UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 
 FORM 10-K
  FOR ANNUAL AND TRANSITION REPORTS
 PURSUANT TO SECTIONS 13 OR 15(D) OF THE
 SECURITIES EXCHANGE ACT OF 1934
  (Mark One)
  x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 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
(I.R.S. Employerof Incorporation or Organization)
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)
 
 Securities registered pursuant to Section 12(b) of the Act: None
 
 Securities registered pursuant to Section 12(g) of the Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share

The New Zealand Stock Exchange
 
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ̈ No x
  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ̈ No x
  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to their Form 10-K. x
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, “large accelerated filer” and smaller company: in Rule 12b-2 of the Exchange Act. (Check One):
  Large accelerated filer  ̈ Accelerated filer  ̈ Non-accelerated filer  ̈ Smaller reporting company x
  Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈ No x
  The aggregate market value of common equity held by non-affiliates as of the last business day of the registrant’s second fiscal quarter, computed by reference to the last sales price as reported by NZX on June 30, 2010 of NZD 0.64 (US$ 0.44) per share, was US$34.8 million.
  The number of shares of the registrant’s common stock outstanding as of March 1, 2011 was 81,978,001.
  DOCUMENTS INCORPORATED BY REFERENCE
  The following documents are incorporated herein by reference:
  (1)
Proxy Statement for the Annual Meeting to be held April 28, 2011, New Zealand Time.
  
  CONTENTS
  PAGEForward Looking Statements

iiiAvailable Information

iiiPART IItem 1.
Business

1Item 1A.
Risk Factors

10Item 1B.
Unresolved Staff Comments

10Item 2.
Properties

10Item 3.
Legal Proceedings

10Item 4
[Reserved]

10PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11Item 6.
Selected Financial Data

13Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

13Item 7A.
Quantitative and Qualitative Disclosure About Market Risk

25Item 8.
Financial Statements and Supplementary Data

26Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

52Item 9A.
Controls and Procedures

52Item 9B.
Other Information

53PART IIIItem 10.
Directors, Executive Officers and Corporate Governance

54Item 11.
Executive Compensation

54Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

54Item 13.
Certain Relationships and Related Transactions, and Director Independence

54Item 14.
Principal Accountant Fees and Services

54PART IVItem 15.
Exhibits, Financial Statement Schedules

55SIGNATURES

56INDEX TO EXHIBITS

58
  ii
  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-K 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.
  iii
  PART I
  ITEM 1. BUSINESS
  As used herein, unless the context otherwise requires, the terms “Company”, “we”, “us”, “our” and words of similar import refer to the combined business of Diligent Board Member Services, Inc. and its consolidated subsidiaries.
  GENERAL INFORMATION
  History
 
 We are a Delaware corporation that was incorporated on September 27, 2007. On October 1, 2007, our accounting predecessor entity and sole stockholder at that time, Services Share Holding, LLC, (previously known as Diligent Board Member Services, Inc. and referred to in this document as “SSH LLC”), contributed substantially all of its assets and its Diligent Boardbooks®1 business to Diligent Board Member Services, Inc. SSH LLC was founded in 1994 and developed complex database-driven software for large and small companies until 2003, when it shifted its focus to corporate governance service delivery
software.
 
 Company 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 before, during and after board meetings. Each of our clients enters into a service agreement whereby we agree to provide and support the Diligent Boardbooks service. Diligent provides clients with subscription-based access to its software and also provides associated services including securely hosting the clients’ data and customer service and support for the application.
 
 The 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.
 
 Diligent 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, Diligent offers annual renewable subscriptions for customer access to its Boardbook product which is hosted on Diligent’s secure servers, and offers a complete suite of related services including training, support, data migration and data security/backup.
 
 
 1 Diligent Boardbooks is a registered trademark of Diligent Board Member Services, Inc.
  1
  The SaaS model allows Diligent 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 companies to retain control over access to the application while outsourcing to Diligent the support activities, such as managing the IT infrastructure and maintaining the software.
 
 The first phase of our business focus was developing and testing the 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 Boardbooks product. We are now in the customer acquisition phase of our business and currently provide the Boardbooks service to over 450 companies and 12,000 users.
 
 Development Timeline
 
 The paragraphs below provide a general timeline of the development of the Diligent Boardbooks system:
 
 ·
The Diligent Boardbooks Concept (1998-2001). 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 Diligent Boardbooks concept was launched and a working concept was produced and tested, which was licensed to SunAmerica Funds.
 
 ·
Diligent Boardbooks Delivery and Development (2000-2002). The development process took more than three years to create the first commercially viable version of Diligent Boardbooks. The founders of SSH LLC made this investment foreseeing the end product could become an extremely valuable licensing opportunity.
 
 ·
Diligent Boardbooks Testing (2002-2004). With SunAmerica Funds as an anchor client, SSH LLC spent a year getting other major accounts to buy licenses in a market that had yet to deal with the implications of the Sarbanes-Oxley Act. These clients had to be “seasoned” (a term we use to describe the time an account takes to become a “paying, satisfied Boardbooks client”) for years in many cases prior to them having the comfort to move their board materials to our servers.
 
 ·
Building Credentials (2004-2006). After “seasoning” the anchor accounts we began establishing our own credentials. Our marketing group produced credential style marketing materials featuring the initial test license accounts.
  2
  ·
Scaling (2006-2007). Before undertaking an international rollout of a large licensing sales force, we tested several key growth assumptions relating to scaling the Diligent Boardbooks service.
 
 ·
Roll-out (2007-2008). The roll-out of a sales force commenced in 2007 and by the end of the 3rd quarter our sales force had increased from 3 to 23 full time salespeople, which was subsequently reduced to 18 following performance evaluations. At the end of 2008, a general workforce reduction, due to a difficult worldwide economic climate, further reduced the sales force to 10.
 
 ·
Growth (2009-2010).Despite the global economic crisis and sales force reduction, the Company had exceptional years in 2009 and 2010. The fourth quarter of 2010 was the best quarter since inception for new sales, with the addition of 59 new agreements for Boardbook licenses and $1.6 million in annual recurring revenue. For the full year 2010, we added 172 new agreements and $3.7 million in annual recurring revenue. Additionally, our revenues for 2010 increased 66% to $8.3 million.
 
 New Zealand Offering
 
 On December 12, 2007, we completed an offshore offering of 24,000,000 common shares to members of the public in conjunction with a listing of our stock on the New Zealand Stock Exchange. The net proceeds of the offering were approximately $16.4 million, which we used to: recruit additional staff to grow our business, including more licensing sales people in North America, Europe and the Pacific Rim; invest in the operational infrastructure required to scale the business; provide working capital to sustain the operations of the business while we further built our revenue streams; and retire certain debt obligations incurred by SSH LLC in connection with the development of the Diligent Boardbooks business.
 
 Our common stock is listed on the New Zealand Stock Exchange and trades under the symbol “DIL.NZ”.
 
 Acquisition of Diligent Board Member Services NZ Limited; Activities of UK and Singapore Subsidiaries
 
 Effective January 1, 2008, we acquired the stock of Diligent Board Member Services NZ Limited, for consideration of NZD 5,000 (approximately US $3,800), which provides software development services and support. Effective April 2008, our United Kingdom subsidiary, Diligent Boardbooks Limited, became active and is engaged in European sales. On December 23, 2010, we formed a new subsidiary in Singapore, APAC Board Services PTE. Ltd., to focus on expansion in the Asia-Pacific region.
  3
  Market Opportunity
 
 The online board portal industry remains in its early stages with market penetration still relatively low. Our client base was previously comprised of blue chip companies predominantly in the financial services sector. These entities had previously been prime targets because their board materials are crucial to effectively managing the corporate governance process. Public recognition by prominent publications has helped us become a leader in the provision of online board portal software in this sector, and a vast opportunity for us remains in the global financial services sector.
 
 In addition to the financial services sector, Diligent has successfully expanded into numerous other sectors as well, including energy, oil and gas, health care and universities. In spite of the financial stress in the key US market, an impressive list of new clients has been added, including several international brand names. Further inroads have also been made into Canada with major energy companies and one of Canada’s largest pension funds selecting the Boardbooks board portal to provide them with real time access to their vital board materials.
 
 In 2010, Diligent achieved sales revenue of over $8.3 million, a year-to-year increase of 66%. The Company’s ability to continue to significantly grow its recurring income each quarter confirms that its SaaS business model is strongly positioned for the future.
 
 The drivers behind Diligent’s significant sales growth include:
 
 ·
Greater brand recognition of the Diligent Boardbooks product.
 
 ·
A highly skilled and focused sales force.
 
 ·
Faster sales turnaround driven, in part, by a general return of business confidence.
 
