Remark Holdings
HSW International, Inc. (Form: 10-Q, Received: 05/16/2011 17:32:43)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 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 March 31, 2011

OR

o   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 001-33720
________________________________________

HSW INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
33-1135689
(State of Incorporation)
 
(I.R.S. Employer
   
Identification Number)

6 Concourse Parkway, Suite 1500
Atlanta, Georgia 30328
 (Address of principal executive offices, including zip code)

404-364-5823
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o   No o

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 the 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 o
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o   No  x

At May 16, 2011, the number of common shares outstanding was 5,424,455.

 
 

 


TABLE OF CONTENTS

   
Page
 PART I – FINANCIAL INFORMATION
 
     
Condensed Consolidated Financial Statements (unaudited)
 
 
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 (unaudited)
1
 
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (unaudited)
 
2
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)
 
3
 
Notes to Condensed Consolidated Financial Statements (unaudited)
4
     
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
     
Quantitative and Qualitative Disclosures about Market Risk
18
     
Controls and Procedures
18
     
 
PART II – OTHER INFORMATION
 
     
Legal Proceedings
19
     
Risk Factors
19
     
Unregistered Sales of Equity Securities and Use of Proceeds
31
     
Defaults Upon Senior Securities
31
     
Reserved
31
     
Other Information
31
     
Exhibits
32
     
 
33

 
 

 
 
PART I – FINANCIAL INFORMATIO N

Item 1 . Condensed Consolidated Financial Statements

HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Expressed in U.S. Dollars)

   
March 31, 2011
   
December 31, 2010
 
             
 Assets
           
             
Current assets
           
 Cash and cash equivalents
  $ 3,872,176     $ 4,843,893  
 Trade accounts receivable, net
    23,620       42,741  
 Trade accounts receivable due from affiliates
    545,948       658,944  
 Prepaid expenses and other current assets
    822,449       566,174  
 Total current assets
    5,264,193       6,111,752  
                 
Property and equipment, net
    437,155       306,460  
Investment in unconsolidated affiliate
    2,541,418       2,972,135  
Licenses to operate in China
    481,000       481,000  
Intangibles, net
    16,429       16,429  
 Total assets
  $ 8,740,195     $ 9,887,776  
                 
 Liabilities and Stockholders’ Equity
               
                 
Current liabilities
               
 Accounts payable
  $ 405,833     $ 382,515  
 Advances from shareholder
    85,745       85,745  
 Accrued expenses and other current liabilities
    435,175       523,384  
 Total current liabilities
    926,753       991,644  
                 
Long term liabilities
               
    Deferred tax liability
    120,250       120,250  
    Obligations under operating leases
    217,920       -  
                 
Commitments and contingencies
    -       -  
                 
Stockholders’ equity
               
 Preferred stock, $.001 par value; 1,000,000 shares authorized, none issued
    -       -  
 Common stock, $.001 par value; 20,000,000 shares authorized,  5,424,455 and 5,375,455 issued and outstanding at March 31,  2011
               
and December 31, 2010, respectively
    5,424       5,375  
 Additional paid-in-capital
    101,052,056       100,701,356  
 Accumulated other comprehensive income
    40,421       38,531  
 Accumulated deficit
    (93,622,629 )     (91,969,380 )
 Total stockholders’ equity
    7,475,272       8,775,882  
 Total liabilities and stockholders’ equity
  $ 8,740,195     $ 9,887,776  


The accompanying notes are an integral part of these condensed consolidated financial statements.

 
1

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Expressed U.S. Dollars)
   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Operating revenue
           
 Web platform services from affiliates
  $ 1,509,597     $ 1,346,630  
 Digital online publishing
    36 ,477       27,481  
   Total revenue
    1,546,074       1,374,111  
                 
Cost of services
    1,075,874       1,149,304  
                 
Gross margin
    470,200       224,807  
                 
Operating expenses
               
 Selling, general and administrative (including stock-based
               
 compensation expense of $222,665 and $38,968 for
               
 the three months ended March 31, 2011 and 2010,
               
 respectively)
    1,609,087       1,503,975  
 Depreciation and amortization
    68,267       75,382  
   Total operating expenses
    1,677,354       1,579,357  
                 
Operating loss
    (1,207,154 )     (1,354,550 )
                 
Other income
               
 Interest income (expense)
    (11,195 )     5,271  
 Other expense
    (4,182 )     -  
   Total other income (expense)
    (15,377 )     5,271  
                 
Loss from operations before income taxes and equity in loss of equity
               
       method investment
    (1,222,531 )     (1,349,279 )
                 
Equity in loss of equity-method investment, net of taxes
    (430,717 )     (77,494 )
                 
                 
Net loss
  $ (1,653,248 )   $ (1,426,773 )
                 
Net loss per share
               
 Net loss per share, basic and diluted
  $ (0.31 )   $ (0.27 )
                 
Basic and diluted weighted average shares outstanding
    5,388,289       5,369,829  


The accompanying notes are an integral part of these condensed consolidated financial statements.


 
2

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Expressed in U.S. Dollars)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
 Net cash used in operating activities
  $ (754,694 )   $ (1,217,512 )
Cash used in operating activities
    (754,694 )     (1,217,512 )
                 
Cash flows from investing activities:
               
 Purchases of property and equipment
    (198,913 )     (4,608 )
Cash used in investing activities
    (198,913 )     (4,608 )
                 
Cash flows from financing activities:
               
  Debt issuance costs
    (20,000 )     -  
Cash used in financing activities
    (20,000 )     -  
                 
Net change in cash and cash equivalents:
    (973,607 )     (1,222,120 )
Impact of foreign currency translation on cash
    1,890       (5,532 )
Cash and cash equivalents at beginning of period
    4,843,893       8,724,546  
Cash and cash equivalents at end of period
  $ 3,872,176     $ 7,496,894  

 
Three Months  Ended March 31,
 
2011
2010
     
Supplemental disclosure of cash flow information
   
     
Other non-cash financing and investing activities
   
Debt issuance costs
              128,000


The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 


HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)


1.  DESCRIPTION OF BUSINESS

Overview

HSW International, Inc. (“HSWI”, “HSW International”, or the "Company") is an online media company that develops and operates next-generation web publishing platforms combining traditional web publishing with social media.  Our co-founding and continuing development of Sharecare, Inc. with Harpo Productions, Sony Pictures Television, Discovery Communications, Jeff Arnold, and Dr. Mehmet Oz created a highly searchable social Q&A healthcare platform organizing the questions and answers of health.  Our international websites published under the HowStuffWorks brand provide readers in China and Brazil with thousands of articles about how the world around them works, serving as destinations for credible, easy-to-understand reference information.  HSWI is the exclusive licensee in China and Brazil for the digital publication of translated content from Discovery, Inc.’s HowStuffWorks.com and in China for the digital publication of translated content from World Book, Inc., publisher of World Book Encyclopedia.  We generate revenue primarily through service fees charged to clients for web platform development and operation services and the sale of online advertising on our websites.  Information on our websites is not incorporated by reference into this Form 10-Q.  We were incorporated in Delaware in March 2006.  In April 2011, we relocated our headquarters to 6 Concourse Parkway, Suite 1500, Atlanta, Georgia 30328.

Liquidity Considerations

Our cash balance was approximately $3.9 million as of March 31, 2011, and we have access to a $1.0 million line of credit.  We consistently monitor our cash position to make adjustments as we believe necessary to maintain our objectives of funding ongoing operations and continuing to make technological investments in our web platform business and our websites and their respective brands.

The Company develops Internet businesses in two emerging markets, and a web platform business, and intends to plan, develop and build a comprehensive personal finance portal in the United States as a new business initiative. We currently operate at a loss and experience negative cash flow from operations.  While we believe that our cash resources on hand together with our line of credit are sufficient to fund our existing businesses for a period of at least 12 months, our cash resources are not sufficient to fund these businesses for an extended period beyond that unless revenues increase significantly and/or we find other sources of capital, neither of which can be assured.  Our management and directors continue to evaluate our progress and likelihood of success in each of our markets, and our ability to raise additional capital, against the relative value of our resources and other opportunities.  Accordingly, we may decide to suspend or reduce our activities in one or more of our markets in order to focus our limited resources in the other(s).  In February 2011, we implemented certain cost savings measures in our Brazil operations in connection with our search for a strategic media partner and consideration of other strategic alternatives.  Our long term plans require additional capital to support the development of our new business initiatives, namely the establishment of new content vertical websites utilizing our Web 3.0 platform.  We are evaluating and pursuing various methods to raise this capital, which may include a public or private debt or equity financing, strategic relationships or other arrangements, or the sale of non-strategic assets.  There can be no assurance that either of these options will be available on acceptable terms, if at all, or that the financing will not be dilutive to our stockholders.
 
We expect that our service agreements to provide web platform services to customers will continue to generate revenues for our company during 2011; and we continue to pursue activities that identify and engage new customers for the business.  Our current web platform services agreement with Sharecare (our largest customer, accounting for approximately 73% of revenues during the three months ended March 31, 2011) expires in December 2011.  Given that we do not expect the Company and Sharecare will extend the term or enter into a new services agreement, there can be no assurance that the revenues generated from service agreements in the future will be sufficient to cover our liquidity needs for the long-term.  Further, Sharecare may be required to raise additional capital in 2011 in order to fund its operations, including its obligations to us under the services agreement.  We currently do not have any material commitments for capital expenditures.  As discussed above, we continue to explore various business initiatives that may lead to additional sources of revenue and growth to replace our revenues from Sharecare, which we do not expect to recur in 2012.  To the extent we are unable to redeploy our cost based related to the Sharecare agreement against new revenue generating opportunities, we may decide to suspend or reduce these costs as part of our cash management strategy.
 

 
4

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)

On March 4, 2011, the Company entered into a senior revolving credit agreement with Theorem Capital, LLC (the "Lender") pursuant to which the Lender agreed to extend HSWI a line of credit of up to $1.0 million for a period of one year from March 4, 2011, subject to renewal by the Lender, at its sole discretion, for an additional one-year period. Under the terms of the credit agreement, HSWI may, in its sole discretion, borrow from the Lender up to $1.0 million from time to time during the term of the credit agreement, in minimum loan amounts of $200,000.  HSWI entered into this senior revolving credit agreement to provide flexibility as HSWI builds and executes upon its latest initiatives.
 
Any borrowings under the credit agreement will be senior unsecured indebtedness of HSWI and may be used for HSWI's working capital and general corporate purposes. Any borrowings will be due and payable, with accrued interest thereon, on March 4, 2012, subject to any renewal of the line of credit, at the Lender's discretion. During the term of the credit agreement, any principal amounts repaid by HSWI may be re-borrowed.  As of March 31, 2011, HSWI had the full $1.0 million available to borrow under this agreement.    Borrowings under the credit agreement will bear interest at a fixed rate equal to 8% per annum, payable on or before March 4, 2012, unless the line of credit is renewed and the payment date extended, in which case interest shall be payable on or before March 4, 2013.


2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements from continuing operations include the accounts of HSWI and our subsidiaries (1) HSW Brasil - Tecnologia e Informação Ltda., (2) HSW (HK) Inc. Limited, (3) Bonet (Beijing) Technology Limited Liability Company, and (4) BoWenWang Technology (Beijing) Limited Liability Company.  The equity of certain of these entities is partially or fully held by citizens of the country of incorporation to comply with local laws and regulations.

Equity investments in which we exercise significant influence but do not control and for which we are not the primary beneficiary are accounted for using the equity method.  In the event of a change in ownership or degree of influence, any gain or loss resulting from an investee share issuance will be recorded in earnings.  Investments in which we are not able to exercise significant influence over the investee are accounted for under the cost method.  Controlling interest is determined by majority ownership interest and the ability to unilaterally direct or cause the direction of management and policies of an entity after considering any third-party participatory rights.  The Company applies the guidelines set forth in Accounting Standards Codification (or ASC) 810 in evaluating whether it has interests in variable interest entities, or VIEs, and in determining whether to consolidate any such entities.  All inter-company accounts and transactions between consolidated companies have been eliminated in consolidation.

We use qualitative analysis to determine whether or not we are the primary beneficiary of a VIE.  We consider the rights and obligations conveyed by our implicit and explicit variable interest in each VIE and the relationship of these with the variable interests held by other parties to determine whether our variable interests have the power to control the VIE’s primary activities and will absorb a majority of a VIE’s expected losses, receive a majority of its expected residual returns, or both.  If we determine that our variable interests will absorb a majority of the VIE’s expected losses, receive a majority of its expected residual returns, or both, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate. 

