Remark Media
HSW International, Inc. (Form: 10-Q, Received: 08/12/2010 17:25:58)

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

FORM 10-Q

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

For the quarterly period ended June 30, 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 of Incorporation)
 
(I.R.S. Employer
   
Identification Number)

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o   No  x

At August 12, 2010, the number of common shares outstanding was 5,376,355.

 
 

 


TABLE OF CONTENTS

   
Page
 
PART I – FINANCIAL INFORMATION
 
     
Financial Statements
 
 
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 (unaudited)
1
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
2
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (unaudited)
3
 
Notes to Condensed Consolidated Financial Statements (unaudited)
4
     
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
     
Quantitative and Qualitative Disclosures about Market Risk
19
     
Controls and Procedures
19
     
 
PART II – OTHER INFORMATION
 
     
Legal Proceedings
20
     
Risk Factors
20
     
Unregistered Sales of Equity Securities and Use of Proceeds
31
     
Defaults Upon Senior Securities
31
     
Reserved
31
     
Other Information
31
     
Exhibits
32
     
 
33

 
 

 

 
PART I – FINANCIAL INFORMATIO N

Item 1. Financial Statements

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

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Assets
           
             
Current assets
           
Cash and cash equivalents
  $ 6,631,938     $ 8,724,546  
    Trade accounts receivable due from affiliates
    723,144       505,562  
Prepaid expenses and other current assets
    440,242       787,972  
Total current assets
    7,795,324       10,018,080  
                 
Property and equipment, net
    442,271       490,306  
Investment in unconsolidated affiliate
    3,797,653       4,405,304  
Licenses to operate in China
    969,560       969,560  
Intangibles, net
    16,429       16,429  
Total assets
  $ 13,021,237     $ 15,899,679  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities
               
Accounts payable
  $ 389,905     $ 410,966  
    Advances from shareholder
    85,745       85,296  
Accrued expenses and other current liabilities
    819,456       744,487  
Total current liabilities
    1,295,106       1,240,749  
                 
Deferred tax liability
    242,390       242,390  
                 
Commitments and contingencies
               
                 
Stockholders’ equity
               
Preferred stock, $.001 par value; 1,000,000 shares authorized, none issued
           
Common stock, $.001 par value; 20,000,000 shares authorized, 5,369,829
               
issued and outstanding at June 30, 2010 and December 31, 2009, (a)
    5,369       5,369  
Additional paid-in-capital
    100,511,286       100,435,372  
Accumulated other comprehensive income
    31,743       40,100  
Accumulated deficit
    (89,064,657 )     (86,064,301 )
Total stockholders’ equity
    11,483,741       14,416,540  
Total liabilities and stockholders’ equity
  $ 13,021,237     $ 15,899,679  

(a)   
All share and per share amounts reflect HSWI’s February 2010 10-for-1 reverse stock split.  See Note 1, “Description of Business”.

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


 
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HSW INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(expressed in U.S. Dollars)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Operating revenue
                       
Web platform services from affiliates
  $ 1,363,080     $     $ 2,709,711     $  
Social media
          45,493             125,100  
Digital online publishing
    76,878       42,661       104,359       89,384  
Total revenue
    1,439,958       88,154       2,814,070       214,484  
                                 
Cost of services
    1,112,534       374,890       2,261,838       763,418  
                                 
Gross margin
    327,424       (286,736 )     552,232       (548,934 )
                                 
Operating expenses
                               
Selling, general and administrative (including stock-based
                               
      compensation expense of $36,946 and $651,543 for
                               
the three months ended June 30, 2010 and 2009, respectively,
                               
        and $75,914 and $1,356,249 for the six months ended June 30,
                               
2010 and 2009, respectively)
    1,303,957       2,983,782       2,807,922       6,017,413  
    Depreciation and amortization
    71,938       121,771       147,319       237,559  
Total operating expenses
    1,375,895       3,105,553       2,955,241       6,254,972  
                                 
Operating loss
    (1,048,471 )     (3,392,289 )     (2,403,009 )     (6,803,906 )
                                 
Other income
                               
Interest income
    5,034       16,258       10,305       31,750  
Other income
                      160,000  
Total other income
    5,034       16,258       10,305       191,750  
                                 
Loss from operations before income taxes and equity in loss of
                               
       equity method investment
    (1,043,437 )     (3,376,031 )     (2,392,704 )     (6,612,156 )
                                 
Equity in loss of equity-method investment, net of taxes
    (530,158 )           (607,652 )      
                                 
                                 
Net loss
  $ (1,573,595 )   $ (3,376,031 )   $ (3,000,356 )   $ (6,612,156 )
                                 
Net loss per share (a)
                               
Net loss per share, basic and diluted
  $ (0.29 )   $ (0.63 )   $ (0.56 )   $ (1.23 )
                                 
Basic and diluted weighted average shares outstanding (a)
    5,369,829       5,361,829       5,369,829       5,361,658  


(a)  
  All share and per share amounts reflect HSWI’s February 2010 10-for-1 reverse stock split.  See Note 1, “Description of Business”.

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


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

   
Six Months Ended June 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net cash used in operating activities
  $ (1,977,400 )   $ (4,196,913 )
Cash used in operating activities
    (1,977,400 )     (4,196,913 )
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (106,851 )     (99,501 )
Cash used in investing activities
    (106,851 )     (99,501 )
                 
Cash flows from financing activities:
           
Cash provided by financing activities
           
                 
Net change in cash and cash equivalents:
    (2,084,251 )     (4,296,414 )
Impact of foreign currency translation on cash
    (8,357 )     26,863  
Cash and cash equivalents at beginning of period
    8,724,546       18,020,159  
Cash and cash equivalents at end of period
  $ 6,631,938     $ 13,750,608  
                 
                 

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

 
3

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.  DESCRIPTION OF BUSINESS

Overview

HSW International, Inc. (“HSWI” or the "Company") is an online publishing company that develops and operates Internet businesses focused on providing consumers in the world’s digital economies with locally relevant, high quality information, and provides web platform services that support traditional web publishing combined with social media.  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.  HSW International 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. (“World Book”), publisher of World Book Encyclopedia.  Our co-founding and continuing development of Sharecare, Inc. (“Sharecare”) will create a highly searchable social Q&A healthcare platform organizing and answering the questions of health, in partnership with Harpo Productions, Sony Pictures Television, Discovery Communications, Jeff Arnold, and Dr. Mehmet Oz.  We generate revenue primarily through the sale of online advertising on our websites and through service fees charged to clients for web platform development and operation services.  We were incorporated in Delaware in March 2006.  Our headquarters are located at 3280 Peachtree Road, Suite 600, Atlanta, Georgia 30305.

