Diligent (DIL) 10-Q 2010 Q3 Quarterly report

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, 2010.

or

¨ 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.  x Yes ¨ 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 8, 2010 was 81,941,334.

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CONTENTS

		PAGE
Forward Looking Statements		ii
Available Information		ii
	PART I – Financial Information
Item 1.	Condensed Consolidated Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4T.	Controls and Procedures	24
	PART II – Other Information
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	[Reserved]	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
SIGNATURES		26

i

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.

ii

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

Diligent Board Member Services, Inc.

Consolidated Balance Sheets

	September 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,217,113		$	1,129,591
Term deposit		73,270			72,530
Accounts receivable, net		344,311			303,331
Prepaid expenses and other current assets		272,975			183,368
Total current assets		1,907,669			1,688,820
Property and equipment, net		1,117,290			1,312,959
Note receivable from affiliate, net of valuation allowance		1,875,685			1,661,791
Restricted cash - security deposits		225,907			221,886
Total assets	$	5,126,551		$	4,885,456
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses	$	599,616		$	397,840
Deferred revenue		2,106,780			1,593,351
Current portion of obligations under capital leases		85,172			113,418
Payables to affiliates		-			5,762
Total current liabilities		2,791,568			2,110,371
Non-current liabilities:
Obligations under capital leases, less current portion		82,331			147,091
Other noncurrent liabilities		49,160			44,252
Total non-current liabilities		131,491			191,343
Total liabilities		2,923,059			2,301,714
Commitments and contingencies
Redeemable preferred stock:
Series A convertible redeemable preferred stock, $.001 par value, 50,000,000 shares authorized, 32,667,123 and 30,000,000 shares issued and outstanding (liquidation value $5,147,568 and $4,766,712)		3,170,350			3,149,851
Stockholders' (deficiency):
Common Stock, $.001 par value, 250,000,000 shares authorized, 78,790,000 and 90,440,000 shares issued and outstanding		78,790			90,440
Additional paid-in capital		21,711,771			24,532,622
Accumulated deficit		(22,742,510	)		(25,180,648	)
Accumulated other comprehensive loss		(14,909	)		(8,523	)
Total stockholders' (deficiency)		(966,858	)		(566,109	)
Total liabilities and stockholders' (deficiency)	$	5,126,551		$	4,885,456

See accompanying notes to consolidated financial statements

1

Diligent Board Member Services, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenues	$	2,188,613		$	1,303,764		$	5,851,494		$	3,457,668
Cost of revenues		704,595			548,555			1,986,815			1,544,122
Gross profit		1,484,018			755,209			3,864,679			1,913,546
Operating expenses:
Selling and marketing expenses		688,315			579,414			1,995,191			1,853,075
General and administrative expenses		1,007,848			931,096			2,892,285			3,055,137
Research and development expenses		253,663			183,826			664,551			542,753
Depreciation and amortization		117,274			102,775			347,177			286,736
Total operating expenses		2,067,100			1,797,111			5,899,204			5,737,701
Operating loss		(583,082	)		(1,041,902	)		(2,034,525	)		(3,824,155	)
Other income (expenses):
Impairment recovery on note receivable from affiliate		1,100,000			-			4,300,000			-
Interest income, net		43,791			90,919			188,173			276,561
Foreign exchange transaction gain (loss)		34,522			54,820			(4,089	)		53,927
Other		-			-			-			170,954
Total other income		1,178,313			145,739			4,484,084			501,442
Income (loss) before provision for income taxes		595,231			(896,163	)		2,449,559			(3,322,713	)
Income tax expense		1,344			9,429			11,421			15,485
Net income (loss)	$	593,887		$	(905,592	)	$	2,438,138		$	(3,338,198	)
Net income (loss) per share:
Basic	$	0.01		$	(0.01	)	$	0.03		$	(0.04	)
Diluted	$	0.01		$	(0.01	)	$	0.02		$	(0.04	)
Weighted average shares outstanding:
Basic		78,790,000			90,440,000			85,532,491			90,348,425
Diluted		113,438,232			90,440,000			120,180,723			90,348,425

See accompanying notes to consolidated financial statements

2

Diligent Board Member Services, Inc.

Consolidated Statement of Changes in Stockholders’ (Deficiency)

And Comprehensive Loss

Nine Months Ended September 30, 2010

(Unaudited)

													Accumulated
				Common			Additional						Other			Total
	Common			Stock			Paid-in-			Accumulated			Comprehensive			Stockholders'
	Shares			$.001 Par Value			Capital			Deficit			(Loss)			(Deficiency)
Balance at January 1, 2010		90,440,000		$	90,440		$	24,532,622		$	(25,180,648	)	$	(8,523	)	$	(566,109	)
Net income		-			-			-			2,438,138			-
Foreign exchange translation adjustment		-			-			-			-			(6,386	)
Total comprehensive income																	2,431,752
Share-based compensation		-			-			511,174			-			-			511,174
Cancellation of common stock		(11,650,000	)		(11,650	)		(3,064,026	)								(3,075,676	)
Amortization of offering costs		-			-			(20,499	)		-			-			(20,499	)
Accrued preferred stock dividend		-			-			(247,500	)		-			-			(247,500	)
Balance at September 30, 2010		78,790,000		$	78,790		$	21,711,771		$	(22,742,510	)	$	(14,909	)	$	(966,858	)

