Remark Holdings
HSW International, Inc. (Form: 10-Q, Received: 11/14/2008 16:03:08)


 
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 September 30, 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)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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.
 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o   No  x

At November 14, 2008, the number of common shares outstanding was 53,638,784.
 



 
 

 


TABLE OF CONTENTS

       
Page
   
PART I – FINANCIAL INFORMATION
   
         
Item 1.
 
Consolidated Financial Statements  (unaudited)
   
   
Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
 
1
   
Consolidated Statements of Operations for the three and nine months ended
   
   
September 30, 2008 and 2007
 
2
   
Consolidated Statements of Cash Flows for the nine months ended September 30, 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
 
18
         
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
25
         
Item 4T.
 
Controls and Procedures
 
25
         
   
PART II – OTHER INFORMATION
   
         
Item 6.
 
Exhibits
 
26
         
Signature
     
27

 
 

 

 
PART I – FINANCIAL INFORMATIO N

Item 1. Consolidated Financial Statements.

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

   
September 30,
   
December 31,
 
   
2008
   
2007
 
   
(Unaudited)
       
             
Assets
           
             
Current assets
           
Cash and cash equivalents
  $ 24,868,023     $ 3,476,673  
Trade accounts receivable
    35,493       23,212  
Prepaid expenses and other current assets
    684,756       942,588  
Assets held for sale
          19,988,029  
Total current assets
    25,588,272       24,430,502  
                 
Property and equipment, net
    677,401       293,182  
Licenses to operate in China
    10,000,000       10,000,000  
Other intangibles, net
    19,766        
Other assets
          21,476  
                 
Total assets
  $ 36,285,439     $ 34,745,160  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities
               
Accounts payable
  $ 573,323     $ 537,418  
Accrued expenses and other current liabilities
    541,639       561,247  
Advances from shareholder and affiliate
    113,288       72,927  
Liabilities held for sale
          6,163,131  
Total current liabilities
    1,228,250       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, 53,638,784 issued and
               
outstanding at September 30, 2008, and 49,306,107 issued and 46,306,107 outstanding
               
and December 31, 2007
    53,639       49,306  
Additional paid-in-capital
    97,860,892       85,980,746  
Accumulated other comprehensive income
    34,770       112,291  
Retained deficit
    (65,392,112 )     (52,245,064 )
Less: cost of treasury stock, 3,000,000 shares in 2007
          (8,986,842 )
Total stockholders’ equity
    32,557,189       24,910,437  
Total liabilities and stockholders’ equity
  $ 36,285,439     $ 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 September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Operating revenue
                       
Digital online publishing
  $ 11,056     $ 60,288     $ 86,734     $ 92,962  
Sales to affiliates
    105,180             202,328        
Total revenue
    116,236       60,288       289,062       92,962  
                                 
Cost of services
    224,861       365,374       790,816       910,880  
                                 
Gross loss
    (108,625 )     (305,086 )     (501,754 )     (817,918 )
                                 
Operating expenses
                               
Selling, general and administrative (including stock-based
                               
compensation expense of $1,189,689 and $1,343,055
                               
for the three months ended September 30, 2008 and 2007,
                               
respectively, and $4,041,714 and $4,845,097 for the nine
                               
months ended September 30, 2008 and 2007, respectively)
    3,987,151       3,080,636       12,772,433       8,723,361  
Depreciation and amortization
    62,186       27,862       147,048       37,373  
Total operating expenses
    4,049,337       3,108,498       12,919,481       8,760,734  
                                 
Loss from continuing operations before other income
                               
(expense) and income taxes
    (4,157,962 )     (3,413,584 )     (13,421,235 )     (9,578,652 )
                                 
Other income (expense)
                               
Interest income
    150,454             407,713        
Interest expense
          (11,156 )           (31,027 )
Total other income (expense)
    150,454       (11,156 )     407,713       (31,027 )
                                 
Loss from continuing operations before income taxes
    (4,007,508 )     (3,424,740 )     (13,013,522 )     (9,609,679 )
                                 
Income taxes
                       
                                 
Loss from continuing operations
    (4,007,508 )     (3,424,740 )     (13,013,522 )     (9,609,679 )
                                 
Loss from discontinued operations, net of income taxes
                (133,526 )      
                                 
Net loss
  $ (4,007,508 )   $ (3,424,740 )   $ (13,147,048 )   $ (9,609,679 )
                                 
Basic and diluted loss per share
                               
Loss from continuing operations
  $ (0.07 )   $ (342,474 )   $ (0.25 )   $ (960,968 )
Loss from discontinued operations
                       
Net loss per share
  $ (0.07 )   $ (342,474 )   $ (0.25 )   $ (960,968 )
                                 
Basic and diluted weighted average shares outstanding
    53,574,919       10       52,728,853       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)

   
Nine Months Ended September 30,
 
   
2008
   
2007
 
             
Cash flows from continuing operating activities:
           
Net loss from continuing operations
  $ (13,013,522 )   $ (9,609,679 )
Adjustments to reconcile net loss from continuing operations to net cash used in
               
continuing operating activities:
               
Depreciation and amortization
    147,048       37,373  
Stock-based compensation
    4,041,714       4,845,097  
Changes in operating assets and liabilities from continuing operations:
               
Accounts receivable
    (12,281 )     (26,791 )
Prepaid expenses and other current assets
    175,835       250,805  
Accounts payable, accrued expenses, and other liabilities
    396,936       665,969  
                 
Net cash used in continuing operating activities
    (8,264,270 )     (3,837,226 )
                 
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
    (8,785,700 )     (3,837,226 )
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (531,167 )     (96,712 )
Sale of INTAC Legacy Businesses
    (4,500,000 )      
Merger related costs, net
    (107,027 )     (75,000 )
Other assets
          (20,706 )
                 
Cash used in investing activities
    (5,138,194 )     (192,418 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock, net
    35,229,607        
Proceeds of advance from shareholder
          3,967,299  
                 
Cash provided by financing activities
    35,229,607       3,967,299  
                 
Net change in cash and cash equivalents
    21,305,713       (62,345 )
Impact of currency translation on cash
    (77,521 )     (7,288 )
Cash and cash equivalents at beginning of period, including $163,158
               
reclassified to assets held for sale
    3,639,831       233,262  
                 
Cash and cash equivalents at end of period
  $ 24,868,023     $ 163,629  

The accompanying notes are an integral part of these consolidated financial statements.
 
3

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

   
Nine Months Ended September 30,
 
   
2008
   
2007
 
             
Supplemental disclosure of cash flow information
           
Cash paid for taxes
  $     $  
Cash paid for interest
  $     $  
                 
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
September 30, 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.

In June 2008, we entered China’s online publishing 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 September 30, 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 acquisition is the Internet licenses intangible we used 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 September 30, 2008, we had approximately 5,000 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 launched our Internet website in China in June 2008.  We have hired Chinese personnel, received licenses to do business in China through the INTAC Merger and we have translated and localized 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.  In September 2008, we entered into a content license agreement with World Book, Inc. (“World Book”) whereby World Book granted to us a perpetual irrevocable limited license to publish World Book created content on the Internet.  World Book will create thousands of original Chinese-language articles providing information across a variety of topics by December 30, 2009.

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) an 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 used to enter the China market in June 2008.

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 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.
 
6


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 at 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). 

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, were 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.

 
7

 
 
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 September 30, 2008.  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 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 the June 2008 launch of our Chinese Internet platform.  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 September 30, 2008, all of HSWI’s assets were in our core Internet businesses and the sole asset we retained from the INTAC Merger is the Internet Licenses intangible we used to enter the Chinese markets in June 2008.

 
8

 

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 nine months ended September 30, 2008 are as follows:

   
Nine Months Ended
 
   
September 30, 2008
 
       
Revenues
  $ 38,849  
Loss from discontinued operations (before income taxes)
    (133,526 )
Loss from discontinued operations
  $ (133,526 )

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 ended 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.
 
 
9

 

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 subsidiary HSW Brasil - Tecnologia e Informação Ltda. (“HSW Brazil”), (3) HSW (HK) Inc. Limited, (4) Bonet (Beijing) Technology Limited Liability Company, and (5) BoWenWang Technology (Beijing) Limited Liability Company.  The equity of certain of these entities is partially or fully held by citizens of the country of incorporation to comply with local laws and regulations.  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”.

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 Brazil and China for the three months ended September 30, 2008, and 2007, were $0.8 million and $1.0 million, respectively.  Net losses from HSW Brazil and China for the nine months ended September 30, 2008, and 2007, were $2.5 million and $2.6 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 and nine months ended September 30, 2008, and 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 and nine months ended September 30, 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 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as with HSWI’s consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 or other actions associated with such ads; in the paid-for-impression model, 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”) 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.
 
 
10

 

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, revenue recorded for the three and nine months ended September 30, 2008 was approximately $116,000 and $289,000, respectively.  Revenue recorded for the three and nine months ended September 30, 2007 was approximately $60,000 and $93,000, respectively. 

As of September 30, 2008, our cumulative losses were $65.4 million which included non cash expenses of $21.1 million for stock-based compensation and $22.5 million goodwill write-off related to the February 29, 2008 INTAC Legacy Businesses disposition.  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.

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.

Reclassifications:

Certain reclassifications have been made to prior year financial information to conform to the current year presentation.

