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,
2009
  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, 2009 of NZD 0.12 (US$ 0.08) per share, was
US$8.6 million.
  The number of shares of the
registrant’s common stock outstanding as of March 1, 2010 was
90,440,000.
  DOCUMENTS
INCORPORATED BY REFERENCE
  The following documents are
incorporated herein by reference:
  (1)
              Proxy
      Statement for the Annual Meeting to be held June 8, 2010, New Zealand
      Time.
  
  CONTENTS
  PAGEForward
      Looking Statements
                    iiAvailable
      Information
                    iiPART
      IItem
      1.
                    Business
                    1Item
      1A.
                    Risk
      Factors
                    8Item
      1B.
                    Unresolved
      Staff Comments
                    8Item
      2.
                    Properties
                    8Item
      3.
                    Legal
      Proceedings
                    8Item
      4
                    [Reserved]
                    8PART
      IIItem
      5.
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    9Item
      6.
                    Selected
      Financial Data
                    10Item
      7.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    11Item
      7A.
                    Quantitative
      and Qualitative Disclosure About Market Risk
                    19Item
      8.
                    Financial
      Statements and Supplementary Data
                    20Item
      9.
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    43Item
      9A.
                    Controls
      and Procedures
                    43Item
      9B.
                    Other
      Information
                    43PART
      IIIItem
      10.
                    Directors,
      Executive Officers and Corporate Governance
                    44Item
      11.
                    Executive
      Compensation
                    44Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    44Item
      13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    44Item
      14.
                    Principal
      Accountant Fees and Services
                    44PART
      IVItem
      15.
                    Exhibits,
      Financial Statement Schedules
                    45SIGNATURES
                    46INDEX
      TO EXHIBITS
                    48
  i
  FORWARD
LOOKING STATEMENTS
 
 Except for statements of historical
fact, certain information described in this document contains "forward-looking
statements" that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "should," "will," "would" or
similar words. The statements that contain these or similar words should be read
carefully because these statements discuss our future expectations, contain
projections of our future results of operations or of our financial position, or
state other "forward-looking" information. Diligent Board Member Services, Inc.
believes that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able
accurately to predict or control. Further, we urge you to be cautious of the
forward-looking statements which are contained in this Form 10-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.
  ii
 
 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, LLC and
referred to in this document as “SSH LLC”), contributed substantially all of its
assets and its “Diligent Boardbooks” 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.
 
 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 280
companies and 7,300 users.
  1
 
 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.
 
 ·
              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-
      ).Despite the current global economic crisis and sales
      force reduction, the Company had an exceptional year in
      2009.  The fourth quarter of 2009 was the best quarter since
      inception for new sales, with the addition of 41 new agreements for
      Boardbook licenses and $0.75 million in annual recurring
      revenue.  For the full year 2009, we added 110 new agreements
      (63% growth) and $2.5 million in annual recurring revenue (64%
      growth).  Additionally, our revenues for 2009 increased 71% to
      over $5.0 million.
 
 New
Zealand Offering
 
 Acquisition of the Diligent
Boardbooks Business.
 
 On October 1, 2007, we entered into a
Contribution Agreement with SSH LLC, under which SSH LLC contributed assets and
certain liabilities relating to the Diligent Boardbooks business as a
contribution to our capital.  In order to effectuate this as a
tax-free transaction, SSH LLC retained certain Diligent Boardbooks liabilities,
which SSH LLC discharged using proceeds of a loan by us to SSH LLC of
approximately $6,800,000.  The monies for this loan were part of the
proceeds of the share offering described below under “New Zealand
Offering.”  To our knowledge, SSH LLC has no continuing operations
other than acting as a holding company for its Diligent shares.
  2
 
 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.
 
 ·
              Advance
      approximately $6.8 million to or on behalf of SSH LLC to retire certain
      debt obligations incurred by SSH LLC in connection with the development of
      the Diligent Boardbooks business.  Of the $6.8 million,
      approximately $3.1 million was reinvested by the holders of the
      obligations in our common stock in a private placement (See “Recent Sales
      of Unregistered Securities” within Item 5) such that our net cash outflow
      as a result of the loan was only $3.7
million.
 
 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 Subsidiary
 
 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.
 
 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 2009,
Diligent achieved sales revenue of over $5 million, a year-to-year increase of
71%. 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.
  3
 
 ·
              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.
 
 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 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.
 
 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.
  4
 
 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 280 companies and over 7,300 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;
 
 ·
              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:
  5
 
 ·
              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.
 
 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”® trademark and applied
for “Diligent Boardbooks”TM 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.  Our customers
currently include SunAmerica Funds, Allianz Global Investors, New York Life
Investment Management and Motorola.  We have implemented the Diligent
Boardbooks system for over 280 companies and over 7,300 users.
  6
 
 Research
and Development
 
 Our research and development efforts
are now focused on improving and enhancing our Diligent Boardbooks system.
 
 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, 2010, we had approximately 45 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.
  7
 
 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. 8th Floor, 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]
  8
  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
                  
                  
                  Low2008
      – 1st
      Quarter
                  
                  
                  .76
                  
                  
                  
                  .632008
      – 2nd
      Quarter
                  
                  
                  .65
                  
                  
                  
                  .232008
      – 3rd
      Quarter
                  
                  
                  .40
                  
                  
                  
                  .182008
      – 4th
      Quarter
                  
                  
                  .25
                  
                  
                  
                  .152009
      – 1st
      Quarter
                  
                  
                  .15
                  
                  
                  
                  .152009
      – 2nd
      Quarter
                  
                  
                  .25
                  
                  
                  
                  .102009
      – 3rd
      Quarter
                  
                  
                  .25
                  
                  
                  
                  .142009
      – 4th
      Quarter
                  
                  
                  .44
                  
                  
                  
                  .18
 
 Holders
 
 As of March 3, 2010 there are 710
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, 2009, 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:
 
 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
                    
                    
                    4,660,003
                    
                    
                    
                    .1439
                    
                    
                    
                    899,997
 
 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”).
  9
 
 On October 1, 2007, we issued
68,484,611 shares of our common stock to SSH LLC in exchange for a contribution
of certain of its assets related to our Diligent Boardbooks business, subject to
certain liabilities, as specified in a Contribution Agreement dated October 1,
2007, in a private offering under Section 4(2) of the Securities Act of
1933.
 
 On
December 10, 2007, we issued 7,515,389 shares of our common stock to various
accredited investors for NZD1.00 (US$0.75) per share in a private placement that
met the requirements of the safe harbor under Rule 903 of Regulation S
promulgated under the Securities Act of 1933 for non-US persons and for
accredited investors who were existing debt holders of SSH LLC.
 
 On December 12, 2007, we issued
24,000,000 shares of our common stock pursuant to our initial public floatation
on the New Zealand Stock Exchange for NZD1.00 per share in an offshore
transaction that met the requirements of the safe harbor under Rule 903 of
Regulation S promulgated under the Securities Act of 1933.  The
offering was led by McDouall Stuart, a participant on the New Zealand Stock
Exchange, on a best efforts basis.  In connection with the offering,
McDouall Stuart received NZD420,000 as a lead sponsor fee, NZD720,000 in
brokerage fees and NZD200,000 in incentive fees.
 
 On
December 12, 2007, we issued 4,000,000 shares of our common stock in recognition
of services provided, or to be provided, to various employees, directors and
service providers pursuant to written agreements under our 2007 Stock Option and
Incentive Plan in accordance with Rule 701 promulgated under the Securities Act
of 1933.  Of the 4,000,000 shares, 1,929,000 shares were subject to a
substantial risk of forfeiture based on continued service requirements that
lapsed in January 2009.  During 2008, 160,000 of these shares were
forfeited.
 
 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 (at Diligent’s option) be paid on the first business day of each
calendar year for the prior year either in cash or in kind 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.
 
 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.
  10
 
 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.
 
 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.
  11
 
 •
              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.
 
 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 current global economic
crisis, the Company had an exceptional year in 2009.  The fourth
quarter of 2009 was the best quarter since inception for new sales, with the
addition of 41 new agreements for Boardbook licenses and $0.75 million in annual
recurring revenue.  For the full year 2009, we added 110 new
agreements (63% growth) and $2.5 million in annual recurring revenue (64%
growth).  Additionally, our revenues for 2009 are over $5.0 million,
an increase of 71%. The
Company now has over 280 worldwide clients and more than 7,300 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.
  12
 
 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.  Historically, installation fees were recognized upon
completion of the installation.  Effective October 1, 2008,
installation fees are recorded ratably over the contract period. The
effect of this change is not material to the Company’s consolidated financial
condition, results of operations or cash flows.
 