See accompanying notes to consolidated financial statements

3

Diligent Board Member Services, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	2,438,138		$	(3,338,198	)
Adjustments to reconcile net income (loss) to net cash and cash equivalents used in operating activities:
Impairment recovery on note receivable from affiliate		(4,300,000	)		-
Depreciation and amortization		347,177			286,736
Share-based compensation		511,174			79,754
Straight-line rent adjustment		4,908			41,535
Changes in operating assets and liabilities:
Accounts receivable		(40,980	)		76,685
Prepaid expenses and other current assets		(89,607	)		(22,161	)
Restricted cash - security deposits		(4,021	)		(990	)
Accounts payable and accrued expenses, net		(45,724	)		(86,353	)
Deferred revenue		513,429			507,141
Payables to affiliates		(5,762	)		(44,048	)
Net cash and cash equivalents used in operating activities:		(671,268	)		(2,499,899	)
Cash flows from investing activities:
Purchase of property and equipment		(146,465	)		(204,827	)
Net cash and cash equivalents used in investing activities:		(146,465	)		(204,827	)
Cash flows from financing activities:
Proceeds from preferred stock issuance		-			2,861,150
Cash received from partial prepayment of note receivable from affiliate		1,010,430			-
Payments of obligations under capital leases		(93,006	)		(102,147	)
Net cash and cash equivalents provided by financing activities		917,424			2,759,003
Effect of exchange rates on cash and cash equivalents		(12,169	)		(10,696	)
Net increase in cash and cash equivalents		87,522			43,581
Cash and cash equivalents at beginning of period		1,129,591			1,265,347
Cash and cash equivalents at end of period	$	1,217,113		$	1,308,928
Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest	$	34,903		$	21,775
Income taxes	$	18,405		$	19,948
Supplemental disclosure of noncash investing and financing activities:
Property and equipment acquired under capital leases	$	-		$	123,385
Prepayment of principal on note receivable from affiliate in exchange for 11,650,000 shares	$	3,075,676		$	-
Accrual of preferred stock dividend	$	247,500		$	-

See accompanying notes to consolidated financial statements

4

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”) is a global leader in web-based portals for Boards of Directors.  The Company develops and sells an online software application called Diligent Boardbooks®, a web based portal that board members, management and administrative staff use to compile, update, review and archive board materials during and after board meetings.  Diligent provides clients with subscription-based access to the software and also provides associated services including securely hosting the clients’ data and customer service and support for the application.

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.

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.  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 provides European sales and marketing services.  Diligent, together with its subsidiaries, are hereinafter referred to as “the Company”.

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 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, 2010, and appropriate disclosure of subsequent events which were not recognized in the financial statements.

2) Liquidity

Historically, as we grew our business and sustained negative cash flow, our primary source of liquidity had been the cash received from stock issuances, including $16.4 million obtained in December 2007 from our initial public offering and $2.9 million obtained from our Series A Preferred Stock issued in March 2009.  Additionally, in June 2010, we received a $1.0 million principal prepayment on the Note receivable from affiliate (See Note 5), and on October 19, 2010, the Company received $1.4 million in an offshore private placement of 3 million shares of newly issued common stock by First NZ Capital Securities Limited (See Note 11).

Although our 2010 year-to-date results show net cash used in operations of $0.7 million, in the quarter ended September 30, 2010 we achieved positive cash flow from operations of approximately $0.2 million. This is the first quarter since inception of the Company in which we achieved positive cash flow from operations.

At September 30, 2010, our sources of liquidity consist of cash and term deposits of approximately $1.3 million.  As noted above, we received an additional $1.4 million from the sale of newly issued stock in October 2010.  The Company also has a $1.0 million revolving line of credit facility with Spring Street Partners, L.P. (See Note 7).  This line of credit offers the Company additional cash flow support if needed.  As of September 30, 2010, the Company has had no borrowings under this credit facility.

  Our current operating expenses and expected capital expenditures are predictable and adequate to support our budgeted growth.  However, with the recent acquisition of additional capital, the Company may evaluate strategic growth opportunities that could change our current expense and capital forecasts.  The primary uncertainty concerning the Company’s capital needs pertains to its ability to continue to achieve expected sales growth in a timely manner.

5

Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

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, 2009, as filed with the SEC on March 18, 2010.

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 nine months ended September 30, 2010 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 fair value of our cash and cash equivalents, term deposits, accounts receivable, accounts payable and accrued expenses approximates book value due to their short term settlements.  See Note 5 for the valuation of the Note receivable from affiliate.

Share-based compensation – The Company measures the cost of employee services received in exchange for an equity-based award 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.

The Company measures compensation cost for awards granted to non-employees 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.

Net income (loss) per share – Basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders, after deducting accrued preferred stock dividends, by the weighted average number of common shares outstanding for the period.

Diluted net income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock, unless the effect is anti-dilutive.  Stock options and convertible preferred stock are included as potential dilutive securities for the periods applicable.  All potentially dilutive securities have been excluded from the calculation for the three and nine months ended September 30, 2009 as they were anti-dilutive.  There were 33,750,000 potentially dilutive securities for the three and nine months ended September 30, 2009.

The components of the calculation of basic and diluted net income (loss) per common share are as follows:

6

Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Numerator:
Net income (loss)	$	593,887		$	(905,592	)	$	2,438,138		$	(3,338,198	)
Preferred stock dividends		(82,500	)		-			(247,500	)		-
Basic net income (loss) available to common shareholders	$	511,387		$	(905,592	)	$	2,190,638		$	(3,338,198	)
Diluted net income (loss) available to common shareholders	$	593,887		$	(905,592	)	$	2,438,138		$	(3,338,198	)
Denominator:
Basic weighted average shares outstanding		78,790,000			90,440,000			85,532,491			90,348,425
Dilutive effect of stock options		1,981,109			-			1,981,109			-
Dilutive effect of convertible preferred stock		32,667,123			-			32,667,123			-
Diluted weighted average shares outstanding		113,438,232			90,440,000			120,180,723			90,348,425
Basic earnings (loss) per share	$	0.01		$	(0.01	)	$	0.03		$	(0.04	)
Diluted earnings (loss) per share	$	0.01		$	(0.01	)	$	0.02		$	(0.04	)

Recent accounting pronouncements– In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance for revenue recognition with multiple deliverables.  This new guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, it modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. This new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, however early adoption is permitted. The Company does not expect this new guidance to have a material effect on the consolidated financial statements.

