from Salon Premium subscriptions
since its implementation in April 2002.  Salon Premium subscriptions
grew from nothing to a high of approximately 89,100 as of December 31,
2004.  However, since that time, subscriptions have been declining to
approximately 23,450 as of March 31, 2009 and to approximately 21,700 as of June
30, 2009.  Salon forecasts that these memberships will continue to
decline to approximately 16,000 as of March 31, 2010.  If the decline
were to be in excess of anticipated amounts, Salon’s operations and available
cash could be adversely affected.
  27
 Salon
has depended on advertising sales for much of its revenues, and its inability to
maintain or increase advertising revenues could harm its business
  Maintaining
or increasing Salon’s advertising revenues depends upon many factors, including
whether it will be able to:
  ·
              successfully
      sell and market its Website auto start Site Pass or other rich media
      advertisements;
  ·
              entice
      non Salon Premium Website visitors to view and advertisers to sell new ad
      units and formats;
  ·
              maintain
      a significant number of unique Website visitors and corresponding
      significant reach of Internet
users;
  ·
              maintain
      a significant number of sellable impressions generated from Website
      visitors available to advertisers;
  ·
              successfully
      sell and market its network to
advertisers;
  ·
              increase
      the dollar amount of the advertising orders it
  receives;
  ·
              increase
      awareness of the Salon brand;
  ·
              improve
      the technology for serving advertising on its
  Website;
  ·
              handle
      temporary high volume traffic spikes to its
  Website;
  ·
              accurately
      measure the number and demographic characteristics of its users;
      and
  ·
              attract
      and retain key sales personnel.
 
 Legislative
action and potential new accounting pronouncements are likely to cause its
general and administrative expenses and other operating expenses to
increase
  To comply
with the Sarbanes-Oxley Act of 2002 and proposed accounting changes by the
Securities and Exchange Commission, Salon may be required to hire additional
personnel and utilize additional outside legal, accounting and advisory
services, all of which will cause its general and administrative costs to
increase.
 
 Hackers
may attempt to penetrate Salon’s security system; online security breaches could
harm its business
 
 Consumer
and supplier confidence in Salon’s Website depends on maintaining relevant
security features.  Security breaches also could damage its reputation
and expose it to a risk of loss or litigation.  Experienced
programmers or “hackers” have successfully penetrated sectors of its systems and
Salon expects that these attempts will continue to occur from time to
time.  Because a hacker who is able to penetrate network security
could misappropriate proprietary information or cause interruptions in its
products and services, Salon may have to expend significant capital and
resources to protect against or to alleviate problems caused by these
hackers.  Additionally, Salon may not have a timely remedy against a
hacker who is able to penetrate its network security.  Such security
breaches could materially affect Salon.  In addition, the transmission
of computer viruses resulting from hackers or otherwise could expose it to
significant liability.  Salon’s insurance policies may not be adequate
to reimburse it for losses caused by security breaches.  Salon also
faces risks associated with security breaches affecting third parties with whom
it has relationships.
  28
 With
a volatile share price, Salon may be the target of securities litigation, which
is costly and time-consuming to defend
  In the
past, following periods of market volatility in the price of a company’s
securities, security holders have instituted class action litigation. Salon’s
share price has in the past experienced price volatility, and may continue to do
so in the future.  Many companies have been subjected to this type of
litigation. If the market value of its common stock experiences adverse
fluctuations and it becomes involved in this type of litigation, regardless of
the merits or outcome, Salon could incur substantial legal costs and its
management’s attention could be diverted, causing its business, financial
condition and operating results to suffer.  To date, Salon has not
been subjected to such litigation.
  Salon’s
quarterly operating results are volatile and may adversely affect its common
stock price
  Salon’s
future revenues and operating results, both GAAP and non GAAP, are likely to
vary significantly from quarter to quarter due to a number of factors, many of
which are outside Salon’s control, and any of which could severely harm Salon’s
business. These factors include:
  ·
              Salon’s
      ability to attract and retain advertisers and
  subscribers;
  ·
              Salon’s
      ability to attract and retain a large number of
  users;
  ·
              the
      introduction of new Websites, services or products by Salon or by its
      competitors;
  ·
              the
      timing and uncertainty of Salon’s advertising sales
  cycles;
  ·
              the
      mix of advertisements sold by Salon or its
  competitors;
  ·
              the
      economic and business cycle;
  ·
              Salon’s
      ability to attract, integrate and retain qualified
    personnel;
  ·
              technical
      difficulties or system downtime affecting the Internet generally or the
      operation of Salon’s Website; and
  ·
              the
      amount and timing of operating
costs.
  Due to
the factors noted above and the other risks discussed in this section, one
should not rely on quarter-to-quarter comparisons of Salon’s results of
operations as an indication of future performance.  It is possible
that some future periods’ results of operations may be below the expectations of
public market analysts and investors.  If this occurs, the price of
its common stock may decline.
  29
 The
controversial content of Salon’s Website may limit its revenues
  Salon’s
Website contains, and will continue to contain, content that is politically and
culturally controversial.  As a result of this content, current and
potential advertisers, potential Salon Premium subscribers, or third parties who
contemplate aggregating content, may refuse to do business with
Salon.  Salon’s outspoken stance on political issues has and may
continue to result in negative reactions from some users, commentators and other
media outlets.  From time to time, certain advocacy groups have
successfully targeted Salon’s advertisers in an attempt to persuade such
advertisers to cease doing business with Salon.  These efforts may be
a material impediment to Salon’s ability to grow and maintain advertising
revenue.
  Salon’s
promotion of the Salon brand must be successful to attract and retain users as
well as advertisers and strategic partners
  The
success of the Salon brand depends largely on its ability to provide high
quality content and services.  If Internet users do not perceive
Salon’s existing content and services to be of high quality, or if Salon
introduces new content and services or enters into new business ventures that
are not favorably perceived by users, Salon may not be successful in promoting
and maintaining the Salon brand.  Any change in the focus of its
operations creates a risk of diluting its brand, confusing consumers and
decreasing the value of its user base to advertisers.  If Salon is
unable to maintain or grow the Salon brand, its business could be severely
harmed.
  Salon
needs to hire, integrate and/or retain qualified personnel because these
individuals are important to its growth
  Salon’s
success significantly depends on key personnel.  In addition, because
Salon’s users must perceive the content of Salon’s Website as having been
created by credible and notable sources, Salon’s success also depends on the
name recognition and reputation of its editorial staff.  Due to
Salon’s history of losses, Salon may experience difficulty in hiring and
retaining highly skilled employees with appropriate
qualifications.  Salon may be unable to retain its current key
employees or attract, integrate or retain other qualified employees in the
future.  If Salon does not succeed in attracting new personnel or
retaining and motivating its current personnel, its business could be
harmed.
 