 ·
High customer confidence in, and satisfaction with, the product; supporting a trend where existing clients continue to upgrade services, add new users and provide new client referrals.
 
 ·
The introduction of an Apple iPad compatible version of Diligent Boardbooks in September 2010, and the acceptance of Boardbooks for iPad 1.0 into the Apple App Store in early January 2011.
 
 An important factor to also note is that this growth has been achieved even though the number of trained sales staff has remained relatively consistent throughout 2009 and 2010 and significantly down from sales staffing levels of 2008.
 
 As confidence appears to be returning to US companies and the Diligent sales pipeline continues to grow, the company is considering expanding its sales force to take advantage of the real growth opportunities. Given the sales performance to date, management has now achieved a proven model when it comes to driving results from its sales force.
  4
  Our Product Strengths
 
 Established Brand. We compete against several competitors within the board portal industry. Notably however, we began development in early 2001 ahead of many of our competitors. As a result, we believe our brand is more established in the marketplace.
 
 Ease of Use. In an article published in The Wall Street Journal on October 23, 2006, the author commented that “The portal from Diligent Board Member Services may be the easiest to use. The Diligent layout looks like a paper book. A binding coil and divider tabs are drawn onto the screen and directors “flip” pages with the click of a mouse.” This “ease of use” has been one of the many key elements to Diligent Boardbooks' popularity among executives with little time to learn a new system.
 
 Flexible Online and Offline Viewing. Diligent Boardbooks may be viewed online via the Internet or offline on the user’s computer. The offline version of Diligent Boardbooks allows a user to download a secure encrypted database of their own corporation’s entire Diligent Boardbooks database. This allows meetings to be run off-site without an Internet connection. The same book-like interface is used to view offline as well as online. This system is secured through high-level security and encryption technology.
 
 Additionally, when paper copies are requested, Diligent Boardbooks has a “Print Book” feature that allows directors to print the entire collated Boardbook complete with page numbers, agenda-related footers and more. This feature is controlled by the user, allowing a page, a tab or a whole book to be printed. This is a password-specific functionality controlled by the users.
 
 Offline Synchronization. The main distinction between Diligent Boardbooks and other systems is that Diligent Boardbooks maintains a single copy and does not download information that has already been downloaded, making synchronization an efficient and rapid process. Accordingly, there is no risk of having multiple copies or outdated documents floating on the computer desktop.
 
 Regular Upgrades. The Diligent Boardbooks software is regularly updated by our software development team. Updates are applied automatically and users receive the benefit of enhanced functionality without the inconvenience of software reinstallation.
 
 Application Security. We designed a powerful and secure triple redundant network to promote absolute protection and availability of client data. Primaries, secondaries and fail-over servers and systems are located in geographically diverse locations for application and data delivery security. An automated intrusion detection system blocks malicious activity and reverse proxy authentication provides another barrier of protection for sensitive data. For complete security, each individual Diligent Boardbooks user has a distinct user name and password that is required to access the Diligent Boardbooks site. All data is encrypted.
  5
  We are SAS 70 – Series II Audited (Statement on Auditing Standards – Service Organizations). This means our licensed client base can be assured that their most intimate corporate information is secure.
 
 Global Support. We serve the highest level officers of some of the largest companies in the world. To assist with completely meeting the expectations of these directors and their key employees, we have staff and contractors in four countries. Our support team is trained to work with its high-level clients to solve any problem a user might encounter. This high level of support is a core competency that has helped to ensure successful implementation and retention for over 450 companies and over 12,000 users to date, while keeping client attrition rates to less than five percent per year.
 
 Full Management and Implementation Team. We provide personalized and high quality account management and implementation to our clients. Each client has a dedicated team that includes an assigned day-to-day account manager, an assigned security engineer and an assigned executive.
 
 Rapid, Cost Effective Deployment. Diligent Boardbooks can be rapidly deployed for use within an organization. Once a company chooses to use Diligent Boardbooks, it can begin to realize the benefits almost immediately. Director training typically takes less than 45 minutes and full product administration training less than 10 hours. We consider this a very important distinguishing factor relative to key competitors whose systems can take considerably longer to implement.
 
 Business Model
 
 We use the SaaS model to distribute our Diligent Boardbooks software to the market and maintain the security and integrity of our clients’ data. Under this model, we license customer access to our Boardbook product, which is hosted on our secure servers, and offer a complete suite of related services including training, support, data migration and data security/backup.
 
 The SaaS model is characterized by a company providing on-demand access to its complex software through a web-based interface in return for subscription-based revenue. The SaaS industry has undergone significant growth over the past five years, spurred on by several factors:
 
 ·
SaaS providers can cost-effectively share one application across hundreds or thousands of companies;
 
 ·
Clients can accelerate the deployment process and eliminate additional infrastructure costs;
  6
  ·
A continuing decline in the cost of bandwidth has meant web-based solutions have become more viable;
 
 ·
Lower cost of implementation. Clients do not pay large sums for a product with a long development and implementation timeframe with no guarantee of success. Instead, clients that pay a nominal set-up and/or training fee (installation fee), and a recurring subscription fee, can begin to use the fully developed service immediately and retain the ability to cancel the service, if unsatisfied;
 
 ·
The success of on-demand services in the consumer market (e.g., Google, iTunes and YouTube) have made accessing content and services commonplace in professionals’ personal lives. Professionals are now demanding similar features in business software; and
 
 ·
The success of early leaders such as WebEx and salesforce.com has demonstrated the viability and value proposition of the SaaS model.
 
 Central characteristics of implementing the SaaS model include the:
 
 ·
Ability to obtain rapid growth in market share and revenue over a sustained period of time;
 
 ·
Highly scalable operations that can support sales growth with much lower increases in operating costs;
 
 ·
Significant up-front investment in sales and marketing in order to maximize the market penetration;
 
 ·
Negative earnings over the expansion period offset by equity capital; and
 
 ·
After a period of intense competition, typically one or two companies emerge as the market leaders.
 
 Marketing; Growth Strategy
 
 We believe building a successful sales and marketing team to present to and serve the boards of the world’s major corporations is a significant undertaking. Staff must have a deep understanding of corporate governance issues while also being able to interact credibly with the board members and senior executives of major US and international corporations.
  7
  The roll-out of our sales force commenced in 2007. By the beginning of the 4th quarter 2008, our sales force had increased to 23 full-time salespeople and then was subsequently reduced to 18 after performance evaluations. In November 2008, after consideration of the then current market environment and economic conditions, and the concern about the Company’s ability to raise additional growth financing on historically favorable terms, management decided to implement a cost reduction program that reduced staff by 13 people, including 8 in sales and 1 in marketing, leaving a total of 10 active in sales. Although this was a dramatic cut in sales force, the Company retained its most
effective salespeople and continued the pattern of growth necessary to maintain its market position. We currently have 8 fully trained sales people and we continue on an ongoing basis to evaluate the performance of our sales team and make adjustments as prudent and/or necessary.
 
 Intellectual Property
 
 We acquired all Diligent Boardbooks-related intellectual property from SSH LLC, as of October 1, 2007. We have protected our unique graphical user interface by copyright. We have registered our “Diligent Boardbooks” trademark and will continue to take steps to protect our intellectual property.
 
 All software developed by us is protected by copyright and has been developed entirely by our employees. Employees and contractors have no rights to the application source code, design, user interface or any other aspect of the application, which is protected by copyright and provisions in our employment contracts.
 
 Clients have no rights, other than licensed use, to the application source code, and generally have no visibility of the source code. We make occasional exceptions to allow clients to perform due diligence security audits, which are protected by non-disclosure/non-use agreements. Client rights to the application are defined and protected by the client service agreement with us.
 
 Customers and Certain Contracts
 
 Our client base is currently comprised of large companies predominantly in the financial services sector, however, the Company has successfully expanded into numerous other sectors as well, including energy, oil and gas, health care and universities. While confidentiality arrangements limit Diligent from disclosing its client base, clients who have permitted disclosure include SunAmerica Funds, Allianz Global Investors, New York Life Investment Management, Motorola, AOL, Exxon Mobil and the BBC. We have implemented the Diligent Boardbooks system for over 450 companies and over 12,000 users.
 
 Research and Development
 
 Our research and development efforts are now focused on improving and enhancing our Diligent Boardbooks system.
  8
  Competition
 
 We are subject to significant competition that could impact our ability to gain market share, win business and increase the price pressure on our products. We face strong competition from a wide variety of firms, both large and small. Some of our primary direct competitors are the following:
 
 ·
Thomson Reuters, headquartered in New York, which provides a board portal service through a product called Thomson BoardLink;
 ·
BoardVantage, Inc., located in California, which provides a product called BoardVantage Board Portal;
 ·
Directors Desk, located in New York and Washington, which provides a product called Directors Desk; and
 ·
SAI Global Limited, which acquired 80-20 Software Inc., a Melbourne-based service provider with a product called Leaders4.
 