 Accounts receivable are recorded at
estimated net realizable value.  A provision for doubtful accounts is
based on management’s assessment of amounts considered uncollectable for
specific customers based on age of debt, history of payments and other relevant
information.  An allowance for doubtful accounts is provided for
accounts receivable which management determines will not be collectable in
full.
 
 Cost
of Revenues and Operating Expenses
 
 Cost of
Revenues.  Cost of revenues consists of direct expenses related
to account management, customer support and IT hosting.  We do not
allocate indirect overhead to cost of revenues.
 
 Selling and Marketing Expenses.  Selling
and marketing expenses are comprised of sales commissions, salaries for sales
and marketing employees, and direct advertising expenses, including mailings and
travel.  We do not allocate indirect overhead to selling and
marketing.
 
 General and Administrative
Expenses.  General
and administrative expenses consist of compensation and related expenses for
executive, finance, accounting, administrative, legal, professional fees, other
corporate expenses and overhead costs such as rents, utilities etc.
 
 Research and Development
Expenses.  Research
and development expenses are incurred as we upgrade and maintain our
software, and develop product enhancements.  Such expenses include
compensation and employee benefits of engineering and testing personnel,
materials, travel and all direct overhead associated with design and required
testing of our product line.  We do not allocate indirect overhead to
research and development.
  13
  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.
 
 Prior to January 1, 2008, our research
and development was outsourced to Diligent Board Member Services, NZ Limited
(“DBMS NZ”), an affiliate of ours through common ownership by a stockholder and
former director of the Company.  Effective January 1, 2008, the
Company acquired DBMS NZ and now the research and development activities are
fully integrated into the Company.
 
 Share-Based
Compensation.  In November 2007, we adopted our 2007 Stock
Option and Incentive Plan pursuant to which we intend to issue share-based
compensation from time to time, in the form of stock, stock options and other
equity based awards.
 
 Share-based
compensation consists of stock issued to employees and contractors for services
rendered.  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.
 
 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.
  14
 
 Note
receivable from affiliate
 
 The note receivable from affiliate (the
“Note”) is recorded at net realizable value, adjusted for any valuation
allowance for amounts considered uncollectable.  The valuation
allowance is reviewed for adjustment at each reporting period.
 
 At December 31, 2008, the Company
recorded a $5.8 million valuation allowance and a corresponding charge to
impairment loss in order to write down the Note to the estimated fair value of
the underlying collateral.  In the absence of an active market for the
Company’s stock, or other observable inputs for similar instruments, the Company
based its valuation principally on the value of the March 2009 issuance of
preferred stock, adjusted using an assumed discount rate of 20%, which is
management’s estimate based on the value of the preferred features of the Series
A Preferred Stock.  In addition, management assumed that SSH LLC
and/or its members would sell a portion of the underlying collateral to meet
their quarterly interest payments, thereby reducing the amount of collateral
expected to be available when the Note matures in 2010.  These are
considered unobservable inputs falling within the definition of Level 3
inputs.
 
 At December 31, 2009, the Company
reduced the valuation allowance to $5.5 million and recorded a corresponding
gain of $300,000.  This recovery was based on the greater than
expected number of shares held as collateral at December 31, 2009, due to the
ability of SSH LLC to sell shares to meet the interest payments at higher than
anticipated prices.
 
 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, 2009 and 2008
 
 Revenues
 
 Year ended December 31,2009
                        
                        
                        2008
                        
                        
                        Increase/(Decrease)Revenues
                        
                        $
                        5,000,639
                        
                        
                        $
                        2,930,702
                        
                        
                        $
                        2,069,937
 
 The
growth in revenues of 71% in the year ended December 31, 2009 when compared with
2008 is a result of the cumulative addition of license agreements each
quarter.  The Company has continued to add license agreements each
quarter since inception.  At December 31, 2009, the cumulative license
agreements were 284, compared with 174 at December 31, 2008, a 63%
increase.  This increase in revenues is in line with our targets and
was achieved at a significantly lower customer acquisition cost. All of the
deferred revenue of $1.6 million recorded on the balance sheet at December 31,
2009 will be recognized as revenue in the next twelve months.
 
 Cost
of Revenues and Operating Expenses
 
 Cost
of Revenues
 
 Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Cost
      of Revenues
                  
                  $
                  2,186,850
                  
                  
                  $
                  1,878,027
                  
                  
                  $
                  308,823
 
 Cost of revenues is comprised of
account management, customer support and IT services.  For the year
ended December 31, 2009, employee costs included in cost of revenues increased
by approximately $135 thousand as compared to the year ended December 31, 2008,
primarily as a result of a realignment of certain management responsibilities
from research and development to account management and customer support, offset
by reductions in headcount.  The remainder of the increase in cost of
revenues is attributable to an increase in IT services of $153 thousand, which
has increased primarily due to hosting facilities the Company has added as a
result of the growth in the number of users.
  15
  Cost of revenues as a percentage of
revenues decreased to 43.7% in 2009, compared with 64.1% for 2008, 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 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Selling
      and Marketing Expenses
                  
                  $
                  2,436,912
                  
                  
                  $
                  6,216,087
                  
                  
                  $
                  (3,779,175
                  )
 
 Subsequent to our initial public
offering at the end of 2007, we significantly increased our sales and marketing
efforts, and the first half of 2008 includes the effect of this
initiative.  By the third quarter of 2008, we initiated plans to scale
back our growth plans in order to reduce our operating
expenses.  These cost reductions were fully implemented by the first
quarter of 2009, and resulted in the significant decrease in selling and
marketing expenses for the year ended December 31, 2009.  Despite this
decrease in sales and marketing expenditures, we were able to achieve an
increase in revenues, in large part because our smaller sales force was more
experienced, fully trained and better focused.
 
 Our sales force peaked to 23 at
September 30, 2008, and was subsequently reduced to 10 at December 31, 2008 and
8 at December 31, 2009, resulting in a decrease in salaries and benefits of
approximately $1.7 million for the year ended December 31, 2009, as compared to
2008.   In addition, we refocused our efforts on the North
American market, resulting in a decrease in costs of our UK sales office of $1.0
million.  Other significant decreases included travel and
entertainment ($0.2 million), outside contractors ($0.3 million), marketing
salaries and wages ($0.2 million) and other marketing costs ($0.4
million).
 
 General
and Administrative Expenses
 
 Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)G
      & A Expenses
                  
                  $
                  3,944,363
                  
                  
                  $
                  5,418,747
                  
                  
                  $
                  (1,474,384
                  )G
      & A Expenses, excluding share-based compensation
                  
                  $
                  3,741,110
                  
                  
                  $
                  4,497,964
                  
                  
                  $
                  (756,854
                  )
 
 The decrease in general and
administrative expenses excluding share-based compensation includes a decrease
in general and administrative expenses for our UK and New Zealand subsidiaries
of $0.1 million which is a result of the refocusing of our efforts on our North
American operations.  It also includes a decrease of $0.3 million in
travel, meals and directors’ costs as we decreased the number of independent and
compensated directors from five during most of 2008 to three at December 31,
2009, and decreases of $0.4 million in rent, office and professional fees
resulting from our cost reduction initiative.  These decreases were
offset by an increase in employee costs of $0.1 million due to additional
staffing requirements.
 
 Research
and Development Expenses
 
 Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Research
      and Development Expenses
                  
                  $
                  730,201
                  
                  
                  $
                  955,385
                  
                  
                  $
                  (225,184
                  )
 
 Research and development expenses
decreased 24% in 2009 as compared to 2008.  Our research and
development is performed primarily by our New Zealand subsidiary, whose expenses
in NZD decreased by 13% as a result of a reduction in R&D staffing after the
achievement of certain key product enhancements.  The remainder of the
decrease in R&D expense is due to the decline in the average NZD/US$
exchange rate by 13% for the first nine months of 2009 when compared with the
average exchange rate for the first nine months of 2008.
  16
 
 Depreciation
and Amortization
 
 Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Depreciation
      and Amortization
                  
                  $
                  418,644
                  
                  
                  $
                  278,295
                  
                  
                  $
                  140,349
 
 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 (loss) on note receivable from affiliate
 
 Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Impairment
      recovery (loss) on note receivable from affiliate
                  
                  $
                  300,000
                  
                  
                  $
                  (5,800,000
                  )
                  
                  $
                  6,100,000
 
 At December 31, 2008, the Company
recorded a $5.8 million valuation allowance and a corresponding charge to
impairment loss in order to write down the Note to the estimated fair value of
the underlying collateral.  At December 31, 2009, the Company reduced
the valuation allowance to $5.5 million and recorded a corresponding recovery of
$300,000.  This recovery was based on the greater than expected number
of shares held as collateral at December 31, 2009, due to the ability of SSH LLC
to sell shares to meet the interest payments at higher than anticipated
prices.
 