 Salon
may expend significant resources to protect its intellectual property rights or
to defend claims of infringement by third parties, and if Salon is not
successful it may lose rights to use significant material or be required to pay
significant fees
 
 Salon’s
success and ability to compete are significantly dependent on its proprietary
content.  Salon relies exclusively on copyright law to protect its
content.  While Salon actively takes steps to protect its proprietary
rights, these steps may not be adequate to prevent the infringement or
misappropriation of its content, which could severely harm its
business.  Salon also licenses content from various freelance
providers and other third-party content providers.  While Salon
attempts to ensure that such content may be freely licensed to it, other parties
may assert claims of infringement against it relating to such
content.
 
 Salon may
need to obtain licenses from others to refine, develop, market and deliver new
services.  Salon may not be able to obtain any such licenses on
commercially reasonable terms or at all or rights granted pursuant to any
licenses may not be valid and enforceable.
 
 30
 In April
1999 Salon acquired the Internet address www.salon.com.  Because
www.salon.com is the address of the main home page to its Website and
incorporates Salon’s name, it is a vital part of its intellectual property
assets.  Salon does not have a registered trademark on the address,
and therefore it may be difficult for it to prevent a third party from
infringing on its intellectual property rights to the address.  If
Salon fails to adequately protect its rights to the Website address, or if a
third party infringes its rights to the address, or otherwise dilutes the value
of www.salon.com, its business could be harmed.
 
 Salon’s
technology development efforts may not be successful in improving the
functionality of its network, which could result in reduced traffic on its
Website, reduced advertising revenues, or a loss of Salon Premium
subscribers
 
 Salon is
constantly upgrading its technology to manage its Website and its Salon Premium
program.  In addition, it is creating technology for new products that
Salon expects to launch during the current fiscal year.  If these
systems do not work as intended, or if Salon is unable to continue to develop
these systems to keep up with the rapid evolution of technology for content
delivery and subscription management, its Website or subscription management
systems may not operate properly, which could harm Salon’s
business.  Additionally, software product design, development and
enhancement involve creativity, expense and the use of new development tools and
learning processes.  Delays in software development processes are
common, as are project failures, and either factor could harm Salon’s
business.  Moreover, complex software products such as its online
publishing and subscription management systems frequently contain undetected
errors or shortcomings, and may fail to perform or scale as
expected.  Although Salon has tested and will continue to test its
systems, errors or deficiencies may be found in these systems that may adversely
impact its business.
 
 Salon
relies on software, purchased from an independent supplier, to deliver and
report some of its advertising, the failure of which could impair its
business
 
 Salon
uses software, purchased from an independent supplier, to manage and measure the
delivery of advertising on its Website.  The software is essential to
Salon whenever an advertiser does not stipulate ad serving from a third party
such as Doubleclick.  This type of software may fail to perform as
expected.  If this software malfunctions, advertisements may not be
served correctly on its Website, or if the software does not accurately capture
impression information, then Salon’s advertising revenues could be reduced, and
its business could be harmed.
 