 We believe the principal factors that generally determine a company’s competitive advantage in the market in which Diligent Boardbooks competes are:
 
 ·
software development capabilities;
 ·
functionality and reliability of products and services;
 ·
competitive sales and marketing capabilities;
 ·
proven testing record of software products and services; and
 ·
market share.
 
 We believe that we compete favorably regarding each of these factors.
 
 Regulation
 
 Our business is not subject to any industry-specific regulation that affects our business as currently conducted, although we are subject to general tax, corporate, securities, employment, privacy and other laws and regulations that affect businesses generally. We are a beneficiary of the push to improve corporate governance and oversight stimulated by the Sarbanes-Oxley Act of 2002, which we believe has increased demand for our Diligent Boardbooks product.
 
 Environmental Matters
 
 We do not believe that the costs and effects of compliance with environmental laws will be material to our business.
 
 Employees
 
 As of March 1, 2011, we had approximately 58 full-time employees. Of these, the majority are located in our New York, New York offices. The remaining employees are located predominantly in our Christchurch, New Zealand office, which provides software and help desk support for several large corporations, as well as providing the software development of the Diligent Boardbooks product. We also have administrative employees in our Wayne, New Jersey office.
  9
  ITEM 1A. RISK FACTORS
 
 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 1B. UNRESOLVED STAFF COMMENTS
 
 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 2. PROPERTIES
  Our headquarters are located at 39 West 37 St., New York, NY 10018, where our primary executive, sales and administrative offices are located. We also have an ancillary administrative office located at 155 Willowbrook Boulevard, Suite 100, Wayne, NJ 07470. We have sales offices in England and New Zealand. We also have an office at 49 Carlyle Street, Christchurch, New Zealand, where our software development takes place. We lease all of these properties and do not own any real property.
 
 We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations, although we intend to open additional sales offices as our geographic sales footprint warrants.
 
 We believe that our facilities are adequately covered by insurance.
  ITEM 3. LEGAL PROCEEDINGS
  The Company is not a party to any material legal proceeding required to be disclosed under Item 103 of Regulation S-K.
  ITEM 4. [RESERVED]
  10
  PART II
  ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  Market Information
 
 There is no United States established public trading market for our common stock. 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.”
 
 The following table shows the high and low closing sales prices for our common stock in New Zealand dollars.
 
 Closing Price of Common Stock (NZD)Period

High


Low2009 – 1st Quarter


.15



.152009 – 2nd Quarter


.25



.102009 – 3rd Quarter


.25



.142009 – 4th Quarter


.44



.182010 – 1st Quarter


.52



.252010 – 2nd Quarter


.70



.462010 – 3rd Quarter


.68



.562010 – 4th Quarter


.69



.57
 
 Holders
 
 As of March 1, 2011 there are 782 holders of record of our common stock.
 
 Dividends
 
 We have not paid any dividends on our common stock within the past two fiscal years or during the current fiscal year, and have no plans to do so in the foreseeable future.
 
 Equity Compensation Plan Information
 
 As of December 31, 2010, no shares of common stock are issuable by us upon the exercise of options, warrants and rights under any equity compensation plan, except as follows:
  11
 
 Plan category

Number of

securities to be

issued

upon exercise of

outstanding

options


Weighted-average

exercise price of

outstanding options


Number of securities

remaining available

for future issuance

under equity

compensation plans

(excluding securities

reflected in column

(a))(a)


(b)


(c)Equity compensation plan approved by security holders


5,190,335



.1902



5,191,664
 
 Recent Sales of Unregistered Securities
 
 The following is a summary of transactions by our company within the past three years involving sales of its securities that were not registered under the Securities Act of 1933 (or “Securities Act”).
 
 On October 23, 2008, we issued 600,000 shares of our common stock to our General Counsel and former CFO pursuant to written agreements under our 2007 Stock Option and Incentive Plan pursuant to the exemption from registration provided by Rule 506 and/or Section 4(2) of the Securities Act of 1933. These shares were subject to a substantial risk of forfeiture based on continued service requirements that lapsed at various dates through May 2009.
  On March 11, 2009, we issued 30,000,000 shares of newly created Series A Preferred Stock to Spring Street Partners, L.P. and Carroll Capital Holdings, LLC for US$0.10 per share. The Series A Preferred Stock was issued pursuant to the exemption from registration provided by Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933 (based on the issuance not involving any public offering and the shares being issued solely to accredited investors). The Preferred Shares carry a fixed, cumulative, dividend of 11% per annum (adjusted for stock splits, consolidation, etc). The dividend may be paid on the first business day of each calendar year for the prior year either in cash or in kind (at Diligent’s option) by the issue of additional Preferred Shares (PIK Shares), to be issued at the same
issue price of US$0.10 per share. The 11% annual dividend on the Preferred Shares will rank ahead of the declaration or payment of any dividends on Diligent’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 Diligent’s common stock. The Preferred Shares will be convertible at any time at the option of the holders into Diligent common stock on a one-for-one basis based on a conversion price of US$0.10 per share. 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 on January 4, 2010. During 2010, the Company anticipated that a cash dividend would be paid on the Series A Preferred Stock and accrued $359,338 for such dividend. In January 2011,
Spring Street Partners, L.P., one of the holders of the Series A Preferred Stock, waived its right to $200,000 of the dividend due on January 1, and directed the Company to retain those funds to support future growth. The founder and managing partner of Spring Street Partners, L.P. is also the chairman of the board of directors of the Company.
  12
  On October 19, 2010, we completed an offshore private placement for 3,000,000 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. The private placement was conducted in reliance upon Regulation S promulgated under the Securities Act of 1933.
 
 ITEM 6. SELECTED FINANCIAL DATA
  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 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  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-K. 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.
  13
  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 client’s 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.
 
 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 to buy licenses 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.
  14
  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 treated as a public company in the U.S. subject to the 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.
 
 Today, as a result of our commitment to sales and marketing, we are currently experiencing outstanding financial growth. Despite the global economic crisis and sales force reduction, the Company had exceptional years in 2009 and 2010. The fourth quarter of 2010 was the best quarter since inception for new sales, with the addition of 59 new agreements for Boardbook licenses and $1.6 million in annual recurring revenue. For the full year 2010, we added 172 new agreements and $3.7 million in annual recurring revenue. Additionally, our revenue for 2010 increased 66% to $8.3 million. The Company now has over 450 worldwide clients and more than 12,000 users of its Boardbooks products, servicing customers across a wide range of industry segments
 
 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.
  15
  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.
 
 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. Installation fees are recorded ratably over the contract period.
 
 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.
  16
  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.
 
 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 a loan receivable due from a related party, SSH LLC.
  17
  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, 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
 
 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 2010 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.
  18
  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 proceeds from the February 2010 sale, which had been placed in escrow, were delivered to the Company on June 8, 2010. After the transaction, the amended Note had a contractual outstanding principal balance of $3,075,685 and was secured by 5,205,597 shares of the Company’s common stock pledged by the members of SSH LLC. In a series of transactions in December 2010 and early January 2011, SSH LLC sold an additional 275,000 shares of the Company’s common stock pledged as
collateral for the Note, as permitted under the Note agreement to fund interest payments. As a result, the number of shares pledged as collateral for the Note has been reduced to 4,930,597.
 
 A portion of the outstanding loan balance of $3,075,685 is reserved 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 primary 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. As discussed below, 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.
  19
  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 at $0.47 per share, which is the price obtained for the 3 million shares issued by the Company in a private placement in October 2010. The Company reviews the valuation of the Note each reporting period and believes
the value is properly stated at December 31, 2010. In assessing the adequacy of the valuation allowance at December 31, 2010, we considered the prices obtained by SSH LLC for the December 2010/January 2011 sales of 275,000 shares, which were approximately equal to the price received for the shares issued in the October 2010 private placement. Additionally, there have been no other third party sales which would cause us to believe that $0.47 per share is not the best measure of the value of the underlying collateral.
 
 Recent Accounting Pronouncements
 
 See Note 3 to the consolidated financial statements at Item 8 of this Form 10-K.
 