In January 2010, the FASB issued new guidance which improves disclosures about fair value measurements.  The new standard was effective for interim and annual periods beginning after December 15, 2009, except for certain disclosures regarding Level 3 measurements which are effective for fiscal years beginning after December 15, 2010.  The Company does not expect this new guidance to have a material effect on the consolidated financial statements.

In February 2010, the FASB issued updated guidance to address certain implementation issues related to an entity’s requirements to perform and disclose subsequent events procedures.  This update requires SEC filers to evaluate subsequent events through the date financial statements are issued and exempts SEC filers from disclosing the date through which subsequent events have been evaluated.  The updated guidance was effective upon issuance, and did not have a material impact on the Company’s consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of other recently issued accounting pronouncements will not have a material impact on consolidated financial position, results of operations, and cash flows, or do not apply to our operations.

7

Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

4) Term deposit

At September 30, 2010, the Company has a term deposit with a New Zealand bank with an initial term of 365 days.  The term deposit in the amount of NZD 100,000 (US$73,270) bears interest at 4.20% and matures in March 2011.

5) Note receivable from affiliate

The note receivable from affiliate represents amounts due from Services Share Holding, LLC (“SSH LLC”, the Company’s predecessor entity), under a Promissory Note and Security Agreement dated October 1, 2007 (the “Note”), as amended by the Prepayment and Amendment Agreement entered into in February 2010 and approved by our stockholders in June 2010.

Prior to the prepayment and amendment, the principal balance of the Note was $7,161,791, which bore interest at 5% per annum, and was scheduled to mature on October 1, 2010.  It was originally secured by 25,000,000 shares of the Company’s stock which was pledged as collateral by members of SSH LLC. A portion of the pledged shares were subsequently sold by SSH LLC in order to obtain funds to make the quarterly interest payments.  At December 31, 2009, there were 21,678,597 shares securing the Note.

The Prepayment and Amendment Agreement with SSH LLC provided for:

· The sale in February 2010 by SSH LLC of a block of 4,823,000 shares of the pledged stock to a third party for US$0.24 per share, for a total of US$1,157,011 (after commissions), which would be applied to the interest due for the period from January through May 2010 ($146,581) and prepayment of principal ($1,010,430).  The proceeds of this sale were placed in escrow pending stockholder approval of the agreement.

· The prepayment of an additional US$3,075,676 of principal through the surrender of 11,650,000 pledged shares to the Company at US$0.26 per share,

· The extension of the maturity date on the Note from October 1, 2010 to October 1, 2012, and

· Effective in June 2010, adjustment of the annual interest rate from 5.0% to 6.5%, payable annually on January 1 of each year, in arrears.

This agreement was subject to the approval of the Company’s shareholders at the annual meeting on June 8, 2010, and was contingent on the receipt of an appraisal attesting to the fairness of the transaction to the shareholders unrelated to SSH LLC. The agreement was approved and the amended Note at September 30, 2010 had an outstanding principal balance of $3,075,685 and is secured by 5,205,597 shares of the Company’s common stock pledged by the members of SSH LLC.  The proceeds from the February 2010 sale which had been placed in escrow were delivered to the Company on June 8, 2010.

The contractual outstanding loan balance of $3,075,685 at September 30, 2010 is reduced on our balance sheet by a valuation allowance of $1,200,000, resulting in a net receivable balance of $1,875,685.  The Note is considered to be collateral dependent, as SSH LLC’s only means of repayment is through liquidation of the underlying collateral.  At December 31, 2008, the then-outstanding loan balance of $7,161,791 was reduced by a $5.8 million valuation allowance, which was based on the estimated fair value of the underlying collateral at that time. In the fourth quarter of 2009, the Company recorded a recovery in the value of the Note of $300,000 and a corresponding decrease in the valuation allowance to $5.5 million. At March 31, 2010, the Company recorded an additional recovery in the value of the note of $3.2 million, and at September 30, 2010 the Company recorded a further recovery of $1.1 million, as described below.

In the absence of an active market for the Company’s common stock, or other observable inputs for similar instruments, the Company originally based its valuation of the underlying collateral on the value of the March 2009 issuance of Series A Preferred Stock, adjusted using an assumed discount rate of 20%, which was management’s estimate of the fair 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 was to mature in October 2010.

8

Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

The recovery of $3.2 million at March 31, 2010 was based on the re-measurement of a significant input used to value the underlying collateral of the Note.  The February 2010 sale of shares to a third party indicated that the preferred stock price was no longer the best measure of the fair value of our common stock.  The Company believed that a better benchmark for fair value was the US$0.24 per share obtained by SSH LLC for the 4.8 million shares sold to a third party in February 2010.  The additional recovery at September 30, 2010 is based on the subsequent re-measurement of the underlying collateral based on the price obtained for the 3 million shares issued by the Company in an offshore private placement in October 2010 (See Note 11).  The Company reviews the valuation of the Note each reporting period and believes the value is properly stated at September 30, 2010.

6) Fair value measurements

The Note is the only financial instrument held by the Company for which a fair value measurement is made using significant unobservable inputs (Level 3).  A reconciliation of the beginning and ending balances of the Note is as follows:

	Nine months			Nine months
	ended			ended
	September 30,			September 30,
	2010			2009
Balance at beginning of period	$	1,661,791		$	1,361,791
Total gains or losses (unrealized/realized)
Included in earnings (or changes in net assets)		4,300,000			-
Included in other comprehensive income		-			-
Purchases, issuances and settlements		(4,086,106	)		-
Transfers in and/or out of Level 3		-			-
Ending balance	$	1,875,685		$	1,361,791
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	4,300,000		$	-

7) Line of credit facility

In March 2010, the Company entered into an agreement with Spring Street Partners, L.P. (“the Lender”) pursuant to which the Lender extended a $1.0 million revolving line of credit facility to the Company.  The Lender is the holder of approximately 22 million shares of the Company’s Series A Preferred Stock and 5 million shares of the Company’s common stock.  The founder and managing partner of the Lender is also the chairman of the board of directors of the Company.