 Interest
Income, net
 
 Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Interest Income, net
                    
                    $
                    358,446
                    
                    
                    $
                    601,280
                    
                    
                    $
                    (242,834
                    )
 
 Interest income, net, includes interest
income on the Note receivable from our affiliate, as well as interest on the
Company’s cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the decrease in our average cash balances from $6.4 million for the year ended
December 31, 2008 to $1.6 million for the year ended December 31,
2009.
 
 Foreign
Exchange Transaction Gain/(Loss)
 
 Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Foreign
      Exchange Gain/(Loss)
                  
                  $
                  60,893
                  
                  
                  $
                  (601,245
                  )
                  
                  $
                  662,138
 
 The parent Company maintains a portion
of its cash balances in NZD and GBP.  The foreign exchange gain of $61
thousand for the year ended December 31, 2009 is a result of the Company holding
less cash in foreign currency accounts during 2009 while the US dollar has
weakened.  The loss in 2008 was a result of the Company holding
significantly higher cash balances in NZD and the strengthening of the US
dollar.
 
 Other
Income
 
 Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Other
      Income
                  
                  $
                  171,339
                  
                  
                  $
                  -
                  
                  
                  $
                  171,339
 
 Other income consists primarily of a
recovery of UK Value Added Tax (VAT).
  17
 
 Liquidity
and Capital Resources
 
 As of December 31, 2009, our principal
sources of liquidity were cash and cash equivalents and term deposits totaling
approximately $1.2 million, and accounts receivable of approximately $0.3
million.  The primary source of our liquidity for the past year has
come from the financing secured in March, 2009.
 
 On March 11, 2009, the Company secured
$3 million of financing from Spring Street Partners, L.P. and Carroll Capital
Holdings, LLC, who collectively purchased 30 million shares of newly-created
Series A Preferred Stock for $0.10 per share.  As discussed in the
following paragraph, at the current level of reduced expenses, coupled with
current sales growth forecasts, management believes this funding will be
sufficient to support sales growth and achieve cash flow breakeven by around the
end of the third quarter of 2010.
 
 In February 2010, the Company entered
into an agreement with SSH LLC, which is conditioned upon stockholder approval
at our annual stockholders’ meeting in June 2010, in accordance with NZX
rules.  The agreement provides for the repayment of approximately
$1.0 million in cash to the Company in partial prepayment of the
outstanding Note.  The agreement also calls for partial prepayment of
an additional $3.1 million by the surrender and cancellation of 11,650,000
Diligent shares which are held as collateral for the Note.  The
repayment of the remaining outstanding principal of $3.1 million (which,
subsequent to the surrender of the 11,650,000 shares, will be secured by
5,205,597 shares of Diligent stock) will be extended by two years to October
2012 and the interest rate will be increased from 5% to 6.5% and payments will
be due annually, as opposed to quarterly.  If approved by our
stockholders, the additional cash of $1.0 million will provide us with further
liquidity.
 
 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 million revolving line of credit facility to the
Company.  The line of credit bears interest at a fixed rate of
9.50%.  Upon the event of default, the Lender has the option to
increase the interest rate on all outstanding obligations to
14.50%.  The line of credit is subject to a 0.5% per annum commitment
fee on the unused portion of the line of credit.  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.  Additionally, the line of credit includes financial
covenants with respect to the achievement of budgeted revenues and
expenses.  To date, no credit has been extended.  As stated
above, management believes our current funding will be sufficient to support
sales growth and achieve cash flow breakeven by around the end of the third
quarter of 2010.  However, this line of credit offers the Company
additional cash flow support if needed.
 
 The Company continues to consider and
evaluate strategic growth opportunities that could result in additional capital
requirements which are not currently within the budget.  Our current
operating expenses and expected capital expenditures are fixed, predictable and
adequate to support our budgeted growth.  We anticipate our
professional fees for the year ended December 31, 2010, including fees
associated with reporting obligation compliance, and general and administrative
costs to be consistent with those incurred for the year ended December 31,
2009.
 
 Cash
flows
 
 Year ended December 31,2009
                      
                      
                      2008Cash
      provided by (used in):Operating
      activities
                      
                      $
                      (2,473,837
                      )
                      
                      $
                      (11,401,441
                      )Investing
      activities
                      
                      $
                      (377,858
                      )
                      
                      $
                      (782,891
                      )Financing
      activities
                      
                      $
                      2,720,789
                      
                      
                      $
                      (205,356
                      )
  18
  Net Cash Flows from Operating
Activities
 
 Cash used in operating activities for
the year ended December 31, 2009 was $2.5 million, compared with $11.4 million
for 2008.  This reduction in cash used in operations resulted from an
increase in revenues of $2.1 million and a decrease in operating expenses of
$5.4 million.  During 2008, the Company incurred significant expenses
to expand our sales and marketing efforts.  By the end of 2008, we had
scaled back expenses, which are reflected in the results for
2009.  Additionally, there is an increase of approximately $1.0
million in cash attributable to deferred revenue from license agreements which
have not yet been fully recognized as revenue.
 
 Net Cash Flows from Investing
Activities
 
 Cash used in investing activities
decreased to $0.4 million in 2009 from $0.8 million in 2008, predominantly used
for purchases of property and equipment.  Subsequent to the IPO in
December 2007, the Company invested significant amounts in our infrastructure,
which resulted in additions to property and equipment of over $0.8 million
during 2008.
 
 Net Cash Flows from Financing
Activities
 
 For the
year ended December 31, 2009, cash provided by financing activities was $2.7
million, compared with $0.2 million used in financing activities in
2008.  During the first quarter of 2009, the Company secured $2.9
million in financing, net of issuance costs, from the issuance of Series A
preferred stock.
 
 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.
  19
 
 ITEM
8.  FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
 INDEX
TO FINANCIAL STATEMENTS
 
 PAGEReport
      of Independent Registered Public Accounting Firm
                  21Consolidated
      Balance Sheets as of December 31, 2009 and December 31,
    2008
                  22Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      December 31, 2008
                  23Consolidated
      Statements of Changes in Stockholders’ Equity (Deficiency) and
      Comprehensive Loss for the years ended December 31, 2009 and December 31,
      2008
                  24Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      December 31, 2008
                  25Notes
      to Consolidated Financial Statements
                  27
  20
 
 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, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders' equity (deficiency) and
comprehensive loss, and cash flows for each of the years ended December 31, 2009
and 2008.  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, 2009 and 2008 and the results of their
operations and their cash flows for each of the years ended December 31, 2009
and 2008, in conformity with accounting principles generally accepted in the
United States of America.
 
 /s/ Holtz
Rubenstein Reminick LLP
 
 New York,
New York
 March 18,
2010
  21
 
 Diligent
Board Member Services, Inc.
 Consolidated
Balance Sheets
 
 December
      31,
                                
                                
                                December 31,2009
                                
                                
                                2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                1,129,591
                                
                                
                                $
                                1,265,347Term
      deposit
                                
                                
                                72,530
                                
                                
                                
                                58,150Accounts
      receivable, net
                                
                                
                                303,331
                                
                                
                                
                                390,180Prepaid
      expenses and other current assets
                                
                                
                                183,368
                                
                                
                                
                                222,617Total
      current assets
                                
                                
                                1,688,820
                                
                                
                                
                                1,936,294Property
      and equipment, net
                                
                                
                                1,312,959
                                
                                
                                
                                1,116,007Note
      receivable from affiliate, net of valuation allowance
                                
                                
                                1,661,791
                                
                                
                                
                                1,361,791Restricted
      cash - security deposits
                                
                                
                                221,886
                                
                                
                                
                                246,685Total
      assets
                                
                                $
                                4,885,456
                                
                                
                                $
                                4,660,777LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
      EQUITYCurrent
      liabilities:Accounts
      payable
                                
                                $
                                144,751
                                
                                
                                $
                                256,319Accrued
      expenses and other liabilities
                                
                                
                                253,089
                                
                                
                                
                                218,541Deferred
      revenue
                                
                                
                                1,593,351
                                
                                
                                
                                601,408Current
      portion of obligations under capital leases
                                
                                
                                113,418
                                
                                
                                
                                114,308Payables
      to affiliates
                                
                                
                                5,762
                                
                                
                                