Stock Based Compensation:
 
We account for stock based compensation in accordance with Statement of Financial Accounting Standard (“SFAS”) 123(R), Share-Based Payment , which requires us to recognize expense related to the fair value of our stock-based compensation awards.
 
SFAS 123(R) 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 123, Accounting for Stock-Based Compensation .  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 (loss) as a component of stockholders’ equity.  Net gains and losses resulting from foreign exchange transactions are recorded in selling, general and administrative expenses.  Both currency translation and transaction losses during 2008 and 2007 were not material to our consolidated financial statements.
 
 
11

 

Recent Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, Fair Value Measurements .  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, except for non-financing assets and liabilities.  The adoption of SFAS 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 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 141(R), Business Combinations .  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.
  
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51 .  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.
 
 
12

 

5.  INCOME TAXES

The Company records income taxes pursuant to SFAS 109, Accounting for Income Taxes .  SFAS 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 and nine months ended September 30, 2008 and 2007.  Our effective rate, which is 0%, differs from the statutory federal rate of 35% and 34% because of our lack of taxable income and because of 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 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 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 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.

 
13

 

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, at an exercise price of $4.26 per share.   These options vest annually over three years ending March 10, 2011.

On May 28, 2008, we granted stock options covering 25,000 shares, at an exercise price of $3.80 per share.  These options vest annually over three years ending May 28, 2011.

On August 12, 2008, we granted stock options covering 125,000 shares, at an exercise price of $3.25 per share.  Of the 125,000 shares subject to the options granted, 100,000 vest on January 31, 2009 subject to achieving certain performance criteria, and 25,000 vest annually over three years ending August 12, 2011.

On September 22, 2008, we granted stock options covering 350,000 shares, at an exercise price of $3.68 per share.  These options vest on May 31, 2009.  The March 10, 2008, May 28, 2008, August 12, 2008 and September 22, 2008 stock option grants are collectively the “2008 Grants”.

On March 10, 2008, we 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.

On August 12, 2008, we granted 30,769 shares of restricted stock to six executives.  The grant date fair value was $3.25 per share.  The restricted stock grant vests on January 31, 2009, subject to achieving certain performance criteria.

As of September 30, 2008, unrecognized compensation expense relating to non-vested restricted stock approximated $115,000 and is expected to be recognized by January 31, 2009.

 
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The per share fair value of the stock options granted, estimated on the date of the grant, was $3.37 and $3.78 for the 2006 Grants and 2007 Grants, respectively, and a range of $1.00 to $2.04 for the 2008 Grants.  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 our stock and of similar entities.  The expected term of options represents the period of time that the options granted are expected to be outstanding.  We use the simplified method, or management’s judgment when unable to use the simplified method, to calculate expected term.  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 Grants
 
2007 Grants
 
2006 Grants
Expected volatility
50% – 75%
 
50%
 
50%
Expected life in years
4.0 – 6.0
 
6.0
 
5.6
Dividend yield
 
 
Risk free interest rate
2.37% – 3.32%
 
4.49%
 
4.83%
 
In accordance with SFAS 123(R), stock-based compensation cost is measured at the 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 and nine months ended September 30, 2008 was approximately $1.2 million and $4.0 million, respectively.  As of September 30, 2008, unrecognized compensation expense relating to non-vested stock options approximated $2.5 million and is expected to be recognized through 2011.  At September 30, 2008, no options had been exercised under this plan.
 
A summary of stock option activity and related information as of September 30, 2008, and changes during the nine months then ended is presented below:
 
             
Weighted
   
         
Weighted
 
average
   
         
average
 
remaining
 
Aggregate
   
Number
   
exercise
 
contract
 
intrinsic
Options
 
of options
   
price
 
term (yrs)
 
value
Outstanding at January 1, 2008
    6,683,056     $ 6.56        
Granted
    512,000       3.59        
Forfeited or expired
    (50,000 )     7.10        
Exercised
                 
Total outstanding at September 30, 2008
    7,145,056     $ 6.35  
7.9
 
$—
Options exercisable at September 30, 2008
    6,028,056     $ 6.54  
8.0
 
 —

The grant date fair value of options vested during the three and nine months ended September 30, 2008, is $8.1 million and $8.6 million, respectively.
 
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.  Subsequent to the merger, 250,000 INTAC stock options expired.  The following table provides a summary of the stock option activity of the remaining options as of September 30, 2008:

 
15

 

               
Weighted
       
         
Weighted
   
average
       
         
average
   
remaining
   
Aggregate
 
   
Number
   
exercise
   
contract
   
intrinsic
 
Options
 
of options
   
price
   
term (yrs)
   
value
 
Outstanding at January 1, 2008
    250,000     $ 5.49       2.8     $ 409,500  
Forfeited or expired
                       
Exercised
                       
Total outstanding at September 30, 2008
    250,000     $ 5.49       5.0     $  
Options exercisable at September 30, 2008
    250,000     $ 5.49       5.0     $  

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.

In conjunction with the merger, simultaneously with the assumption of the INTAC stock options and as discussed in Note 2, we issued warrants to purchase 500,000 shares of our common stock 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 September 30, 2008, there were 250,000 warrants outstanding.

On May 13, 2008, HSWI entered into a Separation Agreement with the Company’s former Chief Financial Officer (“CFO”) in conjunction with the CFO’s desire to retire.  This Agreement provided 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 was paid a lump sum severance payment of $200,000 upon termination as an employee in accordance with his employment contract, and allowed 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.

On April 3, 2008, the Company extended the stock option term for a member of the Company’s board of directors who was also a former member of INTAC’s board of directors.  The options were extended from a 7-year term to a 10-year term.  The change in contractual term was accounted for as a modification under SFAS 123(R), which resulted in an additional $78,000 of stock-based compensation expense, which was recognized immediately as the options were fully vested.
 
 
16

 

Earnings per Share

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Loss per share:
                       
Loss from continuing operations
  $ (4,007,508 )   $ (3,424,740 )   $ (13,013,522 )   $ (9,609,679 )
Loss from discontinued operations
                (133,526 )      
Net loss
  $ (4,007,508 )   $ (3,424,740 )   $ (13,147,048 )   $ (9,609,679 )
                                 
Weighted average shares outstanding
    53,574,919       10       52,728,853       10  
                                 
Basic and diluted loss per share
                               
Loss from continuing operations
  $ (0.07 )   $ (342,474 )   $ (0.25 )   $ (960,968 )
Loss from discontinued operations
                       
Net loss
  $ (0.07 )   $ (342,474 )   $ (0.25 )   $ (960,968 )
                                 
Weighted average shares outstanding
    53,574,919       10       52,728,853       10  
                                 
Dilutive stock options
                       
                                 
Total common shares and dilutive securities
    53,574,919       10       52,728,853       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%.  The notes payable balance was paid in full in 2007 and accordingly, there is no note payable outstanding at September 30, 2008.

From time to time, Capela purchases advertising space on our Brazilian website “Como Tudo Functiona”.  The revenue associated with these transactions is classified as “Sales to Affiliates” in the accompanying consolidated financial statements.  The Company recognized $105,180 and $202,328 of revenue from affiliates during the three and nine months ended September 30, 2008, respectively.

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

As of September 30, 2008, the Company has approximately $27,000 payable to China Trend Holdings Ltd., related to the INTAC Legacy Businesses disposition.  China Trend Holdings Ltd. 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, disposition expenses related to this transaction were to be split evenly between the Company and China Trend Holdings Ltd.  The Company withheld $200,000 of the purchase price to cover China Trend Holdings Ltd. estimated portion of disposition expenses.  As the Company makes disposition expense payments, half of those costs offset the advance from affiliate balance on the consolidated balance sheet.  Any remaining funds, $27,000 at September 30, 2008, will be released to China Trend Holdings, Ltd. once all disposition expenses have been paid.

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

Cautionary Statement Regarding Forward-Looking Information

The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the 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.  Relevant risks and uncertainties include those referenced in our filings with the SEC, and include but are not limited to: reliance on third parties for content; economic and industry conditions specific to Brazil and China, such as the state of the telecommunications and internet infrastructure in Brazil and China and uncertainty regarding protection of intellectual property in Brazil and China; challenges inherent in developing an online business in Brazil and China, including obtaining regulatory approvals and adjusting to changing political and economic policies; governmental laws and regulations, including unclear and changing laws and regulations related to the internet sector in China; general industry conditions and competition; general economic conditions, such as interest rate and currency exchange rate fluctuations; and restrictions on certain intellectual property under agreements with third parties.  We also urge you to carefully review the risk factors set forth in other documents we file from time to time with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2007.

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) 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

We completed the INTAC Merger 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.

 
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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”.
·  
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 September 30, 2008, Discovery, through its wholly owned subsidiary HSW, owned approximately 42.8% of our outstanding common stock.

Our Operations

Our initial focus is 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 believe that both China and Brazil represent significant, growing markets for our initial online publishing strategy.

We launched our Brazilian website in March 2007.  At September 30, 2008, we had approximately 5,000 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.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.  We recognized $116,236 and $289,062 of revenue during the three and nine months ended September 30, 2008, respectively.

In June 2008, we entered 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.  The website address is http://bowenwang.com.cn .  We have hired Chinese personnel, received licenses to conduct certain business in China and translated and localized our content for the China online publishing business.

 
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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.  In September 2008, we entered into a content license agreement with World Book, Inc. (“World Book”) whereby World Book granted to us a perpetual irrevocable limited license to publish World Book created content on the Internet.  World Book will create thousands of original Chinese-language articles providing information across a variety of topics by December 30, 2009.

