Remark Holdings
HSW International, Inc. (Form: 10-Q, Received: 05/15/2008 17:15:42)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2008

 

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)

 

One Capital City Plaza

3350 Peachtree Road, Suite 1600
Atlanta, GA  30326

(Address of principal executive offices, including zip code)

 

404-974-2715
(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    o    No    x

 

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. (Check one):

 

 

Large accelerated filer o

 

 

Accelerated filer o

 

Non-accelerated filer x

 

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  x

 

At May 15, 2008, the number of common shares outstanding was 53,608,015.

 

 



 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

1

 

 

 

Item 1.

Consolidated Financial Statements (unaudited)

1

 

Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007

1

 

Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007

2

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007

3

 

Notes to Consolidated Financial Statements (unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

 

 

 

Item 4T.

Controls and Procedures

23

 

 

 

 

PART II – OTHER INFORMATION

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

25

 

 

 

Signature

 

26

 



 

PART I – FINANCIAL INFORMATION

 

Item 1.  Consolidated Financial Statements.

 

HSW INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(expressed in U.S. Dollars)

 

 

 

March 31,
2008

 

December 31,
2007

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

30,991,355

 

$

3,476,673

 

Trade accounts receivable

 

97,302

 

23,212

 

Prepaid expenses and other current assets

 

937,354

 

942,588

 

Assets held for sale

 

 

19,988,029

 

Total current assets

 

32,026,011

 

24,430,502

 

 

 

 

 

 

 

Property and equipment, net

 

508,346

 

293,182

 

Other assets

 

 

21,476

 

Licenses to operate in China

 

10,000,000

 

10,000,000

 

Other intangibles, net

 

21,788

 

 

 

 

 

 

 

 

Total assets

 

$

42,556,145

 

$

34,745,160

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

982,989

 

$

537,418

 

Accrued expenses and other current liabilities

 

540,547

 

561,247

 

Advances from shareholder

 

200,000

 

72,927

 

Liabilities held for sale

 

 

6,163,131

 

Total current liabilities

 

1,723,536

 

7,334,723

 

 

 

 

 

 

 

Deferred tax liability

 

2,500,000

 

2,500,000

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued

 

 

 

Common stock, $.001 par value, 200,000,000 shares authorized, 53,608,015 and 49,306,107 issued and  outstanding at March 31, 2008 and December 31, 2007, respectively

 

53,608

 

49,306

 

Additional paid-in-capital

 

95,109,530

 

85,980,746

 

Accumulated other comprehensive income

 

310,856

 

112,291

 

Retained deficit

 

(57,141,385

)

(52,245,064

)

Less: cost of treasury stock, 3,000,000 shares in 2007

 

 

(8,986,842

)

Total stockholders’ equity

 

38,332,609

 

24,910,437

 

Total liabilities and stockholders’ equity

 

$

42,556,145

 

$

34,745,160

 

 

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

 

1



 

HSW INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(expressed in U.S. Dollars)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Operating revenue

 

 

 

 

 

Digital online publishing

 

$

44,837

 

$

 

 

 

 

 

 

 

Cost of services

 

325,272

 

 

 

 

 

 

 

 

Gross loss

 

(280,435

)

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Selling, general and administrative (including stock-based compensation expense of $1,290,321 and $1,853,346 in 2008 and 2007, respectively)

 

4,546,107

 

2,879,937

 

Depreciation and amortization

 

28,160

 

4,378

 

Total operating expenses

 

4,574,267

 

2,884,315

 

 

 

 

 

 

 

Loss from continuing operations before other income (expense) and income taxes

 

(4,854,702

)

(2,884,315

)

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income

 

91,907

 

 

Other (expense)

 

 

(2,470

)

Total other income (expense)

 

91,907

 

(2,470

)

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

(4,762,795

)

(2,886,785

)

 

 

 

 

 

 

Income taxes

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(4,762,795

)

(2,886,785

)

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

(133,526

)

 

 

 

 

 

 

 

Net loss

 

$

(4,896,321

)

$

(2,886,785

)

 

 

 

 

 

 

Basic and diluted loss per share

 

 

 

 

 

Loss from continuing operations

 

$

(0.09

)

$

(288,679

)

Loss from discontinued operations

 

 

 

Net loss per share

 

$

(0.09

)

$

(288,679

)

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

51,027,422

 

10

 

 

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

 

2



 

HSW INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(expressed in U.S. Dollars)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Cash flows from continuing operating activities:

 

 

 

 

 

Net loss from continuing operations

 

$

(4,762,795

)

$

(2,886,785

)

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

28,160

 

4,378

 

Stock based compensation

 

1,290,321

 

1,853,346

 

Changes in operating assets and liabilities from continuing operations:

 

 

 

 

 

Accounts receivable

 

(74,090

)

 

Prepaid expenses and other current assets

 

(78,785

)

7,677

 

Accounts payable, accrued expenses, and other liabilities

 

765,148

 

197,743

 

 

 

 

 

 

 

Net cash used in continuing operating activities

 

(2,832,041

)

(823,641

)

 

 

 

 

 

 

Cash flows from discontinued operating activities:

 

 

 

 

 

Net loss from discontinued operations

 

(133,526

)

 

Adjustments to reconcile net loss from discontinued operations to net cash used in discontinued operating activities:

 

 

 

 

 

Depreciation and amortization

 

170,475

 

 

Gain on sale of businesses

 

(343,990

)

 

Changes in operating assets and liabilities from discontinued operations:

 

 

 

 

 

Accounts receivable

 

31,030

 

 

Prepaid expenses and other current assets

 

(56,419

)

 

Accounts payable, accrued expenses, and other liabilities

 

(189,000

)

 

 

 

 

 

 

 

Net cash used in discontinued operating activities

 

(521,430

)

 

 

 

 

 

 

 

Net cash used in operating activities

 

(3,353,471

)

(823,641

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(243,223

)

(118,022

)

Sale of INTAC Legacy Businesses

 

(4,300,000

)

 

Merger related costs, net

 

(107,027

)

 

 

 

 

 

 

 

Cash used in investing activities

 

(4,650,250

)

(118,022

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock, net

 

35,229,607

 

 

Proceeds (repayment) of advance from shareholder

 

(72,927

)

785,792

 

 

 

 

 

 

 

Cash provided by financing activities

 

35,156,680

 

785,792

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

27,152,959

 

(155,871

)

Impact of currency translation on cash

 

198,565

 

6,527

 

Cash and cash equivalents at the beginning of the period

 

3,639,831

 

233,262

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the period

 

$

30,991,355

 

$

83,917

 

 

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

 

3



 

HSW INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(expressed in U.S. Dollars)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

 

$

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

14,052

 

 

 

 

 

 

 

Other non-cash financing and investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Receipt of shares for sale of INTAC Legacy Businesses

 

$

18,400,000

 

$

 

 

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

 

4



 

HSW INTERNATIONAL, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

(Unaudited)

 

1.  DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

 

HSW International, Inc (the “Company”, or “HSWI” or “we”, or “our”), is a Delaware corporation that was formed on March 14, 2006, as a wholly owned subsidiary of Howstuffworks, Inc. (“HSW”) in order to (i) develop businesses using exclusive digital publishing rights to HSW’s content for the countries of China and Brazil, and (ii) to effect the merger with INTAC International, Inc. (“INTAC”) (the “INTAC Merger”).

 

Our primary focus is to build an international online publishing company that develops and operates Internet businesses focused on providing consumers in the world’s emerging digital economies with locally relevant, high quality content.  We entered the Brazilian online publishing market in March 2007, by utilizing a royalty-free and exclusively licensed digital content database provided by HSW prior to the INTAC Merger.

 

We are preparing to enter the China market utilizing a combination of the contributed assets from HSW with the benefit of INTAC’s relationships and knowledge of the Chinese markets in obtaining our Internet licenses.  We currently maintain offices in China, Brazil, and Atlanta, Georgia, our corporate headquarters.

 

Prior to the INTAC Merger and related financing transactions our sole shareholder was HSW, a privately-held online publishing company founded in 1999 that provides objective and useful information for people to learn about the world around them and make informed decisions.  HSW’s website, HowStuffWorks.com, offers in-depth, easy-to-understand explanations, expert product reviews, comprehensive buying guides and informational videos, simplifying thousands of topics in the areas of health, science, travel, automotive, electronics, consumer products and many other areas.  On December 17, 2007, HSW, our largest shareholder, merged with Discovery Communications, LLC (“Discovery”) becoming a wholly-owned subsidiary of Discovery.  As of March 31, 2008, Discovery, through its wholly-owned subsidiary, HSW, owned approximately 42.8% of our outstanding common stock.  HSW remains based in Atlanta, Georgia.

 

On October 2, 2007, the date of our merger with INTAC, the following occurred:

 

·                   HSW contributed to us in exchange for shares of our common stock, exclusive digital publishing rights to HSW’s content for the countries of China and Brazil which we translate and localize into the predominant languages of China and Brazil.

 

·                   Our stock became publicly traded on the NASDAQ Global Market under the symbol “HSWI” in connection with our merger with INTAC, with INTAC becoming our wholly owned subsidiary.  We were determined to be the accounting acquirer under the applicable guidance.  At the date of the INTAC Merger, holders of INTAC common stock received one share of our common stock in exchange for each of their shares of INTAC common stock.  Prior to the INTAC Merger, INTAC’s common stock was traded on the NASDAQ Capital Market under the symbol “INTN”.

 

·                   Certain investors purchased or agreed to purchase shares of our common stock (equity financings) having an aggregate value of approximately $39.4 million of which $22.5 million and $16.9 million (both before expenses) were received in October 2007, and January and February 2008, respectively.

 

·                   In connection with and as a condition of the INTAC Merger, INTAC sold its wireless handset and prepaid calling cards distribution business (“distribution companies”), to an entity controlled by Wei Zhou, INTAC’s Chief Executive Officer and President, in exchange for 3.0 million shares of our common stock held by Mr. Zhou.  The 3.0 million shares of our common stock were recorded as treasury shares valued at cost as determined by a third party valuation.

 

On February 29, 2008, based on an increased focus on our Internet based publishing segment, we disposed of all INTAC’s remaining legacy businesses which included services related to wireless telephone training and the development and sale of educational software in China (“INTAC Legacy Businesses”).  Following the disposition, the sole asset retained from the INTAC

 

5



 

acquisition is the Internet licenses intangible we are using to enter the Chinese market.  The operations from the INTAC Legacy Businesses have been reflected as discontinued operations in our consolidated financial statements.  All intercompany balances and transactions have been eliminated.

 

Our core Internet publishing platforms in Brazil and China are our only business segment subsequent to the February 29, 2008, disposition of the INTAC Legacy Businesses.  These platforms are in the early development stage.   We launched our Brazilian Internet website in March 2007.  At March  31, 2008, we had approximately 4,200 articles that were either (i) articles from the HSW content database translated from English to Portuguese, or (ii) originally created content.  We will continue to expand the website by (i) adding original proprietary digital content designed to meet the information needs of the Brazilian online community,
(ii) expanding the amount of translated content from HSW, and (iii) refining local marketing strategies.

 

We expect to deploy our Internet platform in China in mid-2008. We have hired Chinese personnel, received licenses to do business in China through the INTAC Merger and are in the process of translating and localizing our content for the China online publishing business. We also intend to generate revenue by assembling our own library of digital content (including originally authored content and content that has been acquired from third parties) for our own use and for licensing to various customers, including HSW, in territories outside of our markets.

 

We expect to expend significant resources in launching, expanding and gaining market share for our Internet platforms in these significant, growing markets for our online publishing business. We believe that with the completed equity financings and the February 29, 2008, INTAC Legacy Businesses disposition (non-core businesses) that our current cash balance and expected cash generated from future operations will be more than sufficient to fund operations for the next twelve months.  If cash from equity financings, dispositions, and generated from operations, is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or obtain additional credit facilities.  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.

