Diligent Corp - FORM 10-Q - November 10, 2009

Attached files

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EX-32.1 - Diligent Corp	v165182_ex32-1.htm
EX-32.2 - Diligent Corp	v165182_ex32-2.htm
EX-31.2 - Diligent Corp	v165182_ex31-2.htm
EX-31.1 - Diligent Corp	v165182_ex31-1.htm
EX-10.12 - Diligent Corp	v165182_ex10-12.htm
EX-10.11 - Diligent Corp	v165182_ex10-11.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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.

¨ 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: 000-53205

Diligent Board Member Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware		26-1189601
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

39 West 37 St. 8th Floor

New York, NY 10018

(Address of principal executive offices)(Zip Code)

(212) 741-8181

(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

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 ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

¨ Large accelerated filer	¨ Accelerated filer

¨ Non-accelerated filer	x 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 x No

The number of shares of the registrant’s common stock outstanding as of November 9, 2009 was 90,440,000.

(This page intentionally left blank)

CONTENTS

			PAGE

Forward Looking Statements			.ii
Available Information			ii

PART I – Financial Information

	Item 1.	Consolidated Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4T.	Controls and Procedures	20

PART II – Other Information

	Item 1.	Legal Proceedings	21
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults Upon Senior Securities	21
	Item 4.	Submission of Matters to a Vote of Security Holders	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	21

SIGNATURES			22

FORWARD LOOKING STATEMENTS

Except for statements of historical fact, certain information described in this document contains "forward-looking statements" that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," "would" or similar words. The statements that contain these or similar words should be read carefully because these statements discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other "forward-looking" information. Diligent Board Member Services, Inc. believes that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able accurately to predict or control. Further, we urge you to be cautious of the forward-looking statements which are contained in this Form 10-Q because they involve risks, uncertainties and other factors affecting our operations, market growth, service, products and licenses. Events in the future may cause our actual results and achievements, whether expressed or implied, to differ materially from the expectations we describe in our forward-looking statements. The occurrence of future events could have a material adverse effect on our business, results of operations and financial position.

AVAILABLE INFORMATION

We file reports, proxy statements, information statements and other information with the Securities and Exchange Commission. You may read and copy this information, for a copying fee, at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on its public reference rooms. Our Securities and Exchange Commission filings are also available to the public from commercial document retrieval services, and at the web site maintained by the Securities and Exchange Commission at http://www.sec.gov. Our internet address is http://www.boardbooks.com. We will make available through a link to the SEC’s web site, electronic copies of the materials we file with the SEC (including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, the Section 16 reports filed by our executive officers, directors and 10% stockholders and amendments to those reports). To receive paper copies of our SEC materials, please contact us by mail addressed to Robert E. Norton, Corporate Secretary, Diligent Board Member Services, Inc., 39 West 37 St. 8th Floor, New York, NY 10018, (212) 741-8181.

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

Diligent Board Member Services, Inc.

Consolidated Balance Sheets

	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Cash and cash equivalents	$	1,308,928		$	1,265,347
Term deposit		72,270			58,150
Accounts receivable, net		313,495			390,180
Prepaid expenses and other current assets		244,778			222,617
Total current assets		1,939,471			1,936,294

Property and equipment, net		1,164,184			1,116,007
Note receivable from affiliate, net of valuation allowance		1,361,791			1,361,791
Restricted cash - security deposits		247,675			246,685
Total assets	$	4,713,121		$	4,660,777

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Accounts payable and accrued expenses	$	388,507		$	474,860
Deferred revenue		1,108,549			601,408
Current portion of obligations under capital leases		105,182			114,308
Payables to affiliates		5,530			49,578
Total current liabilities		1,607,768			1,240,154

Obligations under capital leases, less current portion		81,180			50,816
Other noncurrent liabilities		41,535			-

Commitments and contingencies

Redeemable preferred stock:
Series A convertible redeemable preferred stock, $.001 par value, 50,000,000 shares authorized, 30,000,000 and 0 shares issued and outstanding (liquidation value $4,684,438)		3,060,701			-

Stockholders' (deficiency) equity:
Common Stock, $.001 par value, 250,000,000 shares authorized, 90,440,000 shares issued and outstanding		90,440			90,440
Additional paid-in capital		24,498,273			24,618,070
Accumulated deficit		(24,656,856	)		(21,318,658	)
Accumulated other comprehensive loss		(9,920	)		(20,045	)
Total stockholders' (deficiency) equity		(78,063	)		3,369,807
Total liabilities, redeemable preferred stock and stockholders' (deficiency) equity	$	4,713,121		$	4,660,777

See accompanying notes to consolidated financial statements

Diligent Board Member Services, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008

Revenues	$	1,303,764		$	797,721		$	3,457,668		$	2,089,893
Cost of revenues		548,555			522,588			1,544,122			1,422,584
Gross profit		755,209			275,133			1,913,546			667,309

Operating expenses:
Selling and marketing expenses		579,414			1,480,228			1,853,075			4,865,123
General and administrative expenses		931,096			1,557,457			3,055,137			4,101,415
Research and development expenses		183,826			235,033			542,753			810,871
Depreciation and amortization		102,775			74,623			286,736			196,368
Total operating expenses		1,797,111			3,347,341			5,737,701			9,973,777

Operating loss		(1,041,902	)		(3,072,208	)		(3,824,155	)		(9,306,468	)

Other income (expenses):
Interest income, net		90,919			133,407			276,561			513,023
Foreign exchange transaction gain/(loss)		54,820			(296,873	)		53,927			(278,061	)
Other		-			-			170,954			-
Total other income (expenses)		145,739			(163,466	)		501,442			234,962

Loss before provision for income taxes		(896,163	)		(3,235,674	)		(3,322,713	)		(9,071,506	)

Provision for income taxes		9,429			26,652			15,485			44,239

Net loss	$	(905,592	)	$	(3,262,326	)	$	(3,338,198	)	$	(9,115,745	)

Net loss per share (basic and diluted)	$	(0.01	)	$	(0.03	)	$	(0.04	)	$	(0.09	)
Weighted average shares outstanding (basic and diluted)		90,440,000			102,071,000			90,348,425			102,071,000

