UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q




(Mark
One)




x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended
June 30, 2010.




or




 ̈ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the
transition period from _________________________ to
_________________________________




Commission
File Number:  000-53205




Diligent
Board Member Services, Inc.




(Exact name of registrant as specified
in its charter)




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




39 West 37 St. 8th
Floor


New York, NY 10018


(Address of principal executive
offices)(Zip Code)





(212) 741-8181


(Registrant’s telephone number,
including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  x Yes  ̈ No




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




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




 ̈
      Large accelerated filer
               ̈
      Accelerated filer ̈
      Non-accelerated filer
              x
      Smaller Reporting Company





Indicate
by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the
Exchange Act).


 ̈Yes
x
No




The
number of shares of the registrant’s common stock outstanding as of August 2,
2010 was 78,790,000.









(This
page intentionally left blank)





CONTENTS




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


i


FORWARD
LOOKING STATEMENTS





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





AVAILABLE
INFORMATION




We file reports, proxy statements,
information statements and other information with the Securities and Exchange
Commission. You may read and copy this information, fora 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 tothe 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’sweb site, electronic copies of the
materials we file with the SEC (including our annual reports on Form
10-K, our quarterly reports on Form 10-Q,
our current reports on Form 8-K, the Section 16 reports filed by our executive
officers, directors and 10% stockholders and amendments to those
reports).  To receive paper copies of our SEC materials, please
contact us by mail addressed to Robert E. Norton, Corporate Secretary, Diligent
Board Member Services, Inc., 39 West 37 St. 8th Floor, New York, NY 10018,
(212) 741-8181.


ii


PART
I—FINANCIAL INFORMATION





Item 1.
Condensed Consolidated Financial Statements.


Diligent
Board Member Services, Inc.


Consolidated
Balance Sheets


June 30,
            
            
            December 31,2010
            
            
            2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            1,060,185
            
            
            $
            1,129,591Term
      deposit
            
            
            68,990
            
            
            
            72,530Accounts
      receivable, net
            
            
            282,255
            
            
            
            303,331Prepaid
      expenses and other current assets
            
            
            243,847
            
            
            
            183,368Total
      current assets
            
            
            1,655,277
            
            
            
            1,688,820Property
      and equipment, net
            
            
            1,175,820
            
            
            
            1,312,959Note
      receivable from affiliate, net of valuation allowance
            
            
            775,685
            
            
            
            1,661,791Restricted
      cash - security deposits
            
            
            225,032
            
            
            
            221,886Total
      assets
            
            $
            3,831,814
            
            
            $
            4,885,456LIABILITIES AND STOCKHOLDERS'
      (DEFICIENCY)Current
      liabilities:Accounts
      payable and accrued expenses
            
            $
            468,491
            
            
            $
            397,840Deferred
      revenue
            
            
            1,712,570
            
            
            
            1,593,351Current
      portion of obligations under capital leases
            
            
            93,019
            
            
            
            113,418Payables
      to affiliates
            
            
            1,720
            
            
            
            5,762Total
      current liabilities
            
            
            2,275,800
            
            
            
            2,110,371Non-current
      liabilities:Obligations
      under capital leases, less current portion
            
            
            104,514
            
            
            
            147,091Other
      noncurrent liabilities
            
            
            48,065
            
            
            
            44,252Total
      non-current liabilities
            
            
            152,579
            
            
            
            191,343Total
      liabilities
            
            
            2,428,379
            
            
            
            2,301,714Commitments
      and contingenciesRedeemable
      preferred stock:Series
      A convertible redeemable preferred stock, $.001 par value, 50,000,000
      shares authorized, 32,667,123 and 30,000,000 shares issued and outstanding
      (liquidation value $5,065,068 and $4,766,712)
            
            
            3,163,426
            
            
            
            3,149,851Stockholders'
      (deficiency):Common
      Stock, $.001 par value, 250,000,000 shares authorized, 78,790,000 and
      90,440,000 shares issued and outstanding
            
            
            78,790
            
            
            
            90,440Additional
      paid-in capital
            
            
            21,513,775
            
            
            
            24,532,622Accumulated
      deficit
            
            
            (23,336,397
            )
            
            
            (25,180,648
            )Accumulated
      other comprehensive loss
            
            
            (16,159
            )
            
            
            (8,523
            )Total
      stockholders' (deficiency)
            
            
            (1,759,991
            )
            
            
            (566,109
            )Total
      liabilities and stockholders' (deficiency)
            
            $
            3,831,814
            
            
            $
            4,885,456




See
accompanying notes to consolidated financial statements


1


Diligent Board Member Services,
Inc.


