Remark Holdings
HSW International, Inc. (Form: 10-K, Received: 03/29/2011 17:28:46)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

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 or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)  

3280 Peachtree Road, Suite 600
Atlanta, Georgia 30305


(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 Par Value
 
NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:  None.

Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes  o     No x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
 
 
 

 

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, as amended, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act (Check one):

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 Act). Yes o   No x
 
At March 28, 2011, 5,424,455 shares of the Registrant’s common stock, $0.001 par value per share, were outstanding.  The aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $4,360,430 as of June 30, 2010, based on the closing price of the Common Stock on that date on the Nasdaq Global Market.  Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such person might be deemed to be an affiliate.  This determination of affiliate status might not be conclusive for other purposes.
 
Documents incorporated by reference: 
 


 
 

 

Table of Contents

   
Page
     
PART I
     
Business
1
Risk Factors
7
Unresolved Staff Comments
24
Properties
24
Legal Proceedings
24
Reserved
24
     
PART II
     
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
25
Selected Financial Data
26
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Quantitative and Qualitative Disclosures about Market Risk
38
Financial Statements and Supplementary Data
40
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
72
Controls and Procedures
72
Other Information
72
     
PART III
     
Directors, Executive Officers and Corporate Governance
73
Executive Compensation
77
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
82
Certain Relationships and Related Transactions, and Director Independence
85
Principal Accounting Fees and Services
89
     
PART IV
     
Exhibits and Financial Statement Schedules
91
     
91
     
92
 

 
 

 

PART I

Forward-looking information

Our disclosure and analysis in this report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and our assumptions regarding the regulatory environment and international markets, include forward-looking statements.  Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “may” and similar expressions are forward-looking statements.  Although these statements are based upon reasonable assumptions, they are subject to risks and uncertainties that are described more fully in this report in the section titled “Part I, Item 1A. Risk Factors.”  These forward-looking statements represent our estimates and assumptions only as of the date of this filing and are not intended to give any assurance as to future results.  As a result, you should not place undue reliance on any forward-looking statements.  We assume no obligation to update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors, except as required by applicable securities laws.


ITEM 1.   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. created a highly searchable social Q&A healthcare platform organizing and answering the questions of health with Harpo Productions, Sony Pictures Television, Discovery Communications, Jeff Arnold, and Dr. Mehmet Oz.  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-K.  We were incorporated in Delaware in March 2006.  Our headquarters are located at 3280 Peachtree Road, Suite 600, Atlanta, Georgia 30305.
 

 
Our History
 
HSW International was formed in March 2006 as a wholly owned subsidiary of HowStuffWorks, Inc. in order to develop businesses using exclusive digital publishing rights to HowStuffWorks’ content for the countries of China and Brazil, and effect the merger with INTAC International, Inc. (the “INTAC Merger”).  We completed the INTAC Merger in 2007 to assist in the development of our digital content database exclusively licensed from HowStuffWorks by (i) accelerating our obtaining Internet licenses in China for launching our Internet platform, (ii) obtaining INTAC’s knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platforms in China, and (iii) providing additional cash flow from INTAC’s established businesses.  These established businesses included services related to wireless telephone training and the development and sale of educational software delivered to customers in China (the “INTAC Legacy Businesses”). 
 
We initially focused on the online publishing of localized, translated Chinese and Brazilian editions of HowStuffWorks.com, utilizing strategies based on those employed by HowStuffWorks, Inc., as tailored to the needs of each localized market. 

In 2008, we decided to further leverage our web publishing infrastructure, diversify our initial focus on emerging economies, and enter the healthcare digital market.  We participated in the founding of Sharecare, and in October 2009 we acquired an equity position in Sharecare, became its development partner, and sold to it substantially all assets of our DailyStrength health social networking business.  As the global economic environment remains tenuous and we continue to have lowered expectations for near-term growth in the emerging economies, we believe our diversification into the world’s largest online advertising economy – the United States – provides greater access to digital revenues.
 
 
 
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HSW International established a new web platform services line of business in 2009, to provide highly customized services and web platforms to other companies seeking cost effective solutions for innovative content-focused websites.  We have licensed rights to use the Web 3.0 platform, a next-generation web publishing platform combining traditional web publishing with social media, we developed for Sharecare.  These rights allow us to create new opportunities in the United States and other markets, and our strategy is to enter into relationships to design, develop, and operate the web platforms for other companies.  This direction allows us to leverage HSWI's expertise in online publishing and provide a source of revenue for the Company.  We also recognize the value of developing our own product based on the Web 3.0 platform and intend to pursue opportunities with strategic partners to plan, develop and build content vertical websites unique to HSWI.

 
 
  Our Relationship with Discovery Communications, Inc.
 
Following HowStuffWorks' contribution of digital publishing rights to us, HowStuffWorks merged with Discovery Communications, Inc.  on December 17, 2007 (the “Discovery Merger”), and became a wholly owned subsidiary of Discovery.  The following summarizes the material agreements between HowStuffWorks and us:

·  
We hold a perpetual, fully paid, royalty-free, sublicensable exclusive license to certain of the content published on HowStuffWorks.com in local languages and the HowStuffWorks brand for Brazil and China.
·  
HowStuffWorks provides to us new and updated content published on HowStuffWorks.com, upon our request and pursuant to the same license terms.
·  
We have the right to an exclusive license for the HowStuffWorks trademarks for our Brazil and China websites that display the HowStuffWorks content.
·  
We hold a perpetual, fully paid up, royalty-free, sublicensable license to the software code for HowStuffWorks’ content management platform.
·  
HowStuffWorks has the right to designate three members of our Board of Directors and the chairperson of the Nominating and Governance Committee.

The merger agreement between Discovery and HowStuffWorks provided that payment to the former HowStuffWorks shareholders for a significant portion of its ownership of our common stock would not be paid at the October 2007 closing of the transaction, but instead would be available to be paid in three semi-annual installments.  The installments were planned to begin in October 2008; however, no payment has occurred as of December 31, 2010.  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 indirectly owns in the future may fall due to the potential distributions pursuant to the terms of the Discovery Merger.  At December 31, 2010, Discovery, through HowStuffWorks, owned approximately 43% of our outstanding common stock. 

 
 
Recent Developments

Sharecare Transactions

On October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare (the "Sharecare Transactions"), which was established as a venture between: Dr. Mehmet Oz, a leading cardiac surgeon, health expert and host of “The Dr. Oz Show”; HARPO Productions, producer of “The Oprah Winfrey Show”; Discovery Communications, the world’s largest non-fiction media company; Jeff Arnold, WebMD founder and Discovery Communications’ Chief of Global Digital Strategy; Sony Pictures Television; and HSWI.  Sharecare was created to build a web-based platform that simplifies the search for health and wellness information by organizing a vast array of the questions of health and providing multiple answers from experts, organizations, publishers, and caregivers representing various points of view.

As a result of these transactions, the Company received an equity stake in Sharecare, sold substantially all of the assets of its DailyStrength subsidiary to Sharecare, agreed to provide management and website development services to Sharecare, and received a limited license to use the Sharecare web platform for HSWI's own businesses.  As of March 28, 2011, HSWI owned approximately 16.5% of Sharecare with an option to increase its ownership position to approximately 18% and had representation on its board of directors.  We consider Sharecare a related party.  Further information about Sharecare is available at http://sharecare.com , we do not incorporate any information on the site into this Form 10-K.

 
 
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We are a founding partner of Sharecare and provided the technology development services for Sharecare through our Web Platform Services division. These services resulted in the development of a unique platform that features interactive questions and answers combining expert content and social media and enabling efficient and intuitive consumption of health and wellness content. We began development of the platform for Sharecare in July 2009, and Sharecare.com was launched in October 2010. Effective January 1, 2011, we entered into an extension of our agreement to provide web platform management and support services to Sharecare through December 31, 2011, and expect to fully transition these services to Sharecare by the end of this most recent extension.
 
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.
 

ComoTudoFunciona – HowStuffWorks Brazil
 
We are continuing to evaluate our business strategy in Brazil in light of our challenges in generating revenues despite achieving meaningful traffic levels.  In February 2011, we implemented cost-saving measures in our Brazil operations in connection with our search for a strategic media partner and consideration of other strategic alternatives.  We believe our resources can be better applied to developing and establishing new content vertical websites leveraging the Web 3.0 platform we developed, and as a result are managing our cash flows in Brazil while evaluating our opportunities.
 


Products and Services

Web Platform Services

In 2009, we established Web Platform Services as a new line of business and operating segment to capitalize on the Company's web publishing and social media expertise and core competency of developing and operating web platforms and Internet businesses.

We developed, launched, and began operating Ask Dr. Oz ( http://doctoroz.com/ask) in September 2009 for Sharecare as the first website of our Web Platform Services business.  We entered into an agreement with Sharecare, on October 30, 2009, to design, develop, launch and operate Sharecare's Web 3.0 platform.  The Sharecare website was launched in October 2010 featuring a database of interactive questions and answers about healthcare information with input from physicians, nurses, and hospitals, representing multiple points of view on a variety of topics.  As part of this relationship, HSWI received a license to use this Web 3.0 platform for certain of its own businesses outside of the health and wellness markets.

For Discovery Communications, we launched Curiosity Online (http://curiosity.discovery.com/) on September 30, 2010, and are continuing development work on the initiative.  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.

 
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.   ComoTudoFunciona was established in March 2007, and as of December 31, 2010, had published over 6,700 articles that were either originally created content or translated and localized from HowStuffWorks.  We are continuing the development of our business strategy in Brazil and are searching for a strategic media partner to build brand recognition and provide greater exposure to our
 
 
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Portuguese content.  We are continuing to evaluate our business strategy in Brazil.  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.


       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 the Company, 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 December 31, 2010, we had published almost 14,700 articles in China.