                                49,578Total
      current liabilities
                                
                                
                                2,110,371
                                
                                
                                
                                1,240,154Non-current
      liabilities:Obligations
      under capital leases, less current portion
                                
                                
                                147,091
                                
                                
                                
                                50,816Other
      noncurrent liabilities
                                
                                
                                44,252
                                
                                
                                
                                -Total
      non-current liabilities
                                
                                
                                191,343
                                
                                
                                
                                50,816Total
      liabilities
                                
                                
                                2,301,714
                                
                                
                                
                                1,290,970Commitments
      and contingenciesRedeemable
      preferred stock:Series
      A convertible redeemable preferred stock, $.001 par value, 50,000,000
      sharesauthorized,
      30,000,000 and 0 shares issued and outstanding (liquidation value
      $4,766,712)
                                
                                
                                3,149,851
                                
                                
                                
                                -Stockholders'
      (deficiency) equity:Common
      Stock, $.001 par value, 250,000,000 shares authorized, 90,440,000 shares
      issued and outstanding
                                
                                
                                90,440
                                
                                
                                
                                90,440Additional
      paid-in capital
                                
                                
                                24,532,622
                                
                                
                                
                                24,618,070Accumulated
      deficit
                                
                                
                                (25,180,648
                                )
                                
                                
                                (21,318,658
                                )Accumulated
      other comprehensive loss
                                
                                
                                (8,523
                                )
                                
                                
                                (20,045
                                )Total
      stockholders' (deficiency) equity
                                
                                
                                (566,109
                                )
                                
                                
                                3,369,807Total
      liabilities, redeemable preferred stock and stockholders' (deficiency)
      equity
                                
                                $
                                4,885,456
                                
                                
                                $
                                4,660,777
  See
accompanying notes to consolidated financial statements
  22
  Diligent
Board Member Services, Inc.
 Consolidated
Statements of Operations
 
 Year
                  
                  
                  Yearended
                  
                  
                  endedDecember
      31,
                  
                  
                  December 31,2009
                  
                  
                  2008Revenues
                  
                  $
                  5,000,639
                  
                  
                  $
                  2,930,702Cost
      of revenues
                  
                  
                  2,186,850
                  
                  
                  
                  1,878,027Gross
      profit
                  
                  
                  2,813,789
                  
                  
                  
                  1,052,675Operating
      expenses:Selling
      and marketing expenses
                  
                  
                  2,436,912
                  
                  
                  
                  6,216,087General
      and administrative expenses
                  
                  
                  3,944,363
                  
                  
                  
                  5,418,747Research
      and development expenses
                  
                  
                  730,201
                  
                  
                  
                  955,385Depreciation
      and amortization
                  
                  
                  418,644
                  
                  
                  
                  278,295Total
      operating expenses
                  
                  
                  7,530,120
                  
                  
                  
                  12,868,514Operating
      loss
                  
                  
                  (4,716,331
                  )
                  
                  
                  (11,815,839
                  )Other
      income (expenses):Impairment
      recovery (loss) on note receivable from affiliate
                  
                  
                  300,000
                  
                  
                  
                  (5,800,000
                  )Interest
      income, net
                  
                  
                  358,446
                  
                  
                  
                  601,280Foreign
      exchange transaction gain (loss)
                  
                  
                  60,893
                  
                  
                  
                  (601,245
                  )Other
                  
                  
                  171,339
                  
                  
                  
                  -Total
      other income (expenses)
                  
                  
                  890,678
                  
                  
                  
                  (5,799,965
                  )Loss
      before provision for income taxes
                  
                  
                  (3,825,653
                  )
                  
                  
                  (17,615,804
                  )Provision
      for income taxes
                  
                  
                  36,337
                  
                  
                  
                  32,798Net
      loss
                  
                  $
                  (3,861,990
                  )
                  
                  $
                  (17,648,602
                  )Net
      loss per share (basic and diluted)
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.17
                  )Weighted
      average shares outstanding (basic and diluted)
                  
                  
                  90,371,507
                  
                  
                  
                  102,397,907
  See
accompanying notes to consolidated financial statements
  23
  Diligent
Board Member Services, Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency)
 and
Comprehensive 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, 2008
                        
                        
                        104,000,000
                        
                        
                        $
                        104,000
                        
                        
                        $
                        23,754,427
                        
                        
                        $
                        (3,670,056
                        )
                        
                        $
                        -
                        
                        
                        $
                        20,188,371Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (17,648,602
                        )
                        
                        
                        -
                        
                        
                        
                        (17,648,602
                        )Foreign
      exchange translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (20,045
                        )
                        
                        
                        (20,045
                        )Total
      comprehensive loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (17,668,647
                        )Write
      off related party receivable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (70,700
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (70,700
                        )Share-based
      compensation, net of forfeitures
                        
                        
                        440,000
                        
                        
                        
                        440
                        
                        
                        
                        920,343
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        920,783Cancellation
      of shares
                        
                        
                        (14,000,000
                        )
                        
                        
                        (14,000
                        )
                        
                        
                        14,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance
      at  December 31, 2008
                        
                        
                        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 offering costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (21,989
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (21,989
                        )Accrual
      of in-kind 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
                        )
  See
accompanying notes to consolidated financial statements
  24
  Diligent
Board Member Services, Inc.
 Consolidated
Statements of Cash Flows
  Year
                    
                    
                    Yearended
                    
                    
                    endedDecember
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (3,861,990
                    )
                    
                    $
                    (17,648,602
                    )Adjustments
      to reconcile net loss to cash used in operating
activities:Impairment
      (recovery) loss on note receivable from affiliate
                    
                    
                    (300,000
                    )
                    
                    
                    5,800,000Depreciation
      and amortization
                    
                    
                    418,644
                    
                    
                    
                    278,295Share-based
      compensation
                    
                    
                    203,253
                    
                    
                    
                    920,783Accrued
      interest receivable
                    
                    
                    -
                    
                    
                    
                    (346,559
                    )Allowance
      for doubtful accounts
                    
                    
                    (7,125
                    )
                    
                    
                    7,125Straight-line
      rent adjustment
                    
                    
                    44,252
                    
                    
                    
                    -Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    93,974
                    
                    
                    
                    (105,520
                    )Prepaid
      expenses and other current assets
                    
                    
                    39,249
                    
                    
                    
                    (110,965
                    )Restricted
      cash - security deposits
                    
                    
                    24,799
                    
                    
                    
                    (202,944
                    )Accounts
      payable and accrued expenses
                    
                    
                    (77,020
                    )
                    
                    
                    (264,465
                    )Deferred
      revenue
                    
                    
                    991,943
                    
                    
                    
                    374,730Payable
      to affiliates
                    
                    
                    (43,816
                    )
                    
                    
                    (103,319
                    )Net
      cash used in operating activities
                    
                    
                    (2,473,837
                    )
                    
                    
                    (11,401,441
                    )Cash
      flows from investing activities:Redemption
      of investment in term deposit, net
                    
                    
                    -
                    
                    
                    
                    18,630Cash
      acquired in acquisition, net of purchase price
                    
                    
                    -
                    
                    
                    
                    83,593Purchase
      of property and equipment
                    
                    
                    (377,858
                    )
                    
                    
                    (885,114
                    )Net
      cash used in investing activities
                    
                    
                    (377,858
                    )
                    
                    
                    (782,891
                    )Cash
      flows from financing activities:Net
      proceeds from preferred stock issuance
                    
                    
                    2,861,150
                    
                    
                    
                    -Cash
      paid for note receivable from affiliate
                    
                    
                    -
                    
                    
                    
                    (100,000
                    )Payments
      of obligations under capital leases
                    
                    
                    (140,361
                    )
                    
                    
                    (105,356
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    2,720,789
                    
                    
                    
                    (205,356
                    )Effect
      of exchange rates on cash and cash equivalents
                    
                    
                    (4,850
                    )
                    
                    
                    (20,045
                    )Net
      (decrease) in cash and cash equivalents
                    
                    
                    (135,756
                    )
                    
                    
                    (12,409,733
                    )Cash
      and cash equivalents at beginning of year
                    
                    
                    1,265,347
                    
                    
                    
                    13,675,080Cash
      and cash equivalents at end of year
                    
                    $
                    1,129,591
                    
                    
                    $
                    1,265,347
  See
accompanying notes to consolidated financial statements
  25
 
 Diligent
Board Member Services, Inc.
 Consolidated
Statements of Cash Flows (Continued)
  Year
                  
                  
                  Yearended
                  
                  
                  endedDecember
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008Supplemental
      disclosure of cash flow information:Cash
      paid during the year for :Interest
                  
                  $
                  32,256
                  
                  
                  $
                  38,356Income
      taxes
                  
                  $
                  20,457
                  
                  
                  $
                  24,750Supplemental
      disclosure of noncash investing and financing activities:Property
      and equipment acquired under capital leases
                  
                  $
                  235,747
                  
                  
                  $
                  -Conversion
      of interest to loan principal
                  
                  $
                  -
                  
                  
                  $
                  346,559Cashless
      repayment of loans by officers from bonus awards
                  
                  $
                  -
                  
                  
                  $
                  126,767Write
      off of related party receivable charged to equity
                  
                  $
                  -
                  
                  
                  $
                  70,700
 
 See
accompanying notes to consolidated financial statements
  26
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 1)           Organization
and nature of the business
 
 Diligent Board Member Services, Inc.
(“Diligent” or the “Company”) is a global leader in web-based portals for Boards
of Directors.  The Company develops and sells an online software
application called Diligent Boardbooks, a web based portal that board members,
management and administrative staff use to compile, update, review and archive
board materials during and after board meetings.  Diligent provides
clients with subscription-based access to the software and also provides
associated services including securely hosting the clients’ data and customer
service and support for the application.
 