Consolidated
Statements of Operations


(Unaudited)




Three Months Ended June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenues
                
                $
                1,915,405
                
                
                $
                1,156,732
                
                
                $
                3,662,882
                
                
                $
                2,153,904Cost
      of revenues
                
                
                659,556
                
                
                
                539,834
                
                
                
                1,282,220
                
                
                
                995,567Gross
      profit
                
                
                1,255,849
                
                
                
                616,898
                
                
                
                2,380,662
                
                
                
                1,158,337Operating
      expenses:Selling
      and marketing expenses
                
                
                739,991
                
                
                
                593,064
                
                
                
                1,306,877
                
                
                
                1,273,661General
      and administrative expenses
                
                
                882,818
                
                
                
                995,598
                
                
                
                1,884,437
                
                
                
                2,124,041Research
      and development expenses
                
                
                233,742
                
                
                
                199,238
                
                
                
                410,888
                
                
                
                358,927Depreciation
      and amortization
                
                
                114,707
                
                
                
                94,404
                
                
                
                229,903
                
                
                
                183,961Total
      operating expenses
                
                
                1,971,258
                
                
                
                1,882,304
                
                
                
                3,832,105
                
                
                
                3,940,590Operating
      loss
                
                
                (715,409
                )
                
                
                (1,265,406
                )
                
                
                (1,451,443
                )
                
                
                (2,782,253
                )Other
      income (expenses):Impairment
      recovery on note receivable from affiliate
                
                
                -
                
                
                
                -
                
                
                
                3,200,000
                
                
                
                -Interest
      income, net
                
                
                68,535
                
                
                
                100,855
                
                
                
                144,382
                
                
                
                185,642Foreign
      exchange transaction gain/(loss)
                
                
                1,018
                
                
                
                41,796
                
                
                
                (38,611
                )
                
                
                (893
                )Other
                
                
                -
                
                
                
                170,954
                
                
                
                -
                
                
                
                170,954Total
      other income
                
                
                69,553
                
                
                
                313,605
                
                
                
                3,305,771
                
                
                
                355,703Income
      (loss) before provision for income taxes
                
                
                (645,856
                )
                
                
                (951,801
                )
                
                
                1,854,328
                
                
                
                (2,426,550
                )Income
      tax (benefit) expense
                
                
                (3,561
                )
                
                
                -
                
                
                
                10,077
                
                
                
                6,056Net
      income (loss)
                
                $
                (642,295
                )
                
                $
                (951,801
                )
                
                $
                1,844,251
                
                
                $
                (2,432,606
                )Net
      income (loss) per share:Basic
                
                $
                (0.01
                )
                
                $
                (0.01
                )
                
                $
                0.02
                
                
                $
                (0.03
                )Diluted
                
                $
                (0.01
                )
                
                $
                (0.01
                )
                
                $
                0.02
                
                
                $
                (0.03
                )Weighted
      average shares outstanding:Basic
                
                
                87,495,495
                
                
                
                90,390,549
                
                
                
                88,959,613
                
                
                
                90,301,878Diluted
                
                
                87,495,495
                
                
                
                90,390,549
                
                
                
                123,062,002
                
                
                
                90,301,878




See
accompanying notes to consolidated financial statements


2


Diligent Board Member Services,
Inc.


Consolidated
Statement of Changes in Stockholders’ (Deficiency)


And
Comprehensive Loss


Six
Months Ended June 30, 2010


(Unaudited)




AccumulatedCommon
            
            
            Additional
            
            
            
            
            
            Other
            
            
            TotalCommon
            
            
            Stock
            
            
            Paid-in-
            
            
            Accumulated
            
            
            Comprehensive
            
            
            Stockholders'Shares
            
            
            $.001 Par Value
            
            
            Capital
            
            
            Deficit
            
            
            (Loss)
            
            
            (Deficiency)Balance
      at January 1, 2010
            
            
            90,440,000
            
            
            $
            90,440
            
            
            $
            24,532,622
            
            
            $
            (25,180,648
            )
            
