Remark Media
HSW International, Inc. (Form: 10-Q, Received: 11/16/2009 17:14:33)
 


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, 2009

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  x   No o

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


 
 

 

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

At November 16, 2009, the number of common shares outstanding was 53,698,292.
 



 
 

 


TABLE OF CONTENTS

   
Page
 
PART I – FINANCIAL INFORMATION
 
     
Item 1.
Condensed Consolidated Financial Statements
 
 
Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited)
1
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)
2
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited)
3
 
Notes to Condensed Consolidated Financial Statements (unaudited)
4
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
17
     
Item 4.
Controls and Procedures
17
     
 
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
18
     
Item 1A.
Risk Factors
18
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
29
     
Item 3.
Defaults Upon Senior Securities
29
     
Item 4.
Submission of Matters to a Vote of Security Holders
29
     
Item 5.
Other Information
29
     
Item 6.
Exhibits
30
     
Signature
 
31

 
 
 

 


PART I – FINANCIAL INFORMATIO N

Item 1. Condensed Consolidated Financial Statements

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

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
             
Assets
           
             
Current assets
           
Cash and cash equivalents
  $ 11,343,371     $ 18,020,159  
Trade accounts receivable, net
    39,802       103,020  
Prepaid expenses and other current assets
    659,043       1,660,097  
Deferred charges
    555,329        
Deferred tax asset
    25,147        
Total current assets
    12,622,692       19,783,276  
                 
Property and equipment, net
    559,032       727,311  
Licenses to operate in China
    2,150,000       2,150,000  
Goodwill
          1,972,944  
Intangibles, net
    22,203       1,676,122  
Assets held for sale (see note 7)
    3,569,298        
Total assets
  $ 18,923,225     $ 26,309,653  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities
               
Accounts payable
  $ 775,388     $ 554,673  
Accrued expenses and other current liabilities
    634,282       322,094  
Advances from shareholder and affiliate
    83,836       83,044  
Total current liabilities
    1,493,506       959,811  
                 
Deferred tax liability
    562,647       873,420  
                 
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, 53,698,292 and 53,638,784
               
issued and outstanding at September 30, 2009 and December 31, 2008, respectively
    53,699       53,639  
Additional paid-in-capital
    100,297,798       98,606,934  
Accumulated other comprehensive income (loss)
    45,185       (1,126 )
Accumulated deficit
    (83,529,610 )     (74,183,025 )
Total stockholders’ equity
    16,867,072       24,476,422  
Total liabilities and stockholders’ equity
  $ 18,923,225     $ 26,309,653  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
1

 

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Operating revenue
                       
Social media
  $ 48,896     $     $ 173,996     $  
Digital online publishing
    42,171       11,056       131,555       86,734  
Sales to affiliates
          105,180             202,328  
Total revenue
    91,067       116,236       305,551       289,062  
                                 
Cost of services
    393,267       224,861       1,156,685       790,816  
                                 
Gross margin
    (302,200 )     (108,625 )     (851,134 )     (501,754 )
                                 
Operating expenses
                               
Selling, general and administrative (including stock-based
                               
compensation expense of $334,675 and $1,189,689 for
                               
the three months ended September 30, 2009 and 2008,
                               
respectively, and $1,690,924 and $4,041,714 for the nine
                               
months ended September 30, 2009 and 2008, respectively)
    2,713,644       3,987,151       8,731,057       12,772,433  
Depreciation and amortization
    123,265       62,186       360,824       147,048  
Total operating expenses
    2,836,909       4,049,337       9,091,881       12,919,481  
                                 
Operating loss
    (3,139,109 )     (4,157,962 )     (9,943,015 )     (13,421,235 )
                                 
Other income
                               
Interest income
    11,160       150,454       42,910       407,713  
Other income
                160,000        
Total other income
    11,160       150,454       202,910       407,713  
                                 
Loss from continuing operations before income taxes
    (3,127,949 )     (4,007,508 )     (9,740,105 )     (13,013,522 )
                                 
Income tax benefit
    393,520             393,520        
                                 
Loss from continuing operations
    (2,734,429 )     (4,007,508 )     (9,346,585 )     (13,013,522 )
                                 
Loss from discontinued operations, net of income taxes
                      (133,526 )
                                 
Net loss
  $ (2,734,429 )   $ (4,007,508 )   $ (9,346,585 )   $ (13,147,048 )
                                 
Basic and diluted loss per share
                               
Loss from continuing operations
  $ (0.05 )   $ (0.07 )   $ (0.17 )   $ (0.25 )
Net loss per share
  $ (0.05 )   $ (0.07 )   $ (0.17 )   $ (0.25 )
                                 
Basic and diluted weighted average shares outstanding
    53,618,292       53,574,919       53,617,163       52,728,853  

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


 
2

 

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

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Cash flows from operating activities:
           
Net cash used in continuing operating activities
  $ (6,598,719 )   $ (8,264,270 )
Net cash used in discontinued operating activities
          (521,430 )
Cash used in operating activities
    (6,598,719 )     (8,785,700 )
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (103,564 )     (531,167 )
Acquisitions, net of cash
    (15,042 )      
Sale of INTAC legacy businesses
          (4,500,000 )
Merger related costs, net
          (107,027 )
Cash used in investing activities
    (118,606 )     (5,138,194 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock, net
          35,229,607  
Cash provided by financing activities
          35,229,607  
                 
Net change in cash and cash equivalents
    (6,717,325 )     21,305,713  
Impact of foreign currency translation on cash
    40,537       (77,521 )
Cash and cash equivalents at beginning of period
    18,020,159       3,639,831  
Cash and cash equivalents at end of period
  $ 11,343,371     $ 24,868,023  
                 
                 
   
Nine Months Ended September 30,
 
    2009     2008  
                 
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 condensed consolidated financial statements.

 
3

 

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


1.  DESCRIPTION OF BUSINESS

Overview

HSW International, Inc. (the “Company”, “HSW International” or “HSWI”) is an online publishing company that develops and operates Internet businesses focused on providing consumers around the world with locally relevant, high quality information and ways to connect with each other.  Our international websites published under the HowStuffWorks brand provide readers in China and Brazil with thousands of articles about how the world around them works, serving as destinations for credible, easy-to-understand reference information.  HSW International is the exclusive licensee in China and Brazil for the digital publication of translated content from HowStuffWorks.com, a subsidiary of Discovery Communications, Inc., and in China for the digital publication of translated content from World Book Inc., publishers of World Book Encyclopedia.  The DailyStrength brand, which we acquired on November 26, 2008, helps hundreds of thousands of readers share information and support on www.dailystrength.org , a comprehensive health-related social media website.   We generate revenue primarily through the sale of online advertising on our websites.
 
As discussed further in our subsequent events note, on October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare, Inc. ("Sharecare").  As a result of these transactions, the Company received an equity stake in Sharecare, sold substantially all of the assets of its Daily Strength subsidiary to Sharecare, agreed to provide management and website development services to Sharecare, and received a limited license to use the Sharecare web platform for its own businesses.  Additionally, the Company issued a promissory note to Sharecare, the majority of which has been offset by services the Company provided to Sharecare prior to the consummation of the transaction.  Finally, Sharecare assumed the potential earn-out payment of up to $3.525 million under the merger agreement by which the Company acquired Daily Strength.  We entered into each of these simultaneously. 
 
Liquidity Considerations
The global financial downturn continues to have a negative effect on the demand for advertising in general, including online advertising.  Economic uncertainty has had and might continue to have a direct impact on our revenue as orders for online advertising have declined and our typical advertiser is spending less per order than in the prior year.  Also, our businesses in Brazil and China, which were launched in the past several years, are still in an early growth stage as the related websites continue to build towards a critical mass of traffic volume.  In consideration of projected market conditions and near-term revenue expectations, we implemented cost reductions at the end of our fourth quarter of 2008 to reduce headcount and better align our costs with our 2009 initiatives.  We consistently monitor our cash position to make adjustments as we believe necessary to maintain our operational objectives of funding ongoing operations and continuing to make technological investments in our websites and their respective brands.

The Company received a notice from the Nasdaq Stock Market indicating that it no longer complies with the requirements of Nasdaq Marketplace Rule 5450(a)(1) for continued listing on the Nasdaq Global Market.  The Company has 180 calendar days, or until March 15, 2010, in which to regain compliance with this listing rule, which requires that shares of HSWI’s stock maintain a minimum bid price of $1.00 per share.  The Company is working on plans to regain compliance with Nasdaq Marketplace Rule 5450(a)(1).


2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements from continuing operations include the accounts of HSWI and our subsidiaries (1) HSW Brasil - Tecnologia e Informação Ltda., (2) HSW (HK) Inc. Limited, (3) Bonet (Beijing) Technology Limited Liability Company, (4) BoWenWang Technology (Beijing) Limited Liability Company, and (5) Daily Strength, Inc.  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.  


 
4

 

The accompanying interim condensed consolidated financial statements for the three and nine months ended September 30, 2009, and 2008 are unaudited.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for financial information have been omitted pursuant to the rules and regulations of Article 10 of SEC Regulation S-X.  In the opinion of management, these condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated.  The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  Operating results for the three and nine months ended September 30, 2009, are not necessarily indicative of results that may be expected for any other future interim period or for the year ending December 31, 2009.  You should read the unaudited condensed consolidated financial statements in conjunction with Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as with HSWI’s consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

In June 2009, the FASB issued authoritative guidance that establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP in the United States.  This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  All GAAP references have been updated to comply with the new guidance.

In June 2009, the FASB issued authoritative guidance that revises the approach to determining the primary beneficiary of a variable interest entity (“VIE”) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE.  This guidance is effective for fiscal years beginning after November 15, 2009 (January 1, 2010 for us), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  We are currently evaluating the effect of adopting this guidance.

In May 2009, the FASB issued authoritative guidance for subsequent events.  This new guidance establishes general standards for disclosure of the date events that occur after the balance sheet date but before the report is issued or available to be issued. This requirement is effective for statements issued for interim and annual periods ending after June 15, 2009.  Entities are required to disclose the date through which subsequent events were evaluated.  Public entities must evaluate subsequent events through the date that financial statements are issued.  Accordingly, we have evaluated subsequent events through November 16, 2009, the date we issued this Quarterly Report on Form 10-Q.

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

In April 2009, the FASB issued authoritative guidance that requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements.  This guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted.  The Company did not have financial instruments as of September 30, 2009, therefore, the Company is not impacted by this guidance.

In June 2008, the FASB issued authoritative guidance that clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method.  This guidance is effective for fiscal years beginning after December 15, 2008 (January 1, 2009 for us) with early adoption prohibited.  The adoption of this pronouncement did not have an impact on net loss per share for any periods presented.

In February 2008, the FASB issued authoritative guidance that delayed the effective date for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until January 1, 2009.  This guidance 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.  The adoption of this guidance, as of January 1, 2009, did not have a material impact on our condensed consolidated financial statements.


 
5

 

In December 2007, the FASB issued authoritative guidance that 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.  This guidance 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, this guidance 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.  This guidance is effective for fiscal years beginning after December 15, 2008 with early adoption prohibited.  The adoption of this guidance, as of January 1, 2009, did not have an impact on our condensed consolidated financial statements.

In December 2007, the FASB issued authoritative guidance that 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.  This guidance is effective for fiscal years beginning on or after December 15, 2008 with early adoption prohibited.  The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.


3.  SEGMENTS

Current authoritative guidance establishes standards for reporting information about operating segments.  This standard requires segmentation based on our internal organization and reporting of revenue and operating income based upon internal accounting methods.  Our financial reporting systems present various data for management to operate the business, including internal profit and loss statements.  The segments are designed to allocate resources internally and provide a framework to determine management responsibility.  Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.  Because of our integrated business structure, operating costs included in one segment can benefit other segments, and therefore these segments are not designed to measure operating income or loss directly related to the products included in each segment.  Reconciling amounts include adjustments to conform with U.S. GAAP and corporate-level activity not specifically attributed to a segment.  Corporate expenses include, among other items: corporate-level general and administration costs, technology costs and on-going maintenance charges; share-based compensation expense related to stock and stock option grants; depreciation and amortization expense; interest expense and income; and charges related to acquired content not yet published on our sites.