In July 2010, we entered into a content distribution and branding relationship for our BoWenWang website with NetEase (NASDAQ: NTES), one of China's largest web portals with over 500 million page views per day. NetEase features our articles on a BoWenWang branded section of NetEase's portal. NetEase also provides promotional links as part of the relationship, directing users to BoWenWang for additional related content.
 

DailyStrength

On October 20, 2009, we sold substantially all of the assets of DailyStrength to Sharecare as part of the Sharecare Transactions.  We now provide services to Sharecare for the DailyStrength website. DailyStrength.org offers content authored by medical professionals based on current topics, support groups, a treatment directory with definitions, private messaging, message boards and personal goal trackers, and primarily serves English-speaking territories such as the United States, Canada, Australia and the United Kingdom.  The medical panel of professionals contributes articles and journals providing insight to a number of topics relevant to the DailyStrength user group and communities.  Additionally, DailyStrength offers users and members the opportunity to launch communities for groups of like-minded individuals regarding topics of personal significance using leading community tools to interact.


Sales & Support
 
We have sales operations in Brazil and China to service advertisers and customers for our businesses.  We conduct sales for the websites in Brazil and China through a direct sales force, as well as strategic relationships with companies that can represent our advertising inventory.

 
Marketing
 
The primary business model for our websites is to sell advertising, sponsorships and related products and services.  By focusing on providing high-quality web properties to end users in Brazil, China and the United States, we aim to establish a user base attractive to advertisers.  We primarily sell advertising based on the quantity of views delivered to advertisers or the success of various advertising-related metrics.
 
Much of our marketing effort is in fostering word-of-mouth momentum by providing high-quality products and services and using public relations efforts.  Additionally, we enter into relationships with local businesses to provide awareness of and traffic to our products and services.  We also engage in advertising designed to inform potential users and customers about our products and services.  We have not yet commenced any marketing activities for our Web Platform Services.

 
 
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Competition
 
The online publishing business is highly competitive.  We encounter significant competition in each market in which we offer our products and services.  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.

Our Web Platform Services business provides services that relate to the design, development and operation of websites for Sharecare.  We currently have a services contract with Sharecare that expires in December 2011.  We are likely to be subject to competition from other website service providers in seeking to acquire other clients for this business.  Website service providers vary in their offerings and the market is highly competitive due to low barriers to entry and a large number of competitors.

Intellectual Property

We rely upon  trademark, copyright and trade secret laws in various jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary assets and brand.  We do not own any patent or copyright registrations.  We hold various trademarks for our brands, and we have additional applications pending.
 
A number of threats exist to our intellectual property rights.  Effective intellectual property protection may not be available in every country in which we intend to distribute products and services.  Additionally, it may be time consuming and costly for us to protect our intellectual property, and even then such steps may not be sufficient or effective.

We license many technologies used in our businesses, including licenses to content owned by HowStuffWorks.  Although we do not believe that our technologies or services infringe the proprietary rights of any third parties, we cannot ensure that third parties will not assert claims against us in the future or that these claims will not be successful. For a further discussion of our intellectual property rights, see "Risk Factors – We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, may materially disrupt our business" in Part I, Item 1A of this Report.
 

Government Regulation
 
Our operations in China and Brazil are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet.  Laws and regulations are being debated and considered for adoption in these countries and others throughout the world in areas relating to user privacy, freedom of expression, content, advertising, information security and intellectual property rights.
 
Additionally, the Internet infrastructures in China and Brazil are subject to regulatory control and, in the case of China, ownership by the Chinese government.  The People’s Republic of China, or PRC, regulates its Internet sector by enacting legislation or issuing regulations regarding the legality of foreign investment in the PRC Internet sector and the existence and enforcement of content restrictions on the Internet.  We believe that our current ownership structure and localized content complies with PRC laws and regulations.  There are, however, substantial uncertainties regarding the interpretation and enforcement of PRC Internet laws and regulations.  Accordingly, it is possible that the PRC government will ultimately take a view contrary to ours.
 
The PRC Ministry of Information Industry (“MII”), the Chinese governmental agency that regulates the Internet in China, has 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 include, among others, online advertising, online news reporting, online publishing, online securities trading, online community, online video, 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.
 
The MII also promulgated a directive, effective January 31, 2008, providing that online videos can only be broadcast or streamed by state-owned or controlled companies.  The MII provided subsequent interpretation to exclude certain websites that existed prior to the directive.  This directive may prevent our Chinese website from displaying online videos, which could have a material effect on
 
 
 
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the business.  During 2010, there were recent indications of an easing of restrictions for entry into China’s business environment, which could reduce the time and cost required to obtain business licenses by a hypothetical new market participant.
 
Because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, even where we have no local entity, employees or infrastructure.  This could also be detrimental to our business.
 
Employees
 
As of December 31, 2010, we had 66 employees located in: Atlanta, Georgia, USA; São Paulo, Brazil; and Beijing, China.
 
Seasonality

We expect our business to be affected by seasonal fluctuations in Internet usage and traditional retail seasonality.  Internet usage generally slows during the summer months, and online shopping and related advertising typically increases in the fourth quarter of each year.  These seasonal trends will likely cause fluctuations in quarterly results, including fluctuations in sequential revenue growth rates.
 
Available Information
 
Our website address is www.hswinternational.com .  Information on our website is not incorporated by reference herein and should not be considered a part of this report.  We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.


 
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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 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
 
 
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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.
 
 
 
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-K.  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.
 
 
 
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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 2010 revenue, 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 90% of our revenues for 2010.  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 dectision to transition these web development, design and management services inhouse.  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 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.
 

 
9

 
 
 
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 hold today.  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 place significant strain on our resources.
 
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 managerial, operational and financial resources.  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 December 31, 2010, there were approximately 5,375,455 shares of our common stock outstanding, and options and warrants to purchase another approximately 971,700 shares outstanding.  At December 31, 2010, we also had reserved an additional 120,318 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 December 31, 2010.  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. 

 
 
11

 
 
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 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, is fault tolerant, and provides 99.995% availability, 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
 
 
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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.
 

 
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
 
 
13

 
 
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.
 
 
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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.
 

 
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
 
 
 
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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 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.
 
 
 
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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
 
 
 
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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 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. 
 
 
 
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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 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.
 
 
20

 

 
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.
 

 
 
21

 

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 December 31, 2010, Discovery owned approximately 42.7% 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.

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.
 
 
22

 

 
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.
 
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.
 
 
23

 

 
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 1B.   UNRESOLVED STAFF COMMENTS

None.


ITEM 2 .  PROPERTIES

Our corporate headquarters are located at 3280 Peachtree Road, Suite 600, Atlanta, Georgia, which consists of approximately 12,000 square feet of leased space.  At December 31, 2010, we also leased approximately 2,500 square feet in Beijing, China, and approximately 500 square feet in Sao Paulo, Brazil.  We do not own any real property.  We believe that our existing facilities are adequate to meet our needs in the near term.
 
As of December 31, 2010, our current total remaining lease obligations were U.S. $1,461,339.

 
ITEM 3.   LEGAL PROCEEDINGS

We are not subject to any material pending legal proceeding, nor are we aware of any material threatened claims against us.


ITEM 4.   RESERVED





 
24

 

PART II
 
ITEM 5.   MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
Our common stock has been traded on the NASDAQ Global Market under the symbol “HSWI” since October 2, 2007.  The following table sets forth the high and low sales prices of our common stock, as reported on the NASDAQ Global Market.  Stock prices, as presented below, have been retroactively restated to reflect HSWI’s February 2010 10-for-1 reverse stock split.  See Note 9, “Stockholders Equity” of the financial statements.
 
   
High
   
Low
 
Year ended December 31, 2009
           
First Quarter
  $ 4.70     $ 0.80  
Second Quarter
    4.70       1.50  
Third Quarter
    6.80       1.90  
Fourth Quarter
    5.10       2.70  
                 
Year ended December 31, 2010
               
First Quarter
  $ 2.36     $ 1.36  
Second Quarter
    2.40       1.54  
Third Quarter
    7.49       1.77  
Fourth Quarter
    7.38       3.76  

 
Holders of Record

As of March 29, 2011, the last sale price of our common stock on NASDAQ Global Market was $3.05 per share.  As of March 29, 2011, there were approximately 20 stockholders of record.

Dividend Policy

We have neither paid nor declared dividends on our common stock since our inception and do not plan to pay dividends in the foreseeable future.  Any earnings that we may realize will be retained to finance our growth.

Reverse Stock Split

On February 16, 2010, the Company conducted a reverse split of its common stock, par value $0.001, at a ratio of 10-for-1 (the "Reverse Split"), at which time each share of common stock was automatically reclassified as and converted into one-tenth of a share of common stock.    Each stockholder’s percentage ownership in the Company and proportional voting power remained unchanged by the Reverse Split, except for those adjustments resulting from stockholders receiving cash in lieu of fractional shares.  In connection with the Reverse Split, the number of authorized shares of the Company’s capital stock was reduced accordingly by a ratio of 10-for-1. For comparability purposes, all references to HSWI stock within this document have been adjusted to reflect the effects of the Reverse Split, unless otherwise indicated.

Equity Compensation Plans

The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to “Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

 
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ITEM 6 .  SELECTED FINANCIAL DATA

The following table sets forth consolidated financial data with respect to us as of and for the years ended December 31, 2010, and 2009.  The selected consolidated financial data below should be read in conjunction with the audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.  Our historical financial data is difficult to compare from period to period because of the Sharecare transactions we have recently consummated, as described in this Annual Report.