Liquidity Considerations
The global financial downturn had a negative effect on the demand for advertising in general, including online advertising.  Economic uncertainty has had and might continue to have a direct impact on our revenue as orders for online advertising internationally have declined.  Also, our businesses in Brazil and China, which we launched within the past three years, are still in a growth stage as we continue to focus on building towards a critical mass of traffic volume.  In consideration of projected market conditions and near-term revenue expectations, we implemented cost reductions in 2009 to reduce headcount and better align our costs with our 2009 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 websites and their respective brands.

We expect to continue to invest in expanding and gaining market share for our internet platforms in Brazil and China, including additional investments to create or acquire content.  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.  We believe that our current cash balance and the combination of our expected cash generated from future operations combined with recently implemented 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 might 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 such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.

We expect that our service agreements to provide web platform services to customers will continue to generate revenues for our company and we are continuing to seek new customers for the business.  However, as our largest customer, Sharecare is a recently-formed entity and our service agreement with Sharecare expires in December 2010, there can be no assurance that the amounts generated will be sufficient to cover our liquidity needs for the long-term.

Reverse Split
On February 3, 2010, the Board of Directors authorized a 10-for-1 reverse split of its authorized, issued and outstanding common shares, effective for shareholders of record on February 10, 2010 (the “Reverse Split”).  The board of directors believed that the Reverse Split was appropriate in order to maintain continued listing of our common stock on the NASDAQ Global Market.  The Reverse Split successfully resulted in our common stock achieving the level necessary to satisfy NASDAQ’s $1.00 minimum bid continued listing requirement, and NASDAQ notified HSWI that we regained compliance with continued listing standards.  However, we cannot predict whether the market price of our common stock will remain equal to or in excess of $1.00
 
 
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because the market price is determined by investors' trades and can be affected by other factors in addition to the number of shares outstanding, such as our future performance and the overall performance of the stock markets.

The Reverse Split became effective upon filing a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware on February 16, 2010.  Immediately after the Reverse Split, we had 5,369,785 common shares outstanding.  Immediately prior to the Reverse Split the Company had approximately 53,698,292 shares of common stock outstanding.  Subsequent to the Reverse Split, the par value per share of the common stock remained unchanged at $0.001 per share.  As a result, on the effective date of the Reverse Split, the stated capital on the Company's consolidated balance sheet attributable to common stock was reduced and the additional paid-in capital account was increased by the amount by which the stated capital was reduced.  Per share net income or loss will be increased because there will be fewer shares of the Company's common stock outstanding.  The Company does not anticipate that there will be any impact to the results of our operations, including changes to the amount of stock-based compensation expense to be recognized in any period, as a result of the Reverse Split.  Additionally, employee and director share and option grants as well as associated exercise prices were adjusted in the same proportion as the Reverse Split.

On July 28, 2010, the Company received a notice from The NASDAQ Stock Market indicating that it has regained compliance with the requirements of NASDAQ Marketplace Rule 5450(b)(1)(C) for continued listing on The NASDAQ Global Market.  The rule requires 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.  The Company had previously received a notice from The NASDAQ Stock Market in March 2010 indicating that it was not in compliance with the requirements of such rule.


2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

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

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

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

The accompanying interim condensed consolidated financial statements for the three and six months ended June 30, 2010, and 2009 are unaudited. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for financial information have been omitted pursuant to the rules and regulations of Article 10 of SEC Regulation S-X. In the opinion of management, these condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to state fairly the financial position, results
 
 
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of operations and cash flows for the periods indicated. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for the three and six months ended June 30, 2010, are not necessarily indicative of results that may be expected for any other future interim period or for the year ending December 31, 2010. You should read the unaudited condensed consolidated financial statements in conjunction with Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as with HSWI’s consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board, or 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 consolidated financial statements.

In December 2009, the FASB issued authoritative guidance that incorporates Accounting Standards Update 2009 – 17, Improvements to Financial Reporting by Enterprises involved with Variable Interest Entities, 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 consolidated 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 consolidated financial statements.


3.  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 has been 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.  

We account for our equity interest in Sharecare under the equity method of accounting, as we exercise significant influence over Sharecare due to our seat on the Sharecare board of directors and also due to our involvement in the development of the Sharecare website.  Under this method, we record our proportionate share of Sharecare’s net income or loss based on the financial results of Sharecare.  As of June 30, 2010, HSWI owned approximately 18% of the outstanding common stock of Sharecare.

 
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The difference between the carrying amount of our investment balance in Sharecare and our proportionate share of Sharecare's underlying net assets was approximately $2.7 million as of June 30, 2010.  The difference is characterized as goodwill and is subject to review in accordance with ASC 323 for an other than temporary decline in value.  We eliminated our portion of intercompany profit included in Sharecare’s earnings during the six months ended June 30, 2010.  Our investment balance in Sharecare reflects the intercompany profit elimination of approximately $81,000.

For the six months ended June 30, 2010, the Company recorded a non-cash adjustment to equity in loss of equity-method investment of approximately $0.1 million to correct our investment in unconsolidated affiliate balance.  The company determined this out-of-period adjustment is not material to the condensed consolidated financial statements for the six month period ended June 30, 2010, forecasted annual results for the fiscal 2010 or any prior period financial statements.

During the three and six months ended June 30, 2010, HSWI recorded revenue of approximately $1.3 million and $2.7 million, respectively, related to services performed under the Sharecare services agreement.

The following table shows select financial data of Sharecare as reported under the equity method:


   
For the Three Month Period Ended June 30, 2010
   
For the Six Month Period Ended June 30, 2010
 
Revenues
  $ 739,974     $ 1,214,078  
Gross profit
    708,851       983,309  
Loss from operations
    (2,854,115 )     (4,850,012 )
Net loss
    (2,857,528 )     (4,843,739 )
Proportional share of investee loss
  $ (508,773 )   $ (867,029 )


4.  SEGMENTS

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

The Company reported two operating segments for the first half of 2009: (1) social media; and (2) digital online publishing.  Our social media segment was comprised of our DailyStrength operations, which generated revenues from the advertisers based primarily in the United States.  We sold substantially all of the assets of the social media segment to a related party, Sharecare, on October 30, 2009.  Subsequently, we no longer recognize activity within that segment.  Our digital online publishing segment consists of our websites in Brazil and China and generates revenues from advertisers based in the respective countries.

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.  The operating results for services performed under the Sharecare services agreement are included in the web platform services segment.