The Company has historically conducted business in two operating segments: (1) Social Media; and (2) Digital Online Publishing.  Our Social Media segment was comprised of our DailyStrength operations, which generate revenues from the advertisers based primarily in the United States.  Our Digital Online Publishing segment consists of our websites in Brazil and China and generates revenues from advertisers based in the respective countries.

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

   
Social
   
Digital Online
             
   
Media
   
Publishing
   
Corporate
   
Total
 
                         
Three Months Ended September 30, 2009
                       
Revenue
  $ 48,896     $ 42,171     $     $ 91,067  
                                 
Operating loss
  $ (347,831 )   $ (486,046 )   $ (2,305,232 )   $ (3,139,109 )
Interest income
                11,160       11,160  
Income tax benefit
                393,520       393,520  
Loss from continuing operations
                          $ (2,734,429 )


 
6

 


   
Social
   
Digital Online
             
   
Media
   
Publishing
   
Corporate
   
Total
 
                         
Three Months Ended September 30, 2008
                       
Revenue
  $     $ 116,236     $     $ 116,236  
                                 
Operating loss
  $     $ (836,967 )   $ (3,320,995 )   $ (4,157,962 )
Interest income
                150,454       150,454  
Loss from continuing operations
                          $ (4,007,508 )


   
Social
   
Digital Online
             
   
Media
   
Publishing
   
Corporate
   
Total
 
                         
Nine Months Ended September 30, 2009
                       
Revenue
  $ 173,996     $ 131,555     $     $ 305,551  
                                 
Operating loss
  $ (991,222 )   $ (1,387,644 )   $ (7,564,149 )   $ (9,943,015 )
Interest income
                42,910       42,910  
Other income
    160,000                   160,000  
Income tax benefit
                393,520       393,520  
Loss from continuing operations
                          $ (9,346,585 )


   
Social
   
Digital Online
             
   
Media
   
Publishing
   
Corporate
   
Total
 
                         
Nine Months Ended September 30, 2008
                       
Revenue
  $     $ 289,062     $     $ 289,062  
                                 
Operating loss
  $     $ (2,502,872 )   $ (10,918,363 )   $ (13,421,235 )
Interest income
                407,713       407,713  
Loss from continuing operations
                          $ (13,013,522 )


   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Total assets:
           
Social media (see note 7)
  $ 3,608,972     $ 3,784,945  
Digital online publishing
    578,879       731,371  
Business segments
    4,187,851       4,516,316  
Corporate
    14,735,374       21,793,337  
Total assets
  $ 18,923,225     $ 26,309,653  

Of the $3,608,972 Social Media assets as of September 30, 2009, $3,569,298 have been classified as assets held for sale in the accompanying condensed consolidated balance sheet.

 
7

 

4.  STOCKHOLDERS’ EQUITY

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 March 25, 2009, we granted 80,000 shares of restricted stock to four members of the Board of Directors.  The grant date fair value was $0.18 per share.  The restricted stock vests on December 31, 2009.  As of September 30, 2009, unrecognized compensation expense relating to non-vested restricted stock approximated $5,000 which we expect to recognize by December 31, 2009.

In accordance with current authoritative guidance, we measure stock-based compensation cost at the grant date based on the fair value of the award, and recognize it as an expense over the requisite service period.  Stock-based compensation expense for the three months ended September 30, 2009 and 2008 was approximately $0.3 million and $1.2 million, respectively.  Stock-based compensation expense for the nine months ended September 30, 2009 and 2008 was approximately $1.7 million and $4.0 million, respectively.  As of September 30, 2009, unrecognized compensation expense relating to non-vested stock options approximated $0.1 million which we expect to recognize through November 2011.  During the three and nine months ended September 30, 2009, no options were granted, forfeited, expired or exercised.  Through September 30, 2009, no options had been exercised under the Plan.
 
The grant date fair value of options vested during the three and nine months ended September 30, 2009, was $1.3 million and $2.3 million, respectively.
 
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,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Loss per share:
                       
Loss from continuing operations
  $ (2,734,429 )   $ (4,007,508 )   $ (9,346,585 )   $ (13,013,522 )
Loss from discontinued operations
                      (133,526 )
Net loss
  $ (2,734,429 )   $ (4,007,508 )   $ (9,346,585 )   $ (13,147,048 )
                                 
Weighted average shares outstanding
    53,618,292       53,574,919       53,617,163       52,728,853  
                                 
Basic and diluted loss per share
                               
Loss from continuing operations
  $ (0.05 )   $ (0.07 )   $ (0.17 )   $ (0.25 )
Net loss
  $ (0.05 )   $ (0.07 )   $ (0.17 )   $ (0.25 )
                                 
Weighted average shares outstanding
    53,618,292       53,574,919       53,617,163       52,728,853  
                                 
Dilutive stock options
                       
                                 
Total common shares and dilutive securities
    53,618,292       53,574,919       53,617,163       52,728,853  

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Anti-dilutive securities not included in diluted net loss
                       
per share calculation:
                       
Stock compensation plans
    7,433,456       7,072,048       7,412,515       6,974,235  
Warrants to purchase common stock
    250,000       250,000       250,000       250,000  
Total anti-dilutive securities
    7,683,456       7,322,048       7,662,515       7,224,235  

 
 
8

 
 
5.  COMPREHENSIVE INCOME

The components of total comprehensive income were as follows:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net loss
  $ (2,734,429 )   $ (4,007,508 )   $ (9,346,585 )   $ (13,147,048 )
Net change in foreign currency translation adjustment,
                               
net of tax
    16,324       75,748       46,311       (77,521 )
Total comprehensive income
  $ (2,718,105 )   $ (3,931,760 )   $ (9,300,274 )   $ (13,224,569 )


6.  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 provided sales, business development, and operations personnel to our Brazilian subsidiary.  Under the agreement, we granted Capela options to purchase 800,000 shares of our common stock at an exercise price of $6.50 per share, the market value on the date of the grant.  These options vested over the three-year contract period.   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 financial statements.  We recognized approximately $105,000 and $202,000 of revenue from affiliates during the three and nine months ended September 30, 2008, respectively.  No revenue was recognized in 2009 from Capela.  Capela was deemed an affiliate due to an ownership interest in HowStuffWorks, our largest shareholder.  As of December 17, 2007, Capela no longer had an ownership interest in HowStuffWorks.

See note 7, Subsequent Event, for a discussion of the transactions between HSWI and Sharecare that occurred on October 30, 2009.

 
9

 

7.  SUBSEQUENT EVENT

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q on November 16, 2009.

On October 30, 2009, the Company joined with Dr. Mehmet Oz, Harpo Productions, Discovery Communications (NASDAQ:  DISCA), Sony Pictures Television and Jeff Arnold (Chairman of our Board of Directors) to form Sharecare, Inc., which is developing an innovative healthcare platform for consumers to ask, learn and act on the questions of health.  The Company simultaneously entered into and effectuated a series of transactions with Sharecare as described below.  

As part of the transactions with Sharecare, on October 30, 2009, the Company entered into a Subscription Agreement for the purchase of 125,000 shares of common stock of Sharecare, representing 20% of the company at the time of purchase.  The aggregate purchase price for the shares was $1,250,000.  In exchange for the shares, the Company contributed $250,000 worth of development work to Sharecare and issued a Secured Promissory Note to Sharecare in the principal amount of $1,000,000.  The note does not bear interest unless an Event of Default (as defined in the note) occurs.  The note is due and payable in full on October 30, 2010, and may be prepaid at any time without penalty or premium.  For so long as principal amounts remain outstanding under the note, all amounts payable by Sharecare to the Company pursuant to the services agreement, described below, will be applied as prepayments on the note.  The majority of the note has been offset by services the Company provided to Sharecare prior to the consummation of the transaction.

As part of the transactions with Sharecare, on October 30, 2009, the Company entered into a Letter Agreement for Services with Sharecare pursuant to which the Company agreed to perform services related to the design, development, hosting and related services necessary to launch and operate the Sharecare website through our direct activities and management of third party vendors.  Sharecare will pay us for the fully burdened cost of our personnel dedicated to the services and other costs incurred in providing the services plus a fixed monthly management fee for services performed since July 1, 2009.  The initial term of the agreement expires on December 31, 2009; thereafter the parties may enter into a new agreement for services, or Sharecare may opt to extend the services for six months to transition to another service provider.   As the criteria to support the recognition of revenue related to the Letter Agreement for Services has not been met as of the accompanying balance sheet date, costs incurred by HSWI that will be included as billable services under the service agreement discussed above, are recorded as deferred charges in the condensed consolidated balance sheet as of September 30, 2009.

As part of the transactions with Sharecare, on October 30, 2009, the Company entered into an Asset Purchase Agreement under which the Company sold substantially all of the assets of its subsidiary Daily Strength, Inc. to a wholly owned subsidiary of Sharecare, Inc., DS Acquisition, Inc., in exchange for which DS Acquisition assumed the potential earn-out payments of Daily Strength under the Merger Agreement dated November 26, 2008, pursuant to which the Company acquired Daily Strength.  The following table details the Daily Strength assets identified for sale that are classified in the accompanying condensed consolidated balance sheet as assets held for sale.

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

In accordance with SFAS 142 and the planned disposition of the Daily Strength assets, the Company performed an impairment analysis on the goodwill balance related to the Daily Strength business as of September 30, 2009.  The results indicated no impairment charge was required.

 Jeff Arnold, Chairman of HSWI’s Board of Directors, is the Chairman and Chief Architect and a significant stockholder of Sharecare.  Additionally, Discovery Communications, Inc., HSWI’s largest stockholder, is a significant stockholder of Sharecare.  HSWI’s Board of Directors established a Special Committee on May 18, 2009, consisting of three independent directors without any interests in Sharecare to evaluate and recommend the terms of these transactions to the Board.  All terms recommended by the Special Committee were unanimously approved by the Board, with Mr. Arnold and Bruce Campbell, President of Digital Media and Business Development for Discovery Communications, abstaining from voting.

 
10

 

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

Cautionary Statement Regarding Forward-Looking Information

The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included as part of this Form 10-Q.  This Form 10-Q contains forward-looking statements based on current expectations.  We sometimes identify forward-looking statements with such words as “may”, “will”, “expect”, “anticipate”, “estimate”, “seek”, “intend”, “believe” or similar words concerning future events. The forward-looking statements contained herein include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling, general and administrative expenses, capital resources, the sufficiency of our cash resources, the expected effects of the sale of substantially all the assets of our Daily Strength business, and the effects of general industry and economic conditions and are subject to risks and uncertainties including, but not limited to, those discussed below, in Part II, Item 1A. and elsewhere in this Form 10-Q that could cause actual results to differ materially from the results contemplated by these forward-looking statements.  Relevant risks and uncertainties include those referenced in our filings with the SEC, and include but are not limited to: risks related to the Sharecare transactions; reliance on third parties for content; economic and industry conditions specific to Brazil and China, such as the state of their telecommunications and internet infrastructure and uncertainty regarding protection of intellectual property; challenges inherent in developing an online business in Brazil and China, including obtaining regulatory approvals and adjusting to changing political and economic policies; governmental laws and regulations, including unclear and changing laws and regulations related to the internet sector in China; general industry conditions and competition; general economic conditions, such as online advertising rates, interest rate and currency exchange rate fluctuations; and restrictions on intellectual property under agreements with third parties.  We also urge you to carefully review the risk factors set forth in Part II, Item 1A. and other documents we file from time to time with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008.

Business Overview and Recent Events

HSW International is an online publishing company that develops and operates Internet businesses focused on providing consumers around the world with locally relevant, high quality information and ways to connect with each other.  We generate revenue primarily through the sale of online advertising on our websites.  Our international websites published under the HowStuffWorks brand provide readers in China and Brazil with thousands of articles about how the world around them works, serving as destinations for credible, easy-to-understand reference information.  HSW International is the exclusive licensee in China and Brazil for the digital publication of translated content from HowStuffWorks.com, a subsidiary of Discovery Communications, Inc., and in China for the digital publication of translated content from World Book Encyclopedia.  The DailyStrength business helps hundreds of thousands of readers share information and support on www.dailystrength.org , a comprehensive health-related social media website.  As further described below, we sold the assets of Daily Strength to Sharecare Inc. and now provide development and operational services to Sharecare.  
 