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, 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 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 the June 2008 launch of our Chinese Internet platform.  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.

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 nine months ended September 30, 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).  As of September 30, 2008, all of HSWI’s assets were in our core Internet businesses and the sole asset we retained from the INTAC Merger is the Internet licenses intangible we used to enter the Chinese markets in June 2008.

 
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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 our operations for the three and nine months ended September 30, 2008 and 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 retained from INTAC were the indefinite-lived Internet Licenses intangible and no revenue was realized from this asset in 2007 or through the nine months ended September 30, 2008.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Operating revenue
                       
Digital online publishing
  $ 11,056     $ 60,288     $ 86,734     $ 92,962  
Sales to affiliates
    105,180             202,328        
Total revenue
    116,236       60,288       289,062       92,962  
                                 
Cost of services
    224,861       365,374       790,816       910,880  
                                 
Gross loss
    (108,625 )     (305,086 )     (501,754 )     (817,918 )
                                 
Operating expenses
                               
Selling, general and administrative
    3,987,151       3,080,636       12,772,433       8,723,361  
Depreciation and amortization
    62,186       27,862       147,048       37,373  
Total operating expenses
    4,049,337       3,108,498       12,919,481       8,760,734  
                                 
Loss from continuing operations before other income
                               
(expense) and income taxes
    (4,157,962 )     (3,413,584 )     (13,421,235 )     (9,578,652 )
                                 
Other income (expense)
                               
Interest income
    150,454             407,713        
Interest expense
          (11,156 )           (31,027 )
Total other income (expense)
    150,454       (11,156 )     407,713       (31,027 )
                                 
Loss from continuing operations before income taxes
    (4,007,508 )     (3,424,740 )     (13,013,522 )     (9,609,679 )
                                 
Income taxes
                       
                                 
Loss from continuing operations
    (4,007,508 )     (3,424,740 )     (13,013,522 )     (9,609,679 )
                                 
Loss from discontinued operations, net of income taxes
                (133,526 )      
                                 
Net loss
  $ (4,007,508 )   $ (3,424,740 )   $ (13,147,048 )   $ (9,609,679 )

Revenue

Revenue for the three and nine months ended September 30, 2008 of approximately $116,000 and $289,000, respectively, was generated in Brazil.  For the nine months ended September 30, 2008, approximately 87% of revenue was generated from paid-for-impression advertising and 13% was generated from pay-per-performance ads.  There was no China digital online publishing revenue during the three and nine months ended September 30, 2008 as the website in China was launched in June 2008.
 
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Cost of Services

Cost of services includes the ongoing third-party costs to translate, localize and enhance articles from English to Portuguese and Mandarin Chinese, as well as, costs incurred to acquire original articles written by third parties.  Portuguese article translation costs totaled $169,000 and $612,000 and Chinese translation costs totaled $47,000 and $163,000 for the three and nine months ended September 30, 2008, respectively.

Operations - Selling, General and Administrative Expenses

Our total selling, general and administrative   expenses increased by $1.0 million and $4.0 million for the three and nine months ended September 30, 2008, respectively, from the comparable periods in 2007.  The increase is primarily attributable to increased costs of establishing our operations related to the Brazil website, and launching the China website, as well as additional costs incurred for compliance and operation as a public company.  These increases over the third quarter of 2007 are primarily comprised of $0.5 million in personnel costs and $0.3 million in professional fees related to being a public company.  These increases over the first nine months of 2007 are primarily comprised of $1.8 million in personnel costs and $2.0 million in professional fees related to our initial public company registration efforts, operating as a public company, as well as continued investment in our platform and technology.  These increases are partially offset by a $153,000 and $803,000 decrease in stock-based compensation expense for the three and nine months ended September 30, 2008, respectively, from the comparable 2007 periods.

Other Income (Expense)

Other income (expense) increased approximately $162,000 and $439,000 for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007.  The increase in interest income reflects an increase in cash on hand resulting from the sale of our stock to certain institutional investors.  The decrease in interest expense is due to full payment on an affiliated party loan during the fourth quarter of 2007.

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 was 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.  The $0.5 million loss from discontinued operations was reduced by a $0.4 million gain upon final disposition on February 29, 2008.

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 high 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”) 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.

 
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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.  Additionally in 2008, restricted shares were granted to certain members of our Board of Directors and executives at the fair market value on the grant date.  As of September 30, 2008, no options had been exercised under the Plan.

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

SFAS 123(R) 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 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.  Stock-based compensation expense was $1.2 million and $1.3 million for the three months ended September 30, 2008 and 2007, respectively, and $4.0 million and $4.8 million for the nine months ended September 30, 2008 and 2007, respectively.

Long-Lived Assets Including Intangible Assets

We review property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of property and equipment is measured by a comparison of the carrying amounts to future net cash flows the assets are expected to generate.  The carrying value of the intangible asset is compared to the fair value in order to determine if an impairment exists.  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 142, Goodwill and Other Intangible Assets , we test intangible assets for impairment annually on December 31, or more frequently if events or changes in circumstances as defined in SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets , indicate that these assets may be impaired.

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 September 30, 2008, we had approximately 5,000 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 launched our Internet platform in China in June 2008.  We have hired Chinese personnel to manage our operations in Beijing and 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 Brazil and China, including up-front expenditures to create or acquire content.  We expect that most of these expenditures will be paid or under commitment before we begin to realize significant revenues.  We believe that our current cash balance and expected cash generated from future operations will be sufficient to fund operations for longer than the next twelve months.  If cash on hand 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.

 
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Cash and cash equivalents was $24.9 million at September 30, 2008, compared to $3.5 million at December 31, 2007.  The increase in cash is primarily attributable to the sale of our stock during the first quarter of 2008.

As of September 30, 2008, our cumulative losses were $65.4 million, which included non-cash expenses of $21.1 million for stock-based compensation and $22.5 million goodwill write-off related to the February 29, 2008 INTAC Legacy Businesses disposition.  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 previously disclosed, in the first quarter of 2008, we received an additional $33.4 million before expenses from the sale of our stock.

Cash flows from operations

Our net cash used in continuing operating activities during the nine months ended September 30, 2008 increased by $4.4 million compared to the prior year period.  The increase was due to increased funding requirements to support our operations in Brazil and China.  Net cash used in discontinued operating activities was $0.5 million for the nine months ended September 30, 2008.

Cash used in investing activities

During the nine months ended September 30, 2008, net cash used in investing activities was $5.1 million compared to $0.2 million in the same period of 2007.  Cash used in investing activities during the nine months ended September 30, 2008 reflects the purchases of property and equipment, as well as $4.5 million of cash used in conjunction with the sale of our INTAC Legacy Businesses.

Cash flows from financing activities

For the nine months ended September 30, 2008, net cash provided by financing activities was approximately $35.2 million versus $4.0 million for the comparable period of 2007.  The significant increase in the nine months ended September 30, 2008 is a direct result of the proceeds we received from the sale of our common stock during the first quarter.
 
 
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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 September 30, 2008, 99% of our cash was denominated in U.S. dollars.  The remaining 1% was denominated in Brazilian Reais, Chinese Rehminbi or Hong Kong Dollars.  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 currently significant.  We do not use financial instruments for trading purposes.  The net assets of our foreign operations at September 30, 2008, were approximately $0.4 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 we have 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.


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 concluded that our disclosure controls and procedures were effective as of September 30, 2008.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  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 September 30, 2008 that materially affected, or is reasonably likely to affect, our internal control over financial reporting.

 
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PART II – OTHER INFORMATION

Item 6. Exhibits.

Exhibit 3.1
 
Amended and Restated Certificate of Incorporation of HSW International, Inc. (filed as Exhibit 99.2 to the form 8-A filed on October 3, 2007 and incorporated herein by reference).
     
Exhibit 3.2
 
Second Amended and Restated Bylaws of HSW International, Inc. (filed as Exhibit 3.2 to the Form 8-K filed on December 18, 2007 and incorporated herein by reference).
     
Exhibit 10.14
 
Amendment No. 1 to Amended and Restated Consulting Agreement, dated as of August 23, 2006, between the HSW International, Inc. and Jeffrey T. Arnold (filed as Exhibit 10.14 to the Form 8-K filed on September 23, 2008 and incorporated herein by reference).
     
Exhibit 10.23
 
2008 Executive Compensation Plan (filed as Exhibit 10.23 to the Form 8-K filed on August 18, 2008 and incorporated herein by reference).
     
Exhibit 10.24†
 
Content License Agreement dated September 17, 2008 between HSW International, Inc. and World Book, Inc.
     
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.

_________________________________
† The registrant has requested confidential treatment with respect to certain portions of this exhibit.  Such portions have been omitted from this exhibit and have been filed separately with the United States Securities and Exchange Commission.
 
* This exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of the Section nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
 
 
26

 
 
SIGNATURE


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



 
HSW INTERNATIONAL, INC.
   
   
Date: November 14, 2008
By:
/s/ Shawn Meredith
 
 
Shawn Meredith
 
Chief Financial Officer
 
 
 
27

Exhibit 10.24
     
*Portions of this exhibit marked [*] are requested to be treated confidentially.
 