We have determined that Bonet (Beijing) Technology Limited Liability Company is a variable interest entity as defined in the ASC 810, “Consolidation.”  We are the primary beneficiary of this entity and accordingly, we have consolidated the results of this entity along with our other subsidiaries.  We have determined that our interest in Sharecare is not a VIE.  Accordingly, since we exercise significant influence but do not control the entity, we use the equity method to account for our investment in Sharecare.

The accompanying interim condensed consolidated financial statements for the three months ended March 31, 2011 and 2010 are unaudited. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for financial information have been omitted pursuant to the rules and regulations of Article 10 of SEC Regulation S-X. In the opinion of management, these condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows for the periods indicated. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United

 
5

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)

States of America. Operating results for the three months ended March 31, 2011, are not necessarily indicative of results that may be expected for any other future interim period or for the year ending December 31, 2011. You should read the unaudited condensed consolidated financial statements in conjunction with Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as with HSWI’s consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Significant Accounting Policies

Debt Issuance Costs

The Company capitalizes costs associated with entering into the revolving credit facility and amortizes them as additional interest expense over the term of the credit facility on a straight-line basis.

In connection with the revolving credit agreement entered into in March 2011, the Company capitalized debt issuance costs of approximately $148,000 to our lender consisting of $20,000 in cash and $128,000 in stock warrants, which were deferred and will be amortized over the life of the revolving credit agreement.

Recent Accounting Pronouncements

Effective January 1, 2011, we adopted new accounting guidance for revenue arrangements with multiple deliverables that are outside of the scope of previous authoritative software revenue recognition guidance. The new accounting guidance provides that, when vendor-specific objective evidence or third-party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration based on the relative selling prices of the separate deliverables (the “relative selling price method”). The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. We concluded the new accounting guidance did not have a material impact on our results of operations, cash flows or financial position for the quarter ended March 31, 2011, as the guidance applied to revenue arrangements with multiple deliverables, which were not significant.
 
3.  INVESTMENT IN SHARECARE

As of March 31, 2011, HSWI owned approximately 16.5% of the outstanding common stock of Sharecare. We account for our equity interest in Sharecare under the equity method of accounting, as we exercise significant influence over Sharecare due to our seat on the Sharecare board of directors and also due to our involvement in the development of the Sharecare website.  Under this method, we record our proportionate share of Sharecare’s net income or loss based on the financial results of Sharecare.

The difference between the carrying amount of our investment balance in Sharecare and our proportionate share of Sharecare's underlying net assets was approximately $2.6 million as of March 31, 2011.  The difference is characterized as goodwill and is subject to review in accordance with ASC 323 for an other than temporary decline in value.  Our investment balance in Sharecare reflects the intercompany profit elimination.

For the quarter ended March 31, 2010, the Company recorded a non-cash adjustment to equity in loss of equity-method investment of approximately $100,000 to correct our investment in unconsolidated affiliate balance.  The Company determined this out-of-period adjustment was not material to the consolidated financial statements for the quarter ended March 31, 2010 or prior period financial statements.



 
6

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)

The following table shows select financial data of Sharecare including HSWI’s proportional share of net loss in Sharecare prior to the elimination of our portion of intercompany profit included in Sharecare’s earnings for the periods ended March 31, 2011 and 2010, of approximately $42,000 and $40,000, respectively:

   
For the Quarter Ended March 31, 2011
   
For the Quarter Ended March 31, 2010
 
Revenues
  $ 2,732,918     $ 474,104  
Gross profit
    2,269,194       274,458  
Loss from operations
    (2,262,616 )     (1,995,897 )
Net loss
    (2,358,323 )     (1,986,211 )
Proportional share of investee loss
  $ (388,887 )   $ (358,256 )

During the quarter ended March 31, 2011 and 2010, HSWI recorded web platform services revenue of approximately $1.1 million and $1.3 million, respectively, related to services performed under the Sharecare services agreement.

4.  SEGMENTS

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.  Because of our integrated business structure, operating costs included in one segment can benefit other segments, and therefore these segments are not designed to measure operating income or loss directly related to the products included in each segment.  Reconciling amounts include adjustments to conform with U.S. GAAP and corporate-level activity not specifically attributed to a segment.  Corporate expenses include, among other items: corporate-level general and administration costs, technology costs and on-going maintenance charges; share-based compensation expense related to stock and stock option grants; depreciation and amortization expense; and interest expense and income.

Our digital online publishing segment consists of our websites in Brazil and China and generates revenues from advertisers based in the respective countries.  The operating results for services performed under the Sharecare and Discovery services agreement are included in the web platform services segment.

Revenue, operating loss and total assets regarding reportable segments are presented in the following tables:

   
Digital Online Publishing
   
Web Platform Services
   
Corporate
   
Total
 
                         
Three Months Ended March 31, 2011
                       
 Revenue
  $ 36,477     $ 1,509,597     $ -     $ 1,546,074  
                                 
 Operating (loss) income
    (223,198 )     436,541       (1,420,497 )     (1,207,154 )
 Interest expense
    -       -       (11,195 )     (11,195 )
 Other expense
    (4,182 )     -       (430,717 )     (434,899 )
 Net (Loss)income
  $ (227,380 )   $ 436,541     $ (1,862,409 )   $ (1,653,248 )



 
7

 


HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)


   
Digital Online Publishing
   
Web Platform Services
   
Corporate
   
Total
 
                         
Three Months Ended March 31, 2010
                       
 Revenue
  $ 27,481     $ 1,346,630     $ -     $ 1,374,111  
                                 
 Operating (loss) income
    (322,665 )     225,000       (1,256,885 )     (1,354,550 )
 Interest income
    -       -       5,271       5,271  
 Other expense
    -       -       (77,494 )     (77,494 )
 Net (Loss)income
  $ (322,665 )   $ 225,000     $ (1,329,108 )   $ (1,426,773 )



   
As of
 
   
March 31, 2011
   
December 31, 2010
 
             
Total assets:
           
Web platform services
  $ 545,948     $ 658,944  
Digital online publishing
    409,500       400,660  
 Business segments
    955,448       1,059,604  
Corporate
    7,784,747       8,828,172  
 Total assets
  $ 8,740,195     $ 9,887,776  


5.  DEBT

Credit Facility

On March 4, 2011, the Company entered into a senior revolving credit agreement with Theorem Capital, LLC (the "Lender") pursuant to which the Lender has agreed to extend HSWI a line of credit of up to $1.0 million for a period of one year from March 4, 2011, subject to renewal by the Lender, at its sole discretion, for an additional one-year period. Under the terms of the credit agreement, HSWI may, in its sole discretion, borrow from the Lender up to $1.0 million from time to time during the term of the credit agreement, in minimum loan amounts of $200,000.  
 
Any borrowings under the credit agreement will be senior unsecured indebtedness of HSWI and may be used for HSWI's working capital and general corporate purposes. Any borrowings will be due and payable, with accrued interest thereon, on March 4, 2012, subject to any renewal of the line of credit, at the Lender's discretion. During the term of the credit agreement, any principal amounts repaid by HSWI may be re-borrowed.
 
The agreement contains certain negative covenants including limits on our trade obligations payable, accrued liability, and other current liability balances.  If we were to default under the first lien revolving credit facility, we would not be permitted to draw additional amounts, and the Lender could accelerate our obligation to pay all outstanding amounts.
 

 
8

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
 
Borrowings under the credit agreement will bear interest at a fixed rate equal to 8% per annum, payable on or before March 4, 2012, unless the line of credit is renewed and the payment date extended, in which case interest shall be payable on or before March 4, 2013. The Lender received a warrant to purchase 65,359 shares of HSWI common stock with an exercise price of $ 3.06 per share in connection with entering into the credit agreement.  The warrants may be exercised within three years from the grant date.   We recorded the fair value of the warrants of approximately $128,000 as debt issuance costs for the three months ended March 31, 2011.  We used a black-scholes valuation technique to determine the fair value of our stock based compensation awards.  As of March 31, 2011, HSWI had the full $1.0 million available to borrow under this agreement.
 

6.  STOCKHOLDERS’ EQUITY


Stock-Based Compensation

HSWI has authorized 800,000 shares under the 2006 Equity Incentive Plan adopted April 13, 2006 (the “2006 Plan”), and an additional 275,000 shares authorized under the 2010 Equity Incentive Plan adopted June 15, 2010 (the “2010 Plan”), for grant as part of long term incentive plans to attract, retain and motivate its eligible executives, employees, officers, directors and consultants.  Options to purchase common stock under the 2006 and 2010 Plans have been granted to our officers and employees with an exercise price equal to the fair market value of the underlying shares on the date of grant.

In accordance with current authoritative guidance, we measure stock-based compensation cost at the grant date based on the fair value of the award, and recognize it as an expense over the requisite service period.  Stock-based compensation expense for the three months ended March 31, 2011 and 2010 was approximately $223,000 and $39,000, respectively.  As of March 31, 2011, unrecognized compensation expense relating to non-vested stock options approximated $1.1 million which we expect to recognize through 2013.  For the quarter ended March 31, 2011, we granted options covering 177,500 shares at an exercise price of $2.88.  Additionally we granted 49,000 shares of restricted stock with a weighted average share price of $3.09.  During the three months ended March 31, 2011, options covering approximately 114,000 shares were forfeited and no options expired.  Through March 31, 2011, no options have been exercised under the Plans.
 
The grant date fair value of options vesting during the three months ended March 31, 2011 and 2010 was approximately $65,000 and $37,000, respectively.


 
9

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)

Net Loss per Share

The following is a reconciliation of the numerators and denominators of our basic and diluted loss per share computations:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Loss per share:
           
Net  loss
  $ (1,653,248 )   $ (1,426,773 )
                 
Weighted average shares outstanding, basic and diliuted
    5,388,289       5,369,829  
                 
                 
Net  loss per share, basic and diluted
  $ (0.31 )   $ (0.27 )
                 
Weighted average shares outstanding
    5,388,289       5,369,829  
                 
Dilutive securities
    -       -  
                 
Total weighted average common shares and dilutive securities
    5,388,289       5,369,829  

We did not include stock options, restricted stock or warrants in the diluted earnings per share calculation above because they were anti-dilutive.  The following schedule describes our anti-dilutive securities not included in diluted net loss per share.



   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Anti-dilutive securities not included in diluted net loss
           
 per share calculation:
           
Stock compensation plans
    1,000,179       787,659  
INTAC options - fully vested
    25,000       25,000  
Warrants to purchase common stock
    90,359       25,000  
   Total anti-dilutive securities
    1,115,538       837,659  



 
10

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)

7.  COMPREHENSIVE LOSS

The components of total comprehensive loss were as follows:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Net loss
  $ (1,653,248 )   $ (1,426,773 )
Net change in foreign currency translation adjustment,
               
 net of tax
    1,890       (5,532 )
Total comprehensive loss
  $ (1,651,358 )   $ (1,432,305 )


8.  RELATED PARTY TRANSACTIONS

Jeff Arnold, a former member of HSWI’s Board of Directors, is the Chairman and Chief Architect and a significant stockholder of Sharecare.  Additionally, Discovery Communications, Inc., HSWI’s largest stockholder, is a significant stockholder of Sharecare.  Jeff Arnold was a member of HSWI’s Board of Directors from 2006 through 2009.

The Company’s revenue from Sharecare for the three months ended March 31, 2011 and 2010 totaled approximately $1.1 million and approximately $1.3 million, respectively.  As of March 31, 2011, HSWI owned approximately 16.5% of the outstanding common stock of Sharecare.  The Company provides web platform services to Sharecare, and amounts due from Sharecare represented 65% of accounts receivable from affiliates as of March 31, 2011.
 
In April 2010, the Company entered into an agreement with Discovery Communications, LLC to provide website development services to Discovery.  The Company’s web platform services revenue from Discovery, an affiliated entity, for the three months ended March 31, 2011 totaled approximately $374,000, and Discovery represented 35% of accounts receivable from affiliates as of March 31, 2011.

On March 30, 2010, the Company entered into a 24-month sublease agreement with Sharecare for rental of our corporate headquarters in Atlanta, Georgia, effective March 1, 2010.  Rent expense for the three months ended March 31, 2011 was approximately $61,000.  In conjunction with the relocation of our headquarters in April 2011, we reduced the square footage and associate expense related to this sublease agreement.
 