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


 
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Digital Online
   
Social
   
Web Platform
             
   
Publishing
   
Media
   
Services
   
Corporate
   
Total
 
                               
Three Months Ended June 30, 2010
                             
 Revenue
  $ 76,878     $     $ 1,363,080     $     $ 1,439,958  
                                         
 Operating (loss) income
    (323,978 )           241,973       (966,466 )     (1,048,471 )
 Interest income
    1,095                   3,939       5,034  
 Other income
                      (530,158 )     (530,158 )
 (Loss)income from operations
  $ (322,883 )   $     $ 241,973     $ (1,492,685 )   $ (1,573,595 )

 
   
Digital Online
   
Social
   
Web Platform
             
   
Publishing
   
Media
   
Services
   
Corporate
   
Total
 
                               
Three Months Ended June 30, 2009
                             
 Revenue
  $ 42,661     $ 45,493     $     $     $ 88,154  
                                         
 Operating (loss) income
    (428,310 )     (322,739 )           (2,641,240 )     (3,392,289 )
 Interest income
                      16,258       16,258  
 Other income
                             
 (Loss)income from operations
  $ (428,310 )   $ (322,739 )   $     $ (2,624,982 )   $ (3,376,031 )

 
   
Digital Online
   
Social
   
Web Platform
             
   
Publishing
   
Media
   
Services
   
Corporate
   
Total
 
                               
Six Months Ended June 30, 2010
                             
 Revenue
  $ 104,359     $     $ 2,709,711     $     $ 2,814,070  
                                         
 Operating (loss) income
    (646,641 )           466,973       (2,223,341 )     (2,403,009 )
 Interest income
    1,095                   9,210       10,305  
 Other income
                      (607,652 )     (607,652 )
 (Loss)income from operations
  $ (645,546 )   $     $ 466,973     $ (2,821,783 )   $ (3,000,356 )

 
   
Digital Online
   
Social
   
Web Platform
             
   
Publishing
   
Media
   
Services
   
Corporate
   
Total
 
                               
Six Months Ended June 30, 2009
                             
 Revenue
  $ 89,384     $ 125,100     $     $     $ 214,484  
                                         
 Operating (loss) income
    (910,598 )     (643,391 )           (5,258,917 )     (6,803,906 )
 Interest income
                      31,750       31,750  
 Other income
          160,000                   160,000  
 (Loss)income from operations
  $ (910,598 )   $ (483,391 )   $     $ (5,227,167 )   $ (6,612,156 )

 

 
8

 


   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Total assets:
           
Web platform services
  $ 706,080     $ 469,185  
Social media
          19,751  
Digital online publishing
    478,362       557,648  
Business segments
    1,184,442       1,046,584  
Corporate
    11,836,795       14,853,095  
Total assets
  $ 13,021,237     $ 15,899,679  


 
9

 

5.  STOCKHOLDERS’ EQUITY

Common Stock

In February 2010, we effected a 10-for-1 reverse stock split of HSWI’s common stock (the “Reverse Split”).  As a result of the Reverse Split, each ten shares of HSWI’s common stock issued and outstanding at 5:00 p.m. on February 10, 2010, were automatically combined into one share of common stock.  Shareholders received cash in lieu of the issuance of any fractional shares

Each share of our common stock entitles its holder to one voting right.

Stock-Based Compensation

HSWI has authorized 800,000 shares under the 2006 Equity Incentive Plan adopted April 13, 2006 (the “2006 Plan”), and an additional 275,000 shares under the 2010 Equity Incentive Plan adopted June 15, 2010 (the “2010 Plan”), for grant as part of long term incentive plans to attract, retain and motivate its eligible executives, employees, officers, directors and consultants.  Options to purchase common stock under the 2006 Plan 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.  During the six months ended June 30, 2010, HSWI did not grant shares of restricted stock to officers and employees under the 2010 Plan.

In accordance with current authoritative guidance, we measure stock-based compensation cost at the grant date based on the fair value of the award, and recognize it as an expense over the requisite service period.  Stock-based compensation expense for the three months ended June 30, 2010 and 2009 was approximately $37,000 and $651,000, respectively.  As of June 30, 2010, unrecognized compensation expense relating to non-vested stock options approximated $301,000 which we expect to recognize through November 2011.  During the six months ended June 30, 2010 and June 30, 2009, no options were granted, forfeited, expired or exercised.  Through June 30, 2010, no options had been exercised under either plan.
 
The grant date fair value of options vested during the three and six months ended June 30, 2010, was approximately $47,000 and $84,000 respectively.

Net Loss per Share

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Loss per share:
                       
Net  loss
  $ (1,573,595 )   $ (3,376,031 )   $ (3,000,356 )   $ (6,612,156 )
                                 
Weighted average shares outstanding
    5,369,829       5,361,829       5,369,829       5,361,658  
                                 
                                 
Net  loss per share, basic and diluted
  $ (0.29 )   $ (0.63 )   $ (0.56 )   $ (1.23 )
                                 
Weighted average shares outstanding
    5,369,829       5,361,829       5,369,829       5,361,658  
                                 
Dilutive stock options
                       
                                 
Total common shares and dilutive securities
    5,369,829       5,361,829       5,369,829       5,361,658  

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

 
 
10

 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
             
Anti-dilutive securities not included in diluted net loss
           
per share calculation:
           
Stock compensation plans
    787,659       715,187  
INTAC options - fully vested
    25,000       25,000  
Warrants to purchase common stock
    25,000       25,000  
Total anti-dilutive securities
    837,659       765,187  


6.  COMPREHENSIVE LOSS

The components of total comprehensive income were as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net loss
  $ (1,573,595 )   $ (3,376,031 )   $ (3,000,356 )   $ (6,612,156 )
Net change in foreign currency translation adjustment,
                               
net of tax
    (2,825 )     26,565       (8,357 )     29,987  
Total comprehensive loss
  $ (1,576,420 )   $ (3,349,466 )   $ (3,008,713 )   $ (6,582,169 )


7.  RELATED PARTY TRANSACTIONS

On October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare, a related party.  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 its own businesses.  Through the services agreement, HSWI continues to provide support services to the DailyStrength website.  Additionally, the Company issued a promissory note to Sharecare, all of which was offset by services the Company provided to Sharecare during 2009.  There was no outstanding balance on the note as of October 30, 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.  We entered into each of these transactions simultaneously.

Jeff Arnold, a former member of HSWI’s Board of Directors, is the Chairman and Chief Architect and a significant stockholder of Sharecare.  Additionally, Discovery Communications, Inc., HSWI’s largest stockholder, is a significant stockholder of Sharecare.  Until December 17, 2009, Bruce Campbell, President of Digital Media and Business Development for Discovery Communications, was a member of HSWI's Board of Directors.  HSWI’s Board of Directors established a Special Committee on May 18, 2009, 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 adviser to provide a fairness opinion on the totality of the transactions.  All terms recommended by the Special Committee were unanimously approved by the Board, with Mr. Arnold and Mr. Campbell abstaining from voting.