 

2.  ACQUISITION OF INTAC INTERNATIONAL, INC.

 

On October 2, 2007, the INTAC Merger became effective with INTAC becoming our wholly owned subsidiary.  The results of the INTAC Legacy Businesses have been included in discontinued operations in our consolidated financial statements since that date until their disposition on February 29, 2008 (see Note 3).  At the date of the INTAC Merger, holders of INTAC common stock received one share of our common stock in exchange for each of their shares of INTAC common stock.

 

INTAC was acquired to assist in our primary business focus, the development of our digital content database exclusively licensed from HSW by (i) accelerating our obtaining Internet licenses in China for launching our Internet platform, (ii) obtaining INTAC’s knowledge of the Chinese markets, relationships, and core competencies, and (iii) providing additional cash flow from its established businesses.

 

In the INTAC acquisition we also obtained two legacy businesses - services related to wireless telephone training and the development and sale of educational software delivered to customers in China.  However, due to (i) an increased focus of our management and resources on our primary Internet publishing business, (ii) a change of control in our majority ownership leading to further refinement in our strategies, and (iii) a under performance of the INTAC Legacy Businesses subsequent to the INTAC Merger, we sold these legacy businesses on February 29, 2008 (see Note 3).  Following the disposition the sole asset we retained from the INTAC acquisition was the Internet Licenses intangible we are using to enter the China market.

 

6



 

The purchase price at October 2, 2007, consisted of the following (dollars in thousands):

 

Exchange of 19,940,727 HSWI common shares for all INTAC shares outstanding including $100,000 of fair value for options assumed

 

$

38,988

 

Direct acquisition costs

 

1,774

 

Other

 

47

 

 

 

40,809

 

Net liabilities assumed

 

3,037

 

Deferred tax liabilities

 

4,055

 

Total purchase price

 

$

47,901

 

 

For convenience, we designated October 1, 2007, as the effective date for this acquisition.

 

We noted that SFAS 141, “Business Combinations” states that “the fair value of securities traded in the market is generally more clearly evident than the fair value of the acquired entity” and “that the quoted market price of a security issued to effect a business combination generally should be used to estimate the fair value of an acquired entity after recognizing possible effects of price fluctuations, quantities traded, issues costs and the like.”  However, HSWI as the acquirer was not publicly traded until after the merger with INTAC.  In addition we considered the unique facts and circumstances in the INTAC Merger, including HSWI’s limited historical operations; the transaction being a merger of equals; and lastly, using INTAC’s public stock price, and determined INTAC’s public stock price was also not a fair value of the equity security because, among other reasons, (i) the public stock price was affected by historical performance of the INTAC distribution business which was sold simultaneously with the Merger, (ii) the INTAC stock was thinly traded, and (iii) a majority of the stock was held by insiders.  As a result, we obtained an independent valuation, (using recognized valuation techniques) of our enterprise value post-merger to determine the fair value of our common stock issued for the INTAC common shares.

 

The deferred tax liabilities approximating $4.1 million relate to the non-deductibility (for tax purposes) of the acquired intangibles in China.

 

As part of the acquisition, we assumed 500,000 INTAC outstanding stock options.  The per share fair value of our stock options issued in exchange for all of INTAC’s outstanding options was estimated using the Black-Scholes options pricing model.  All of the options assumed were either already fully vested at the time of the merger or vested in full as a result of the INTAC Merger.  Therefore, the fair value of the assumed options, $100,000, was treated as part of the purchase price.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands).  We are in the process of obtaining third-party valuations of certain assets and liabilities including tax and deferred tax balances; thus the allocation of the purchase price is subject to refinement.

 

7



 

Cash and cash equivalents

 

$

118

 

Trade accounts receivable

 

4,584

 

Other current assets

 

1,683

 

Property and equipment

 

298

 

Other assets

 

90

 

Licenses to operate in China (indefinite life)

 

10,000

 

Vendor endorsement in China (indefinite life)

 

4,400

 

Acquired database (5 year life)

 

1,335

 

Acquired software (5 year life)

 

1,500

 

Coursework books (4 year life)

 

1,035

 

Franchise agreements (4 year life)

 

680

 

Goodwill

 

28,951

 

Assets acquired

 

54,674

 

Accounts payable and other liabilities

 

(9,810

)

Deferred tax liabilities

 

(4,055

)

Net assets acquired

 

$

40,809

 

 

The purchase price allocation is based on estimates of the fair value of the tangible and intangible assets acquired and liabilities assumed. These estimates were arrived at utilizing recognized valuation techniques with the assistance of an independent valuation firm.  Goodwill of approximately $29.0 million resulted primarily from our expectation that we could utilize INTAC’s knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platform in China.  However as discussed in Note 3, subsequent to December 31, 2007, we decided to dispose of all INTAC Legacy Businesses prior to our integrating INTAC with our online publishing segment.  Accordingly all goodwill at December 31, 2007, along with all other intangibles and net assets acquired except for the Internet Licenses intangible was allocated to the INTAC Legacy Businesses in our determination of the appropriate carrying values of our acquired INTAC assets, considering our expected loss on disposition (see Note 3).  Goodwill is not expected to be deductible for tax purposes in the China.

 

The intangible assets, other than the indefinite lived goodwill, Internet licenses, and the vendor endorsement, are being amortized over their useful lives of 4.0 to 5.0 years with a weighted-average amortization period of 4.62 years. We recorded no in-process research and development related to this acquisition.

 

Following the disposition, the sole asset we retain from the INTAC Legacy Businesses is the Internet licenses intangible that has an indefinite life and is not amortized and from which no revenue has been generated from the date of acquisition to December 31, 2007.  Therefore, any pro forma information assuming the acquisition of this remaining asset as of the beginning of the respective periods would provide no additional useful information.

 

In connection with and as a condition of the INTAC Merger, INTAC sold its distribution companies to an entity controlled by Mr. Zhou in exchange for 3.0 million shares of our common stock held by Mr. Zhou.  The 3.0 million shares of our common stock were recorded as treasury shares valued at cost as determined by a third party valuation for similar reasons that an independent valuation was performed to value the INTAC Merger, as discussed above.

 

3.  DISCONTINUED OPERATIONS – INTAC LEGACY BUSINESSES

 

Due to an increased focus of our management and resources on our primary Internet publishing business , a change of control in our majority ownership leading to further refinement in our strategies, and an under performance of the INTAC Legacy Businesses after the INTAC Merger, in early 2008, we decided to dispose of the INTAC Legacy Businesses. The INTAC Legacy Businesses were comprised of two lines of business which were both unrelated to our core Internet platform businesses.

 

We had originally estimated when deciding to acquire the INTAC Legacy Businesses that, in addition to accelerating our obtaining Internet licenses in China for launching our Internet platform, INTAC would provide us (i) further knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platforms in China, and (ii) additional cash flow from its established businesses.  Following the underperformance of the INTAC Legacy Businesses in the fourth quarter of 2007, that resulted in short-term negative cash flow from these operations of $1.1 million, and a change-in-control

 

8



 

of our business through the acquisition of our largest shareholder, HSW, by Discovery, we reconsidered the potential risk of excessive short-term consumption of cash and management resources by our acquired non-core INTAC Legacy Businesses and refined our strategic direction.

 

We decided that it was critical that all our current resources be fully focused on expanding our Brazilian platform and launching our Chinese Internet platform in mid-2008.  Although we believe we have benefited in the short-term from INTAC’s relationships and knowledge of the Chinese markets in obtaining our Internet licenses, this refined strategic focus did not allow us the time required to realize the expected long-term synergies, embodied in our acquired INTAC goodwill, from INTAC’s knowledge of the Chinese markets, relationships, and core competencies.   In addition, we were provided with and acted on an opportunity to sell the unrelated INTAC Legacy Businesses for approximately their stand-alone appraised value, and through simultaneous sale of the treasury stock received, generate significant additional cash resources for investing into our core Internet businesses.

 

On February 15, 2008, we entered into a share purchase agreement to sell the INTAC Legacy Businesses.  On February 29, 2008, we completed the sale of the subsidiaries that comprised the INTAC Legacy Businesses.  These subsidiaries were sold to China Trend Holdings Ltd., a British Virgin Islands corporation that is owned by Mr. Zhou, CEO, director and significant stockholder of INTAC prior to the INTAC Merger in October 2007.  Mr. Zhou was also on our board of directors from October 2007 to December 2007.  In accordance with the share purchase agreement with China Trend Holdings, we were to receive 5.0 million of our common shares owned by Mr. Zhou. In addition, as a condition to the February 29, 2008, INTAC Legacy Businesses disposition, the INTAC Legacy Businesses were to include $4.5 million in cash at closing.

 

At the February 29, 2008, INTAC Legacy Businesses disposition, we received only 4.5 million shares of our common stock from Mr. Zhou and accordingly, we only funded the INTAC Legacy Businesses with $2.7 million in cash.  Mr. Zhou delivered his additional 0.5 million shares of our common stock to us on March 26, 2008, and on March 31, 2008, we released another $1.6 million in cash to the INTAC Legacy Businesses ($1.8 million for the stock received net of an estimated $0.2 million withheld for disposition expenses).  As of March 31, 2008, all of HSWI’s assets are now in our core Internet businesses and the sole asset we retained from the INTAC Merger is the Internet licenses intangible we are using to enter the Chinese markets.

 

In the year ended December 31, 2007, we recognized a preliminary goodwill write off of approximately $22.5 million related to the February 29, 2008, INTAC Legacy Businesses disposition.  All goodwill resulting from the INTAC acquisition was included with the INTAC Legacy Businesses when we determined the potential write off, because such operations had not been integrated with our online publishing segment prior to our decision to dispose of the INTAC Legacy Businesses. The goodwill write off due to disposition resulted from the fair value of the expected net proceeds of 5.0 million shares of our common stock valued at $3.68 per share (less estimated disposal costs) being less than the combined cash to be transferred in the disposition plus the carrying value of the net assets and intangibles sold in the disposition.  The disposition proceeds of 5.0 million shares of our common stock, 4.5 million at closing with an additional 0.5 million shares delivered to us on March 26, 2008, were recorded to treasury stock at $3.68 per share based on a Stock Purchase Agreement entered into on February 15, 2008 where we agreed to sell and two qualified institutional buyers agreed to purchase 5.0 million shares of our common stock at a purchase price of $3.68 per share.

 

As a result of this disposition, the operations of the INTAC Legacy Businesses have been segregated and reported as discontinued operations for all the periods presented in our consolidated statements of operations.  Since we had not acquired INTAC prior to October 2, 2007, comparative quarter discontinued operations is not presented. The results of discontinued operations for the three months ended March 31, 2008 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2008

 

 

 

 

 

Revenues

 

$

38,849

 

Loss from discontinued operations (before income taxes)

 

(133,526

)

Loss from discontinued operations

 

$

(133,526

)

 

9



 

The following table presents (i) the INTAC Legacy Businesses’ carrying value of the assets and liabilities disposed on February 29, 2008, and (ii) the carrying value of the assets and liabilities at December 31, 2007 that have been reclassified as “held for resale” for the consolidated balance sheet at December 31, 2007:

 

 

 

At Date of Disposition

 

 

 

 

 

February 29, 2008

 

December 31, 2007

 

Cash and cash equivalents

 

$

 

$

164

 

Trade accounts and other receivables

 

2,967

 

2,998

 

Prepaid expenses and other

 

1,451

 

1,401

 

Property and equipment

 

270

 

291

 

Intangible assets

 

8,627

 

8,701

 

Goodwill

 

6,540

 

6,433

 

Total assets disposed

 

19,855

 

19,988

 

Accrued liabilities and other

 

4,909

 

4,633

 

Deferred tax liabilities

 

1,514

 

1,530

 

Total liabilities disposed

 

6,423

 

6,163

 

Net assets disposed before cash transferred to disposed subsidiaries

 

13,432

 

13,825

 

Cash to be transferred to disposed subsidiaries

 

4,500

 

4,500

 

Net assets disposed

 

$

17,932

 

$

18,325

 

 

The estimated goodwill write off due to disposition, based on the expected fair value resulting from disposition was preliminary at December 31, 2007.  Upon final disposition on February 29, 2008 proceeds received of $18.4 million of our common stock (including 500,000 shares received in March 2008) exceeded the net assets carrying value of $17.9 million by $0.5 million partially offset by our estimated disposition costs accrual of $0.1 million, resulting in a net recovery on disposition of $0.4 million in the quarter ending March 31, 2008.  The recovery primarily resulted from our operation of the disposed subsidiaries at a $0.5 million loss through the disposition date resulting in the carrying value of net assets and liabilities decreasing from normal activities such as depreciation and amortization, disbursements and cash receipts on accounts receivable.  We recorded this net recovery of $0.4 million on disposition in the Loss from Discontinued Operations that partially offset the discontinued operations operating loss of $0.5 million.