As of March 31, 2011, the Company had an outstanding liability due to its affiliate, Discovery, of approximately $86,000.

  9.  SUBSEQUENT EVENT

On April 4, 2011, HSWI received notification from The NASDAQ Stock Market indicating that the Company no longer complies with the requirements of Nasdaq Marketplace Rule 5450(b)(1)(A) for continued listing on The NASDAQ Global Market because the Company's stockholders' equity had fallen below $10 million as reported on our Annual Report on Form 10-K for the year ended December 31, 2010.  HSWI’s stockholders’ equity as of December 31, 2010 was $8,775,882.  The Company has been provided until May 19, 2011, to either regain compliance or submit a plan to NASDAQ to regain compliance.  HSWI intends to transfer the public listing of its common stock to the NASDAQ Capital Market. The Company believes it currently meets the listing qualifications for the NASDAQ Capital Market and that the transfer would satisfy The NASDAQ Stock Market’s continued listing requirements. If HSWI does not transfer its listing to the NASDAQ Capital Market, the Company may instead submit a plan to NASDAQ to regain compliance with the NASDAQ Global Market continued listing requirements.  If the plan is accepted, NASDAQ can grant an extension of up to 180 calendar days from the date of the notice, or until October 3, 2011, to evidence compliance. If the plan is not accepted, the Company will have the right to appeal and the common stock would remain listed on The NASDAQ Global Market until the completion of the appeal process. There can be no assurances the Company will be able to satisfy the requirements of Rule 5450(b)(1)(A) and maintain continued listing on the NASDAQ Global Market, or that the Company will be able to satisfy the continued listing requirements of the NASDAQ Capital Market if it transfers its listing to such market.
 
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included as part of this Form 10-Q.  This Form 10-Q contains forward-looking statements based on current expectations.  We sometimes identify forward-looking statements with such words as “may”, “will”, “expect”, “anticipate”, “estimate”, “seek”, “intend”, “believe” or similar words concerning future events. The forward-looking statements contained herein include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling, general and administrative expenses, capital resources, the sufficiency of our cash resources, our expectations regarding Sharecare, our expectations regarding the growth of our websites usage and revenues, our plans to develop our product offerings, and the effects of general industry and economic conditions and are subject to risks and uncertainties including, but not limited to, those discussed below, in Part II, Item 1A. and elsewhere in this Form 10-Q that could cause actual results to differ materially from the results contemplated by these forward-looking statements.  Relevant risks and uncertainties include those referenced in our filings with the SEC, and include but are not limited to: risks related to the Sharecare transactions; insufficient liquidity; reliance on third parties for content; economic and industry conditions specific to Brazil and China, such as the state of their telecommunications and internet infrastructure and uncertainty regarding protection of intellectual property; challenges inherent in developing an online business in Brazil and China, including obtaining regulatory approvals and adjusting to changing political and economic policies; governmental laws and regulations, including unclear and changing laws and regulations related to the Internet sector in China; general industry conditions and competition; general economic conditions, such as online advertising rates, interest rate and currency exchange rate fluctuations; and restrictions on intellectual property under agreements with third parties.  We also urge you to carefully review the risk factors set forth in Part II, Item 1A. and other documents we file from time to time with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2010.

Business Overview and Recent Events

HSW International, Inc. (“HSWI”, “HSW International” or the "Company") is an online media company engaged in both publishing and web platform technology that develops and operates next-generation web publishing platforms combining traditional web publishing with social media.  HSWI’s internet businesses focus on providing consumers in the world’s digital economies with locally relevant, high quality information.  Our co-founding and continuing development of Sharecare, Inc. with Harpo Productions, Sony Pictures Television, Discovery, Jeff Arnold, and Dr. Mehmet Oz created a highly searchable social Q&A healthcare platform organizing the questions and answers of health.  Our international websites published under the HowStuffWorks brand provide readers in China and Brazil with thousands of articles about how the world around them works, serving as destinations for credible, easy-to-understand reference information.  HSWI is the exclusive licensee in China and Brazil for the digital publication of translated content from Discovery Communications, Inc.’s  HowStuffWorks.com, and in China for the digital publication of translated content from World Book, Inc. , publisher of World Book Encyclopedia.  We generate revenue primarily through service fees charged to clients for web platform development and operation services and the sale of online advertising on our websites.  We were incorporated in Delaware in March 2006.  In April 2011, we relocated our headquarters to 6 Concourse Parkway, Suite 1500, Atlanta, Georgia 30328.

HSW International developed and launched Sharecare's website (http://www.sharecare.com) on October 7, 2010.  On May 2, 2011, HSWI developed and launched the Curiosity website for Discovery Communications (http://curiosity.discovery.com).
 
The Company develops Internet businesses in two emerging markets and a web platform business, and intends to plan, develop and build a comprehensive personal finance portal in the United States as a new business initiative. We currently operate at a loss and experience negative cash flow from operations.  While we believe that our cash resources on hand together with our line of credit are sufficient to fund our existing businesses for a period of at least 12 months, our cash resources are not sufficient to fund these businesses for an extended period beyond that unless revenues increase significantly and/or we find other sources of capital, neither of which can be assured.  Our management and directors continue to evaluate our progress and likelihood of success in each of our markets, and our ability to raise additional capital, against the relative value of our resources and other opportunities.  Accordingly, we may decide to suspend or reduce our activities in one or more of our markets in order to focus our limited resources in the other(s).  In February 2011, we implemented certain cost savings measures in our Brazil operations in connection with our search for a strategic media partner and consideration of other strategic alternatives.  Our long term plans require additional capital to support the development of our new business initiatives, namely the establishment of new content vertical websites utilizing our Web 3.0 platform.  We are evaluating various methods to raise this capital, which may include a public or private debt or equity financing, strategic relationships or other arrangements, or the sale of non-strategic assets.


 
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On November 17, 2010, Sharecare completed a sale of additional equity securities to its founding stockholders.  Rather than purchase its pro rata share of equity securities offered in the financing, HSWI purchased an option to purchase at a later date its pro rata share of Sharecare’s equity securities.  HSWI purchased the option for a percentage of the purchase price of its pro rata share of equity securities offered in the financing.  The option expires on July 30, 2011, and may be exercised in whole (but not in part) at any time prior to that date by payment of the aggregate exercise price of the equity shares to be purchased.

Business Trends

A portion of our business consists of websites we recently established.  We expect that our business should grow as these websites achieve greater awareness within their markets, resulting in increased usage against which we can sell advertising.  While a growing online advertising market exists in Brazil, we believe it will take additional time for meaningful online advertisement rates to develop in China. Currently, neither of our international websites generates sufficient revenue to cover the cost of developing and publishing content. During 2009, we made a business decision to provide web platform development services to entities publishing high quality content with a goal of diversifying our revenue base. Since 2009, we have developed and launched two unique websites based on our newly developed platform that combines quality content with the most popular features of social media. Next, we plan to develop our own product offering, a portal that takes advantage of social media combined with personal finance content with features that enhance user engagement and allows for a more efficient search experience.  This portal will be developed to provide a digital forum for exploring insights related to personal finance decisions. We intend to continue prudent investments in building our platform development business as well as our own product based on the next-generation platform developed in-house.
 
Our Brazilian website ComoTudoFunciona , which launched in March 2007, is our most mature business. Page views for ComoTudoFunciona decreased by 12.4% during the three months ended March 31, 2011 compared to the same period in 2010.  The decrease in page views results from changes in our publishing pace and changes in search engine algorithms. Additionally, the number of unique visitors to the website decreased by 6.2% for the same periods. Both events affected our search results and the number of unique visitors on our website during the first quarter of 2011.
 
Our Chinese website BoWenWang launched in June 2008.  Unlike in Brazil, where we established our website with significant promotional commitments from one of the country’s largest Internet portals, BoWenWang launched with a focus on organic traffic development.  This contributed to initial usage trending below that in Brazil, though the overall traffic in China has now surpassed Brazil.  We believe that by focusing on developing business relationships to further the exposure of the website, we should be able to continue to grow usage.
 
The number of unique visitors for BoWenWang increased 1.5% during the three months ended March 31, 2011 compared to the same period in 2010 as we continue to attract new visitors to our website. Page views decreased 1.9% during the same period due to changes in our promotional campaigns as we develop new approaches for engaging visitors on our site. We expect to see growth in the number of users and page views, which we believe should result in increased revenues for our Chinese website but we are cautious on the revenue outlook since the current economic environment in China and the rate of development of its Internet advertising market has been slower to develop than originally forecasted.  
 
Both seasonal fluctuations in Internet usage and traditional retail seasonality have affected, and are likely to continue to affect, our business.  Internet usage generally slows during the summer months, and expenditures by advertisers typically increase in the fourth quarter of each year.  These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results.
 
Due to fluctuations in the online advertising market, the growth of online advertising in Brazil and China in future years may be lower than previously expected.  We believe that the value of our international assets will be recognized over a longer-term horizon, as online advertising markets develop for Brazil and China and as the websites’ traffic fundamentals improve.  Due to the fact that our near-term performance may be impacted by the state of online advertising markets, we may experience changes in financial measures used to estimate fair values, which may lead to further non-cash impairment charges to our long-lived assets.
 
 
We continue to invest in building what we believe are the necessary employee and systems infrastructures required to manage our operational growth and develop and promote our products and services.  Additionally, we plan to maintain an awareness of the alignment of our administrative costs and revenues, and make operating adjustments as we believe necessary to best position HSW International for long-term success.


Our Operations

ComoTudoFunciona – HowStuffWorks Brazil

ComoTudoFunciona ( http://hsw.com.br ) is Brazil's online source for credible, unbiased and easy-to-understand explanations of how the world actually works.  The Portuguese-language site is the exclusive digital publisher in Brazil of translated and localized content from the leading Discovery Communications brand HowStuffWorks, and is published from HSWI's São Paulo offices.  
 
 
 
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ComoTudoFunciona was established in March 2007, and as of March 31, 2011, had published over 6,800 articles that were either originally created content or translated and localized from HowStuffWorks.  In February 2011, we implemented cost savings measures in our Brazil operations in connection with our search for a strategic media partner and consideration of other strategic alternatives. 

We recognized approximately $27,000 and $26,000 of revenue from Brazil during the three months ended March 31, 2011, and 2010, respectively.  Results of operations are included in the digital online publishing reporting segment.


BoWenWang – HowStuffWorks China

BoWenWang ( http://www.bowenwang.com.cn ) is an information and reference website that provides China with encyclopedic knowledge and easy-to-understand explanations of how the world works.  The website is published from Beijing in the Chinese language.  Launched in June 2008, BoWenWang features a combination of original content authored by our publishing team in Beijing, translated and localized articles from the leading Discovery Communications brand HowStuffWorks, and content from World Book, Inc.

BoWenWang is the exclusive digital publisher in China of translated HowStuffWorks content.  In September 2008, we entered into an exclusive content partnership with World Book, Inc. to dramatically increase the amount of content published on BoWenWang .  In 2009, World Book created thousands of original Chinese-language articles providing information on many branches of knowledge, including arts, sciences, technology, mathematics, sports, and recreation, exclusively for our Chinese website.  At March 31, 2011, we had published almost 14,900 articles in China.

Revenue generated from the operations based in China was approximately $9,200 and $1,400 during the three months ended March 31, 2011 and 2010, respectively.  Results of operations are included in the digital online publishing reporting segment.

Web Platform Services

In October 2009, the Company entered into a Letter Agreement for Services with Sharecare pursuant to which the Company agreed to perform services related to the design, development, hosting and related services necessary to launch and operate the Sharecare website through our direct activities and management of third party vendors.  Sharecare agreed to pay us for the fully burdened cost of our personnel dedicated to the services and other costs incurred in providing the services plus a fixed monthly management fee for services performed under the services agreement.   Pursuant to an amendment dated January 26, 2011, the agreement will now expire on December 31, 2011, and we do not expect the Company and Sharecare will extend the term or enter into a new services agreement.  The majority of our revenue recognized during the three months ended March 31, 2011 resulted from the services we performed for Sharecare.  We intend to expand our Web Platform Services to additional clients in the coming year, while we actively develop content vertical websites owned by HSWI that we intend to launch as a new business line taking advantage of our platform know-how and expertise.