The Company’s revenue from Sharecare for the quarter and six months ended June 30, 2010 totaled approximately $1.3 million and $2.7 million, respectively.  As of June 30, 2010, HSWI owned approximately 18% of the outstanding common stock of Sharecare.  The Company provides web platform services to Sharecare, and Sharecare represented 72% of accounts receivable from affiliates as of June 30, 2010.

In May 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 quarter ended June 30, 2010 totaled approximately $23,000, and Discovery represented 28% of accounts receivable from affiliates as of June 30, 2010.

In February 2010, the Company entered into a sublease agreement with Sharecare.  We record monthly rental expense of approximately $20,000, net of certain offsets, on a straight line basis over the life of the lease.

As of June 30, 2010, the Company had outstanding payables due to its affiliate Discovery of approximately $86,000.


 
11

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included as part of this Form 10-Q.  This Form 10-Q contains forward-looking statements based on current expectations.  We sometimes identify forward-looking statements with such words as “may”, “will”, “expect”, “anticipate”, “estimate”, “seek”, “intend”, “believe” or similar words concerning future events. The forward-looking statements contained herein include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling, general and administrative expenses, capital resources, the sufficiency of our cash resources, the expected effects of the sale of substantially all the assets of our Daily Strength business, and the effects of general industry and economic conditions and are subject to risks and uncertainties including, but not limited to, those discussed below, in Part II, Item 1A. and elsewhere in this Form 10-Q that could cause actual results to differ materially from the results contemplated by these forward-looking statements.  Relevant risks and uncertainties include those referenced in our filings with the SEC, and include but are not limited to: risks related to the Sharecare transactions; reliance on third parties for content; economic and industry conditions specific to Brazil and China, such as the state of their telecommunications and internet infrastructure and uncertainty regarding protection of intellectual property; challenges inherent in developing an online business in Brazil and China, including obtaining regulatory approvals and adjusting to changing political and economic policies; governmental laws and regulations, including unclear and changing laws and regulations related to the Internet sector in China; general industry conditions and competition; general economic conditions, such as online advertising rates, interest rate and currency exchange rate fluctuations; and restrictions on intellectual property under agreements with third parties.  We also urge you to carefully review the risk factors set forth in Part II, Item 1A. and other documents we file from time to time with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2009.

Business Overview and Recent Events

HSW International, Inc. (“HSWI”) is an online publishing company that develops and operates Internet businesses focused on providing consumers in the world’s digital economies with locally relevant, high quality information, and provides web platform services that support traditional web publishing combined with social media.  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.  HSW International 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.  Our co-founding and continuing development of Sharecare will create a highly searchable social Q&A healthcare platform organizing and answering the questions of health.  We generate revenue primarily through the sale of online advertising on our websites and through service fees charged to clients for web platform development and operation services.  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 18% as of June 30, 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 $1.3 million during the second quarter of 2010 as a result of performing services for Sharecare.


Business Trends

A portion of our business consists of websites we recently established or acquired.  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
 
 
12

 
 
to develop in China.  A recent addition to our service offering includes web platform services.  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.  The number of page views for ComoTudoFunciona increased by 27.5% during the second quarter of 2010 compared to the same period in 2009.  Additionally, the number of unique visitors to the website increased by 22.1% for the same periods. 

Our Chinese website BoWenWang launched in June 2008, and results show usage development consistent with a recently launched website.  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 but 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.  The number of page views for BoWenWang increased 822.5% during the second quarter of 2010 compared to the same period in 2009.  Additionally, the number of unique visitors to the website increased 295.5% 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.

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 advertising market declined overall in 2009 due to the global economic downturn.  This decline affected online advertising expenditures as well, and has resulted in lower revenue for our business than expected.  The economic environment might cause advertisers to continue to reduce the amount they spend on online advertising, which could negatively affect the growth rate of our revenues.  If operating results deteriorate or do not improve, or if unfavorable changes occur in other economic factors used to estimate fair values, we might incur non-cash impairment charges to our long-lived assets in the future.

Given our investments and progress in building our infrastructure and developing our personnel over the past years, in 2009 we began offering web platform services to other companies seeking cost effective solutions for developing and operating innovative websites.  Our newest business leverages 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 growth and develop and promote our products and services.  Additionally, we plan to maintain an awareness of the alignment of our costs and revenues, and make operating adjustments as we believe necessary to best position HSW International for success.

Our Operations

ComoTudoFunciona – HowStuffWorks Brazil

ComoTudoFunciona ( http://hsw.com.br ) is Brazil's online source for credible, unbiased and easy-to-understand explanations of how the world actually works.  The Portuguese-language site is the exclusive digital publisher in Brazil of translated and localized content from the leading Discovery Communications brand HowStuffWorks, and is published from HSWI's São Paulo offices.   ComoTudoFunciona was established in March 2007, and as of June 30, 2010, had published over 6,100 articles that were either originally created content or translated and localized from HowStuffWorks.  We are continuing to implement our business strategy in Brazil as we focus on expansion by adding original proprietary digital content designed to meet the information needs of the Brazilian online community, expanding the amount of translated content from HowStuffWorks, pursuing strategic business partnerships, and refining local marketing and business development strategies.  We recognized approximately $73,000 and $99,000 of revenue from Brazil during the three and six months ended June 30, 2010, and $34,000 and $80,000 during the three and six months ended 2009, respectively.  Results of operations are included in the digital online publishing reporting segment.


BoWenWang – HowStuffWorks China

BoWenWang ( http://www.bowenwang.com.cn ) is an information and reference website that provides China with encyclopedic knowledge and easy-to-understand explanations of how the world works.  The website is published from Beijing in the Chinese
 
 
13

 
 
Mandarin 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 June 30, 2010, we had published over 14,398 articles in China.

Revenue generated from the operations based in China was approximately $5,000 during the six months ended June 30, 2010, and $9,000 during the six months ended June 30, 2009.  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 including 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, previously reported in our Social Media segment, 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 for the three and six months ended June 30, 2009 are included in the social media reporting segment.


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 has been 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, a member of HSWI’s Board of Directors until June 2010, 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.
 
 
14

 
 
We account for our investment in Sharecare under the equity method of accounting.  For the three and six months ended June 30, 2010, we recognized a loss in the equity investment of $530,000 and $608,000, respectively, net of taxes.


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.  This agreement will expire on December 31, 2010, unless the Company and Sharecare agree to extend the term or enter into a new services agreement.  We are currently in discussions with Sharecare regarding this matter.

The majority of our revenue recognized in our web platform services segment in the second quarter of 2010 resulted from the services we performed for Sharecare.