On October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare, Inc.  As a result of these transactions, the Company received an equity stake in Sharecare, sold substantially all of the assets of its Daily Strength subsidiary to Sharecare, agreed to provide management and website development services to Sharecare, and received a limited license to use the Sharecare web platform for its own businesses.  Additionally, the Company issued a promissory note to Sharecare, the majority of which has been offset by services the Company provided to Sharecare prior to the consummation of the transaction.  Finally, Sharecare assumed the potential earn-out payment of up to $3.525 million under the merger agreement by which the Company acquired Daily Strength.  We entered into each of these simultaneously.  Further detail on these transactions follows.

On October 30, 2009, the Company entered into a Subscription Agreement for the purchase of 125,000 shares of common stock of Sharecare, representing 20% of the company at the time of purchase.  Sharecare is a healthcare platform for consumers to ask, learn and act on the questions of health.  The aggregate purchase price for the shares was $1,250,000.  In exchange for the shares, the Company contributed $250,000 worth of development work to Sharecare and issued a Secured Promissory Note to Sharecare in the principal amount of $1,000,000.  The note does not bear interest unless an Event of Default (as defined in the note) occurs.  The note is due and payable in full on October 30, 2010, and may be prepaid at any time without penalty or premium.  For so long as principal amounts remain outstanding under the note, all amounts payable by Sharecare to the Company pursuant to the services agreement, described below, will be applied as prepayments on the note.


 
11

 

On October 30, 2009, the Company entered into a Letter Agreement for Services with Sharecare pursuant to which the Company agreed to perform services related to the design, development, hosting and related services necessary to launch and operate the Sharecare website through our direct activities and management of third party vendors.  Sharecare will pay us for the fully burdened cost of our personnel dedicated to the services and other costs incurred in providing the services plus a fixed monthly management fee for services performed since July 1, 2009.  The initial term of the agreement expires on December 31, 2009; thereafter the parties may enter into a new agreement for services, or Sharecare may opt to extend the services for six months to transition to another service provider.   As the criteria to support the recognition of revenue related to the Letter Agreement for Services has not been met as of the accompanying balance sheet date, costs incurred by HSWI that will be included as billable services under the service agreement discussed above, are recorded as deferred charges in the condensed consolidated balance sheet as of September 30, 2009.

On October 30, 2009, the Company entered into an Asset Purchase Agreement under which the Company sold substantially all of the assets of its subsidiary Daily Strength, Inc. to a wholly owned subsidiary of Sharecare, Inc., DS Acquisition, Inc., in exchange for which DS Acquisition assumed the potential earn-out payments of Daily Strength under the Merger Agreement dated November 26, 2008, pursuant to which the Company acquired Daily Strength.  The Daily Strength assets identified for sale are classified in the accompanying condensed consolidated balance sheets as assets held for sale.  The Company is in process of completing its evaluation of the accounting treatment for the transactions.

Jeff Arnold, Chairman of HSWI’s Board of Directors, is the Chairman and Chief Architect and a significant stockholder of Sharecare.  Additionally, Discovery Communications, Inc., HSWI’s largest stockholder, is a significant stockholder of Sharecare.  HSWI’s Board of Directors established a Special Committee consisting of three independent directors without any interests in Sharecare to evaluate and recommend the terms of these transactions to the Board.

Business Trends

Much of our business consists of websites we recently established or acquired.  We expect that our business should grow as these websites achieve greater awareness within their markets, resulting in increased usage against which we can sell advertising.  While significant online advertising markets exist in the United States and Brazil, we believe it will take additional time for meaningful online advertisement rates to develop in China.

Our Brazilian website ComoTudoFunciona , which launched in March 2007, is our most mature business.  The number of page views for ComoTudoFunciona has decreased by 7% during the third quarter of 2009 compared to the same period in 2008 due to a change in Brazil’s school schedule; students are typical contributors to a portion of our traffic.  Additionally, the number of unique visitors to the website has increased by 14% for the same periods.

Our Chinese website BoWenWang launched in June 2008, and early results show usage development consistent with a recently-launched website.  Unlike in Brazil, where we established our website with significant promotional commitments from one of the country’s largest Internet portals, BoWenWang launched with a focus on organic traffic development.  This has contributed to initial usage trending below that in Brazil.  We believe that by focusing on developing business relationships to further the exposure of the website, we should be able to continue to grow usage.  However, the current economic environment in China and the rate of development of its Internet advertising market could negatively affect the growth rate of our revenues for our Chinese business.

The number of page views for BoWenWang increased 677% during the third quarter of 2009 compared to the same period in 2008 through organic traffic growth.  Additionally the number of unique visitors to the website increased 229% for the same period.  We expect to see growth in the number of users and page views, which we believe should result in increased revenues for our Chinese website.

Both seasonal fluctuations in Internet usage and traditional retail seasonality have affected, and are likely to continue to affect, our business.  Internet usage generally slows during the summer months, and expenditures by advertisers typically increase in the fourth quarter of each year.  These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results.

The advertising market declined overall in 2008 and the first three quarters of 2009 due to the global economic downturn.  This decline affected online advertising expenditures as well, and has resulted in lower revenue for our business than expected.  The economic environment might cause advertisers to continue to reduce the amount they spend on online advertising, which could negatively affect the growth rate of our revenues.  The international economic challenges contributed to the impairment charge we took as of December 31, 2008 for the intangible asset of the licenses to operate in China.  If operating results deteriorate or do not improve, and/or if unfavorable changes occur in other economic factors used to estimate fair values, we might incur additional non-cash impairment charges to goodwill or other intangible assets in the future.
 
 
 
12

 
 
Recognizing the difficulty of the economic environment, we have reduced operating expenses in 2009 in an attempt to better align spending with expectations for growth.  We continue to invest in building the necessary employee and systems infrastructures required to manage our growth and develop and promote our products and services.  Additionally, we will maintain an awareness of the alignment of our costs and revenues, and make operating adjustments as we believe necessary to best position HSW International for success.

Business Development

On October 30, 2009, the Company joined with Dr. Mehmet Oz, Harpo Productions, Discovery Communications (NASDAQ:  DISCA), Sony Pictures Television and Jeff Arnold (Chairman of our Board of Directors) to form Sharecare, Inc., which is developing an innovative healthcare platform for consumers to ask, learn and act on the questions of health.

HSW International and the other co-founders of Sharecare each hold minority equity positions in the company.  Additionally, HSW International has entered into a service agreement with Sharecare to develop the company’s next generation platform and site, leveraging HSWI’s expertise in online content platforms.  As part of the transaction, HSW International transferred its Daily Strength business to Sharecare.

The Sharecare website will be a highly searchable social Q&A platform, backed by a comprehensive information architecture that creates and organizes the questions of health.  HSW International and the other founding partners have the license to use this platform to develop businesses in other content categories.

HSW International developed and launched Sharecare’s initial Q&A content located at http://ask.doctoroz.com , which features a subset of the initial questions and answers from Sharecare and its content partners.

Our Operations

ComoTudoFunciona – HowStuffWorks Brazil
We entered the Brazilian online publishing market in March 2007.  At September 30, 2009, we had approximately 5,800 articles that were either (i) from the HowStuffWorks content database translated from English to Portuguese, or (ii) originally created content.  The web site address is http://hsw.com.br/ .  We are developing 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 HowStuffWorks, and (iii) refining local marketing strategies.  We recognized approximately $33,000 and $116,000 of revenue from our Brazilian operations during the three months ended September 30, 2009 and 2008, respectively, and $114,000 and $289,000 of revenue during the nine months ended September 30, 2009 and 2008, respectively.  The decrease in Brazil revenue is due to sales to affiliates recorded during 2008 that did not recur in 2009.

BoWenWang – HowStuffWorks China
In June 2008, we entered China’s online publishing market utilizing the contributed assets from HowStuffWorks and our predecessor INTAC’s relationships and knowledge of the Chinese markets to obtain our internet licenses.  In September 2008, we entered into an exclusive content partnership with World Book, Inc. to create thousands of original Chinese-language articles providing information on all branches of knowledge, including arts, sciences, technology, mathematics, sports and recreation, exclusively for HSW International's Beijing-based website, BoWenWang ( http://www.bowenwang.com.cn/ ).  At September 30, 2009, we published approximately 9,800 articles on our Chinese website.  Revenue generated from the operations based in China was approximately $9,000 and $18,000 during the three and nine months ended September 30, 2009, respectively.  No revenue was generated from the operations based in China during the three and nine months ended September 30, 2008.

DailyStrength
DailyStrength.org offers content authored by medical professionals, support groups, a treatment directory with definitions, private messaging, one-on-one chat forums and personal goal trackers.  DailyStrength primarily serves English-speaking territories, such as the United States, Canada, Australia and the United Kingdom.  The medical panel of professionals contributes articles and journals providing insight to a number of topics relevant to the DailyStrength user group and communities.  DailyStrength and its user groups create online communities and support services to help people cope with health, stress and other challenges of modern life.  As mentioned above, on October 30, 2009, the Company entered into a series of transactions with Sharecare, among other things, we sold substantially all of the assets of DailyStrength to Sharecare, Inc. and obtained an equity interest in Sharecare.


 
13

 

Results of Operations

The following table sets forth our operations for the three and nine months ended September 30, 2009 and 2008.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Operating revenue
                       
Social media
  $ 48,896     $     $ 173,996     $  
Digital online publishing
    42,171       11,056       131,555       86,734  
Sales to affiliates
          105,180             202,328  
Total revenue
    91,067       116,236       305,551       289,062  
                                 
Cost of services
    393,267       224,861       1,156,685       790,816  
                                 
Gross margin
    (302,200 )     (108,625 )     (851,134 )     (501,754 )
                                 
Operating expenses
                               
Selling, general and administrative (including stock-based
                               
compensation expense of $334,675 and $1,189,689 for
                               
the three months ended September 30, 2009 and 2008,
                               
respectively, and $1,690,924 and $4,041,714 for the nine
                               
months ended September 30, 2009 and 2008, respectively)
    2,713,644       3,987,151       8,731,057       12,772,433  
Depreciation and amortization
    123,265       62,186       360,824       147,048  
Total operating expenses
    2,836,909       4,049,337       9,091,881       12,919,481  
                                 
Operating loss
                               
Social media
    (347,831 )           (991,222 )      
Digital online publishing
    (486,046 )     (836,967 )     (1,387,644 )     (2,502,872 )
Business segments
    (833,877 )     (836,967 )     (2,378,866 )     (2,502,872 )
Corporate
    (2,305,232 )     (3,320,995 )     (7,564,149 )     (10,918,363 )
Total operating loss
    (3,139,109 )     (4,157,962 )     (9,943,015 )     (13,421,235 )
                                 
Other income
                               
Interest income
    11,160       150,454       42,910       407,713  
Other income
                160,000        
Total other income
    11,160       150,454       202,910       407,713  
                                 
Loss from continuing operations before income taxes
    (3,127,949 )     (4,007,508 )     (9,740,105 )     (13,013,522 )
                                 
Income tax benefit
    393,520             393,520        
                                 
Loss from continuing operations
    (2,734,429 )     (4,007,508 )     (9,346,585 )     (13,013,522 )
                                 
Loss from discontinued operations, net of income taxes
                      (133,526 )
                                 
Net loss
  $ (2,734,429 )   $ (4,007,508 )   $ (9,346,585 )   $ (13,147,048 )

Segment Data
We monitor and analyze our financial results on a segment basis for reporting and management purposes, as is presented in Note 3 to our Condensed Consolidated Financial Statements hereto.  Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

Our Social Media segment is comprised of our DailyStrength operations, which generate the majority of its revenues from the advertisers based in the United States.  Our Digital Online Publishing segment consists of our Brazil and China based websites and generates revenues from advertisers in the respective countries.


 
14

 

Revenue
Total revenue for the three months ended September 30, 2009 was approximately $91,000, a decrease of approximately $25,000 from the comparable period in 2008.  The decrease was primarily due to affiliated sales of approximately $105,000 during the third quarter of 2008 which did not recur during 2009.  This decrease was partially offset by the addition of DailyStrength, our Social Media segment, to our portfolio of websites.  Revenue generated from our Social Media segment and Digital Online Publishing segment was approximately $49,000 or 54% and $42,000 or 46%, respectively, of total revenue for the third quarter of 2009.  For the three months ended September 30, 2009, our Brazil-based website generated approximately 39% of revenue from the Digital Online Publishing segment from paid-for-impression advertising and 61% from pay-per-performance ads.  We recognized revenue of approximately $9,000 in the Digital Online Publishing segment from China during the three months ended September 30, 2009.