 The Company was incorporated in the
State of Delaware on September 27, 2007 and is listed on the New Zealand Stock
Exchange (“NZSX”).  On December 12, 2007, the Company completed its
initial public offering on the NZSX.  In April 2008, the Company filed
a Form 10 registration statement with the United States Securities and
Exchange Commission (“SEC”), which became effective on June 30,
2008.  The Company’s corporate headquarters are located in New York
and 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 to the Company.  The Company also
has a wholly-owned subsidiary, Diligent Boardbooks Limited (“DBL”), an England
and Wales limited liability company which was formed on December 14, 2006, to
provide European sales and marketing services.  DBL was inactive until
April 2008.  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, 2009, and
appropriate disclosure of subsequent events which were not recognized in the
financial statements.
 
 2)           Liquidity
 
 Despite growth in net sales during
2008, the Company’s growth rate lagged behind its projections.  Amid
liquidity concerns, the Company initiated plans to scale back its growth plans
in order to reduce operating expenses.  During the fourth quarter of
2008, the Company significantly reduced its sales force, reduced salaries for
some of its more highly compensated employees and reduced the number of members
of the board of directors.  This resulted in a significant reduction
in operating expenses in 2009, while still achieving growth in
revenues.  The Company also actively sought additional sources of
financing and, in March 2009, issued 30,000,000 shares of newly-created Series A
Preferred Stock for $0.10 per share, providing additional capital of $2,861,150,
net of issuance costs (See Note 12).  The primary source of our
liquidity for the past year has been this financing.  At the current
level of reduced expenses, coupled with current sales growth forecasts,
management believes this funding will be sufficient to support sales growth and
achieve cash flow breakeven by around the end of the third quarter of
2010.
 
 In February 2010, the Company entered
into an agreement with Services Share Holding, LLC (“SSH LLC”), which is
conditioned upon stockholder approval at our annual stockholders’ meeting
in June 2010, in accordance with NZX rules.  The agreement
provides for the repayment of approximately $1.0 million in cash to the
Company in partial prepayment of the outstanding note receivable from affiliate
(See Note 17).  If approved by our stockholders, the additional cash
of $1.0 million will provide us with further liquidity.  With the
exception of scheduled interest payments, the Company had not included the
collection of the note receivable in its liquidity planning.
 
 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 million revolving line of credit facility to the
Company (See Note 17).  This line of credit offers the Company
additional cash flow support if needed.
  27
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 The Company continues to consider and
evaluate strategic growth opportunities that could result in additional capital
requirements which are not currently within the budget.  Our current
operating expenses and expected capital expenditures are fixed, predictable and
adequate to support our budgeted growth.  The primary uncertainty
concerning the Company’s capital needs pertains to its ability 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, 2009 and 2008, cash equivalents include
investments in money market funds of $102,409 and $1,144,312, 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.
 
 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.
  28
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 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.  Historically, installation fees were recognized upon
completion of the installation.  Effective October 1, 2008,
installation fees are recorded ratably over the contract period. The
effect of this change is not material to the Company’s consolidated financial
condition, results of operations or cash flows.
 
 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.
 
 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 gain (loss) is primarily
attributable to movement in exchange rates on certain of the Company’s cash
accounts held in foreign currencies.
 
 The Company does not use forward
exchange contracts to hedge exposures to foreign currency denominated
transactions.
 
 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.
  29
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 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 Company’s financial instruments
include cash and cash equivalents, term deposits, accounts receivable, accounts
payable and accrued expenses.  The fair value of these financial
instruments approximates book value due to their short term
settlements.
 
 Note
receivable from affiliate– 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.
 
 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 loss per share is
computed by dividing the net loss attributable to common stockholders by the
weighted average number of common shares outstanding for the period, excluding
unvested restricted common shares.  Diluted net loss per share is
computed using the weighted average number of common shares outstanding and,
when dilutive, unvested restricted common shares.  Because the Company
reported a net loss for all periods presented, all potential common shares
attributable to unvested restricted stock have been excluded from the
computation of the diluted net loss per share because the effect would have been
anti-dilutive.
 
 Recent
accounting pronouncements– In April 2009, the
Financial Accounting Standards Board (“FASB”) issued new accounting guidance
intended to provide additional application guidance and enhance disclosures
regarding fair value measurements and impairments of securities. The guidance
was effective for interim and annual periods ending after June 15, 2009. The
Company adopted this guidance upon its issuance and it had no material impact on
the Company’s consolidated financial statements.
 
 In May
2009, the FASB issued new guidance on management’s assessment of subsequent
events, which establishes the accounting and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. It required the disclosure of the date through which an
entity evaluated subsequent events and the basis for that date. In February
2010, the FASB issued an update to this guidance which requires that SEC filers
evaluate subsequent events through the date financial statements are available
to be issued, but removed the requirement to disclose that date.  The
updated guidance was effective upon issuance, and did not have a material impact
on the Company’s consolidated financial statements.
 
 In July
2009, the FASB issued the Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (“Codification”), which is the single
source of authoritative U.S. nongovernmental GAAP.  The Codification
does not change GAAP, but is intended to make it easier to find and research
issues and changes the way GAAP is referenced.  The Codification was
effective for interim and annual periods ending after September 15,
2009.  The Company began to use the new Codification when referring to
GAAP in its financial statements for the third quarter of 2009.  The
Codification does not affect our consolidated financial position, cash flows or
results of operations.
 
 In August
2009, the FASB issued new guidance which clarifies measurement and disclosures
of the fair value of liabilities.  The update is effective in the
first reporting period after issuance.  This guidance did not have a
material effect on the Company’s consolidated financial
statements.
  30
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 In
October 2009, the FASB issued new guidance for revenue
recognition with multiple deliverables.  This new guidance
impacts the determination of when the individual deliverables included in a
multiple-element arrangement may be treated as separate units of accounting.
Additionally, it modifies the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. This new guidance
is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, however early adoption is
permitted. The Company does not expect this new guidance to have a material
effect on the consolidated financial statements.
 
 In
January 2010, the FASB issued new guidance which improves disclosures about fair
value measurements.  The new standard is effective for interim and
annual periods beginning after December 15, 2009, except for certain
disclosures regarding Level 3 measurements which are effective for fiscal years
beginning after December 15, 2010.  The Company is evaluating the
impact of this guidance on its consolidated financial
statements.
 
 4)
              Acquisition
      of DBMS NZ
 
 On January 1, 2008, the Company
acquired all the outstanding shares of DBMS NZ, for NZD 5,000
(US$3,804).  Prior to the acquisition, DBMS NZ provided research and
development services for the Company.  The purchase price was
allocated to the assets and liabilities as follows:
 
 AssetsCash
                        
                        $
                        87,397Accounts
      receivable
                        
                        
                        24,809Other
      current assets
                        
                        
                        24,300Property
      and equipment, net
                        
                        
                        4,688141,194LiabilitiesAccounts
      payable
                        
                        
                        52,271Accrued
      vacation pay
                        
                        
                        85,119137,390Net
      assets acquired
                        
                        $
                        3,804
 
 5)
              Term
      deposit
 
 At
December 31, 2009, the Company has 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) bears interest at 4.50% and matures in March
2010.
 