 
15

 

Results of Operations

The following table sets forth our operations for the three months and six months ended June 30, 2010 and 2009.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Operating revenue
                       
Web platform services from affiliates
  $ 1,363,080     $     $ 2,709,711     $  
    Social media
          45,493             125,100  
Digital online publishing
    76,878       42,661       104,359       89,384  
Total revenue
    1,439,958       88,154       2,814,070       214,484  
                                 
Cost of services
    1,112,534       374,890       2,261,838       763,418  
                                 
Gross margin
    327,424       (286,736 )     552,232       (548,934 )
                                 
Operating expenses
                               
Selling, general and administrative (including stock-based
                               
compensation expense of $36,946 and $651,543 for
                               
the three months ended June 30, 2010 and 2009, respectively,
                               
        and $75,914 and $1,356,249 for the six months ended June 30,
                               
2010 and 2009, respectively)
    1,303,957       2,983,782       2,807,922       6,017,413  
Depreciation and amortization
    71,938       121,771       147,319       237,559  
Total operating expenses
    1,375,895       3,105,553       2,955,241       6,254,972  
                                 
Total operating loss
    (1,048,471 )     (3,392,289 )     (2,403,009 )     (6,803,906 )
                                 
Other income
                               
Interest income
    5,034       16,258       10,305       31,750  
Other income
                      160,000  
Total other income
    5,034       16,258       10,305       191,750  
                                 
Loss from operations before income taxes and equity in loss of equity method investment
    (1,043,437 )     (3,376,031 )     (2,392,704 )     (6,612,156 )
                                 
                                 
Equity in loss of equity-method investment, net of taxes
    (530,158 )           (607,652 )      
                                 
                                 
Net loss
  $ (1,573,595 )   $ (3,376,031 )   $ (3,000,356 )   $ (6,612,156 )

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

The Company reported two operating segments for the first three quarters of 2009: (1) social media and (2) digital online publishing.  Our social media segment was comprised of our DailyStrength operations, which generated revenues from the advertisers based primarily in the United States.  We sold substantially all of the assets of the social media segment to a related party, Sharecare, on October 30, 2009.  Subsequently, we no longer recognize activity within that segment.  Our digital online publishing segment consists of our websites in Brazil and China and generates revenues from advertisers based in the respective countries.

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.  The operating results for services performed under the Sharecare Services agreement are included in the web platform services segment.
 
 
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Revenue
Total revenue for the three months ended June 30, 2010 was approximately $1.4 million, an increase of approximately $1.3 million from the comparable period in 2009.  The increase was primarily due to the introduction of our web platform services, which generated approximately $1.4 million during the three months ended June 30, 2010.  Revenue generated from our Digital Online Publishing segment was approximately $77,000 and $43,000 for the three months ended June 30, 2010 and June 30, 2009, respectively.  For the three months ended June 30, 2010, our Brazil-based website generated approximately 23.4% of revenue from the Digital Online Publishing segment from paid-for-impression advertising and 76.6% from pay-per-performance ads.

Total revenue for the six months ended June 30, 2010 was approximately $2.8 million, an increase of approximately $2.6 million from the comparable period in 2009.  The increase was due to the introduction of our web platform services, which generated approximately $2.7 million during the six months ended June 30, 2010.  No revenue was generated from our web platform services segment during the first six months of 2009.  Revenue generated from our Digital Online Publishing segment was approximately $104,000 for the six months ended June 30, 2010.  For the six months ended June 30, 2010, our Brazil-based website generated approximately 38.4% of revenue from the Digital Online Publishing segment from paid-for-impression advertising and 61.6% from pay-per-performance ads.

In October 2009, we sold substantially all of the assets of the Social Media segment.  Therefore, no revenue was recognized for this segment for the three months and six months ended June 30, 2010.

Cost of Services
Cost of services includes the ongoing third-party costs to acquire original content, translate and localize content from English to Portuguese and Chinese, as well as costs incurred to support our web platform services including labor, content and third party platform support services. These costs were $1.1­ million and $2.3 million for the three and six months ended June 30, 2010, and $375,000 and $763,000 for the three and six months ended June 30, 2009, respectively.  The increase is primarily attributable to costs incurred to support our web platform services.

Operations - Selling, General and Administrative Expenses
Our total selling, general and administrative   expenses decreased by $1.7 million from $3 million to $1.3 million for the three months ended June 30, 2010 and 2009, respectively.  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 three month period ended June 30, 2010, thereby creating a decrease in our selling, general and administrative expense compared to the respective periods ended June 30, 2009.  Additionally, our stock-based compensation expense for the three months ended June 30, 2010 was $615,000 less than the same period in 2009, reflecting vesting of options at our higher stock prices in earlier periods.

Our total selling, general and administrative   expenses decreased by $3.2 million from $6 million to $2.8 million for the six months ended June 30, 2010 and 2009, respectively.  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 six month period ended June 30, 2010, thereby creating a decrease in our selling, general and administrative expense compared to the periods ended June 30, 2009.  Additionally, our stock-based compensation expense for the first six months of 2010 was $1.3 million less than the same period in 2009, reflecting vesting of options at our higher stock prices in earlier periods.

Other Income
Total other income decreased approximately $181,000 for the six months ended June 30, 2010, compared to the same period in 2009 due to income from a contract termination payment from a former customer recognized in the first quarter of 2009, as well as  lower interest rates and less cash on hand resulting in lower interest income during 2010.

Loss in Equity Investment
We account for our investment in Sharecare under the equity method of accounting.  For the three and six month periods ended June 30, 2010, we recognized a loss in the equity investment of $530,000 and $608,000, respectively, net of taxes.

Income Tax Benefit
There was no tax benefit as of June 30, 2010 as a full valuation allowance was recorded against our deferred tax assets.

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

Cash and cash equivalents was $6.6 million at June 30, 2010, compared to $8.7 million at December 31, 2009.  The decrease in cash is primarily due to the use of working capital to fund operations.

     
Six Months Ended June 30,
 
     
2010
   
2009
 
               
Cash flows
             
Used in operating activities
 
  $ (1,977,400 )   $ (4,196,913 )
Used in investing activities
      (106,851 )     (99,501 )
Provided by financing activities
             
Net change in cash and cash equivalents
      (2,084,251 )     (4,296,414 )
Impact of currency translation on cash
      (8,357 )     26,863  
Cash and cash equivalents at beginning of period
      8,724,546       18,020,159  
Cash and cash equivalents at end of period
    $ 6,631,938     $ 13,750,608  

Cash flows from operations
Our net cash used in operating activities during the six months ended June 30, 2010, decreased by approximately $2.2 million compared to the same period in the prior year due to increased cash flow from revenue, cost-cutting measures and reductions in professional fees.