In April 2010, the Company entered into a services agreement with Discovery Communications pursuant to which the Company agreed to perform services related to the design, development, hosting and related services necessary to launch and operate the Discovery Curiosity website through our direct activities and management of third party vendors.  Discovery agreed to pay us for the fully burdened cost of our personnel dedicated to the services and other costs incurred in providing the services plus a fixed monthly management fee for services performed.

 
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Results of Operations

The following table sets forth our operations for the three months ended March 31, 2011 and 2010.

   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Operating revenue
           
 Web platform services
  $ 1,509,597     $ 1,346,630  
Digital online publishing
    36,477       27,481  
  Total revenue
    1,546,074       1,374,111  
                 
Cost of services
    1,075,874       1,149,304  
                 
Gross margin
    470,200       224,807  
                 
Operating expenses
               
 Selling, general and administrative (including stock-based
               
 compensation expense of $222,665 and $38,968 for
               
 the three months ended March 31, 2011 and 2010)
    1,609,087       1,503,975  
 Depreciation and amortization
    68,267       75,382  
   Total operating expenses
    1,677,354       1,579,357  
                 
Total operating loss
    (1,207,154 )     (1,354,550 )
                 
Other income
               
 Interest income (expense)
    (11,195 )     5,271  
 Other expense
    (4,182 )     -  
   Total other income (expense)
    (15,377 )     5,271  
                 
Loss from operations before income taxes and equity in loss of equity
    (1,222,531 )     (1,349,279 )
     method investment
               
                 
Equity in loss of equity-method investment, net of taxes
    (430,717 )     (77,494 )
                 
                 
Net loss
  $ (1,653,248 )   $ (1,426,773 )


Segment Data
We monitor and analyze our financial results on a segment basis for reporting and management purposes, as is presented in Note 4 to our Condensed Consolidated Financial Statements hereto.  Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

Our digital online publishing segment consists of our websites in Brazil and China and generates revenues from advertisers based in the respective countries.  The operating results for services performed under the Sharecare and Discovery Services agreement are included in the web platform services segment.

Revenue
Total revenue for the three months ended March 31, 2011 was approximately $1.5 million, an increase of approximately $170,000 from the comparable period in 2010.  The increase in revenue is primarily attributable to a new project for Discovery, a related party, during the first fiscal quarter of 2011.  Revenue generated from our Digital Online Publishing segment recorded during the three months ended March 31, 2011 was consistent with the same period in 2010.
 
 
 
15

 
 
 
Cost of Services
Cost of services includes the ongoing third-party costs to acquire original content, translate and localize content from English to Portuguese and Chinese, as well as costs incurred to support our web platform services business including labor, content and third party platform support services. These costs were consistent year over year at $1.1 million for the three months ended March 31, 2011 and 2010, respectively. 

Operations - Selling, General and Administrative Expenses
Our total selling, general and administrative   expenses increased by approximately $105,000 from $1.5 million to $1.6 million for the three months ended March 31, 2011 from the comparable period in 2010.  The increase is due to incremental stock-based compensation expense of $184,000 recorded during the three months ended March 31, 2011 reflecting increased restricted stock and stock option issuances.

Other Income
Total other income decreased approximately $20,000 for the three months ended March 31, 2011, compared to the same period in 2010 as our cash on hand decreased during the same periods, resulting in lower interest income.  Additionally, we recorded amortization of debt issuance costs of approximately $12,000 during the first quarter of 2011.

Loss in Equity Investment
We account for our investment in Sharecare under the equity method of accounting.  As of March 31, 2011, we recognized a loss in the equity investment of $430,717, net of taxes. Sharecare’s website was launched in the fourth quarter of 2010 and has experienced meaningful traffic growth on the website due to its quality content, media partnerships and array of experts answering the questions of health and wellness. The early losses reflected herein represent infrastructure and marketing investments to build the newly launched website and position it in the market place for future growth.


Income Tax Expense
There was no tax expense as of March 31, 2011 as a full valuation allowance was recorded against our deferred tax assets.

Recent Accounting Pronouncements
Recent accounting pronouncements are summarized in Note 2 to the accompanying consolidated financial statements.

Liquidity and Capital Resources

Cash and cash equivalents was $3.9 million at March 31, 2011, compared to $4.8 million at December 31, 2010.  The decrease in cash is primarily due to the use of working capital to fund the Company’s operations.

   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Cash flows
           
 Used in operating activities
  $ (754,694 )   $ (1,217,512 )
 Used in investing activities
    (198,913 )     (4,608 )
 Used in financing activities
    (20,000 )     -  
Net change in cash and cash equivalents
    (973,607 )     (1,222,120 )
 Impact of currency translation on cash
    1,890       (5,532 )
 Cash and cash equivalents at beginning of period
    4,843,893       8,724,546  
Cash and cash equivalents at end of period
  $ 3,872,176     $ 7,496,894  


 
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Cash flows from operations
Our net cash used in operating activities during the three months ended March 31, 2011, decreased by approximately $463,000 compared to the same period in the prior year due to increased profit margin and improved cash collections from revenue growth.

Cash flows from investing activities
During the three months ended March 31, 2011, net cash used in investing activities was approximately $200,000 compared to $5,000 in the same period of 2010 due to the use of tenant improvement allowances specifically for the acquisition of office assets and leasehold improvements.
Cash flows from financing activities
For the three months ended March 31, 2011, net cash used in financing activities was $20,000 for debt issuance costs related to our revolving credit agreement.  For the three months ended March 31, 2010, there was no net cash provided by financing activities.

Non -Cash financing activities
For the three months ended March 31, 2011, there was approximately $128,000 in non-cash financing activities related to the warrants issued in conjunction with the revolving credit agreement.

Liquidity Considerations
Our cash balance was approximately $3.9 million as of March 31, 2011, and we have access to a $1.0 million line of credit.  We consistently monitor our cash position to make adjustments as we believe necessary to maintain our objectives of funding ongoing operations and continuing to make technological investments in our web platform business and our websites and their respective brands.

The Company develops Internet businesses in two emerging markets and a web platform business, and intends to plan, develop and build a comprehensive personal finance portal in the United States as a new business initiative. We currently operate at a loss and experience negative cash flow from operations.  While we believe that our cash resources on hand together with our line of credit are sufficient to fund our existing businesses for a period of at least 12 months, our cash resources are not sufficient to fund these businesses for an extended period beyond that unless revenues increase significantly and/or we find other sources of capital, neither of which can be assured.  Our management and directors continue to evaluate our progress and likelihood of success in each of our markets, and our ability to raise additional capital, against the relative value of our resources and other opportunities.  Accordingly, we may decide to suspend or reduce our activities in one or more of our markets in order to focus our limited resources in the other(s).  In February 2011, we implemented certain cost savings measures in our Brazil operations in connection with our search for a strategic media partner and consideration of other strategic alternatives.  Our long term plans require additional capital to support the development of our new business initiatives, namely the establishment of new content vertical websites utilizing our Web 3.0 platform.  We are evaluating and pursuing various methods to raise this capital, which may include a public or private debt or equity financing, strategic relationships or other arrangements, or the sale of non-strategic assets.  There can be no assurance that either of these options will be available on acceptable terms, if at all, or that the financing will not be dilutive to our stockholders.
 
We expect that our service agreements to provide web platform services to customers will continue to generate revenues for our company during 2011; and we continue to pursue activities that identify and engage new customers for the business.  Our current web platform services agreement with Sharecare (our largest customer, accounting for approximately 73% of revenues during the three months ended March 31, 2011) expires in December 2011.  Given that we do not expect the Company and Sharecare will extend the term or enter into a new services agreement, there can be no assurance that the revenues generated from service agreements in the future will be sufficient to cover our liquidity needs for the long-term.  Further, Sharecare may be required to raise additional capital in 2011 in order to fund its operations, including its obligations to us under the services agreement.  We currently do not have any material commitments for capital expenditures.  As discussed above, we continue to explore various business initiatives that may lead to additional sources of revenue and growth to replace our revenues from Sharecare, which we do not expect to recur in 2012.  To the extent we are unable to redeploy our cost based related to the Sharecare agreement against new revenue generating opportunities, we may decide to suspend or reduce these costs as part of our cash management strategy.
 
On March 4, 2011, the Company entered into a senior revolving credit agreement with Theorem Capital, LLC (the "Lender") pursuant to which the Lender agreed to extend HSWI a line of credit of up to $1.0 million for a period of one year from March 4, 2011, subject to renewal by the Lender, at its sole discretion, for an additional one-year period. Under the terms of the credit agreement, HSWI may, in its sole discretion, borrow from the Lender up to $1.0 million from time to time during the term of the credit agreement, in minimum loan amounts of $200,000.  HSWI entered into this senior revolving credit agreement to provide flexibility as HSWI builds and executes upon its latest business initiatives.

 
Any borrowings under the credit agreement will be senior unsecured indebtedness of HSWI and may be used for HSWI's working capital and general corporate purposes. Any borrowings will be due and payable, with accrued interest thereon, on March 4, 2012,
 
 
17

 
 
subject to any renewal of the line of credit, at the Lender's discretion. During the term of the credit agreement, any principal amounts repaid by HSWI may be re-borrowed.  As of March 31, 2011, HSWI had the full $1.0 million available to borrow under this agreement.    Borrowings under the credit agreement will bear interest at a fixed rate equal to 8% per annum, payable on or before March 4, 2012, unless the line of credit is renewed and the payment date extended, in which case interest shall be payable on or before March 4, 2013.

The Lender received a warrant to purchase 65,359 shares of HSWI common stock with an exercise price of $ 3.06 per share in connection with entering into the credit agreement.  The fair value of the warrants of approximately $128,000 has been recorded as debt issuance costs.  These costs will be amortized over the term of the credit facility.

Off Balance Sheet Arrangements

None.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

We translate the foreign currency financial statements of our international operations into U.S. dollars at current exchange rates, except revenue and expenses, which we translate at average exchange rates during each reporting period.  We accumulate net exchange gains or losses resulting from the translation of assets and liabilities in a separate section of stockholders’ equity titled Accumulated other comprehensive income.  Generally, our foreign expenses are denominated in the same currency as the associated foreign revenue, and at this stage of development the exposure to rate changes is minimal.

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and accounts receivables. At March 31, 2011, 99% of our cash was denominated in U.S. dollars.  The remaining 1% was denominated in Brazilian Reais, Chinese Renminbi or Hong Kong Dollars.  All our cash is placed with financial institutions we believe are of high credit quality.  Our cash is maintained in bank deposit accounts, which, at times, exceed federally insured limits.  We have not experienced any losses in such accounts and do not believe our cash is exposed to any significant credit risk.

We do not use financial instruments to hedge our foreign exchange exposure because the effects of the foreign exchange rate fluctuations are not currently significant.  We do not use financial instruments for trading purposes.  We do not use any derivative financial instruments to mitigate any of our currency risks.  The net assets of our foreign operations at March 31, 2011, were approximately $82,000.

In March 2011, the Company entered into a Revolving Credit Agreement for $1.0 million over a 12-month term.  Amounts borrowed under the line of credit bear an annual interest rate of 8%. We expect to draw on this line of credit should our other liquidity strategies fail to fulfill our cash needs for the short-term. The line of credit requires that we maintain minimum assets and can be renewed annually at Theorem Capital’s discretion.  There are no outstanding balances under the line of credit as of March 31, 2011.

Item 4.   Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this quarterly report.  Based on that evaluation, the Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports 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) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

There has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


 
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PART II – OTHER INFORMATION

Item 1.   Legal Proceedings.

None.


Item 1A.   Risk Factors.

This report contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those discussed in this report.  Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

We continue to develop our business and prospects are difficult to evaluate.
We have a limited operating history and our business strategy is evolving, so we have limited experience in the web platform, vertical website and international Internet markets.  We are in varying development stages of our business, with a limited operating history upon which investors and others can evaluate our current business and prospects.  Our prospects must be considered in light of the many risks, uncertainties, expenses, delays, and difficulties frequently encountered by companies in their early stages of development.  Some of the risks and difficulties we expect to encounter include our ability to:

·  
successfully commercialize and monetize our assets;
·  
successfully attract advertisers for our websites and clients for our web platform services;
·  
continue to raise additional working capital, the lack of which would likely have a significant negative impact on our long term business plan and our ability to take advantage of our strategic alliances and to successfully execute our expansion plan;
·  
manage our expense structure as a U.S. public company including, without limitation, compliance with the Sarbanes Oxley and Dodd Frank Acts;
·  
manage the anticipated rise in operating expenses;
·  
manage and implement successfully new business strategies;
·  
adapt and successfully execute our evolving and unpredictable business model, with which we will have only limited experience;
·  
establish and take advantage of contacts and strategic relationships;
·  
adapt to our potential diversification into other industries and geographic regions;
·  
manage and adapt to rapidly changing and expanding operations;
·  
implement and improve operational, financial and management systems and processes;
·  
respond effectively to competitive developments;
·  
attract, retain and motivate qualified personnel; and
·  
manage each of the other risks set forth in this report.
 