 Results of Operations for the Years Ended December 31, 2010 and 2009
 
 Revenues
 
 Year ended December 31,2010


2009


Increase/(Decrease)Revenues

$
8,300,958


$
5,000,639


$
3,300,319
 
 The growth in revenues of 66% in the year ended December 31, 2010 when compared with 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 December 31, 2010, the cumulative license agreements were 456, compared with 284 at December 31, 2009, a 61% increase. The fourth quarter of 2010 saw an increase of 59 license agreements and marked an all-time high quarterly increase. The introduction of an Apple iPad compatible version of Diligent Boardbooks in September 2010 contributed to the increased demand for our product and we expect this trend to continue.
 
 All of the deferred revenue of $2.8 million recorded on the balance sheet at December 31, 2010 will be recognized as revenue in the next twelve months.
  20
  Cost of Revenues and Operating Expenses
 
 Cost of Revenues
 
 Year ended December 31,2010


2009


Increase/(Decrease)Cost of Revenues

$
2,774,217


$
2,186,850


$
587,367
 
 Cost of revenues is comprised of account management, customer support and IT services. For the year ended December 31, 2010, employee costs included in cost of revenues increased by approximately $445 thousand as compared to the year ended December 31, 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 $61 thousand, which increased primarily due to hosting facilities the Company has expanded as a result of the growth in the number of users. Additional cost increases attributable to our larger
client base include travel costs of $34 thousand, equipment maintenance of $31 thousand, and phone support of $9 thousand.
 
 Cost of revenues as a percentage of revenues decreased to 33.4% in 2010, compared with 43.7% for 2009, as a result of the greater economies of scale that we have achieved as our client base increased.
 
 Selling and Marketing Expenses
 
 Year ended December 31,2010


2009


Increase/(Decrease)Selling and Marketing Expenses

$
2,658,301


$
2,436,912


$
221,389
 
 Selling and marketing expenses increased in 2010 as compared to 2009 as a result of an increase in labor costs of $108 thousand, comprised of a decrease in salary expense for sales people, which was more than offset by an increase in commissions earned. Labor costs for marketing activities were level, as we decreased our in-house marketing staff, while increasing the use of outside consultants. Marketing costs overall increased by approximately $47 thousand primarily due to an increase in trade shows and printing costs, offset by a reduction in advertising and mailings. Foreign selling expenses increased by approximately $83 thousand, primarily in the UK.
  21
  General and Administrative Expenses
 
 Year ended December 31,2010


2009


Increase/(Decrease)General & Administrative Expenses

$
3,847,156


$
3,944,363


$
(97,207
)
 
 The decrease in general and administrative expenses is comprised of increases in share-based compensation expense relating to stock options ($398 thousand) and employee compensation ($71 thousand), offset by decreases in professional fees ($435 thousand), state and city capital taxes ($64 thousand), UK general and administrative costs ($43 thousand) and director-related costs ($15 thousand). The decrease in professional fees is attributable to the inclusion in 2009 of incremental professional fees associated with the requirements of becoming a public company in the U.S. The overall reduction in general and administrative expenses is a result of our focus on cost control in order to direct our resources towards business growth.
 
 Research and Development Expenses
 
 Year ended December 31,2010


2009


Increase/(Decrease)Research and Development Expenses

$
963,916


$
730,201


$
233,715
 
 Research and development expenses increased 32% in 2010, as compared to 2009. Our research and development is performed primarily by our New Zealand subsidiary, whose expenses in NZD increased by 13%, due to increased staffing for new product development, including development of Diligent Boardbooks for Apple iPad. In US dollars, the New Zealand costs increased by 30%, as a result of an increase in the average NZD/US$ exchange rate to 0.72 in 2010 from 0.63 in 2009. Additionally, we increased R&D staff in our New York office in 2010.
 
 Depreciation and Amortization
 
 Year ended December 31,2010


2009


Increase/(Decrease)Depreciation and Amortization

$
472,593


$
418,644


$
53,949
 
 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
 
 Year ended December 31,2010


2009


Increase/(Decrease)Impairment recovery on note receivable from affiliate

$
4,300,000


$
300,000


$
4,000,000
  22
  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.
 
 Interest Income, net
 
 Year ended December 31,2010


2009


Increase/(Decrease)Interest Income, net

$
233,388


$
358,446


$
(125,058
)
 
 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 approximately $4.1 million, resulting in less interest income overall.
 
 Foreign Exchange Transaction Gain/(Loss)
 
 Year ended December 31,2010


2009


Increase/(Decrease)Foreign Exchange Transaction Gain/(Loss)

$
(13,000
)

$
60,893


$
(73,893
)
 
 The Company’s US and UK operations have transactions with customers and suppliers denominated in currencies other than their functional currencies, primarily the Canadian Dollar and the Euro. Additionally, the US parent Company maintains a portion of its cash and receivable balances in foreign currencies, primarily the NZD and GBP. Foreign exchange transaction gains and losses arise on the settlement of foreign currency transactions at amounts different from the recorded amounts, and the measurement of the unrealized foreign currency gains and losses in the related assets and liabilities at the end of the period. In 2009, the US dollar weakened significantly against both the NZD and GBP, while in 2010 the US dollar recovered against the GBP and experienced
just a slight weakening against the NZD.
 
 Other Income
 
 Year ended December 31,2010


2009


Increase/(Decrease)Other Income

$
-


$
171,339


$
(171,339
)
 
 Other income in 2009 consists of a recovery of UK Value Added Tax (VAT) on prior year expenses.
  23
  Liquidity and Capital Resources
 
 Historically, as the Company grew its business and sustained negative cash flow, its primary source of liquidity had been the cash received from stock issuances, including $16.4 million obtained in December 2007 from the Company’s initial public offering and $2.9 million obtained from the issuance of Series A preferred stock issued in March 2009. Additionally, in June 2010, the Company received a $1.0 million principal prepayment on the Note receivable from affiliate, and on October 20, 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.
 
 In the third and fourth quarters of 2010, the Company generated positive cash flows from operations of $0.2 million and $0.7 million, respectively, resulting in approximately $18 thousand net cash generated from operations for the full year. This marks the first year since inception of the Company that Diligent achieved positive cash flow from operations.
 
 At December 31, 2010, the Company’s sources of liquidity consist of cash and term deposits of approximately $3.3 million. The Company also has a $1.0 million revolving line of credit facility with Spring Street Partners, L.P. This line of credit offers the Company additional cash flow support, if needed. As of December 31, 2010, the Company has had no borrowings under this credit facility.
 
 The Company’s 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 is evaluating strategic growth opportunities that could change our current expense and capital forecasts, particularly in the Asia-Pacific region. The Company’s expected cash receipts from operations are adequate to support budgeted expenses for 2011. 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
 
 Year ended December 31,2010


2009Cash provided by (used in):Operating activities

$
17,843


$
(2,473,837
)Investing activities

$
(257,339
)

$
(377,858
)Financing activities

$
2,324,749


$
2,720,789
  24
  Net Cash Flows from Operating Activities
 
 Cash provided by operating activities was $17,843 for the year ended December 31, 2010, compared with $2,473,837 cash used in operating activities for 2009. This marks the first year since inception that the Company has generated positive cash flow from operations. This was achieved through increased revenues coupled with a leveling off of cash-based operating expenses (operating expenses less depreciation and share-based compensation).
 
 Net Cash Flows from Investing Activities
 
 Cash used in investing activities is comprised primarily of purchases of property and equipment, which decreased to $257,339 in 2010 from $377,858 in 2009. Following Diligent’s IPO at the end of 2007, the Company made significant investments in property and equipment. Additions each year result from necessary expansion to accommodate our growing customer base.
 
 In 2010, the Company invested an additional $25,000 in a New Zealand term deposit.
 
 Net Cash Flows from Financing Activities
 
 For the year ended December 31, 2010, cash provided by financing activities was $2,324,749, consisting principally of approximately $1.0 million received from a prepayment of the Note receivable from affiliate and $1.4 million received from the issuance of common stock in a private placement in the fourth quarter of 2010. In 2009, cash provided by financing activities of $2,720,789 consists principally of the proceeds of the issuance of Series A preferred stock.
 
 Off-Balance Sheet Arrangements
 
 We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  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.
  25
  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 INDEX TO FINANCIAL STATEMENTS
 
 PAGEReport of Independent Registered Public Accounting Firm
27Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009
28Consolidated Statements of Operations for the years ended December 31, 2010 and December 31, 2009
29Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) and Comprehensive Income (Loss) for the years ended December 31, 2010 and December 31, 2009
30Consolidated Statements of Cash Flows for the years ended December 31, 2010 and December 31, 2009
31Notes to Consolidated Financial Statements
32
  26
  Report of Independent Registered Public Accounting Firm
 
 To the Board of Directors and Stockholders of
 Diligent Board Member Services, Inc.
 