 

We are continuing to finalize with our external valuation consultants certain tax liabilities and deferred tax assets and liabilities resulting from the initial INTAC subsidiaries acquisition purchase price allocation, which remains preliminary, and as a result, any such changes may affect the final loss on disposition and the final loss on discontinued operations. An adjustment to the estimated loss, if any, based on further refinement of the measurement of the purchase accounting and resulting loss on disposition will be recognized in the subsequent reporting period.

 

4.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Principles of Consolidation:

 

The consolidated financial statements from continuing operations include the accounts of (1) HSWI, (2) our wholly-owned subsidiary HSW Brazil LLC (‘‘HSW Brazil’’),  (3) HSW (Hong Kong) Inc. Limited, (4) Bonet (Beijing) Technology Limited Liability Company, and (5) Bowenwang Technology (Beijing) Limited Liability Company,  some of which are partially owned by local management in order to comply with Chinese ownership and regulatory requirements.  The operations of  the INTAC Legacy Businesses since October 2, 2007, the date of the INTAC Merger, through February 29, 2008, the date of INTAC Legacy Businesses disposition are reflected as discontinued operations, and the assets and liabilities for the year ended December 31, 2007, have been reclassified as “held for sale”.

 

10



 

All intercompany balances and transactions have been eliminated in consolidation.  During the periods reported, our revenue was derived primarily from advertising revenue from our Internet website in Brazil.   Net losses from HSW International Brazil for the three months ended March 31, 2008 and 2007, were $0.7 million and $0.6 million, respectively.

 

The year-end 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.

 

The accompanying interim consolidated financial statements for the three months ended March 31, 2008 and March 31, 2007 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 consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated.  Operating results for the three months ended March 31, 2008 are not necessarily indicative of results that may be expected for any other future interim period or for the year ending December 31, 2008.  You should read the unaudited consolidated financial statements in conjunction 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, 2007.

 

Revenue Recognition Policies:

 

Online Publishing Revenue

 

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

 

We recognize revenue when the service has been provided, and the other criteria set forth in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” have been met; namely, the fees we charge are fixed or determinable, we and our  advertisers understand the specific nature and terms of the agreed-upon transactions and the collectability is reasonably assured.

 

Cost of Revenue:

 

Online Publishing

 

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

 

Liquidity:

 

Our core Internet publishing platforms in Brazil and China are our only remaining business segment subsequent to the sale of the INTAC Legacy Businesses.  Our Internet publishing platforms are in the early development of our business (see Note 1).

 

Due to the start up nature of the online publishing segment of HSWI, no revenue was recorded in the first quarter of 2007, while revenue for the three months ended March 31, 2008 was only approximately $45,000.

 

As of March 31, 2008, our cumulative losses were $57.1 million which included non cash expenses of $18.3 million for stock-based compensation.  We used a significant amount of the $21.0 million net proceeds from the October 2, 2007, sale of stock in the equity financing to pay transaction costs, to pay off advances from HSW, and to fund operations.   In the first quarter of 2008, we received an additional $33.4 million from the sale of our stock.   We believe the proceeds from the sale of our stock in our first quarter of 2008 will provide us sufficient working capital to establish our operations in Brazil and China and provide sufficient working capital for at least the next twelve months.

 

11



 

Use of Estimates:

 

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

 

Stock Based Compensation:

 

We account for stock based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”) which requires us to recognize expense related to the fair value of our stock-based compensation awards.

 

SFAS 123R requires the use of a valuation model to calculate the fair value of the stock based awards.  We have elected to use the Black-Scholes options pricing model to determine the fair value of stock options on the dates of grant, consistent with that used for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”).  We measure stock-based compensation based on the fair values of all stock-based awards on the dates of grant, and recognize stock-based compensation expense using the straight-line method over the vesting periods.

 

Foreign Currency:

 

The functional currency of our international subsidiaries is the local currency, Reais in Brazil, Renminbi in China or Hong Kong dollars.  The financial statements of these subsidiaries are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue, costs and expenses.  Translation gains and losses are recorded in accumulated other comprehensive income as a component of stockholders’ equity.  Net gains and losses resulting from foreign exchange transactions are recorded in other expense, net.  Both currency translation and transaction losses during 2008 and 2007 were not material to our consolidated financial statements.

 

Recent Accounting Pronouncements:

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “ Fair Value Measurements ” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles in the United States (“GAAP”), and expands disclosures about fair value measurements.  SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement would be determined based on the assumptions that market participants would use in pricing the asset or liability.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements as the Company had no financial assets other than cash and accounts receivable.

 

An associated pronouncement, SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities , was also effective at the beginning of the Company’s 2008 fiscal year. The Company has elected not to apply the fair value option to measure any of the financial assets and liabilities on its balance sheet not already valued at fair value under other accounting pronouncements. These other financial assets and liabilities are primarily accounts receivable and accounts payable which are reported at historical value. The fair value of these financial assets and liabilities approximate their fair value because of their short duration.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “ Business Combinations ” (“SFAS 141(R)”). SFAS 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date.  SFAS 141(R) also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date.  In addition, SFAS 141(R) requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.  SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 with early adoption prohibited. We are currently evaluating the effect the implementation of SFAS 141(R) will have on the consolidated financial statements.

 

12



 

In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 ” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will be required to be reported as a component of equity, and requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest retained, to be recorded at fair value with any gain or loss recognized in earnings.  SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 with early adoption prohibited.  We are currently evaluating the effect the implementation of SFAS 160 will have on the consolidated financial statements.

 

5.  INCOME TAXES

 

The Company records income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”).  SFAS No. 109 uses an asset and liability approach to account for income taxes, wherein deferred taxes are provided for book and tax basis differences for assets and liabilities.   As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered.  If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable.  In this process, certain relevant criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and credit carrybacks and taxable income in future years.  Our judgment regarding future taxable income may change due to future market conditions, changes in U.S. tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.

 

No income tax benefit was recorded for the three months ended March 31, 2008 and March 31, 2007.  Our effective rate, which is 0%, differs from the statutory federal rate of 35% and 34% and was caused by an increase in the valuation allowance due to net operating losses.

 

6.  STOCKHOLDERS’ EQUITY

 

Common Stock

 

As discussed in Note 1, on October 2, 2007, we completed the INTAC Merger and related transactions affecting our stockholders’ equity as follows:

 

·                   We issued 22,940,717 and 22,940,727 million shares of our stock to HSW and to INTAC shareholders, respectively.

 

·                   Three million shares of common stock were recorded as treasury shares valued at cost, $9.0 million.

 

·                   We sold 3,424,653 shares of our common stock to certain investors for $22.5 million prior to expenses.  On February 4, 2008, we issued 2,689,464 additional shares to these investors pursuant to an adjustment mechanism provided for in their stock purchase agreement.  The stock purchase agreement with these investors requires shelf registration statements covering the resale of their shares.

 

·                   We entered into a stock purchase agreement with certain investors who agreed to purchase shares of our common stock, conditioned upon the shares being publicly registered.  Such registration was subsequently declared effective on January 14, 2008.  On January 31, 2008, we issued 1,579,348 shares of our stock in exchange for $5.8 million in cash before expenses and, on February 1, 2008, we sold our 3 million treasury shares for $11.0 million in cash before expenses.

 

On February 29, 2008, we completed the INTAC Legacy Businesses disposition.  In accordance with the share purchase agreement, we were to receive 5.0 million of our common shares owned by Mr. Zhou and the INTAC Legacy Businesses were to include $4.5 million in cash.  At the February 29, 2008, disposition, we received only 4.5 million of our shares and we only funded the INTAC Legacy Businesses with $2.7 million in cash (see Note 3).  Concurrently, we sold the 4.5 million shares of common stock to two qualified institutional buyers for $16.6 million in cash before expenses.  Our stock purchase agreement with

 

13



 

the investors allows them to request registration of resale of their stock within 180 days of the sale, if they are not able to sell their shares under Rule 144 at that time.

 

We received the additional 0.5 million shares of our stock from Mr. Zhou on March 26, 2008, and released another $1.8 million in cash to the INTAC Legacy Businesses. The additional 0.5 shares were sold to the institutional buyers for $1.8 million pursuant to the Stock Purchase Agreement.

 

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

 

Stock Based Compensation

 

Under the 2006 Equity Incentive Plan adopted April 13, 2006 (the “Plan”), HSWI authorized 8,000,000 shares for grant as part of a long term incentive plan to attract, retain and motivate its eligible executives, employees, officers, directors and consultants.  Options to purchase common stock under the 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.

 

On August 23, 2006, we granted stock options covering 6,337,500 shares, (the “2006 Grants”) at an exercise price of $6.50.  Of the 6,337,500 shares subject to the options granted, 2,000,000 vested on the date of grant, 2,000,000 vest on the date of the second anniversary date of the grant date, 600,000 vested over the period from August 23, 2006 to June 4, 2007, and 1,737,500 vest over three years.

 

On October 10, 2007, we granted stock options covering 730,000 shares, (the “2007 Grants”) at an exercise price of $7.10 per share.   Of the 730,000 shares subject to the options granted, 218,889 vested on the date of grant, 319,444 vest monthly over the period from date of grant through August 23, 2009, 76,667 vest annually over two years ending August 23, 2009, 40,000 vest annually over three years ending April 23, 2010, 50,000 vest annually over three years ending October 10, 2010, and 25,000 vest annually over three years ending November 19, 2010.

 

On March 10, 2008, we granted stock options covering 12,000 shares, (the “2008 Grants”) at an exercise price of $4.26 per share.   The shares subject to these options vest monthly through March 10, 2011.

 

On March 10, 2008, HSWI granted 33,096 shares of restricted stock to four members of the Board of Directors. The grant date fair value was $4.26 per share. The restricted stock vests on December 31, 2008.

 

The per share fair value of the stock options granted, estimated on the date of the grant, was $3.37, $3.78 and $2.04 for the 2006 Grants, 2007 Grants and 2008 Grants, respectively.  We use the Black-Scholes options pricing model to value our options, using the assumptions in the following table.  Expected volatilities are based on the historical volatility of the stock combined with other factors.  The expected term of options represents the period of time that the options granted are expected to be outstanding. The risk-free rate of periods during the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

 

 

2008 Grant

 

2007 Grant

 

2006 Grant

 

Expected Volatility

 

50

%

50

%

50

%

Expected Life in years

 

5.5

 

6

 

5.6

 

Dividend yield

 

0

 

0

 

0

 

Risk free interest rate

 

2.37

%

4.49

%

4.83

%

 

In accordance with SFAS No. 123R, stock-based compensation cost is measured at grant date based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period.  Stock-based compensation expense for the three months ended March 31, 2008 was approximately $1.3 million. Unrecognized compensation expense as of March 31, 2008, relating to non-vested stock options approximated $4.5 million and is expected to be recognized through 2009.  At March 31, 2008, no options have been exercised under the Plan.