The line of credit bears interest at a fixed rate of 9.50% per annum on outstanding borrowings.  Upon an event of default, the Lender has the option to increase the interest rate on all outstanding obligations to 14.50% per annum.  The line of credit is subject to a 0.5% per annum commitment fee on the unused portion, paid quarterly in arrears.  Accrued interest must be paid quarterly on the last business day of each quarter.  The credit facility matures in September 2011, at which time all outstanding principal and unpaid interest and commitment fees are due in full.

9

Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

The Lender has a first priority lien on all of the Company’s accounts receivable.  The line of credit agreement includes restrictive covenants regarding liens, additional indebtedness, sales of assets and dividend payments on common stock.  Additionally, the line of credit includes financial covenants with respect to the achievement of budgeted revenues and expenses.

As of September 30, 2010, the Company has no outstanding borrowings under this credit facility.

8) 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 aggregate proceeds 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. 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 March 11, 2014.

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).

10

Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Accounting for Preferred Shares – 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 March 11, 2014.  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.

For the year 2009, the Board of Directors of the Company approved the issuance of PIK Shares in lieu of cash, which dividend was effective January 4, 2010.  Accordingly, the holders of the Series A Preferred Stock received an aggregate of 2,667,123 PIK shares, and total issued and outstanding preferred shares at September 30, 2010 are 32,667,123.

The carrying value of the Preferred Shares at September 30, 2010 and December 31, 2009 is as follows:

	September 30,			December 31,
	2010			2009
Gross proceeds	$	3,000,000		$	3,000,000
Less: Issuance costs		(138,850	)		(138,850	)
		2,861,150			2,861,150
Issuance of PIK shares		266,712			-
Cumulative amortization of issuance costs		42,488			21,989
Cumulative in-kind dividend		-			266,712
Balance	$	3,170,350		$	3,149,851

In 2010, the Company anticipates that cash dividends will be paid on the Series A Preferred Stock.  Accordingly, preferred stock dividends of $247,500 for the nine months ended September 30, 2010 are included in accrued expenses and other current liabilities.

9) Stock option and incentive plan

In November 2007, the Company adopted the 2007 Stock Option and Incentive Plan (“the 2007 Plan”) authorizing the issuance of up to 10,000,000 shares of the Company’s common stock as awards to be granted 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 2007 Plan is administered 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 2007 Plan.

In June 2010, the Company adopted the 2010 Stock Option and Incentive Plan (“the 2010 Plan”) authorizing the issuance of up to 5,000,000 shares of the Company’s common stock as Incentive Stock Options and Non-Qualified Stock Options.  Under the 2010 Plan, only employees are eligible for Incentive Stock Options.  The 2010 Plan is to be administered by the Remunerations and Nominations Committee pursuant to delegation by the Company's Board of Directors, which will determine the number of shares, the term, the frequency and date, the type, the exercise periods, and any performance criteria pursuant to which stock option awards may be granted.

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Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Restricted stock awards – 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 those dates.  The estimated fair value of the shares at the award date was measured using the closing price of NZD0.25 (US$0.14) per share on the date of grant.

During the nine months ended September 30, 2010 and 2009, the Company recognized share-based compensation costs related to restricted stock awards of $0 and $23,099, respectively.  At September 30, 2010 all 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 2007 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.  In October 2009, the Company granted an additional 910,003 options to employees under the 2007 Plan.

In July 2010, the Company awarded 800,000 options to outside consultants, pursuant to the 2010 Plan.

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, 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 options were estimated based on the following assumptions:

Expected volatility (1)		167.69 - 186.94%
Expected term (2)	5.25 – 6.00 years
Risk-free interest rate (3)		1.85 - 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 $0.1825 per share.

A summary of stock option activity for the nine months ended September 30, 2010 is as follows:

	Options		Weighted average exercise price		Weighted average remaining contractual term
Outstanding at January 1, 2010		4,660,003	$	0.14
Granted		800,000		0.45
Exercised		-		-
Forfeited		91,667		0.14
Outstanding at September 30, 2010		5,368,336		0.19	9.04 years
Exercisable at September 30, 2010		1,958,333		0.19

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Diligent Board Member Services, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

During the nine months ended September 30, 2010, the Company recognized share-based compensation costs related to stock options of $511,174.  At September 30, 2010 there was $290,715 of unrecognized share-based compensation expense related to options granted that will be recognized over the next two years.

10)  Income taxes

The Company records a current income tax provision for foreign tax obligations in New Zealand.  No US or UK current income taxes have been provided due to tax losses incurred.  The Company has recorded a full valuation allowance against all US deferred tax assets because management is unable to conclude that it is more likely than not that the deferred tax assets will 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 2007 through 2009 tax years are open for examination by the respective taxing jurisdictions.

11)  Subsequent events

On October 19, 2010, the Company completed an offshore private placement for 3 million shares of newly issued common stock by First NZ Capital Securities Limited at NZ$0.62 (US$0.47) per share, for total proceeds of NZ$1,824,000 (US$1,380,950), net of expenses.

In October 2010, 151,334 stock options issued to employees in October 2009 were exercised.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear 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

The Company develops and makes available an online software application called Diligent Boardbooks, a web based portal that board members, management and administrative staff use to compile, update, review and archive board materials before, during and after board meetings. The Company provides clients with subscription-based access to its software and also provides associated services including securely hosting the client’s data and customer service and support for the application.

Software-as-a-Service (“SaaS”) Model

The Company uses the Software-as-a-Service (“SaaS”) model to distribute its Diligent Boardbooks application to the market and maintain the security and integrity of its clients’ data. Under this model, the Company offers annual renewable subscriptions for customer access to its Boardbook product which is hosted on the Company’s secure servers, and offers a complete suite of related services including training, support, data migration and data security/backup.