Because of our lack of operating history and the early stage of development of our business, we will have limited insight into trends and conditions that may exist or emerge and affect our business, especially with respect to the web platform and online publishing market.  We cannot be certain that our business strategy will be successful or that it will successfully address these risks.  Any failure by us to successfully implement our new business plans could have a material adverse effect on our business, results of operations and financial condition.

We may not have sufficient liquidity to support the time required for our business to fully develop.
The Company is in the process of developing global Internet businesses, including publishing businesses in two emerging markets, a web services business, and intends to pursue opportunities to plan, develop and build new content vertical websites in the United States.  We currently operate at a loss and with a substantial negative cash flow from operations.  While we believe that our cash resources on hand together with our line of credit are sufficient to fund these businesses for a period of at least 12 months, our cash resources are not sufficient to fund these businesses for an extended period beyond that unless revenues increase significantly or we find other sources of capital, neither of which can be assured.  Additionally, the development of our new content vertical website will require additional sources of capital for the Company.  Our management and directors continue to evaluate our progress and likelihood of success in each of our markets, and our ability to raise additional capital, against the relative value of our resources and other opportunities.  Accordingly, we might decide to suspend our activities in one or more of our markets in order to focus our limited resources in the other(s).  We may also need to raise additional funds for our business or the development of new initiatives, which may be dilutive to our stockholders.
 
 
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We may not be able to raise additional funds when needed for our business or to exploit opportunities.

We may need to raise additional funds to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities.  If required, we may attempt to raise such additional funds through public or private debt or equity financing, strategic relationships or other arrangements such as the revolving credit agreement entered into in March 2011 and further described in the Liquidity and Capital Resources section of this Form 10-Q.  If we are unable to maintain compliance with the debt covenants, funds may not be available under our revolving credit agreement.  In addition to this revolving credit agreement, there can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.

If we default on our credit facility, we might incur substantial penalties and impair our ability to raise additional capital.

In March 2011 we entered into a senior revolving credit agreement with Theorem Capital, LLC under which Theorem Capital extended us a line of credit of up to $1.0 million for a period of one year, subject to renewal.  Our credit agreement contains covenants that we consider usual and customary for an agreement of this type, including restrictions on incurring additional indebtedness, maximum trade obligations and accrued expenses and other current liabilities, use of loan proceeds and payment of dividends. Upon the occurrence of an event of default, including payment defaults, breaches of covenants, insolvency proceedings and events having a material adverse effect on our financial condition, business assets, operations or property, Theorem Capital may declare all outstanding obligations under the credit agreement due and payable and the aggregate unpaid principal balance of any borrowings, and any other obligations under the credit agreement will bear interest at a default rate of 11% per annum until the event of default is waived or cured or all outstanding obligations are paid in full.  Additionally, if we were to default on the credit agreement, it could subject us to lawsuits, deplete our cash reserves, and hinder our ability to raise additional capital in the future.  If we breach our covenants or otherwise default on this credit agreement, it could have an adverse impact on our financial condition, which could in turn have an adverse affect on the price of our stock.

Our new web platform services line of business may not prove to be profitable.
 

We intend to offer web platform services to other customers, but we have limited sales, marketing and other resources and may not be successful in obtaining those customers.  Because Sharecare and Discovery Communications the customers generating virtually all of our web platform services revenue to date are related parties, the pricing and other terms included in those current agreements may not be indicative of the terms we can successfully obtain in arms-length transactions with other customers.  We have limited experience in this line of business, and will be subject to competition with companies with greater resources and experience.  Due to these factors, we may be unable to achieve profitability in this new line of business.

We may not be able to successfully establish a personal finance content vertical website.

We intend to develop, launch and operate a personal finance content vertical website leveraging the Web 3.0 platform developed by HSWI.  We have limited experience in personal finance, and limited sales, marketing, and other resources related to the operations and revenue generation for a United States-based website.  Additionally, we expect steep competition from established sources for financial information on the Internet.

Our services agreement with Sharecare, which provided the vast majority of our 2011 revenue to date, will expire at the end of the year.

We currently provide web development, design and management services to Sharecare under a services agreement which provided approximately 73% of our revenues during the three months ended March 31, 2011.  This agreement will expire in December 2011, and we do not expect the Company and Sharecare will extend the term or enter into a new services agreement.  As Sharecare has developed its operations and grown, it has made the strategic decision to transition these web development, design and management services in-house.  This expiration will cause us to lose a significant source of revenue, which would hurt our financial results and condition if the revenue is not replaced with other sources.

We generate revenue on our international sites from advertising, and the reduction in spending by or loss of advertisers could seriously harm our business.

Economic uncertainty as well as the risk associated with an emerging market has had and might continue to have a direct impact on our revenue.  We cannot predict the timing, strength or duration of the current economic issues or the subsequent economic recovery generally or in the online advertising market.  If the economy or markets in which we operate worsen, our business, financial
 
 
 
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condition and results of operations will likely be materially and adversely affected.  Our advertisers can generally terminate their contracts with us at any time.  Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner.  If we are unable to be competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively harm our revenues and business.  In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns.  Any decreases in or delays in advertising spending due to general economic conditions could reduce our revenues or negatively impact our ability to grow our revenues.

We may not succeed in marketing and monetizing our international assets to potential customers or developing strategic partnerships for the distribution of our products and services.

Our plans to market and monetize our assets in the Chinese and Brazilian online markets through the Internet are still relatively new and unproven.  Moreover, we will have limited experience in determining the pricing of the products and services that we plan to develop.  We may not be successful in establishing a customer base or strategic partnerships for the distribution of our products and services.  If we are not successful in developing, releasing and marketing these products and services on a profitable basis, our results of operations would be materially and adversely affected.
 
We may not have the resources available to simultaneously develop operations in China and Brazil.  Accordingly, there may be a delay in developing such operations or we might decide not to pursue these markets, which could affect our business plan and results of operations.

We could incur asset impairment charges for intangible assets or other long-lived assets.
 

We have intangible assets and other long-lived assets, therefore future financial performance lower than anticipated or changes in estimates and assumptions, which in many cases require significant judgment, could result in impairment charges.  We test intangible assets that are determined to have an indefinite life for impairment on a reporting unit basis during the fourth quarter of each fiscal year, and assess whether factors or indicators, such as unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, become apparent that would require an interim test.  Adverse changes in the operating environment and related key assumptions used to determine the fair value of our indefinite lived intangible assets or declines in the value of our common stock may result in future impairment charges for a portion or all of these assets. For example, in December 2010 we recorded an impairment charge of $488,560, primarily because of changes in our assumptions as to the time and cost required to obtain licenses to operate in China similar to the ones we currently hold.  In addition, if the rate of growth of advertising revenues earned by our China operations were to be less than projected or if additional regulatory changes in China were to negatively impact our business, an impairment charge for a portion or all of the assets may be required. An impairment charge could have a material adverse effect on our business, financial position and results of operations, but would not be expected to have an impact on our cash flows or liquidity.


The growth we seek is difficult to achieve and will limit our resources and may inhibit our ability to grow.

Substantial future growth will be required in order for us to realize our business objectives.  Growth of this magnitude is rare.  To the extent we are capable of growing our business as necessary; we expect that such growth will place a significant strain on our limited managerial, operational and financial resources.  If we achieve substantial growth, we must manage our growth, if any, through appropriate systems and controls in each of these areas.  We must also establish, train and manage a larger work force.  If we do not manage the growth of our business effectively, our business, results of operations and financial condition could be materially and adversely affected.

We face intense competition, which could have an adverse effect on our business, financial condition and results of operations.

The online publishing and web platform services markets are highly competitive.  We encounter significant competition across our business lines and in each market in which we offer our products and services.  In the online publishing market, we expect that our competitors include (i) national Internet portals in China such as Baidu, Shanda Interactive Entertainment, Sina, sohu.com and tom.com, and (ii) national websites in Brazil such as Terra and UOL, all of which compete with us for online advertising revenue and end users.  Many of our competitors have more experience, resources and website visitors than us.  In the vertical website and web platform services markets, many of our competitors have been providing similar services for an extended period of time, and have developed established brands, reputations, offerings, and client bases.  Most of our vertical website and web platform services competitors have more experience and resources than we do.
 
 
 
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Resales of our common stock and additional obligations to issue our common stock may cause the market price of our stock to fall.
 
As of March 31, 2011, there were approximately 5,424,455 shares of our common stock outstanding, and options and warrants to purchase another approximately 1,035,179 shares outstanding.  At March 31, 2011, we also had reserved an additional 7,818 shares for future issuance under our equity compensation plans.  Resales of outstanding shares or issuance of new shares could depress the market price for our common stock.

Various factors could negatively affect the market price or market for our common stock.
 
The market for and price of our common stock could be affected by the following factors:
 
·  
general market and economic conditions;
·  
our common stock has been thinly traded; and 
·  
minimal third party research is available regarding our company.

Additionally, the terms of the Discovery Merger provided that payment to HowStuffWorks shareholders for a significant portion of HowStuffWorks’ ownership of our common stock would not be paid at the October 2007 closing of the transaction and instead are  payable to HowStuffWorks’ former shareholders in three semi-annual installments.  The installments were planned to begin in October 2008; however, the shareholder representative had not authorized payment as of March 31, 2011.  Such payments will be in the form of cash or shares of HSWI stock now held by HowStuffWorks.  Accordingly, the amount of shares of our common stock Discovery owns in the future may fall due to a combination of reasons.  All of our rights to publish HowStuffWorks content will remain effective regardless of the number of shares HowStuffWorks owns in the future.  If Discovery and HowStuffWorks’ former shareholders’ representative elect to distribute shares of our common stock to former HowStuffWorks shareholders, a significant number of shares may be sold by such shareholders relative to the daily market trading volumes for our common stock.  These factors could also affect our common stock, and depress the market price for our common stock or limit the market for resale of our common stock.

We might not be able to remain listed on The NASDAQ Stock Market.
In September 2009, we received a notice from The NASDAQ Stock Market indicating that we no longer complied with the continued listing requirement that our shares of common stock maintain a minimum closing bid price of $1.00.  In response, we conducted the Reverse Split and regained compliance with continued listing standards.  In March 2010 the Company received a notice from The NASDAQ Stock Market indicating that we were not in compliance with the continued listing requirement that the publicly held shares of the Company, which is calculated by subtracting all shares held by officers, directors or beneficial owners of 10% or more of the total shares outstanding, maintain a minimum market value of $5,000,000.  On July 28, 2010, the Company received a notice from The NASDAQ Stock Market indicating that it had regained compliance with this rule.  However, our common stock might not remain equal to or in excess of the $1.00 minimum closing bid price or our public float might drop below $5,000,000, either of which could result in our common stock being de-listed from the NASDAQ Global Market.   The market price of our common stock is also based on other factors outside of our control. 

On April 4, 2011, HSWI received notification from The NASDAQ Stock Market indicating that the Company no longer complies with the requirements of Nasdaq Marketplace Rule 5450(b)(1)(A) for continued listing on The NASDAQ Global Market because the Company's stockholders' equity has fallen below $10 million as reported on our Annual Report on Form 10-K for the year ended December 31, 2010.  HSWI’s stockholders’ equity as of December 31, 2010 was $8,775,882.  The Company has been provided until May 19, 2011, to submit a plan to NASDAQ to regain compliance. If the plan is accepted, NASDAQ can grant an extension of up to 180 calendar days from the date of the notice, or until October 3, 2011, to evidence compliance. If the plan is not accepted, the Company will have the right to appeal and the common stock would remain listed on The NASDAQ Global Market until the completion of the appeal process. To regain compliance, the Company must have stockholders' equity of at least $10 million.  There can be no assurances the Company will be able to satisfy the requirements of Rule 5450(b)(1)(A) and maintain continued listing on The NASDAQ Global Market.