See accompanying notes to consolidated financial statements

Diligent Board Member Services, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(3,338,198	)	$	(9,115,745	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		286,736			196,368
Share-based compensation		79,754			697,370
Accrued interest receivable		-			(258,141	)
Changes in operating assets and liabilities:
Accounts receivable		76,685			(294,446	)
Prepaid expenses and other current assets		(22,161	)		(35,027	)
Restricted cash - security deposits		(990	)		(204,544	)
Accounts payable and accrued expenses		(86,353	)		83,744
Deferred revenue		507,141			115,746
Payables to affiliates		(44,048	)		(121,897	)
Other noncurrent liabilities		41,535			-
Net cash used in operating activities		(2,499,899	)		(8,936,572	)
Cash flows from investing activities:
Cash acquired in acquisition, net of purchase price		-			83,593
Investment in term deposit		-			(993,620	)
Purchase of property and equipment		(204,827	)		(856,967	)
Net cash used in investing activities		(204,827	)		(1,766,994	)
Cash flows from financing activities:
Proceeds from issuance of Series A preferred stock, net		2,861,150			-
Cash paid for note receivable from affiliate		-			(100,000	)
Due from officers		-			(145,843	)
Payments of obligations under capital leases		(102,147	)		(77,468	)
Net cash provided by (used in) financing activities		2,759,003			(323,311	)
Effect of exchange rates on cash and cash equivalents		(10,696	)		8,691
Net increase (decrease) in cash and cash equivalents		43,581			(11,018,186	)
Cash and cash equivalents at beginning of period		1,265,347			13,675,080
Cash and cash equivalents at end of period	$	1,308,928		$	2,656,894

Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest	$	21,775		$	30,563
Income taxes	$	19,948		$	7,184
Supplemental disclosure of noncash investing and financing activities:
Share-based compensation	$	79,754		$	697,370
Property and equipment acquired under capital leases	$	123,385		$	-
Conversion of accrued interest to loan principal	$	-		$	258,141

See accompanying notes to consolidated financial statements

Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1)	Organization and nature of the business

Diligent Board Member Services, Inc. (“Diligent” or the “Company”) provides worldwide online management of corporate governance documents (“Boardbooks”) to corporate clients. Boardbooks is a web-based portal that directors and administrative staff use to compile, update and examine board materials prior to and during board meetings. Each client of the Company enters into a service agreement whereby the Company agrees to provide and support the Boardbooks service.

The Company was incorporated in the State of Delaware on September 27, 2007 and is listed on the New Zealand Stock Exchange (“NZSX”). On December 12, 2007, the Company completed its initial public offering on the NZSX. In April 2008, the Company filed a Form 10 registration statement with the United States Securities and Exchange Commission (“SEC”), which became effective on June 30, 2008. The Company’s corporate headquarters are located in New York and New Zealand.

The Company’s predecessor entity was Services Share Holding, LLC (previously called Diligent Board Member Services, LLC), a Delaware limited liability company (herein referred to as “SSH LLC”).

The Company has a wholly-owned subsidiary located in New Zealand, Diligent Board Member Services NZ Limited (“DBMS NZ”), which was acquired on January 1, 2008. Prior to January 1, 2008, DBMS NZ was owned by a stockholder and officer of the Company. DBMS NZ provides research and development services to the Company. The Company also has a wholly-owned subsidiary, Diligent Boardbooks Limited (“DBL”), an England and Wales limited liability company which was formed on December 14, 2006, and provides European sales and marketing services. DBL was inactive until April 2008.

The Company’s consolidated financial statements are presented in US dollars, rounded to the nearest dollar, which is the Company’s functional and presentational currency.

The Company has evaluated all subsequent events through November 9, 2009, which represents the filing date of this Form 10-Q with the SEC, to ensure that this Form 10-Q includes subsequent events that should be recognized in the financial statements as of September 30, 2009, and appropriate disclosure of subsequent events which were not recognized in the financial statements.

Liquidity

Despite growth in net sales during 2008, the Company’s growth rate lagged behind its projections. Amid liquidity concerns, the Company initiated plans to scale back its growth plans in order to reduce operating expenses. During the fourth quarter of 2008, the Company significantly reduced its sales force, reduced salaries for some of its more highly compensated employees and reduced the number of members of the board of directors. The Company also actively sought additional sources of financing and, in March 2009, issued 30,000,000 shares of newly-created Series A Preferred Stock for $0.10 per share, providing additional capital of $2,861,150, net of issuance costs (See Note 7).

At the current level of reduced expenses, coupled with current sales growth forecasts, management believes this funding will be sufficient to support the operations and obligations of the Company through an expected cash flow break even by the end of the third quarter of 2010. The primary uncertainty concerning the Company’s capital needs pertains to its ability to achieve the expected sales growth in a timely manner such that recurring revenues exceed operating expenditures prior to the depletion of capital.

The note receivable from affiliate, due from SSH LLC, provides for quarterly interest payments of approximately $90,000 due through October 1, 2010, and a $7,161,791 principal payment due October 1, 2010. This note is collateralized with 21,992,597 shares of Diligent common stock. Management believes that collection of the note receivable is dependent upon, and limited to, the amount of cash that SSH LLC can receive from the sale of the underlying collateral as payments become due and has recorded a valuation allowance on the note (see Note 6). Although management believes a portion of the principal will be collected when due in October 2010, with the exception of interest payments due under the note, the Company has not included the collection of the note receivable in its liquidity planning.

3)	Significant accounting policies

Basis of presentation – The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions for Form 10-Q pursuant to the rules and regulations of the SEC. Accordingly, they do not include all information and notes required by GAAP and provided in the annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Form 10-K of the Company for the year ended December 31, 2008, as filed with the SEC on March 30, 2009 and amended on May 14, 2009.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair value of financial instruments – The Company’s financial instruments include cash and cash equivalents, term deposits, accounts receivable, accounts payable and accrued expenses. The fair value of these financial instruments approximates book value due to their short term settlements.

Share-based compensation – In November 2007, we adopted our 2007 Stock Option and Incentive Plan pursuant to which we intend to issue share-based compensation from time to time, in the form of stock, stock options and other equity based awards.

Share-based compensation consists of stock or stock options issued to employees and contractors for services rendered. The Company measures the cost of employee services received in exchange for an award of equity-based securities using the fair value of the award on the date of the grant, and recognizes the cost over the period that the award recipient is required to provide services to the Company in exchange for the award.

Compensation cost for awards granted to non-employees is measured based on the fair value of the award at the measurement date, which is the date performance is satisfied or services are rendered by the non-employee. Compensation costs are amortized over the underlying awards’ vesting terms, and are recorded as share-based compensation expense. These costs are included in general and administrative expense in our statement of operations.