The SaaS model allows the Company to differentiate itself through technological innovation and customer service while the subscription billing approach results in a predictable and recurring revenue stream. This SaaS model also allows clients to retain control over access to the application while outsourcing to the Company the support activities, such as managing the IT infrastructure and maintaining the software.

SaaS Benefits

The Company’s SaaS model addresses several difficulties found in the traditional software model and offers the following critical advantages for our company:

• Highly scalable operations. Because our clients’ boards do not ordinarily meet on a daily or monthly basis, our system has the capability to support many more Boards without absorbing increased costs associated with customer growth.

• Better revenue visibility. By offering renewable annual subscriptions instead of one time perpetual licenses, the Company has much better revenue foresight. This high revenue visibility allows the Company to undertake much better planning and budgeting, with significant advantages for corporate strategy and profitability.

• Lower cost of development. The Companyhas developed one application that is cost effectively shared across thousands of end users. This is considerably less expensive than developing all the permutations (data bases, operating systems, etc) needed by customers who want to run the software on their own premises.  These economies allow the Company to spend resources on developing increased functionalities for its Boardbooks application instead of on creating multiple versions of the same code.

• Longer corporate life. The SaaS model has a long tail of recurring revenue that reduces investment risk, simplifies corporate planning and leads to extended corporate life.

• Better expense visibility. Because revenue is more predictable, the Company is able to better plan expenses.

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Diligent’s History

We began developing components of the Diligent Boardbooks system starting in 1998.  In 2001, SunAmerica Funds requested a solution to automate the management of its board meeting papers.  With this request, the founders of the Company launched the Diligent Boardbooks concept and produced and tested a working concept that was delivered to SunAmerica Funds.  By 2002, the founders of the Company believed the end product could become an extremely valuable licensing opportunity.  With SunAmerica Funds as one of our anchor clients, the Company spent a year selling Boardbooks licenses to other major accounts in a market that had yet to deal with the implications of the Sarbanes-Oxley Act.  Starting in 2006, after fully developing the capabilities of our product with our anchor clients, we began establishing our own credentials. Our marketing group produced promotional marketing materials featuring our anchor clients which described the Boardbooks product and explained its benefits for boards of directors.  For the next two years, before undertaking an international rollout of a large licensing sales force, we tested several key growth assumptions relating to scaling the Diligent Boardbooks product.

On December 12, 2007 we completed a public share offering of 24,000,000 shares of our common stock in conjunction with a listing of our stock on the New Zealand Stock Exchange under the symbol “DIL.”  As a result, the Company is subject to the regulation and reporting requirements imposed by the New Zealand Stock Exchange.  There is no United States established public trading market for our common stock.  However, because the Company is a U.S. company incorporated in Delaware with over 500 shareholders, it is also subject to the U.S. reporting and regulatory requirements of the Securities and Exchange Commission (“SEC”) and the Securities Exchange Act of 1934.  Because of this dual regulation in New Zealand and the U.S., the Company is required to meet both standards, which means the Company sometimes is faced with conflicting requirements and always must comply with the more stringent rule.

In the third quarter of 2010, the Company produced its strongest quarterly sales performance since inception by adding a record $0.86 million of new annualized license fee income.  This quarter builds on the momentum established in the first six months of this year, which saw the Company’s best first half since inception, with $1.28 million in new annualized licenses through June 30, 2010.  The Company continues to see a high level of interest in Diligent’s Boardbooks product and has a strong sales pipeline as we enter the fourth quarter of 2010.   The Company’s annualized fee income was up 32% against the same quarter a year ago and a total of 41 new licenses were added during the third quarter compared to 30 for the third quarter of 2009 – an improvement of 37% and an all-time record quarterly performance.  The Company now has approximately 400 worldwide clients and over 10,400 users of its Boardbooks product.  Moreover, the third quarter of 2010 was the first quarter to achieve positive cash flow from operations.  The Company’s ability to deliver on its projection to be cash flow breakeven by the third quarter of 2010 is a noteworthy milestone for the Company and its investors and sets the stage for an exciting chapter in Diligent’s development.

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 stock-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.

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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.

The Company recognizes revenue 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 the Boardbooks licenses is recorded ratably over the contract period, which is generally twelve months.  License fees paid in advance are recorded as deferred revenue until recognized.  The Company generally invoices its customers in annual installments.  Accordingly, the deferred revenue balance does not represent the total contract value of annual or multi-year, noncancelable subscription agreements.  The Company also earns fees for set-up and training (“installation fees”) of the Boardbooks system.  Historically, installation fees were recognized upon completion of the installation. 

Accounts receivable are recorded at their 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.

Software development costs are expensed 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, software has been available for general release concurrent with the establishment of technological feasibility and, accordingly, the Company has not capitalized any development costs.  Costs incurred to enhance products 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.

Share-Based Compensation.  In November 2007, we adopted our 2007 Stock Option and Incentive Plan pursuant to which we have issued share-based compensation from time to time, in the form of stock options and other equity based awards.  In June 2010, we adopted the 2010 Stock Option and Incentive Plan pursuant to which we issued stock options in July 2010.

Share-based compensation consists of stock issued to employees and contractors for services rendered.  The Company measures the cost of employee services received in exchange for an equity-based award 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.

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The Company measures compensation cost for awards granted to non-employees 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.

Interest Income (Expense), net

Interest income is derived from interest bearing bank deposits held by US, UK and New Zealand bank accounts, together with investment income from the Note receivable due from our affiliate, SSH LLC.

Foreign Exchange

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 Pound Sterling (GBP).

The Company’s wholly-owned subsidiaries, 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.