            $
            (8,523
            )
            
            $
            (566,109
            )Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,844,251
            
            
            
            -Foreign
      exchange translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,636
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,836,615Share-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            223,754
            
            
            
            -
            
            
            
            -
            
            
            
            223,754Cancellation
      of common stock
            
            
            (11,650,000
            )
            
            
            (11,650
            )
            
            
            (3,064,026
            )
            
            
            
            
            
            
            
            
            
            
            (3,075,676
            )Amortization
      of offering costs
            
            
            -
            
            
            
            -
            
            
            
            (13,575
            )
            
            
            -
            
            
            
            -
            
            
            
            (13,575
            )Accrued
      preferred stock dividend
            
            
            -
            
            
            
            -
            
            
            
            (165,000
            )
            
            
            -
            
            
            
            -
            
            
            
            (165,000
            )Balance
      at June 30, 2010
            
            
            78,790,000
            
            
            $
            78,790
            
            
            $
            21,513,775
            
            
            $
            (23,336,397
            )
            
            $
            (16,159
            )
            
            $
            (1,759,991
            )




See
accompanying notes to consolidated financial statements


3




Diligent Board Member Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)


Six Months Ended June 30,2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  1,844,251
                  
                  
                  $
                  (2,432,606
                  )Adjustments
      to reconcile net income (loss) to net cash and cash equivalents used in
      operating activities:Impairment
      recovery on note receivable from affiliate
                  
                  
                  (3,200,000
                  )
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  229,903
                  
                  
                  
                  183,961Share-based
      compensation
                  
                  
                  223,754
                  
                  
                  
                  23,099Straight-line
      rent adjustment
                  
                  
                  3,813
                  
                  
                  
                  38,818Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  21,076
                  
                  
                  
                  119,208Prepaid
      expenses and other current assets
                  
                  
                  (60,479
                  )
                  
                  
                  (177,513
                  )Restricted
      cash - security deposits
                  
                  
                  (3,146
                  )
                  
                  
                  5,838Accounts
      payable and accrued expenses, net
                  
                  
                  (94,348
                  )
                  
                  
                  77,616Deferred
      revenue
                  
                  
                  119,219
                  
                  
                  
                  189,553Payables
      to affiliates
                  
                  
                  (4,042
                  )
                  
                  
                  (49,578
                  )Net
      cash and cash equivalents used in operating activities:
                  
                  
                  (919,999
                  )
                  
                  
                  (2,021,604
                  )Cash
      flows from investing activities:Purchase
      of property and equipment
                  
                  
                  (88,975
                  )
                  
                  
                  (184,213
                  )Net
      cash and cash equivalents used in investing activities:
                  
                  
                  (88,975
                  )
                  
                  
                  (184,213
                  )Cash
      flows from financing activities:Proceeds
      from preferred stock issuance
                  
                  
                  -
                  
                  
                  
                  2,861,150Cash
      received from partial prepayment of note receivable from
      affiliate
                  
                  
                  1,010,430
                  
                  
                  
                  -Payments
      of obligations under capital leases
                  
                  
                  (62,977
                  )
                  
                  
                  (65,629
                  )Net
      cash and cash equivalents provided by (used in) financing
      activities
                  
                  
                  947,453
                  
                  
                  
                  2,795,521Effect
      of exchange rates on cash and cash equivalents
                  
                  
                  (7,885
                  )
                  
                  
                  (11,168
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (69,406
                  )
                  
                  
                  578,536Cash
      and cash equivalents at beginning of period
                  
                  
                  1,129,591
                  
                  
                  
                  1,265,347Cash
      and cash equivalents at end of period
                  
                  $
                  1,060,185
                  
                  
                  $
                  1,843,883Supplemental
      disclosure of cash flow information:Cash
      paid during the period for :Interest
                  
                  $
                  24,782
                  
                  
                  $
                  15,300Income
      taxes
                  
                  $
                  10,206
                  
                  
                  $
                  12,634Supplemental
      disclosure of noncash investing and financing activities:Property
      and equipment acquired under capital leases
                  
                  $
                  -
                  
                  
                  $
                  46,200Prepayment
      of principal on note receivable from affiliate in exchange for 11,650,000
      shares
                  
                  $
                  3,075,676
                  
                  
                  $
                  -




See
accompanying notes to consolidated financial statements


4




Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)


1)
            Organization
      and nature of the business





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





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





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





The Company has evaluated all subsequent
events through the filing date of this Form 10-Q with the SEC, to ensure that
this Form 10-Q includes subsequent events that should be recognizedin the financial statements as ofJune 30, 2010, and appropriate disclosure of
subsequent events which were not recognized in the financial
statements.