Earnings per share – Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, excluding unvested restricted common shares. Diluted net loss per share is computed using the weighted average number of common shares outstanding and, when dilutive, unvested restricted common shares and stock options. Because the Company reported a net loss for all periods presented, all potential common shares attributable to unvested restricted stock and stock options have been excluded from the computation of the diluted net loss per share because the effect would have been anti-dilutive.

Recent accounting pronouncements – In April 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. The guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance upon its issuance and it had no material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued new guidance on management’s assessment of subsequent events, which establishes the accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The new guidance was effective for interim and annual periods ending after June 15, 2009, and the implementation did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new accounting guidance which will change the way entities account for securitizations and special-purpose entities. The new guidance eliminates existing exceptions, strengthens the standards relating to securitizations and special-purpose entities, and enhances disclosure requirements, and is effective for fiscal years beginning after November 15, 2009. The adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.

In July 2009, the FASB issued the Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“Codification”), which is the single source of authoritative U.S. nongovernmental GAAP. The Codification does not change GAAP, but is intended to make it easier to find and research issues and will change the way GAAP is referenced. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company has begun to use the new Codification when referring to GAAP in this Form 10-Q.

4)	Acquisition of DBMS NZ

On January 1, 2008, the Company acquired all the outstanding shares of DBMS NZ, for NZD 5,000 (US$3,804). Prior to the acquisition, DBMS NZ provided research and development services for the Company.

5)	Term deposit

At September 30, 2009, the Company had a term deposit with a New Zealand bank with an original term of 365 days. The term deposit in the amount of NZD 100,000 (US$72,270 at September 30, 2009) bears interest at 4.50% and matures in March 2010.

At December 31, 2008, the Company had a term deposit with a New Zealand bank with an original term of 100 days. The term deposit in the amount of NZD 100,000 (US$58,150 at December 31, 2008) bore interest at 6.00% and matured in March 2009.

6)	Note receivable from affiliate

The note receivable from affiliate represents amounts due from SSH LLC under a Promissory Note and Security Agreement dated October 1, 2007 (the “Note”).

The Note bears interest at 5% per annum, which is payable in arrears on the first day of each calendar quarter, commencing April 1, 2008. SSH LLC elected, under the terms of the Note, to defer each of the first four quarterly interest payments through January 1, 2009, in which case the interest was added to the principal balance and continues to accrue interest from the date the payment was due. The loan matures on October 1, 2010, when the entire principal balance and all accrued interest will be due and payable. At December 31, 2008, the Note was secured by 25,000,000 shares of the Company’s stock which were pledged as collateral by members of SSH LLC.

At September 30, 2009 and December 31, 2008, the contractual outstanding loan balance was $7,161,791 (including accrued interest through December 31, 2008 of $371,778). The Company evaluated the collectability of the loan and determined that at December 31, 2008 it was probable that the Company would be unable to collect all amounts contractually due under the Note. This conclusion was principally based on the deterioration in the value of the underlying collateral and the worsening economic environment.

At December 31, 2008, the Company recorded a $5.8 million valuation allowance and a corresponding charge to impairment loss in order to write down the Note to the estimated fair value of the underlying collateral. In the absence of an active market for the Company’s stock, or other observable inputs for similar instruments, the Company based its valuation principally on the value of the recent issue of preferred stock, adjusted using an assumed discount rate of 20%, which is management’s estimate based on the value of the preferred features of the Series A Preferred Stock. In addition, management assumed that SSH LLC and/or its members would sell a portion of the underlying collateral to meet their quarterly interest payments, thereby reducing the amount of collateral expected to be available when the Note matures in 2010. These are considered unobservable inputs falling within the definition of Level 3 inputs.

On March 30, 2009, SSH LLC sold 2,387,263 pledged shares to Spring Street Partners, L.P. in a private transaction valued at $0.075 per share, or $179,045 in the aggregate. The proceeds were applied against the Note interest payments due April 1 and July 1, 2009. In September 2009, SSH LLC sold an additional 620,140 shares to Spring Street Partners, L.P. in a private transaction valued at $0.144 per share. The proceeds of $89,523 were used to pay the interest due October 1, 2009. As a result, the number of shares securing the Note at September 30, 2009 is 21,992,597.

At September 30, 2009, the Company reviewed the valuation of the Note and determined that no further adjustment to the valuation allowance is necessary.

7) Redeemable Preferred Stock – On March 11, 2009, the Company issued 30,000,000 shares of newly-created Series A Preferred Stock for $0.10 per share in a private offering, for an aggregate of $3,000,000 in additional capital. Expenses relating to the share issuance were $138,850. The principal terms of the Preferred Shares are as follows:

Dividend rights – The Preferred Shares carry a fixed, cumulative, dividend of 11% per annum (adjusted for stock splits, consolidation, etc). The dividend, which is due on the first business day of each calendar year for the prior year, may (at the Company’s option) be paid either in cash or in kind by the issuance of additional Preferred Shares (PIK Shares), to be issued at the same issue price as the Series A Preferred Stock of $0.10 per share. The 11% annual dividend on the Preferred Shares will have preference over the declaration or payment of any dividends on the Company’s common stock (ordinary shares). In addition to the 11% preferred dividend, the holders of the Preferred Shares will also be entitled to participate pro rata in any dividend paid on the Company’s common stock.

Conversion rights – The Preferred Shares are convertible at any time at the option of the holders into the Company’s common stock on a one-for-one basis at a conversion price of $0.10 per share. In addition, Preferred Shares will automatically be converted into common stock upon the closing of an underwritten share offering by the Company on a registered stock exchange which realizes at least $40,000,000 of gross proceeds.

Redemption rights – The holders of the Preferred Shares have the option to require the Preferred Shares (including any PIK shares) to be redeemed in cash, at $0.10 per share plus accrued and unpaid dividends, at any time after 60 months from the date of issue of the Preferred Shares.

Anti-Dilution Provision – In the event of a future offering of the Company’s stock at a price per common share which is less than the Preferred Share conversion price immediately before such offering, the conversion price for the Preferred Shares is adjusted according to a weighted average formula.

Liquidation entitlement – In the event of any voluntary or involuntary liquidation of the Company, the holders of Preferred Shares are entitled to an amount per Preferred Share equal to 1.5 times the original issue price of $0.10 plus any dividends which have become due but have not been paid.