 At December 31, 2008, the Company had a
term deposit with a New Zealand bank with a term of 100 days.  The
term deposit in the amount of NZD 100,000 (US$58,150 at December 31, 2008) bore
interest at 6.00% and matured in March 2009.
  31
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 6)
              Accounts
      receivable
 
 Accounts
      receivable consists of the
following:
 
 December
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Trade
      receivables
                    
                    $
                    303,331
                    
                    
                    $
                    397,305Allowance
      for doubtful accounts
                    
                    
                    -
                    
                    
                    
                    (7,125
                    )$
                    303,331
                    
                    
                    $
                    390,180
 
 7)
              Property
      and equipment and obligations under capital
  leases
 
 Property and equipment is comprised of
the following:
 
 December
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Equipment
                      
                      $
                      1,416,470
                      
                      
                      $
                      960,259Computer
      software
                      
                      
                      479,370
                      
                      
                      
                      326,760Leasehold
      improvements
                      
                      
                      140,653
                      
                      
                      
                      130,5532,036,493
                      
                      
                      
                      1,417,572Less:
      accumulated depreciation/amortization
                      
                      
                      723,534
                      
                      
                      
                      301,565Net
      property and equipment
                      
                      $
                      1,312,959
                      
                      
                      $
                      1,116,007
 
 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 $130 to $2,528,
and maturities from January 2010 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:
  32
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 December
      31,
                                            
                                            
                                            December
      31,2009
                                            
                                            
                                            2008Capital
      lease assets included inproperty and
    equipment
                                            
                                            $
                                            475,628
                                            
                                            
                                            $
                                            246,679Accumulated
      depreciation
                                            
                                            
                                            192,727
                                            
                                            
                                            
                                            96,284$
                                            282,901
                                            
                                            
                                            $
                                            150,395Year
                                            
                                            
                                            Yearended
                                            
                                            
                                            endedDecember
      31,
                                            
                                            
                                            December
      31,2009
                                            
                                            
                                            2008Depreciation
      expense relatingto capital lease assets
                                            
                                            $
                                            96,443
                                            
                                            
                                            $
                                            80,212
 
 The following is a schedule of future
minimum lease payments due under capital leases as of
December 31, 2009:
 
 Year
      endingDecember 31,2010
                                
                                
                                $
                                157,1032011
                                
                                
                                
                                110,7872012
                                
                                
                                
                                67,724Total
      minimum lease payments
                                
                                335,614Less
      interest portion of payments
                                
                                (75,105
                                )Present
      value of minimum lease payments
                                $
                                260,509
 
 8)           Note receivable from affiliate
- The note receivable from affiliate represents amounts due from SSH LLC, the
Company’s predecessor entity, under a Promissory Note and Security Agreement
dated October 1, 2007 (the “Note”).
 
 The Note bears interest at 5% per
annum, which is payable in arrears on the first day of each calendar quarter,
commencing April 1, 2008.  SSH LLC elected, under the terms of the
Note, to defer each of the first four quarterly interest payments through
January 1, 2009, which were added to the principal balance and bear interest
from the date the payment was due. The loan matures on October 1, 2010, when the
entire principal balance and all accrued interest will be due and
payable.  It was originally secured by 25,000,000 shares of the
Company’s stock which were pledged as collateral by members of SSH
LLC.  At December 31, 2009 the number of shares securing the Note
is 21,678,597
 
 At December 31, 2009 and 2008, the
contractual outstanding loan balance was $7,161,791.  At December 31,
2008, the Company recorded a $5.8 million valuation allowance and a
corresponding charge to impairment loss in order to write down the Note to the
estimated fair value of the underlying collateral.
  33
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 In the absence of an active market for
the Company’s stock, or other observable inputs for similar instruments, the
Company based its valuation principally on the value of the March 2009 issuance
of preferred stock, adjusted using an assumed discount rate of 20%, which is
management’s estimate based on the value of the preferred features of the Series
A Preferred Stock.  In addition, management assumed that SSH LLC
and/or its members would sell a portion of the underlying collateral to meet
their quarterly interest payments, thereby reducing the amount of collateral
expected to be available when the Note matures in 2010.  These are
considered unobservable inputs falling within the definition of Level 3
inputs.
 
 On March 30, 2009, SSH LLC sold
2,387,263 pledged shares to Spring Street Partners, L.P. in a private
transaction valued at $0.075 per share, or $179,045 in the
aggregate.  The proceeds were applied against the Note interest
payments due April 1 and July 1, 2009.  In September 2009, SSH LLC
sold an additional 620,140 shares to Spring Street Partners, L.P. in a private
transaction valued at $0.144 per share.  The proceeds of $89,523 were
used to pay the interest due October 1, 2009.  In November 2009, SSH
LLC sold an additional 314,000 shares to a third party for $0.285 per share and
used the proceeds to pay the interest due
January 1, 2010.
 
 At December 31, 2009, the Company
reduced the valuation allowance to $5.5 million and recorded a corresponding
recovery of $300,000.  This recovery was based on the greater than
expected number of shares held as collateral at December 31, 2009, due to the
ability of SSH LLC to sell shares to meet the interest payments at higher than
anticipated prices.
 
 In February 2010, the Company reached
an agreement with SSH LLC, subject to shareholder approval, to buy back some of
the underlying collateral in exchange for a partial prepayment of the Note and
an amendment to its terms (See Note 17).
 
 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
                    
                    
                    Yearended
                    
                    
                    endedDecember
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    1,361,791
                    
                    
                    $
                    6,715,232Total
      gains or losses (unrealized/realized)Included
      in earnings (or changes in net assets)
                    
                    
                    300,000
                    
                    
                    
                    (5,800,000
                    )Included
      in other comprehensive income
                    
                    
                    -
                    
                    
                    
                    -Purchases,
      issuances and settlements
                    
                    
                    -
                    
                    
                    
                    446,559Transfers
      in and/or out of Level 3
                    
                    
                    -
                    
                    
                    
                    -Ending
      balance
                    
                    $
                    1,661,791
                    
                    
                    $
                    1,361,791The
      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
                    
                    $
                    300,000
                    
                    
                    $
                    (5,800,000
                    )
  34
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 9)        
    Related party transactions
 
 Loans to
director and officer – In April 2008, the Company made loans to two
officers, one of whom was also a Director, in the amount of NZD218,000
(US$145,843), which were non-interest bearing.  These loans were made
prior to the time that the Company was subject to the requirements of Sarbanes
Oxley §402, which prohibits such loans to officers, but were outstanding at the
time the Company filed its initial registration statement on Form 10 with the
SEC; therefore the Company was in violation of Sarbanes Oxley §402 at that
time.  These loans were repaid with officers’ bonuses in October 2008
when the Company became aware of the prohibition.
 
 Marketing
expense–During
the years ended December 31, 2009 and 2008, the Company incurred marketing
expenses of approximately $147,000 and $217,000, respectively, for services
rendered by Yankee Hill Company, LLC, an entity owned by a stockholder of the
Company.
 
 Consulting
agreement with Sugar International – From April 2008 through January
2009, the Company incurred expenses for sales training provided by a consultant
from Sugar International.  A director and stockholder of the Company
is a director and stockholder of Sugar International.  For the years
ended December 31, 2009 and 2008, the Company recorded sales training expenses
of approximately $15,000 and $184,500, respectively, for such services, of which
$0 and $38,500 is included in payables to affiliates at December 31, 2009
and 2008, respectively.
 
 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, 2009 and 2008 were approximately
$86,000 and $83,000, respectively.  Payables to affiliates include
approximately $5,800 and $11,000 at December 31, 2009 and 2008, respectively,
payable to Buddle Findlay.
 
 Rent
expense – The Company subleased its New Jersey office from an affiliate
through August 2009.  Additionally, the Company subleased office space
in New York City from an affiliate through April 2008.  Rent expense
paid to affiliates for the years ended December 31, 2009 and 2008, was
approximately $29,000 and $77,000, respectively.
 
 10)           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
                                      
                                      
                                      Yearended
                                      
                                      
                                      endedDecember
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008Revenues:United
      States
                                      
                                      $
                                      4,193,354
                                      
                                      
                                      $
                                      2,514,790Foreign
                                      
                                      
                                      807,285
                                      
                                      
                                      
                                      415,912Total
                                      
                                      $
                                      5,000,639
                                      
                                      
                                      $
                                      2,930,702December
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008Long-lived
      assets outsidethe United States, net
                                      
                                      $
                                      507,794
                                      
                                      
                                      $
                                      405,534
  35
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 11)         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, 2009 and December 31, 2008 as a result of the
Company's net operating losses.  At December 31, 2009, the
Company has net operating loss carryforwards of U.S. income taxes of $16.0
million, which expire from 2027 through 2029.
 