2)
            Liquidity





The primary source of our liquidity for
the past year has been the $2.9 million of financing obtained from our Series A
Preferred Stock issued in March 2009.  At June 30, 2010, our sources
of liquidity consist of cash and term deposits of approximately $1.1
million.





In February 2010, Services Share
Holding, LLC (the Company’s predecessor entity, hereinafter referred to as “SSH
LLC”) sold approximately 4.8 million shares of Company stock pledged as
collateral for the Note receivable from affiliate for approximately $1.2
million.  The proceeds were placed in escrow pending stockholder
approval at our annual stockholders’ meeting on June 8, 2010, as required by the
New Zealand Stock Exchange listing rules (See Note 5).  The sale was
approved and we received approximately $0.2 million interest in cash in April
and May 2010 and a $1.0 million principal prepayment in cash in June
2010,  providing us with additional 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 $1.0 million revolving line of credit facility to the
Company (See Note 8).  This line of credit offers the Company
additional cash flow support if needed.  As of June 30, 2010, the
Company has no borrowings under this credit facility.





The Company continues to consider and
evaluate strategic growth opportunities that could result in a need for
additional capital not currently within the Company’s 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.





5
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)


3)
            Significant
      accounting policies





Basis of
presentation– The accompanying
interim consolidated financial statements have been prepared in accordance with
accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information and
theinstructions for Form 10-Q pursuant to the rules and regulations of
the SEC.  Accordingly, they do not include all information and notes
required by GAAP and provided in the annual consolidated financial
statements.  These financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
Form 10-K of the Company for the year ended December 31, 2009, as filed
with the SEC on March 18, 2010.





In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements.  The
results of operations for the six months ended June 30, 2010 are not necessarily
indicative of the results to be expected for the full year.





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





Fair
value of financial instruments – The fair value of our cash and cash
equivalents, term deposits, accounts receivable, accounts payable and accrued
expenses approximates book value due to their short term
settlements.  See Note 5 for the valuation of the Note receivable from
affiliate and Note 6 for the valuation of foreign currency options.





Share-based
compensation–
The Company measures the cost of employee services received in exchange for an
equity-based award using the fair value of the award on the date of the grant,
and recognizes the cost over the period that the award recipient is required to
provide services to the Company in exchange for the award.





The Company measures compensation cost
for awards granted to non-employees based on the fair value of the award at the
measurement date, which is the date performance is satisfied or services are
rendered by the non-employee.





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





Diluted net income (loss) per share
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
unless the effect is anti-dilutive.Stock options, nonvested restricted
stock and convertible preferred stock are included as potential dilutive
securities for the periods applicable.  All potentially dilutive
securities have been excluded from the calculation for thethree months ended June 30, 2010 and for thethreeand sixmonths endedJune30, 2009 as they were anti-dilutive.The number of potentially dilutive securities
for the three months ended June 30, 2010 and for thethreeand sixmonths endedJune30, 2009were 34,102,389, 30,000,000 and 30,000,000,
respectively.





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




6


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
  Three months ended June 30,
              
              
              Six months ended June 30,2010
              
              
              2009
              
              
              2010
              
              
              2009Numerator:Net
      income (loss)
              
              $
              (642,295
              )
              
              $
              (951,801
              )
              
              $
              1,844,251
              
              
              $
              (2,432,606
              )Preferred
      stock dividends
              
              
              (82,500
              )
              
              
              -
              
              
              
              (165,000
              )
              
              
              -Basic
      net income (loss) available to common shareholders
              
              $
              (724,795
              )
              
              $
              (951,801
              )
              
              $
              1,679,251
              
              
              $
              (2,432,606
              )Diluted
      net income (loss) available to common shareholders
              
              $
              (642,295
              )
              
              $
              (951,801
              )
              
              $
              1,844,251
              
              
              $
              (2,432,606
              )Denominator:Basic
      weighted average shares outstanding
              
              
              87,495,495
              
              
              
              90,390,549
              
              
              