Voting rights – Preferred Shares have equal voting rights (one vote per share) to common stock, except that Preferred Shares do not vote in the general election of directors.

Other provisions – For as long as not less than 15,000,000 Preferred Shares are outstanding, the holders of the Preferred Shares have the right between them to appoint one director, and the Company may not take action relating to certain major transactions without obtaining the consent of not less than 60% of the Preferred Shares or without obtaining the approval of the director appointed by the holder of the Preferred Shares (for matters requiring Board of Directors approval).

Accounting for Preferred Shares – US GAAP requires that, if certain criteria are met, companies must bifurcate conversion options from their host instruments and account for them as free standing derivative instruments. The Company has evaluated the conversion option on the Preferred Shares and determined that the embedded conversion option should not be bifurcated. Additionally, the Company analyzed the conversion feature and determined that the effective conversion price was higher than the market price at date of issuance; therefore no beneficial conversion feature was recorded. The Company has classified the Preferred Shares as temporary equity because they are redeemable upon the occurrence of an event that is not solely within the control of the issuer. As noted above, the holders of the Preferred Shares may demand redemption any time after 60 months from the date of issue. The securities are carried at their face value net of issuance costs plus accrued dividends (representing fair value) because the contingency has not been met and it is not probable that it will be met. If the redemption were considered likely to occur, the carrying value would be adjusted to its liquidation value.

The carrying value of the Preferred Shares at September 30, 2009 is as follows:

Gross proceeds	$	3,000,000
Less: Issuance costs		(138,850	)
	$	2,861,150
Cumulative amortization of offering costs		15,113
Cumulative in kind dividend		184,438
Balance at September 30, 2009	$	3,060,701

8) Stockholders’ equity – In March 2009, the stockholders of the Company approved an increase in the number of authorized shares of common stock from 200,000,000 to 250,000,000.

9) Stock option and incentive plan – In November 2007, the Company adopted the 2007 Stock Option and Incentive Plan (“the Plan”) authorizing the granting of awards to selected employees, directors and consultants of the Company, and its affiliates in the form of incentive stock options, non-qualified stock options, and stock awards. The Plan is administrated by the Company's Board of Directors. Pursuant to delegation by the Company's Board of Directors, the Remunerations and Nominations Committee determines the number of shares, the term, the frequency and date, the type, the exercise periods, any performance criteria pursuant to which stock option awards may be granted and the restrictions and other terms and conditions of each grant of restricted shares in accordance with the terms of the Plan. The Plan authorizes the issuance of up to 10,000,000 shares of the Company’s common stock.

Restricted Stock Awards – On November 8, 2007, the Company granted 4,000,000 shares of common stock to selected employees (3,064,000 shares), directors (200,000 shares) and consultants (736,000 shares) of the Company, and its affiliates. Of these shares, 2,071,000 shares were fully vested upon issuance on December 12, 2007, 160,000 shares were forfeited during 2008 and 1,769,000 shares vested on January 1, 2009, based on continued employment through that date. The fair value of the awards to employees was estimated to be NZD 0.90(US$0.69) per share, which was the closing price of the Company's stock on December 12, 2007. The fair values of the awards to non-employees were closing prices on various measurement dates.

On October 23, 2008, the Company granted 600,000 shares of restricted stock to two officers in accordance with the terms of their employment agreements, which included 250,000 shares which vested immediately, 250,000 shares which vested on February 15, 2009, and 100,000 shares which vested on May 15, 2009, based on continued employment through that date. The estimated fair value of the shares at the award date was measured using the closing price of NZD 0.25 (US$0.14) per share on the date of grant.

During the nine months ended September 30, 2009 and 2008, the Company recognized share-based compensation costs related to restricted stock awards of $23,099 and $697,370, respectively.

There were 2,119,000 shares of nonvested restricted stock outstanding at December 31, 2008, of which 1,769,000 became fully vested on January 1, 2009, 250,000 became fully vested in February 2009, and the remaining 100,000 became fully vested in May 2009. Accordingly, at September 30, 2009 restricted stock is fully vested and there is no unrecognized compensation cost.

Stock Option Awards – On August 20, 2009 the Board of Directors approved the Stock Option Agreement, which contains the terms and conditions with respect to stock options granted by the Company under the Plan. On that date, the Board of Directors awarded 3,650,000 stock options to officers and an additional 100,000 options to two former outside directors of the Company. The exercise price of each option is the market price of the Company’s stock for the last sale prior to the grant date, converted to U.S. dollars using the exchange rate in effect on the grant date. The options generally expire after a period not to exceed ten years, except in the event of termination, whereupon vested options must be exercised generally within three months, or upon death or disability, in which cases the vested options may be exercised within twelve months, but in all cases the exercise date may not exceed the expiration date.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model and the resulting fair value is recorded as share-based compensation expense on a straight line basis over the option vesting period for employee stock options, ranging from six months to three years. The value of the options granted to former directors was charged to expense as of the grant date.

The fair values of the options granted were estimated based on the following assumptions:

Expected volatility (1)		183.98 - 186.94	%
Expected term (2)	5.35 – 6.00 years
Risk-free interest rate (3)		2.43 - 2.75	%
Dividend yield		-

(1)

The expected volatility was determined using historical volatility data for comparable companies.

(2)

The expected term of the options has been estimated using the simplified method allowed by the SEC, which calculates the average of the vesting period and the contractual term of the options.

(3)

The risk free interest rate is based on the U.S. Treasury constant maturity nominal yield with a term approximately equal to the expected terms of the options.

The weighted average grant-date fair value of the options granted was $0.1369.

A summary of stock option activity for the nine months ended September 30, 2009 is as follows:

	Options		Weighted average exercise price		Weighted average remaining contractual term
Outstanding at January 1, 2009		-	$	-
Granted		3,750,000		.14
Exercised		-		-
Forfeited		-		-
Outstanding at September 30, 2009		3,750,000		.14	9.89 years
Exercisable at September 30, 2009		-	$	.14

During the nine months ended September 30, 2009, the Company recognized share-based compensation costs related to stock options of $56,655. At September 30, 2009 there was $456,802 of unrecognized share-based compensation expense related to options granted that will be recognized over the next three years.

10) Income taxes – The Company records an income tax provision for foreign tax obligations in New Zealand. No US current income taxes have been provided due to losses incurred. The Company has recorded a full valuation allowance against all US deferred tax assets because it is more likely than not that the deferred tax assets will not be realized.