CONTENT LICENSE AGREEMENT
 
           This CONTENT LICENSE AGREEMENT (the “ Agreement ”) is entered into and effective September 17, 2008 (the “ Effective Date ”), by and between World Book, Inc. (“ World Book ”), a Delaware corporation with offices at 233 North Michigan Avenue, Suite 2000, Chicago, IL 60601, and HSW International, Inc. (“ HSWI ”), a Delaware corporation with offices at One Capital City Plaza, 3350 Peachtree Road, Suite 1600, Atlanta, Georgia  30326.
 
           WHEREAS , World Book owns or licenses certain articles and other materials including, without limitation, the Reference Content and Images content.
 
           WHEREAS , HSWI desires to Display certain Content on the HSWI Websites and World Book desires to license the Content for this use in accordance with the terms and conditions set forth herein.
 
           NOW, THEREFORE , in consideration of the mutual promises and covenants set forth below, the parties hereto agree as follows:
 
1.         DEFINITIONS .  Capitalized terms not otherwise defined herein shall have the meanings specified below.
 
1.1   Acquisition ” is defined in Section 11.8 hereof.
 
1.2   Payments/Advances ” is defined in Section 4.1(ii) hereof.
 
1.3   Affiliate ” means any distributor or franchisee of HSWI or any company or other entity worldwide, including without limitation corporations, partnerships, joint ventures, and limited liability companies in which HSWI directly or indirectly holds at least a 19% ownership, equity, control or financial interest and which HSWI intends to enjoy any of HSWI’s rights hereunder.  A list of Affiliates as of the Effective Date is attached hereto as Attachment A .   Attachment A may be modified from time to time upon notice by HSWI to reflect a revised list of Affiliates and each modified Attachment A shall be deemed incorporated herein by reference.
 
1.4   Affinity ” means the arrangement of Reference Content and Images into articles about a variety of subjects as agreed by HSWI and World Book in accordance with this Agreement and identified in detail in Schedule A .
 
1.5   Article ” is defined in Section 2.2(i) hereof.
 
1.6   Buy-Out Fee ” is defined in Section 4.2   hereof.
 
1.7   Competitors ” is defined in Section 11.8 hereof.
 
1.8   Competitors II ” is defined in Section 2.1(ii) hereof.
 

1.9   Confidential Information ” means any and all trade secrets, proprietary or confidential information of either party and includes, without limitation: (a) any information, software, material, data or business, financial, operational, customer, vendor, and other information disclosed by one party to the other, (b) the terms of this Agreement, and/or (c) the fact of the existence of this Agreement except as specifically permitted in Section   7 .   Confidential Information will not include information that the receiving party can prove:  (w) was already in such party’s possession prior to receipt; (x) was independently developed by such party; (y) was obtained from a third party who had the right to disclose such information to such party, and/or (z) was or became generally available to the public other than as a result of disclosure by such party.
 
1.10   Content ” means, collectively: (a) the Reference Content; (b) Translated Content; (c) any updates to any of the foregoing provided by World Book; and (d) World Book Derivatives. The term “Content” shall not include any HSWI Modifications.
 
1.11   Delivery Period ” means the following:
 
(i)         July 1, 2008 – December 30th, 2009
 
1.12   Display ” means to use, publicly display, publicly perform, provide a link to, provide the ability to download and/or print and otherwise make available on or through web sites.
 
1.13   Effective Date ” is defined in the preamble of this Agreement.
 
1.14   Encyclopedia ” means a tab or section of a website: (a) branded with the word “encyclopedia”; or (b) that consists solely of multiple unrelated Affinities as provided by World Book hereunder.
 
1.15   Excess Royalties ” is defined in Section 4.1(iii) hereof.
 
1.16   Exclusive ” shall mean World Book shall have no further right to grant to third parties the same or any other licenses to the Content in the Open Free Web and itself retains no such rights or other licenses.
 
1.17   Force Majeure Event ” is defined in Section 11.1 hereof.
 
1.18   HSWI Modifications ” means modifications to the Content made by or on behalf of HSWI or its Affiliates in accordance with this Agreement, except to the extent the HSWI Modifications are World Book Derivatives.
 
1.19   HSWI Websites ” means, collectively, the Chinese language website found at bowenwang.com.cn, and all other websites (be they Chinese language or non-Chinese language) owned or controlled by HSWI or its Affiliates whether presently existing or later developed, and all successor websites to any of the foregoing websites
 


1.20   Images ” means illustrative materials, including but not limited to charts, graphs, photographs, tables and renderings wholly owned by World Book and licensed to HSWI.
 
1.21   Intellectual Property Rights ” means any and all rights, titles and interests, whether foreign or domestic, in and to any and all trade secrets, patents, copyrights, service marks, trademarks, know-how, or similar intellectual property rights, as well as any and all moral rights, rights of droit moral, rights of privacy, publicity and similar rights of any type under the laws or regulations of any governmental, regulatory, or judicial authority, foreign or domestic.
 
1.22   Net Revenue ” means gross revenue less costs not to exceed [*] percent ([*]%) of such gross revenue, including reasonable third-party agency/ third-party advertising sales commissions and rebates and serving, bad debts and applicable taxes.
 
1.23   Open Free Web ” means all websites (i) through which content can be indexed by Google and/or other consumer search engines; (ii) through which content is openly accessible by the public free of charge, and/or (iii) that do not charge a subscription fee or other fee for access to the content of the website.
 
1.24   Reference Content ” means content created from various World Book digital databases, print products, outside reference sources or materials acquired by World Book and which shall be provided in simplified Chinese characters and shall consist of sixteen million (16,000,000) to [*] ([*]) Chinese characters.
 
1.25   Royalties ” means fees payable by HSWI to World Book and calculated on the basis set forth in Section 4.1 hereof.
 
1.26   Significant Breach ” means an uncured breach (pursuant to the cure provisions of Section 6.2(i) ) by HSWI of one or more of the following:
 
(i)         HSWI brands the Affinities with the word “Encyclopedia” and/or Displays the Affinities or the underlying Reference Content and/or Images as an Encyclopedia in breach of Section   2.2(iii) ;
 
(ii)         HSWI uses or Displays the World Book Brand to promote the Content in violation of Section 7.4 ;
 
(iii)        HSWI assigns this Agreement to a Competitor (as defined in Section 11.8 ) of World Book in violation of Section 11.8 ; and/or
 
(iv)        HSWI fails to make payments as required by Section 4 .
 
1.27   Translated Content ” means non-Chinese versions of the Affinities and/or the Reference Content, created pursuant to Section   2.3 .
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
1.28   Updating Services ” means that upon World Book’s update to or maintenance of the World Book Online Reference Center or the Reference Content, World Book will provide notice, a reference to the affected Articles, and the actual content of the update to HSWI so that HSWI can update and maintain the factual data in the Affinities.  Such services shall be of the scope and nature with which World Book updates and maintains its content in the normal course of its own updating and maintenance process.
 
1.29   World Book Brand ” is defined in Section 7.4 hereof.
 
1.30   World Book Derivatives ” means any modifications, updates or other derivative works to the Content based on other Content provided by World Book regardless of who performs such modifications, updates or other derivative works.
 
1.31   World Book Online Reference Center ” means World Book’s online product found at www.worldbookonline.com or any successor URL thereto.
 
2.   LICENSE GRANT .
 
2.1   License Grant and Restrictions .
 
(i)   License Grant .  Subject to the terms and conditions set forth herein, World Book hereby grants to HSWI, a perpetual, irrevocable limited license to use, copy, store, archive, distribute, transmit, modify (subject to Section 2.1(iv) ), and Display the Content, Images and Affinities in whole or in part, only on the HSWI Websites or in promotions in any media for the HSWI Websites.  The license to each component of the Content, Images and Affinities shall be subject to the term and exclusivity provisions set forth in this Section 2 .  The license to each component of the Content, Images and Affinities shall be supplemented by any additional license rights in this Section 2 , and in the event of any conflict with this Section 2.1 such other additional license rights in this Section 2 shall prevail.  
 
(ii)   Right to Sublicense .  World Book further grants HSWI the right to sub-license the Content, Images and Affinities to users of the HSWI Websites to view, to store, and to make reasonable copies of the Content, Images and Affinities to use such Content, Images and Affinities for non-commercial, private purposes, provided that HSWI sets forth the limited terms of such sublicense in writing in the HSWI Websites’ terms and conditions.  In addition, World Book grants HSWI the right to sub-license the Content for business development purposes, with no more than [*] ([*]%) of the Content being licensed to any single third party, and in limited, non-material usage in other mediums for promotional or public relations purposes.  HSWI may not sublicense the Content, Images or Affinities to any paid-subscription website which is an aggregator of third-party content (for the avoidance of doubt, such shall not include the
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
HSWI Websites).  Notwithstanding anything to the contrary herein, attached as Attachment B is a list of companies (the “ Competitors II ”)   which are competitors with World Book and to whom sublicense may be made only with prior written consent of World Book, which World Book may withhold at its sole discretion.  The Competitors II may be modified from time to time by notice to and approval of the other party, not to be unreasonably withheld.  HSWI shall provide World Book on or before June 30th and December 31st of each year with a list of third parties to whom sublicense hereunder has been made during such semiannum.
 
(iii)   No Other Rights .  Except as set forth herein, HSWI has no other right to sublicense the Content except with the advance written consent of World Book.  World Book retains all rights not specifically granted herein.
 