              88,959,613
              
              
              
              90,301,878Dilutive
      effect of stock options
              
              
              -
              
              
              
              -
              
              
              
              1,435,266
              
              
              
              -Dilutive
      effect of convertible preferred stock
              
              
              -
              
              
              
              -
              
              
              
              32,667,123
              
              
              
              -Diluted
      weighted average shares outstanding
              
              
              87,495,495
              
              
              
              90,390,549
              
              
              
              123,062,002
              
              
              
              90,301,878Basic
      earnings (loss) per share
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              0.02
              
              
              $
              (0.03
              )Diluted
      earnings (loss) per share
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              0.02
              
              
              $
              (0.03
              )


Recent
accounting pronouncements– In October2009, the Financial Accounting Standards
Board (“FASB”) issued new guidance for revenue recognition with
multiple deliverables.  This new guidance impacts the determination of
when the individual deliverables included in a multiple-element arrangement may
be treated as separate units of accounting. Additionally, it modifies the manner in which the
transaction consideration is allocated across the separately identified
deliverables by no longer permitting the residual method of allocating
arrangement consideration. This new guidance is effectivefor revenue arrangementsentered into or materially modified in
fiscal years beginning on or after June 15, 2010, however early adoption is permitted.
The Company does not expect this new guidance to have a material effect on the
consolidated financial statements.





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





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





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





4)
            Term
      deposit





At June
30, 2010, 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$68,990)
bears interest at 4.20% and matures in March 2011.




7


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)


5)
            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”), as
amended by the Prepayment and Amendment Agreement entered into in February 2010
and approved by our stockholders in June 2010.





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




The Prepayment and Amendment Agreement
with SSH LLCprovides
for:




·
            The salein February 2010by SSH LLC of a block of 4,823,000
      shares of the pledged stock to a third party for US$0.24per share, for a total of
      US$1,157,011 (aftercommissions),which wouldbe applied to the interestdue for the periodfrom January
      through May 2010
      ($146,581) andprepayment ofprincipal ($1,010,430).  The proceeds of this
      sale were placed in escrow pending stockholder approval of the
      agreement.




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




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




·
            Adjustment of theannualinterest ratefrom 5.0%to 6.5%effective in June 2010,payable
      January1 of each year, in
      arrears.




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





At June 30, 2010, the contractual
outstanding loan balance is $3,075,685, which is reduced by a valuation
allowance of $2,300,000, resulting in a net receivable balance of
$775,685.  Prior to the Prepayments described above,  the
contractual outstanding loan balance of the Note was $7,161,791.  The
Note is considered to be collateral dependent, as SSH LLC’s only means of
repayment is through liquidation of the underlying collateral.  At
December 31, 2008, the carrying amount was reduced by a $5.8 million valuation
allowance which was based on the estimated fair value of the underlying
collateral at that time.  In the fourth quarter of 2009, the Company
recorded a recovery in the value of the Note of $300,000 and a corresponding
decrease in the valuation allowance to $5.5 million. As a result of the above
described transaction, at March 31, 2010 the Company determined that the fair
value of the underlying collateral had increased and recorded an additional
recovery of $3.2 million.





In the absence of an active market for
the Company’s common stock, or other observable inputs for similar instruments,
the Company originally based its valuation of the underlying collateral on the
value of the March 2009 issuance of Series A Preferred Stock, adjusted using an
assumed discount rate of 20%, which was management’s estimate of the fair value
of the preferred features of the Series A Preferred Stock.  In
addition, management assumed that SSH LLC and/or its members would sell a
portion of the underlying collateral to meet their quarterly interest payments,
thereby reducing the amount of collateral expected to be available when the Note
was to mature in October 2010.




8


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)


The recovery of $3.2 million at March
31, 2010 was based on the remeasurement of a significant input used to value the
underlying collateral of the Note, due to recent events and activity which
indicated that the preferred stock price was no longer the best measure of the
fair value of our common stock.  The Company believes thata
better benchmark for fair value is the US$0.24 per share obtained by SSH LLC for
the 4.8 million shares sold to a third party in the first quarter of
2010.  Prior to the issuance of the March 31, 2010 financial
statements, the Company received the results of the appraisal required by the
NZX, which indicated that the agreement was fair to the non-SSH LLC
shareholders, and fully anticipated that stockholder approval of the Prepayment
and Amendment Agreement would be obtained at the Company’s annual
meeting.  In addition, the Company continued to meet growth
projections. Based on all of these
factors evaluated together, we believe the revised measurement is the
best representation of fair value for our common stock.   The
Company reviews the valuation of the Note each reporting period and believes the
value is properly stated at June 30, 2010.