Consolidated Statement of Operations Data:
 
   
Years Ended December 31,
 
   
2010
   
2009
 
             
Operating revenue (Note 11)
  $ 6,655,064     $ 2,259,816  
Cost of services
    5,405,128       2,869,509  
Gross margin
    1,249,936       (609,693 )
Operating expenses
    5,768,070       11,351,787  
Loss from operations
    (4,518,134 )     (11,961,480 )
Other income (loss)
    14,514       209,661  
Deferred income tax benefit
    121,238       688,630  
Loss in equity investment, net of tax
    (1,522,697 )     (818,087 )
Net loss
  $ (5,905,079 )   $ (11,881,276 )
                 
Per share data:
               
Basic loss per share from operations
  $ (1.10 )   $ (2.22 )
Basic loss per share
  $ (1.10 )   $ (2.22 )
Weighted average shares outstanding – basic
    5,368,419       5,361,767  
 
Consolidated Balance Sheet Data:

   
December 31,
 
   
2010
   
2009
 
             
Cash and cash equivalents
  $ 4,843,893     $ 8,724,546  
Goodwill and other intangibles
    497,429       985,989  
Total assets
    9,887,776       15,899,679  
Total liabilities
    1,111,894       1,483,139  
Stockholders’ equity
    8,775,882       14,416,540  

 
 
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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our consolidated financial statements and the related notes and other financial information included elsewhere in this report.  The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions.  The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report.  Our actual results could differ materially from those discussed here.


Business Overview and Recent Developments

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. created a highly searchable social Q&A healthcare platform organizing and answering the questions of health, in partnership with Harpo Productions, Sony Pictures Television, Discovery, Jeff Arnold, and Dr. Mehmet Oz.  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.  Our headquarters are located at 3280 Peachtree Road, Suite 600, Atlanta, Georgia 30305.
 
In October 2009 the Company entered into and effectuated a series of transactions with Sharecare, Inc.  Sharecare is a venture among Dr. Mehmet Oz, a leading cardiac surgeon, health expert and host of “The Dr. Oz Show”; HARPO Productions, producer of “The Oprah Winfrey Show”; Discovery Communications, the world’s largest non-fiction media company; Jeff Arnold, WebMD founder and Discovery Communications’ Chief of Global Digital Strategy; Sony Pictures Television; and HSWI.  Sharecare was founded to develop and build a web platform that simplifies the search for health and wellness information by organizing all of the questions of health and providing multiple answers representing different points of view.  As a result of these transactions, we received an equity stake in Sharecare (20% initially, and approximately 16.5% as of December 31, 2010 as a result of subsequent sales of equity by Sharecare to third parties), sold substantially all of the assets of our DailyStrength subsidiary to Sharecare, agreed to provide management and website development services to Sharecare, and received a limited license to use the Sharecare web platform for our own businesses.  Additionally, we issued a promissory note to Sharecare for $1.0 million, all of which was offset by services we provided to Sharecare, and the promissory note is now paid in full and cancelled.  Finally, Sharecare assumed the potential earn-out payment of up to $3.525 million under the merger agreement by which the Company acquired DailyStrength.  We generated revenue of approximately $5.9 million during 2010 as a result of performing services for Sharecare.
 
HSW International developed and launched Sharecare's website (http://www.sharecare.com) on October 7, 2010, and has entered into a Web Platform Services agreement with Discovery Communications for the development of the Curiosity Online website (http://curiosity.discovery.com).
 
The Company intends to develop a comprehensive personal finance vertical Web 3.0 site as a new business initiative. The Company will need additional capital to support this development and is exploring options for to finance this new business initiative.
 
We are continuing to evaluate our business strategy in Brazil.  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. As such, cost containment measures have been implemented to manage our cash flows in conjunction with our search.


 
27

 
 
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 significant online advertising markets exist in Brazil, we believe it will take additional time for meaningful online advertisement rates to develop in China.  More recently we began providing web platform services and we plan to develop a personal finance Web 3.0 site.  We intend to continue prudent investments in building this business for serving future customers.
 
Our Brazilian website ComoTudoFunciona , which launched in March 2007, is our most mature business.  Subject to seasonality, the number of page views for ComoTudoFunciona increased by 22.9% during 2010 compared to the same period in 2009.  Additionally, the number of unique visitors to the website increased by 15.6% for the same periods. 
 
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 page views for BoWenWang increased 311% during 2010 compared to the same period in 2009.  Additionally, the number of unique visitors to the website increased 127.5% for the same period.  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.
 
The overall online advertising market has declined in recent years, and 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 further lead to non-cash impairment charges to our long-lived assets.
 
Given our investments and progress in building our infrastructure and developing our personnel over the past years, we began offering web platform services in 2009 and are expanding to other companies seeking cost effective solutions for developing and operating innovative websites.  This new business should leverage our existing expertise in innovative web platform design and development, including our own websites in Brazil and China as well as the Web 3.0 platform we are developing, and our ability to support and service web platforms and applications.
 
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 success.
 
 
28

 
 
 
Our Operations

We continue to focus on building our portfolio of content rich websites that we build, develop and launch.  Our core skill sets involve developing next-generation internet platforms that take advantage of best of breed development practices that enhance user engagement.  We are using the license from Sharecare to expand our platform and offerings.

 
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.   ComoTudoFunciona was established in March 2007, and as of December 31, 2010, had published over 6,700 articles that were either originally created content or translated and localized from HowStuffWorks.  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.  We recognized approximately $176,000 and $178,000 of revenue from Brazil during the twelve months ended December 31, 2010 and 2009, respectively.  


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 the Company, 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 December 31, 2010, we had published almost 14,700 articles in China.

In July 2010 we entered into a content distribution and branding relationship for our BoWenWang website with NetEase (NASDAQ: NTES), one of China's largest web portals with over 500 million page views per day. NetEase features our articles on a BoWenWang branded section of NetEase's portal. NetEase provides promotional links as part of the relationship, directing users to BoWenWang for additional related content.
 
Revenue generated from the operations based in China was approximately $14,000 and 19,000 during the twelve months ended December 31, 2010 and 2009 respectively.   Results of operations are included in the digital online publishing reporting segment.


DailyStrength

Now owned by Sharecare, DailyStrength.org offers content authored by medical professionals based on current topics, support groups, a treatment directory with definitions, private messaging, message boards and personal goal trackers, and primarily serves English-speaking territories such as the United States, Canada, Australia and the United Kingdom.  The medical panel of professionals contributes articles and journals providing insight to a number of topics relevant to the DailyStrength user group and communities.  Additionally, DailyStrength offers users and members the opportunity to launch communities for groups of like-minded individuals regarding topics of personal significance using leading community tools to interact.

On October 30, 2009, we sold substantially all of the assets of DailyStrength to Sharecare as part of the Sharecare Transactions.  As a result, DailyStrength is no longer an operating segment of our Company.  Instead, we provide services to Sharecare for the DailyStrength website under the Letter Agreement for Services described below.  In addition, we own a minority investment in Sharecare, as further discussed below.  Results of operations for DailyStrength through October 2009 are included in the social media reporting segment.

 
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Investment in Sharecare – a related party

On October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare, Inc.  (the "Sharecare Transactions"), which was established as a venture among: Dr. Mehmet Oz, a leading cardiac surgeon, health expert and host of “The Dr. Oz Show”; HARPO Productions, producer of “The Oprah Winfrey Show”; Discovery Communications, the world’s largest non-fiction media company; Jeff Arnold, WebMD founder and Discovery Communications’ Chief of Global Digital Strategy; and HSWI.  Sharecare was created to build a web-based platform that simplifies the search for health and wellness information by organizing a vast array of the questions of health and providing multiple answers from experts, organizations, publishers, and caregivers representing various points of view.

As a result of these transactions, the Company:
 
·  
Entered into a subscription agreement for the purchase of 125,000 shares of common stock of Sharecare, representing 20% ownership of Sharecare at the time of purchase;  
·  
Sold substantially all of the assets of its DailyStrength subsidiary to Sharecare;
·  
Agreed to provide management and website development services to Sharecare; and
·  
Received a limited license to use the Sharecare web platform for HSWI's own businesses. 

Additionally, the Company issued a promissory note for $1 million to Sharecare, all of which was satisfied by services the Company provided to Sharecare during 2009.  Finally, Sharecare assumed the potential earn-out payment of up to $3.525 million under the merger agreement by which the Company acquired DailyStrength.  

Jeff Arnold, formerly a 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.  HSWI’s Board of Directors established a Special Committee consisting of three independent directors without any interests in Sharecare to evaluate and recommend the terms of these transactions to the Board.  The Special Committee engaged a third party financial advisor to provide a fairness opinion on the totality of the transactions.


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 since July 1, 2009.  Although we performed services for Sharecare during the third quarter of 2009, we were not able to recognize the associated revenue until the effective date of the services agreement, October 30, 2009.  Therefore, the revenue recognized during 2009 represents six months of revenue related to services rendered before and after the effective date of 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.  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.

The majority of our revenue recognized in 2010 resulted from the services we performed for Sharecare.

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.


 
30

 
 

Results of Operations – Year Ended December 31, 2010, Compared to Year Ended December 31, 2009

The following table sets forth our results of operations for the years ended December 31, 2010, and 2009.  

HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in U.S. Dollars)
 
     
Years Ended December 31,
             
   
2010
   
2009
 
             
Operating revenue
           
Digital online publishing
  $ 190,712     $ 196,942  
     Social media
          194,458  
     Web platform services from affiliates
    6,464,352       1,868,416  
Total revenue
    6,655,064       2,259,816  
                 
Cost of services
    5,405,128       2,869,509  
                 
Gross margin
    1,249,936       (609,693 )
                 
Operating expenses
               
Selling, general and administrative (including stock-based
               
compensation expense of $265,990 and $1,780,168
               
in 2010 and 2009, respectively)
    4,983,981       10,136,353  
    Gain on sale of DailyStrength
          (404,094 )
Impairment loss
    488,560       1,180,440  
Depreciation and amortization
    295,529       439,088  
Total operating expenses
    5,768,070       11,351,787  
                 
Loss from operations
    (4,518,134 )     (11,961,480 )
                 

 
31

 


 
 
             
Non-operating income
           
Interest income
    14,514       50,515  
Other income
          159,146  
Total non-operating income
    14,514       209,661  
                 
Loss before income taxes and equity in loss of equity-method investment
    (4,503,620 )     (11,751,819 )
                 
                 
    Income tax expense (benefit)
    (121,238 )     (688,630 )
    Equity in loss of equity-method  investment, net of taxes
    (1,522,697 )     (818,087 )
                 
                 
Net loss
    (5,905,079 )     (11,881,276 )
                 
Basic and diluted weighted average shares outstanding (a)
    5,368,419       5,361,767  
                 
Basic and diluted loss per share (a)
    (1.10 )     (2.22 )
 
(a)  
All outstanding share and per share amounts have been restated to reflect HSWI’s February 2010 10-for-1 reverse stock split.  See Note 11, “Stockholders’ Equity”.