(iv)   Restrictions .  The Content and Images shall be available to Display on the HSWI Websites as one or more individual articles, via commercially available browsers using personal computers, mobile devices, kiosks, or other equipment.  HSWI may modify the Content, including using excerpts, for purposes of exercising its rights under this Agreement, including without limitation, to fit the format and the look-and-feel of the HSWI Websites, for promotion of the Content or HSWI Websites, for allowing third parties to sponsor certain Content, and to include links in the Content to HSWI Websites or third party websites; provided, however, HSWI may not edit, modify, or create derivative works from the Content for purposes of changing the substantive information contained in the Content, except (i) as otherwise approved by World Book in writing; or (ii) as otherwise expressly provided in this Agreement.  HSWI may not Display the Content or Images on any website which is pornographic.  HSWI may not translate the Content provided by World Book hereunder except as set forth in Section 2.3 or for purposes of performing updates.
 
(v)   Third Party Service Provider Rights .  HSWI may permit third party suppliers of services and facilities (including, without limitation, agents, consultants, host providers, data centers, outsource service providers, disaster backup and recovery service providers) to use the Content, Images and Affinities under the terms of this Agreement in support of HSWI exercising its rights under this Agreement.  HSWI also may designate one or more third party suppliers of services as HSWI’s agent for the administration of this Agreement and the receipt of services under this Agreement from World Book.
 
(vi)   Affiliate Rights . All rights granted to HSWI under this Agreement may be exercised by or through HSWI and/or its Affiliates.
 


 
2.2   Affinities .
 
(i)   Creation .  World Book shall create and deliver the Affinities in the Delivery Period.  The Affinities will be organized into stand-alone articles around specific topics (each, an “ Article ”) according to the taxonomy set forth in Schedule A .  Any given Affinity will consist of multiple Articles in the same subject area (i.e., history or life sciences).  There shall be at least one Article for each of those topics identified in Schedule B .  World Book shall create the Affinities based on Reference Content and other content owned or licensed by World Book, including without limitation, various World Book digital databases, print products, outside reference sources or materials acquired by World Book.  World Book will make reasonable efforts to cross check the Reference Content against other World Book products for factual accuracy.  World Book will create the Affinities according to the guidelines and instructions provided by HSWI from time to time, and agreed to by World Book whose consent shall not be unreasonably withheld, and according to the high quality standards for commercially published works, but in no event less than the standards of World Book for its own published works.  If an Affinity does not meet the requirements set forth herein, World Book will promptly revise the Affinity to meet such.  The total amount of material World Book makes available for all Affinities shall be no less than sixteen million (16,000,000) Chinese characters.  Additionally, the Affinities shall collectively contain at least sixteen thousand (16,000) Articles written in simplified Chinese characters, with an average and median number of words per Article of no less than one thousand (1,000) simplified Chinese characters.
 
(ii)   Delivery .  World Book will deliver at least [*] percent ([*]%) of the Articles in the Affinities on or before [*], and at least [*] percent ([*]%) on or before the [*].  World Book will deliver the Affinities according to the following schedule.
 
 
 
Date for Delivery
  Affinities for Delivery
    a)           [*]
  Prior to [*] b)           [*]
    c )           [*]
    a )           [*]
    b )           [*]
 
Prior to [*]
c )           [*]
    d )           [*]
    e )           [*]
   
f)            [*]
 
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

The format and media for the delivery of the Affinities, such as FTP or other mutually-agreeable method, and the XML schema and applicable metadata requirements are set forth in Schedule C .
 
(iii)   Scope of License for Affinity & Content Included in Affinity .  Subject to the terms and conditions of this Agreement, World Book grants HSWI the right to use, copy, store, archive, distribute, transmit, modify, translate (subject to Section 2.3 ), and Display the Content that comprises the Affinities as part of the Affinities, and the Affinities themselves, in any manner and in any digital media (and to sublicense such rights to third parties), provided that HSWI does not resell all or license substantially all of the Content for a fee to other content publishers.  The term of the license for the Content delivered to HSWI as part of the Affinities, and the Affinities themselves, shall be perpetual, Exclusive, and irrevocable.  World Book shall have no right to allow any party other than HSWI, including World Book, to publish, distribute, duplicate, or otherwise use the Reference Content that comprises the Affinities on the Open Free Web for purposes of creating any materials that are the same or similar to the Affinities and published online or in any other free digital media.  World Book shall have no right to use the Reference Content that comprises the Affinities on the Open Free Web except for purposes of performing its obligations to HSWI under this Agreement.  HSWI may not brand the Affinities with the word “Encyclopedia.”  Notwithstanding anything to the contrary in this Agreement, the Affinities or the underlying Reference Content and/or Images may not be Displayed as an Encyclopedia.  World Book shall not license to any third parties or otherwise use the Content as Affinities in any digital form during the term of the license.
 
(iv)   Scope of License for Images Included in Affinity .  World Book grants HSWI the right to use, copy, store, archive, distribute, transmit, modify, translate (subject to Section 2.3 ), and Display the Images as part of the Affinity.  The term of the license for the Images delivered to HSWI as part of the Affinity, shall be perpetual and irrevocable.  [*] ([*]) of the Images shall be Exclusive for the Open Free Web.
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

2.3   Translated Content .
 
(i)   Right to Create Translated Content .  Where rights permit, HSWI shall have the right to translate the Affinities for Display on the Open Free Web on HSWI Websites. HSWI shall, promptly after creating such Translated Content, provide World Book with a copy of the Translated Content in a format and manner acceptable to the parties.  HSWI shall advise World Book that it desires to translate the Affinities prior to commencing such translation and World Book shall notify HSWI if World Book does not hold the rights necessary to allow HSWI to translate any Articles or portions thereof.  HSWI may not Display the Translated Content as an Encyclopedia, and may not translate any Affinity for which a same subject-matter Affinity has not been previously licensed by HowStuffWorks, Inc.  Additionally, if HSWI translates any of the Affinities into English, HSWI’s sole rights to publish such English Translated Content shall be as a translation on those foreign language HSWI Websites which are not intended for English-language audiences.  Notwithstanding the foregoing, HSWI may not translate any Affinity into English for which a same subject Affinity has not been previously licensed by World Book to HowStuffWorks, Inc.
 
(ii)   Scope of License .  The term of the license for Translated Content shall be for a term of [*] ([*]) years from the time such Translated Content is first Displayed on an HSWI Website.  In addition, such license for Translated Content shall be Exclusive for Display on the Open Free Web.  At the end of such [*] ([*]) year period, HSWI shall have the right to renew the Agreement under materially the same terms or shall have an option to purchase the Translated Content outright to the extent rights permit and to the extent the parties mutually agree to terms for such sale.
 
2.4   Non-Display .  HSWI may, in its sole discretion, decide not to Display Content obtained from World Book.  If HSWI elects in a written notice to World Book that HSWI will not Display any such Content, notwithstanding anything to the contrary herein, the license to such Content shall be non-Exclusive.
 
2.5   Exclusivity .  Commencing on the Effective Date and continuing for eighteen (18) months, World Book shall work exclusively with HSWI to publish Chinese language Content for the Open Free Web and shall not itself, directly or indirectly, publish Chinese language Content for the Open Free Web.  For purposes of clarity, and except as otherwise set forth herein, World Book maintains the right to continue to publish Content and Images for its paid-subscription websites and other existing or new partner paid-subscription websites, provided that such are not within the definition of the Open Free Web.  Additionally commencing on the Effective Date and continuing for eighteen (18) months, World Book shall offer HSWI a right of first refusal to create any paid-subscription Chinese language websites, which do not exist as of the date hereof, using the Content on equal or better terms as agreed to between World Book and a third party.
 
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
2.6   Updating Services . World Book shall provide Updating Services to HSWI until the later of: (a) such time as World Book’s cessation of providing Updating Services to HowStuffWorks, Inc. or its successor, but such Updating Services shall be only for the same Content under this Agreement for which World Book is obligated to provide Updating Services to HowStuffWorks, Inc. or its successor; (b) such time as the Royalties paid in a given year are less than $[*]; or (c) [*] years from the Effective Date.  World Book shall provide the updates in the manner and form as set forth in Schedule D .  HSWI acknowledges that the Updating Services will not be automated and may require review and editing by HSWI.  Notwithstanding anything to the contrary, HSWI shall have the right to update the Content, Affinity and Images to correct errors or alleged errors (including, without limitation, errors of omission) in such or in response to third party claims related to the Content, Images or Affinity, and may use World Book content and data in connection with such updates.  World Book shall provide the Updating Services in English, and HSWI may translate any such updates into Chinese only.  Any authored content provided under the Updating Services, even when translated into Chinese by HSWI, shall be subject to the license herein for that Content which is being updated, and for the avoidance of doubt shall not be considered Translated Content.
 
3.   INTELLECTUAL PROPERTY RIGHTS; OWNERSHIP AND LICENSES .
 
3.1   World Book’s Ownership Rights .  World Book shall own all right, title and interest, including all Intellectual Property Rights, in and to the Content and in all Intellectual Property Rights in the Content, including, without limitation, World Book Brands (as defined in Section 7.4 ) and any derivative works to any of the foregoing.  HSWI shall have no proprietary interest in the Content, other than the license rights set forth herein.
 
3.2   HSWI’s Ownership Rights .  HSWI shall own all right, title and interest, including all Intellectual Property Rights, in and to (i) the HSWI Websites, their look and feel and the software code or web site infrastructure that it develops, licenses, or purchases to support Display of the Content; and (ii) the HSWI Modifications.
 