Our internal control over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur. 
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be satisfied.  Internal control over financial reporting and disclosure controls and procedures are designed to give a reasonable assurance that they are effective to achieve their objectives.  We cannot provide absolute assurance that all of our possible future control issues will be detected.  These inherent limitations include the possibility that judgments in our decision
 
 
 
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making can be faulty, and that isolated breakdowns can occur because of simple human error or mistake.  The design of our system of controls is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed absolutely in achieving our stated goals under all potential future or unforeseeable conditions.  Because of the inherent limitations in a cost effective control system, misstatements due to error could occur and not be detected.

We may have additional tax liabilities if tax positions we have taken in prior years are challenged.

Although the company has not been a substantial tax payer to date, we and our subsidiaries are subject to taxes in the United States and various foreign jurisdictions.  We believed that our tax returns appropriately reflected our tax liability when those tax returns were filed.  However, applicable tax authorities may challenge our tax positions.  Any successful challenge to one or more of our prior tax positions could result in a material tax liability to us or to one or more of our subsidiaries, including INTAC, for one or more prior years.

The state of the Internet infrastructure in China and Brazil may limit our growth.

We rely on the Internet for our business, including the publication of content online and our Internet portals.  The Internet infrastructures in China and Brazil are not well developed and are subject to regulatory control and, in the case of China, ownership by the Chinese government.  The cost of Internet access is high relative to the average income in China.  Failure to further develop these infrastructures could limit our ability to grow.  Alternatively, as these infrastructures improve and Internet use increases, we may not be able to scale our systems proportionately.  Our reliance on these infrastructures makes us vulnerable to disruptions or failures in service, without sufficient access to alternative networks and services.  Such disruptions or failures could reduce our user satisfaction.  Should these risks be realized, our ability to increase revenues and profitability would be impaired.

Our operations are vulnerable to natural disasters and other events.

While we believe we have adequate backup systems in place, we could still experience system failures and electrical outages from time to time in the future, which could disrupt our operations.  All of our servers and routers are currently hosted in a single location which poses site redundancy risk.  Although our site is a Tier 4 data center, which is composed of multiple active power and cooling distribution paths, has redundant components, and is fault tolerant, we do not have a documented disaster recovery plan in the event of damage from fire, flood, typhoon, earthquake, power loss, telecommunications failure, break in or similar events.  If any of the foregoing occurs, we may experience a temporary system shutdown.  If there is significant disruption or damage to the data center hosting our web servers, our ability to provide access to our websites would be interrupted.  We do not carry any business interruption insurance.  Although we carry property insurance, our coverage may not be adequate to compensate us for all losses, particularly with respect to loss of business and reputation that may occur.

Our network operations may be vulnerable to hacking, viruses and other disruptions, which may make our products and services less attractive and reliable.

Internet usage of our products could decline if any well publicized compromise of our security occurs.  “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment.  Hackers, if successful, could misappropriate proprietary information or cause disruptions in our service.  We may be required to expend capital and other resources to protect our website against hackers.  If our security measures are breached as a result of third-party action, employee error or otherwise, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We cannot assure you that any measures we may take will be effective.  In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability, as well as materially damage our reputation and decrease our user traffic.

 
 
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Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.

We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success.  Unauthorized use of our intellectual property by third parties may adversely affect our business and reputation.  We rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and others to protect our intellectual property rights.  Despite our precautions, it is possible for third parties to obtain and use our intellectual property without authorization.  Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet related industries are uncertain and still evolving.  In particular, the laws of the PRC, Brazil and other countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States.  Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others.  Future litigation could result in substantial costs and diversion of resources.

We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, materially disrupt our business.

We cannot be certain that our products and services will not infringe valid patents, copyrights or other intellectual property rights held by third parties.  We may in the future be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business.  In particular, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and may incur licensing fees or be forced to develop alternatives.  We may incur substantial expenses in defending against these third party infringement claims, regardless of their merit.  Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business.

Our sublicensed content is subject to the terms and conditions of agreements between HowStuffWorks and third parties.

Under the terms of our contribution agreements, HowStuffWorks transferred and contributed to us all rights, but only those rights, that belong to and are held by HowStuffWorks pursuant to third-party licenses.  Some of those licenses, including those with Publications International, Ltd., contain restrictions on the use of content and termination provisions for breaches of the license agreements.  Accordingly, a breach of any third party license by HowStuffWorks may cause us to lose our license with such third party, which could have a material adverse effect on the implementation of our business plan, value of our content offering and results of our operations.

A slowdown or other adverse developments in the PRC or Brazil economy may materially and adversely affect our customers, demand for our services and our business.

We may be sensitive to a slowdown in economic growth or other adverse changes in the PRC and Brazil economies.  This is particularly true in light of current financial and economic uncertainties.  In response to adverse economic developments, companies have reduced spending on marketing and advertising.  As a result, a slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China or Brazil may materially reduce the demand for our services and materially and adversely affect our business.

PRC laws and regulations related to the PRC Internet sector are unclear and will likely change in the near future.  If we are found to be in violation of current or future PRC laws or regulations, we could be subject to severe penalties.

The PRC regulates its Internet sector by making pronouncements or enacting regulations regarding the legality of foreign investment in the PRC Internet sector and the existence and enforcement of content restrictions on the Internet.  There are substantial uncertainties regarding the interpretation of current PRC Internet laws and regulations, including those discussed below.

The PRC enacted regulations applying to Internet related services and telecommunications related activities.  While many aspects of these regulations remain unclear, they purport to limit and require licensing of various aspects of the provision of Internet information services.  The Ministry of Information Industry, or MII, has also stated that the activities of Internet content providers are subject to regulation by various PRC government authorities, depending on the specific activities conducted by the Internet content provider.  Various government authorities have stated publicly that they are in the process of preparing new laws and regulations that will govern these activities.  The areas of regulation currently include online advertising, online news reporting, online publishing, online securities trading and the provision of industry specific (e.g., drug related) information over the Internet.  Other aspects of our online operations may be subject to regulation in the future.
 
 
 
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Under the agreement reached in November 1999 between the PRC and the United States concerning the United States’ support of China’s entry into the World Trade Organization, or the WTO, foreign investment in PRC Internet services was to be liberalized to allow for 30% foreign ownership in key telecommunication services, including PRC Internet ventures, for the first year after China’s entry into the WTO, 49% in the second year and 50% thereafter.  China officially entered the WTO on December 11, 2001.  However, the implementation of China’s WTO accession agreements is still subject to various conditions.

The interpretation and application of existing PRC laws and regulations, the directives of the MII and the possible new laws or regulations have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, PRC Internet companies, including us.  Accordingly, it is possible that the relevant PRC authorities could, at any time, assert that any portion or all of our ownership structure and business violate existing or future PRC laws, regulations or policies.  It is also possible that the new laws or regulations governing the PRC Internet sector that have been adopted or may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of our proposed businesses and operations.  In addition, these new laws and regulations may be retroactively applied to us.

If we are found to be in violation of any existing or future PRC laws or regulations, the relevant PRC authorities would have broad discretion in dealing with such violation, including, without limitation, the following:

·  
levying fines;
·  
confiscating our income;
·  
revoking our business licenses;
·  
pursuing criminal sanctions against our business and personnel;
·  
shutting down our servers and/or blocking our websites;
·  
requiring us to restructure our ownership structure or operations; and
·  
requiring us to discontinue any portion or all of our Internet business based in China.
 
 
Any of these actions could have a material adverse effect on our financial condition and results of operations.

A 2006 regulation establishes more complex procedures in the PRC for acquisitions conducted by foreign investors, which could make it more difficult for us to pursue growth through acquisitions.

In August 2006, six PRC regulatory agencies - the PRC Ministry of Commerce, or the MOC, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and the Chinese State Administration for Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective in September 2006.  Among other things, the new regulations established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requiring in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise.  Additional regulations adopted in February 2011 provide for national security review of merger and acquisition transactions. We may grow our business in part by directly acquiring complementary businesses in China.  Complying with the requirements of the new regulations could be time-consuming, and any required approval processes, including obtaining approval from the MOC, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

We face risks related to health epidemics and other outbreaks, particularly in the PRC.

Our business could be adversely affected by outbreaks of avian influenza, SARS or other widespread diseases.  Many users of our Websites, especially in China, access the Internet at public cafes.  Any prolonged recurrence of avian influenza, SARS or other widespread disease in China could prompt the government to restrict people’s movements, limit gathering in public places, or otherwise prevent our users from accessing Internet cafes.  If our users cannot access Internet cafes, or we are unable to staff our office in China, our business operations could be materially affected.  We have not adopted any written preventive measures or contingency plans to combat any future outbreak of avian influenza, SARS or any other epidemic.

We may incur administrative and staffing cost due to the PRC’s new labor contract law.

In 2007 the Standing Committee of the National People’s Congress of China enacted the Labor Contract Law, which became effective in January 2008.  The Labor Contract Law’s goal is to improve job security and to protect the rights and interests of employees.  In order to fully comply with the legal requirements under the Labor Contract Law, we may incur administrative and staffing cost, which could adversely affect our results of operations.

 
 
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The online advertising markets in China and Brazil are still developing and present risk to our revenues to be generated from our online publishing business.

We expect our online publishing businesses in China and Brazil to derive significant revenue from online advertisements.  The online advertising markets in China and Brazil are still developing, and future growth and expansion of these markets is uncertain.  If these online advertising markets do not grow at expected rates, our results of operations and financial condition will be materially adversely affected.

Our international operations subject us to other significant risks including unpredictable governmental regulation in China and Brazil.

Our international operations expose us to a wide variety of other risks including increased credit risks, customs duties, import quotas and other trade restrictions, potentially greater inflationary pressures, and the risk of failure or material interruption of wireless systems and services.  Changes may occur in foreign trade and investment laws in the territories and countries where we will operate.  U.S. laws and regulations relating to investment and trade in foreign countries could also change to our detriment.  Any of these factors could materially and adversely affect our revenues and profits. 

We are subject to risk of political instability and trade sanctions within China.  China has traditionally been a closed market with strict political controls.  As China shifts to a market economy, growing economic and social freedoms may conflict with the more restrictive political and governmental policies.  In addition, democratic countries throughout the world have, from time to time, attempted to use economic and other sanctions to achieve political or social change in other countries.  Each of these factors could result in economic sanctions, economic instability, the disruption of trading and war within China and the Asia Pacific Rim, any of which could result in our inability to conduct business operations in China.  Because we expect a substantial amount of our business to be within China in the long term, the disruption of distribution channels into China would have material and adverse consequences to our business.

In the past, the Brazilian government has intervened in the Brazilian economy and occasionally made drastic changes in economic policy.  The Brazilian government’s actions to control inflation and affect other policies have included high interest rates, wage and price controls, currency devaluations, capital controls and limits on exports, among other actions.  Our business, financial condition, revenues, results of operations, prospects and the market price of our securities may be adversely affected by changes in Brazilian government policies, as well as general economic factors, including:

·  
currency fluctuations;
·  
exchange controls and restrictions on remittances abroad, such as those that were briefly imposed on such remittances (including dividends) in 1989 and in the beginning of 1990;
·  
inflation;
·  
price instability;
·  
energy policy;
·  
interest rate increases;
·  
liquidity of domestic capital and lending markets;
·  
changes in tax policy; and
·  
other political, domestic, social and economic developments in or affecting Brazil.

Also, the President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and, consequently, affect the operations and financial performance of businesses operating in Brazil.  We have no control over, and cannot predict what policies or actions the Brazilian government may take in the future.

Further risks relating to international operations include, but are not restricted to, unexpected changes in legal and regulatory requirements, changes in tariffs, exchange rates and other barriers, political and economic instability, possible effects of war and acts of terrorism, difficulties in accounts receivable collections, difficulties in managing distributors or representatives, difficulties in staffing and managing international operations, difficulties in protecting our intellectual property overseas, seasonality of sales and potentially adverse tax consequences.  Any of these factors could materially and adversely affect our revenues and profits.

Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
 
Some of our revenues and operating expenses are denominated in Chinese Renminbi .  Currently, we may purchase foreign exchange for settlement of “current account transactions” without the approval of the SAFE.  We may also retain foreign exchange in our
 
 
 
26

 
 
current account (subject to a ceiling approved by the SAFE) to satisfy foreign exchange liabilities or to pay dividends.  However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future.