Cash flows from investing activities
During the six months ended June 30, 2010, net cash used in investing activities, related to the purchase of property, plat, & equipment, was approximately $107,000 compared to $100,000 in the same period of 2009.

Cash flows from financing activities
For the six months ended June 30, 2010 and June 30, 2009, there was no net cash provided by financing activities.

Liquidity Considerations
The global financial downturn continues to have a negative effect on the demand for advertising in general, including online advertising.  Economic uncertainty has had and might continue to have a direct impact on our revenue as orders for online advertising have declined and our typical advertiser is spending less per order than in the prior year.  Also, our businesses in Brazil and China, which we launched in the past few years, are still in a growth stage as we continue to focus on building towards a critical mass of traffic volume.  In consideration of projected market conditions and near-term revenue expectations, we consolidated certain administrative functions at the end of the fourth quarter 2009 to reduce headcount and better align our costs with our 2009 strategic initiatives, which resulted in cost reductions.  We consistently monitor our cash position to make adjustments as we believe necessary to maintain our operational objectives of funding ongoing operations and continuing to make technological investments in our websites and their respective brands.

We expect to continue to expend resources in expanding and gaining market share for our internet platforms in Brazil and China, including additional investments to create or acquire content.  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.  We believe that our current cash balance, combined with our expected cash generated from future operations and recently implemented cost reduction measures, should provide sufficient cash to fund operations for at least the next twelve months.  However, if cash on hand and generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we might implement further cost reduction strategies, sell additional equity or obtain debt financing to fund further development and attain profitability.  There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all, or that we will achieve profitability.

We expect that our service agreement with Sharecare will generate revenues for our company.  However, as Sharecare is a newly formed entity and the service agreement expires in December 2010, there can be no assurance that the amounts generated will be sufficient to cover our liquidity needs for the long-term.

 
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Item 3.   Quantitative and Qualitative Disclosures About Market Risk

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

In June 2010, China announced that it will no longer tightly couple the value of its currency, the Renminbi, to the U.S. Dollar.  Additionally, many governments including that of the United States are advocating that China allow the value of the Renminbi to rise relative to the U.S. Dollar and other currencies.  While the outcome of China’s new currency policy is unknown, the Renminbi has since risen approximately 1% against the U.S. Dollar and may further significantly increase.  Because we fund our China operations with our treasury funds, which are held in U.S. Dollars, an increasing Renminbi value effectively increases our costs of operations in China.  We continue to monitor the applicable exchange rates and administer our treasury plans accordingly.

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and accounts receivables. At June 30, 2010, 98% of our cash was denominated in U.S. dollars.  The remaining 2% 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 June 30, 2010, were approximately $312,000.

We have not entered into long-term agreements or borrowing arrangements with third parties under which any amounts were outstanding during 2010.  Therefore, we do not believe we have any material exposure to market risk changes in interest rates.

We do not currently have any credit facilities and therefore are not subject to interest rate risk.  Due to the nature of our short-term investments and our lack of debt, we have concluded that we face no material market risk exposure.

Item 4.   Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this quarterly report.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

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


 
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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings .

None.


Item 1A.  Risk Factors.

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

We continue to develop our business and prospects are difficult to evaluate.

We have a limited operating history and limited experience in the Chinese Internet, Brazilian Internet, and web platform 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 the contributed and acquired 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 Act;
·  
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 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 Internet businesses, including publishing businesses in two emerging markets and a web services business.  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.  Our management and directors continually evaluate our progress and likelihood of success in each of our markets, and our ability to raise additional capital, against the relative value of our resources and other opportunities.  Accordingly, we might decide to suspend our activities in one or more of our markets in order to focus our limited resources in the other(s). 
 
 
 
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We may not be able to raise additional funds when needed for our business or to exploit opportunities.

We may need to raise additional funds to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities.  If required, we may attempt to raise such additional funds through public or private debt or equity financing, strategic relationships or other arrangements.  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.

We may not succeed in marketing and monetizing our 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 new and unproven.  Moreover, we will have limited experience in determining the pricing of the products and services that we plan to develop.  Because we have never marketed or sold these products and services, 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 do not have significant experience in the Brazilian and Chinese marketplaces.  Additionally, 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.

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 will include (i) national Internet portals in China such as Baidu, NetEase.com, Shanda Interactive Entertainment, Sina, sohu.com and tom.com, and (ii) national websites in Brazil such as Terra and UOL, all of which will 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 web platform services market, 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.  Many of our web platform services competitors have more experience and resources than we do.
 
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 June 30, 2010, there were approximately 5,376,355 shares of our common stock outstanding, and options and warrants to purchase another approximately 815,000 shares outstanding.  At June 30, 2010, we also had reserved an additional 275,000 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.

 
 
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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 has not authorized payment as of June 30, 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.  However, our common stock might not remain equal to or in excess of the $1.00 minimum closing bid for a substantial period of time.  The market price of our common stock is also based on other factors outside of our control.

On July 28, 2010, the Company received a notice from The NASDAQ Stock Market indicating that it has regained compliance with the requirements of NASDAQ Marketplace Rule 5450(b)(1)(C) for continued listing on The NASDAQ Global Market.  The rule requires 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.  The Company had previously received a notice from The NASDAQ Stock Market in March 2010 indicating that it was not in compliance with the requirements of such rule.

Our internal control over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur.  Internal control over financial reporting and disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objective will be met.

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.

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 certain aspects of 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 will make 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.

 
 
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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, a Tier 4 data center.  We do not have a documented disaster recovery plan in the event of damage from fire, flood, typhoon, earthquake, power loss, telecommunications failure, break in or similar events.  If any of the foregoing occurs, we may experience a temporary system shutdown.  If there is significant disruption or damage to the data center hosting our web servers, our ability to provide access to our websites would be interrupted.  We do not carry any business interruption insurance.  Although we carry property insurance, our coverage may not be adequate to compensate us for all losses, particularly with respect to loss of business and reputation that may occur.

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

Internet usage of our products could decline if any well publicized compromise of our security occurs.  “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment.  Hackers, if successful, could misappropriate proprietary information or cause disruptions in our service.  We may be required to expend capital and other resources to protect our website against hackers.  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 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.
 
 
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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.

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.
 
 
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
 
 
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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.  We may grow our business in part by directly acquiring complementary businesses in China.  Complying with the requirements of the new regulations could be time-consuming, and any required approval processes, including obtaining approval from the MOC, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

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

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

We may incur substantial 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 substantial 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 using the contributed assets.