 

14



 

A summary of stock option activity and related information as of March 31, 2008, and changes during the three months then ended is presented below:

 

Options

 

Number
of options

 

Weighted
average
exercise
price

 

Weighted
average
remaining
contract
term (yrs)

 

Aggregate
intrinsic
value

 

Outstanding at January 1, 2008

 

6,683,056

 

$

6.56

 

8.8

 

 

Granted

 

12,000

 

4.26

 

 

 

Forfeited or Expired

 

(50,000

)

7.10

 

 

 

Exercised

 

 

 

 

 

Total Outstanding at March  31, 2008

 

6,645,056

 

$

6.55

 

8.5

 

$

9,400

 

Options Exercisable at March 31, 2008

 

3,873,056

 

$

6.55

 

8.5

 

 

 

The aggregate intrinsic value in the above tables represents the total pre-tax intrinsic value (the difference between the HSWI closing stock price on the last trading date of the periods presented and the exercise price, multiplied by the number of options).  The amount of aggregate intrinsic value will change based on the fair market value of our stock.

 

The fair value of options vested during the three months ended March 31, 2008, is $1.3 million.

 

We assumed 500,000 INTAC stock options as part of the INTAC Merger and exchanged them for an equal amount of HSWI options.  All of these options were either already fully vested at the time of the merger or vested in full as a result of the INTAC Merger. Therefore, the fair value of the assumed options was treated as part of the purchase price and no related expense was recorded (see Note 2).  The per share fair value of our stock options issued in exchange for all of INTAC’s options was estimated using the Black-Scholes options pricing model, resulting in a $0.04 to $0.39 fair value range per option (weighted average fair value options assumed is $0.33). The fair value of each option grant was estimated on the date of grant using the following assumptions: underlying stock price of $1.95; no dividend yield; expected volatility of 50%; risk-free interest rate of 5.0%; and, expected life of seven years.

 

Options

 

Number
of options

 

Weighted
average
exercise
price

 

Weighted
average
remaining
contract
term (yrs)

 

Aggregate
intrinsic
value

 

Outstanding at January 1, 2008

 

250,000

 

$

5.49

 

2.8

 

$

409,500

 

Forfeited or Expired

 

 

 

 

 

Exercised

 

 

 

 

 

Total Outstanding at March 31, 2008

 

250,000

 

$

5.49

 

4.3

 

$

231,000

 

Options Exercisable at March 31, 2008

 

250,000

 

$

5.49

 

4.3

 

$

231,000

 

 

In conjunction with merger, simultaneously with the assumption of the INTAC stock options and as discussed in Note 2, 500,000 warrants were issued to HSW on the same terms as the INTAC stock options with a provision that as the exchanged stock options are forfeited or expire, a similar amount of the warrants expire.  At March 31, 2008, there were 250,000 warrants outstanding.

 

On May 13, 2008, HSWI entered into a Separation Agreement with the Company’s Chief Financial Officer (“CFO”) in conjunction with the CFO’s desire to retire. This Agreement provides for the CFO to continue as an employee and officer of HSWI through July 31, 2008, and as a consultant for six months thereafter. The CFO will be paid a lump sum severance payment

 

15



 

of $200,000 upon termination as an employee in accordance with his employment contract, and allow his stock options to remain exercisable for the full 10-year term notwithstanding his termination. The change in contractual term was accounted for as a modification under SFAS 123(R), which resulted in an additional $43,000 of stock-based compensation expense, which was recognized immediately as the options were fully vested.

 

Earnings per Share

 

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

 

 

 

Three months ended March 31,

 

 

 

2008

 

2007

 

Loss per share:

 

 

 

 

 

Loss from continuing operations

 

$

(4,762,795

)

$

(2,886,785

)

Loss from discontinued operations

 

(133,526

)

 

Net loss

 

$

(4,896,321

)

$

(2,886,785

)

 

 

 

 

 

 

Weighted average shares outstanding

 

51,027,422

 

10

 

 

 

 

 

 

 

Basic and diluted loss per share

 

 

 

 

 

Loss from continuing operations

 

$

(0.09

)

$

(288,679

)

Loss from discontinued operations

 

 

 

Net loss

 

$

(0.09

)

$

(288,679

)

 

 

 

 

 

 

Weighted average shares outstanding

 

51,027,422

 

10

 

 

 

 

 

 

 

Dilutive stock options

 

 

 

 

 

 

 

 

 

Total common shares and dilutive securities

 

51,027,422

 

10

 

 

Stock options, restricted stock and warrants are not included in the diluted earnings per share calculation above as they are anti-dilutive.

 

7. RELATED PARTY TRANSACTIONS

 

In August 2006, HSW Brazil entered into a 36 month services agreement with Administradora de Bens Capela (“Capela”), a Brazilian corporation, whereby Capela provides sales, business development, and operations personnel to our Brazilian subsidiary. Monthly fees for these services are $66,197 (U.S. Dollars). The terms of the agreement also provided to Capela 800,000 stock options at $6.50, the market value on the contract and grant date vesting over the three year contract period. These options are included in the options described in Note 6.

 

During 2006, we entered into six unsecured notes payable with Capela that had various maturity dates in 2007. Interest on these loans was based on the Interbank Certificate of Deposit rate plus 0.3% through 0.5%. As of March 31, 2007, the balance of the notes payable outstanding was $195,848, including accrued interest. The notes payable balance of was paid in full in 2007 and accordingly, there is no note payable outstanding at March 31, 2008.

 

Capela was deemed an affiliate due to an ownership interest in HSW, indirectly our largest shareholder.

 

16



 

PART I – FINANCIAL INFORMATION

 

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 consolidated financial statements and notes thereto included as part of this Form 10-Q. This Form 10-Q contains forward-looking statements that are based upon 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, and the effects of general industry and economic conditions and are subject to risks and uncertainties including, but not limited to, those discussed below and elsewhere in this Form 10-Q that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the risk factors set forth in other documents we file from time to time with the SEC.

 

Business Overview and Recent Events

 

We were formed on March 14, 2006 as a wholly owned subsidiary of Howstuffworks, Inc. (“HSW”) in order to (i) develop exclusive digital publishing rights to HSW’s content for the countries of China and Brazil, and (ii) to effect the INTAC Merger . Our ongoing primary focus is to become an international online publishing company that develops and operates Internet businesses focused on providing consumers in the world’s emerging digital economies with locally relevant, high quality content.

 

The INTAC Merger

 

The INTAC Merger was done to assist in the development of our digital content database exclusively licensed from HSW by (i) accelerating our obtaining Internet licenses in China for launching our Internet platform, (ii) obtaining INTAC’s knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platforms in China, and (iii) providing additional cash flow from INTAC’s established businesses. These established businesses included services related to wireless telephone training and the development and sale of educational software delivered to customers in China (“INTAC Legacy Businesses”). As discussed below, the INTAC Legacy Businesses were subsequently disposed.

 

Prior to the consummation of the merger with INTAC, we had only limited assets and operations incident to our formation and in preparation for the merger with INTAC and subsequent business.

 

On October 2, 2007, we completed the INTAC Merger and related transactions pursuant to which:

 

·                   HSW contributed to us, in exchange for our common stock, perpetual, fully paid up, royalty-free exclusive digital publishing rights to HSW’s existing content for the countries of China and Brazil which we are translating and localizing into the predominant languages of China and Brazil.

 

·                   A wholly owned subsidiary of ours was merged with INTAC surviving as a wholly owned subsidiary of ours and holders of INTAC common stock received one share of our common stock in exchange for each of their shares of INTAC common stock.

 

·                   Certain investors purchased or agreed to purchase shares of our common stock having an aggregate value of approximately $39.4 million, of which $22.5 million and $16.9 million (both before expenses) were received in October 2007, and January and February 2008, respectively.

 

·                   Our stock became publicly traded on the NASDAQ Global Market under the symbol “HSWI” in connection with the INTAC Merger. Prior to the INTAC Merger, INTAC’s common stock was traded on the NASDAQ Capital Market under the symbol “INTN”.

 

17



 

·                   In connection with and as a condition of the INTAC Merger, INTAC sold its wireless handset and prepaid calling cards distribution businesses (“distribution companies”), to an entity controlled by Mr. Zhou, in exchange for 3.0 million shares of our common stock held by Mr. Zhou. The 3.0 million shares of our common stock were recorded as treasury shares valued at cost as determined by a third party valuation.

 

As more fully discussed in Note 2 to the consolidated financial statements included in this Form 10-Q, the preliminary allocation of the purchase price of $47.9 million resulted in approximately $29.0 million of goodwill primarily from our expectations that we could utilize INTAC’s knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platforms in China. However, as discussed below, we decided to dispose of the entire INTAC Legacy Businesses subsequent to December 31, 2007.

 

HSW Merger with Discovery Communications, LLC.

 

In December 2007, HSW was acquired by Discovery Communications, LLC and became a wholly owned subsidiary of Discovery. As a result, certain of our contributions from HSW were modified. At March 31, 2008, Discovery, through its wholly owned subsidiary HSW, owned approximately 42.8% of our outstanding common stock.

 

Our Operations

 

Our initial focus in the online publishing market will be the online publishing of localized, translated Chinese and Brazilian editions of the HowStuffWorks Internet site, utilizing strategies based on those employed by HSW, as tailored to the needs of each localized market.

 

We launched our Brazilian website in March 2007. At March 31, 2008, we had approximately 4,200 articles that were either (i) articles from the HSW content database translated from English to Portuguese, or (ii) originally created content. The web site address is http://hsw.uol.com.br/ . We are in the early development of our business strategy in Brazil as we continue to expand by (i) adding original proprietary digital content designed to meet the information needs of the Brazilian online community, (ii) expanding the amount of translated content from HSW, and (iii) refining local marketing strategies. Although initial traffic has been strong with monthly page views averaging 3.3 million in the first quarter of 2008, only $44,837 of revenue has been earned during the first quarter of 2008.

 

We are entering the Chinese online publishing market and utilizing a combination of the licensed and sublicensed content that we recently received from HSW with the benefits of INTAC International, Inc.’s relationships and knowledge of the Chinese markets in obtaining our Internet licenses. We expect to deploy our Internet platform in China in mid-2008. We have hired Chinese personnel, received licenses to conduct certain business in China and are in the process of translating and localizing our content for the China online publishing business.

 

We also intend to generate revenue by assembling our own library of digital content (including originally authored content and content that has been acquired from third parties) for our own use and for licensing to various customers, including HSW, in territories outside of our markets. Both China and Brazil represent significant, growing markets for our initial online publishing strategy.

 

Sale of the INTAC Legacy Businesses (Discontinued Operations) and Related Transactions

 

Due to an increased focus of our management and resources on our primary Internet publishing business , a change of control in our majority ownership leading to further refinement in our strategies, and an under performance of the INTAC Legacy Businesses after the INTAC Merger, we decided subsequent to December 31, 2007, to dispose of these Legacy Businesses. The INTAC Legacy Businesses were comprised of two lines of business, including services related to wireless telephone training and the development and sale of educational software in China, both unrelated to our core Internet platform business.

 

We had originally estimated when deciding to acquire the INTAC Legacy Businesses that in addition to accelerating our obtaining Internet licenses in China for launching our Internet platform, INTAC would provide us (i) further knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platform in China, and (ii) additional cash flow from INTAC’s established businesses. Following the underperformance of the INTAC Legacy Businesses in the fourth quarter of 2007, that resulted in short-term negative cash flow from these operations and a change-in-control of our business

 

18



 

through the acquisition of our largest shareholder HSW, by Discovery, we reconsidered the potential risk of excessive consumption of short-term cash and management resources by our acquired non-core INTAC Legacy Businesses and refined our strategic direction.

 

We decided that it was critical that all our current resources be fully focused on expanding our Brazilian platform and launching our Chinese Internet platform in mid-2008. Although we believe we have benefited in the short-term from INTAC’s relationships and knowledge of the Chinese markets in obtaining our Internet licenses, this refined strategic focus did not allow us the time required to realize the expected long-term synergies from INTAC’s knowledge of the Chinese markets, relationships, and core competencies. In addition, we were provided with and acted on an opportunity to sell the unrelated INTAC Legacy Businesses for approximately their stand-alone appraised value, and through simultaneous sale of the treasury stock received, generate significant additional cash resources for investing into our core Internet businesses.