 The significant components of loss
before provision for income taxes and the consolidated income tax provision are
as follows:
 
 Year
                      
                      
                      Yearended
                      
                      
                      endedDecember
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Loss
      before provision for income taxes:Domestic
                      
                      $
                      (4,098,429
                      )
                      
                      $
                      (16,543,217
                      )Foreign
                      
                      
                      272,776
                      
                      
                      
                      (1,072,587
                      )Total
                      
                      $
                      (3,825,653
                      )
                      
                      $
                      (17,615,804
                      )Provision
      for income taxes:Domestic
                      
                      $
                      -
                      
                      
                      $
                      -Foreign
                      
                      
                      36,337
                      
                      
                      
                      32,798Total
                      
                      $
                      36,337
                      
                      
                      $
                      32,798
 
 The income tax provision differs from
the amount of tax determined by applying the federal statutory rate as
follows:
 
 Year
                    
                    
                    Yearended
                    
                    
                    endedDecember
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008%
                    
                    
                    %Federal
      income tax statutory rate
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )State
      income taxes, net of federal benefit
                    
                    
                    (10.6
                    )
                    
                    
                    (10.6
                    )Foreign
      income taxes
                    
                    
                    0.9
                    
                    
                    
                    0.2Tax
      effect of:Share-based
      compensation
                    
                    
                    13.8
                    
                    
                    
                    -Meals
      and entertainment
                    
                    
                    0.1
                    
                    
                    
                    0.1Other
                    
                    
                    0.1
                    
                    
                    
                    -Valuation
      allowance
                    
                    
                    30.6
                    
                    
                    
                    44.5Income
      tax provision
                    
                    
                    0.9
                    
                    
                    
                    0.2
  36
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 Deferred
taxes are as follows:
  Year
      Ended
                          December
      31,
                          2009
                        
                        
                        Year
      Ended
                          December
      31,
                          2008(In
      thousands)
                        
                        
                        (In
      thousands)Deferred
      tax asset (liability)Share-based
      compensation
                        
                        $
                        -
                        
                        
                        $
                        73Bad
      debt expense
                        
                        
                        -
                        
                        
                        
                        3Note
      impairment loss
                        
                        
                        2,451
                        
                        
                        
                        2,610Depreciation
                        
                        
                        (38
                        )
                        
                        
                        -Accruals
                        
                        
                        19
                        
                        
                        
                        -Other
                        
                        
                        (1
                        )
                        
                        
                        -Net
      Operating Loss Carryforwards
                        
                        
                        7,115
                        
                        
                        
                        5,293Valuation
      Allowance
                        
                        
                        (9,546
                        )
                        
                        
                        (7,979
                        )Total
                        
                        $
                        -
                        
                        
                        $
                        -
 
 Management
has provided a valuation allowance of approximately $9,546,000 and $7,979,000 as
of December 31, 2009 and 2008, 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 Company has an insignificant amount of
deferred tax assets related to DBMS NZ, which are offset against accrued
expenses and other liabilities in 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.  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 2009 are open for examination by the
federal, state and foreign taxing jurisdictions.
 
 12)          Redeemable Preferred Stock
–On March 11,
2009, the Company issued 30,000,000 shares of newly-created Series A Preferred
Stock for $0.10 per share in a private offering, for an aggregate of $3,000,000
in additional capital.  Expenses relating to the share issuance were
$138,850.  The principal terms of the Preferred Shares are as
follows:
 
 Dividend
rights – The Preferred Shares carry a fixed, cumulative, dividend of 11% per
annum (adjusted for stock splits, consolidation, etc).  The dividend,
which is due on the first business day of each calendar year for the prior year,
may (at the Company’s option) be paid either in cash or in kind by the issuance
of additional Preferred Shares (PIK Shares), to be issued at the same issue
price as the Series A Preferred Stock of $0.10 per share.  The 11%
annual dividend on the Preferred Shares will have preference over the
declaration or payment of any dividends on the Company’s common stock (ordinary
shares).  In addition to the 11% preferred dividend, the holders of
the Preferred Shares will also be entitled to participate pro rata in any
dividend paid on the Company’s common stock.
 
 Conversion
rights – The Preferred Shares are convertible at any time at the option of the
holders into the Company’s common stock on a one-for-one basis at a conversion
price of $0.10 per share. In addition, Preferred Shares will automatically be
converted into common stock upon the closing of an underwritten share offering
by the Company on a registered stock exchange which realizes at least
$40,000,000 of gross proceeds.
  37
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 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 and it is not probable that it will be met.  If the
redemption were considered likely to occur, the carrying value would be adjusted
to its liquidation value.
 
 The
carrying value of the Preferred Shares at December 31, 2009 is as
follows:
 
 Gross
      proceeds
                    
                    $
                    3,000,000Less:
      Issuance costs
                    
                    
                    (138,850
                    )2,861,150Cumulative
      amortization of offering costs
                    
                    
                    21,989Cumulative
      in kind dividend
                    
                    
                    266,712Balance
      at December 31, 2009
                    
                    $
                    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.
  38
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 13)
              Stockholders’
      equity (deficiency)
 
 Cancellation
of shares – Pursuant to the Company's initial public offering, SSH LLC
was required to place 14,000,000 of the Company's common shares into escrow
through December 31, 2008, at which time these shares would be delivered to the
Company for cancellation if certain sales milestones were not
met.  The Company did not meet these sales milestones, and
accordingly, the 14,000,000 shares were cancelled at December 31,
2008.
 
 Increase
in authorized shares – 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.
 
 Issuance
of preferred stock – On March 11, 2009, the Company issued 30,000,000
shares of newly created Series A preferred stock for US$0.10 per share (see Note
12).
 
 14)
              Stock
      option and incentive plan
 
 In
November 2007, the Company adopted the 2007 Stock Option and Incentive Plan
(“the Plan”) authorizing the granting of awards to selected employees, directors
and consultants of the Company, and its affiliates in the form of incentive
stock options, non-qualified stock options, and stock awards. The Plan is
administrated by the Company's Board of Directors. Pursuant to delegation by the
Company's Board of Directors, the Remunerations and Nominations Committee
determines the number of shares, the term, the frequency and date, the type, the
exercise periods, any performance criteria pursuant to which stock option awards
may be granted and the restrictions and other terms and conditions of each grant
of restricted shares in accordance with the terms of the Plan.  The
Plan authorizes the issuance of up to 10,000,000 shares of the Company’s common
stock.
 
 Restricted
Stock Awards – On
November 8, 2007, the Company granted 4,000,000 shares of common stock to
selected employees (3,064,000 shares), directors (200,000 shares) and
consultants (736,000 shares) of the Company, and its affiliates. Of these
shares, 2,071,000 shares were fully vested upon issuance on December 12, 2007,
160,000 shares were forfeited during 2008 and 1,769,000 shares vested on January
1, 2009, based on continued employment through that date. The fair value of the
awards to employees was estimated to be 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,
2009 and 2008, the Company recognized share-based compensation costs related to
restricted stock awards of $23,099 and $920,783, respectively.
 
 At
December 31, 2009 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 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.
  39
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 The exercise price of each option is
the market price of the Company’s stock for the last sale prior to the grant
date, converted to U.S. dollars using the exchange rate in effect on the grant
date.  The options generally expire after a period not to exceed ten
years, except in the event of termination, whereupon vested options must be
exercised generally within three months, or upon death or disability, in which
cases the vested options may be exercised within twelve months, but in all cases
the exercise date may not exceed the expiration date.
 
 The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model and
the resulting fair value is recorded as share-based compensation expense on a
straight line basis over the option vesting period for employee stock options,
ranging from six months to three years.  The value of the options
granted to former directors was charged to expense as of the grant
date.
 
 The fair values of the options granted
were estimated based on the following assumptions:
 
 Expected
      volatility (1)
                  183.98
      - 186.94%Expected
      term (2)
                  5.35
      – 6.00 yearsRisk-free
      interest rate (3)
                  2.36
      - 2.75%Dividend
      yield
                  -
 
 (1)
              The
      expected volatility was determined using historical volatility data for
      comparable companies.
 (2)
              The
      expected term of the options has been estimated using the simplified
      method allowed by the SEC, which calculates the average of the vesting
      period and the contractual term of the
options.
 (3)
              The
      risk free interest rate is based on the U.S. Treasury constant maturity
      nominal yield with a term approximately equal to the expected terms of the
      options.
 
 The
weighted average grant-date fair value of the options granted was
$0.1406.
 