Additionally, some of our revenues and operating expenses are denominated in Brazilian Reais .  Brazilian law allows the Brazilian government to impose restrictions on the conversion of the Real into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil.  The government may impose such restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance.  The Brazilian government last imposed remittance restrictions for approximately six months in 1989 and early 1990.  The likelihood that the Brazilian government would impose such restrictions again depends on the extent of Brazil’s foreign currency reserves, the availability of foreign currency in the foreign exchange markets on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy toward the International Monetary Fund and other factors.

Since a portion of our revenues will be denominated in Renminbi , existing and future restrictions on the exchange of Renminbi to other currencies may limit our ability to use revenue generated in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies.  Similarly, in the event that a significant amount of our revenues are denominated in Reais , any future restrictions on the exchange of Reais for other currencies or the remittance to foreign investors of proceeds from their investments in Brazil may limit our ability to use revenue generated in Reais to fund our business activities outside Brazil, or expenditures denominated in foreign currencies.

We are subject to risks of currency fluctuations and exchange restrictions.

Currency fluctuations, devaluations and exchange restrictions may adversely affect our liquidity and results of operations.  In some countries, local currencies are not readily converted into Euros or U.S. dollars (or other “hard currencies”) or are only converted at government controlled rates, and, in some countries, the transfer of hard currencies offshore has been restricted from time to time.  Very limited hedging transactions are available in China to reduce its exposure to exchange rate fluctuations.  To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.  While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure, if at all.  Our revenues as expressed in our U.S. dollar financial statements will decline in value if Renminbi or Reais depreciate relative to the U.S. dollar.  In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into U.S. dollars or by Brazilian exchange control regulations that restrict our ability to convert Reais into U.S. dollars.

China recently announced that it will allow its currency to trade more freely and no longer carry a value as closely associated with that of the U.S. Dollar as it has in the past.  It is possible that such de-coupling will increase the relative value of the Renminbi to the U.S. Dollar, resulting in our incurring higher costs in China due to the higher cost of exchanging U.S. Dollars for Renminbi and our funding our China operations from U.S. Dollars held in our treasury.

Regulation and censorship of information collection and distribution in China may adversely affect our business.

China has enacted regulations governing Internet access and the distribution of news and other information.  Furthermore, the Propaganda Department of the Chinese Communist Party has been given the responsibility to censor news published in China to ensure, supervise and control a particular political ideology.  In addition, the MII has published implementing regulations that subject online information providers to potential liability for content included on their portals and the actions of subscribers and others using their systems, including liability for violation of PRC laws prohibiting the distribution of content deemed to be socially destabilizing.  Because many PRC laws, regulations and legal requirements with regard to the Internet are relatively new and untested, their interpretation and enforcement involve significant uncertainty.  In addition, the PRC legal system is a civil law system in which decided legal cases have limited binding force as legal precedents.  As a result, in many cases it is difficult to determine the type of content that will result in liability for a website operator.

Periodically, the Ministry of Public Security has stopped the distribution over the Internet of information which it believes to be socially destabilizing.  The Ministry of Public Security has the authority to cause any local Internet service provider to block any website maintained outside China at its sole discretion.  If the PRC government were to take action to limit or eliminate the distribution of information through our portals or to limit or regulate current or future applications available to users of our portals, our business would be adversely affected.

The State Secrecy Bureau, which is directly responsible for the protection of state secrets of all PRC government and Chinese Communist Party organizations, is authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the distribution of online information.  Under the applicable regulations, we
 
 
 
27

 
 
could be held liable for any content transmitted on our portal.  Furthermore, where the transmitted content clearly violates the laws of the PRC, we will be required to delete it, and where the transmitted content is considered suspicious, we are required to report such content.  We must also undergo computer security inspections, and if we fail to implement the relevant safeguards against security breaches, our operations in the PRC could be shut down.

Although the PRC has several laws and regulations relating to the use of the Internet, addressing personal privacy in use of the Internet and the freedom of communications, the PRC government does not restrict online service providers in the collection, transmission and commercial use of personal information or data.  Personal data is protected from unlawful use by general statutes and by any contractual arrangement between the user and the service provider.

Since spring of 2005, the National People’s Congress and the State Council have begun legislative review of a draft Law for Protection of Personal Information which provides a wider scope of information protection than that required to protect the personal privacy of a citizen.  Cellular phone number, home address, medical files and occupational information will all be protected under the draft law.  The draft further provides that usage of such personal information by service providers (excluding the national security authority, research institutions, and news agency) shall be subject to the prior authorization of each individual and violation under this law could result in administrative, civil, and even criminal liabilities.  If regulations are adopted addressing the collection, transmission and commercial use of personal information or data, we could be subject to these penalties, aspects of our business plan could no longer be viable and our business would thus be adversely affected.

Potential additional Chinese regulation could affect our business in China.

The Ministry of Information Industry, the Chinese governmental agency that regulates the Internet in China, promulgated a directive effective January 31, 2008, providing that online videos can only be broadcast or streamed by state-owned or controlled companies.  Subsequently, the Ministry of Information Industry acted to provide exceptions for certain non-state-owned or controlled companies.  While it is possible that our Chinese website would not be permitted to display online videos, which could have a material effect on the content provided on such website, it is not yet clear what, if any, effect this regulation has upon our business in China.

Political and economic policies of the PRC government could affect our business.

A portion of our business, assets and operations are located in China and a significant portion of our future revenues are expected to be derived from our operations in China.  Accordingly, our business could be adversely affected by changes in political, economic or social conditions in China, adjustments in PRC government policies or changes in laws and regulations.

The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development in a number of respects, including:

·  
structure;
·  
level of government involvement;
·  
level of development;
·  
level of capital reinvestment;
·  
growth rate;
·  
control of foreign exchange; and
·  
methods of allocating resources.

Since 1949, China has been primarily a planned economy subject to a system of macroeconomic management.  Although the Chinese government still owns a significant portion of the productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous enterprises and the utilization of market mechanisms.  We cannot predict what effects the economic reform and macroeconomic measures adopted by the Chinese government may have on our business or results of operations.

The PRC legal system embodies uncertainties which could limit the legal protections available to us.

The PRC legal system is a civil law system based on written statutes.  Unlike common law systems, it is a system in which decided legal cases have little precedential value.  In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.  We are subject to laws and regulations applicable to foreign investment in mainland China.  However, these laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to us and other foreign investors.  In addition, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the Internet, our
 
 
 
28

 
 
ownership structure and currency exchange, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.

It may be difficult to enforce any civil judgments against us, because in the future a significant portion of our assets could be located outside of the United States.

Although the combined company is incorporated in the State of Delaware, in the future a substantial portion of our assets could be located in Brazil and the PRC.  As a result, it may be difficult for investors to enforce outside the United States any actions brought against us in the United States, including actions predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States.  In addition, certain of our directors and officers a portion of their assets may be located outside the United States (principally in Brazil and the PRC).  As a result, it may not be possible for investors to effect service of process within the United States upon those directors and officers, or to enforce against them or us judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States.  There is doubt as to the enforceability in Brazil and the PRC, in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any state of the United States.

If we are not able to attract and retain key management and consultants, we may not successfully integrate the contributed assets into our historical business or achieve our other business objectives.

We will depend upon our senior management and consultants for our business success.  The loss of the service of any of the key members of our senior management may significantly delay or prevent the integration of the contributed assets and other business objectives.  Our ability to attract and retain qualified personnel, consultants and advisors will be critical to our success.  We may not be able to attract and retain these individuals, and our failure to do so would adversely affect our business.

The concentration of our stock ownership will likely limit your ability to influence corporate matters.
 
HowStuffWorks, a subsidiary of Discovery, beneficially owns a significant percentage of our outstanding common stock and entered into a stockholders agreement.  The stockholders agreement entitles HowStuffWorks to designate nominees to our Board of Directors.  Furthermore, James Rosenstock, a member of the Board, is Senior Vice President, Corporate Development at Discovery Communications.  As a result, Discovery has the ability to influence our management and affairs and determine the outcome of matters submitted to stockholders for approval, including the election and removal of directors, amendments to the charter, approval of equity-based employee compensation plans and any merger, consolidation or sale of all or substantially all of our assets.  The interests of Discovery and its affiliates may materially conflict with the interests of other shareholders.  For as long as they exert a significant influence over our business affairs, they will have the ability to cause us to take actions that may be adverse to the interests of other shareholders or inconsistent with other shareholders’ investment objectives.


The concentration of our stock ownership, as well as our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, stockholders agreement and Delaware law contain provisions that may make our acquisition more difficult without the approval of our board of directors, which could discourage, delay or prevent a transaction involving our change of control.

As of March 31, 2011, Discovery owned over 40% of our outstanding shares of common stock through its HowStuffWorks subsidiary.  As a result, it will be difficult for our other stockholders to approve a takeover of us without the cooperation of Discovery.

Furthermore, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain anti-takeover provisions, including but not limited to the following provisions:

·  
only our Board of Directors may call special meetings of our stockholders;
·  
our stockholders may take action only at a meeting of our stockholders and not by written consent;
·  
we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
·  
SEC Rule 14a-8 requires that we receive notice of stockholder proposals at least 120 days prior to the date of our proxy statement for the previous year’s annual meeting or we do not have to include them in our proxy materials; and
·  
for stockholder proposals not requested to be included in our proxy materials under Rule 14a-8, we require advance notice of not less than 60 nor more than 90 days prior to a meeting for the proposal to be introduced and considered.

 
 
29

 
 
In addition, the stockholders agreement gives HowStuffWorks the right to designate nominees to our Board of Directors.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change of control of us.  These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to cause us to take other corporate actions you desire.

Section 203 of the Delaware General Corporation Law may also delay, defer or prevent a change in control that our stockholders might consider to be in their best interest.  We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an interested stockholder.  Section 203 could have the effect of delaying, deferring or preventing a change in control of us that our stockholders consider to be in their best interest.

Acquisitions, business combinations and other transactions present integration risk and may have negative consequences for our business and our stockholders.
 
The process of integrating acquired businesses into our existing operations may result in unforeseen difficulties and liabilities and may require a disproportionate amount of resources and management attention.  Difficulties that we encounter in integrating the operations of acquired businesses could have a material adverse effect on our results of operations and financial position.  Moreover, we may not realize any of the anticipated benefits of an acquisition and integration costs may exceed anticipated amounts.  We may enter into joint ventures, strategic alliances or similar arrangements with third parties.  These transactions result in changes in the nature and scope of our operations and changes in our financial condition.  Financing for these transactions may come from cash on hand, proceeds from the issuance of additional common stock or proceeds from debt financing.
 
 
The issuance of additional equity or debt securities could:

·  
cause substantial dilution of the percentage ownership of our stockholders at the time of the issuance;
·  
cause substantial dilution of our earnings per share;
·  
subject us to the risks associated with increased leverage;
·  
subject us to restrictive covenants that could limit our flexibility in conducting future business activities; and
·  
adversely affect the prevailing market price for our outstanding securities.

Our investment in Sharecare’s equity securities involves a substantial degree of risk.

Our investment in Sharecare’s equity securities is illiquid and might fail to appreciate and might decline in value or become worthless.  Our Sharecare equity securities likely will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of Sharecare.  Sharecare is a recently-formed company with limited history of operations.  Its prospects must be considered in light of the many risks, uncertainties, expenses, delays and difficulties encountered by companies in their early stages of development.  Moreover, Sharecare operates in the highly competitive internet industry and might not achieve profitability or consumer acceptance in the near-term, if ever.

Even if Sharecare is successful, our ability to realize the value of our investment might be limited.  Because it is a private company, there is no public market for Sharecare’s securities, and the Sharecare securities are subject to restrictions on resale that might prevent us from selling these securities during periods in which it would be advantageous to do so.  As a result, we might have to wait for a liquidity event, such as a public offering or the sale of Sharecare, to realize the value of our investment, if any.  It is likely to take a significant amount of time before a liquidity event occurs.

Because we account for our investment in Sharecare under the equity method of accounting, we record our proportionate share of Sharecare’s net income or loss.  Sharecare has generated losses since its inception, and it remains uncertain when, if ever, Sharecare will achieve profitability.   If Sharecare generates losses, we will record our proportional share of the loss, which could adversely affect our financial condition.