 

At December 31, 2007, we recognized in loss from operations before income taxes in the statement of operations, a preliminary goodwill write off of approximately $22.5 million related to the February 29, 2008, INTAC Legacy disposition. During the three months ended March 31, 2008, we recognized a loss of $133,526, which has been recorded as discontinued operations in the accompanying consolidated financial statements. All the goodwill resulting from the INTAC acquisition was included in the INTAC Legacy Businesses when we determined the potential write off, because such operations had not been integrated with our online publishing segment prior to our decision to dispose of the INTAC Legacy Businesses.

 

On February 29, 2008, we completed the sale of the INTAC Legacy Businesses. The INTAC Legacy Businesses were sold to China Trend Holdings Ltd., a British Virgin Islands corporation that is owned by Mr. Zhou, CEO, director and significant stockholder of INTAC prior to the INTAC Merger in October 2007. Mr. Zhou was also on our board of directors from October 2007 to December 2007. In accordance with the share purchase agreement with China Trend Holdings, we were to receive 5.0 million of our common shares owned by Mr. Zhou. In addition, as a condition to the February 29, 2008, INTAC Legacy Businesses disposition, the INTAC Legacy Businesses were to include $4.5 million in cash at closing.

 

At the February 29, 2008, INTAC Legacy Businesses disposition, we received only 4.5 million shares of our common stock from Mr. Zhou and accordingly, we only funded the INTAC Legacy Businesses with $2.7 million in cash. Mr. Zhou delivered his additional 0.5 million shares of our common stock to us on March 26, 2008, and on March 31, 2008, we released another $1.6 million in cash to the INTAC Legacy Businesses ($1.8 million for the stock received net of an estimated $0.2 million withheld for disposition expenses). At March 31, 2008, all of HSWI’s assets are now in our core Internet businesses and the sole asset we retained from the INTAC Merger is the Internet licenses intangible we are using to enter the Chinese markets.

 

On February 15, 2008, we entered into a stock purchase agreement where we agreed to sell and two qualified institutional buyers agreed to purchase the 5.0 million shares of our common stock received from the INTAC Legacy Businesses disposition at a purchase price of $3.68 per share. Simultaneously with the February 29, 2008 disposition, we sold the 4.5 million shares we received to the institutional buyers. Subsequently on March 26, 2008, we sold the additional 0.5 million shares from Mr. Zhou to the institutional buyers.

 

Results of Operations

 

Prior to the consummation of the merger with INTAC, we had only limited assets and operations incident to our formation and in preparation for the merger with INTAC and subsequent businesses.

 

The following table sets forth of our operations for the three months ended March 31, 2008 and March 31, 2007. As discussed in Notes 1, 2, and 3 to the consolidated financial statements included in this Form 10-Q, HSWI merged with INTAC International Inc. on October 2, 2007, and the INTAC Legacy Businesses were subsequently disposed on February 29, 2008. Following the disposition, the primary assets we retain from INTAC are the indefinite - lived Internet licenses intangible and no revenue was realized from this asset in 2007 or 2008.

 

19



 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Operating revenue

 

 

 

 

 

Digital online publishing

 

$

44,837

 

$

 

 

 

 

 

 

 

Cost of services

 

325,272

 

 

 

 

 

 

 

 

Gross loss

 

(280,435

)

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Selling, general and administrative

 

4,546,107

 

2,879,937

 

Depreciation and amortization

 

28,160

 

4,378

 

Total operating expenses

 

4,574,267

 

2,884,315

 

 

 

 

 

 

 

Loss from continuing operations before other income (expense) and income taxes

 

(4,854,702

)

(2,884,315

)

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income

 

91,907

 

 

Other (expense)

 

 

(2,470

)

Total other income (expense)

 

91,907

 

(2,470

)

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

(4,762,795

)

(2,886,785

)

 

 

 

 

 

 

Income taxes

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(4,762,795

)

(2,886,785

)

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

(133,526

)

 

 

 

 

 

 

 

Net loss

 

$

(4,896,321

)

$

(2,886,785

)

 

Revenue

 

Revenue for the three months ended March 31, 2008 of approximately $45,000 was generated in Brazil. For the three months ended March 31, 2008, approximately 22% of revenue was generated from paid-for impression advertising and 78% was generated from pay for performance ads. There was no China digital online publishing revenue during the three months ended March 31, 2008 as the website in China has not yet been launched. No revenue was generated during the three months ended March 31, 2007.

 

Cost of Services

 

Cost of services includes the ongoing third party translation costs incurred by third party vendors for services of translating, localizing, and enhancing articles in English to Portuguese and Mandarin Chinese. Portuguese article translation costs totaled $229,000 and Chinese translation costs totaled $96,000 for the three months ended March 31, 2008, respectively.  Due to the fact that we had little or no operations during three month period ended March 31, 2007, we incurred no cost of services for that time period.

 

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Operations—Selling, General and Administrative Expenses

 

Our total selling, general and administrative expenses increased by $1.7 million to $4.5 million for the three months ended March 31, 2008 from the comparable period in 2007. The increase is primarily attributable to increased costs relating to the launching of the Brazil website, the preparation for entering the China market, and the increased costs of becoming a public company. These increases over 2007 are comprised of $825,000 in personnel related costs, $20,000 in facility costs, and $1.2 million in professional fees related to being public which should not reoccur to this magnitude in future periods. These increases are partially offset by a $545,000 decrease in stock-based compensation expense.

 

Other Income (Expense)

 

Other income (expense) increased $94,000 for the three months ended March 31, 2008, compared to the comparable period in 2007. The increase in interest income reflects an increase in cash on hand resulting from the sale of our stock to the institutional investors.

 

Discontinued Operations - INTAC Legacy Businesses

 

The discussion that follows relates to the INTAC Legacy Businesses results of operations for the three months ended March 31, 2008. Revenue of approximately $39,000 are for services related to wireless telephone training and the development and sale of educational software in China. The cost of such revenue, approximately $28,000, is primarily comprised of service fees paid for the provision of software training and technological services and amortization of the software.

 

Product development costs of $312,000 are primarily from the development, production and delivery of our career development services, including salaries and facility costs. Selling, general and administrative expenses of $177,000 are primarily occupancy, insurance costs and personnel related expenses.

 

Critical Accounting Policies

 

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

 

Revenue Recognition

 

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

 

We recognize revenue when the service has been provided, and the other criteria set forth in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” have been met; namely, the fees we charge are fixed or determinable, we and our advertisers understand the specific nature and terms of the agreed-upon transactions and the collectability is reasonably assured.

 

Stock-Based Compensation

 

Under the Plan, HSWI authorized 8,000,000 shares for grant as part of a long term incentive plan to attract, retain and motivate its eligible executives, employees, officers, directors and consultants.  Options to purchase common stock under the 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. As of March 31, 2008, no options had been exercised under the Plan.

 

We account for stock based compensation in accordance with SFAS 123R which requires us to recognize expense related to the fair value of our stock-based compensation awards.

 

SFAS 123R requires the use of a valuation model to calculate the fair value of the stock based awards. We have elected to use the Black-Scholes options pricing model to determine the fair value of stock options on the dates of grant, consistent with that used for pro forma disclosures under SFAS No. 123. We measure stock-based compensation based on the fair values of all stock-based

 

21



 

awards on the dates of grant, and recognize stock-based compensation expense using the straight-line method over the vesting periods. Stock-based compensation expense was $1.3 million and $1.9 million for the three months ended March 31, 2008 and 2007, respectively.

 

Long-Lived Assets Including Goodwill and Other Intangible Assets

 

We review property and equipment and intangible assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to future net cash flows the assets are expected to generate. If these assets are considered to be impaired, the impairment to be recognized equals the amount the carrying value of the assets exceeds its fair market value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), we test goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or circumstances indicate an asset’s carrying value may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets and for Long-Lived Assets to be Disposed Of”.

 

Liquidity and Capital Resources

 

Our core Internet publishing platforms in Brazil and China are our only remaining businesses subsequent to the February 29, 2008 INTAC Legacy Businesses disposition and are in the early development of our strategy. We launched our Brazilian Internet platform in March 2007. At March 31, 2008, we had approximately 4,200 articles and we will continue to expand the platform by (i) adding original proprietary digital content designed to meet the information needs of the Brazilian online community, (ii) expanding the digital data base with translated content, and (iii) refining local marketing strategies.

 

We expect to deploy our Internet platform in China in mid-2008. We have hired Chinese personnel and in 2008 will hire additional Chinese personnel to translate and localize our content for the China online publishing business as well as adding original proprietary digital content designed to meet the information needs of the Chinese online community.

 

We also intend to assemble a library of digital content and license it to various customers, including HSW in territories outside of our markets. It is anticipated that this content will include originally authored content as well as content acquired from other parties.

 

We expect to expend significant resources in launching, expanding and gaining market share for our Internet platforms in these significant, growing markets. We believe that with the completed equity financings and disposition of non-core INTAC Legacy Businesses that our current cash balance and expected cash generated from future operations will be more than sufficient to fund operations for the next twelve months. If cash from equity financings, dispositions, and generated from operations, is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or obtain additional credit facilities. 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.

 

Due to the start up nature of the online publishing segment of HSWI, no revenue was recorded in the three months ended March 31, 2007. For the three months ended March 31, 2008, HSWI recorded approximately $45,000 in revenue primarily related to our operations in Brazil.

 

As of March 31, 2008, our cumulative losses were $57.1 million which included non -cash expenses of $18.3 million for stock-based compensation. We used a significant amount of the $21.0 million net proceeds from the October 2, 2007, sale of stock to pay transaction costs, to pay off advances from HSW, and to fund operations.  As discussed above, in the first quarter of 2008, we received $33.4 million before expenses from the sale of our stock. We believe the proceeds from the sale of our stock in early 2008 will provide us sufficient working capital to establish our operations in Brazil and China and provide sufficient working capital through the next twelve months.

 

Cash flows from operations

 

Cash and cash equivalents was $31.0 million at March 31, 2008, compared to $3.6 million at December 31, 2007. The increase in cash is primarily attributable to sale of our stock to certain institutional investors during the first quarter of 2008.

 

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Our net cash used in continuing operating activities in the three months ended March 31, 2008 increased by $2.0 million compared to the same period ended March 31, 2007.  The increase was due to the increased net losses for the period.  Net cash used in discontinued operating activities was $0.5 million for the three months ended March 31, 2008.

 

Cash used in investing activities

 

During the three months ended March 31, 2008, cash used in investing activities was $4.7 million.   Cash used in investing activities during the three months ended March 31, 2008 reflects the purchases of property and equipment as well as cash used in conjunction with the sale of our INTAC Legacy Businesses.

 

Cash flows from financing activities

 

For the three months ended March 31, 2008, net cash provided by financing activities was approximately $35.2 million versus $0.8 million for the three months ended March 31, 2007.  The significant increase in the three months ended March 31, 2008 relates to the proceeds we received from the sale of our common stock during the first quarter.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and accounts receivables. At March 31, 2008, 98% of our cash was denominated in U.S. dollars.  The amount of cash at March 31, 2008 denominated in Brazilian Reais, Chinese Rehminbi or Hong Kong Dollars comprised the remaining 2%.  All our cash is placed with financial institutions we believe are of high credit quality.

 

We do not use financial instruments to hedge our foreign exchange exposure because the effects of the foreign exchange rate fluctuations are not material.  We do not use financial instruments for trading purposes.  The net assets of our foreign operations at March 31, 2008, were approximately $0.5 million.

 

We have not entered into long-term agreements or borrowing arrangements with third parties under which any amounts were outstanding during 2008.  Therefore, we do not believe there is any material exposure to market risk changes in interest rates.

 

We do not use any derivative financial instruments to mitigate any of our currency risks.  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.  Therefore, no quantitative tabular disclosures are required.

 

Item 4T.  Control Procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management, including our Vice Chairman (principal executive officer) and the Chief Financial Officer (principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.  As of the end of the period covered by this Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Vice Chairman and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based upon that evaluation and subject to the foregoing, our Vice Chairman and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2008.