 A summary of stock option activity for
the year ended December 31, 2009 is as follows:
 
 Options
                  
                  
                  Weighted
                    average
                    exercise price
                  
                  
                  Weighted average
                    remaining
                    contractual termOutstanding
      at January 1, 2009
                  
                  
                  -
                  
                  
                  $
                  -Granted
                  
                  
                  4,660,003
                  
                  
                  
                  .1439Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2009
                  
                  
                  4,660,003
                  
                  
                  
                  .1439
                  
                  
                  9.66
      yearsExercisable
      at December 31, 2009
                  
                  
                  -
                  
                  
                  
                  .1439
 
 During the year ended December 31,
2009, the Company recognized share-based compensation costs related to stock
options of $180,154.  At December 31, 2009 there was $467,781 of
unrecognized share-based compensation expense related to options granted that
will be recognized over the next 2.75 years.
 
 15)           Commitments
and contingencies
 
 Operating
leases – In April 2008, the Company entered into an operating lease
agreement for its office space in New York City for seven years, which requires
an annual base rent of $210,000, with an escalation clause.  The
rental expense for the years ended December 31, 2009 and 2008 was approximately
$227,000 and $189,000, respectively.
 
 In June 2009, DBMS NZ entered into a
three-year operating lease for office space in Christchurch, New
Zealand.  The terms of the lease require an annual rent of NZD42,000
(US$30,463 at December 31, 2009).  The total rental expense under the
new and expiring leases for the year ended December 31, 2009 was NZD76,028
(US$47,062) and NZD84,233 (US$60,032), respectively.
  40
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 The Company or its consolidated
subsidiaries have entered into several other short-term property leases
requiring montly rentals of approximately $3,000, for terms expiring through
June 2010.
 
 The lease agreements require security
deposits in the amount of $221,886 at December 31, 2009.
 
 The following is a schedule of future
minimum lease payments as of December 31, 2009:
 
 Year
      ending December 31
                        2010
                        
                        $
                        265,6882011
                        
                        
                        258,2642012
                        
                        
                        249,8672013
                        
                        
                        241,6752014
                        
                        
                        248,9252015
      and thereafter
                        
                        
                        62,688$
                        1,327,107
 
 Employment
contract – In June 2009, the Company entered into an employment contract
with an officer which provides for annual compensation of
$210,000.  The contract also provides for grants of stock, subject to
Board of Director approval and continued employment, of 250,000 shares each in
August 2009, 2010, and 2011.  The first of these grants was included
in the stock options issued in August 2009 (See Note 14).  The
contract may be terminated at any time with ninety days written
notice.
 
 401(k)
plan – On January 1, 2008 the Company adopted a defined contribution plan
in the form of a qualified 401(k) plan (“the 401(k) Plan”), in which
substantially all US employees are eligible to participate.  The
Company makes no matching contributions under the 401(k) Plan.
 
 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.
 
 16)           Financial
instruments
 
 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.  The Company has not
entered into forward contracts or other currency hedges.
  41
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 Years
Ended December 31, 2009 and 2008
 
 Liquidity
risk – The Company expects that its cash and cash equivalents will be
adequate to support sales growth and achieve cash flow breakeven by around the
end of the third quarter of 2010.  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 (see Note
17).  The primary uncertainty concerning our capital needs pertains to
our ability to achieve the expected sales growth in a timely manner such that
recurring revenues exceed operating expenditures.
 
 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.  One customer accounted for 14.2% of the accounts
receivable balance at December 31, 2009 and 10.5% of the accounts receivable
balance at December 31, 2008.  No single customer generated more than
10% of revenue in 2009 and 2008.
 
 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.
 
 17)           Subsequent
events
 
 Repayment
and Amendment of Note Receivable-In February 2010, the
Company entered into an agreement with SSH LLC, which is conditioned upon
stockholder approval at our annual stockholders’ meeting in June 2010, in
accordance with NZX rules.  The agreement provides for the repayment
of approximately $1.0 million in cash to the Company in partial prepayment
of the outstanding Note.  The agreement also calls for partial
prepayment of an additional $3.1 million by the surrender and cancellation of
11,650,000 Diligent shares which are held as collateral for the
Note.  The repayment of the remaining outstanding principal of $3.1
million (which, subsequent to the surrender of the 11,650,000 shares, will be
secured by 5,205,597 shares of Diligent stock) will be extended by two years to
October 2012 and the interest rate will be increased from 5% to 6.5% and
payments will be due annually, as opposed to quarterly.  If approved
by our stockholders, the additional cash of $1.0 million will provide us with
further liquidity.
 
 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 million
revolving line of credit facility to the Company.  The Lender is the
holder of 20 million shares of the Company’s Series A preferred stock and
approximately 5 million shares of the Company’s common stock, and the founder
and managing partner of the Lender is 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.  Upon the
event of default, the Lender has the option to increase the interest rate on all
outstanding obligations to 14.50%.  The line of credit is subject to a
0.5% per annum commitment fee on the unused portion of the line of credit, paid
quarterly in arrears.  Accrued interest and accrued commitment fees
must be paid quarterly on the last business day of each quarter.  The
line of credit 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.  Additionally, the line of credit includes financial
covenants with respect to the achievement of budgeted revenues and
expenses.
  42
 
 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, 2009.
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
 
 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, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
 
 ITEM
9B.  OTHER INFORMATION
  Not
applicable
  43
  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.
  44
 
 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.
  45
 
 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
      18, 2010
                  
                  DILIGENT
      BOARD MEMBER SERVICES, INC.By:
                  /s/ Steven P. RuseSteven
      P. Ruse, Chief Financial Officer (PrincipalFinancial
      Officer )
  46
  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
      18, 2010Alessandro
      Sodi
                                                                                                                                        
                                                                                                                                        President,
      Director (PrincipalExecutive
      Officer)/s/
      Steven P. Ruse
                                                                                                                                        
                                                                                                                                        Chief
      Financial Officer (Principal
                                                                                                                                        
                                                                                                                                        March
      18, 2010Steven
      P. Ruse
                                                                                                                                        
                                                                                                                                        Financial
      Officer)/s/
      Donald Meisner
                                                                                                                                        
                                                                                                                                        Treasurer
      (Principal Accounting
                                                                                                                                        
                                                                                                                                        March
      18, 2010Donald
      Meisner
                                                                                                                                        
                                                                                                                                        Officer)/s/
      Sharon Daniels
                                                                                                                                        
                                                                                                                                        Chief
      Marketing Officer, Director
                                                                                                                                        
                                                                                                                                        March
      18, 2010Sharon
      Daniels/s/
      David Liptak
                                                                                                                                        
                                                                                                                                        Director
                                                                                                                                        
                                                                                                                                        March
      18, 2010David
      Liptak/s/
      Peter Huljich
                                                                                                                                        
                                                                                                                                        Director
                                                                                                                                        
                                                                                                                                        March
      18, 2010Peter
      Huljich/s/
      Rick Bettle
                                                                                                                                        
                                                                                                                                        Director
                                                                                                                                        
                                                                                                                                        March
      18, 2010Rick
      Bettle/s/
      Mark Russell
                                                                                                                                        
                                                                                                                                        Director
                                                                                                                                        
                                                                                                                                        March
      18, 2010Mark
      Russell
  47
  
 INDEX
TO EXHIBITS
 
 ExhibitNumbers
              
              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,
      LLC and Diligent Board Member Services, Inc.10.21
              
              Shareholder
      Restriction Deed dated November 1, 2007 among Diligent Board Member
      Services, Inc., Diligent Board Member Services, LLC and McDouall Stuart
      Securities Limited10.31
              
              Escrow
      Agreement dated November 7, 2007 among UMB Bank, N.A., Diligent Board
      Member Services, Inc. and Diligent Board Member Services,
    LLC10.4.11
              
              Promissory
      Note and Security Agreement dated October 1, 2007 in the principal amount
      of $6,800,000 given by Diligent Board Member Services, LLC to the order of
      Diligent Board Member Services, Inc.10.4.2
              
              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, LLC) 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.10.71
              
              Form
      of Restricted Stock Award Agreement for restricted stock awards under the
      2007 Stock Option and Incentive Plan10.82
              
              Service
      Agreement dated May 29, 2008 between Diligent Board Member Services, Inc.
      and Sugar International Limited10.93
              
              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,
      LLC10.115
              
              Employment
      agreement of CFO Steven P. Ruse
  48
  
 10.12
              
              Credit
      Facility established by Spring Street Partners, L.P. as Lender in favor of
      Diligent Board Member Services, Inc. as Borrower21
              
              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)
  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.
  49