3.3   Documents .  Each party agrees (without further compensation) to execute any applications, agreements and instruments and to do all other things reasonably requested by the other party, at the requesting party’s expense (both during and after the term of this Agreement) in order to vest the rights provided in this Agreement.
 
4.   PAYMENT .
 
4.1   Royalties .
 
(i)   Royalty Rates .  HSWI shall pay to World Book Royalties calculated as a defined percentage of the Net Revenue received by HSWI from
 
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
advertising generated directly from Content by web pages containing Content or any portion of the Content provided by World Book to HSWI hereunder.  The Royalty rate shall be [*] percent ([* ] %) on the Affinities and Reference Content; and [*] percent ([*]%) on Translated Content.
 
(ii)   Payments/Advances .  During the applicable Contract Period, HSWI shall pay World Book non-refundable advances towards the Royalties in the amounts set forth below ( “ Payments/ Advances ”):
 
   
Due Date
  Amount
      [*]
 $ [*]
    [ * ]   [*]
 $ [*]
      [*]
 $ [*]
      [*]
 $ [*]
      [*]
 $ [*]
    [ * ]   [*]
 $ [*]
      [*]
 $ [*]
      [*]
 $ [*]
      TOTAL
 $ [*]
 
World Book will submit invoices to HSWI for the Payments/Advances at least [*] ([*]) days prior to the due date of such Payment/Advance, with the exception of the first payment which shall be due [*].  No Royalty payments will be due until the amount of the Royalties exceed the amount of the Payments/Advances described above for the development and delivery of the Affinities and Content licensed hereunder, and then Royalties will only be owed for any Royalties in excess of the amount of the Payments/Advances, as further detailed in the following Sub-Section.  If, subsequent to the Effective Date and prior to the end of 2009, HowStuffWorks, Inc. enters into one or more new agreements or modifies an existing agreement with World Book to license content with guaranteed payment obligations in such new agreement or in such modification totaling at least [*] dollars ($[*]) in additional fees, then each of HSWI’s [*], and [*], [*] shall be reduced from $[*] to $[*].  Nothing paid in Contract Period 1 pursuant to the [*], as amended shall be used to calculate guaranteed payment obligations hereunder.
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
 

 
 
(iii)   Calculation and Payment of Excess Royalties .  Royalties for Content will be calculated based on the Royalty rates set forth in Subsection (i) and compared to the Payments/Advances paid by HSWI during the term of this Agreement.  If such calculated Royalties exceed all Payments/Advances paid during the term of this Agreement (“ Excess Royalties ”), HSWI will pay such Excess Royalties within [*] ([*]) days after the end of the calendar year in which such Excess Royalties were earned.  Additionally, within [*] ([*]) days after the end of each calendar year, HSWI will provide to World Book a report of its Royalty calculations.  If Excess Royalties are earned before all Payments/Advances have been paid, the Excess Royalties will be deducted from future Payments/Advances.  In the event that Royalties are [*] than Payments/Advances, [*].  By way of example, if the calculated Royalties for 2008 are $[*].  Royalty statements shall be final and accepted by the parties unless World Book has, in good faith, notified HSWI of the amount and specific reasons for the dispute within [* ] ([* ] ) days from the date of the statement.
 
4.2   Buy-Out Option .  HSWI shall have the right at any time following [*] to pay World Book a single fee (the “ Buy-Out Fee ”), the payment of which would eliminate HSWI’s obligation to pay any further Excess Royalties.  The Buy-Out Fee shall be the [*] of: a) the amount [*], or b) an amount equal to [*] times the calculated Royalties of the most recent calendar year.
 
4.3   Taxes .  To the extent required, HSWI shall pay all sales, use or similar state or local taxes in connection with this Agreement, except for employment taxes or taxes related to World Book’s income.
 
5.   AUDIT .  HSWI shall maintain complete and accurate records to support and document the Royalties owed under this Agreement in accordance with generally accepted accounting principles consistently applied and to document compliance with the terms of this Agreement.  HSWI shall also provide reasonable assistance to World Book or its designated agent to conduct audits to confirm the payments hereunder.  Any such audit will be conducted upon [*] ([*]) days notice and during regular business hours, and shall be at [*] expense, unless such audit reveals a discrepancy of more than [*] percent ([*]%) in the total applicable amount reported by HSWI, in which case [*] shall pay for, or reimburse [*] the cost of, such audit.  Any such audit shall be conducted by an independent certified public accounting firm which is not engaged in performing other work for World Book or its affiliates; which agrees to enter into a confidentiality agreement with HSWI; and which is not compensated in any manner of contingency arrangements on the basis of its findings.  HSWI further agrees that until the expiration of [*] ([*]) year after the termination of this Agreement, HSWI will make available upon written request to World Book or any of its duly authorized representatives, this Agreement and books, documents, and records of HSWI that are necessary to verify the nature and extent of the revenue derived by HSWI from advertising related to the Content hereunder.  No more than [*] audit may be conducted in any [*] month period, unless the then-most-recent audit reveals a discrepancy of more than [*] percent ([*]%) in the total applicable amount reported by HSWI.
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
6.   TERM, EXTENSION, AND TERMINATION .
 
6.1   Term .
 
(i)   Term of Agreement .  This Agreement shall commence on the Effective Date and, except as set forth in Subsection (ii) , continue in full force and effect through the Delivery Period.
 
(ii)   Term of Licenses .  Notwithstanding Subsection (i) , certain license grants for Content, Images and Affinities extend beyond the expiration or earlier termination of this Agreement as set forth herein.  With respect to such Content, Images and Affinities, the terms and conditions of this Agreement shall continue to apply.
 
6.2   Termination for Cause or Bankruptcy .  This Agreement may be terminated by a party in the event of:
 
(i)   any material default in, or material breach of, any of the material terms and conditions of this Agreement by the other party, which default continues in effect after the defaulting party has been provided with written notice of default and sixty (60) days to cure such default;
 
(ii)   the commencement of a voluntary case or other voluntary proceeding seeking liquidation, reorganization or other relief with respect to the other party of its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect, that authorizes the reorganization or liquidation of such other party or its debt or the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property;
 
(iii)   the other party’s consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it; or
 
(iv)   the other party’s making a general assignment for the benefit of creditors; or the other party’s being adjudicated insolvent; or the other party taking any corporate action to authorize any of the foregoing.
 
6.3   Effect of Termination .  Upon the expiration or termination of this Agreement, HSWI shall pay World Book all amounts due and owing up to the date of termination, within [*] ([*]) days after such expiration or termination.  In addition, upon the expiration or termination of the applicable license, HSWI shall cease to Display the applicable Content that is not licensed under a perpetual license, return or destroy such Content within [*] ([*]) days after such expiration or termination at the direction of World Book, and, upon request by World Book, certify completion of the return or destruction in writing.  There shall be no effect upon the applicable Content that is licensed under a perpetual license.
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
6.4   Remedies .  The termination or expiration of this Agreement for any reason shall not affect either party’s rights or obligations arising prior to the effective date of such termination.  For purposes of clarification, upon a Significant Breach of this Agreement by HSWI which remains uncured, the rights to publicly use the World Book Brand as set forth in Section 7.4 may be revoked by World Book.  Notwithstanding anything in this Agreement to the contrary, the rights and remedies of the parties as set forth in this Agreement are not exclusive and are in addition to any other rights and remedies available to it at law or in equity.
 
6.5   Equitable Relief .  Each party acknowledges that its breach of certain provisions of this Agreement would cause irreparable injury to the other party for which monetary damages may not be an adequate remedy.  Accordingly, each party will be entitled to seek injunctions and other equitable remedies in the event of such a breach or threatened breach by the other party, or to seek specific performance of any provision hereof.  A party’s right to seek equitable relief shall not limit in any manner such party’s respective rights to seek other and/or additional remedies at law or in equity.
 
7.   CONFIDENTIALITY .
 
7.1   Protection of Confidential Information .  Solely for the purposes of the use and disclosure of Confidential Information, each of World Book and HSWI is defined to include such party’s directors, officers, employees, legal counsel, and consultants, with a need to know, and who are advised by such party of the confidential nature of the information or who are required to execute a nondisclosure agreement with the confidentiality terms at least as restrictive in all material respects as set forth in this Agreement.  Each party shall maintain all of the Confidential Information disclosed to it by the other party in strict confidence and will protect such information with the same degree of care that each party exercises with its own Confidential Information, but in no event less than a reasonable degree of care.  Each party may use the Confidential Information disclosed to it by the other party only to perform its obligations under this Agreement.  Except as provided in this Agreement, neither party shall use or disclose any Confidential Information disclosed to it by the other party without the express prior written consent of such disclosing party.  Neither party shall decompile, disassemble, or reverse engineer any Confidential Information disclosed to such party by the other party, and any information derived in violation of such covenant shall automatically be deemed Confidential Information.  All of the Confidential Information, and all copies, extracts, summaries and other reproductions thereof, shall be and remain the property of the respective disclosing party.  Upon written request or upon the expiration of this Agreement, all Confidential Information (and all copies thereof) will be returned to the party disclosing such or destroyed, with written certification thereof, except that one archival copy of written material to be kept confidential and segregated from the parties’ regular files may be retained by each party’s legal counsel solely for purposes of verifying compliance with this Agreement.
 
