Foe Salon Media Group

...

Financial Analysis

At the end of Fiscal Year 2015, Salon reported revenues of $4.95 million, this is a decrease of -17.6% from the previous year (See Exhibit 3). Cost of goods sold stayed relatively stable on absolute terms, yet, on a relative basis, the decrease in revenues led to a sharp drop in gross margin, 20.3% versus 42.6% the prior year. Operating expenses also increased over this period, as technology buildouts for mobile and video, as well as site maintenance increased. Salon reported a net loss of $3.94 million, marking 18 years of continued losses.

On the balance sheet, Salon had a negative working capital, as current assets were $1.7 million and current liabilities $9.8 million. This, along with reported shareholder equity of $-7.7 million, mean the company could run into issues funding itself in the future since it has exhausted its lines of credit and would more than likely have issues raising equity in the future. Over the life of the company, investors have contributed more than $115 million in equity to the company, and continued losses have entirely eaten away at this capital base through time.

Throughout the company’s history, it has relied on two principal investors, John Warnock, Chairman of the Board of Salon, and William Hambrecht, Director, for additional paid-in-capital and advances to remain solvent. Going forward, Salon will remain dependent on these two individuals for financial support while they look for possible external financial partners. Though, erratic revenues, continued projected losses, and inconsistent user growth, will make finding an external financial partner very difficult.

Deal structure

Team

Salon’s leadership team is comprised of 5 key people. Cynthia Jeffers, Chief Executive Office and Chief Technology Officer, Elizabeth Hambrecht, Chief Financial Officer, David Daley, Editor-in-Chief, Matthew Sussberg, Vice President of Sales, and John Warnock Chairman of the Board. These five positions comprise the most critical positions in the firm, as they decide the strategy, produce content, and generate revenue. Additionally, Salon has relied heavily on John Warnock for financial support (See Exhibit 4 for biographies).

Cynthia Jeffers joined the firm on May 7, 2012. Her prior technical experiences, combined with new fresh ideas for content and strategy helped tip the board in her favor. Prior to joining Salon, Jeffers was technical director at the Huffington Post, which is known for its aggressive use of technology to drive traffic through innovations such as editorial tools for commentary and social media integration. Her technical background includes experience with web, mobile and new and emerging platforms. Given Salon’s web-only presence, and transition to mobile readership, Jeffers appears to be a good fit to help the company make the necessary strides in mobile. With that being said, Jeffers has never been CEO before, nor has she had experience in turnarounds nor operating a company in severe financial distress. The company’s inability to make key investments could limit her ability to take strategy form thoughts all the way to execution.

Matthew Sussberg, joined Salon in 2012 as VP of Sales. Given Salon’s reliance on advertising sales, it was imperative to hire talent experienced in growing digital ad sales. Matthew brings experience in growing advertising revenues from his experience at both Us Weekly and The Huffington Post. Since Matthew joined the team, he has emphasized selling advertising not only through direct sales, but also through programmatic options. The big challenge, which is industry wide, is how to monetize the mobile segment, as Salon’s audience is increasingly accessing its content through mobile. Monetizing mobile must be addressed from a technology and sales standpoint, and the changing landscape has proven challenging for the sales team to date.

Another critical team member is Elizabeth Hambrecht, who currently resides as Chief Financial Officer. Elizabeth has held a variety of roles at Salon, including previous stints as CEO, CFO, and as a Director since 2003. Elizabeth’s tenure and experience within the firm makes her a vital member of the team. Before joining Salon, Elizabeth was a co-founder of www.asiacontent.com, and also helped fund and launch www.boom.com, which was Hong Kong’s first electronic brokerage site. Her previous experience helped Elizabeth rise from President to CEO at Salon. It is unclear why she stepped down as CEO, as the press release and news sources offer no explanation. Additionally, one thing that is slightly concerning about Elizabeth, and her position in the company, is that her father is William Hambrecht, who has been a majority investor throughout Salon’s history.

David Daley servers as the Editor-in-Chief for Salon. (what bout Dave’s experience makes him a good or bad fit for this role?

Chairman John Warnock has proven to be a critical member of the Salon team, as he has served as Chairman of the board since 2006. He has, on several occasions, provide the financial capital needed to continue Salon’s operations. No one else has more skin in the game than him. Warnock founded and served as CEO and CTO of Adobe Systems.

Do we believe this team is the team capable to run the business going forward?

Resources

Intro paragraph

Salon faces challenges in retaining and attracting talent due to budget constraints and several rounds of layoffs. Currently, Salon has 47 employees, compared to its peak, when it employed between 150 to 175 people. Though Salon provides stock options, these are ultimately worthless as the strike price on them is well above the current trading price, so hard to see how it can use these as incentives to attract or retain employees.

Salon has developed a number of relationships with key accounts such as Siemens, AT&T, Amazon, Adobe, Cadillac, Infiniti, Lexus, Cole Haan, Warner Brothers, MSNBC, HBO, Showtime, FX, IFC, AMC, and National Geographic. In order to see revenue growth with these accounts, Salon will need to demonstrate to these key accounts that its unique visitors will continue to increase along with adequately developing a strategy to monetize mobile, since Mobile views are approaching 50% of its site’s traffic.

Additionally, Salon generates revenue from referring users and licensing its content to third-party websites. These partnerships have proven additional bump in revenue, but are not a dominant contributor. In fiscal year