Total revenue for the nine months ended September 30, 2009 was approximately $306,000, an increase of approximately $16,000 from the comparable period in 2008.  The increase is primarily attributable to revenues from DailyStrength, our Social Media segment.  Revenue generated from our Social Media segment and Digital Online Publishing segment was approximately $174,000 or 57% and $132,000 or 43%, respectively, of total revenue for the first three quarters of 2009.  In conjunction with the services agreement entered into with Sharecare on October 30, 2009, we expect to recognize approximately $700,000 for services performed between July 1, 2009 through September 30, 2009 during the fourth quarter of 2009.  This revenue will be offset by the deferred charges recorded on our September 30, 2009 condensed consolidated balance sheet.  For the nine months ended September 30, 2009, our Brazil-based website generated approximately 57% of its revenue from the Digital Online Publishing segment from paid-for-impression advertising and 43% from pay-per-performance ads.  We recognized revenue of approximately $18,000 in the Digital Online Publishing segment from China during the nine months ended September 30, 2009.

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, costs incurred to acquire original articles written by medical experts and other third parties, as well as site development charges.  Article acquisition and translation costs were approximately $393,000 and $1,157,000 for the three and nine months ended September 30, 2009 and represent articles acquired for future publication on our websites.  These costs were approximately $225,000 and $791,000, respectively, for the prior year periods.  Article acquisition and article translation costs vary due to the volume of new content deployed on our site during any quarter.  These costs also fluctuate due to varying needs and timing, which determine the number of articles to be published.  Approximately $0.6 million of cost of services are deferred and will be recognized in the fourth quarter of 2009 when the related revenue is earned under the Sharecare services agreement.

Operations - Selling, General and Administrative Expenses
Our total selling, general and administrative   expenses decreased by $1.3 million from $4.0 million to $2.7 million for the three months ended September 30, 2009 from the comparable period in 2008.  Our stock-based compensation expense was $0.9 million less than the same period in 2008 reflecting our higher stock price in earlier periods.  The remaining $0.4 million decrease resulted from cost reduction efforts.

Our total selling, general and administrative   expenses decreased by $4.1 million from $12.8 million to $8.7 million for the nine months ended September 30, 2009 from the comparable period in 2008.  Consulting, legal and accounting expenses decreased $0.7 million, which is primarily attributable to costs associated with the INTAC legacy businesses disposition during the first quarter of 2008.  Additionally, our stock-based compensation expense was $2.4 million less than the same period in 2008 reflecting our higher stock price in earlier periods.  The remaining $1.0 million decrease resulted from cost reduction efforts.

Operating Loss
Our operating loss was $0.3 million and $1.0 million for the Social Media segment, and $0.5 million and $1.4 million for the Digital Online Publishing segment, and our corporate level operating loss was $2.3 million and $7.6 million for the three and nine months ended September 30, 2009, respectively.

Other Income
Total other income decreased approximately $139,000 and $205,000 for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008 due to lower interest income resulting from lower cash balances and lower interest rates.  The decrease for the nine months ended September 30, 2009 was partially offset by a contract termination payment from a former customer that is classified as Other Income.
 

 
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Income Tax Benefit
Tax benefits increased approximately $0.4 million for the three months and nine months ended September 30, 2009 due to a decrease in the valuation allowance.  The valuation allowance decrease resulted from the classification of a Daily Strength indefinite lived asset as held for sale as of September 30, 2009 (See note 7).  The classification of the Daily Strength indefinite lived asset as held for sale triggered a change in the nature of the indefinite lived intangible asset; therefore, the related deferred tax liability became available to offset the other deferred tax assets. 
 
Discontinued Operations - INTAC Legacy Businesses
The $0.5 million loss from discontinued operations was reduced by a $0.4 million gain upon final disposition on February 29, 2008.

Liquidity and Capital Resources

     
Nine Months Ended September 30,
 
     
2009
   
2008
 
               
Cash flows
             
Used in operating activities
 
  $ (6,598,719 )   $ (8,785,700 )
Used in investing activities
      (118,606 )     (5,138,194 )
Provided by financing activities
            35,229,607  
Net change in cash and cash equivalents
      (6,717,325 )     21,305,713  
Impact of currency translation on cash
      40,537       (77,521 )
Cash and cash equivalents at beginning of period
      18,020,159       3,639,831  
Cash and cash equivalents at end of period
    $ 11,343,371     $ 24,868,023  

Cash and cash equivalents was $11.3 million at September 30, 2009, compared to $18.0 million at December 31, 2008.  The decrease in cash is primarily due to the use of working capital to fund operations.

Cash flows from operations
Our net cash used in operating activities during the nine months ended September 30, 2009 decreased by $2.2 million compared to the same period in the prior year due to cost-cutting measures and a reduction in professional fees.  Net cash used in discontinued operating activities was $0.5 million for the nine months ended September 30, 2008.

Cash flows from investing activities
During the nine months ended September 30, 2009, net cash used in investing activities was approximately $0.1 million compared to $5.1 million in the same period of 2008.  Cash used in investing activities during the nine months ended September 30, 2008 includes $4.5 million of cash used in conjunction with the sale of our INTAC legacy businesses, and $0.5 million invested in building our technology environment and infrastructure.

Cash flows from financing activities
For the nine months ended September 30, 2008, net cash provided by financing activities was approximately $35.2 million resulting from the proceeds we received from the sale of our common stock during the first quarter of 2008.  We had no financing activities in 2009.

Liquidity Considerations
The global financial downturn continues to have a negative effect on the demand for advertising in general, including online advertising.  Economic uncertainty has had and might continue to have a direct impact on our revenue as orders for online advertising have declined and our typical advertiser is spending less per order than in the prior year.  Also, our businesses in Brazil and China, which were launched in the past several years, are still in an early growth stage as the related websites continue to build towards a critical mass of traffic volume.  In consideration of projected market conditions and near-term revenue expectations, we implemented cost reductions at the end of our fourth quarter of 2008 to reduce headcount and better align our costs with our 2009 initiatives.  We consistently monitor our cash position to make adjustments as we believe necessary to maintain our operational objectives of funding ongoing operations and continuing to make technological investments in our websites and their respective brands.

As further discussed in Item 1A. Risk Factors, the Company received a notice from the Nasdaq Stock Market indicating that it no longer complies with the requirements of Nasdaq Marketplace Rule 5450(a)(1) for continued listing on the Nasdaq Global Market.  The Company has 180 calendar days, or until March 15, 2010, to regain compliance with the listing rule, which requires that shares of HSWI’s stock maintain a minimum bid price of $1.00 per share.  The Company is working on plans to regain compliance with Nasdaq Marketplace Rule 5450(a)(1).


 
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We expect to expend significant resources in expanding and gaining market share for our internet platforms in Brazil and China, including up-front expenditures to create or acquire content.  We currently do not have any material commitments for capital expenditures.  Our anticipated expenditures will be made in the respective markets based on our success and anticipated market conditions and trends.  We expect that most of these expenditures will be paid or under commitment before we begin to realize significant revenues.  Additionally, in the normal course of business, we continue to explore various business initiatives that may lead to additional sources of revenue and growth.  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 even if there is not an increase in revenues.  If cash on hand and generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we might sell additional equity or obtain bank financing to fund further development and attain profitability.  There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.

We expect that our recently announced service agreement with Sharecare will generate revenues for our company.  However, as Sharecare is a newly formed entity and the service agreement expires at the end of 2009, there can be no assurance that the amounts generated will be sufficient to cover our liquidity needs for the long-term.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We translate the foreign currency financial statements of our international operations into U.S. dollars at current exchange rates, except revenue and expenses, which we translate at average exchange rates during each reporting period.  We accumulate net exchange gains or losses resulting from the translation of assets and liabilities in a separate section of stockholders’ equity titled “accumulated other comprehensive income (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, 2009, 99% of our cash was denominated in U.S. dollars.  The remaining 1% was denominated in Brazilian Reais, Chinese Renminbi or Hong Kong Dollars.  All our cash is placed with financial institutions we believe are of high credit quality.  Our cash is maintained in bank deposit accounts, which, at times, exceed federally insured limits.  We have not experienced any losses in such accounts and do not believe our cash is exposed to any significant credit risk.

We do not use financial instruments to hedge our foreign exchange exposure because the effects of the foreign exchange rate fluctuations are not currently significant.  We do not use financial instruments for trading purposes.  We do not use any derivative financial instruments to mitigate any of our currency risks.  The net assets of our foreign operations at September 30, 2009, 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 2009.  Therefore, we do not believe we have any material exposure to market risk changes in interest rates.

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


Item 4.  Controls and Procedures

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

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


 
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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

None.


Item 1A.  Risk Factors.

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

We are in the early development of our business and prospects are difficult to evaluate.

We have no significant operating history, and limited experience in the Chinese and Brazilian markets.  We are in the early development of our business, with a limited operating history upon which investors and others can evaluate our current business and prospects.  Our prospects must be considered in light of the many risks, uncertainties, expenses, delays, and difficulties frequently encountered by companies in their early stages of development.  Some of the risks and difficulties we expect to encounter include our ability to:

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

We may not have sufficient liquidity to support the time required for our business to fully develop.

The Company is in the process of launching Internet businesses including publishing businesses in two emerging markets.  While we believe that our cash resources on hand are sufficient to fund these businesses for a period of at least 12 months, our cash resources are not sufficient to fund these businesses for an extended period beyond that unless revenues increase significantly or we find other sources of capital, neither of which can be assured.  Our management and directors continually evaluate our progress and likelihood of success in each of our markets, and our ability to raise additional capital, against the relative value of our resources and other opportunities. Accordingly, we might decide to suspend our activities in one or more of our markets in order to focus our limited resources in the other(s). 

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

Our plans to market and monetize our assets in the Chinese and Brazilian online markets through the Internet are new and unproven.  Moreover, we will have limited experience in determining the pricing of the products and services that we plan to develop.  Because we have never marketed or sold these products and services, we may not be successful in establishing a customer base or strategic partnerships for the distribution of our products and services.  If we are not successful in developing, releasing and marketing these products and services on a profitable basis, our results of operations would be materially and adversely affected.
 
We do not have significant experience in the Brazilian and Chinese marketplaces.  Additionally, we may not have the resources available to simultaneously develop operations in China and Brazil.  Accordingly, there may be a delay in developing such operations or we might decide not to pursue these markets, which could affect our business plan and results of operations.

The growth we seek is rare.

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

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

The online publishing market is highly competitive.  We encounter significant competition across our business lines and in each market in which we offer our products and services.  In the online publishing market, we expect that our competitors will include national Internet portals in China such as Baidu, NetEase.com, Shanda Interactive Entertainment, Sina, sohu.com and tom.com; national websites in Brazil such as Terra and UOL; which will compete with us for online advertising revenue and end users.  Many of our competitors have more experience, resources and visitors than us.

Resales of our common stock and additional obligations to issue our common stock may cause the market price of our stock to fall.
 
An aggregate of 33,634,192 shares of our common stock held by INTAC affiliates, HowStuffWorks and investors that participated in our equity financings was registered and such investors could resell that stock.  In addition, HowStuffWorks holds a warrant to purchase 250,000 shares of our common stock.  The issuance of these new shares and the resale of additional shares of our common stock could depress the market price for our common stock.


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

Additionally, the terms of the HowStuffWorks December 2007 merger with Discovery provided that payment to HowStuffWorks shareholders for a significant portion of HowStuffWorks’ ownership of our common stock would not be paid at the October 2007 closing of the transaction and instead will be payable to HowStuffWorks’ former shareholders in three semi-annual installments beginning on October 2008, subject to the consent of the former shareholders’ representative.  Such payments will be in the form of cash or shares of HSWI stock now held by HowStuffWorks.  The amount of shares of our common stock owned by Discovery in the future may fall or rise due to a combination of reasons.  All of our rights to publish HowStuffWorks content will remain effective regardless of the number of shares owned by HowStuffWorks in the future.  If Discovery and HowStuffWorks’ former shareholders’ representative elect to distribute shares of our common stock to former HowStuffWorks shareholders, a significant number of shares may be sold by such shareholders relative to the daily market trading volumes for our common stock.  These factors could also affect our common stock, and depress the market price for our common stock or limit the market for resale of our common stock.