 

 
7.2   Disclosures Required by Law .  If a party is required to disclose Confidential Information received from the other party, by law or a governmental authority, including, without limitation, pursuant to a subpoena, court order, interrogatories, civil investigation demand, or other process, such Confidential Information may be disclosed, provided that the disclosing party, if permitted: (a) promptly notifies the other party  of the disclosure requirement; (b) cooperates with the other party’s efforts to resist or narrow the disclosure and to obtain an order or other reliable assurance that confidential treatment will be accorded Confidential Information; and (c) furnishes only Confidential Information that is legally compelled to be disclosed according to advice of its legal counsel.
 
7.3   Disclosures to Investors .  HSWI may disclose the contents of this Agreement to promote investment to potential financial investors or institutions, provided that such parties are subject to a confidentiality agreement at least as restrictive in all material respects as the confidentiality terms in this Agreement.
 
7.4   Use of World Book Brand .  Except as set forth herein, neither party shall issue any press releases or public statements concerning this Agreement or the subject matter herein without the other party’s prior written agreement, except as required by law.  World Book grants no right to HSWI for the use or Display of World Book’s brands, logos, service marks, or other trade names or trademarks of World Book (“ World Book Brand ”) in any manner, except as permitted in this Section.  HSWI may not use the World Book Brand to promote the Content on any of the HSWI Websites to existing or potential users.  HSWI may use World Book’s name solely to promote advertising or investment to potential advertising clients or financial investors or institutions.  Notwithstanding the foregoing, and subject to the terms and conditions of this Agreement, HSWI may identify the Content on the HSWI Websites and elsewhere as “From the editors of World Book, Inc.,” in simplified Chinese language as set forth in Schedule E or such other credit or credits as the parties hereto may mutually agree in writing, except for any of that Content which has been modified without the approval of World Book.  Additionally, World Book agrees to cooperate with HSWI’s issuing a press release within one month of entering into this Agreement which identifies HSWI as receiving exclusive content created by World Book and includes relevant quotes from World Book executives.  Any press releases issued by HSWI including the World Book Brand shall be previously approved in writing by World Book, which consent shall not be unreasonably withheld.
 
7.5   Required Disclosures .  Notwithstanding the foregoing, World Book acknowledges that HSWI is a publicly listed company subject to various disclosure regulations.  In connection with such, World Book acknowledges that HSWI may disclose in its regulatory filings, investor communications, and associated statements the World Book Brand and those aspects of this Agreement that HSWI reasonably finds are required to be disclosed by law or regulation.  HSWI will use its commercially reasonable efforts to consult with World Book on any such legally required public disclosures of the World Book Brand and this Agreement.
 

 
7.6   The restrictions on use and disclosure of Confidential Information under this Section 7 shall remain in effect [*] ([*]) years following disclosure of the Confidential Information; provided, however, for trade secrets such restrictions shall continue for so long as such information is deemed a trade secret under applicable law.
 
8.   REPRESENTATIONS AND WARRANTIES .
 
8.1   Mutual Representations .  Each party represents and warrants to the other party that:
 
(i)   It is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation and, if relevant under such laws, in good standing;
 
(ii)   It has the corporate and/or other legal capacity, authority and power to execute, deliver, and perform its obligations under this Agreement and any other document relating hereto to which it is a party, and has taken all necessary action to authorize such execution, delivery and performance;
 
(iii)   Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets;
 
(iv)   All governmental and other authorizations, approvals, consents, notices and filings that are required to have been obtained or submitted by it with respect to this Agreement and any other document relating hereto to which it is a party have been obtained or submitted and are in full force and effect and all conditions of any such authorizations, approvals, consents, notices and filings have been complied with;
 
(v)   Its obligations under this Agreement and any other document relating hereto or thereto to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms;
 
(vi)   There is not pending or, to its knowledge, threatened against it any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any other document relating hereto to which it is a party or its ability to perform its obligations under the same;
 
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.
 

 
(vii)   There is not pending or, to its knowledge, threatened against it any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator related to the violation of the Intellectual Property Rights of a third party related to the subject matter of this Agreement; and
 
(viii)   It is not relying upon any representations of the other party other than those expressly set forth in this Agreement or any other document relating hereto.
 
8.2   HSWI’s Representations and Warranties .  HSWI hereby represents and warrants that it has all applicable rights in and to the HSWI Websites and the HSWI Websites do not and will not infringe or misappropriate the Intellectual Property  Rights of any third persons.
 
8.3   World Book’s Representations and Warranties .  World Book hereby represents and warrants that:
 
(i)   it has all applicable rights in and to the Content and the Content does not and will not infringe or misappropriate any Intellectual Property Rights of any third persons;
 
(ii)   it will perform all services in a professional, diligent, and workmanlike manner;
 
(iii)   the Content will be free from material errors or inaccuracies;
 
(iv)   the Content will comply with all laws and regulations of the People’s Republic of China, including without limitation for distribution, publication and educational use as contemplated herein; and,
 
(v)   the Content as delivered by World Book is expressly approved by or within the applicable guidelines of the national government, any ministries, and provincial governments, as applicable, of the People’s Republic of China for distribution, publication and education use as contemplated herein.
 
In the event of a breach of the foregoing warranties, and without limitation to any other remedies of HSWI, World Book shall promptly remedy the breach at no additional cost or expense to HSWI.
 
8.4   Disclaimer .   EXCEPT AS SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES, INCLUDING, WITHOUT LIMITATION, AS TO THE ACCURACY OR COMPLETENESS OF THE CONTENT.  TO THE FULL EXTENT ALLOWED BY APPLICABLE LAW, EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR USE OR PURPOSE.
 

 
 

 
 
9.   INDEMNIFICATION .
 
9.1   HSWI   HSWI hereby agrees to defend, indemnify and hold harmless World Book and its officers, directors, agents, and employees from all costs, damages, liabilities and expenses (including reasonable attorneys fees) arising out of: (a) any third party claim or action alleging that any of the following infringe or misappropriate the Intellectual Property Rights of a third party: (i) the HSWI Websites or the HSWI trade dress utilized in the Display of the Content on the HSWI Websites; (ii) any Translated Content; or (iii) any HSWI Modifications and any World Book Derivatives independently created by or on behalf of HSWI; and/or (b) any third party claim or action arising out of HSWI’s material breach of this Agreement; provided that (i) World Book notifies HSWI promptly in writing of any such threat, claim, and/or proceedings related thereto; (ii) HSWI is given the opportunity to assume sole control over the defense and all related settlement negotiations, except that World Book shall have sole authority over approval of any settlement that admits fault or liability on the part of World Book; and, (iii) World Book provides HSWI with all reasonably necessary assistance, information and authority to perform the foregoing at HSW’s expense.  Notwithstanding anything to the contrary, the indemnity under this Section shall not apply to the extent the Content provided by World Book, or any accurate translation, contributes or results in an infringement or misappropriation of the Intellectual Property Rights of a third party.
 
9.2   World Book .  World Book hereby agrees to defend, indemnify and hold harmless HSWI, its Affiliates, and their officers, directors, agents, employees, advertisers, service providers, end users and related entities from all costs, damages, liabilities and expenses (including reasonable attorneys fees) arising out of: (a) any third party claim or action alleging that the Content, Affinities and Images (excluding any World Book Derivatives independently created by or on behalf of HSWI) in the manner delivered by World Book or as contemplated for HSWI’s use hereunder infringes or misappropriates any Intellectual Property Rights of any third party; and/or (b) any third party claim or action arising out of World Book’s material breach of this Agreement; provided that: (i) HSWI notifies World Book promptly in writing of any such threat, claim, and/or proceedings related thereto; (ii) World Book is given the opportunity to assume sole control over the defense and all related settlement negotiations, except that HSWI shall have sole authority over approval of any settlement that admits fault or liability on the part of HSWI; and, (iii) HSWI provides World Book with all reasonably necessary assistance, information and authority to perform the foregoing at World Book’s expense.
 

 
10.   LIMITATIONS OF LIABILITY .
 
10.1   EXCEPT FOR EITHER PARTY’S VIOLATION OF THE CONFIDENTIALITY OBLIGATIONS AND FOR EITHER PARTY’S INDEMNIFICATION OBLIGATIONS, NEITHER PARTY SHALL BE LIABLE UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY AMOUNTS IN EXCESS IN THE AGGREGATE OF THE AMOUNT OF THE FEES PAID OR PAYABLE UNDER THIS AGREEMENT.
 
10.2   EXCEPT FOR EITHER PARTY’S VIOLATION OF THE CONFIDENTIALITY OBLIGATIONS AND FOR EITHER PARTY’S INDEMNIFICATION OBLIGATIONS, IN NO EVENT WILL EITHER PARTY BE LIABLE FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, INDIRECT OR PUNITIVE DAMAGES, OR LOST PROFITS, REGARDLESS OF WHETHER SUCH LIABILITY IS BASED ON BREACH OF CONTRACT, TORT, STRICT LIABILITY, BREACH OF WARRANTIES, FAILURE OF ESSENTIAL PURPOSE OR OTHERWISE AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
 
11.   MISCELLANEOUS PROVISIONS .
 
11.1   Force Majeure .  In the event that either party is unable to perform any of its obligations under this Agreement or to enjoy any of its benefits because of any event beyond the control of the affected party including, but not limited to, natural disaster, acts of God, actions or decrees of governmental bodies or failure of communication lines (a “ Force Majeure Event ”), the party who has been so affected shall promptly give written notice to the other party and shall use commercially reasonable efforts to resume performance.  Upon receipt of such notice, all obligations under this Agreement shall be immediately suspended for the duration of such Force Majeure Event.
 