The Company and its subsidiaries are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. The Company’s federal, state and foreign income tax returns for the tax years ended December 31, 2008 and 2007 are open for examination by the respective taxing jurisdictions.

11) Subsequent events – On October 9, 2009, the Company issued 910,000 stock option awards to employees, at an exercise price of $0.16 per share, which vest one year from the date of grant and expire ten years from the date of grant

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

The following discussions of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto included elsewhere in this Form 10-Q. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Overview

We develop and sell an online software application called Diligent Boardbooks, which is a web-based portal that directors and administrative staff use to compile, update and examine board materials prior to and during board meetings. Each of our clients enters into a service agreement whereby we agree to provide and support the Diligent Boardbooks service.

The Diligent Boardbooks product features an on-screen interface that resembles a book and displays documents in single web-viewable pages, from a secure central database. The software is accessed via the internet and is a “point and click” system that gives directors the ability to navigate throughout the entire virtual book.

The first phase of our business focus was developing and testing the Diligent Boardbooks system, building a loyal core of blue chip customers to become champions of the product, and promoting product awareness through exposure in print media. During this phase we did not focus on revenue growth or profitability, and sales and marketing had been conducted by two to three staff members, who fit this role alongside their other responsibilities. By 2007 we had a commercially viable product and shifted our focus to commit substantial resources to the sales and marketing of our Diligent Boardbooks product.

In December 2007, the Company raised $16.4 million, net of expenses, in its initial public offering on the New Zealand Stock Exchange. Our plan was to use the proceeds of the IPO to significantly expand our sales force and aggressively target growth. By the first quarter of 2008, much of the infrastructure for this growth was set up.

Despite growth in net sales, our growth rate lagged behind the projections we had set for the Company, which was exacerbated by the global financial crisis. By the third quarter of 2008, we initiated plans to scale back our growth plans in order to reduce our operating expenses. We significantly reduced our sales force, reduced salaries for some of our more highly compensated employees and reduced the number of members of the board of directors from nine to six.

In March 2009, the Company secured $2.9 million of financing, net of issuance costs, through the issuance of Series A Convertible Preferred Stock. At the current level of reduced expenses, coupled with conservative sales growth forecasts, management believes this funding will be sufficient to support sales growth and achieve cash flow breakeven by the end of the third quarter of 2010.

The third quarter of 2009 was the best quarter since inception for new sales, with the addition of 30 new agreements for Boardbook licenses and $0.65 million in annual recurring revenue. For the nine months ended September 30, 2009, we added 69 new agreements and $1.64 million in annual recurring revenue. The Company now has 243 worldwide clients and more than 6,500 users of its Boardbooks products, servicing customers across a wide range of industry segments. Significantly for the Company, the third quarter performance reflects a positive shift in the confidence level of US companies, which had been particularly hard hit by the global financial crisis. While the global economic climate continues to be challenging, interest in Boardbooks remains strong with the level of inquiry high, the sales pipeline growing, and a significant number of discussions with prospective clients in the well-developed stage. In these difficult economic conditions, companies still seek to implement and upgrade Diligent Boardbooks as a way to save costs, improve efficiencies and broaden their corporate governance and compliance standards.

Despite the encouraging results of the third quarter, our overall performance continues to depend, in part, on worldwide economic conditions. The United States and other key international economies are currently undergoing a period of severe recession, characterized by falling demand for a variety of goods and services, restricted credit, going concern threats to financial institutions and major multi-national companies, poor liquidity, declining asset values, reduced corporate profitability, extreme volatility in credit, equity and foreign exchange markets and increased bankruptcies. These conditions could adversely affect our customers’ ability or willingness to purchase our service, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, deferral of costs, the allowance for accounts receivable, software development costs, the impairment of long-lived assets and note receivable, income taxes and assumptions for share-based compensation. Management bases its estimates and judgments on historical experience, known trends or events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We define our “critical accounting policies” as those that require us to make subjective estimates about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations or that concern the specific manner in which we apply GAAP. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at the time the accounting estimate is made and applied and require us to assess a range of potential outcomes.

We believe the following critical accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment.

Revenues and Accounts Receivable

We derive our revenues from set-up and training fees (“installation fees”) of the Boardbooks system and license fees for the ongoing use of our Diligent Boardbooks software. We have no other significant sources of revenues at this time.

Diligent recognizes revenue in accordance with the provisions of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition which states that revenue is realized and earned when all of the following criteria are met: (a) persuasive evidence of the arrangement exists, (b) delivery has occurred or services have been rendered, (c) the seller’s price to the buyer is fixed and determinable and (d) collectability is reasonably assured. Revenue from Diligent Boardbooks licenses is accrued ratably over the contract period. License fees paid in advance are recorded as deferred revenue until recognized. Through September 30, 2008, revenue from installations was recognized upon completion of the installation. Effective October 1, 2008, revenue from installations is accrued ratably over the contract period. The effect of this change is not material to the Company’s financial condition, operations or cash flow.

Accounts receivable are recorded at estimated net realizable value. A provision for doubtful accounts is based on management’s assessment of amounts considered uncollectable for specific customers based on age of debt, history of payments and other relevant information. An allowance for doubtful accounts is provided for accounts receivable which management determines will not be collectable in full.

Cost of Revenues and Operating Expenses

Cost of Revenues. Cost of revenues consists of direct expenses related to account management, customer support and IT hosting. We do not allocate indirect overhead to cost of revenues.

Selling and Marketing Expenses. Selling and marketing expenses are comprised of sales commissions, salaries for sales and marketing employees, and direct advertising expenses, including mailings and travel. We do not allocate indirect overhead to selling and marketing.

General and Administrative Expenses. General and administrative expenses consist of compensation and related expenses for executive, finance, accounting, administrative, legal, professional fees, other corporate expenses and overhead costs such as rents, utilities etc.

Research and Development Expenses. Research and development expenses are incurred as we upgrade and maintain our software, and develop product enhancements. Such expenses include compensation and employee benefits of engineering and testing personnel, materials, travel and all direct overhead associated with design and required testing of our product line. We do not allocate indirect overhead to research and development.

The Company expenses software development costs as they are incurred, until technological feasibility has been established, at which time those costs are capitalized until the product is available for general release to customers. To date, our software has been available for general release concurrent with the establishment of technological feasibility and, accordingly, we have not capitalized any development costs. Costs we incur to enhance products or after the general release of the service using the product are expensed in the period they are incurred and included in research and development costs in our consolidated statements of operations.