From time to time, the Company uses foreign currency option contracts that are not designated as hedging instruments to manage exposure to fluctuations in foreign currency.  The Company uses these instruments as economic hedges and not for speculative or trading purposes.  All foreign currency option contracts are recorded at fair value in other current assets on the balance sheet and unrealized gains or losses at the balance sheet date are recorded in the income statement.  The Company has no open foreign currency option contracts as of September 30, 2010.

Income taxes

Diligent Board Member Services, Inc. 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 carryforwards. 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 on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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 2007 through 2009 tax years are open for examination by the respective taxing jurisdictions.

Note receivable from affiliate

The note receivable from affiliate represents amounts due from Services Share Holding, LLC (“SSH LLC”, the Company’s predecessor entity), under a Promissory Note and Security Agreement dated October 1, 2007 (the “Note”), as amended by the Prepayment and Amendment Agreement entered into in February 2010 and approved by our stockholders in June 2010.

Prior to the prepayment and amendment, the principal balance of the Note was $7,161,791, which bore interest at 5% per annum, and was scheduled to mature on October 1, 2010.  It was originally secured by 25,000,000 shares of the Company’s stock which was pledged as collateral by members of SSH LLC. A portion of the pledged shares were subsequently sold by SSH LLC in order to obtain funds to make the quarterly interest payments.  At December 31, 2009, there were 21,678,597 shares securing the Note.

17

The Prepayment and Amendment Agreement with SSH LLC provided for:

· The sale in February 2010 by SSH LLC of a block of 4,823,000 shares of the pledged stock to a third party for US$0.24 per share, for a total of US$1,157,011 (after commissions), which would be applied to the interest due for the period from January through May 2010 ($146,581) and  prepayment of principal ($1,010,430).  The proceeds of this sale were placed in escrow pending stockholder approval of the agreement.

· The prepayment of an additional US$3,075,676 of principal through the surrender of 11,650,000 pledged shares to the Company at US$0.26 per share,

· The extension of the maturity date on the Note from October 1, 2010 to October 1, 2012, and

· Effective in June 2010, adjustment of the annual interest rate from 5.0% to 6.5%, payable annually on January 1 of each year, in arrears.

This agreement was subject to the approval of the Company’s shareholders at the annual meeting on June 8, 2010, and was contingent on the receipt of an appraisal attesting to the fairness of the transaction to the shareholders unrelated to SSH LLC. The agreement was approved and the amended Note as of September 30, 2010 had an outstanding principal balance of $3,075,685 and is secured by 5,205,597 shares of the Company’s common stock pledged by the members of SSH LLC.  The proceeds from the February 2010 sale which had been placed in escrow were delivered to the Company on June 8, 2010.

The contractual outstanding loan balance at September 30, 2010 of $3,075,685 is reduced on our balance sheet by a valuation allowance of $1,200,000, resulting in a net receivable balance of $1,875,685.  The Note is considered to be collateral dependent, as SSH LLC’s only means of repayment is through liquidation of the underlying collateral.  At December 31, 2008, the then-outstanding loan balance of $7,161,791 was reduced by a $5.8 million valuation allowance, which was based on the estimated fair value of the underlying collateral at that time. In the fourth quarter of 2009, the Company recorded a recovery in the value of the Note of $300,000 and a corresponding decrease in the valuation allowance to $5.5 million. At March 31, 2010, the Company recorded an additional recovery in the value of the note of $3.2 million, and at September 30, 2010 the Company recorded a further recovery of $1.1 million, as described below.

In the absence of an active market for the Company’s common stock, or other observable inputs for similar instruments, the Company originally based its valuation of the underlying collateral on the value of the March 2009 issuance of Series A Preferred Stock, adjusted using an assumed discount rate of 20%, which was management’s estimate of the fair 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 was to mature in October 2010.

The recovery of $3.2 million at March 31, 2010 was based on the re-measurement of a significant input used to value the underlying collateral of the Note.  The February 2010 sale of shares to a third party indicated that the preferred stock price was no longer the best measure of the fair value of our common stock.  The Company believed that a better benchmark for fair value was the US$0.24 per share obtained by SSH LLC for the 4.8 million shares sold to a third party in February 2010.  The additional recovery at September 30, 2010 is based on the subsequent re-measurement of the underlying collateral based on the price obtained for the 3 million shares issued by the Company in a private placement in October 2010 (See Note 11).  The Company reviews the valuation of the Note each reporting period and believes the value is properly stated at September 30, 2010.

Recent Accounting Pronouncements

See Note 3 to the condensed consolidated financial statements at Item 1 of this Form 10-Q

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Results of Operations for the Three Months Ended September 30, 2010 and 2009

Revenues

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Revenues	$	2,188,613	$	1,303,764	$	884,849

The growth in total revenues of 68% in the third quarter of 2010 when compared with the 2009 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, 2010, the cumulative license agreements were 397, compared with 243 at September 30, 2009.  A net of 41 new licenses were added during the third quarter of 2010, compared with 30 for the third quarter of 2009.  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 $2.1 million recorded on the balance sheet at September 30, 2010 will be recognized as revenue in the next twelve months.

Cost of Revenues and Operating Expenses

Cost of Revenues

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Cost of Revenues	$	704,595	$	548,555	$	156,040

Cost of revenues is comprised of account management, customer support and IT services.  For the three months ended September 30, 2010, employee costs included in cost of revenues increased by approximately $96 thousand as compared to the three months ended September 30, 2009, primarily as a result of a realignment of certain management responsibilities from research and development to account management, and an increase in head count to support our larger client base. The remainder of the increase in cost of revenues is primarily attributable to an increase in hosting costs of approximately $31 thousand, which increased primarily due to hosting facilities the Company has added as a result of the growth in the number of users.  Additional cost increases attributable to our larger client base include printing and production of user materials of $11 thousand, equipment maintenance of $7 thousand, and travel costs of $4 thousand.