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

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

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

We and our subsidiaries are subject to taxes in the United States and various foreign jurisdictions.  We believed that our tax returns appropriately reflected our tax liability when those tax returns were filed.  However, our tax positions may be challenged by the applicable tax authorities.  Any successful challenge to one or more of our prior tax positions could result in a material tax liability to us or to one or more of our subsidiaries, including INTAC, for one or more prior years.


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

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

Our operations are vulnerable to natural disasters and other events.

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

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

Internet usage of our products could decline if any well publicized compromise of our security occurs.  “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment.  Hackers, if successful, could misappropriate proprietary information or cause disruptions in our service.  We may be required to expend capital and other resources to protect our website against hackers.  We cannot assure you that any measures we may take will be effective.  In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability, as well as materially damage our reputation and decrease our user traffic.

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

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

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

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


 
21

 

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

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

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

Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue and we may be sensitive to a slowdown in economic growth or other adverse changes in the PRC and Brazil economies.  This is particularly true in light of current financial and economic uncertainties.  In response to adverse economic developments, companies may reduce spending on marketing and advertising.  As a result, a slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China or Brazil may materially reduce the demand for our services and materially and adversely affect our business.

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

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

The PRC enacted regulations applying to Internet related services and telecommunications related activities.  While many aspects of these regulations remain unclear, they purport to limit and require licensing of various aspects of the provision of Internet information services.  The MII (Ministry of Information Industry) has also stated that the activities of Internet content providers are subject to regulation by various PRC government authorities, depending on the specific activities conducted by the Internet content provider.  Various government authorities have stated publicly that they are in the process of preparing new laws and regulations that will govern these activities.  The areas of regulation currently include online advertising, online news reporting, online publishing, online securities trading and the provision of industry specific (e.g., drug related) information over the Internet.  Other aspects of our online operations may be subject to regulation in the future.

Under the agreement reached in November 1999 between the PRC and the United States concerning the United States’ support of China’s entry into the World Trade Organization, or the WTO, foreign investment in PRC Internet services was to be liberalized to allow for 30% foreign ownership in key telecommunication services, including PRC Internet ventures, for the first year after China’s entry into the WTO, 49% in the second year and 50% thereafter.  China officially entered the WTO on December 11, 2001.  However, the implementation of China’s WTO accession agreements is still subject to various conditions.

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


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

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

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

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

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

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

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

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

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

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

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

Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
 
Some of our operating expenses are denominated in Chinese Renminbi.  Currently, we may purchase foreign exchange for settlement of “current account transactions” without the approval of the Chinese State Administration for Foreign Exchange, or SAFE.  We may also retain foreign exchange in our current account (subject to a ceiling approved by the SAFE) to satisfy foreign exchange liabilities or to pay dividends.  However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future.

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

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

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

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


 
24

 

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

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

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

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

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

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

Potential additional Chinese regulation could affect our business in China.

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


 
25

 

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

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

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

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

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

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

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

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

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


 
26

 


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

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

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

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

As of September 30, 2009, HowStuffWorks owned approximately 43% of our outstanding shares of common stock.  As a result, it will be difficult for our other stockholders to approve a takeover of us without the cooperation of HowStuffWorks.

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

·  
only our Board of Directors may call special meetings of our stockholders;
·  
our stockholders may take action only at a meeting of our stockholders and not by written consent;
·  
·  
SEC Rule 14a-8 requires that we receive notice of stockholder proposals at least 120 days prior to the date of our proxy statement for the previous year’s annual meeting or we do not have to include them in our proxy materials; and
·  
for stockholder proposals not requested to be included in our proxy materials under Rule 14a-8, we require advance notice of not less than 60 nor more than 90 days prior to a meeting for the proposal to be introduced and considered.

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

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

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


 
27

 

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

·  
cause substantial dilution of the percentage ownership of our stockholders at the time of the issuance;
·  
cause substantial dilution of our earnings per share;
·  
subject us to the risks associated with increased leverage;
·  
subject us to restrictive covenants that could limit our flexibility in conducting future business activities; and
·  
adversely affect the prevailing market price for our outstanding securities.
 
We may not be able to raise additional funds when needed for our business or to exploit opportunities.

We may need to raise additional funds to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities.  If required, we may attempt to raise such additional funds through public or private debt or equity financing, strategic relationships or other arrangements.  There can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.

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

We generated the majority of our revenues in 2008 and the first nine months of 2009 from our advertisers.  The global financial crisis continues to have a negative effect on the demand for advertising in general, including online advertising.  Economic uncertainty has had and might continue to have a direct impact on our revenue as orders for online advertising have declined and our typical advertiser is spending less per order than in the prior year.  We cannot predict the timing, strength or duration of the current economic slowdown or subsequent economic recovery generally or in the online advertising market.  If the economy or markets in which we operate continue to worsen, our business, financial condition and results of operations will likely be materially and adversely affected.  Our advertisers can generally terminate their contracts with us at any time.  Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner.  If we are unable to be competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively harm our revenues and business.  In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns.  Any decreases in or delays in advertising spending due to general economic conditions could reduce our revenues or negatively impact our ability to grow our revenues.

We may not be able to remain listed on the Nasdaq Stock Market.

On September 16, 2009, we received a notice from the Nasdaq Stock Market indicating that we no longer comply with the requirements of Nasdaq Marketplace Rule 5450(a)(1) for continued listing on the Nasdaq Global Market.  The rule requires that shares of HSWI’s stock maintain a minimum bid price of $1.00 per share.

We have 180 calendar days, or until March 15, 2010, in which to regain compliance with the listing requirement.  If we do not regain compliance prior to the expiration of the 180-day grace period, Nasdaq will provide written notice that HSWI’s securities are subject to delisting.  Alternatively, we may be eligible for an additional 180-day grace period if we meet the initial listing standards, with the exception of bid price, for the Nasdaq Capital Market.  To avail ourselves of this option, we will need to submit an application to transfer our securities to the Nasdaq Capital Market.


 
28

 

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

Our investment in Sharecare’s equity securities is illiquid and might fail to appreciate and might decline in value or become worthless.  Our Sharecare equity securities likely will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of Sharecare.  Sharecare is a recently-formed company with no history of operations. Its prospects must be considered in light of the many risks, uncertainties, expenses, delays and difficulties encountered by companies in their early stages of development.  Moreover, Sharecare operates in the highly competitive internet industry and might not achieve profitability or consumer acceptance in the near-term, if ever.

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

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

Jeff Arnold, our Chairman of the Board of Directors, and Chief of Global Digital Strategy for Discovery Communications, Inc., the parent company of HowStuffWorks, together with Discovery Communications, Inc., beneficially own over 40% of our common stock.  Mr. Arnold is also Chairman and Chief Architect of Sharecare.  As a result, Mr. Arnold and Discovery Communications have the ability to significantly influence and manage the affairs of both companies and determine the outcome of matters submitted for approval to stockholders of each company.  If HSWI and Sharecare’s interests diverge, there is a risk that Mr. Arnold or Discovery Communications will favor actions by Sharecare that are adverse to HSWI.  Additionally, as a member of our Board, Mr. Arnold’s ownership interest in Sharecare will disqualify him from some deliberations of our Board.  Bruce Campbell, a member of our Board of Directors, is President of Digital Media and Business Development for Discovery Communications.  As a member of our Board, Mr. Campbell’s position with Discovery Communications, which holds an ownership interest in Sharecare, will disqualify him from some deliberations of our Board.  Additionally, if HSWI and Sharecare’s interest diverge, there is a risk that Mr. Campbell or Discovery Communications will favor actions by Sharecare that are adverse to HSWI.

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

We currently provide web development, design and management services to Sharecare under a services agreement.  This agreement will expire in December 2009 unless the Company and Sharecare agree to extend the term or the Company and Sharecare enter into a new services agreement.  If neither occurs, Sharecare may extend the term for up to six months to transition the services performed by the Company for Sharecare to a new service provider.  We are in the process of negotiating a new services agreement with Sharecare but might not be able to reach an agreement on as favorable terms as the existing services agreement, if at all.


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

None.


Item 3.  Defaults Upon Senior Securities.

None.


Item 4.  Submission of Matters to a Vote of Security Holders.

None.


Item 5.  Other Information.

None.


 
29

 

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 10.26
 
Letter Agreement by and between HSW International, Inc. and Gregory Swayne dated September 28, 2009.
     
Exhibit 10.27
 
Confidential Separation and Release Agreement dated as of September 28, 2009 by and between HSW International, Inc. and Henry Adorno.
     
Exhibit 10.28
 
Asset Purchase Agreement by and among HSW International, Inc., Daily Strength, Inc., DS Acquisition, Inc. and Sharecare, Inc., dated as of October 30, 2009.
     
Exhibit 10.29
 
Subscription Agreement by and between HSW International, Inc. and Sharecare, Inc., dated as of October 30, 2009.
     
Exhibit 10.30
 
Secured Promissory Note issued by HSW International, Inc. to Sharecare, Inc., dated as of October 30, 2009.
     
Exhibit 10.31†
 
Letter Agreement for Services Agreement by and between HSW International, Inc. and Sharecare, Inc., dated as of October 30, 2009.
     
Exhibit 10.32
 
License Agreement dated as of October 30, 2009, by and among HSW International, Inc., Sharecare Inc.  ZoCo 1, LLC, Discovery SC Investment, Inc., Oz Works, L.L.C., and Arnold Media Group, LLC.
     
Exhibit 31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
Exhibit 31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
Exhibit 32*
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Title 18 of the United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

_________________________________
† The registrant has requested confidential treatment with respect to portions of this exhibit.  These 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.

 

 
30

 


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 16, 2009
By:
/s/ Shawn G. Meredith
 
   
Shawn G. Meredith
   
Chief Financial Officer

 
 
31
 
Exhibit 10.26

September 28, 2009

Mr. Gregory Swayne
 

Dear Greg:

 On behalf of HSW International, Inc. (“ HSW International ” or the “ Company ”), I am pleased to offer you employment as Chief Executive Officer of HSW International under the terms set forth below in this letter agreement (the “ Letter Agreement ”), commencing on September 28, 2009 (the “ Commencement Date ”).  The terms of your employment are set forth as follows:

1.   Services and Duties.

(a)   Position .  You will serve as Chief Executive Officer of HSW International, and shall perform all duties consistent with that position and such duties as shall be reasonably prescribed from time to time by the Company, including without limitation general supervision, direction, and control of the business of HSW International, subject to the control of the Board of Directors of the Company (the “ Board ”) and its committees.  You also agree to serve without additional remuneration in such other executive or director capacity as directed by the Board for one or more direct or indirect subsidiaries of the Company.

(b)   Devotion of Time .  During the term of this Letter Agreement, you agree to devote your full attention, energies and best efforts to rendering services on behalf of HSW International (or its parent, subsidiaries or other affiliates if directed to do so by the Company).  You shall not engage in any outside employment without the express written consent of the Company.  Notwithstanding the above, you shall be permitted, to the extent such activities do not substantially interfere with the performance of your duties and responsibilities hereunder to (i) manage your personal, financial and legal affairs, (ii) serve on civic or charitable boards or committees (it being expressly understood and agreed that your continuing to serve on any such board and/or committees on which you are serving, or with which you are otherwise associated, as of the Commencement Date, shall be deemed not to interfere with the performance of your duties and responsibilities under this Letter Agreement), (iii) investing or trading in stocks, bonds, commodities or other forms of investment, including real property; and, (iv) continue serving on the board of directors of Airsage, Inc.

2.   Term .

This term of this Letter Agreement shall begin on the Commencement Date and, unless earlier terminated as provided herein, shall end on the third anniversary of the Commencement Date (the “ Term ”).  Thereafter, this Letter Agreement shall terminate,
 
 
 
Page 1

 
 
 
and, unless either party shall elect in writing not to continue your employment with the Company, you shall become an at-will employee of the Company.