 

23



 

The Company’s management, including the Vice Chairman and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of one or more persons.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

 

There was no change in our internal control over financial reporting in the quarter ended March 31, 2008 that materially affected, or is reasonably likely to affect, our internal control over financial reporting.

 

24



 

PART II – OTHER INFORMATION

 

Item 5.  Other Information.

 

On May 13, 2008, we entered into a Separation Agreement with J. David Darnell, our Chief Financial Officer.   The agreement provides for Mr. Darnell to continue as an employee and officer of HSWI through July 31, 2008, and as a consultant for six months thereafter.   We will pay Mr. Darnell a lump sum severance payment of $200,000 upon termination as an employee in accordance with his employment contract, and allow his stock options to remain exercisable for their full 10-year term notwithstanding his termination.   Mr. Darnell’s termination was not caused by, and there has not been, any disagreement between him and HSWI over financial, accounting, operational or any other matter.   He has decided to retire and HSWI thanks him for his service and wishes him well.   A copy of Mr. Darnell’s agreement is attached hereto as Exhibit 10.22.

 

Item 6. Exhibits.

 

Exhibit 2.4 ¥

 

Share Purchase Agreement between INTAC International, Inc. and Wei Zhou, dated February 15, 2008.

 

 

 

Exhibit 10.21 ¥

 

Stock Purchase Agreement between HSW International, Inc. and the investors named therein, dated February 15, 2008.

 

 

 

Exhibit 10.22

 

Separation Agreement with J. David Darnell dated May 13, 2008 (filed herewith).

 

 

 

Exhibit 31.1

 

Certification of Vice Chairman 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 Vice Chairman 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.

 

¥ Previously filed.

 

25



 

SIGNATURES

 

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

 

 

 

HSW INTERNATIONAL, INC.

 

 

 

 

Date: May 15, 2008

By:

/s/ J. David Darnell

 

J. David Darnell

 

Chief Financial Officer

 

26


Exhibit 10.22

 

SEPARATION AGREEMENT

 

This SEPARATION AGREEMENT (the “Agreement”) is made this 13 th day of May, 2008 by and between J. David Darnell, a citizen and resident of the State of Texas (hereinafter referred to as “You” or “you”), INTAC, a Nevada corporation with its principal place of business in Atlanta, Georgia (“INTAC”), and HSW International, Inc., a Delaware corporation with its principal place of business in Atlanta, Georgia (“HSWI”) (INTAC and HSWI are referred to collectively herein as the “Company”).

 

1.              Termination of Employment .

 

a.      Termination Date .  Your employment with the Company and the Executive Employment Agreement entered into by and between you and the INTAC on June 11, 2002 (as amended or modified, the “Employment Agreement”) will terminate effective July 31, 2008 (the “Termination Date”).  You acknowledge and agree that such termination is as a result of mutual agreement of the Company and you, as referenced in Section 5(a) of the Employment Agreement.  Such termination shall not affect those provisions of the Employment Agreement which are intended to survive beyond termination.  The Company will continue to pay you your current base salary for all time worked, including any amounts due you for unused vacation time, up to the Termination Date.

 

b.      Employee Benefits .   Except as otherwise provided in this Agreement, as provided by the specific terms of a benefit plan or as required by law, all of your employee benefits with the Company will terminate upon the Termination Date.

 

2.              Severance Pay .  If you sign this Agreement, and if, on the Termination Date, you sign the Release Agreement attached hereto and fully incorporated by reference as Exhibit A (the “Release”) and do not revoke it, you will receive from the Company a lump sum amount, payable in cash, of  Two-Hundred Thousand Dollars ($200,000) (“Severance Pay”).  You hereby acknowledge and agree that but for your execution of this Agreement and Release attached hereto as Exhibit A , you would not be entitled to receive the Severance Pay as set out herein. This Severance Pay will be paid less any withholdings required by law or authorized by you.  The Severance Pay will be payable to you in accordance with the Company’s payroll practices and procedures on the Company’s next regular payday after the expiration of the Revocation Period (as defined in Section 4 of the Release.)

 

3.              Equity Grants .  The stock options held by you and exercisable for a total of 150,000 shares of HSWI common stock (“Employee Stock Options”) are hereby automatically (and without further condition or requirement) amended such that the expiration date applicable to such Employee Stock Options is and shall be irrevocably extended until ten (10) years from the date of original grant for those Employee Stock Options.   To the extent these Employee Stock Options were incentive stock options, this Section renders these options non-statutory stock options.  HSWI and the Company hereby acknowledge and agree that the Employee Stock Options are fully vested on the date

 



 

hereof, shall be exercisable, upon the terms thereof, into shares of HSWI common stock and such shares shall remain freely transferable by you under HSWI’s S-8 or otherwise until such extended expiration date.

 

4.              Consulting Arrangement .  On the Termination Date, you agree to execute the Consulting Agreement (the “Consulting Agreement”) attached hereto as Exhibit B which provides for you to be a consultant for the Company for the time period set forth under the Consulting Agreement (the “Consulting Period.”)

 

5.              Release of Claims . In consideration of the Company paying you the Severance Pay, and as a condition to you receiving the Severance Pay, you agree that (i) you have been given a period of at least twenty-one (21) days to consider whether to execute the Release attached hereto as Exhibit A , (ii) you will execute this Release on the Termination Date, and (iii) you will return the signed and dated copy of the Release to Bradley Zimmer at the Company.  If you do not sign the Release and return it to the Company in the manner set forth herein, or if you sign the Release and then revoke it as set forth in Section 4 of the Release, you will not be entitled to the Severance Pay described in Section 2 of this Agreement.  Furthermore, your refusal to sign the Release will constitute a material breach of this Agreement.

 

6.              Section 409A .  This Agreement and the payments to be made hereunder are compliant with Internal Revenue Code Section 409A, and you shall not bear any responsibility for any tax or related charges under such Section 409A as a result hereof.

 

7.              Indemnification and Advance of Expenses .   HSWI hereby reaffirms its obligations of indemnification and advancement of expenses to you, as set forth under HSWI’s Amended and Restated Certificate of Incorporation, Article VII, Sections 2 and 3, and HSWI’s Second Amended and Restated Bylaws, Article IX, all of which expressly survive the execution and delivery hereof.

 

8.              Resignation as Director and Officer .  By signing this Agreement, you hereby resign (i) from your seat as member of the board of directors of and (ii) from all positions as an officer of the Company, its parent companies, affiliates, subsidiaries, divisions, and agents, and their respective successors, assigns, heirs, executors and administrators, effective as of the Termination Date.

 

9.              Return of Property . Following the Consulting Period or earlier as deemed by the Company, you shall return all property of the Company in your possession, including, without limitation, any Company credit cards, Company-owned equipment, and all originals and any copies of all disks, tapes, files, correspondence, data, notes and other documents pertaining to the Company’s proprietary products, customers and business and Proprietary Information as defined in the Employment Agreement.  Such property shall be in the same condition as when provided to you, reasonable wear and tear excepted.  Your return of such property is an express requirement of this Agreement and the Employment Agreement.

 



 

10.            Reaffirmation .  You hereby reaffirm and acknowledge your continuing obligations under the Employment Agreement (which shall continue in full force and effect in accordance with their terms notwithstanding the termination of your employment) and that a breach of the Employment Agreement will also constitute a breach of this present Agreement.

 

11.            No Disparagement .  You agree that you will not denigrate, defame, disparage or cast aspersions upon the Company, the Company Parties (as defined in the Release), their products, services, business and manner of doing business, and that you will use your reasonable best efforts to prevent any member of your immediate family from engaging in any such activity.  Upon inquiry from any third party, the Company will release only your dates of employment and positions held, unless you provide written authorization for the Company to release additional information.

 

12.            Relief and Enforcement .  You understand and agree that any breach of this Agreement by you will relieve the Company of its obligation to continue paying you any then-unpaid Severance Pay as set out in Section 2 above.  You also understand and agree that if you violate the terms of Sections 5, 9, 10 or 11 of this Agreement, you will cause injury to the Company and/or one or more of the Company Parties that will be difficult to quantify or repair, and that monetary damages would be insufficient to remedy any harm suffered by the Company and/or the Company Parties.  Accordingly, you agree that if you violate Sections 5, 9, 10, or 11 of this Agreement, the Company or the Company Parties may obtain a temporary restraining order or injunction, restraining you from any further breach of this Agreement.  The Company’s right to equitable relief in the form of an injunction or temporary restraining order is in addition to and not in lieu of any other remedies that the Company or the Company Parties have, including but not limited to monetary damage or any other remedies.

 

13.            No Modifications; Governing Law; Entire Agreement .  This Agreement cannot be changed or terminated orally, and no modification or waiver of any of the provisions of this Agreement will be effective unless it is in writing and signed by both you and the Company.  This Agreement is to be governed by and construed in accordance with the laws of the State of Delaware.  This Agreement sets forth the entire and fully integrated understanding between the parties, and there are no representations, warranties, covenants or understandings, oral or otherwise, that are not expressly set out herein.

 

14.            Voluntary Execution .  By signing below, you acknowledge that you have read this Agreement, that you understand its contents and that you have relied upon or had the opportunity to seek the legal advice of your attorney, who is the attorney of your own choosing.

 

15.            Miscellaneous .

 

a.      Should any portion, term or provision of this Agreement be declared or determined by any court to be illegal, invalid or unenforceable, the validity or the

 



 

remaining portions, terms and provisions shall not be affected thereby, and the illegal, invalid or unenforceable portion, term or provision shall be deemed not to be part of this Agreement.

 

b.      The parties agree that the failure of a party at any time to require performance of any provision of this Agreement shall not affect, diminish, obviate or void in any way the party’s full right or ability to require performance of the same or any other provision of this Agreement at any time thereafter.

 

c.      This Agreement shall inure to the benefit of and shall be binding upon you, your heirs, administrators, representatives, executors, successors and assigns and upon the successors and assigns of the Company.

 

d.      The headings of the paragraphs of this Agreement are for convenience only and are not binding on any interpretation of this Agreement.  This Agreement may be executed in counterparts.

 

[ Signature page follows .]

 



 

 

INTAC:

 

 

 

 

 

INTAC International, Inc.

 

 

 

 

 

By:

/s/ Henry N. Adorno

 (SEAL)

 

Name:

Henry N. Adorno

 

 

Title:

Vice Chairman

 

 

 

 

 

 

 

 

HSWI:

 

 

 

 

 

HSW International, Inc.

 

 

 

 

 

By:

/s/ Henry N. Adorno

 (SEAL)

 

Name:

Henry N. Adorno

 

 

Title:

Vice Chairman

 

 

 

 

 

 

 

 

YOU:

 

 

 

 

 

 

 

 

/s/ J. David Darnell

 (SEAL)

 

J. David Darnell

 

 



 

EXHIBIT A

 

RELEASE AGREEMENT

 

This RELEASE AGREEMENT (the “Release”) is made this        day of                                    , 2008, by and between J. David Darnell (“You” or “you”), HSW International, Inc., a Delaware corporation with its principal place of business in Atlanta, Georgia (“HSWI”),  and INTAC International, Inc., a Nevada corporation with its principal place of business in Atlanta, Georgia (“INTAC”) (HSWI and INTAC are referred to collectively herein as the “Company”).

 

WHEREAS, You and the Company have agreed that your employment will terminate on the terms and conditions set forth in the Separation Agreement to which this Release is attached (the “Separation Agreement”);

 

WHEREAS, the Separation Agreement requires you to execute this Release as a condition to receiving the severance payment described in Section 2 thereof.