 We have audited the accompanying consolidated balance sheets of Diligent Board Member Services, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders' equity (deficiency) and comprehensive loss, and cash flows for the years then ended.  Diligent Board Member Services, Inc.'s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements and assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Diligent Board Member Services, Inc. as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
 /s/ Holtz Rubenstein Reminick LLP
 
 New York, New York
 March 22, 2011
  27
 
 Diligent Board Member Services, Inc.
 Consolidated Balance Sheets
 
 December 31, 2010


December 31, 2009ASSETSCurrent assets:Cash and cash equivalents

$
3,212,449


$
1,129,591Term deposit


97,300



72,530Accounts receivable


494,048



303,331Prepaid expenses and other current assets


323,911



183,368Total current assets


4,127,708



1,688,820Property and equipment, net


1,082,104



1,312,959Note receivable from affiliate, net of valuation allowance


1,875,685



1,661,791Restricted cash - security deposits


226,617



221,886Total assets

$
7,312,114


$
4,885,456LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current liabilities:Accounts payable

$
84,388


$
144,751Accrued expenses and other liabilities


915,431



253,089Deferred revenue


2,849,225



1,593,351Current portion of obligations under capital leases


86,230



113,418Payables to affiliates


-



5,762Total current liabilities


3,935,274



2,110,371Non-current liabilities:Obligations under capital leases, less current portion


60,861



147,091Other noncurrent liabilities


50,255



44,252Total non-current liabilities


111,116



191,343Total liabilities


4,046,390



2,301,714Commitments and contingenciesRedeemable 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 $5,259,406 and $4,766,712)


3,177,291



3,149,851Stockholders' equity:Common Stock, $.001 par value, 250,000,000 shares authorized, 81,968,001 and 90,440,000 shares issued and outstanding


81,968



90,440Additional paid-in capital


23,107,919



24,532,622Accumulated deficit


(23,099,704
)


(25,180,648
)Accumulated other comprehensive loss


(1,750
)


(8,523
)Total stockholders' equity (deficiency)


88,433



(566,109
)Total liabilities, redeemable preferred stock and stockholders' equity (deficiency)

$
7,312,114


$
4,885,456
  See accompanying notes to consolidated financial statements
  28
  Diligent Board Member Services, Inc.
 Consolidated Statements of Operations
 
 Year ended


Year endedDecember 31,


December 31,2010


2009Revenues

$
8,300,958


$
5,000,639Cost of revenues


2,774,217



2,186,850Gross profit


5,526,741



2,813,789Operating expenses:Selling and marketing expenses


2,658,301



2,436,912General and administrative expenses


3,847,156



3,944,363Research and development expenses


963,916



730,201Depreciation and amortization


472,593



418,644Total operating expenses


7,941,966



7,530,120Operating loss


(2,415,225
)


(4,716,331
)Other income (expenses):Impairment recovery on note receivable from affiliate


4,300,000



300,000Interest income, net


233,388



358,446Foreign exchange transaction gain (loss)


(13,000
)


60,893Other


-



171,339Total other income, net


4,520,388



890,678Income (loss) before provision for income taxes


2,105,163



(3,825,653
)Provision for income taxes


24,219



36,337Net income (loss)

$
2,080,944


$
(3,861,990
)Net income (loss) per share:Basic

$
0.02


$
(0.04
)Diluted

$
0.02


$
(0.04
)Weighted average shares outstanding:Basic


84,487,207



90,371,507Diluted


119,388,351



90,371,507
 
 See accompanying notes to consolidated financial statements
  29
  Diligent Board Member Services, Inc.
 Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)
 and Comprehensive Income (Loss)
 
 AccumulatedCommon


Additional





Other


TotalCommon


Stock


Paid-in-


Accumulated


Comprehensive


Stockholders'Shares


$.001 Par Value


Capital


Deficit


Income (Loss)


Equity(Deficiency)Balance at January 1, 2009


90,440,000


$
90,440


$
24,618,070


$
(21,318,658
)

$
(20,045
)

$
3,369,807Net loss


-



-



-



(3,861,990
)


-



(3,861,990
)Foreign exchange translation adjustment


-



-



-



-



11,522



11,522Total comprehensive loss


-



-



-



-



-



(3,850,468
)Share-based compensation, net of forfeitures


-



-



203,253



-



-



203,253Amortization of preferred stock offering costs


-



-



(21,989
)


-



-



(21,989
)Accrual of preferred stock dividend


-



-



(266,712
)


-



-



(266,712
)Balance at December 31, 2009


90,440,000


$
90,440


$
24,532,622


$
(25,180,648
)

$
(8,523
)

$
(566,109
)Net income


-



-



-



2,080,944



-



2,080,944Foreign exchange translation adjustment


-



-



-



-



6,773



6,773Total comprehensive income


-



-



-



-



-



2,087,717Share-based compensation, net of forfeitures


-



-



601,541



-



-



601,541Cancellation of common stock


(11,650,000
)


(11,650
)


(3,064,026
)


-



-



(3,075,676
)Issuance of shares in private placement


3,000,000



3,000



1,395,096



-



-



1,398,096Exercise of stock options


178,001



178



29,464



-



-



29,642Amortization of preferred stock offering costs


-



-



(27,440
)


-



-



(27,440
)Accrual of preferred stock dividend


-



-



(359,338
)


-



-



(359,338
)Balance at December 31, 2010


81,968,001


$
81,968


$
23,107,919


$
(23,099,704
)

$
(1,750
)

$
88,433
 See accompanying notes to consolidated financial statements
  30
  Diligent Board Member Services, Inc.
 Consolidated Statements of Cash Flows
 
 Year ended


Year endedDecember 31,


December 31,2010


2009Cash flows from operating activities:Net income (loss)

$
2,080,944


$
(3,861,990
)Adjustments to reconcile net income (loss) to net cashprovided by (used in) operating activities:Impairment recovery on note receivable from affiliate


(4,300,000
)


(300,000
)Depreciation and amortization


472,593



418,644Share-based compensation


601,541



203,253Allowance for doubtful accounts


-



(7,125
)Straight-line rent adjustment


6,003



44,252Changes in operating assets and liabilities:Accounts receivable


(190,717
)


93,974Prepaid expenses and other current assets


(140,543
)


39,249Restricted cash - security deposits


(4,731
)


24,799Accounts payable and accrued expenses


242,641



(77,020
)Deferred revenue


1,255,874



991,943Payables to affiliates


(5,762
)


(43,816
)Net cash provided by (used in) operating activities


17,843



(2,473,837
)Cash flows from investing activities:Additional investment in term deposit


(25,000
)


-Purchase of property and equipment


(232,339
)


(377,858
)Net cash used in investing activities


(257,339
)


(377,858
)Cash flows from financing activities:Net proceeds from preferred stock issuance


-



2,861,150Cash received from partial prepayment of note receivable from affiliate


1,010,430



-Proceeds from issuance of common stock through private placement


1,398,096



-Proceeds from exercise of stock options


29,642



-Repayments of obligations under capital leases


(113,419
)


(140,361
)Net cash provided by financing activities


2,324,749



2,720,789Effect of exchange rates on cash and cash equivalents


(2,395
)


(4,850
)Net increase (decrease) in cash and cash equivalents


2,082,858



(135,756
)Cash and cash equivalents at beginning of year


1,129,591



1,265,347Cash and cash equivalents at end of year

$
3,212,449


$
1,129,591Supplemental disclosure of cash flow information:Cash paid during the year for :Interest

$
47,155


$
32,256Income taxes

$
17,222


$
20,457Supplemental disclosure of noncash investing and financing activities:Property and equipment acquired under capital leases

$
-


$
235,747Prepayment of principal on note receivable from affiliate in exchange for 11,650,000 shares

$
3,075,676


$
-Accrual of preferred stock dividend

$
359,338


$
-
 
 See accompanying notes to consolidated financial statements
  31
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 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 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 Christchurch, New Zealand.
 
 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 for the Company. The Company has a wholly-owned subsidiary, Diligent Boardbooks Limited (“DBL”), an England and Wales limited liability company which was formed on December 14, 2006, to provide European sales and marketing services. DBL was inactive until April 2008. The Company also has a Singapore-based wholly-owned subsidiary, APAC Board Services PTE. Ltd., which was formed on December 23, 2010 and had no operations in 2010. 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-K with the SEC, to ensure that this Form 10-K includes subsequent events that should be recognized in the financial statements as of December 31, 2010, and appropriate disclosure of subsequent events which were not recognized in the financial statements.
 
 2)           Liquidity
 
 Historically, as the Company grew its business and sustained negative cash flow, its primary source of liquidity had been the cash received from stock issuances, including $16.4 million obtained in December 2007 from the Company’s initial public offering and $2.9 million obtained from the issuance of Series A preferred stock issued in March 2009. Additionally, in June 2010, the Company received a $1.0 million principal prepayment on the Note receivable from affiliate, and on October 20, 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.
 