3.   Compensation and Related Matters .

(a)   Base Salary .  Your starting salary upon the Commencement Date will be $22,916.67 per month ($275,000 annually) through December 31, 2009, and then will increase to $25,000 per month ($300,000 annually) (the “ Base Salary ”).  The Base Salary will be paid to you (minus applicable federal, state and local payroll taxes, and other withholdings required by law or authorized by you) in accordance with HSW International’s normal payroll practices.  The Compensation Committee of the Board will review your Base Salary compensation for any discretionary merit-based increases on January 1, 2011, and January 1, 2012.

(b)   Bonus Compensation .  In addition to the Base Salary, you will be eligible for an annual discretionary bonus to be determined by the Board based on performance criteria of you and the Company to be discussed with and communicated to you within sixty days by the Compensation Committee of the Board (“ Bonus Plan ”).

(c)   Expenses .  During your employment hereunder, you shall be entitled to receive prompt reimbursement for all reasonable business and entertainment expenses incurred by you in performing services hereunder, provided that you properly account therefor to the Company.  All such reimbursements shall be subject to HSW International’s policies and procedures.

(d)   Other Benefits .  Beginning on the Commencement Date, you shall be entitled to participate in other benefit plans to which you are eligible pursuant to Company policy, which may be amended from time to time in the Company’s discretion, and the applicable plan documents (the “ Standard Benefit Plans ”).  Such shall include medical and health benefit plans consistent with those granted other executives in the Company.

(e)   Vacations .  You shall be entitled to four weeks of paid vacation per year in accordance with HSW International’s policies and procedures.

(f)   Stock Options .  HSW International will grant to you options to acquire 410,000 shares of HSW International’s common stock (the “ Options ”) in accordance with the Company’s 2006 Equity Incentive Plan (the “ Incentive Plan ”).  The Options represent the entirety of the stock-based compensation that you will receive during the Term.  You acknowledge that the grant date for the Options is anticipated to be approximately one week following the Company’s public disclosure of its anticipated entrance into a transaction agreement with ShareCare, Inc.  Unless otherwise defined herein, capitalized terms used in this sub-Section have the meanings assigned such terms in the Incentive Plan.  The Award Agreement will reflect HSW International’s standard terms and conditions for stock option grants except as follows:
 
 
 
Page 2

 
 
 
(i)   The Options shall have an exercise price equal to 100% of the Fair Market Value on the date of the Award.
 
(ii)   Fifty thousand shares of the Options shall become immediately vested upon the Commencement date, and 1/36 th of the remainder shall become fully vested on each monthly anniversary of the Commencement Date for the Term.  Except as provided elsewhere in this Letter Agreement, vesting shall occur at the times indicated only if you remain an employee of the Company and this Letter Agreement is then in effect.
 
(iii)   If either party should terminate your employment and this Letter Agreement for any reason, then all un-vested Options shall terminate with such termination.
 
(iv)   The term of the Option will be ten years from the date of the Award Agreement (“ Option Term ”).
 
(v)   Options that are vested shall be irrevocable and may be exercised in whole or in part, by you, your heirs or estate, for the full remaining Option Term so long as you remain an employee of the Company. Otherwise, all Options held by you shall terminate and no longer be exercisable one year from the termination of your employment with HSW International for any reason.
 
(vi)   If a Change in Control (as defined below) should occur during the Term, then all un-vested Options shall become fully vested as of the date of said Change in Control.  “Change of Control” means any of the following: (a) a merger or consolidation of HSW International into or with any other person or persons, or a transfer of equity interests in a single transaction or a related series of transactions, in which in any case the equity holders of HSW International immediately prior to such merger, consolidation, sale, exchange, conveyance or other disposition or first of such series of transactions possess less than a majority of the voting power of Employer’s or any successor entity’s issued and outstanding equity securities immediately after such transaction or series of such transactions; or (b) a single transaction or related series of transactions, pursuant to which a person or persons acquire all or substantially all of HSW International’s assets determined on a consolidated basis.

4.   Termination .

During the Term, your employment hereunder may be terminated by HSW International or by you under the following circumstances:

(a)   Mutual Agreement .  Your employment may be terminated by mutual written agreement between you and the Company.
 
 
 
Page 3

 

 
(b)   Death .  Your employment shall terminate immediately upon your death.

(c)   Disability .  The Company may terminate your employment if you are unable to perform the essential functions of your job under this Letter Agreement due to a physical or mental impairment (“ Disability ”).  However, under no circumstances will the Company terminate your employment pursuant to its rights in this subsection provided that such Disability does not continue past 120 days from the point the Company notifies you in writing of your Disability.

(d)   Cause .  Your employment may be terminated immediately for Cause.  “Cause” means the occurrence or existence of any of the following with respect to you, as determined in good faith by the Board (with your abstaining if then a member of the Board):

(i)   any act of dishonesty resulting in a materially adverse effect upon the Company or material misappropriation, embezzlement, fraud or similar conduct involving HSW International or any affiliate;
(ii)   the conviction or a plea of nolo contendere, guilty or the equivalent with respect to a felony charge or crime involving moral turpitude or dishonesty;
(iii)   any intentional damage by you of a material nature to any property of HSW International or any affiliate;
(iv)   conduct by you which constitutes gross negligence in serving in your capacity as an employee of  the Company or any affiliate which includes, but is not limited to, the disclosing of trade secrets or confidential information of the Company or any affiliate to persons not entitled to receive such information;
(v)   any breach of any non-competition or non-solicitation agreement between you and HSW International or any affiliate;
(vi)   any material breach by you of any material obligation under this Letter Agreement, or fiduciary duties to HSW International or any affiliate which is not cured by you within 30 days of receipt of written notice specifying such breach; or
(vii)   the engaging by you in employment practices which violate federal, state or local law.

(e)   Termination Without Cause .  Notwithstanding any provisions of this Letter Agreement to the contrary, prior to the expiration of the Term, HSW International may terminate your employment for any reason other than those specified in the foregoing paragraphs (a), (b), (c) or (d) (or for no reason) at any time effective upon delivery of 30 days written notice by the Board, provided that the Company may at its election provide continued Base Salary payments and medical and health benefits for all or a portion of such thirty (30) day period in lieu of such notice.
 
 
 
Page 4

 

 
(f)   Termination by You with Notice .  You may terminate your employment (resign) at any time effective upon 30 days written notice to the Board, provided that the Company may at its election provide continued Base Salary payments and medical and health benefits for all or a portion of such thirty (30) day period in lieu of such notice.

(g)   Expiration at End of Term .  The Employer may permit this Letter Agreement to expire, by its terms, upon the giving of written notice thereof to Executive at least 90 days prior to the expiration of the Term.

5.   Compensation and Payments Upon Termination .

You will be entitled to the following compensation from HSW International (in lieu of all other sums payable to you hereunder) upon the termination of your employment.

(a)   Mutual Agreement .  If your employment is terminated as a result of mutual agreement, HSW International shall pay your Base Salary, plus all accrued, earned and unused benefits under the Standard Benefit Plans, in each case, through the date of termination, plus the amount actually earned under any Bonus Plan (i.e., prorated for any year less than a full calendar year) as of the date of your termination, and you will be entitled to receive any vested pension and retirement benefits (for all purposes of this Letter Agreement, all such accrued, earned and unpaid items through the applicable date of termination (minus applicable federal, state and local payroll taxes, and other withholdings required by law or authorized by you) are referred to as the “Earned Amounts”).

(b)   Death .  If your employment is terminated as a result of death, HSW International will pay to your estate the Earned Amounts and shall have no further obligations to you or your heirs or estate.

(c)   Disability .  If your employment is terminated as a result of Disability, you will be provided long term disability benefits to which you may be eligible (if any), in accordance with HSW International’s then existing Standard Benefit Plans and HSW International shall pay to you the Earned Amounts and shall have no further obligations to you.

(d)   Cause .  If your employment is terminated for Cause, HSW International shall pay to you the Earned Amounts and shall have no further obligations to you.

(e)   Termination Without Cause .  If HSW International shall elect to terminate your employment for a reason other than those described in (a), (b), (c), (d) or (g) of Section 4 of this Letter Agreement (or for no reason), then, HSW International shall pay to you the following and shall have no further obligations to you:
 
 
 
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(i)   the Earned Amounts; plus,

(ii)   your Base Salary and medical and health benefits in effect as of the date of termination for a period of: (A) twelve months from the date of termination if such occurred prior to October 1, 2010; (B) nine months from the date of termination if such occurred between October 1, 2010, and September 30, 2011; or (C) six months from the date of termination if such occurred between October 1, 2011 and the end of the Term, such period not to extend beyond the original end of the Term; each, payable (minus applicable federal, state and local payroll taxes, and other withholdings required by law or authorized by you) as if you remained an active employee of the Company (the “ Severance Payment ”); provided , however , no Severance Payment shall be payable under this Subsection 5(e)(ii) unless you execute and deliver to the Company, in a form acceptable to the Company and its counsel, a general release of claims against the Company (the “Release”), which Release is not revoked by you within any time period allowed for revocation under applicable law.  Such Release must be signed by you and any revocation period must have expired within sixty (60) days after the effective date of your termination of employment.

(f)   Termination by You with Notice .  In the event that you terminate your employment (resign),  HSW International shall pay to you the Earned Amounts and shall have no further obligations to you.

(g)   Expiration at End of Term .  In the event HSW International elects to permit this Letter Agreement to expire by its own terms, pursuant to the provisions of Section 4(g), HSW International will pay to you the Earned Amounts through the end of the Term and shall have no further obligations to you.

6.   Non-Disclosure .

(a)   Proprietary Information .  By virtue of your employment with HSW International, you will have access to confidential, proprietary, and highly sensitive information relating to the business of the Company and which is a competitive asset of the Company (“ Proprietary Information ”).  Such Proprietary Information includes all information that relates to the business of the Company, which is or has been disclosed to you orally or in writing by the Company or obtained by virtue of work performed for the Company, is or was developed by the Company, and is not generally available to or known by individuals or entities within the industry in which the Company is or may become engaged or readily accessible by independent investigation.  The Proprietary Information sought to be protected includes, without limitation, information pertaining to:  (i) the identities of customers and clients with which or whom the Company does or seeks to do business, as well as the point of contact persons and decision-makers at these customers and clients, including their names, addresses, e-mail addresses and positions; (ii) the past or present purchasing history and the past and/or current job requirements of
 
 
 
Page 6

 
 
each past and/or existing customer and client; (iii) the volume of business and the nature of the business relationship between the Company and its customers and clients; (iv) the pricing of the Company’s products or services, including any deviations from its standard pricing for particular customers and clients; (v) the Company’s business plans and strategy; (vi) information regarding the Company’s employees, including their identities, skills, talents, knowledge, experience, and compensation; (vii) the Company’s financial results and business condition; and (viii) computer programs and software developed by the Company and tailored to the Company’s needs by its employees, independent contractors, or vendors; (ix) information relating to the Company’s vendors or other key suppliers; (x) any past or present merchandise or supply sources in the future; (xi) system designs, procedure manuals, automated data programs, reports, personnel procedures, and supply and service resources.  Proprietary Information may be contained on HSW International’s computer network, in computerized documents or files, or in any written or printed documents, including any written reports summarizing such information.

(b)   Non-Disclosure of Proprietary Information .  You acknowledge that HSW International’s Proprietary Information will be disclosed to you throughout your employment at the Company in order to enable you to perform your duties for the Company.  Finally, you acknowledge that the unauthorized disclosure of Proprietary Information could place the Company at a competitive disadvantage.  Consequently, during your employment and for a period of two (2) years thereafter, you agree not to use, publish, disclose or divulge, directly or indirectly, any Proprietary Information except in the performance of your duties to the Company.  You further agree not to make un-authorized copies of any Proprietary Information during your employment.

(c)   Survival of Your Obligations .  You understand and agree that your obligations under this Section shall survive the termination of this Letter Agreement and/or your employment with HSW International for a period of two years, except for Proprietary Information that constitutes trade secrets in which case the obligations of confidentiality shall continue in perpetuity.  You further understand and agree that your obligations under this Section are in addition to, and not in limitation or preemption of, all other obligations of confidentiality which you have to HSW International under general legal or equitable principles, or other policies implemented by the Company.