Revenues

Over the last two years, we generated the majority of our revenues from our web platform services segment, which were approximately $6.5 million and $1.9 million for the twelve month periods ended December 31, 2010 and 2009, respectively.  The increase in revenue is primarily attributable to an increase in the volume of services performed for both new and existing customers, which are related parties.  Additionally, these services were performed during all of 2010 compared to six months in 2009.    Our digital online publishing segment is comprised of our international website businesses based in Brazil and China.  In Brazil, where we launched our website in March 2007, we generated revenue for the years ended December 31, 2010 and 2009 of approximately $­­­176,000 and $­178,000, respectively.  For the year ended December 31, 2010, approximately 39% of revenue from our Brazil website was generated from paid-for-impression advertising and 61% was generated from pay-per-performance ads.  In China, we generated revenue for the years ended December 31, 2010 and 2009, of approximately $14,000 and $19,000, respectively.  For the year ended December 31, 2010, approximately 60% of revenue from our China website was generated from paid-for-impression advertising, 3% was generated from pay-per-performance ads and 37% was generated from sponsorship advertising. Our social media segment is represented by the DailyStrength website and contributed approximately $194,000 of revenue for the year ended December 31, 2009 before we sold it to Sharecare on October 30, 2009.  Similar to 2010, we expect the web platform services segment to continue to be our primary source of revenue during 2011.


Cost of Services

Cost of services includes the costs incurred to support our web platform services including labor, content and third party platform support services as well as ongoing third-party costs to acquire original content, translate and localize content from English to Portuguese and Chinese. These costs were $5.4 million and $2.9 million for the years ended December 31, 2010 and 2009, respectively.   The increase in cost is due to the infrastructure needed to support the growth of the web platform services business.


Operations – Selling, General and Administrative Expenses

Our total selling, general and administrative   expenses (“SG&A”) decreased by $5.2 million for the year ended December 31, 2010, as compared to 2009.  In conjunction with our new web platform services business, we redirected existing resources that provided technology support in the first half of 2009 to this segment to provide services to our web platform customers.  As these costs support the web platform services revenue, they have been recorded as cost of services for the year ended December 31, 2010, thereby creating a decrease in our selling, general and administrative expense compared to the year December 31, 2009. Additionally we experienced a $1.5 million decrease in stock-based compensation expense for the year ended December 31, 2010, as compared to
 
 
 
32

 
 
2009.  Stock-based compensation expense is a non-cash item, and in 2010 totaled $266,000.  The decrease in stock-based compensation expense year-over-year reflects vesting during 2010 of options at exercise prices at the lower end of options ranging from $3.85 per share to $42.60 per share, reflecting our higher stock price in earlier periods when the options were granted.  The decrease in the above mentioned items was partially offset by an increase of $240,000 in fees related to the Sharecare transaction in 2009.

We are continuing to evaluate our business strategy in Brazil.  In February 2011, we implemented certain cost-saving measures in our Brazil operations in connection with our search for a strategic media partner and consideration of other strategic alternatives.


Gain on Sale of DailyStrength

On October 30, 2009, the Company entered into a series of transactions to form Sharecare, a venture established to build a web-based platform that simplifies the search for health and wellness information by organizing a vast array of the questions of health and providing multiple answers from experts, organizations, publishers, and caregivers representing various points of view.  The DailyStrength website offers content authored by medical professionals based on current topics, support groups, a treatment directory with definitions, private messaging, message boards and personal goal trackers.

On October 30, 2009, we sold substantially all of the assets of DailyStrength to Sharecare under the Sharecare Transactions.  GAAP guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 defines this transaction as a deconsolidation and requires a mathematical computation of a gain or loss related to the deconsolidation based on the difference between the carrying value of the assets and the fair value of consideration received.  Accordingly, we recognized a gain of approximately $400,000 on the sale of the DailyStrength assets to Sharecare.


Impairment Loss

As a result of our annual impairment test in the fourth quarter, we recorded an indefinite-lived intangible asset impairment charge of $489,000 during the year ended December 31, 2010, related to our licenses to operate in China.  The most significant change to the prior year valuation was due to changes in key assumptions used to determine the valuation of the China licenses based on recent indications of an easing of restrictions for entry into China’s business environment, specifically assumptions regarding the time and cost required to obtain similar licenses by a hypothetical new market participant.  We continue to expect to receive operational benefits from the licenses to operate in China as these licenses are essential to our ongoing business in China.  Accordingly, we continue to carry an intangible asset of approximately $481,000 after the impairment charges.  We have experienced positive trends regarding traffic patterns to our China website and expect that further growth in visitors and recurring visits will provide a basis for our website to generate more revenue than experienced in the prior year.  If we do not realize our expectations for revenues, we may have to recognize additional impairment charges.


Depreciation and Amortization

Depreciation and amortization expense decreased by approximately $144,000 due mainly to the sale of the Daily Strength assets to Sharecare in 2009.

Interest Income

Interest income decreased by approximately $36,000 due to decreased cash balances combined with decreases in interest rates available.


Other Income

Other income decreased approximately $159,000 for the year ended December 31, 2010, as compared to 2009.  The decrease in other income reflects an early termination fee paid by an advertising customer during 2009.


 
33

 
 
Deferred Income Tax Benefit

We recorded a $121,000 tax benefit related to the impairment charge against the licenses to operate in China intangible asset.


Loss in Equity Investment

We account for our investment in Sharecare under the equity method of accounting.  For the years ended December 31, 2010 and 2009, we recognized a loss in the equity investment of approximately $1.5 million and approximately $818,000, respectively, net of taxes.   The Sharecare results were as expected for a new entity which launched a new website in late 2010.


Liquidity and Capital Resources

Our cash balance was approximately $4.8 million as of December 31, 2010.  We believe that this balance and cash generated from our current operations will be sufficient to meet our requirements for the next twelve months.  The market for online advertising in Brazil and China is developing at a slower rate than previously expected, in part due to the global financial downturn of recent years.  In consideration of market conditions and near-term revenue expectations, we implemented cost reductions in both 2010 and early 2011 to reduce overhead and better align our costs with our strategic initiatives.  We continually 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.
 
We expect to continue to invest in expanding and gaining market share for our web platform services and our international internet sites, including additional investments to create or acquire content.  We are carefully evaluating our strategy for our Brazil web business and have implemented cost-saving measures while we explore strategic alternatives.  We expect that our service agreements to provide web platform services to customers will continue to generate revenues for our company and we continue to pursue activities that identify and engage new customers for the business.  Our largest customer (approximately 90% of 2010 revenues), Sharecare, is a recently-formed entity and our service agreement with Sharecare expires in December 2011.  Given that we do not expect the Company and Sharecare will extend the term or 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.  Our anticipated investments will be made in the respective markets based on our success and anticipated market conditions and trends.  We expect that most of these investments will be paid or under commitment before we begin to realize significant revenues.  Additionally, in the normal course of business, we continue to explore various business initiatives that may lead to additional sources of growth, such as our recent content distribution and promotional agreement with Chinese web portal NetEase.  
 
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. HSWI entered into this senior revolving credit agreement to provide flexibility as HSWI builds and executes upon its social media content strategy.
 
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.
 
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.  
 
 
 
34

 
 
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.

Cash and cash equivalents was $4.8 million at December 31, 2010, compared to $8.7 million at December 31, 2009.  The decrease in cash is primarily attributable to the use of cash to fund operations.  We believe that our current cash balance and the combination of our expected cash generated from future operations combined with cost reduction measures will provide sufficient cash to fund operations for at least twelve months.  However, if cash on hand and generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may draw down on our line of credit,  implement further cost reduction strategies, or attempt to sell additional equity or obtain financing to fund further development and attain profitability.  There is no assurance that our current financing will be sufficient to fund our capital needs or that additional financing will be available or that we will be able to complete financing on satisfactory terms, if at all.


Cash flows from operations used in operating activities

Our net cash used in operating activities during 2010 decreased by $5.5 million compared to the prior year.  The decrease in cash used was due to cost cutting measures we implemented in 2010 as well as growth in revenue from our web platform services business.
.

Cash used in investing activities

During the year ended December 31, 2010, net cash used in investing activities was $215,000 compared to $129,000 in 2009.  The increase was primarily due to capital expenditures for tenant improvements.


Cash flows from financing activities

For the years ended December 31, 2010 and December 31, 2009, there was no net cash provided or used by financing activities.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  We believe that our critical accounting policies, revenue recognition, stock-based compensation and long-lived assets including goodwill, equity investments, and other intangible assets may involve a higher degree of judgment and complexity.


Revenue Recognition

We recognize revenue when the service has been provided, and the other criteria set forth in Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition have been met; namely, the fees we charge are fixed or determinable, we and our advertisers understand the specific nature and terms of the agreed-upon transactions, and the collectability is reasonably assured.

We recognize online publishing revenue as visitors are exposed to or react to advertisements on our website.  We generate revenue from advertising in the form of sponsored links and image ads.  This includes both pay-per-performance ads and paid-for-impression advertising.  In the pay-per-performance model, we earn revenue based on the number of clicks associated with such ad; in the paid-for-impression model (sponsorships), revenue is derived from the display of ads.