Cost of revenues as a percentage of revenues decreased to 32.2% for the third quarter of 2010, compared with 42.1% for the third quarter of 2009, as a result of the greater economies that we have achieved as our client base increased.

Selling and Marketing Expenses

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Selling and Marketing Expenses	$	688,315	$	579,414	$	108,901

Selling and marketing expenses are higher in the third quarter of 2010 as compared to the comparable 2009 quarter as a result of an increase in outside consultant costs of $25 thousand, salaries and commissions of $14 thousand, marketing expenses of $25 thousand and foreign selling expenses of $31 thousand, primarily in the UK.

General and Administrative Expenses

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
General and Administrative Expenses	$	1,007,848	$	931,096	$	76,752

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The increase in general and administrative expenses is comprised of an increase in share-based compensation expense of $231 thousand primarily relating to stock options issued in the third quarter of 2010, offset by decreases in professional fees of $69 thousand, employee related costs of $25 thousand, director related costs of $23 thousand and state and city capital taxes of $42 thousand.

Research and Development Expenses

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Research and Development Expenses	$	253,663	$	183,826	$	69,837

Our research and development is performed primarily by our New Zealand subsidiary.  The New Zealand expenses in local currency increased due to additional headcount. The difference in the average US$/NZD exchange rates for the periods resulted in an additional increase when measured in US dollars.

Depreciation and Amortization

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Depreciation and Amortization	$	117,274	$	102,775	$	14,499

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

Impairment recovery on note receivable from affiliate

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Impairment recovery on note receivable from affiliate	$	1,100,000	$	-	$	1,100,000

The carrying value of the Note had previously been reduced by a valuation allowance to reflect the estimated fair value of the Company’s common stock which is held as collateral for the Note, as the Note is deemed to be collateral dependent.  At September 30, 2010, the Company re-measured a significant input used to value the underlying collateral and recorded a recovery of $1.1 million, based on recent events and activity which indicated that the revised measurement is the best representation of fair value of the underlying collateral for the Note.

Interest Income, net

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Interest Income, net	$	43,791	$	90,919	$	(47,128	)

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 prepayment and amendment of the Note in June 2010.  Although the interest rate increased from 5.0% to 6.5%, the principal balance decreased by almost $4.1 million, resulting in less interest income overall.

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Foreign Exchange Transaction Gain(Loss)

	Three months ended September 30,
	2010		2009		Increase/(Decrease)
Foreign Exchange Transaction Gain(Loss)	$	34,522	$	54,820	$	(20,298	)

The parent Company maintains a portion of its cash and receivable balances in foreign currencies, primarily the NZD and GBP.  The gain for the three months ended September 30, 2010 is due to a weakening of the US dollar against both NZD and GBP.  During the third quarter of 2009 there was a more significant weakening of the US dollar against both NZD and GBP.  

Results of Operations for the Nine Months Ended September 30, 2010 and 2009

Revenues

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Revenues	$	5,851,494	$	3,457,668	$	2,393,826

The growth in revenues of 69% in the first three quarters of 2010 when compared with the first three quarters of 2009 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, 2010, the cumulative license agreements were 397, compared with 243 at September 30, 2009.  A net of 113 new licenses were added during the first three quarters of 2010, compared with 69 for the first three quarters of 2009.  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 $2.1million recorded on the balance sheet at September 30, 2010 will be recognized as revenue in the next twelve months.

Cost of Revenues and Operating Expenses

Cost of Revenues

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Cost of Revenues	$	1,986,815	$	1,544,122	$	442,693

Cost of revenues is comprised of account management, customer support and IT services.  For the nine months ended September 30, 2010, employee costs included in cost of revenues increased by approximately $325 thousand as compared to the nine months ended September 30, 2009, primarily as a result of a realignment of certain management responsibilities from research and development to account management, and an increase in head count to support our larger client base. The remainder of the increase in cost of revenues is primarily attributable to an increase in hosting costs of approximately $24 thousand, which increased primarily due to hosting facilities the Company has added as a result of the growth in the number of users.  Additional cost increases attributable to our larger client base include printing and production of user materials of $25 thousand, equipment maintenance of $27 thousand, and travel costs of $25 thousand.

Cost of revenues as a percentage of revenues decreased to 33.9% for the first three quarters of 2010, compared with 44.7% for the first three quarters of 2009, as a result of the greater economies that we have achieved as our client base increased.

Selling and Marketing Expenses

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Selling and Marketing Expenses	$	1,995,191	$	1,853,075	$	142,116

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Selling and marketing expenses are higher for the first three quarters of 2010 as compared to the comparable 2009 period as a result of an increase in outside consultant costs of $23 thousand, marketing expenses of $66 thousand and foreign selling expenses of $31 thousand, primarily in the UK.  Salaries and commissions were consistent with the prior year as a result of an increase in commissions due to increased sales, offset by a slight reduction in headcount.

General and Administrative Expenses

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
General and Administrative Expenses	$	2,892,285	$	3,055,137	$	(162,852	)

The decrease in general and administrative expenses is comprised of an increase in share-based compensation expense of $451 thousand, relating to stock options issued through the third quarter of 2010, offset by decreases in professional fees of $404 thousand, employee compensation of $77 thousand, rent and office costs of $41 thousand, director related costs of $26 thousand and state and city capital taxes of $58 thousand.  The decrease in professional fees is attributable to the inclusion in the first nine months of 2009 of incremental professional fees associated with the requirements of becoming a public company in the U.S.

Research and Development Expenses

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Research and Development Expenses	$	664,551	$	542,753	$	121,798

Our research and development is performed primarily by our New Zealand subsidiary.  The New Zealand expenses for the first three quarters of 2010 in local currency increased slightly over the comparable 2009 period due to an increase in headcount and consulting costs throughout the three quarters of 2010, offset by the realignment of certain management responsibilities from research and development to account management.  An additional increase was due to the difference in the average US$/NZD exchange rates for the three quarters of 2010 compared with the same periods in 2009, resulting in higher expense when measured in US dollars.