6)
            Derivatives





The Company uses foreign currency
option contracts that are not designated as hedging instruments to manage
exposure to fluctuations in foreign currency.  The Company uses these
instruments as economic hedges and not for speculative or trading
purposes.  All foreign currency option contracts are recorded at fair
value in other current assets on the balance sheet and expire within three
months from the balance sheet date.  In the second quarter of 2010,
mark-to-market losses on foreign currency option contracts were not significant
to the Company’s consolidated financial condition or results of
operations.  There were no options or other derivative instruments
prior to the second quarter of 2010.





At June
30, 2010, the Company held option contracts with an aggregate U.S. dollar
notional value of $150,000 and a fair value of $5,679.





7)
            Fair value
      measurements





The following table details the fair
value measurements within the fair value hierarchy:




Fair value measurements at June 30, 2010 using:Outside prices in
            
            
            
            
            
            Significantactive markets
            
            
            Significant other
            
            
            unobservableusing identical
            
            
            observable inputs
            
            
            inputsTotal
            
            
            assets (Level 1)
            
            
            (Level 2)
            
            
            (Level 3)Foreign
      currency option contracts
            
            $
            5,679
            
            
            $
            -
            
            
            $
            5,679
            
            
            $
            -Note
      receivable from affiliate
            
            
            775,685
            
            
            
            -
            
            
            
            -
            
            
            
            775,685Total
            
            $
            781,364
            
            
            $
            -
            
            
            $
            5,679
            
            
            $
            775,685




The fair value of the foreign currency
option contracts is estimated based on the fair value of comparable
contracts.





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




9


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
  Six months
              
              
              Six monthsended
              
              
              endedJune 30,
              
              
              June 30,2010
              
              
              2009Balance
      at beginning of period
              
              $
              1,661,791
              
              
              $
              1,361,791Total
      gains or losses (unrealized/realized)Included
      in earnings (or changes in net assets)
              
              
              3,200,000
              
              
              
              -Included
      in other comprehensive income
              
              
              -
              
              
              
              -Purchases,
      issuances and settlements
              
              
              (4,086,106
              )
              
              
              -Transfers
      in and/or out of Level 3
              
              
              -
              
              
              
              -Ending
      balance
              
              $
              775,685
              
              
              $
              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
              
              $
              3,200,000
              
              
              $
              -


8)
            Line of credit
      facility





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





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





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





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





9)
            Redeemable Preferred
      Stock





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





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




10


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)


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





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





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





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





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





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





Accounting for Preferred Shares–If certain criteria are met, companies
must bifurcate conversion options from their host instruments and account for
them as free standing derivative instruments.  The Company has
evaluated the conversion
option on the Preferred Shares and determined that the embedded conversion
option should not be bifurcated.  Additionally, the Company analyzed
the conversion feature and determined that the effective conversion price was
higher than the market priceat date of issuance; therefore no
beneficial conversion feature was recorded.  The Companyhas 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)
becausethe contingency has not been met and it
is not probable that it will be met.  If the redemption were
considered likely to occur, the carrying value would be adjusted to its
liquidation value.





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





The carrying value of the Preferred
Shares atJune
30, 2010 andDecember 31,2009 is as follows:




11


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)


June 30,
              
              
              December 31,2010
              
              
              2009Gross
      proceeds
              
              $
              3,000,000
              
              
              $
              3,000,000Less:
      Issuance costs
              
              
              (138,850
              )
              
              
              (138,850
              )2,861,150
              
              
              
              2,861,150Issuance
      of PIK shares
              
              
              266,712
              
              
              
              -Cumulative
      amortization of issuance costs
              
              
              35,564
              
              
              
              21,989Cumulative
      in-kind dividend
              
              
              -
              
              
              
              266,712Balance
              
              $
              3,163,426
              
              
              $
              3,149,851




In 2010, the Company anticipates that
cash dividends will be paid on the Series A Preferred
Stock.  Accordingly, preferred stock dividends of $165,000for thesixmonths endedJune 30, 2010 are included in accrued expenses
and other current liabilities.