We recognize web platform services revenue at the time services are performed.  All of our services revenue is related to the design, development, hosting and other services required to launch and operate the Sharecare, DailyStrength and Ask Dr. Oz websites through our direct activities and management of third-party vendors.  This revenue is classified within our web platform services segment.
 
 
 
35

 

We also recognize web platform services revenue on certain projects using a percentage of completion method.  Sales are calculated based on the percentage that total costs incurred bear to total estimated costs at completion.


Stock-Based Compensation

Under the 2006 Equity Incentive Plan adopted April 13, 2006, and the 2010 Equity Plan adopted June 15, 2010 (the “Plans”), HSWI authorized a total of 1,075,000 shares for grant as part of a long term incentive plan to attract, retain and motivate its eligible executives, employees, officers, directors and consultants.  Options to purchase common stock under the 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.  Additionally in 2008, we granted restricted shares to certain members of our Board of Directors and executives at the fair market value on the grant date.  As of December 31, 2010, no options had been exercised under the Plan.

We account for stock-based compensation in accordance with Codification ASC 718, which requires us to recognize expense related to the fair value of our stock-based compensation awards.

ASC 718 requires the use of a valuation model to calculate the fair value of the stock based awards.  We have elected to use the Black-Scholes options pricing model to determine the fair value of stock options on the dates of grant, consistent with that used for pro forma disclosures under ASC 718.  We measure stock-based compensation based on the fair values of all stock-based awards on the dates of grant, and recognize stock-based compensation expense using the straight-line method over the vesting periods.  Stock-based compensation expense was $266,000 and $1.8 million for the years ended December 31, 2010 and 2009, respectively.


Impairment of Property and Equipment

Property and equipment is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  Such events include significant adverse changes in the business climate, the impact of significant customer losses, unanticipated current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life.  Recoverability of property and equipment is measured by a comparison of the carrying amounts to future net cash flows the assets are expected to generate.  For purposes of recognition and measurement of an impairment loss, property and equipment are grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.  As of September 30, 2009, and in anticipation of the planned disposition of the DailyStrength assets, we performed an impairment analysis on our property and equipment in our social media reportable segment.  The results indicated no impairment charge was required.  Other than the sale of our DailyStrength assets in 2009, no other triggering events occurred during 2010 that would have caused the Company to believe that the fair value of its property and equipment had declined below its carrying value.

Impairment of Investments

Investments are reviewed to determine if events have occurred which would indicate that a decrease in value has occurred which is other than temporary.  Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. We monitor our assets for potential impairment on an ongoing basis.  No impairment charge has been recognized on our investment balances as of December 31, 2010 or 2009.


Impairment of Definite-Lived Intangible Assets

Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  The carrying amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition.  We monitor our assets for potential impairment on an ongoing basis.  As of September 30, 2009, and in anticipation of the planned disposition of the DailyStrength assets, we performed an impairment analysis on the majority of our definite-lived intangible assets.  The results indicated no impairment charge was required.  In October 2009, we sold the majority of our definite-lived intangible assets to Sharecare.  No impairment test was necessary at December 31, 2010.

 
36

 


Goodwill Impairment

Generally, we perform our annual assessment for impairment for goodwill and indefinite-lived intangible assets during the fourth quarter of the fiscal year, unless facts and circumstances require differently.  We determine recoverability by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit using a discounted cash flow model. Estimating the fair value of the reporting unit involves uncertainties, because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy.  The variability of the factors that management uses to perform the goodwill impairment test depends on a number of conditions, including uncertainty about future events and cash flows.  All such factors are interdependent and, therefore, do not change in isolation.  Accordingly, our accounting estimates may materially change from period to period due to changing market factors.  Significant judgments in this area involve determining whether a triggering event has occurred, determining the future cash flows for the assets involved and determining the proper discount rate to be applied in determining fair value.
 
As of September 30, 2009, and in anticipation of the planned disposition of the DailyStrength assets, we performed an impairment analysis of our goodwill.  The results indicated no impairment charge was required.  We subsequently sold the DailyStrength assets to Sharecare and as of December 31, 2010, no goodwill remained and therefore no impairment test was necessary.
 
 

Indefinite-Lived Intangible Asset Impairment

As a result our annual impairment test in the fourth quarter, we recorded indefinite-lived intangible asset impairment charges of $488,560 during the year ended December 31, 2010, related to the licenses to operate in China.  The calculation of the fair value of the Company’s licenses to operate in China was performed consistently with the annual test performed at December 31, 2009, with updated assumptions where appropriate.  The most significant change to the prior year valuation was due to changes in key assumptions used to determine the valuation of the China licenses based on recent indications of an easing of entry into China’s business environment, specifically assumptions regarding the time and cost required to obtain similar licenses by a hypothetical new market participant.  The Company tests its indefinite-lived intangible assets, which are licenses to operate in China, for impairment by utilizing discounted cash flow models to estimate their fair values.  These cash flow models involve several assumptions.  Changes in the Company’s assumptions could materially impact its fair value estimates.  Assumptions critical to its fair value estimates are: (i) weighted-average cost of capital rates used to derive the present value factors used in determining the fair value; (ii) projected annual revenue growth rates used in the models; and (iii) projected long-term growth rates used in the derivation of terminal year values.  The valuation of our China license requires us to estimate the period of time a hypothetical market participant, which we define as an internet company wishing to establish a presence in China, would need to obtain our Chinese business licenses.  Other assumptions include estimates of projected capital expenditures, upfront costs incurred to obtain similar licenses, and working capital requirements.  These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances.  
 
The following table presents the range of assumptions the Company used to derive its fair value estimates during the impairment test conducted in the fourth quarter of 2010.
 
   
Assumptions
 
Weighted-average cost of capital
    28 %
Long-term growth rates
    7 %
Annual revenue growth rates
    17.0-1565.0 %
Time required to obtain similar licenses
 
4.5 months
 
 
If the Company makes additional downward revisions to its cash flow projections in the future, the Company may experience material impairment charges to the remaining carrying amount of its licenses to operate in China.
 
 
37

 

Recent Accounting Pronouncements

We are subject to recent accounting pronouncements, as described in detail in Note 3 to our consolidated financial statements included in Item 8 herein.


Off-Balance Sheet Arrangements

None.



ITEM 7A .  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 (loss)”.  Generally, our foreign expenses are denominated in the same currency as the associated foreign revenue, and at this stage of our 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 December 31, 2010, 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 December 31, 2010, were approximately $889,000.

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 28, 2011.
 












 
38

 

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

CONSOLIDATED FINANCIAL STATEMENTS

40
41
42
43
45
46
90

For supplemental quarterly financial information, see Note 15, Quarterly Results of Operations (unaudited), of the Notes to Consolidated Financial Statements.



 
39

 

 
Report of Independent Registered Public Accounting Firm

 

 
To the Board of Directors and Stockholders of HSW International, Inc.:
 

 
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of HSW International, Inc. and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the accompanying index   presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Notes 2 and 11 to the consolidated financial statements, the Company has entered into significant transactions with Sharecare, Inc., a related party.
 

 

 
 
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
 
March 29, 2011
 


 
40

 

 
HSW INTERNATIONAL , INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(expressed in U.S. Dollars)
 
 
   
December 31,
 
   
2010
   
2009
           
Assets
         
           
Current assets
         
Cash and cash equivalents
  $ 4,843,893     $ 8,724,546  
Trade accounts receivable (net of allowance for doubtful accounts
               
of $0 and $0  at December 31, 2010 and 2009, respectively)
    42,741       36,377  
   Trade accounts receivable due from affiliates
    658,944       469,185  
Prepaid expenses and other current assets
    566,174       787,972  
Total current assets
    6,111,752       10,018,080  
                 
Property and equipment, net
    306,460       490,306  
Investment in unconsolidated affiliate
    2,972,135       4,405,304  
Licenses to operate in China
    481,000       969,560  
Intangibles, net
    16,429       16,429  
                 
Total assets
  $ 9,887,776     $ 15,899,679  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities
               
Accounts payable
  $ 382,515     $ 410,966  
Accrued expenses and other current liabilities
    489,315       686,549  
    Advances from shareholder
    85,745       85,296  
Other current liabilities
    34,069       57,938  
Total current liabilities
    991,644       1,240,749  
                 
Long-term liabilities
               
     Deferred tax liability
    120,250       242,390  
                 
Commitments and contingencies
           
                 
Stockholders’ equity
               
Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued
           
Common stock, $0.001 par value, 20,000,000 shares authorized,­ 5,375,455
               
and 5,369,829 issued and outstanding at December 31, 2010, and
               
December 31, 2009, respectively  (a)
    5,375       5,369  
Additional paid-in-capital
    100,701,356       100,435,372  
Accumulated other comprehensive income
    38,531       40,100  
Accumulated deficit
    (91,969,380 )     (86,064,301 )
Total stockholders’ equity
    8,775,882         14,416,540  
Total liabilities and stockholders’ equity
  $ 9,887,776     $ 15,899,679  

(a)  
All outstanding share amounts have been restated to reflect HSWI’s February 2010 10-for-1 reverse stock split.  See Note 9, “Stockholders’ Equity”.