Prior to January 1, 2008, our research and development was outsourced to Diligent Board Member Services NZ Limited (“DBMS NZ”), an affiliate through common ownership by a stockholder and former director of the Company. Effective January 1, 2008, the Company acquired DBMS NZ, thus the research and development activities are fully integrated into the Company.

Share-Based Compensation. In November 2007, we adopted our 2007 Stock Option and Incentive Plan pursuant to which we intend to issue share-based compensation from time to time, in the form of stock, stock options and other equity based awards.

Share-based compensation consists of stock issued to employees and contractors for services rendered. Diligent measures the cost of employee services received in exchange for an award of equity-based securities using the fair value of the award on the date of the grant, and recognizes the cost over the period that the award recipient is required to provide services to Diligent in exchange for the award.

The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model and the resulting fair value is recorded as compensation expense on a straight line basis over the option vesting period for employee stock options.

The fair values of the options granted were estimated based on the following assumptions:

Expected volatility (1)		183.98 - 186.94	%
Expected term (2)	5.35 – 6.00 years
Risk-free interest rate (3)		2.43 - 2.75	%
Dividend yield		-

(1)

The expected volatility was determined using historical volatility data for comparable companies.

(2)

The expected term of the options has been estimated using the simplified method allowed by the SEC, which calculates the average of the vesting period and the contractual term of the options.

(3)

The risk free interest rate is based on the U.S. Treasury constant maturity nominal yield with a term approximately equal to the expected terms of the options.

Interest Income, net

Interest income is derived from interest bearing bank deposits held in US, UK and New Zealand bank accounts, together with investment income from a note receivable due from a related party, SSH LLC. Interest expense is attributable to financing costs of capital leases.

Foreign Exchange Transactions

As a worldwide company, certain of Diligent’s revenues and expenses are denominated in foreign currencies, which are recorded at the approximate rates of exchange in effect at the transaction dates. Assets and liabilities are translated at the exchange rates in effect at the balance sheet dates, with differences recorded as foreign exchange gains or losses in the statements of operations. Additionally, the Company has cash balances maintained in New Zealand Dollars (NZD) and British Pounds Sterling (GBP).

The Company’s wholly-owned subsidiaries, Diligent Boardbooks Limited (“DBL”) and DBMS NZ, utilize the GBP and the NZD, respectively, as their functional currencies. Assets and liabilities of these subsidiaries are translated to US dollars at exchange rates in effect at the balance sheet dates, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income.

Income taxes

The parent Company files U.S. federal and state income tax returns. Foreign operations file income tax returns in their respective foreign jurisdictions. The Company accounts for deferred income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Note receivable from affiliate

The note receivable from affiliate represents amounts due from SSH LLC under a Promissory Note and Security Agreement dated October 1, 2007 (the “Note”).

At September 30, 2009, the Company reviewed the valuation of the Note and determined that no further adjustment to the valuation allowance of $5.8 million is necessary.

Recent accounting pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. The guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance upon its issuance and it had no material impact on the Company’s consolidated financial statements.

Results of Operations for the Three Months Ended September 30, 2009 and 2008

Revenues

	Three months ended September 30,
	2009		2008		Increase/(Decrease)
Revenues	$	1,303,764	$	797,721	$	506,043

The growth in total revenues of 63% in the third quarter of 2009 when compared with the 2008 third quarter is a result of the cumulative addition of license agreements each quarter. The Company has continued to add license agreements each quarter since inception. At September 30, 2009, the cumulative license agreements were 243, compared with 144 at September 30, 2008. A net of 30 new licenses were added during the third quarter of 2009, compared with 27 for the third quarter of 2008. This increase in revenues is in line with our targets and was achieved at a significantly lower customer acquisition cost. All of the deferred revenue of $1.1 million recorded on the balance sheet at September 30, 2009 will be recognized as revenue in the next twelve months, including $0.5 million which will be recognized in the fourth quarter of 2009.

Cost of Revenues and Operating Expenses

Cost of Revenues

	Three months ended September 30,
	2009		2008		Increase/(Decrease)
Cost of Revenues	$	548,555	$	522,588	$	25,967

Cost of revenues is comprised of account management, customer support and IT services. For the three months ended September 30, 2009, employee costs included in cost of revenues increased by approximately $49 thousand as compared to the 2008 third quarter, primarily as a result of a realignment of certain management responsibilities from research and development to account management and customer support, offset by reductions in headcount. This increase was offset by a decrease of approximately $23 thousand in hosting costs for the quarter. Commencing in the third quarter of 2008, we added additional hosting facilities to accommodate growth, so although hosting costs are higher overall for 2009, the quarter to quarter costs are slightly lower due to the significant increase which occurred in the third quarter of 2008 and then leveled off.

Cost of revenues as a percentage of revenues decreased to 42.1% for the 2009 third quarter, compared with 65.5% for the third quarter of 2008, as a result of the greater economies of scale that we have achieved as our client base increased.

Selling and Marketing Expenses

	Three months ended September 30,
	2009		2008		Increase/(Decrease)
Selling and Marketing Expenses	$	579,414	$	1,480,228	$	(900,814	)

Subsequent to our initial public offering at the end of 2007, we significantly increased our sales and marketing efforts, and the first half of 2008 includes the effect of this initiative. By the third quarter of 2008, we initiated plans to scale back our growth plans in order to reduce our operating expenses. These cost reductions were fully implemented by the first quarter of 2009, and resulted in the significant decrease in selling and marketing expenses for the three months ended September 30, 2009 as compared to the comparable 2008 period. Despite this decrease in sales and marketing expenditures, we were able to achieve an increase in revenues, in large part because our smaller sales force was more experienced, fully trained and better focused.

We reduced our total sales force to 8 at September 30, 2009 from 23 at September 30, 2008, and our fully trained sales force to a quarterly average of 8.3 for the third quarter of 2009 from 21.3 for the comparable 2008 quarter, resulting in a decrease in salaries and benefits of approximately $0.39 million for the three months ended September 30, 2009, as compared to the third quarter of 2008. In addition, we refocused our efforts on the North American market, resulting in a decrease in costs of our UK sales office of $0.10 million. Other significant decreases included outside contractors ($0.13 million), travel and entertainment ($0.05) and other marketing costs ($0.23 million).