 

NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged by all parties, the parties hereby agree as follows:

 

1.              Release of Claims .  In exchange for the Company providing you with the consideration described in the Separation Agreement, you release and forever discharge the Company, as well as its parent companies, affiliates, subsidiaries, divisions, officers, directors, stockholders, employees, agents, representatives, attorneys, lessors, lessees, licensors and licensees, and their respective successors, assigns, heirs, executors and administrators (collectively, the “Company Parties”), from any and all claims, demands, and causes of action of every kind and nature, whether known or unknown, direct or indirect, accrued, contingent or potential, which you ever had or now have arising out of or related to your employment with the Company and the termination thereof (except where and to the extent that such a release is expressly prohibited or made void by law).  The release includes, without limitation, your release of the Company Parties from any claims by you for lost wages or benefits, stock options, restricted stock, compensatory damages, punitive damages, attorneys’ fees and costs, equitable relief or any other form of damages or relief.  In addition, this release is meant to release the Company Parties from all common law claims, including claims in contract or tort, including, without limitation, claims for breach of contract, wrongful or constructive discharge, intentional or negligent infliction of emotional distress, misrepresentation, tortious interference with contract or prospective economic advantage, invasion of privacy, defamation, negligence or breach of any covenant of good faith and fair dealing.  You also specifically and forever release the Company Parties (except where and to the extent that such a release is expressly prohibited or made void by law) from any claims based on unlawful employment discrimination or harassment, including claims under the federal Age Discrimination in Employment Act (29 U.S.C. § 621 et seq .).

 

You acknowledge that this release applies both to known and unknown claims that may exist between you and the Company Parties.  You expressly waive and relinquish all rights and benefits which you may have under any state or federal statute or common law principle that

 



 

would otherwise limit the effect of this Release to claims known or suspected prior to the date you execute this Release, and do so understanding and acknowledging the significance and consequences of such specific waiver.  Provided, however , that nothing in this Release extinguishes any claims you may have against the Company for breach of this Release or the Separation Agreement.

 

2.              No Admissions; Covenant Not to Sue . You understand, acknowledge and agree that the release set out above in Section 1 is not an admission by the Company or the Company Parties that any such claims exist or that the Company or any of the Company Parties are liable for any such claims.  Unless prohibited by applicable law or regulation, you further agree not to hereafter, directly or indirectly, sue, assist in or be a voluntary party to any litigation against any one or more of the Company Parties for any claims relating to events occurring prior to or simultaneously with the execution of this Release, including but not limited to your termination of employment with the Company.

 

3.              Consideration .  In consideration of your executing this Release, Company is providing you with the payments and benefits set out in Section 2 of the Separation Agreement.

 

4.              Right to Revoke .  ONCE SIGNED BY YOU, THIS RELEASE IS REVOCABLE IN WRITING FOR A PERIOD OF SEVEN (7) DAYS (THE “REVOCATION PERIOD”).  IN ORDER TO REVOKE ACCEPTANCE OF THIS AGREEMENT, YOU MUST DELIVER WRITTEN NOTICE TO BRADLEY ZIMMER AT THE COMPANY, AND SUCH WRITTEN NOTICE MUST ACTUALLY BE RECEIVED BY BRADLEY ZIMMER WITHIN THE SEVEN (7) DAY REVOCATION PERIOD.

 

5.              Voluntary Execution .  By signing below, you acknowledge that you have read the foregoing Release, that you understand its contents and that you have relied upon or had the opportunity to seek the legal advice of your attorney, who is the attorney of your own choosing. YOU HEREBY ACKNOWLEDGE THAT YOU HAVE BEEN GIVEN A PERIOD OF AT LEAST TWENTY-ONE (21) DAYS TO CONSIDER WHETHER TO EXECUTE THIS RELEASE.  YOU ALSO ACKNOWLEDGE THAT YOU WERE ADVISED BY THE COMPANY IN WRITING TO CONSULT WITH AN ATTORNEY BEFORE SIGNING THIS RELEASE.

 

6.              No Modifications; Governing Law; Entire Agreement .  This Release cannot be changed or terminated orally, and no modification or waiver of any of the provisions of this Release is effective unless in writing and signed by all of the parties hereto.  The parties agree that this Release is to be governed by and construed in accordance with the laws of the State of Delaware. This Release sets forth the entire and fully integrated understanding between the parties with respect to the matters addressed herein, and there are no representations, warranties, covenants or understandings, oral or otherwise, that are not expressly set out herein.

 

7.              Miscellaneous .

 

(a)            Should any portion, term or provision of this Release be declared or determined by any court to be illegal, invalid or unenforceable, the validity or the remaining

 



 

portions, terms and provisions shall not be affected thereby, and the illegal, invalid or unenforceable portion, term or provision shall be deemed not to be part of this Release.

 

(b)            The parties agree that the failure of a party at any time to require performance of any provision of this Release shall not affect, diminish, obviate or void in any way the party’s full right or ability to require performance of the same or any other provision of this Release at any time thereafter.

 

(c)            This Release shall inure to the benefit of and shall be binding upon you, your heirs, administrators, representatives, executors, successors and assigns and upon the successors and assigns of the Company.

 

(d)            The headings of the paragraphs of this Release are for convenience only and are not binding on any interpretation of this Release.  This Release may be executed in counterparts.

 

IN WITNESS WHEREOF, each of the parties hereto acknowledges having read and understood the contents and effect of this Release and has executed this Release freely and with full authority duly given, all as of the date first above written.

 

[ Signature page follows ]

 



 

 

INTAC:

 

 

 

 

 

 

 

 

INTAC International, Inc.

 

 

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

Date:

                               

, 2008

 

 

 

 

 

 

 

 

HSWI:

 

 

 

 

 

HSW International, Inc.

 

 

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

Date:

                               

, 2008

 

 

 

 

 

 

 

 

YOU:

 

 

 

 

 

 

 

 

 

 (SEAL)

 

J. David Darnell

 

 

 

 

 

Date:

                               

,2008

 

 



 

EXHIBIT B

 

FORM OF CONSULTING AGREEMENT

 

INDEPENDENT CONTRACTOR AGREEMENT

 

THIS INDEPENDENT CONTRACTOR AGREEMENT (this “Agreement”), effective              , by and between HSW International, Inc. a Delaware corporation  with its principal place of business at One Capital City Plaza, 3350 Peachtree Rd., NE, Suite 1600,  Atlanta, Georgia 30326 (“HSWI”), and J. David Darnell  (hereinafter “Contractor”).  (Contractor and HSWI are each referred to herein as “Party” or “party” and collectively as the “Parties” or “parties”).

 

For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties mutually agree to enter into a Consulting Agreement as follows:

 

1.              Services .  Contractor will provide the consulting services (“Services”) to HSWI as described on Exhibit A attached hereto, in accordance with the specifications and timetable herein.  During the term hereof, Contractor will, in Contractor’s reasonable discretion, agree to provide services requested by HSWI in addition to those specifically described on Exhibit A (“Additional Services”).

 

2.              Term of Agreement .  The term of this Agreement (the “Term”) shall commence on August 1, 2008, and, unless otherwise terminated as provided herein, shall continue for six (6) months.

 

3.              Fees, Expenses and Payment .  In consideration for the Services:

 

(a)            HSWI shall pay Contractor the fee (“Fee”) of $20,000 per month during the Term.  Payments will be made net 30 days in arrears upon completion of services and will be paid upon receipt of an invoice from Contractor.  The invoice will include an updated status report on Contractor’s consulting efforts.

 

(b)            HSWI shall not be liable to Contractor for any expenses paid or incurred by Contractor unless otherwise agreed to and approved in advance in writing by HSWI (the “Expenses”). Any such Expenses shall be in connection with this Agreement and fully conform with HSWI’s then-current policies, as communicated from time to time.

 

(c)            Contractor will invoice HSWI for Expenses, which shall be due and payable within thirty (30) days of the invoice date.  Contractor will include these expenses as part of Contractor’s monthly Fee invoice, and shall include supporting documentation for such expenses.

 

(d)            Payroll taxes, including federal, state and local taxes, shall not be withheld or paid by HSWI on behalf of Contractor. Contractor shall not be treated as an employee for federal or state tax purposes with respect to the services performed under this agreement. Contractor shall be responsible to pay all taxes as mandated by law.

 



 

4.              Performance .  Contractor shall personally perform Contractor’s obligations hereunder in a workmanlike and professional manner, and shall not employ or utilize any other persons for the performance of such.  Any materials provided to HSWI by Contractor hereunder shall be Contractor’s original work, unencumbered by any third parties, unless expressly authorized in writing by HSWI on a case-by-case basis.  Contractor agrees to cooperate with HSWI on any matters related to the performance of services hereunder.

 

5.              Indemnification . Contractor agrees to indemnify and hold harmless HSWI and its directors, officers, agents and employees from and against any claims, liabilities, losses, damages, proceedings or actions (whether pending or threatened) related to or arising out of the Services and Additional Services, if any.  HSWI shall give reasonable notice to the other of any such claim, loss, action, damage, expense or other liability.  This Section 5 shall survive the termination of this Agreement.

 

6.              Notices .  All notices required by either Party under this Agreement shall be in writing, and shall be deemed to have been given on the date such noticed is presented personally, or transmitted by facsimile (receipt confirmed), two (2) business days after delivery by a nationally recognized courier service, or three (3) days after mailed registered or certified, return receipt requested, to the other Party at the following address , or such other address as a Party may designate by notice to the other Party:

 

If to HSWI:

HSW International, Inc.

 

Attn: Legal Department

 

One Capital City Plaza

 

3350 Peachtree Road, Suite 1600

 

Atlanta, Georgia 30326

 

 

If to Contractor:

J. David Darnell

 

Intac

 

12221 Merit Drive, Suite 600

 

Dallas, Texas 75251

 

7.              Ownership of Materials .

 

(a)            Contractor covenants and agrees that all of Contractor’s Work Product (as defined below) for HSWI, and all of the ideas and other intellectual property contained therein, shall be the sole and exclusive property of HSWI and HSWI shall maintain all worldwide right, title and interest therein. Contractor agrees (without further compensation) to execute any applications, agreements and instruments (including any assignment agreements and instruments) and to do all other things reasonably requested by HSWI, at HSWI’s expense (both during and after the Term of this Agreement) in order to vest more fully in HSWI all worldwide ownership rights in such Work Product, including, without limitation, United States and foreign patent or other proprietary rights and copyrights. For purposes hereof, “Work Product” shall mean all works of authorship created, conceived or developed by Contractor in the performance of Contractor’s consulting duties.

 



 

(b)            If any one or more of the Work Product are protectible by copyright and are deemed in any way to fall within the definition of “work made for hire,” as such term is defined in 17 U.S.C. § 101, such work shall be considered a “work made for hire,” the copyright of which shall be owned solely, completely and exclusively by HSWI. If any one or more of the aforementioned items are protectible by copyright and are not considered to be included in the categories of works covered by the “work made for hire” definition contained in 17 U.S.C. § 101, such items shall be deemed to be assigned and transferred by Contractor completely and exclusively to HSWI by virtue of the execution of this Agreement.

 

(c)            Contractor hereby waives any and all claims that he may have in any jurisdiction to “moral rights” or rights of “droit moral” with respect to the Work Product and acknowledges, confirms and agrees that HSWI, without the necessity of any further consideration or action on the part of HSWI or Contractor, shall have the right to make (or have others on HSWI’s behalf make) enhancements and derivative works of the same and that HSWI or its designee shall own all worldwide right, title and interest in and to all such enhancements and derivative works.

 

(d)            Upon completion or termination of this Agreement, Contractor agrees to return to HSWI all lists, books, records, company property, and Confidential Information (defined below) obtained in connection with HSWI’s business, and any copies made thereof.