11.2   Notice .  All notices, demands, requests or other communications required or permitted under this Agreement will be deemed given when (i) personally delivered; (ii) upon receipt after being sent by registered U.S. mail, return receipt requested; or (iii) upon receipt after being sent by commercial overnight carrier service with tracking capabilities to the address of the party set forth below, or such other address as such party last provided to the other party by written notice.
 
World Book, Inc.
233 North Michigan Avenue
Suite 2000
Chicago, IL 60601
Attn: Chief Financial Officer
 

 
HSW International, Inc.
One Capital City Plaza
3350 Peachtree Road,
Suite 1600
Atlanta, Georgia  30326
Attn: Chief Executive Officer
 
with a copy to:
 
HSW International, Inc.
One Capital City Plaza
3350 Peachtree Road,
Suite 1600
Atlanta, Georgia  30326
Attn: General Counsel
 
11.3   Waiver .  Failure to enforce any term of this Agreement at any time for any period shall not be construed as a waiver of such rights.  No waiver shall be valid against any party hereto unless made in writing and signed by the party against whom enforcement of such waiver is sought and then only to the extent expressly specified therein.
 
11.4   Amendments .  No changes or modifications to any provision of this Agreement shall be effective unless made in writing and signed by both parties.
 
11.5   Severability .  In the event any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall be unimpaired and the parties will substitute a new enforceable provision of like economic intent and effect.
 
11.6   Governing Law .  This Agreement, the rights and obligations of the parties hereto, and any claims or disputes thereto, shall be governed by and construed in accordance with the laws of the State of New York without reference to conflict of law principles.  Venue for any proceedings not subject to arbitration under this Agreement shall be in the state and federal courts located in New York, New York.
 
11.7   Arbitration .  If any dispute arises under this Agreement that is not settled promptly in the ordinary course of business, the Parties shall seek to resolve any such dispute between them; first, by negotiating promptly with each other in face-to-face negotiations.  Any controversy or claim arising out of or relating to the interpretation, enforcement or breach of this Agreement that cannot be resolved within fifteen (15) business days (or such period as the Parties shall otherwise agree) through face-to-face negotiations shall be resolved by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association.  Arbitration shall be by a single arbitrator mutually acceptable to the parties and experienced in the matters at issue and selected by the Parties in accordance with the Commercial Arbitration Rules of the American Arbitration Association.   If the parties are unable to agree upon a single arbitrator, each party shall select an arbitrator and the two arbitrators shall select the third arbitrator.  The arbitration shall only be held in New York, New York.  The decision of the arbitrator shall be final and binding and may be enforced in any court having jurisdiction over the subject matter or either of the Parties, except that each party reserves all rights of appeal.  The arbitrator(s) shall determine to what extent each of the Parties shall bear the costs and expenses incurred in connection with any such arbitration proceeding (including reasonable attorneys’ fees and expenses) on the basis of the arbitrator’s assessment of the relative merits of the Parties’ positions.
 

 
11.8   Assignment .  Except as set forth herein, the parties shall not have any right or ability to assign, transfer, or sublicense any obligations or benefit under this Agreement without the prior written consent of the other party, which shall not be unreasonably withheld, except that, upon written notice to the other party, a party (i) may assign and transfer this Agreement and its rights and obligations hereunder to any third party who succeeds to substantially all its business, stock, or assets related to this Agreement, including, without limitation, to a Competitor (as defined below) (an “ Acquisition ”); and (ii) may assign or transfer any rights to receive payments hereunder.  Notwithstanding the foregoing, attached as Attachment C is a list of companies (the “ Competitors ”) to whom assignment of this Agreement outside of an Acquisition may be made only with prior written consent of the other party, which the other party may withhold at its sole discretion.  Such list of Competitors may be modified from time to time by notice to and approval of the other party, not to be unreasonably withheld.  In the event of an assignment of this Agreement in connection with an Acquisition of HSWI by any party other than a Competitor, notwithstanding anything to the contrary herein, such acquiring party’s license to the Content shall be expanded, to the extent the licenses are available, to include also such acquiring party’s paid subscription site(s) (if any) so long as: (i) such acquiring party’s paid subscription site(s) are not primarily marketed to the school and/or library market; and (ii) such Content is not provided to any Competitor or Competitor II; and (iii) the Royalties shall also be calculated as the applicable defined percentage of the Net Revenues received by HSWI from subscription fees generated on the paid-subscription websites where the Content is Displayed.  In addition, in the event of an Acquisition of HSWI by a Competitor of World Book, in no event shall the Content be provided to such Competitor or to any Competitor II.  Notwithstanding the foregoing, nothing in this Agreement shall be deemed to prevent an Acquisition of HSWI by any party, including without limitation a Competitor.
 
11.9   Additional Actions and Documents .  Each of the parties hereto hereby agrees to take or cause to be taken such further actions, to execute, deliver and file or cause to be executed, delivered and filed such further documents, and will obtain such consents, as may be necessary or as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement.  However, in no case will World Book be required to execute any lien UCC documentation for public filing.
 
11.10   Headings .  Section headings contained in this Agreement are inserted for convenience or reference only, shall not in no way affect the interpretation of any of the provisions herein.
 
11.11   Independent Contractors .  Notwithstanding any provision hereof, for purposes of this Agreement, each party shall be and act as an independent contractor and not as a partner, a joint venturer, or an agent of the other party, and shall not bind nor attempt to bind the other party in any way without prior written consent.
 
11.12   Survival .  Sections 1, 2, 3, 4, 6.1(ii), 6.3, 6.4, 6.5, 7, 8, 9, 10 and 11 shall survive the expiration or termination of this Agreement for any reason.
 
11.13   Entire Agreement .  This Agreement, including all Attachments hereto, constitutes the entire agreement of the parties and supersedes all proposals, oral or written, all negotiations, conversations, discussions, or agreements between the parties relating to the subject matter of this Agreement and all past dealing or industry custom.
 
[Signatures Follow On Next Page]
 


 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of its Effective Date.
 
AGREED:
 
HSW International, Inc.
 
WORLD BOOK, INC.
     
By:
  /s/ Bradley T. Zimmer         
By:
  /s/ Donald Keller
         
Name:
  Bradley T. Zimmer  
Name:
  Donald Keller
         
Title:
  Executive Vice President & General Counsel  
Title:
  VP & CFO
         
         

 

 

 

 

 

 

 
LIST OF ATTACHMENTS
 
Attachment A                                 List of HSWI Affiliates
 
Attachment B                                 List of Competitors II
 
Attachment C                                 List of Competitors
 
Schedule A                                     Taxonomy Schedule
 
Schedule B                                     Article Schedule
 
Schedule C                                     Format and Delivery Schedule
 
Schedule D                                     Updating Format
 
Schedule E                                     World Book Brand Translation
 

 


 
 

 

Attachment A
 
HSWI AFFILIATES
 
1.  
HSW (HK) Inc. Limited
2.  
HSWI (HK) Holdings, Ltd.
3.  
HSW Brasil – Tecnologia e Informacao, Ltda.
4.  
Bowenwang Technology (Beijing) Limited Liability Company
5.  
HSW (PRC) Co.
6.  
BoNet (Beijing) Technology Limited
7.  
Intac International, Inc.
8.  
[*]
9.  
[*]
10.  
[*]
11.  
[*]



[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
 

 

Attachment B
 
COMPETITORS II
           
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 
·[ *]
 

[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
 

 
 
Attachment C
 
COMPETITORS
 
World Book Competitors
 
·  
[*]
 
·  
[*]
 
·  
[*]
 
·  
[*]
 
·  
[*]
 
·  
[*]
 
·  
[*]
 
·  
[*]
 
·  
[*]
 

[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
 

 

Schedule A
 
AFFINITIES TAXONOMY
 
[*]
 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
 

 

Schedule B
 
ARTICLES
 
 
 
The topics for the Articles include the following, which may be expanded upon.
 
[* ]

 
[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
 

 

Schedule C
 
FORMAT & DELIVERY
 
To Be Determined
 

 

 
 

 

Schedule D
 
UPDATING FORMAT
 
Updating Services shall be provided in the following or substantially similar format, e-mailed by World Book to an address or addresses specified by HSWI.  Data for such will be provided, expressed as [*], in the form [*], or as World Book [*], in order by World Book [*].

[*]
[*]

[*]

[*]
[*]

[*]

[*]

[*]

[*]


[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 
 

 

Schedule E
 
WORLD BOOK BRAND TRANSLATION
 

 
[ * ]
 

[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.


 
Exhibit 31.1

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

I, Henry Adorno, certify that:

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

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

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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)) 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: November 14, 2008
 
/s/ Henry Adorno
 
Henry Adorno
Vice Chairman




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

I, Shawn Meredith, certify that:

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

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

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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)) 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: November 14, 2008
 
/s/ Shawn Meredith
 
Shawn Meredith
Chief Financial Officer


 
Exhibit 32

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

Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of HSW International, Inc. (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 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.



 
November 14, 2008
November 14, 2008
     
 
By:
/s/ Henry Adorno
 
By:
/s/ Shawn Meredith
 
 
Henry Adorno
Shawn Meredith
 
Vice Chairman
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.