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

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

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

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

In the past, the Brazilian government has intervened in the Brazilian economy and occasionally made drastic changes in economic policy.  The Brazilian government’s actions to control inflation and affect other policies have included high interest rates, wage and price controls, currency devaluations, capital controls and limits on exports, among other actions.  Our business, financial condition, revenues, results of operations, prospects and the market price of our securities may be adversely affected by changes in Brazilian government policies, as well as general economic factors, including:
 
 
 
25

 

 
·  
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 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.

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 significant amount 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.
 
 
 
26

 

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

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

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

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

The State Secrecy Bureau, which is directly responsible for the protection of state secrets of all PRC government and Chinese Communist Party organizations, is authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the distribution of online information.  Under the applicable regulations, we could be held liable for any content transmitted on our portal.  Furthermore, where the transmitted content clearly violates the laws of the PRC, we will be required to delete it, and where the transmitted content is considered suspicious, we are required to report such content.  We must also undergo computer security inspections, and if we fail to implement the relevant safeguards against security breaches, our operations in the PRC could be shut down.

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

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

Potential additional Chinese regulation could affect our business in China.

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

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

A significant 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.

 
 
27

 
 
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.

It may be difficult to enforce any civil judgments against us or our board of directors or officers, 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 and all or a substantial 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, Michael Cascone, a member of the Board, is Chief Operating Officer of Discovery’s Digital Media business unit which includes HowStuffWorks.  As a result, Discovery has the ability to influence our management and affairs and determine
 
 
28

 
 
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 controlling influence over our business affairs, they will have the ability to cause us to take actions that may be adverse to the interests of other shareholders or inconsistent with other shareholders’ investment objectives.

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

As of June 30, 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.

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.
 
 
 
29

 
 
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.

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

The global financial crisis continues to have a negative effect on the demand for advertising in general, including online advertising.  Economic uncertainty has had and might continue to have a direct impact on our revenue as orders for online advertising have declined.  We cannot predict the timing, strength or duration of the current economic slowdown or subsequent economic recovery generally or in the online advertising market.  If the economy or markets in which we operate continue to 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.

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 no 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.

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 42.7% 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.  Michael Cascone, a member of our board of directors, is Chief Operating Officer of Discovery’s Digital Media business unit.  As a member of our board, Mr. Cascone’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. Cascone will favor actions by Sharecare that are adverse to HSWI.

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

We recently began a new line of business to offer web platform services to other companies.  We currently have one significant
 
 
 
30

 
 
customer for these services, Sharecare, and our agreement with Sharecare expires in December 2010.  Although we believe Sharecare will renew the agreement, Sharecare may decide not to do so or we may be unable to reach agreement on terms for renewal.  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 is a related party, the pricing and other terms included in the current agreement 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.

Our services agreement with Sharecare will soon expire, and we might not be able to negotiate a new agreement on as favorable terms, if at all.

We currently provide web development, design and management services to Sharecare under a services agreement.  This agreement will expire in December 2010 unless the Company and Sharecare agree to extend the term or enter into a new services agreement.  If neither occurs, Sharecare may extend the term for up to six months to transition the services performed by the Company for Sharecare to a new service provider.  We are in the process of negotiating a new services agreement with Sharecare but might not be able to reach an agreement on as favorable terms as the existing services agreement, if at all.  If we are unable to reach an agreement, we will lose a significant portion of our revenue.


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

None.


Item 3.  Defaults Upon Senior Securities.

None.


Item 4.  Reserved



Item 5.  Other Information.

None.

 
31

 

Item 6.  Exhibits.
 
Exhibit 3.1
 
Amended and Restated Certificate of Incorporation of HSW International, Inc. (filed as Exhibit 3.1 to the Form 10-K filed on April 15, 2010 and incorporated herein by reference).
     
Exhibit 3.1.1
 
Certificate of Amendment to the Corporation’s Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1.1 to the Form 8-K on February 16, 2010 and incorporated herein by reference).
     
Exhibit 3.2
 
Second Amended and Restated Bylaws of HSW International, Inc. (filed as Exhibit 3.2 to the Form 8-K filed on December 18, 2007 and incorporated herein by reference).
     
Exhibit 10.34**
 
HSW International, Inc. 2010 Equity Incentive Plan (filed as Exhibit 10.34 in the Form 8-K filed on June 21, 2010 and incorporated herein by reference).
     
Exhibit 10.35
 
Second Amendment to the Letter of Agreement for Services, by and Between Sharecare Inc. and HSWI Dated October 30, 2009, as Amended by the First Amendment Thereto, Dated December 30, 2010.
     
Exhibit 31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
Exhibit 31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
Exhibit 32*
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Title 18 of the United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
     
 
_________________________________
* This exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of the Section nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

**Executive Compensation Arrangement pursuant to 601(b)(10)(iii)(A) of Regulation S-K



 
32

 


SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  HSW INTERNATIONAL, INC.  
       
Date: August 12, 2010
By:
/s/ Shawn G. Meredith  
    Name: Shawn G. Meredith   
    Title: Chief Financial Officer  
       

 
33

 

Exhibit 31.1

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

I, Gregory M. Swayne, certify that:

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

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

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

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

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

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

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

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

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

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

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



Date: August 12, 2010
 
/s/ Gregory M. Swayne
 
Gregory M. Swayne
Chief Executive Officer

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

Exhibit 31.2
 
Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Shawn G. Meredith, certify that:

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

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

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

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

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

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

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

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

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

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

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


Date: August 12, 2010
 
/s/ Shawn G. Meredith
 
Shawn G. Meredith
Chief Financial Officer

 
A signed original of this written statement required by Section 302, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 302, has been provided to HSW International and will be retained by HSW International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
Exhibit 32

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

Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of HSW International, Inc. (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the period presented in the Report.



 
August 12, 2010
August 12, 2010
     
 
By:
/s/ Gregory M. Swayne
 
By:
/s/ Shawn G. Meredith
 
   
Gregory M. Swayne
 
Shawn G. Meredith
   
Chief Executive Officer
 
Chief Financial Officer

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

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

 
                                                                                                                                                                                                                                                                                                                         Exhibit 10.35
 
 
Portions of this exhibit marked [*] are requested to be treated confidentially.
 

SECOND AMENDMENT TO THE
 
LETTER AGREEMENT FOR SERVICES
 
by and between
 
SHARECARE, INC.,
 
and
 
HSW INTERNATIONAL, INC.
 
This SECOND AMENDMENT (“ Second Amendment ”) is entered into effective as of the 30 th day of June 2010 (“ Effective Date ”), by and between Sharecare, Inc., a company incorporated under the laws of the State of Delaware and located at 3280 Peachtree Road, Suite 600, Atlanta, GA 30303 (“ Sharecare ”) and HSW International, Inc., a company incorporated under the laws of the State of Delaware and located at 3280 Peachtree Road, Suite 600, Atlanta, GA 30305 (“ HSWI ”).
 