 

8.      Relationship of the Parties .  During the Term, Contractor and any individual or entity hired by Contractor in connection with the performance of the Services will be an independent contractor and not HSWI’s employee for any purpose, including, but not limited to, the application of the Fair Labor Standards Act’s minimum wage and overtime provisions, the Federal Insurance Contribution Act, the Social Security Act, the Federal Unemployment Tax Act, the provisions of the Internal Revenue Code, and all federal, state and local laws and regulations.  Contractor understands that HSWI will not be responsible for withholding or paying any federal or state income, social security or other taxes in connection with any compensation paid under this Agreement, and Contractor agrees to pay all such taxes when due.  HSWI will provide Contractor with a Form 1099 to the extent required by law.  Contractor hereby agrees to indemnify and hold HSWI harmless from any and all claims, causes of action or other proceedings related to or resulting from Contractor’ s failure to pay taxes in compliance with applicable law.  Contractor further understands and agrees that Contractor and any individual or entity hired by Contractor in connection with the performance of the Services will not be entitled to any medical, disability, pension or other employment benefits or rights provided by HSWI (whether by agreement or by operation or law), including but not limited to group insurance, liability insurance, disability insurance, paid vacations, sick leave, retirement plans, hea lth plans, premium overtime pay, and the like.  In addition, HSWI will not provide worker’s compensation coverage for Contractor or its employees.  Because Contractor is an independent contractor, HSWI will have no obligations to pay Contractor or its employees and agents overtime compensation under the Fair Labor Standards Act, or to make any payments at any rate other than the rate agreed to in this Agreement.  It is Contractor’s sole responsibility to provide worker’s compensation coverage and, if applicable, pay any premium overtime rate, for any individual or entity hired by Contractor who is working on any services for HSWI.  Contractor agrees to provide HSWI with evidence of the payments and insurance required by this Agreement whenever requested.  During the Term, Contractor will retain sole and absolute discretion and judgment in the manner and means of carrying out the Services.  Contractor

 



 

further agrees that during the Term, he has a full opportunity to find other business (so long as such other business is not in violation of this Agreement), and that he will use a high level of skill necessary to perform the Services.  During the Term, Contractor will not have the authority to enter into any contract on behalf of HSWI or otherwise to bind HSWI to any agreement, and Contractor agrees not to hold himself out as having such authority unless expressly authorized in writing to do so, and HSWI will not be liable for any obligation incurred by Contractor during the Term.  During the Term, Contractor shall indemnify and hold HSWI harmless from all claims, losses, injuries or damages, and wages or any other form of compensation (including, without limitation, reasonable attorneys’ fees and costs) arising in connection with any claim, suit or proceeding alleging that Contractor has or had a relationship with HSWI other than an independent contracting relationship during the Term.

 

9.              Assignment .  Upon advance written notice HSWI may assign this Agreement in its entirety to a parent, subsidiary or successor in interest to the business of the party, provided such assignee is able to and does fulfill the obligations of the assignor.  Notwithstanding any such assignment, the assignor shall remain primarily liable to the other party for the assignee’s performance under this Agreement.  This Agreement may not be otherwise assigned or transferred.

 

10.            Termination .

 

a.              Termination by Notice .  At any time prior to the end of the Term, either Party hereto may terminate this Agreement by providing at least thirty (30) days advance written notice of termination to the other party (“Termination by Notice”).  Upon Termination by Notice, HSWI will pay Contractor only that portion of the  Fee due to Contractor for Services performed through the effective date of the termination and any pre-approved Expenses in accordance with Section 3, above.

 

b.              Termination for Cause .  At any time prior to the end of the Term, the HSWI may terminate this Agreement immediately and without advanced notice for “Cause.”  For purposes of this Agreement, “Cause” shall mean and include:  (i) Contractor’s material breach of this Agreement; (ii) Contractor’s commission of a felony or crime involving moral turpitude; (iii) any act by Contractor involving dishonesty in the performance of the Services, including, without limitation, fraud, misappropriation or embezzlement; (iv) Contractor’s repeated failure or refusal to perform the Services; or (v) any willful or grossly negligent act or omission by Contractor that is injurious to HSWI, including injury to HSWI’s reputation.  If HSWI terminates this Agreement for Cause, HSWI will pay Contractor only that portion of the Fee due to Contractor for Services performed through the effective date of the termination and any pre-approved Expenses in accordance with Section 3, above.

 

c.              Other Termination .  This Agreement shall terminate immediately upon Contractor’s death or “Disability.”  For purposes of this Agreement, “Disability” is defined as Contractor’s inability to perform the Services for a period of thirty (30) consecutive days.  If this Agreement is terminated due to Contractor’s death or Disability, HSWI will pay Contractor only that portion of the Fee due to Contractor for Services performed through the effective date of the termination and any pre-approved Expenses in accordance with Section 3, above.

 



 

11.            Confidential Information .  The terms set forth on Exhibit B, entitled “Confidential Information,” are incorporated herein by this reference.  Without limiting such Exhibit B, each of the parties hereto agrees that it will not, without the written consent of the other party in each instance, (i) use in advertising, publicity or otherwise (including, without limitation, on the Internet) the other party’s name, domain name, any trademark, trade name, symbol or any abbreviation or contraction thereof owned by or referring to that party; or (ii) represent, directly or indirectly, that any product or service offered by the party has been approved or endorsed by the other party.

 

12.            Covenant Not To Compete .  During the Term of this Agreement and for a period of six (6) months after its termination or completion, Contractor will not engage directly or indirectly as employee, consultant, manager, proprietor or solicitor for himself or others in a similar or competitive business which he is here contracted by HSWI to do and perform, in any city or state where or within which he shall have worked for HSWI under this Agreement.

 

13.            Non-Solicitation/Public Comments . Contractor agrees that during the term of this Agreement and for twelve months after the termination or expiration of this Agreement, Contractor shall not:

 

(a)    Solicit for employment and then employ any employee of HSWI or any of its affiliates or subsidiaries;

 

(b)    Make any public statement concerning HSWI, any of its affiliates or subsidiaries, employees, officers and directors unless such statement is previously approved by an officer of HSWI, except as required by law;

 

(c)    Disparage HSWI and its affiliated entities, or its and/or their owners, officers, directors, members, employees or agents, or its and/or their business, policies, practices or services, in any way whatsoever.

 

(d)    Induce, attempt to induce or knowingly encourage any Customer of HSWI or any of its affiliates or subsidiaries to divert any business or income from HSWI or its affiliates or subsidiaries or to stop or alter the manner in which they are then doing business with HSWI or any of its affiliates or subsidiaries. “Customer” shall mean any individual or entity that was or is a customer or client or whose business was actively solicited by HSWI or its affiliates or subsidiaries at any time, regardless of whether such Customer was generated, in whole or in part, by Contractor’s efforts.

 

14.            Entire Agreement .  These terms and conditions herein, including any Exhibits attached hereto, constitute the entire agreement between the Parties with respect to the subject matter hereof; all prior agreements, representations, statements, negotiations and undertakings, whether written or oral, are superseded hereby.  This Agreement may be supplemented, amended or revised only by a writing that is signed by each of the parties.

 

15.            Governing Law/Jurisdiction and Venue .  This Agreement shall be exclusively governed by and construed under the laws of the State of Delaware.

 

16.            Approval Signatures .  Signature by authorized representatives of the respective Parties listed below constitutes acceptance of and notice to proceed with the performance and

 



 

provision of the Services specified on Exhibit A .  No additional work relating to any other project or engagement than that described in this Agreement, shall be authorized without the express written agreement of both Parties hereto.

 

17.            Non Waiver .  The failure of either party to this Agreement to exercise any of its rights under this Agreement at any time does not constitute a breach of this agreement and shall not be deemed to be a waiver of such rights or a waiver of any subsequent breach.

 

18.            Compliance With Laws .  Contractor represents that he has complied and will continue to comply with all relevant federal, state and local laws and regulations.

 

19.            Severability .  If any part of this agreement is held to be unenforceable, the rest of this agreement shall nevertheless remain in full force and effect.

 

20.            Survival .  Contractor acknowledges and agrees that his obligations under Sections 5, 7, 8, 11, 12, and 13 of this Agreement will survive the termination of this Agreement regardless of the cause or manner of the termination.  Any waiver by HSWI of a breach of any provision of this Agreement will not operate as a waiver of any subsequent breach of that provision or any other provision of this Agreement.

 

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives.

 

 

CONTRACTOR:

HSWI:

 

 

 

 

 

 

J. David Darnell

HSW International, Inc.

 

 

 

 

 

 

 

 

 

 

By:

 

 

J. David Darnell

 

 

 

Title:

 

 

 

 

Date:

 

 

Date:

 

 

 



 

EXHIBIT A

 

Consulting Services

 

Contractor shall assist management and the accounting/finance group of HSWI with special projects and the transition of his former duties as appropriate but shall not function as an executive officer nor employee of HSWI nor retain liability as such.  In the event of any inconsistency between the terms of this Agreement and the terms of his Separation Agreement, the terms of the Separation Agreement shall control.

 



 

EXHIBIT B

 

Confidential Information

 

During the course of this relationship, it may be necessary or convenient for HSWI to divulge Confidential Information (as herein defined) to Contractor. If Confidential Information is disclosed by HSWI to Contractor, including any such disclosed prior to the effective date of this Agreement, then the following shall apply.

 

1.      The term “ Confidential Information ” means all non-public information that: (i) HSWI designates as being confidential information in connection with the disclosure of such information; or (ii) is of a sensitive or proprietary nature, including without limitation negotiations in progress, terms of agreements, financial data, customer lists, advertising, marketing and promotional plans, and business partner lists, including but not limited to trade secrets.

 

2.      Confidential Information shall not include any information that (i) is at the time of disclosure or subsequently becomes publicly available without Contractor’s breach of any obligations owed to HSWI pursuant to this agreement; (ii) becomes known to Contractor prior to HSWI’s disclosure of such information to Contractor; (iii) becomes or became known to Contractor from a source other than HSWI who to Contractor’s actual knowledge without any obligation of inquiry, obtained such information without a breach of an obligation of confidentiality owed to HSWI; or (iv) is independently developed by Contractor.

 

3.      Contractor shall retain in strict confidence all of HSWI’s Confidential Information and take reasonable security precautions, at least to the same extent as Contractor takes to protect Contractor’s own confidential information, to insure that all of Contractor’s and Contractor’s affiliates’ colleagues and employees hold in strict confidence and do not disclose to any third party any of HSWI’s Confidential Information during the Term of this Agreement and for five years thereafter.  Notwithstanding the foregoing, Contractor shall maintain the confidentiality of any trade secrets in perpetuity.

 

4.      If Contractor has any questions or uncertainties as to what constitutes Confidential Information, he shall consult with an executive officer of HSWI.

 

5.      Notwithstanding the foregoing restrictions, Contractor may use and disclose any Confidential Information to the extent required by an order of any court or other governmental authority, but in each case only after HSWI has been so notified and has had the opportunity, if possible, to seek and obtain reasonable protection for such information in connection with such disclosure.

 



 

6.      All Confidential Information shall remain the exclusive property of HSWI and no license or similar rights of any kind shall be or be deemed to have been created or implied by this Agreement.

 

7.      The provisions of this Exhibit B shall survive and be enforceable beyond the termination or completion of this agreement.

 

8.      Without limiting the remedies available to HSWI, Contractor acknowledges that a breach of any of the covenants contained in this Exhibit B may result in material irreparable injury to HSWI or any of its subsidiaries or affiliates for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, HSWI shall be entitled to obtain a temporary restraining order or a preliminary injunction or permanent injunction restraining Contractor from engaging in activities prohibited by this Exhibit B or such other relief as may be required to specifically enforce any of the covenants contained herein.

 

 


Exhibit 31.1

 

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

 

I, Henry N. Adorno, Vice Chairman of HSW International, Inc. certify that:

 

1.     I have reviewed this 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 quarterly 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;

 

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: May 15, 2008

 

/s/ Henry N. Adorno

 

Henry N. Adorno

Vice Chairman

 


Exhibit 31.2

 

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

 

I, J. David Darnell, Chief Financial Officer of HSW International, Inc., certify that:

 

1.     I have reviewed this 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 quarterly 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;

 

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: May 15, 2008

 

/s/ J. David Darnell

 

J. David Darnell

Chief Financial Officer

 


Exhibit 32

 

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

 

Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of HSW International, Inc. (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the three months ended  March 31, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the period presented in the Report.

 

 

 

May 15, 2008

May 15, 2008

 

 

 

 

By:

/s/ Henry N. Adorno

 

By:

/s/ J. David Darnell

 

Henry N. Adorno

J. David Darnell

 

Vice Chairman

Senior Vice President and 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.