General and Administrative Expenses

	Three months ended September 30,
	2009		2008		Increase/(Decrease)
General and Administrative Expenses	$	931,096	$	1,557,457	$	(626,361	)

General and administrative expenses includes $0.06 million of share-based compensation expense for the three months ended September 30, 2009, compared with $0.24 million for the three months ended September 30, 2008. General and administrative expenses, excluding share-based compensation, were $0.87 million and $1.32 million for the three months ended September 30, 2009 and 2008, respectively. The decrease in general and administrative expenses excluding share-based compensation is $0.45 million. This includes a decrease in general and administrative expenses for our UK and New Zealand subsidiaries of $0.17 million which is a result of the refocusing of our efforts on our North American operations. It also includes a net decrease in professional fees of approximately $0.13 million, a decrease of $0.05 million in rent, office and employee costs, a decrease of $0.03 million in travel, meals and directors’ costs, and other decreases of $0.07 million, all resulting from our cost reduction initiative.

Research and Development Expenses

	Three months ended September 30,
	2009		2008		Increase/(Decrease)
Research and Development Expenses	$	183,826	$	235,033	$	(51,207	)

Research and development expenses decreased 22% in the third quarter of 2009 as compared to the third quarter of 2008. Our research and development is performed primarily by our New Zealand subsidiary, whose expenses in NZD decreased by 15% as a result of a reduction in R&D staffing after the achievement of certain key product enhancements. The remainder of the decrease in R&D expense is due to the decline in the average NZD/US$ exchange rate by 6% for the third quarter of 2009 when compared with the average exchange rate for the third quarter of 2008.

Depreciation and Amortization

	Three months ended September 30,
	2009		2008		Increase/(Decrease)
Depreciation and Amortization	$	102,775	$	74,623	$	28,152

The increase in depreciation and amortization is attributable to the net increase in property and equipment, consisting principally of computer equipment and computer software.

Interest Income, net

	Three months ended September 30,
	2009		2008		Increase/(Decrease)
Interest Income, net	$	90,919	$	133,407	$	(42,488	)

Interest income, net, includes interest income on the Note Receivable from our affiliate, as well as interest on the Company’s cash and cash equivalents and term deposits which are interest-bearing. The decrease in interest income is attributable to the decrease in our cash and term deposit balances to $1.4 million at September 30, 2009 from $3.7 million at September 30, 2008.

Foreign Exchange Transaction Gain/(Loss)

	Three months ended September 30,
	2009		2008			Increase/(Decrease)
Foreign Exchange Gain (Loss)	$	54,820	$	(296,873	)	$	351,693

The parent Company maintains a portion of its cash balances in NZD and GBP. The foreign exchange gain of $55 thousand for the three months ended September 30, 2009 is a result of the Company holding less cash in foreign currency accounts during the third quarter of 2009 while the US dollar has weakened. The loss in 2008 was a result of the Company holding significantly higher cash balances in NZD and the strengthening of the US dollar.

Results of Operations for the Nine months Ended September 30, 2009 and 2008

Revenues

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
Revenues	$	3,457,668	$	2,089,893	$	1,367,775

The growth in revenues of 65% in the first three quarters of 2009 when compared with the first three quarters of 2008 is a result of the cumulative addition of license agreements each quarter. The Company has continued to add license agreements each quarter since inception. At September 30, 2009, the cumulative license agreements were 243, compared with 144 at September 30, 2008. A net of 69 new licenses were added during the first three quarters of 2009, compared with 70 for the first three quarters of 2008. This increase in revenues is in line with our targets and was achieved at a significantly lower customer acquisition cost. All of the deferred revenue of $1.1 million recorded on the balance sheet at September 30, 2009 will be recognized as revenue in the next twelve months, including $0.5 million which will be recognized in the fourth quarter of 2009.

Cost of Revenues and Operating Expenses

Cost of Revenues

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
Cost of Revenues	$	1,544,122	$	1,422,584	$	121,538

Cost of revenues is comprised of account management, customer support and IT services. For the nine months ended September 30, 2009, employee costs included in cost of revenues increased by approximately $52 thousand as compared to the nine months ended September 30, 2008, primarily as a result of a realignment of certain management responsibilities from research and development to account management and customer support, offset by reductions in headcount. The remainder of the increase in cost of revenues is attributable to IT services. IT services costs have increased primarily due to additional hosting facilities the Company has added as a result of the growth in the number of users.

Cost of revenues as a percentage of revenues decreased to 44.7% for the first three quarters of 2009, compared with 68.1% for the comparable 2008 period, as a result of the greater economies of scale that we have achieved as our client base increased.

Selling and Marketing Expenses

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
Selling and Marketing Expenses	$	1,853,075	$	4,865,123	$	(3,012,048	)

Subsequent to our initial public offering at the end of 2007, we significantly increased our sales and marketing efforts, and the first half of 2008 includes the effect of this initiative. By the third quarter of 2008, we initiated plans to scale back our growth plans in order to reduce our operating expenses. These cost reductions were fully implemented by the first quarter of 2009, and resulted in the significant decrease in selling and marketing expenses for the nine months ended September 30, 2009. Despite this decrease in sales and marketing expenditures, we were able to achieve an increase in revenues, in large part because our smaller sales force was more experienced, fully trained and better focused.

We reduced our total sales force to 8 at September 30, 2009 from 23 at September 30, 2008, and our fully trained sales force to a quarterly average of 8.3 for the third quarter of 2009 from 21.3 for the comparable 2008 quarter, resulting in a decrease in salaries and benefits of approximately $1.24 million for the nine months ended September 30, 2009, as compared to the first nine months of 2008. In addition, we refocused our efforts on the North American market, resulting in a decrease in costs of our UK sales office of $0.62 million. Other significant decreases included travel and entertainment ($0.14 million), outside contractors ($0.28 million), marketing salaries and wages ($0.15 million) and other marketing costs ($0.51 million).

General and Administrative Expenses

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
General and Administrative Expenses	$	3,055,137	$	4,101,415	$	(1,046,278	)

General and administrative expenses includes $0.08 million of share-based compensation expense for the nine months ended September 30, 2009, compared with $0.70 million for the nine months ended September 30, 2008. General and administrative expenses, excluding share-based compensation, were $2.98 million and $3.40 million for the nine months ended September 30, 2009 and 2008, respectively. The decrease in general and administrative expenses excluding share-based compensation is $0.42 million. This includes a decrease in general and administrative expenses for our UK and New Zealand subsidiaries of $0.26 million which is a result of the refocusing of our efforts on our North American operations. It also includes a decrease of $0.31 million in travel, meals and directors’ costs as we decreased the number of directors from nine at September 30, 2008 to six at September 30, 2009, and decreases of $0.03 million in rent, office and professional fees resulting from our cost reduction initiative. These decreases were offset by an increase in employee costs of $0.17 million due to additional staffing requirements.