 Salon
may be held liable for content or third party links on its Website or content
distributed to third parties
 
 As a
publisher and distributor of content over the Internet, including user-generated
content, links to third party Websites that may be accessible through Salon.com,
or content that includes links or references to a third party’s Website, Salon
faces potential liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature, content or
ownership of the material that is published on or distributed from its
Website.  These types of claims have been brought, sometimes
successfully, against online services, Websites and print publications in the
past.  Other claims may be based on errors or false or misleading
information provided on linked Websites, including information deemed to
constitute professional advice such as legal, medical, financial or investment
advice.  Other claims may be based on links to sexually explicit
Websites.  Although Salon carries general liability and media
insurance, its insurance may not be adequate to indemnify Salon for all
liabilities imposed.  Any liability that is not covered by its
insurance or is in excess of its insurance coverage could severely harm its
financial condition and business.  Implementing measures to reduce its
exposure to these forms of liability may require Salon to spend substantial
resources and limit the attractiveness of Salon’s service to users.
 
 31
 Concerns
about transactional security may hinder electronic commerce on Salon’s Website
and may expose Salon to potential liability
 
 A
significant barrier to sale of subscriptions and electronic commerce is the
secure transmission of confidential information over public
networks.  Any breach in Salon’s security could expose it to a risk of
loss or litigation and possible liability.  Salon relies on encryption
and authentication technology licensed from third parties to provide secure
transmission of confidential information.  As a result of advances in
the capabilities of Internet hackers, or other developments, a compromise or
breach of the algorithms Salon uses to protect customer transaction data may
occur.  A compromise of Salon’s security could severely harm its
business.  A party who is able to circumvent Salon’s security measures
could misappropriate proprietary information, including customer credit card
information, or cause interruptions in the operation of its
Website.
 
 Salon may
be required to expend significant capital and other resources to protect against
the threat of security breaches or to alleviate problems caused by these
breaches.  Protection may not be available at a reasonable price or at
all.
 
 Salon’s
internally developed software and software platforms provided by a third party
to manage Salon’s subscription business might fail resulting in lost
subscription income
 
 Salon’s
software to manage its subscription business was developed internally to
interface with the software provided by a third party.  The third
party’s software provides a gateway to authenticate credit card
transactions.  Even though Salon’s system to manage its Salon Premium
program is Payment Card Industry (PCI) compliant, if this system were to fail or
not function as intended, credit card transactions might not be processed and
Salon’s cash resources and revenues would therefore be harmed.
 
 Salon’s
systems may fail due to natural disasters, telecommunications failures and other
events, any of which would limit user traffic
 
 Substantially
all of Salon’s communications hardware and computer hardware operations for its
Website are in a facility in Sacramento, California that has been extensively
retrofitted to withstand a major earthquake.  Fire, floods,
earthquakes, power loss, telecommunications failures, break-ins, supplier
failure to meet commitments, and similar events could damage these systems and
cause interruptions in its services.  Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting Salon’s Website and could cause advertisers to terminate any agreements
with Salon.  In addition, Salon could lose advertising revenues during
these interruptions and user satisfaction could be negatively impacted if the
service is slow or unavailable.If
any of these circumstances occurred, Salon’s business could be
harmed.  Salon’s insurance policies may not adequately compensate it
for losses that may occur due to any failures of or interruptions in its
systems.  Salon does not presently have a formal disaster recovery
plan.
 
 Salon’s
Website must accommodate a high volume of traffic and deliver frequently updated
information.  It is possible that Salon will experience systems
failures in the future and that such failures could harm its
business.  In addition, its users depend on Internet service
providers, online service providers and other Website operators for access to
its Website.  Many of these providers and operators have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to its systems.  Any of
these system failures could harm its business.
 
 32
 Privacy
concerns could impair Salon’s business
  Salon has
a policy against using personally identifiable information obtained from users
of its Website and services without the user’s permission.  In the
past, the Federal Trade Commission has investigated companies that have used
personally identifiable information without permission or in violation of a
stated privacy policy.  If Salon uses personal information without
permission or in violation of its policy, Salon may face potential liability for
invasion of privacy for compiling and providing information to its corporate
customers and electronic commerce merchants.  In addition, legislative
or regulatory requirements may heighten these concerns if businesses must notify
Internet users that the data may be used by marketing entities to direct product
promotion and advertising to the user.  Other countries and political
entities, such as the European Union, have adopted such legislation or
regulatory requirements. The United States may adopt similar legislation or
regulatory requirements.  If consumer privacy concerns are not
adequately addressed, its business, financial condition and results of
operations could be materially harmed.
 