The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
41

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONSOL IDATED STATEMENTS OF OPERATIONS
(expressed in U.S. Dollars)
 
 
   
Years Ended December 31,
   
2010
     
2009
 
 
               
Operating revenue
             
Digital online publishing
  $ 190,712     $ 196,942  
    Social media
          194,458  
    Web platform services from affiliates
    6,464,352       1,868,416  
Total revenue
    6,655,064       2,259,816  
                   
Cost of services
    5,405,128       2,869,509  
                   
Gross margin
    1,249,936       (609,693 )
                   
Operating expenses
                 
Selling, general and administrative (including stock-based
                 
compensation expense of $265,990 and $1,780,168
                 
in 2010 and 2009, respectively)
    4,983,981       10,136,353  
    Gain on sale of DailyStrength
          (404,094 )
Impairment loss
    488,560       1,180,440  
Depreciation and amortization
    295,529       439,088  
Total operating expenses
    5,768,070       11,351,787  
                   
Loss from operations
    (4,518,134 )     (11,961,480 )
                   
                   
Non-operating income
                 
Interest income
    14,514       50,515  
Other income
          159,146  
Total non-operating income
    14,514       209,661  
                   
Loss before income taxes and
    (4,503,620 )     (11,751,819 )
equity in loss of equity-method investment
                 
                   
Income tax benefit
    121,238       688,630  
Equity in loss of equity-method investment, net of taxes
    (1,522,697 )     (818,087 )
                   
                   
Net loss
  $ (5,905,079 )   $ (11,881,276 )
                   
Basic and diluted loss per share (a)
  $ (1.10 )   $ (2.22 )
                   
Basic and diluted weighted average shares outstanding (a)
    5,368,419       5,361,767  
 
(a)  
All outstanding share and per share amounts have been restated to reflect HSWI’s February 2010 10-for-1 reverse stock split.  See Note 9, “Stockholders’ Equity”.

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


 
42

 


HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHO LDERS’ EQUITY AND COMPREHENSIVE LOSS
(expressed in U.S. Dollars)
 
 
                     
Accumulated
         
Total
 
               
Additional
   
Other
         
Stockholders’
 
   
Common Stock
   
Paid-in
   
Comprehensive
   
Accumulated
   
Equity
 
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Deficit
   
(Deficit)
 
                                     
Balance at December 31, 2008
    5,363,878     $ 5,363     $ 98,655,210     $ (1,126 )   $ (74,183,025 )   $ 24,476,422  
                                                 
Comprehensive loss:
                                               
Net loss
                            (11,881,276 )     (11,881,276 )
Foreign currency translation
                      41,226             41,226  
Total comprehensive loss
                                            (11,840,050 )
                                                 
                                                 
  Restricted stock grants
    8,000       8       (8 )                  
  Forfeited restricted stock
    (2,049 )     (2 )     2                          
  Stock-based compensation
                                               
  expense
                1,780,168                   1,780,168  
                                                 
Balance at December 31, 2009
    5,369,829     $ 5,369     $ 100,435,372     $ 40,100     $ (86,064,301 )   $ 14,416,540  
                                                 
Comprehensive loss:
                                               
Net loss
                            (5,905,079 )     (5,905,079 ))
Foreign currency translation
                      (1,569 )           (1,569 )
Total comprehensive loss
                                            (5,906,648 )
                                                 
Restricted stock grants
    8,000       8       (8 )                  
 Forfeited restricted stock
    (2,374 )     (2 )     2                          
Stock-based compensation
                                               
   expense
                265,990                   265,990  
Balance at December 31, 2010
    5,375,455     $ 5,375     $ 100,701,356       38,531     $ (91,969,380 )   $ 8,775,882  

All outstanding share and per share amounts have been restated to reflect HSWI’s February 2010 10-for-1 Reverse Split.  See Note 9. “Stockholder’s Equity”.

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

 
43

 

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

   
Years Ended December 31,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net loss
  $ (5,905,079 )   $ (11,881,276 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    295,529       439,088  
Impairment loss
    488,560       1,180,440  
         Gain on sale of DailyStrength
          (404,094 )
         Web platform services rendered in exchange for reduction in promissory note
          (1,000,000 )
         Services rendered in exchange for equity investment in Sharecare
          (250,000 )
Stock-based compensation
    265,965       1,780,168  
Deferred income taxes
    (122,140 )     (688,630 )
         Equity in loss of equity-method investment
    1,522,697       818,087  
         Loss on sale of fixed assets
    14,095       1,117  
Changes in operating assets and liabilities:
               
Accounts receivable
    (6,364 )     113,643  
Accounts receivable from affiliate
    (189,759 )     (469,185 )
Prepaid expenses and other current assets
    221,798       872,128  
Accounts payable, accrued expenses, and other liabilities
    (249,086 )     280,930  
Net cash used in operating activities
    (3,663,784 )     (9,207,584 )
                 
Cash flows from investing activities:
               
Purchases of fixed assets and software, net
    (125,772 )     (114,213 )
Other, net
    (89,528 )     (15,042 )
Net cash used in investing activities
    (215,300 )     (129,255 )
                 
Net change in cash and cash equivalents
    (3,879,084 )     (9,336,839 )
Impact of currency translation on cash
    (1,569 )     41,226  
Cash and cash equivalents at beginning of period
    8,724,546       18,020,159  
Cash and cash equivalents at end of period
  $ 4,843,893     $ 8,724,546  

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

 
44

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(expressed in U.S. Dollars)
 
 

   
Years Ended December 31,
 
   
2010
   
2009
 
             
Supplemental disclosure of cash flow information
           
             
Other non-cash financing and investing activities
           
    Equity investment in Sharecare in return for issuance of promissory note
          1,000,000  
    Equity investment in Sharecare in exchange for services rendered
          250,000  
Equity investment in Sharecare, contract for services agreement, license to use Sharecare web platform for HSWI’s own business, assumption of DailyStrength earnout by Sharecare in exchange for DailyStrength assets (see Note 2)
          3,569,298  

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



 
45

 
 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)
 

1.   DESC RIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

Description of the Business

HSW International, Inc. (“HSWI” 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. (“Sharecare”) created a highly searchable social Q&A healthcare platform organizing and answering the questions of health, in partnership with Harpo Productions, Sony Pictures Television, Discovery, Jeff Arnold, and Dr. Mehmet Oz.  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 (“Discovery”) HowStuffWorks.com, and in China for the digital publication of translated content from World Book, Inc. (“World Book”), 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.  Our headquarters are located at 3280 Peachtree Road, Suite 600, Atlanta, Georgia 30305.  We currently maintain offices in Atlanta, Georgia, China, and Brazil.

We entered the Brazilian online publishing market in March 2007, by utilizing royalty-free and exclusively licensed digital content provided by HowStuffWorks.  At December 31, 2010, we had approximately 6,700 articles that were either (i) articles from the HowStuffWorks content database translated from English to Portuguese, or (ii) originally created content.  The web site address is ( http://hsw.com.br/ ).  We are continuing to evaluate our business strategy in Brazil. We are searching for a strategic media partner which to build brand recognition and provide greater exposure to our Portuguese content.  In February 2011, we implemented certain cost-saving measures in our Brazil operations in connection with our search for a strategic media partner and consideration of other strategic alternatives.  As such, cost containment measures have been implemented to manage our cash flows in conjunction with our search.
 
In June 2008, we entered China’s online publishing market utilizing a combination of the contributed assets from HowStuffWorks with the benefit of INTAC’s relationships and knowledge of the Chinese markets in obtaining our Internet licenses.  In September 2008, we announced an exclusive content partnership with World Book.  In 2009, World Book created thousands of original Chinese-language articles providing information on all branches of knowledge, including arts, sciences, history, technology, mathematics, sports, and recreation, exclusively for HSW International's Beijing-based website, BoWenWang ( http://www.bowenwang.com.cn/ ).  At December 31, 2010, we had published approximately 14,700 articles.

In November 2008, we acquired DailyStrength, Inc. (“DailyStrength”), publisher of the health social networking website DailyStrength ( http://www.DailyStrength.org ).  DailyStrength was founded in 2006 by internet veterans with more than 20 years of experience conceiving, building, and running communities on the web, including Yahoo Mail, Yahoo Message Boards, Yahoo Groups, GeoCities, Facebook and more.  DailyStrength hosts more than 500 communities focused on issues such as weight loss, divorce, parenting and illnesses.  Users of the site both read and interact with high-quality, accurate reference information.  The site features health journals, discussion forums, virtual hugs, member-created groups, and treatment reviews plus unique content provided on a daily basis by physicians and other health professionals.

On October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare, Inc. ("Sharecare").  Sharecare is a venture among Dr. Mehmet Oz, a leading cardiac surgeon, health expert and host of “The Dr. Oz Show”; HARPO Productions, producer of “The Oprah Winfrey Show”; Discovery Communications, the world’s largest non-fiction media company; Jeff Arnold, WebMD founder and Discovery Communications’ Chief of Global Digital Strategy; Sony Pictures Television; and HSWI.  Sharecare was founded to build a website that simplifies the search for health and wellness information by organizing all of the questions of health and providing multiple answers representing different points of view.  As a result of these transactions, the Company received an equity stake in Sharecare, sold substantially all of the assets of its DailyStrength subsidiary to Sharecare, agreed to provide management and website development services to Sharecare, and received a limited license to use the Sharecare
 
 
46

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)
 
 
web platform for its own businesses.  Additionally, the Company issued a promissory note for $1 million to Sharecare, all of which was offset by services the Company provided to Sharecare during 2009, and the note is now paid in full.  Finally, Sharecare assumed the potential earn-out payment of up to $3.525 million under the merger agreement by which the Company acquired DailyStrength.  We earned the majority of our revenue from the services agreement with Sharecare during 2009 and 2010.
 

Liquidity Considerations

Our cash balance was approximately $4.8 million as of December 31, 2010.  We believe that this balance and cash generated from our current operations will be sufficient to meet our requirements for the next twelve months.  The market for online advertising in Brazil and China is developing at a slower rate than expected, in part due to the global financial downturn of recent years.  In consideration of market conditions and near-term revenue expectations, we implemented cost reductions in February 2011 to reduce overhead and better align our costs with our strategic initiatives.  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.
 
We expect to continue to invest in expanding and gaining market share for our web platform services and our international internet sites, including additional investments to create or acquire content.  We expect that our service agreements to provide web platform services to customers will continue to generate revenues for our company; and we continue to pursue activities that identify and engage new customers for the business.  Our largest customer (approximately 90% of 2010 revenues), Sharecare, is a recently-formed entity and our current web platform services agreement with Sharecare 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 their obligations to us under the services agreement.  We currently do not have any material commitments for capital expenditures.  Our anticipated investments will be made in the respective markets based on our success and anticipated market conditions and trends.  We expect that most of these investments will be paid or under commitment before we begin to realize significant revenues.  Additionally, in the normal course of business, we continue to explore various business initiatives that may lead to additional sources of revenue and growth, such as our recent content distribution and promotional agreement with Chinese web portal NetEase.  
 