7.   Return of Company Property .

You acknowledge that all memoranda, notes, correspondence, databases, computer discs, computer files, computer equipment and/or accessories, pagers, telephones, passwords or pass codes, records, reports, manuals, books, papers, letters, CD-ROM diskettes, keys, Internet database access codes, client profile data, job orders, client and customer lists, contracts, software programs (including source code), information and records, drafts of instructions, guides and manuals, and other documentation (whether in draft or final form), and other sales, financial or technological information relating to the Company’s business, and any and all other documents containing Proprietary Information furnished to you by any representative of the Company or otherwise acquired or developed by you in connection with you association
 
 
 
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with the Company (collectively, “ Recipient Materials ”) shall at all times be the property of the Company.  Within forty-eight (48) hours of the termination of your employment for any reason, you will return to the Company any Recipient Materials (inclusive of any copies) that are in your possession, custody or control.

8.   Non-Compete and Non-Solicitation of Customers/Clients .

(a)   Access to Proprietary Information .  You acknowledge that the special relationship of trust and confidence between you, HSW International, and its clients and customers creates a high risk and opportunity for the misappropriation of the relationship and goodwill existing between HSW International and its clients and customers.  You further acknowledge and agree that it is fair and reasonable for HSW International to take steps to protect itself from the risk of such misappropriation.  You further acknowledge that, at the outset of your employment with HSW International and/or throughout your employment with the Company, you have been or will be provided with access to and informed of HSW International’s Proprietary Information, which will enable you to benefit from the Company’s goodwill and know-how.

(b)   Inevitable Disclosure .  You acknowledge that it would be inevitable in the performance of your duties as a director, officer, employee, investor, agent or executive of any person, association, entity, or company which competes with HSW International to disclose and/or use HSW International’s Proprietary Information, as well as to misappropriate HSW International’s goodwill and know-how, to or for the benefit of such other person, association, entity, or company.  You also acknowledge that, in exchange for the execution of the non-solicitation restriction set forth in Section 8(c), you have received substantial, valuable consideration.  You further acknowledge and agree that this consideration constitutes fair and adequate consideration for the execution of the non-solicitation restriction set forth in this Section 8.

(c)   Covenant Not to Compete .  You agree that during your employment with HSW International and, if terminated, for a period following employment that continues so long as (i) Severance Payment is being made, or (ii) you hold any vested, unexercised Options that have not been terminated (the “ Restrictive Period ”), you shall not, without the prior written consent of the Board, directly or indirectly, on your own behalf or in the service of or on behalf of others, within the Territory, perform the same or substantially the same duties you performed for HSW International, on behalf of any business that competes with HSW International.  You and the Company acknowledge that the business of the Company is very broad in scope and that your duties are equally broad in scope because you are the CEO with overall responsibility for the entire business.  Consequently, “ Territory ” means the United States of America, China and Brazil.  The Restrictive Period shall not apply during any time following termination of your employment when no Severance Payment is being made and none of the Options have an exercise price higher than the volume weighted average price of the Company’s common stock over the five most recent trading days.
 
 
 
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(d)   Non-Solicitation of Customers .  Ancillary to the enforceable promises set forth in this Letter Agreement as well as to protect the vital interests described in this Letter Agreement, you agree that, while you are employed by HSW International and during the Restrictive Period, you will not, without the prior written consent of HSW International, directly or indirectly, solicit any customer for the purpose of providing products or services that compete with products and services provided by the HSW International.  This restriction is limited to customers with whom you had material contact during your employment for the purpose of performing your job duties at the Company.  You also agree that, while you are employed by HSW International and for twelve months thereafter, you will not, without the prior written consent of HSW International, directly or indirectly, solicit any business partner of HSW International for the purpose of enticing that business partner to alter, limit or terminate its relationship with HSW International.  This restriction is limited to business partners with whom you had material contact during your employment for the purpose of performing your job duties at the Company.

(e)   Reasonable Restrictions .  You agree that the restrictions set forth above are ancillary to an otherwise enforceable agreement, are supported by independent valuable consideration, and that the limitations as to time, geographical area, and scope of activity to be restrained by this Section 8 are reasonable and acceptable, and do not impose any greater restraint than is reasonably necessary to protect the goodwill and other business interests of HSW International.  You agree that if, at some later date, a court of competent jurisdiction determines that the non-competition and/or the non-solicitation provisions set forth in this Section 8 do not meet the criteria set forth in applicable law, this Section 8 may be reformed by the court and enforced to the maximum extent permitted under applicable law.

(f)   Breach .  If you are found to have violated any of the provisions of this Section 8, you agree that the restrictive period of each covenant so violated shall be extended by a period of time equal to the period of such violation by him.  You understand that your obligations under this Section 8 shall survive the termination of your employment with the Company and shall not be assignable by you.

9.   Non-Solicitation of Employees and Executives .

You acknowledge that, as part of your employment or association with HSW International, you will become familiar with the salary, pay scale, capabilities, experiences, skill and desires of the Company’s employees.  In order to protect the confidentiality of such information, as well as HSW International’s investment in and relationships with such employees, you agree that, for a period of 12 months following the termination of your employment with HSW International, whether such termination occurs at the insistence of you or the Company, you shall not directly or indirectly recruit or solicit employees of HSW International with whom you had contact for the purpose of performing your job duties.  This restriction is limited to recruiting or soliciting for the purpose of enticing the employee to end his or her relationship with HSW International.  
 
 
 
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Your obligations under this Section 9 shall survive the termination of this Letter Agreement and your employment with HSW International.

10.   Remedies .

You hereby acknowledge and agree that in the event that you violate any of the provisions set forth in Sections 6, 7, 8, or 9 of this Letter Agreement, HSW International will suffer immediate and irreparable harm which cannot be accurately calculated in monetary damages.  Consequently, you acknowledge and agree that the Company shall – without limitation to or waiver of any other relief available to the Company – be entitled to immediate injunctive relief, either by temporary or permanent injunction, to prevent such a violation.

11.   Notification of Prospective Employment .

Prior to accepting employment or an association with any third party which is engaged in a business competitive to the business conducted by HSW International or which, because of the nature of your proposed or potential position with the third party, may require you to use or disclose the Company’s Proprietary Information, you agree to notify such third party that you are bound by the terms of this Letter Agreement.  You also agree that the Company may, at any time while any of the non-disclosure or non-solicitation covenants contained in this Letter Agreement are in force, provide notice of the existence of this Letter Agreement to any third party with whom or which you propose to negotiate or are negotiating concerning employment or an association or to accept employment, or with whom or which you have accepted employment or an association, without any liability to you for any such notice.

12.   Inventions, Ideas/Patentable Inventions .

You agree to disclose, fully and promptly, and only to HSW International, all ideas, methods, plans, improvements or patentable inventions of any kind which are made or discovered, in whole or in part, by you during the performance of your job duties; that result from any aid, support, or assistance by HSW International; or that are created during your work time with HSW International.  In connection with any invention, discovery, concept or idea subject to the foregoing Sections, you will promptly execute a specific assignment of any title, shop-right or license to the Company, and, if requested to do so, will cooperate fully with the Company to secure a patent, shop-right, or license therefor in the United States and/or foreign countries.  However, nothing in this Letter Agreement shall require any assignment otherwise prohibited by law.  You further agree that any and all work product created or performed by you while you are working with or on behalf of the Company, is a “work for hire” under the terms of the United States Copyright Act, and shall be and remain the exclusive property of the Company.  You hereby assign any and all rights, title, and ownership interests that you may now have or hereafter acquire in or to such work product to HSW International.  In the event the Company is unable for any reason, after reasonable effort, to secure your signature on any document needed in connection with the actions specified in the preceding
 
 
 
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paragraph, you hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as your agent and attorney in fact, which appointment is coupled with an interest, to act for and in your behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by you.  You hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which you now or may hereafter have for infringement of any invention, discovery, concept or idea assigned hereunder to the Company.
13.   No Conflicting Obligations.

You hereby represent that, except as you have disclosed in writing to the Company, you are not bound by the terms of any agreement with any other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of your employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. You hereby further represent that, to the best of your knowledge, your performance of all  the terms of this Letter Agreement and as an employee of the Company does not and shall not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by you in confidence or in trust prior to your employment with the Company, and you will not knowingly disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any third party.

14.   Successors; Binding Agreement .

 This Letter Agreement shall be binding upon, and insure to the benefit of, HSW International, you, and their respective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributees, devisees, and legatees, as applicable.  Without limiting the generality of the foregoing, HSW International may assign this Letter Agreement to any successor of HSW International (or the same may remain with HSW International as a subsidiary of a larger institution), without your consent, with such assignee being required to perform the Company’s obligations hereunder.

15.   Complete Agreement; Survival .

This Letter Agreement sets forth the entire agreement among HSW International and you concerning the subject matter hereof, and supersedes all prior written or oral understandings of the parties.  Sections 6, 7, 8, 9, 10 11 and 12 of this Letter Agreement shall survive the termination of Employee’s employment regardless of the party terminating the employment and regardless of the manner of such termination.

16.   Notice .

For purposes of this Letter Agreement, notices and all other communications provided for shall be in writing and shall be deemed to have been duly given when (i)
 
 
 
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delivered personally; (ii) sent by telecopy or similar electronic device and confirmed; (iii) delivered by overnight express; or (iv) sent by registered or certified mail, postage prepaid, addressed as follows:

If to you:
Greg Swayne
 
 

If to HSW International:

HSW International, Inc.
3350 Peachtree Road
One Capital City Plaza, Suite 1600
Atlanta, GA 30326
Attention: Board of Directors

or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

17.   Taxes.

The Company shall withhold such amounts from any compensation or other benefits payable to you under this Letter Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. You hereby acknowledge and agree that you are responsible for the review with your own personal tax advisors the federal, state, local and foreign (if applicable) tax consequences of any grant or transactions contemplated by this Letter Agreement and you are relying solely on such advisors and not on any statements or representations of the Company or any of its agents with respect to any such tax consequences.  You (and not the Company) shall be responsible for your own tax liability that may arise as a result of any grants or transactions contemplated by this Letter Agreement.

18.   Miscellaneous .

No provision of this Letter Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by you and the Company.  No waiver by either party hereto of, or compliance with, any condition or provision of this Letter Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Letter Agreement.
 
 
 
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19.   Governing Law .

This Letter Agreement is being made and is intended to be performed in the State of Georgia, and shall be governed, construed, interpreted, and enforced in accordance with the substantive laws of the State of Georgia.

20.   Counterparts .

This Letter Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same agreement.

21.   Voluntary Agreement .

The parties acknowledge that each has had an opportunity to consult with an attorney or other counselor concerning the meaning, import, and legal significance of this Letter Agreement, and each has read this Letter Agreement, as signified by their respective signatures hereto, and each is voluntarily executing the same after, if sought, advice of counsel for the purposes and consideration herein expressed.

[ signatures follow on next page ]
 
 

 
 
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To accept this offer, please sign and date this Letter Agreement in the space provided below and return it to me no later than September 28, 2009.  A second copy of the document has been provided for you to keep for your records.
 

Sincerely,
 


 
/s/ Kai-Shing Tao       
Mr. Kai-Shing Tao
Chairman, Compensation Committee
of the Board of Directors
HSW International, Inc.
 

 
I accept this offer of employment with HSW International, Inc. and agree to the terms and conditions outlined in this letter.
 

 

 
/s/ Gregory Swayne    September 28, 2009 
By:   Gregory Swayne    Date
 
 
 
 
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Exhibit 10.27

CONFIDENTIAL SEPARATION AND RELEASE AGREEMENT

This CONFIDENTIAL SEVERANCE AND RELEASE AGREEMENT (the “Agreement”) is made as of the date last written on the signature page hereof by and between Henry N. Adorno, a citizen and resident of Atlanta, Georgia (hereinafter referred to as “Executive”), and, HSW International, Inc., a Delaware corporation with its principal place of business in Atlanta, Georgia (the “Company”).  (The Company and Executive are sometimes collectively referred to hereinafter as the “Parties.”)

WHEREAS, Executive has been employed by the Company as its Vice Chairman and principal executive officer; and

WHEREAS, Executive has tendered his resignation to the Company, which the Company has accepted; and

WHEREAS, in exchange for the consideration provided for herein, to which Executive would not have been otherwise entitled, the parties are willing to agree to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the foregoing, the mutual promises herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows.