10)
            Stock
      option and incentive plan




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





In June
2010, the Company adopted the 2010 Stock Option and Incentive Plan (“the 2010
Plan”) authorizing the issuance of up to 5,000,000 shares of the Company’s
common stock as Incentive Stock Options and Non-Qualified Stock
Options.  Under the 2010 Plan, only employees are eligible for
Incentive Stock Options.  The 2010 Plan is to be administered by the
Remunerations and Nominations Committee pursuant to delegation by the Company's
Board of Directors, which will determine the number of shares, the term, the
frequency and date, the type, the exercise periods, and any performance criteria
pursuant to which stock option awards may be granted.  As of
June 30, 2010, no stock options have been awarded under the 2010
Plan.





Restricted
stock awards – On
October 23, 2008, the Company granted 600,000 shares of restricted stock to two
officers in accordance with the terms of their employment agreements, which
included 250,000 shares which vested immediately, 250,000 shares which vested on
February 15, 2009, and 100,000 shares which vested on May 15, 2009, based on
continued employment through those dates.  The estimated fair value of
the shares at the award date was measured using the closing price of NZD0.25
(US$0.14) per share on the date of grant.





During the six months ended June 30,
2010 and June 30, 2009, the Company recognized share-based compensation costs
related to restricted stock awards of $0 and $23,099,
respectively.  At June 30, 2010 all restricted stock is fully vested
and there is no unrecognized compensation cost.





Stock
option awards –
On August 20, 2009 the Board of Directors approved the Stock Option Agreement,
which contains the terms and conditions with respect to stock options granted by
the Company under the 2007 Plan.  On that date, the Board of Directors
awarded 3,650,000 stock options to officers and an additional 100,000 options to
two former outside directors of the Company.  On October 9, 2009, the
Company granted an additional 910,003 shares to employees.





12


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)


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
in 2009 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 per
share.





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





Options
                          
                          
                          Weighted
                            average
                            exercise price
                          
                          Weighted average
                            remaining
                            contractualtermOutstanding
      at January 1, 2010
                          
                          
                          4,660,003
                          
                          
                          $
                          .1439Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          45,000
                          
                          
                          
                          .1439Outstanding
      at June 30, 2010
                          
                          
                          4,615,003
                          
                          
                          
                          .1439
                          
                          9.17
      yearsExercisable
      at June 30, 2010
                          
                          
                          300,000
                          
                          
                          
                          .1439





During the six months ended June 30,
2010, the Company recognized share-based compensation costs related to stock
options of $223,754.  At June 30, 2010 there was $244,027 of
unrecognized share-based compensation expense related to options granted that
will be recognized over the next 2.25 years.





11)
            Income
      taxes





The
Company records an income tax provision for foreign tax obligations in New
Zealand.  No US or UK current income taxes have been provided due to
tax losses incurred.  The Company has recordeda full valuation allowance against all
US deferred tax assets,
because management is unable to conclude thatit is more likely than not
that the deferred tax assets will be realized.





The Company and its subsidiaries are
subject to regular audits by federal, state and foreign tax
authorities.  These audits may result in additional tax
liabilities.  The Company’s federal, state and foreign income tax
returns for the 2007 through 2009 tax years are open for examination by the
respective taxing jurisdictions.


13




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




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





Overview





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





Software-as-a-Service
(“SaaS”) Model





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





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





SaaS
Benefits





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





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





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





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





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





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


14




Diligent’s
History




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





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





In the
first half of 2010, the Company recorded a number of milestones, none more
pleasing than recording our best ever start to the year.  At the half
way mark of the 2010 year, the Company has added license fees of $1.28 million,
up significantly over the $0.99 million from the same time in 2009 and $0.81
million in 2008.  Encouragingly, the sales momentum generated during
the first half of 2010 is expected to continue throughout the remainder of the
year.  The Company’s income consists of subscription-based revenue
that recurs each year and increases with each new license agreement or
upgrade.  Year on year, our sales revenue is up 70% while operational
costs have decreased approximately 3%.  Moreover, our customer
satisfaction is such that we continue to enjoy a high retention rate – in fact
not only are customers demonstrably happy with the Boardbook product and
services, customer upgrades continue to provide a significant boost to
sales.  In fact, the second quarter of 2010 represented the best
quarter ever for upgrades from existing Diligent customers.   The
Company now has over 350 worldwide clients and more than 9,500 users of its
Boardbooks product.