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.  HSWI entered into this senior revolving credit agreement to provide flexibility as HSWI builds and executes upon its social media content strategy.
 
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.
 
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.

 
 
47

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)


2.  TRANSACTIONS WITH SHARECARE

On October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare, Inc.  (the "Sharecare Transactions"), which was established as a venture among: Dr. Mehmet Oz, a leading cardiac surgeon, health expert and host of “The Dr. Oz Show”; HARPO Productions, producer of “The Oprah Winfrey Show”; Discovery Communications, the world’s largest non-fiction media company; Jeff Arnold, WebMD founder and Discovery Communications’ Chief of Global Digital Strategy; and HSWI.  Sharecare was created to build a web-based platform that simplifies the search for health and wellness information by organizing a vast array of the questions of health and providing multiple answers from experts, organizations, publishers, and caregivers representing various points of view.

As a result of these transactions, the Company:
 
·  
Entered into a subscription agreement for the purchase of 125,000 shares of common stock of Sharecare, representing 20%  ownership of Sharecare at the time of purchase;  
·  
Sold substantially all of the assets of its DailyStrength subsidiary to Sharecare;
·  
Agreed to provide management and website development services to Sharecare; and
·  
Received a limited license to use the Sharecare web platform for HSWI's own businesses. 

Additionally, the Company issued a promissory note for $1 million to Sharecare, all of which was satisfied by services the Company provided to Sharecare during 2009.  Finally, Sharecare assumed the potential earn-out payment of up to $3.525 million under the merger agreement by which the Company acquired DailyStrength.  

Upon the sale of DailyStrength to Sharecare, the Company recorded a gain of $404,094, representing the difference in the fair value of consideration received and the carrying amounts of DailyStrength.
 
The following table details the DailyStrength assets sold to Sharecare on October 30, 2009:

Property and equipment, net
  $ 34,616  
Intangibles, net
    1,536,096  
Goodwill
    1,998,586  
Total assets held for sale
  $ 3,569,298  

We account for our equity interest in Sharecare under the equity method of accounting based on our ability to exercise significant influence through our vendor relationship with Sharecare as well as our ownership percentage and representation on its board of directors.  Under this method, we record our proportionate share of Sharecare’s net income or loss based on the financial results of Sharecare.  As of December 31, 2010, HSWI owned approximately 16.5% of the outstanding common stock 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.  The difference is characterized as goodwill and is subject to subsequent measurement in accordance with ASC 323 for an other than temporary decline in value.  We eliminated our portion of intercompany profit included in Sharecare’s historical earnings through December 31, 2010, which was approximately $243,000.  Our investment balance in Sharecare reflects the intercompany profit elimination.

For the year ended December 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 is not material to the consolidated financial statements for the year ended December 31, 2010 or prior period financial statements.

As a result of the issuance of common stock by Sharecare to third party investors in 2010, we recorded a change in interest gain of approximately $632,000, which is included in “Equity in loss of equity-method investment, net of tax” on the consolidated statement of operations.
 
 
48

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)

 
The following table shows select financial data of Sharecare, as well as HSWI’s proportional share of net loss in Sharecare as reported under the equity method:

   
For the Year Ended December 31, 2010
For the Year Ended December 31, 2009
Revenues
 
$
              4,742,403
63,729
Gross Profit
   
   4,000,091
(165,549)
Loss from Operations
   
(11,863,151)
(4,336,494)
Net Loss
   
(12,008,017)
(4,329,761)
Loss in Equity Investment, net of tax
 
$
          (1,980,122)
(818,324)

 
3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements 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 are not the primary beneficiary are accounted for using the equity method.  In the event of a change in ownership, 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 (“ASC”) ASC 810 in evaluating whether it has interests in VIEs (variable interest entity) 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 (variable interest entity).  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 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.
 
 
49

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)

We have determined that our interest in Sharecare is not a VIE.  Additionally, we are not the primary beneficiary of this entity.  Accordingly, we use the equity method to account for our investment in Sharecare.
 
 
Revenue Recognition

Digital Online Publishing and Social Media Revenue
 
We generally recognize online publishing revenue as visitors are exposed to or react to advertisements on our website.  We generate revenue from advertising in the form of sponsored links and image ads.  This includes both pay-per-performance ads and paid-for-impression advertising.  In the pay-per-performance model, we earn revenue based on the number of clicks associated with such ads; in the paid-for-impression model (sponsorships), revenue is derived from the display of ads.

Web Platform Services
 
We recognize web platform services revenue at the time services related to the design, development, hosting, and related web services are performed.  We record revenue on a gross versus net basis as we bear the risk of loss related to the services performed, the majority of which relates to services performed by HSWI resources.  We are able to recognize all of the revenue generated from this effort when the services have been provided since we meet the criteria set forth in Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition ; namely, the fees we charge are fixed or determinable, we and our customers understand the specific nature and terms of the agreed-upon transactions and collectability is reasonably assured.

We also recognize web platform services revenue on certain projects using a percentage of completion method.  Sales are calculated based on the percentage that total costs incurred bear to total estimated costs at completion.


Cost of Services

Digital Online Publishing
 
The online publishing cost of revenue represents the cost of translating and localizing content and acquiring original content written by third parties.

Social Media
 
The social media cost of revenue represents the cost of acquiring original content written by third parties.

Web Platform Services
 
The web platform services cost of revenue represents labor cost to design, develop, host, launch and operate websites through our direct activities and management of third-party vendors.  Additionally, cost of revenue represents the cost of acquiring content written by third parties as well site hosting costs.


Concentration of Credit Risk and Accounts Receivable
 
Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and accounts receivable.  At December 31, 2010, 99% of our cash was denominated in U.S. dollars, and 1% represented cash 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, may 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.  Cash held by non-US subsidiaries is subject to foreign currency fluctuations against the U.S. dollar.  Our risk in foreign currency is somewhat mitigated at this time as U.S. funds are transferred monthly to Brazil and China to fund that month’s operating activity.  If, however, the U.S. dollar is devalued significantly against the Brazilian Reais or the Chinese Renminbi , the cost to further develop our websites in Brazil and China could exceed our original estimates.

 
50

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)

The majority of our accounts receivable balance as of December 31, 2010, is from Sharecare.  We regularly evaluate the collectability of trade receivable balances based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns.  If we determine that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material events impacting its business, we record a specific reserve for bad debt to reduce the related receivable to the amount expected to be recovered.  The Company’s revenue from Sharecare for the year ended December 31, 2010 and December 31, 2009, totaled approximately $6 million and approximately $1.9 million, respectively.  The Company provides web platform services to Sharecare, and amounts due from Sharecare represented 73% of accounts receivable from affiliates as of December 31, 2010.
 

In April 2010, the Company entered into an agreement with Discovery Communications, LLC (“Discovery”) to provide website development services to Discovery.  The Company’s web platform services revenue from Discovery, an affiliated entity, for the year ended December 31, 2010 totaled approximately $527,000, and Discovery represented 27% of accounts receivable from affiliates as of December 31, 2010.
 
Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents.  We maintain our cash in financial institutions we believe are of high credit quality and do not believe any undue risk is associated with our cash balances.  A large portion of the cash balance is maintained at one financial institution.


Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes.  Actual results could differ materially from those estimates.  On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, intangible assets and useful lives of property and equipment, stock based compensation, equity method investments, and income taxes, among other things.


Income Taxes

We account for taxes based on guidance in ASC 740.  We recognize income taxes under the asset and liability method.  Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The application of income tax law is inherently complex.  Laws and regulations in this area are voluminous and are often ambiguous.  As a result, we are required to make many subjective assumptions and judgments regarding our income tax exposures, interpretations of, and guidance, surrounding income tax laws and regulations change over time.  As a result, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and consolidated statements of operations.

We intend to classify interest and penalties arising from unrecognized income tax positions in the statement of operations as general and administrative expenses if they occur.  At December 31, 2009, and 2008, we had no accrued interest or penalties related to uncertain tax positions.  The tax years 2008, 2007, 2006 and 2005 are not or have not been under examination but remain open to examination under IRS statute.

 
 
51

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)

Stock Based Compensation

We measure stock-based compensation at the grant date based on the calculated fair value of the award.  We recognize the expense over the employee’s requisite service period, generally the vesting period of the award.  We estimate the fair value of stock options at the grant date using the Black-Scholes option pricing model with weighted average assumptions for the activity under our stock plans.  Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate among others, impact the fair value estimate.  Further, the forfeiture rate impacts the amount of aggregate compensation.  These assumptions are subjective and generally require significant analysis and judgment to develop.  We estimate the fair value for restricted stock grants based on the market value at the grant date.  Options vest based on meeting a minimum performance condition.
 
We do not recognize a deferred tax asset for unrealized tax benefits associated with the tax deductions in excess of the compensation recorded (excess tax benefit).  We apply the “with and without” approach for utilization of tax attributes upon realization of net operating losses in the future.  This method allocates stock-based compensation benefits last among other tax benefits recognized.  In addition, we apply the “direct only” method of calculating the amount of windfalls or shortfalls.


Foreign Currency

The functional currency of our international subsidiaries is the local currency, Reais in Brazil, Renminbi in China or Hong Kong dollars.  The financial statements of these subsidiaries are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue, costs and expenses.  Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity.  Net gains and losses resulting from foreign exchange transactions are recorded in selling, general and administrative expenses.  Currency translation and transaction losses during 2010 and 2009 were not material to our consolidated financial statements.