Recitals
 
Whereas , on October 30, 2009, Sharecare and HSWI entered into a Letter Agreement for Services, as amended by the First Amendment of December 30, 2009, (the “ Agreement ”) whereby HSWI is to perform certain services for Sharecare;
 
Whereas , the Agreement provides for HSWI to perform services for Sharecare in connection with the Sharecare Service on a dedicated “Ask Dr. Oz” subdomain of the website for “The Dr. Oz Show” and on a top level domain Sharecare website, respectfully referred to in the Agreement as the Oz Site and the Sharecare Site;
 
Whereas , Sharecare and HSWI wish to amend the Agreement to provide for HSWI's provision of certain additional services to Sharecare related to Sharecare's outsourced operation and management of the top level domain website for “The Dr. Oz Show” as more specifically described herein; and,
 
Whereas , Sharecare and HSWI wish to extend the Term of the Agreement until December 31, 2010, unless earlier terminated solely as expressly permitted in the Agreement.
 
Now, Therefore , for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:
 
1.   Defined Terms . Capitalized terms used but not specifically defined in this Amendment shall have the meanings ascribed to them in the Agreement.
 
2.   Additional Services . Pursuant to the terms set forth in this Second Amendment, HSWI agrees to perform additional Services to operate the top level domain web site for “The Dr. Oz Show,” presently located at www.doctoroz.com, (the “ Dr. Oz Show Site ”) including without limitation the development of additional functionality and new content for the Dr. Oz Show Site, in accordance with the Show Site Specifications and Show Site Budget as described and defined in Sections 3 and 4 , respectively, below (“ Additional Services ”). It is understood and agreed that notwithstanding the fact that the Oz Site is a subdomain on the Dr. Oz Show Site, the Services and other terms applicable thereto shall be unaffected by the terms of this Second Amendment and the terms hereof shall apply only to the remainder of the Dr. Oz Show Site
 
 
 

 
 
 
except as may be expressly contemplated hereunder. Except as expressly set forth in this Second Amendment to the contrary, the Additional Services shall be deemed to be Services under and for purposes of the Agreement.
 
3.   Show Site Specifications . The parties shall work in good faith and prepare a mutually agreed specifications document to cover the Additional Services for the Dr. Oz Show Site (the “ Show Site Specifications ”), which shall be consistent with the development and operational plan (the “ Oz Show Plan ”) agreed upon between Sharecare and the Dr. Oz Show Site owner (“ Dr. Oz Show Site Owner ”) pursuant to the agreement between them. Notwithstanding the foregoing, any service levels agreed to in the Show Site Specifications shall be consistent with those that HSWI reasonably can meet given the Show Site Budget. HSWI agrees to perform the Additional Services for the Dr. Oz Show Site in accordance with the mutually agreed Show Site Specifications, subject to Changes thereto initiated and approved by the parties as contemplated under the Agreement.
 
4.   Dr. Oz Show Site Budget . The parties shall work in good faith and prepare a mutually agreed budget to cover Services for the Dr. Oz Show Site, such budget to be prepared in a manner consistent with the preparation of the initial Budget set forth in Section 7 of the Agreement (the “ Dr. Oz Show Site Budget ”). HSWI agrees to perform the Services for the Dr. Oz Show Site in accordance with the mutually agreed Dr. Oz Show Site Budget, subject to modification from time to time by written agreement of the parties in connection with mutually agreed Changes. Any amounts incurred for the Additional Services in excess of the Dr. Oz Show Site Budget shall be incurred by HSWI at its sole risk and cost unless otherwise agreed to by Sharecare through mutually agreed Changes. The Dr. Oz Show Site Budget will include an additional fixed management fee for HSWI’s management of the Dr. Oz Show Site, as follows: (i) for the first [*] 1 months, a monthly fee of $[*], and (ii) for the next [*]months, a monthly fee of $[*].
 
5.   Additional Termination Rights . In addition to the termination rights generally applicable to the Services under the Agreement, the parties hereby agree that Sharecare shall have the right to terminate the Additional Services without termination of the Agreement or the other Services contemplated thereunder by written notice to HSWI following any termination of the agreement between Sharecare and the Dr. Oz Show Site Owner, it being understood that Sharecare shall provide HSWI prompt written notice of such termination or other event as soon as reasonably practical after its receipt of such notice from the Dr. Oz Show Site Owner.
 
6.   Extension of Term . The date of June 30, 2010, in Section 1 of the Agreement, referring to the expiration of the Term, as amended by the First Amendment of December 30, 2009, is amended and replaced with the date of December 31, 2010, such that the Term of the Agreement shall expire on December 31, 2010. The Services performed by HSWI during the extended Term contemplated hereunder shall constitute “Services” under the Agreement for all purposes of the Agreement.
 
7.   Extension of Term Budget . The parties shall work in good faith and prepare a mutually agreed budget to cover Services performed during the extended Term contemplated in this
 

 
[*] Confidential treatment requested.

 
 

 
 
Amendment (i.e., for the period of the Term commencing on July 1, 2010, and extending through the remainder of the Term), such budget to be prepared in a manner consistent with preparation of the initial Budget set forth in Section 7 of the Agreement, as the same may have been modified by the parties in accordance with the terms of the Agreement (collectively, the “ Modified Budget ”). HSWI agrees to perform the Services in accordance with the mutually agreed Modified Budget, subject to modification from time to time by written agreement of the parties in connection with mutually agreed Changes.
 
8.   Authority . Each party represents and warrants that it has full and complete authority to enter into this Amendment.
 
9.   Effect of Amendment . Except as expressly set forth in this Amendment, all provisions set forth in the Agreement shall continue to remain in full force and effect and shall not be affected by this Amendment. To the extent of any direct conflict between the terms of this Amendment and the terms of the Agreement, the applicable terms of this Amendment shall control.
 
10.   Further Assurances . The parties will execute and deliver such other instruments and documents, and take such other actions, as either party reasonably requests to evidence or effect the transactions contemplated by this Amendment.
 
11.   Headings . The headings contained in this Amendment are for reference purposes only and will not affect in any way the meaning or interpretation of this Amendment.
 
12.   Counterparts . This Amendment may be executed in two or more counterparts (electronically - i.e., by scanned PDF - or otherwise), each of which shall be deemed to be an original, but all of which together shall constitute one instrument binding on the parties, notwithstanding that both parties are not signatories to the original or the same counterpart.
 
[ Signatures continued on next page ]
 

 
 
 

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


By:   /s/ Colin B. Daniel                                                              By:   /s/ Bradley T. Zimmer                                                                        

Name:   Colin B. Daniel, CPA                                                    Name:  Bradley T. Zimmer                                                       

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