 In the third and fourth quarters of 2010, the Company generated positive cash flows from operations of $0.2 million and $0.7 million, respectively, resulting in approximately $18 thousand net cash generated from operations for the full year. This marks the first year since inception of the Company that Diligent achieved positive cash flow from operations.
  32
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 At December 31, 2010, the Company’s sources of liquidity consist of cash and term deposits of approximately $3.3 million. The Company also has a $1.0 million revolving line of credit facility with Spring Street Partners, L.P. This line of credit offers the Company additional cash flow support if needed. As of December 31, 2010, the Company has had no borrowings under this credit facility.
 
 The Company’s 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 is evaluating strategic growth opportunities that could change our current expense and capital forecasts, particularly in the Asia-Pacific region. The Company’s expected cash receipts from operations are adequate to support budgeted expenses for 2011. 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.
 
 3)           Significant accounting policies
 
 Basis of presentation–The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
 
 Principles of consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
 
 Use of estimates–The preparation of financial statements in conformity with generally accepted accounting principles 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.
 
 Cash and cash equivalents – The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company invests its excess cash primarily in bank and money market funds of major financial institutions. Accordingly, its cash equivalents are subject to minimal credit and market risk. At December 31, 2010 and 2009, cash equivalents include investments in money market funds of $2,277 and $102,409, respectively, which are carried at cost which approximates fair value.
 
 Term deposits – Term deposits are short-term investments with banks, with maturities greater than three months at inception.
  33
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 Accounts receivable –Accounts receivable are recorded at estimated net realizable value. A provision for doubtful accounts is recorded based on management’s assessment of amounts considered uncollectable for specific customers based on age of the receivable, 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.
 
 Property and equipment – Property and equipment consists of computer and office equipment, leasehold improvements and internal-use computer software. Property and equipment are carried at cost, less accumulated depreciation and amortization and any impairment losses.
 
 Internal-use software – The Company capitalizes certain costs incurred after the preliminary project stage in connection with developing or obtaining software for internal use. Internal use software is included in property and equipment.
 
 Depreciation and amortization – Depreciation on property and equipment is computed on a straight line basis at rates adequate to recover the cost of the assets over their estimated useful lives, which range from three to five years. Leasehold improvements are depreciated over estimated useful lives of the assets or the term of the underlying lease, whichever is shorter. Amortization of computer software is computed on the straight-line method over its estimated useful life, which is three years. Expenditures for repair and maintenance costs are expensed as incurred.
 
 Impairment of long-lived assets–The Company periodically reviews the carrying amounts of its tangible and intangible assets to determine whether events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. An impairment loss is measured as the amount by which the
carrying amount of the long-lived asset exceeds its fair value.
 
 Revenue recognition– 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. Installation fees are recorded ratably over the contract period.
  34
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 Advertising Expenses – Advertising is expensed as incurred. Advertising expense was $320,822 and $302,724 for the years ended December 31, 2010 and 2009, respectively.
 
 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.
 
 Operating leases–The Company records rental costs, including costs related to fixed rent escalation clauses and rent holidays, on a straight-line basis over the lease term.
 
 Income taxes– Diligent 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.
 
 Foreign exchange– The Company’s wholly-owned subsidiaries, DBL and DBMS NZ, utilize the British Pound Sterling and the New Zealand Dollar (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.
  35
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 Transactions in foreign currencies are reported at the approximate rates of exchange at the transaction date. Assets and liabilities are translated at the rates of exchange in effect at the balance sheet date. All differences are recorded in results of operations. The foreign exchange loss is primarily attributable to unfavorable movement in exchange rates on certain of the Company’s cash accounts held in foreign currencies.
 
 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 December 31, 2010.
 
 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.
 
 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. The note receivable from affiliate is recorded at estimated net realizable value, adjusted for any valuation allowance for amounts considered uncollectable. The valuation allowance is reviewed for adjustment each reporting period. See Note 6.
 
 Segment reporting – Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. In light of the Company’s current product offering, management believes that the Company operates in one segment.
 
 Net loss and and diluted net 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 year ended December 31, 2009 as they were anti-dilutive. There were 34,660,003 potentially dilutive securities for the year ended December 31, 2009.
  36
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 The components of the calculation of basic and diluted net income (loss) per common share are as follows:
 
 Year ended December 31,2010


2009Numerator:Net income (loss)

$
2,080,944


$
(3,861,990
)Preferred stock dividends


(359,338
)


(266,712
)Basic net income (loss) available to common shareholders

$
1,721,606


$
(4,128,702
)Diluted net income (loss) available to common shareholders

$
2,080,944


$
(3,861,990
)Denominator:Basic weighted average shares outstanding


84,487,207



90,371,507Dilutive effect of stock options


2,234,021



-Dilutive effect of convertible preferred stock


32,667,123



-Diluted weighted average shares outstanding


119,388,351



90,371,507Basic earnings (loss) per share

$
0.02


$
(0.04
)Diluted earnings (loss) per share

$
0.02


$
(0.04
)
 
 Recent accounting pronouncements– 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 new guidance did not 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.
  37
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 From time to time, new accounting pronouncements are issued by the FASB and are adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of other recently issued accounting pronouncements will not have a material impact on the consolidated financial position, results of operations, and cash flows, or do not apply to the Company’s operations.
 
 4)
Term deposit
 
 At December 31, 2010, the Company has a term deposit with a New Zealand bank with a term of 98 days. The term deposit in the amount of NZD 125,000 (US$97,300 at December 31, 2010) bears interest at 4.02% and matures in March 2011.
 
 At December 31, 2009, the Company had a term deposit with a New Zealand bank with a term of 365 days. The term deposit in the amount of NZD 100,000 (US$72,530 at December 31, 2009) bore interest at 4.50% and matured in March 2010.
 
 5)
Property and equipment and obligations under capital leases
 
 Property and equipment is comprised of the following:
 
 December 31,2010


2009Equipment

$
1,579,859


$
1,416,470Computer software


537,379



479,370Leasehold improvements


151,594



140,6532,268,832



2,036,493Less: accumulated depreciation/amortization


1,186,728



723,534Net property and equipment

$
1,082,104


$
1,312,959
 
 Obligations under capital leases consist of various financing arrangements entered into by the Company to acquire computer equipment and software. The leases bear interest at rates ranging from 10.96% to 30.96% per annum, with monthly payments ranging from $658 to $2,528, and maturities from July 2011 to October 2012.
 
 Each lease is secured by the underlying leased asset. Amortization of assets recorded under capital leases is included in depreciation expense. The equipment relating to capital leases, included in property and equipment on the balance sheet, is as follows:
  38
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 Year ended December 31,2010


2009Capital lease assets included in property and equipment

$
246,449


$
409,409Accumulated depreciation


81,496



139,077$
164,953


$
270,332
 
 Year ended December 31,2010


2009Depreciation expense relating to capital lease assets

$
52,139


$
72,599
 
 The following is a schedule of future minimum lease payments due under capital leases as of December 31, 2010:
 
 Year endingDecember 31,2011

$
110,7872012


67,724Total minimum lease payments


178,511Less interest portion of payments


(31,420
)Present value of minimum lease payments

$
147,091
 
 6)           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.
  39
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
  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 proceeds from the February 2010 sale which had been placed in escrow were delivered to the Company on June 8, 2010. After the transaction, the amended Note had a contractual outstanding principal balance of $3,075,685 and was secured by 5,205,597 shares of the Company’s common stock pledged by the members of SSH LLC. In a series of transactions in December 2010 and early January 2011, SSH LLC sold an additional 275,000 shares of the Company’s common stock pledged as
collateral for the Note, as permitted under the Note agreement to fund interest payments. As a result, the number of shares pledged as collateral for the Note has been reduced to 4,930,597.
 
 A portion of the outstanding loan balance of $3,075,685 is reserved 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 primary 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. As discussed below, 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.
  40
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 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 at $0.47 per share, which is the price obtained for the 3 million shares issued by the Company in a private placement in October 2010. The Company reviews the valuation
of the Note each reporting period and believes the value is properly stated at December 31, 2010. In assessing the adequacy of the valuation allowance at December 31, 2010, we considered the prices obtained by SSH LLC for the December 2010/January 2011 sales of 275,000 shares, which were approximately equal to the price received for the shares issued in the October 2010 private placement. Additionally, there have been no other third party sales which would cause us to believe that $0.47 per share is not the best measure of the value of the underlying collateral.
 