Research and Development Expenses

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
Research and Development Expenses	$	542,753	$	810,871	$	(268,118	)

Research and development expenses decreased 33% in the first three quarters of 2009 as compared to the first three quarters of 2008. Our research and development is performed primarily by our New Zealand subsidiary, whose expenses in NZD decreased by 17% as a result of a reduction in R&D staffing after the achievement of certain key product enhancements. The remainder of the decrease in R&D expense is due to the decline in the average NZD/US$ exchange rate by 21% for the first nine months of 2009 when compared with the average exchange rate for the first nine months of 2008.

Depreciation and Amortization

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
Depreciation and Amortization	$	286,736	$	196,368	$	90,368

The increase in depreciation and amortization is attributable to the net increase in property and equipment, consisting principally of computer equipment and computer software.

Interest Income, net

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
Interest Income, net	$	276,561	$	513,023	$	(236,462	)

Interest income, net, includes interest income on the Note Receivable from our affiliate, as well as interest on the Company’s cash and cash equivalents and term deposits which are interest-bearing. The decrease in interest income is attributable to the decrease in our cash and term deposit balances from $3.7 million at September 30, 2008 to $1.4 million at September 30, 2009.

Foreign Exchange Transaction Gain/(Loss)

	Nine months ended September 30,
	2009		2008			Increase/(Decrease)
Foreign Exchange Gain/(Loss)	$	53,927	$	(278,061	)	$	331,988

The parent Company maintains a portion of its cash balances in NZD and GBP. The foreign exchange gain of $54 thousand for the nine months ended September 30, 2009 is a result of the Company holding less cash in foreign currency accounts during the first three quarters of 2009 while the US dollar has weakened. The loss in 2008 was a result of the Company holding significantly higher cash balances in NZD and the strengthening of the US dollar.

Other Income

	Nine months ended September 30,
	2009		2008		Increase/(Decrease)
Other Income	$	170,954	$	-	$	170,954

Other income consists of a recovery of UK Value Added Tax (VAT) on prior year expenses.

Liquidity and Capital Resources

As of September 30, 2009, our principal sources of liquidity were cash and cash equivalents and term deposits totaling approximately $1.4 million, and accounts receivable of approximately $0.3 million. On March 11, 2009, the Company secured $2.9 million (net) of financing from Spring Street Partners, L.P. and Carroll Capital Holdings, LLC, who collectively purchased 30 million shares of newly-created Series A Preferred Stock for $0.10 per share. Prior to March 2009, our primary source of financing was the proceeds of our New Zealand public offering completed in December 2007, which raised $16.4 million (net) from the issuance of 24 million shares of common stock.

Despite growth in net sales, our growth rate lagged behind the projections we had set for the Company at the time of the IPO, which was exacerbated by the global financial crisis. Amid liquidity concerns, we initiated plans to scale back our growth plans in order to reduce our operating expenses. During the fourth quarter of 2008, we significantly reduced our sales force, reduced salaries for some of our more highly compensated employees and reduced the number of members of the board of directors. At the current level of reduced expenses, coupled with current sales growth forecasts, management believes this funding will be sufficient to support the operations and obligations of the Company through an expected cash flow break even by the end of the third quarter of 2010.

The Company continues to consider and evaluate strategic growth opportunities that could result in additional capital requirements that are not currently within the budget. Our current operating expenses and expected capital expenditures are fixed, predictable and adequate to support our budgeted growth. The primary uncertainty concerning our capital needs pertains to our ability to achieve the expected sales growth in a timely manner such that recurring revenues exceed operating expenditures prior to the depletion of capital.

Net Cash Flows from Operating Activities

Cash used in operating activities for the first nine months of 2009 was $2.50 million, compared with $8.94 million for the nine months of 2008. This reduction in cash used in operations resulted from an increase in revenues of $1.37 million and a decrease in operating expenses of $4.24 million. During the three quarters of 2008, the Company incurred significant expenses to expand our sales and marketing efforts. By the end of 2008, we had scaled back expenses, which is reflected in the results for the three quarters of 2009.

Net Cash Flows from Investing Activities

Cash used in investing activities decreased from $1.77 million in the first nine months of 2008 to $0.20 million in the comparable 2009 period, predominantly used for purchases of property and equipment. Subsequent to the IPO in December 2007, the Company invested significant amounts in our infrastructure, which resulted in additions to property and equipment of over $0.85 million during the first three quarters of 2008. Additionally, approximately $1.0 million of cash was invested in a term deposit during the first three quarters of 2008.

Net Cash Flows from Financing Activities

For the three quarters of 2009, cash provided by financing activities was $2.76 million, compared with $0.32 million used in financing activities for the comparable 2008 period. During the first quarter of 2009, the Company secured $2.9 million in financing, net of issuance costs, from the issuance of Series A preferred stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4T. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. As of the end of the quarter ended September 30, 2009, our Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that our current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. There has been no change in the Company’s internal control over financial reporting required by Exchange Act Rule 13a-15 or 15d-15 that occurred during the fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect Diligent Board Member Services, Inc.’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

Not required

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

None

Item 3. Defaults Upon Senior Securities.

Not applicable

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

None

Item 5. Other Information.

Not applicable

Item 6. Exhibits.

Exhibit Numbers		Exhibits

10.11		Employment agreement of CFO Steven P. Ruse

10.12		Form of Stock Option Award Agreement for stock option under 2007 Stock Option and Incentive Plan

31.1		CEO Certification pursuant to Rule 13a-14(a)

31.2		CFO Certification pursuant to Rule 13a-14(a)

32.1		CEO Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C. 1350

32.2		CFO Certification furnished pursuant to Rule 13a-14(b)

SIGNATURES

Pursuant to the requirements on 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.

	DILIGENT BOARD MEMBER SERVICES, INC.

Dated: November 9, 2009	By:	/s/ Alessandro Sodi
		Alessandro Sodi, Chief Executive Officer (Principal
	Executive Officer)

Dated: November 9, 2009	By:	/s/ Steven P. Ruse
		Steven P. Ruse, Chief Financial Officer (Principal
	Financial Officer)

Attached files

Diligent Corp Reports

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