Depreciation and Amortization

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Depreciation and Amortization	$	347,177	$	286,736	$	60,441

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

Impairment recovery on note receivable from affiliate

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Impairment recovery on note receivable from affiliate	$	4,300,000	$	-	$	4,300,000

The carrying value of the Note had previously been reduced by a valuation allowance to reflect the estimated fair value of the Company’s common stock which is held as collateral for the Note, as the Note is deemed to be collateral dependent.  At March 31, 2010, the Company re-measured a significant input used to value the underlying collateral and recorded a recovery of $3.2 million.  An additional recovery of $1.1 million was recorded at September 30, 2010, based on recent events which indicated that the revised measurement was the best representation of fair value of the underlying collateral for the Note.

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Interest Income, net

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Interest Income, net	$	188,173	$	276,561	$	(88,388	)

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 prepayment and amendment of the Note in June 2010.  Although the interest rate increased from 5.0% to 6.5%, the principal balance decreased by almost $4.1 million, resulting in less interest income overall.

Foreign Exchange Transaction Gain/(Loss)

	Nine months ended September 30,
	2010			2009		Increase/(Decrease)
Foreign Exchange Gain/(Loss)	$	(4,089	)	$	53,927	$	(58,016	)

The parent Company maintains a portion of its cash and receivable balances in foreign currencies, primarily the NZD and GBP.  The foreign exchange differences for the nine months ended September 30, 2010 and 2009, are a result of the strengthening of the US dollar against NZD from January through June of 2010 followed by a strengthening in the third quarter, while the US dollar strengthened against GPB over the same nine months of 2010.  In the first three quarters of 2009, the US dollar significantly weakened against both NZD and GBP.

Other Income

	Nine months ended September 30,
	2010		2009		Increase/(Decrease)
Other Income	$	-	$	170,954	$	(170,954	)

Other income in 2009 consists of a recovery of UK Value Added Tax (VAT) on prior year expenses.

Liquidity and Capital Resources                                                                

Historically, as we grew our business and sustained negative cash flow, our primary source of liquidity had been the cash received from stock issuances, including $16.4 million obtained in December 2007 from our initial public offering and $2.9 million obtained from our Series A Preferred Stock issued in March 2009.  Additionally, in June 2010, we received a $1.0 million principal prepayment on the Note receivable from affiliate (See Note 5), and on October 19, 2010, the Company received $1.4 million in an offshore private placement of 3 million shares of newly issued common stock by First NZ Capital Securities Limited (See Note 11).

Although our 2010 year-to-date results show net cash used in operations of $0.7 million, in the quarter ended September 30, 2010 we achieved positive cash flow from operations of approximately $0.2 million. This is the first quarter since inception of the Company in which we achieved positive cash flow from operations.

At September 30, 2010, our sources of liquidity consist of cash and term deposits of approximately $1.3 million.  As noted above, we received an additional $1.4 million from the sale of newly issued stock in October 2010.  The Company also has a $1.0 million revolving line of credit facility with Spring Street Partners, L.P. (See Note 7).  This line of credit offers the Company additional cash flow support if needed.  As of September 30, 2010, the Company has had no borrowings under this credit facility.

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  Our current operating expenses and expected capital expenditures are fixed, predictable and adequate to support our budgeted growth.  However, with the recent acquisition of additional capital, the Company may evaluate strategic growth opportunities that could change our current expense and capital forecasts.  The primary uncertainty concerning the Company’s capital needs pertains to its ability to continue to achieve the expected sales growth in a timely manner.

Cash flows

	Nine months ended September 30,						Three months ended September 30,
	2010			2009			2010			2009
Cash provided by (used in):
Operating activities	$	(671,268	)	$	(2,499,899	)	$	248,731		$	(478,295	)
Investing activities	$	(146,465	)	$	(204,827	)	$	(57,490	)	$	(20,614	)
Financing activities	$	917,424		$	2,759,003		$	(30,029	)	$	(36,518	)

Net Cash Flows from Operating Activities

Cash used in operating activities for the nine months ended September 30, 2010 was $0.7 million, compared with $2.5 million for the first three quarters of 2009.  The Company has been reducing its cash burn rate from operations, primarily from increased revenues coupled with a reduction in operating expenses.  In the third quarter of 2010, for the first time since inception, the Company generated positive cash flow from operations of $0.2 million.

Net Cash Flows from Investing Activities

Cash used in investing activities is comprised entirely of purchases of property and equipment.

Net Cash Flows from Financing Activities

For the nine months ended September 30, 2010, cash received from financing activities consists principally of the $1.0 million received from a prepayment of the Note receivable from affiliate.  During the comparable 2009 period, the Company secured $2.9 million in financing, net of issuance costs, from the issuance of Series A Preferred Stock.  For the three months ended September 30, 2010 and 2009, cash used in financing activities consists entirely of payments of obligations under capital leases.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Because the Company qualifies as a smaller reporting company, as defined by §229.10(f)(1) it is not required to provide the information required by this Item.

Item 4T. Controls and Procedures.

(a)  Evaluation of disclosure controls and procedures.  As of the end of the quarter ended September 30, 2010, 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, 2010 that has materially affected, or is reasonably likely to materially affect Diligent Board Member Services, Inc.’s internal control over financial reporting.

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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. [Reserved]

Item 5. Other Information.

Not applicable

Item 6. Exhibits.

Exhibit
Numbers	Exhibits
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) and 18 U.S.C. 1350

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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 8, 2010	By:	/s/ Alessandro Sodi
	Alessandro Sodi, Chief Executive Officer (Principal Executive Officer)
Dated:  November 8, 2010	By:	/s/ Steven P. Ruse
	Steven P. Ruse, Chief Financial Officer (Principal Financial Officer)

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