 7)  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 follows:
 
 Year ended December 31,2010


2009Balance at beginning of period

$
1,661,791


$
1,361,791Total gains or losses (unrealized/realized)Included in earnings (or changes in net assets)


4,300,000



300,000Included in other comprehensive income


-



-Purchases, issuances and settlements


(4,086,106
)


-Transfers in and/or out of Level 3


-



-Ending balance

$
1,875,685


$
1,661,791The 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


$
300,000
  41
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 8) Accrued expenses and other liabilities
 
 Accrued expenses and other current liabilities is comprised of the following:
 
 December 31,2010


2009Accrued dividend

$
359,338


$
-Accrued commissions, bonuses, and payroll


300,775



73,563Other (individually less than 5% of total current liabilities)


255,318



179,526Total accrued expenses and other liabilities

$
915,431


$
253,089
 
 9) 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 5.5 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.
 
 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 December 31, 2010, the Company has no outstanding borrowings under this credit facility.
  42
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 10)        Related party transactions
 
 Marketing expense–During the years ended December 31, 2010 and 2009, the Company incurred marketing expenses of approximately $176,000 and $147,000, respectively, for services rendered by Yankee Hill Company, LLC, an entity owned by a stockholder of the Company.
 
 Legal services – A director is a partner of Buddle Findlay, a law firm which provides legal services to the Company in New Zealand. Fees paid to Buddle Findlay for the years ended December 31, 2010 and 2009 were approximately $20,000 and $86,000, respectively. Payables to affiliates include $0 and approximately $5,800 at December 31, 2010 and 2009, respectively, payable to Buddle Findlay.
 
 Rent expense – The Company subleased its New Jersey office from an affiliate through August 2009. Rent expense paid to affiliates for the years ended December 31, 2010 and 2009 was $0 and approximately $29,000, respectively.
 
 11)        Geographic information
 
 The Company’s revenue, by geographic location of the customer, and long-lived assets located outside the United States are as follows:
 
 Year ended December 31,2010


2009Revenues:United States

$
6,596,969


$
4,193,354Foreign


1,703,989



807,285Total

$
8,300,958


$
5,000,639December 31,2010


2009Long-lived assets outsidethe United States, net

$
383,416


$
507,794
 
 12)         Income taxes
 
 No provision (benefit) for U.S. income taxes has been recorded in the accompanying consolidated financial statements for the periods ended December 31, 2010 and December 31, 2009 as a result of the Company's net operating losses. At December 31, 2010, the Company has net operating loss carryforwards of U.S. income taxes of $17,513,250, which expire from 2027 through 2030.
  43
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 The significant components of loss before provision for income taxes and the consolidated income tax provision are as follows:
 
 Year ended December 31,2010


2009Income (loss) before provision for income taxes:Domestic

$
2,035,766


$
(4,098,429
)Foreign


69,397



272,776Total

$
2,105,163


$
(3,825,653
)Provision for income taxes:Current:Domestic

$
-


$
-Foreign


27,064



31,194Total current

$
27,064


$
31,194Deferred:Domestic

$
-


$
-Foreign


(2,845
)


5,143Total deferred

$
(2,845
)

$
5,143Provision for income taxes

$
24,219


$
36,337
 
 The income tax provision differs from the amount of tax determined by applying the federal statutory rate as follows:
 
 Year ended December 31,2010


2009%


%Federal income tax statutory rate


34.00



(34.00
)State income taxes, net of federal benefit


6.63



(10.60
)Foreign income taxes


1.19



0.90Tax effect of:Share-based compensation


5.28



13.80Other


(1.07
)


0.20Change in valuation allowance


(44.84
)


30.60Income tax provision


1.19



0.90
  44
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 Significant components of deferred tax assets and liabilities are as follows:
 Year ended December 31,2010


2009(In thousands)


(In thousands)Deferred tax asset (liability)Net fixed assets

$
(108
)

$
(38
)Accruals and reserves


625



2,469Foreign


18



-Net operating loss carryforwards


6,954



7,115Valuation allowance


(7,471
)


(9,546
)Total

$
18


$
-
 
 Management has provided a valuation allowance of approximately $7,471,000 and $9,546,000 as of December 31, 2010 and 2009, respectively, for all U.S. net deferred tax assets since it is more likely than not that the related deferred tax assets will not be realized. The net deferred tax asset of $18,000 relates to the Company’s New Zealand subsidiary and is included in other current assets on the balance sheet.
 
 The Company has evaluated its uncertain tax positions and determined that any required adjustments would not have a material impact on the Company’s financial statements. The Company classifies interest and penalties on uncertain tax positions as interest expense and general and administrative expenses, respectively. There were no interest and penalties recorded in 2010. Interest and penalties recorded in 2009 were approximately $2,000 and $10,000, respectively.
 
 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 2007 through 2010 are open for examination by the federal, state and foreign taxing jurisdictions.
 
 13)        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.
  45
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 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 – 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. If the redemption were considered likely to occur, the carrying value would be adjusted to its liquidation value.
  46
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 The carrying value of the Preferred Shares at December 31, 2010 and December 31, 2009 is as follows:
 
 December 31,2010


2009Gross proceeds

$
3,000,000


$
3,000,000Less: Issuance costs


(138,850
)


(138,850
)2,861,150



2,861,150Issuance of PIK shares


266,712



-Cumulative amortization of offering costs


49,429



21,989Cumulative in kind dividend


-



266,712Balance at December 31, 2010

$
3,177,291


$
3,149,851
 
 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 on January 4, 2010.
 
 14)
Stockholders’ equity (deficiency)
 
 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.
 
 On June 8, 2010, the Company’s shareholders approved the surrender of 11,650,000 pledged SSH LLC common shares as a prepayment associated with the Note. These shares were cancelled at June 8, 2010. See Note 6.
 
 In October 2010, the Company announced the successful completion of a 3,000,000 common share private placement at $0.47 per share. These new shares were allotted and settled on October 20, 2010.
 
 In the fourth quarter of 2010, several employees of the Company exercised options previously granted to them for common shares in an aggregate amount of 178,001.
  47
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 15)        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 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 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 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 to employees, directors and consultants of the Company and its affiliates, as Incentive Stock Options and Non-Qualified 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.
 
 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 NZD0.90(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 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 years ended December 31, 2010 and 2009, the Company recognized share-based compensation costs related to restricted stock awards of $0 and $23,099, respectively, which is included in general and administrative expenses in the statement of operations.
 
 At December 31, 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. On October 9, 2009, the Company granted an additional 910,003 shares to employees under the 2007 Plan. In July 2010, the Company granted 800,000 options to outside consultants, under 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 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.
  48
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 The value of options granted to nonemployees is initially measured at grant date and remeasured each quarter until the vesting date, which is the measurement date for share-based compensation issued to nonemployees.
 
 The fair values of the options granted were estimated based on the following assumptions:
 
 Year Ended December 31,2010


2009Expected volatility (1)


167.79
%


183.98 – 186.94
%Expected term (2)

5.25 years


5.35 – 6.00 yearsRisk-free interest rate (3)


1.85
%


2.36 – 2.75
%Dividend yield


-



-Weighted average grant-date fair value of granted options

$
0.4266


$
0.1406
 
 (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 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.
 
 A summary of stock option activity for the year ended December 31, 2010 is as follows:
 
 Options


Weighted

average

exercise price

Weighted average

remaining

contractual termOutstanding at January 1, 2010


4,660,003


$
0.14Granted


800,000



0.45Exercised


(178,001
)


0.16Forfeited


(91,667
)


0.16Outstanding at December 31, 2010


5,190,335



0.19

8.78 yearsExercisable at December 31, 2010


2,690,335



0.19

8.77 years
 
 During the years ended December 31, 2010 and 2009, the Company recognized share-based compensation expense related to stock options of $601,541 and $180,154, respectively, which is included in general and administrative expenses in the statement of operations. At December 31, 2010 there was $231,610 of unrecognized share-based compensation expense that will be recognized over the next 1.75 years.
  49
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 The aggregate intrinsic value of the stock options outstanding and exercisable at December 31, 2010 was $912,424. The aggregate intrinsic value of options exercised during 2010 was $55,127. No options were exercisable at December 31, 2009 or exercised during 2009.
 
 16)        Commitments and contingencies
 
 Operating leases – The Company has operating lease agreements for office space in New York City, New Jersey, New Zealand and the United Kingdom, which expire at various dates through 2018. Leases with rent escalations are recognized as rent expense over the term of the lease. Operating lease rent expense for the years ended December 31, 2010 and 2009 was approximately $307,778 and $383,917, respectively.
 
 The lease agreements require security deposits in the amount of $222,354 at December 31, 2010.
 