Sharecare may need to raise additional capital, and our equity position in Sharecare may be diluted if Sharecare issues additional equity, options, or warrants.  If Sharecare makes a capital call of its existing equity holders, our position may be diluted if we choose not to contribute additional capital.  During Sharecare's most recent round of capital raises we purchased an option to maintain our equity position in Sharecare; the exercise of this option would increase our current ownership of approximately 16.5% to approximately 18%, assuming there is no other change in Sharecare's issued and outstanding equity.

 
 
30

 
 
Two of our stockholders also have substantial Sharecare investments, and potential conflicts of interests could harm us.

Jeff Arnold, a member of the Board of Directors until June 2010 and Chief of Global Digital Strategy for Discovery, the parent company of HowStuffWorks, together with Discovery beneficially own over 40% of our common stock.  Both Mr. Arnold and Discovery own significant interests in Sharecare and serve on the board of directors of Sharecare, and Mr. Arnold is also Chairman and Chief Architect of Sharecare.  As a result, Mr. Arnold and Discovery have the ability to significantly influence and manage the affairs of both HSWI and Sharecare and determine the outcome of matters submitted for approval to stockholders of each company.  If HSWI and Sharecare’s interests diverge, there is a risk that Mr. Arnold or Discovery will favor actions by Sharecare that are adverse to HSWI.  James Rosenstock, a member of our board of directors, is Senior Vice President, Corporate Development for Discovery.  As a member of our board, Mr. Rosenstock’s position with Discovery will disqualify him from some deliberations of our board.  If HSWI and Sharecare’s interests diverge, there is a risk that Mr. Rosenstock will favor actions by Sharecare that are adverse to HSWI.


Item 2 .  Unregistered Sales of Equity Securities and Use of Proceeds.

None.


Item 3.   Defaults Upon Senior Securities.

None.


Item 4 .  Reserved



Item 5.   Other Information.

None.


 
31

 

Item 6.  Exhibits.

 
Exhibit
     
Registrant’s
     
Exhibit
 
Filed
Number
 
Description of Document
 
Form
 
Dated
 
Number
 
Herewith
                     
10.37
 
Senior Revolving Credit Agreement dated March 4, 2011.
 
8-K
 
3/10/11
 
10.38
   
                     
10.38
 
Revolving Promissory Note dated March 4, 2011 issued to Theorem Capital.
 
8-K
 
3/10/11
 
10.38
   
                     
10.31.3†
 
Third Amendment to Letter Agreement for Services dated as of January 1, 2011, by and between HSW International, Inc. and Sharecare, Inc.
             
X
                     
31.1
 
Certification by the Principal Executive Officer pursuant to Section 240.13a-14 or section 240.15d-14 of the Securities and Exchange Act of 1934, as amended
             
X
                     
31.2
 
Certification by the Principal Financial and Accounting Officer pursuant to Section 240.13a-14 or section 240.15d-14 of the Securities and Exchange Act of 1934, as amended
             
X
                     
32*
 
Certification by the Principal Executive Officer and Certification by the Principal Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
               

_________________________________

† The registrant has requested confidential treatment with respect to certain portions of this exhibit. Such portions have been omitted from this exhibit and have been filed separately with the United States Securities and Exchange Commission.

* This exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of the Section nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.


 
32

 


SIGNATURE


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.



 
HSW INTERNATIONAL, INC.
   
   
Date: May 16, 2011
By:
/s/ Shawn G. Meredith
 
   
Shawn G. Meredith
   
Chief Financial Officer





33


 
 

Portions of this exhibit marked [*] are requested to be treated confidentially.



THIRD AMENDMENT TO THE
LETTER AGREEMENT FOR SERVICES
by and between
SHARECARE, INC.
and
HSW INTERNATIONAL, INC.


 
This Third Amendment (“ Third Amendment ”) is entered into effective as of the 1st day of January, 2011 (“ Third Amendment Effective Date ”), by and between Sharecare, Inc., a company incorporated under the laws of the State of Delaware and located at 3280 Peachtree Road, Suite 600, Atlanta, GA  30305 (“ Sharecare ”) and HSW International, Inc., a company incorporated under the laws of the State of Delaware and located at 3280 Peachtree Road, Suite 600, Atlanta, GA  30305 (“ HSWI ”).
 
 
Recitals
 
 
Whereas , on October 30, 2009, Sharecare and HSWI entered into a Letter Agreement for Services, as amended by the First Amendment of December 30, 2009, and the Second Amendment of June 30, 2010 (the “ Agreement ”), whereby HSWI is to perform certain services for Sharecare;
 
 
Whereas , the Agreement provides for HSWI to perform services for Sharecare in connection with the Sharecare Site and the Dr. Oz Show Site;
 
 
Whereas , Sharecare and HSWI wish to amend certain terms of the Agreement as more specifically defined herein and extend the Term of the Agreement until December 31, 2011, unless earlier terminated solely as expressly permitted in the Agreement.
 
 
Now, Therefore , for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:
 
 
1.            Defined Terms . Capitalized terms used but not specifically defined in this Amendment shall have the meanings ascribed to them in the Agreement.
 
 
2.            Management Fee .  The Dr. Oz Show Site Budget will no longer include an additional fixed management fee for HSWI’s management of the Dr. Oz Show Site, as had been provided for in Section 4 of the Second Amendment of June 30, 2010.  The monthly fixed management fee specified in Section 7 of the Agreement is amended with the amount of $[*] per month.
 
 
3.            Extension of Term . The date of December 31, 2010, in Section 1 of the Agreement, referring to the expiration of the Term, as amended by the Second Amendment of June 30, 2010, is amended and replaced with the date of December 31, 2011, such that the Term of the Agreement shall expire on December 31, 2011, unless otherwise terminated in accordance with the Agreement.  The Services performed by HSWI during the extended Term contemplated hereunder shall constitute “Services” under the Agreement for all purposes of the Agreement.
 
 
4.            Transition Services .  Section 17 of the Agreement, Transition Services, is amended and replaced in its entirety with the following:
 
 
[*] Confidential treatment requested.
 

 
 

 

 
Transition Services .
 
 
(a)            Scope. The parties shall work in good faith and prepare by April 1, 2011, a mutually agreed plan to transition responsibility for the operation of the Sharecare Site and Dr. Oz Show Site to Sharecare (the “ Transition Plan ”).  The transition shall occur during 2011 at a time or times and in a manner consistent with the Transition Plan and those Budget and Specifications which have been agreed to by the parties.  Unless otherwise specified in the Transition Plan or requested by Sharecare, HSWI shall maintain responsibility for the Services, including the operation of the Sharecare Site, Dr. Oz Show Site, and Daily Strength Site (collectively, “ Sites ” under the Agreement for all purposes of the Agreement), through the end of the Term, which shall constitute the point at which responsibility for the same is assumed by Sharecare.  Any transition of the Services  to Sharecare prior to the end of the Term shall not result in any reduction in the full amounts HSWI may charge or would otherwise be due as reflected in the Budget agreed to herewith, as it is recognized that HSWI will have made various personnel and resource commitments in connection with the Services.  As such, all resources identified in the Budget will be billed for and Sharecare will be responsible for minimum payment at those amounts specified in the Budget, regardless of the actual time incurred by HSWI personnel on behalf of Sharecare as a result of Sharecare's transition of Services prior to the end of the Term.  If HSWI, in its sole discretion, reassigns or terminates any HSWI personnel who were previously responsible for Services which were transitioned to Sharecare, then Sharecare will not be responsible for amounts set forth in the Budget for such personnel during that time when they are reassigned or terminated.
 
 
(b)            Transition Requirements. If and as requested by Sharecare, regardless of whether the parties shall have agreed upon the Transition Plan, and without limitation or modification of HSWI's other responsibilities under the Agreement including those under Sections 6, 9, 11 and 18, HSWI will provide the following additional transition services for the Sites (" Transition Services ") to Sharecare:
 
 
 
(i)
upon request, assistance with the identification of new Sharecare technical staff;
 
 
 
(ii)
knowledge transfer from HSWI to an internal technology team at Sharecare, including the provisions of Documentation or other forms of transferring that knowledge reasonably necessary for an orderly transition and the continued development and operation by Sharecare of the Sites;
 
 
 
(iii)
training of existing and new Sharecare staff;
 
 
 
(iv)
assisting Sharecare with establishing agreements with those third party services then being utilized by HSWI as part of the Sharecare Service (for the avoidance of doubt, such does not include individual independent contractors); and,
 
 
 
 (v)
assist in migration of the development environment of the Sharecare Service as and when requested by Sharecare, in a manner as reasonably agreed to by the parties in order to ensure an operational development environment exists at Sharecare.
 
 
(c)            Second Level Support.   For any Services transitioned to Sharecare prior to the end of the Term, HSWI agrees to provide transition support, if and as requested, to Sharecare for those aspects of the Services with which Sharecare requires assistance consistent with the Budget and the Specifications (" Second Level Support ").  HSWI will provide Second Level Support within the scope of those resources then-funded by Sharecare, on a month-to-month basis, for so long as requested by Sharecare during the Term.
 
 
 (d)            Post Transition Plan Services. Following December 31, 2011, any Services required by Sharecare would be subject to mutually agreed extensions of the Term, Specifications and Budgets.
 
 
 

 
 
5.            Budget .  The parties have mutually agreed on a twelve-month Budget pursuant to a consent executed herewith.  To the extent that the Transition Plan or Transition Services requirements, or agreed-upon Sharecare requests in connection with the Services, exceed the Budget, the parties will work in good faith to enter into one or more Change Orders to modify the Specifications or Budget in connection with such.  In connection with such, Sharecare may designate a slower development or release schedule for the Sites by HSWI in order for HSWI resources to allocate more time, pursuant to the Budget, to the Transition Plan or Transition Services.
 
 
6.            Authority . Each party represents and warrants that it has full and complete authority to enter into this Amendment.
 
 
7.            Effect of Amendment . Except as expressly set forth in this Amendment, all provisions set forth in the Agreement shall continue to remain in full force and effect and shall not be affected by this Amendment. To the extent of any direct conflict between the terms of this Amendment and the terms of the Agreement, the applicable terms of this Amendment shall control.
 
 
8.            Further Assurances . The parties will execute and deliver such other instruments and documents, and take such other actions, as either party reasonably requests to evidence or effect the transactions contemplated by this Amendment.
 
 
9.            Headings . The headings contained in this Amendment are for reference purposes only and will not affect in any way the meaning or interpretation of this Amendment.
 
 
10.            Counterparts . This Amendment may be executed in two or more counterparts (electronically - i.e., by scanned PDF - or otherwise), each of which shall be deemed to be an original, but all of which together shall constitute one instrument binding on the parties, notwithstanding that both parties are not signatories to the original or the same counterpart.
 
 
[ Signatures continued on next page ]
 

 
 

 


 

 
 
This Third Amendment to the Agreement is signed below by the duly authorized representatives of the parties and effective as of the Third Amendment Effective Date.
 
Sharecare                                                                                           HSWI
Sharecare, Inc.                                                                                              HSW International, Inc.


By:   /s/ Colin B. Daniel                                                                                                  By:   /s/ Bradley T. Zimmer
 
 
Name:  Colin B. Daniel, CPA                                                                                        Name:  Bradley T. Zimmer

Title:  Vice President, Finance                                                                                     Title:  Executive Vice President & General Counsel
 

 


Exhibit 31.1

Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Gregory M. Swayne, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of HSW International, Inc.;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)        Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 16, 2011
 
/s/ Gregory M. Swayne
 
Gregory M. Swayne
Chief Executive Officer

 
A signed original of this written statement required by Section 302, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 302, has been provided to HSW International and will be retained by HSW International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
Exhibit 31.2
 
Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Shawn G. Meredith, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of HSW International, Inc.;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)        Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 16, 2011
 
/s/ Shawn G. Meredith
 
Shawn G. Meredith
Chief Financial Officer

 
A signed original of this written statement required by Section 302, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 302, has been provided to HSW International and will be retained by HSW International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 



Exhibit 32

Certification pursuant to Title 18 of the United States Code Section 1350,
as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of HSW International, Inc. (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the period presented in the Report.



 
May 16, 2011
May 16, 2011
     
 
By:
/s/ Gregory M. Swayne
 
By:
/s/ Shawn G. Meredith
 
   
Gregory M. Swayne
 
Shawn G. Meredith
   
Chief Executive Officer
 
Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.  This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (“Exchange Act”) or otherwise subject to liability under that section.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to HSW International, Inc. and will be retained by HSW International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.