 Possible
state sales and other taxes could adversely affect Salon’s results of
operations
 
 Salon
does not collect sales or other taxes from individuals who sign up for Salon
subscriptions.  During the year ended March 31, 2008, the State of
California audited Salon’s sales tax returns and found Salon in compliance with
its filings and did not object to the fact that it did not collect sales tax on
subscriptions.  However, one or more other states may seek to impose
sales tax collection obligations on out-of-state companies, including Salon,
which engage in or facilitate electronic commerce.  State and local
governments have discussed and made proposals imposing taxes on the sale of
goods and services through the Internet.  Such proposals, if adopted,
could substantially impair the growth of electronic commerce and could reduce
Salon’s ability to derive revenue from electronic commerce.  Moreover,
if any state or foreign country were to assert successfully that Salon should
collect sales or other taxes on the exchange of merchandise on its network or to
tax revenue generated from Salon subscriptions, its financial results could be
harmed.
  Provisions
in Delaware law and Salon’s charter, stock option agreements and offer letters
to executive officers may prevent or delay a change of control
  Salon is
subject to the Delaware anti-takeover laws regulating corporate
takeovers.  These anti-takeover laws prevent Delaware corporations
from engaging in a merger or sale of more than 10% of its assets with any
stockholder, including all affiliates and associates of the stockholder, who
owns 15% or more of the corporation’s outstanding voting stock, for three years
following the date that the stockholder acquired 15% or more of the
corporation’s assets unless:
  ·
              the
      Board of Directors approved the transaction in which the stockholder
      acquired 15% or more of the corporation’s
  assets;
 
 ·
              after
      the transaction in which the stockholder acquired 15% or more of the
      corporation’s assets, the stockholder owned at least 85% of the
      corporation’s outstanding voting stock, excluding shares owned by
      directors, officers and employee stock plans in which employee
      participants do not have the right to determine confidentially whether
      shares held under the plan will be tendered in a tender or exchange offer;
      or
 
 ·
              on
      or after this date, the merger or sale is approved by the Board of
      Directors and the holders of at least two-thirds of the outstanding voting
      stock that is not owned by the
stockholder.
  33
 A
Delaware corporation may opt out of the Delaware anti-takeover laws if its
certificate of incorporation or bylaws so provide. Salon has not opted out of
the provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Salon and may discourage
attempts by other companies to acquire Salon.
  Salon’s
certificate of incorporation and bylaws include a number of provisions that may
deter or impede hostile takeovers or changes of control or management. These
provisions include:
  ·
              Salon’s
      Board is classified into three classes of Directors as nearly equal in
      size as possible with staggered three year-terms;
  and
 
 ·
              special
      meetings of the stockholders may be called only by the Chairman of the
      Board, the Chief Executive Officer or the Board of
    Directors.
 
 These
provisions may have the effect of delaying or preventing a change of
control.
  Salon’s
certificate of incorporation and bylaws provide that it will indemnify officers
and Directors against losses that they may incur in investigations and legal
proceedings resulting from their services to Salon, which may include services
in connection with takeover defense measures. These provisions may have the
effect of preventing changes in Salon’s management.
  In
addition, employment agreements with certain executive officers provide for the
payment of severance and acceleration of the vesting of options and restricted
stock in the event of termination of the executive officer following a change of
control of Salon.  These provisions could have the effect of
discouraging potential takeover attempts.
  34
 Item 2.  Unregistered Sales of Equity Securities and Use
of Proceeds.
 
 Not
applicable.
 
 Item 3.  Defaults Upon Senior Securities.
 
 Not
applicable.
 
 Item
4.  Submission of Matters to a Vote of Security Holders.
 
 Not
applicable.
 
 Item 5.  Other Information.
 
 Not
applicable.
 
 Item
6.  Exhibits
 
 (a)      Exhibits.
  31.1
              Certification
      of Richard Gingras, Chief Executive Officer of the Registrant pursuant to
      Section 302, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 31.2
              Certification
      of Norman Blashka, Chief Financial Officer of the Registrant pursuant to
      Section 302, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 32.1
              Certification
      of Richard Gingras, Chief Executive Officer of the Registrant pursuant to
      Section 906, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 32.2
              Certification
      of Norman Blashka, Chief Financial Officer of the Registrant pursuant to
      Section 906, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 
 35
 Signatures
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 SALON
      MEDIA GROUP, INC.Dated:  August
      14, 2009
                          By:
                          /s/Richard
      GingrasRichard
      Gingras
                            Chief
      Executive OfficerDated:  August
      14, 2009
                          
                          /s/Norman
      BlashkaNorman
      Blashka
                            Executive
      Vice President and
                            Chief
      Financial Officer
  36