 Future minimum lease payments for leases that have initial or non-cancelable lease terms in excess of one year at December 31, 2010 are as follows:
 
 Year ending

December 31,2011

$
323,5742012


322,9462013


309,1832014


311,8442015


314,5842016 and thereafter


691,186$
2,273,317
 
 Warranties and indemnification – The Company’s service is warranted to perform in a manner materially consistent with its marketing and training materials, specifications and technical information provided to users. The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations.
 
 The Company has also agreed to indemnify its directors and officers to the fullest extent allowed under Delaware law for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s services as a director or officer of the Company, or arising as a result of that person serving at the request of the Company as a director, officer, employee or agent of another enterprise. The Company maintains director and officer insurance coverage that should enable the Company to recover a portion of any future amounts paid.
  50
  Diligent Board Member Services, Inc.
 Notes to Consolidated Financial Statements
 Years Ended December 31, 2010 and 2009
 
 17)         Risks and uncertainties
 
 Interest rate risk - Interest rate risk is the risk that market interest rates will change and impact Diligent’s financial results by affecting the rate of interest charged or received by the Company. It is not expected that changes in interest rates will materially affect the Company’s results of operations.
 
 Currency rate risk - The Company is subject to currency rate risk primarily from export sales to Canada, Europe, Australia and New Zealand, and from cash balances maintained in foreign currencies.
 
 Liquidity risk – The Company expects that its cash and cash equivalents will be adequate to support sales and growth. Particularly in light of current economic conditions, the Company intends to manage liquidity risk by continuously monitoring forecasted and actual cash flows and matching the maturity profiles of financial assets and liabilities. Additionally, in March 2010, the Company secured a a $1 million revolving line of credit facility, which provides the Company cash flow protection if needed. 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.
 
 Concentrations of credit and other risks - The Company sells its service to a diverse number of customers and performs ongoing credit evaluations of its customers' financial condition as part of its accounts receivable monitoring procedures. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. No single customer accounted for more than 10% of the accounts receivable balance at December 31, 2010 and one customer accounted for 14.2% of the accounts receivable balance at December 31, 2009. No single customer generated more than 10% of revenue in 2010 and 2009.
 
 Financial instruments which potentially subject the Company to significant concentration of credit risk include money market funds, time deposits and a term deposit. These financial instruments are classified as either cash and cash equivalents or term deposit and are maintained with high credit quality banking institutions in the United States, New Zealand and Great Britain. At times the cash balances may be in excess of the insurance limits at a particular bank.
 
 18)         Subsequent events
 
 In January 2011, Spring Street Partners, L.P., one of the holders of the Series A Preferred Stock, waived its right to $200,000 of the dividend due on January 1, and directed the Company to retain those funds to support future growth. The Company will record this waiver as a capital contribution in the first quarter of 2011. The founder and managing partner of Spring Street Partners, L.P. is also the chairman of the board of directors of the Company.
  51
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  None
 
 ITEM 9A. CONTROLS AND PROCEDURES
  Evaluation of Disclosure Controls and Procedures
  Our management, with the participation of our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Form 10-K, were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in SEC’s rules
and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
 Management’s Report on Internal Control Over Financial Reporting
  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2010.
  Because the Company qualifies as a smaller reporting company, as defined by §229.10(f)(1), this annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
 
 Changes in Internal Control Over Financial Reporting
 
 There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the year ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
  52
  ITEM 9B. OTHER INFORMATION
  Not applicable
  53
  PART III
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  The information required by this Item is incorporated by reference from the information to be contained in our Proxy Statement.
 
 ITEM 11. EXECUTIVE COMPENSATION
  The information required by this Item is incorporated by reference from the information to be contained in our Proxy Statement.
 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  The information required by this Item is incorporated by reference from the information to be contained in our Proxy Statement.
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  The information required by this Item is incorporated by reference from the information to be contained in our Proxy Statement.
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  The information required by this Item is incorporated by reference from the information to be contained in our Proxy Statement.
  54
  PART IV
  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 a.
The following documents are filed as a part of this Report:
 
 1)
Financial Statements:The information concerning our financial statements, and Report of Independent Registered Public Accounting Firm required by this Item is incorporated by reference herein to the section of this Report in Item 8, entitled “Consolidated Financial Statements and Supplementary Data.”
 
 2)
Financial Statement Schedules:
 
 The Financial Statement Schedules not listed have been omitted because they are not applicable or are not required or the information required to be set forth herein is included in the Consolidated Financial Statements or Notes thereto.
 
 3)
Exhibits:See “Index to Exhibits.”
 
 b.
Exhibits.The exhibits listed below in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Annual Report on Form 10-K.
 
 c.
Financial Statement Schedules.
  55
 
 SIGNATURES
 Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
  Dated: March 22, 2011
DILIGENT BOARD MEMBER SERVICES,

INC.By:
/s/ Steven P. RuseSteven P. Ruse, Chief Financial Officer(Principal Financial Officer )
  56
 
 POWER OF ATTORNEY
 
 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven P. Ruse and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all reports of the Registrant on Form 10-K and to sign any and all amendments to such reports and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities & Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
  Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the dates indicated.
  Name

Title

Date/s/ Alessandro Sodi

Chief Executive Officer,

March 22, 2011Alessandro Sodi

President, Director

(PrincipalExecutiveOfficer)/s/ Steven P. Ruse

Chief Financial Officer

March 22, 2011Steven P. Ruse

(Principal Financial Officer)/s/ Donald Meisner

Treasurer (Principal

March 22, 2011Donald Meisner

Accounting Officer)/s/ David Liptak

Director

March 22, 2011David Liptak/s/ Peter Huljich

Director

March 22, 2011Peter Huljich/s/ Rick Bettle

Director

March 22, 2011Rick Bettle/s/ Mark Russell

Director

March 22, 2011Mark Russell
  57
 
 INDEX TO EXHIBITS
 
 Exhibit

Numbers

Exhibits3.13

Amended and Restated Certificate of Incorporation3.21

Amended and Restated Bylaws4.11

Form of common stock certificate10.11

Contribution Agreement dated October 1, 2007 between Diligent Board Member Services, Inc. and Diligent Board Member Services, Inc.10.4.11

Promissory Note and Security Agreement dated October 1, 2007 in the principal amount of $6,800,000 given by Diligent Board Member Services, Inc. to the order of Diligent Board Member Services, Inc.10.4.26

Prepayment and Amendment Agreement dated February 9, 2010 between Diligent Board Member Services, Inc. and Services Share Holding, LLC10.5.11

Limited Pledge of Collateral for Loan dated February 18, 2008 given by Services Share Holding, LLC (f/k/a Diligent Board Member Services, Inc.) to Diligent Board Member Services, Inc.10.5.24

Amendment to Limited Pledge of Collateral for Loan dated January 14, 2009 given by Services Share Holding, LLC to Diligent Board Member Services, Inc.10.5.34

Limited Pledge of Collateral for Loan dated January 14, 2009 given by Corcoran Consulting, LLC to Diligent Board Member Services, Inc.10.61

2007 Stock Option and Incentive Plan of Diligent Board Member Services, Inc.10.6.1

2010 Stock Option and Incentive Plan of Diligent Board Member Services, Inc.10.71

Form of Restricted Stock Award Agreement for restricted stock awards under the 2007 Stock Option and Incentive Plan10.93

Stock Purchase Agreement dated February 13, 2009 among Diligent Board Member Services, Inc., Spring Street Partners, L.P. and Carroll Capital Holdings, LLC10.103

Investor Rights Agreement dated March 11, 2009 among Diligent Board Member Services, Inc., Spring Street Partners, L.P. and Carroll Capital Holdings, LLC
  58
 
 10.115

Employment agreement of CFO Steven P. Ruse10.127

Credit Facility established by Spring Street Partners, L.P. as Lender in favor of Diligent Board Member Services, Inc. as Borrower10.13

Employment agreement between APAC Board Services PTE. Ltd. (Singapore) and Eslinda Hamzah21

Subsidiaries25

Powers of Attorney executed by all officers and directors of the Company who have signed this report on Form 10-K31.1

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. 135032.2

CFO Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C. 1350
  1 Filed with the Original Form 10 Filing on April 30, 2008.
  2 Filed with Amendment No. 3 to Form 10 Filing on February 12, 2009.
  3Filed with Form 8-K Filing on March 13, 2009.
  4 Filed with Form 10-K Filing on March 30, 2009.
  5 Filed with Form 10-Q Filing on November 9, 2009.
 
 6Filed with Form 8-K Filing on February 24, 2010.
 
 7 Filed with Form 10-K Filing on March 18, 2010.
  59