1.            Termination; Notice .

(a)           Effective as of September 28, 2009 (the “Termination Date”), Executive has resigned from Executive’s employment as Vice Chairman and principal executive officer of the Company, and the Company has accepted Executive’s resignation.  Except as set out in this Agreement, as provided by the specific terms of a benefit plan or as required by law, as of the Termination Date, all of Executive’s employee benefits with the Company will be terminated.  Executive also hereby represents that Executive has returned to the Company all Company-owned equipment, keys or passes, software, files, materials, programs and documents (including any copies).  In addition, upon receipt of Executive’s final paycheck from the Company, Executive agrees and acknowledges that Executive will have been paid by the Company for all of the time that Executive worked for the Company through the Termination Date.

2.            Separation Pay .  If Executive signs this Agreement and does not revoke Executive’s acceptance as provided in Section 8 below, the Company will pay Executive an amount equal to his regular base salary at the rate in effect on the Termination Date through December 31, 2009 (the “Separation Pay”).  Executive will receive the Separation Pay (minus applicable federal, state and local payroll taxes, and other withholdings required by law or authorized by Executive) in accordance with the Company’s payroll procedures on the Company’s next regular payday following the expiration of the “Revocation Period” as defined in Section 8 below.  Executive agrees to cooperate with and perform such duties as may be reasonably requested of Executive from time to time by the Company during the remainder of calendar year 2009, to assist with the Company’s transition of principal executive officers.
 
 
 
 

 

 
If Executive does not sign this Agreement and return it to the Company within twenty one (21) days, or if Executive signs this Agreement and revokes it, Executive will not be entitled to receive the Separation Pay described above.

3.            Release of Claims .  In exchange for the Company’s providing Executive with the Separation Pay described in Section 2, above, by signing this Agreement, Executive releases and forever discharges the Company, as well as its parent companies, affiliates, subsidiaries, divisions, officers, directors, stockholders, employees, agents, representatives, attorneys, lessors, lessees, licensors and licensees, and their respective successors, assigns, heirs, executors and administrators (collectively, the “the Company Parties”), from any and all claims, demands, and causes of action of every kind and nature, whether known or unknown, direct or indirect, accrued, contingent or potential, which Executive ever had or now has, including but not limited to any claims arising out of or related to Executive’s employment with the Company and the termination thereof (except and to the extent that such a release is expressly prohibited or made void by law).  The release includes, without limitation, Executive’s release of the Company Parties from any claims by Executive for lost wages or benefits, stock options, compensatory damages, punitive damages, attorneys’ fees and costs, equitable relief or any other form of damages or relief.  In addition, this release is meant to release the Company Parties from all common law claims, including claims in contract or tort, including, without limitation, claims for breach of contract, wrongful or constructive discharge, intentional or negligent infliction of emotional distress, misrepresentation, tortious interference with contract or prospective economic advantage, invasion of privacy, defamation, negligence or breach of any covenant of good faith and fair dealing.  Executive also specifically and forever releases the Company Parties (except and to the extent that such a release is expressly prohibited or made void by law) from any claims based on unlawful employment discrimination or harassment, including the Federal Age Discrimination in Employment Act (29 U.S.C. § 621 et   seq .).

By signing this Agreement, Executive agrees and acknowledges that Executive has no cause to believe there has been any violation of any local, state, or federal law that has occurred with respect to Executive’s employment or separation of employment from the Company.  Executive acknowledges that this release applies both to known and unknown claims that may exist between Executive and the Company and the Company Parties.  Executive expressly waives and relinquishes all rights and benefits which Executive may have under any state or federal statute or common law principle that would otherwise limit the effect of this Agreement to claims known or suspected prior to the date Executive executes this Agreement, and does so understanding and acknowledging the significance and consequences of such specific waiver.  Provided, however, that nothing in this Agreement extinguishes any claims Executive may have against the Company for breach of this Agreement.

In exchange for the Executive’s execution of this Agreement and his continued cooperation with the Company as provided above, the Company releases and forever discharges Executive, as well as his legal representatives, successors, assigns, heirs, executors and administrators (collectively, “the Executive Parties”), from any and all claims, demands, and causes of action of every kind and nature, whether known or unknown, direct or indirect, accrued, contingent or potential, which the Company ever had or now has, including but not limited to any claims arising out of or related to Executive’s employment with the Company and the termination thereof (except and to the extent that such a release is expressly prohibited or
 
 
 
2

 
 
made void by law).  The release includes, without limitation, the Company’s release of Executive from any claims by the Company for compensatory damages, punitive damages, attorneys’ fees and costs, equitable relief or any other form of damages or relief.  In addition, this release is meant to release Executive from all common law claims, including claims in contract or tort, including, without limitation, claims for breach of contract, misrepresentation, tortious interference with contract or prospective economic advantage, defamation, negligence or breach of any covenant of good faith and fair dealing.  Notwithstanding the foregoing, the release of claims against Executive by the Company contained in this Section 3, shall not apply in any respect to any claims the Company may assert against Executive based in fraud, for embezzlement or arising from a violation of criminal law by Executive (the “Reserved Claims.”)

By signing this Agreement, the Company agrees and acknowledges that the Company has no cause to believe there has been any violation of any local, state, or federal law that has occurred with respect to Executive’s employment or separation of employment from the Company.  The Company acknowledges that this release applies both to known and unknown claims that may exist between the Company and Executive (excepting the Reserved Claims).  The Company expressly waives and relinquishes all rights and benefits which the Company may have under any state or federal statute or common law principle that would otherwise limit the effect of this Agreement to claims known or suspected prior to the date the Company executes this Agreement, and does so understanding and acknowledging the significance and consequences of such specific waiver.  Provided, however, that nothing in this Agreement extinguishes any claims the Company may have against Executive for breach of this Agreement.

4.            No Admissions .  The Parties hereby acknowledge and agree that the releases set out above in Section 3 of this Agreement constitute a final compromise of any potential claims by one Party against the other in connection with Executive’s employment by the Company (excepting the Reserved Claims), and is not an admission by any Party that any such claims exist or that any Party is liable for any such claims.  Unless prohibited by applicable law or regulation, the Parties further agree not to hereafter, directly or indirectly, sue, assist in or be a voluntary party to any litigation against the other Party for any claims relating to events occurring prior to or simultaneously with the execution of this Agreement, including but not limited to Executive’s termination of employment with the Company (excepting the Reserved Claims).

Notwithstanding the foregoing, nothing in this Agreement prohibits Executive from filing a charge with, or participating in any investigation or proceeding conducted by, the U.S. Equal Employment Opportunity Commission or a comparable state or federal fair employment practices agency; provided, however, that this Agreement fully and finally resolves all monetary matters between Executive and the Company and the Company Parties, and by signing this Agreement, Executive is waiving any right to monetary damages, attorneys’ fees and/or costs related to or arising from any such charge, complaint or lawsuit filed by Executive or on Executive’s behalf, individually or collectively.

5.            Confidentiality; No Disparagement; Cooperation .

(a)            Confidentiality .  Executive hereby represents and agrees that Executive has not and will not (except as required by law) disclose information regarding the specific terms of this Agreement, and particularly the amount or nature of Executive’s Separation Pay, to
 
 
 
3

 
 
anyone except Executive’s immediate family, Executive’s attorney and accountant or financial advisor as reasonably necessary.


(b)            Cooperation .  Executive hereby agrees that he will cooperate with and assist the Company in any dispute, grievance, investigation, litigation or administrative claim involving any matters relating to the period of time that Executive was employed by the Company.

(c)            Board Seat .  Notwithstanding Executive’s resignation as Vice Chairman of the Company, Executive shall remain a member of the Company’s Board of Directors (the “Board”) until such time as the next meeting at which the election of directors shall take place.  The parties acknowledge that Executive will not stand for reelection to the Board at such annual meeting.

6.            Relief and Enforcement .  Executive understands and agrees that any breach of this Agreement by Executive will relieve the Company of its obligation to provide any unpaid Separation Pay as set out in Section 2, above.  Executive also understands and agrees that if Executive violates the terms of Section 5 of this Agreement, Executive will cause injury to the Company and/or one or more of the Company Parties) that will be difficult to quantify or repair, so that the Company (and/or the Company Parties) will have no adequate remedy at law.  Accordingly, Executive agrees that if Executive violates Section 5 of this Agreement, the Company (or the Company Parties) will be entitled as a matter of right to obtain an injunction from a court of law, restraining Executive from any further violation of this Agreement.  The right to an injunction is in addition to and not in lieu of any other remedies that the Company (or the Company Parties) has at law or in equity.

7.            No Modifications; Governing Law; Entire Agreement .  This Agreement cannot be changed or terminated orally, and no modification or waiver of any of the provisions of this Agreement is effective unless in writing and signed by all of the parties hereto.  The parties agree that this Agreement is to be governed by and construed in accordance with the laws of the State of Georgia, and that any suit, action or charge arising out of or relating to this Agreement will be adjudicated in the state or federal courts in Fulton County, Georgia.  This Agreement sets forth the entire and fully integrated understanding between the parties, and there are no representations, warranties, covenants or understandings, oral or otherwise, that are not expressly set out herein.

8.            Right to Revoke .  ONCE SIGNED BY EXECUTIVE, THIS AGREEMENT IS REVOCABLE IN WRITING FOR A PERIOD OF SEVEN (7) DAYS (THE “REVOCATION PERIOD”).  IN ORDER TO REVOKE EXECUTIVE’S ACCEPTANCE OF THIS AGREEMENT, EXECUTIVE MUST DELIVER WRITTEN NOTICE TO THE COMPANY CARE OF BRADLEY T. ZIMMER, AND SUCH WRITTEN NOTICE MUST ACTUALLY BE RECEIVED WITH THE SEVEN (7) DAY REVOCATION PERIOD.

9.            Voluntary Execution .  By signing below, Executive acknowledges that Executive has read this Agreement, that Executive understands its contents and that Executive has relied upon or had the opportunity to seek the legal advice of Executive’s attorney, who is the attorney
 
 
 
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of Executive’s own choosing.  Executive further acknowledges and agrees that the Company advised Executive in writing to consult with any attorney before executing this Agreement.

10.            Due Authority .  The Company has full authority necessary to enter into this Agreement, and such has been approved by the Board of Directors of the Company or a committee thereof in which sufficient authority is vested.

11.            Prior Equity Awards .  For the avoidance of doubt, the parties acknowledge that Executive has earned the following equity awards, which shall continue pursuant to the terms of their applicable written agreements between Executive and the Company:  (a) Stock Option Award dated August 23, 2006, in the amount of 250,000 optioned shares with an exercise price of $6.50 per share; (b) Stock Option Award dated October 10, 2007, in the amount of 250,000 optioned shares with an exercise price of $7.10 per share; and (c) Stock Option Award dated August 12, 2008, in the amount of 30,000 optioned shares with an exercise price of $3.25 per share.  All aforementioned awards are vested in full and carry an expiration and termination date that is ten years from their respective dates of grant.

12.            Miscellaneous .

(a)           Should any portion, term or provision of this Agreement be declared or determined by any court to be illegal, invalid or unenforceable, the validity or the remaining portions, terms and provisions shall not be affected thereby, and the illegal, invalid or unenforceable portion, term or provision shall be deemed not to be part of this Agreement.

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

(c)           This Agreement shall inure to the benefit of and shall be binding upon Executive, Executive’s heirs, administrators, representatives, executors, successors and assigns and upon the successors and assigns of the Company.

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

EXECUTIVE HEREBY ACKNOWLEDGES THAT EXECUTIVE HAS BEEN GIVEN A PERIOD OF AT LEAST TWENTY-ONE (21) DAYS TO CONSIDER WHETHER TO EXECUTE THIS AGREEMENT, WHICH EXECUTIVE MAY WAIVE BY SIGNING AT ANY TIME PRIOR TO THE EXPIRATION OF THE 21 DAY CONSIDERATION PERIOD.  EXECUTIVE ALSO ACKNOWLEDGES THAT EXECUTIVE WAS ADVISED BY THE COMPANY IN WRITING TO CONSULT WITH AN ATTORNEY BEFORE SIGNING THIS AGREEMENT .

[ The next page is the signature page. ]


             

 
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EMPLOYEE:
 
       
       
  /s/ Henry N. Adorno 
(SEAL)
 
(Signature)
 
       
     
 
Henry N. Adorno
 
       
 
Date:
September 28, 2009
 



 
THE COMPANY:
 
       
 
HSW INTERNATIONAL, INC.