Purchase Price Allocations

From time to time, we enter into material business combinations.  In accordance to ASC 805, Business Combinations, the purchase price is allocated to the various assets acquired and liabilities assumed at their estimated fair value.  Fair values of assets acquired and liabilities assumed are based upon available information and may involve us engaging an independent third party to perform an appraisal of tangible and intangible assets.  Estimating fair values can be complex and subject to significant business judgment and most commonly impacts property, plant and equipment and intangible assets, including those with indefinite lives.  Generally, we have, if necessary, up to one year from the date of acquisition to obtain all of the information that we have arranged to obtain and that is known to be obtainable to finalize the purchase price allocation.  Until that time, the purchase price allocation may remain subject to change based on final valuations of assets acquired and liabilities assumed and may be subject to material revision.


Property and Equipment

Property and equipment is stated at cost less accumulated depreciation.  We compute depreciation, which is recorded within operating expenses in the consolidated statements of operations, using the straight-line method over the estimated useful lives of the assets, generally one to three years for computer equipment and software and three to five years for building improvements and office equipment.  Costs represent the purchase price and any directly attributable costs of bringing the asset to working condition for its intended use.  Repairs and maintenance are expensed as incurred.  Betterments and capital improvements are capitalized and depreciated over the remaining useful life of the related asset.  We record gains or losses from disposal of property and equipment to operations.


Advertising Expenses

We expense advertising costs in the year in which they are incurred.  Advertising expense for each of the years ended December 31, 2010, and 2009 was approximately $6,000 and $45,000, respectively.


 
52

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)

Commitments and Contingencies

We record liabilities for loss contingencies arising from claims, assessments and litigation and other sources when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  In the opinion of management, after consultation with legal counsel, there are no material claims, assessments and litigation against the Company as of December 31, 2010.

 
Impairment of Property and Equipment and Definite-Lived Intangible Assets

Property and equipment and definite-lived intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  Such events include significant adverse changes in the business climate, the impact of significant customer losses, unanticipated current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life.  Recoverability of these assets is measured by a comparison of the carrying amounts to future net cash flows the assets are expected to generate.  For purposes of recognition and measurement of an impairment loss, property and equipment and definite-lived intangible assets are grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.  As of September 30, 2009, and in anticipation of the planned disposition of the DailyStrength assets in 2009, we performed an impairment analysis on our assets in our social media reportable segment.  The results indicated no impairment charge was required.  Other than the sale of our DailyStrength assets, no other triggering events occurred that would have caused the Company to believe that the fair value of its property and equipment and definite-lived assets had declined below its carrying value.

Impairment of Investments

Investments are reviewed to determine if events have occurred which would indicate that a decrease in value has occurred which is other than temporary.  Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. We monitor our assets for potential impairment on an ongoing basis.  No impairment charge has been recognized on our investment balances as of December 31, 2010 or 2009.

Goodwill and Indefinite-Lived Intangible Assets Impairment

Generally, we perform our annual assessment for impairment for goodwill and indefinite-lived intangible assets during the fourth quarter of the fiscal year, unless facts and circumstances require differently.  For goodwill, we determine recoverability by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit using a discounted cash flow model.  The Company tests its indefinite-lived intangible assets, which are licenses to operate in China, for impairment by utilizing discounted cash flow models to estimate their fair values.  Estimating the fair value of the reporting unit and our long-lived intangible assets involve uncertainties, because management is required to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy.  The variability of the factors that management uses to perform our impairment tests depend on a number of conditions, including uncertainty about future events and cash flows.  All such factors are interdependent and, therefore, do not change in isolation.  Accordingly, our accounting estimates may materially change from period to period due to changing market factors and other conditions.  Significant judgments in this area involve determining whether a triggering event has occurred, determining the future cash flows for the assets involved and determining the proper discount rate to be applied in determining fair value.

As of September 30, 2009, and in anticipation of the planned disposition of the DailyStrength assets, we performed an impairment analysis of our goodwill.  The results indicated no impairment charge was required.  We subsequently sold the DailyStrength assets
 
 
53

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)
 
to Sharecare and as of December 31, 2009 and 2010, no goodwill remains and therefore no impairment test was necessary.  We performed an impairment test of our indefinite-lived intangible assets as of September 30, 2009, as a result of the planned disposition of the website trade names related to the Sharecare transaction.  The results indicated no impairment charge was required.  In October 2009, the website trade names were sold to Sharecare.

As a result our annual impairment test in the fourth quarter, we recorded indefinite-lived intangible asset impairment charges of $489,000 during the year ended December 31, 2010, related to the licenses to operate in China.  See Note 5.


Net Loss per Share

We compute net loss per share in accordance with ASC 260, Earnings per Share , which requires dual presentation of basic and diluted earnings or loss per share (“EPS”).

We compute basic loss per share by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding during the period.  We calculate diluted loss per share by dividing net loss by the weighted-average number of common shares and dilutive potential common shares, if any, outstanding during the period.  Our stock options and warrants were not included in the computation of diluted loss per share because their effects are anti-dilutive.
 
 
Recent Accounting Pronouncements

In January 2010, the FASB issued authoritative guidance that expands the required disclosures about fair value measurements.  This guidance provides for new disclosures requiring the Company to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements.  This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements.  The adoption of this guidance did not have a material impact on our financial statements.

In November 2009, the FASB issued authoritative guidance that incorporates Amendments to FASB Interpretation No. 46(R) into the Accounting Standards Codification.  The new requirements are effective as of the beginning of an enterprise’s first fiscal year beginning after November 15, 2009 (January 1, 2010, for us).  The adoption of this guidance did not have a material impact on our financial statements.


In June 2009, the FASB issued authoritative guidance that revises the approach to determining the primary beneficiary of a variable interest entity, or VIE, to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE.  This guidance is effective for fiscal years beginning after November 15, 2009 (January 1, 2010, for us), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  The adoption of this guidance did not have a material impact on our financial statements.

In April 2009, the FASB issued authoritative guidance that provides additional guidance and disclosure requirements regarding the recognition and measurement of contingent assets acquired and contingent liabilities assumed in a business combination where the fair value of the contingent assets and liabilities cannot be determined as of the acquisition date.  This guidance is effective for acquisitions occurring after January 1, 2009.  The adoption of this guidance did not have any impact on the Company, and its future impact will be dependent upon the specific terms of future business combinations, if any.

 
54

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)

4.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

As of December 31, 2010 and 2009, prepaid expenses and other assets consisted of the following:

   
As of December 31,
 
   
2010
   
2009
 
             
Prepaid insurance
  $ 348,936     $ 510,838  
Deposits and other current assets
    217,238       277,134  
Total
  $ 566,174     $ 787,972  



5.  GOODWILL AND INTANGIBLE ASSETS

In accordance with ASC 350 and the planned sale of the DailyStrength assets, the Company performed an impairment analysis on the goodwill balance related to the DailyStrength business as of September 30, 2009.  In performing the impairment assessment, the Company estimated the fair value of its single reporting unit that had goodwill using the Income Approach (discounted cash flow analysis)   — the discounted cash flow (“DCF”) valuation method requires an estimation of future cash flows of an entity and then discounting those cash flows to their present value using an appropriate discount rate.  The discount rate selected reflects the risks inherent in the projected cash flows.  The key inputs and assumptions of the DCF method are the projected cash flows, the terminal value of the entity, and the discount rate.

Based upon the results of the impairment assessment the Company did not believe that its goodwill related to the DailyStrength reporting unit was impaired as of September 30, 2009.  In making the determination that goodwill was not impaired at September 30, 2009, the Company considered both qualitative and quantitative factors.

As a result of our annual impairment test in the fourth quarter, we recorded indefinite-lived intangible asset impairment charges of $489,000 during the year ended December 31, 2010, related to the licenses to operate in China.  We recorded the impairment charge related to the licenses to operate in China in “impairment loss” in our consolidated statements of operations.  The calculation of the fair value of the Company’s intangible asset was performed consistently with the annual test performed at December 31, 2009, with updated assumptions where appropriate.  The most significant change to the prior year valuation was due to changes in key assumptions used to determine the valuation of the China licenses based on recent indications of an easing of restrictions for entry into China’s business environment, specifically assumptions regarding the time and cost required to obtain similar licenses by a hypothetical new market participant (See Note 6)
 
As a result of our annual impairment test in the fourth quarter, we recorded indefinite-lived intangible asset impairment charges of $1.2 million during the year ended December 31, 2009, related to the licenses to operate in China.  We present the impairment charge related to the licenses to operate in China in “impairment loss” in our consolidated statement of operations.  The calculation of the fair value of the Company’s intangible asset was performed consistently with the annual test performed at December 31, 2008, with updated assumptions where appropriate.  The most significant change to the prior year valuation was a downward revision to projected cash flows due to declines in the Company’s projected sales in China from its previous projections.
 
The following table presents a summary of the activity related to the carrying value of goodwill (figures in thousands):


     
Years Ended December 31,
     
2009
 
Balance as of January 1:
       
Goodwill
  $
31,031,326
 
Accumulated Amortization
   
(29,058,382)
 
Net Balance
  $
1,972,944
 
         
Goodwill acquired during the year
       
         
Goodwill write off due to disposition (see Note 2 and 3)
   
  (1,972,944)
 
Accumulated losses
   
 
Balance as of December 31
  $
 


Our Brazil operation has recorded indefinite-lived intangible assets of $16,429 as of December 31, 2010 and 2009, for website domain names.

 
55

 
 
HSW INTERNATIONAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(expressed in U.S. Dollars)

 
Intangibles include the following as of December 31, 2010 and 2009:
 
   
As of December 31, 2010
 
   
Gross
   
Accumulated Amortization
   
Disposals
   
Adjustments
   
Net
 
                               
Intangible assets not subject to amortization:
                             
  Licenses related to China
    969,560       -       -       (488,560 )     481,000  
  Site domains
    16,429       -       -       -       16,429  
Subtotal
    985,989       -       -       (488,560 )     497,429  
                                         
Total
  $ 985,989     $ -     $ -     $ (488,560 )   $ 497,429  
                                         
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