Critical
Accounting Policies and Estimates





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




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


15




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




Revenues
and Accounts Receivable





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





The Company recognizes revenue when all
of the following criteria are met: (a) persuasive evidence of the arrangement
exists, (b) delivery has occurred or services have been rendered, (c) the
seller’s price to the buyer is fixed and determinable and (d) collectability is
reasonably assured.  Revenue from the Boardbooks licenses is recorded
ratably over the contract period, which is generally twelve
months.  License fees paid in advance are recorded as deferred revenue
until recognized.  The Company generally invoices its customers in
annual installments.  Accordingly, the deferred revenue balance does
not represent the total contract value of annual or multi-year, noncancelable
subscription agreements.  The Company also earns fees for set-up and
training (“installation fees”) of the Boardbooks
system.  Historically, installation fees were recognized upon
completion of the installation.





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





Cost
of Revenues and Operating Expenses





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





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





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





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





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





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





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.


16




The
Company measures compensation cost for awards granted to non-employees based on
the fair value of the award at the measurement date, which is the date
performance is satisfied or services are rendered by the
non-employee.





Interest
Income (Expense), net





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





Foreign
Exchange





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





The
Company’s wholly-owned subsidiaries, 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.





The
Company uses foreign currency option contracts that are not designated as
hedging instruments to manage exposure to fluctuations in foreign
currency.  The Company uses these instruments as economic hedges and
not for speculative or trading purposes.  All foreign currency option
contracts are recorded at fair value in other current assets on the balance
sheet and unrealized gains or losses at the balance sheet date are recorded in
the income statement.





Income
taxes





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





The Company and its subsidiaries are
subject to regular audits by federal, state and foreign tax
authorities.  These audits may result in additional tax
liabilities.  The Company’s federal, state and foreign income tax
returns for the 2007 through 2009 tax years are open for examination by the
respective taxing jurisdictions.





Note
receivable from affiliate





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





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


17




The Prepayment and Amendment Agreement
with SSH LLC provides for:




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


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


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


·
            Adjustment
      of the annual interest rate from 5.0% to 6.5% effective in June 2010,
      payable January 1 of each year, in
arrears.




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





At June 30, 2010, the contractual
outstanding loan balance is $3,075,685, which is reduced by a valuation
allowance of $2,300,000, resulting in a net receivable balance of
$775,685.  Prior to the Prepayments described above,  the
contractual outstanding loan balance of the Note was $7,161,791.  The
Note is considered to be collateral dependent, as SSH LLC’s only means of
repayment is through liquidation of the underlying collateral.  At
December 31, 2008, the carrying amount was reduced by a $5.8 million valuation
allowance which was based on the estimated fair value of the underlying
collateral at that time.  In the fourth quarter of 2009, the Company
recorded a recovery in the value of the Note of $300,000 and a corresponding
decrease in the valuation allowance to $5.5 million. As a result of the above
described transaction, at March 31, 2010 the Company determined that the fair
value of the underlying collateral had increased and recorded an additional
recovery of $3.2 million.





In the absence of an active market for
the Company’s common stock, or other observable inputs for similar instruments,
the Company originally based its valuation of the underlying collateral on the
value of the March 2009 issuance of Series A Preferred Stock, adjusted using an
assumed discount rate of 20%, which was management’s estimate of the fair value
of the preferred features of the Series A Preferred Stock.  In
addition, management assumed that SSH LLC and/or its members would sell a
portion of the underlying collateral to meet their quarterly interest payments,
thereby reducing the amount of collateral expected to be available when the Note
was to mature in October 2010.




The recovery of $3.2 million at March
31, 2010 was based on the remeasurement of a significant input used to value the
underlying collateral of the Note, due to recent events and activity which
indicated that the preferred stock price was no longer the best measure of the
fair value of our common stock.  The Company believes that a better
benchmark for fair value is the US$0.24 per share obtained by SSH LLC for the
4.8 million shares sold to a third party in the first quarter of
2010.  Prior to the issuance of the March 31, 2010 financial
statements, the Company received the results of the appraisal required by the
NZX, which indicated that the agreement was fair to the non-SSH LLC
shareholders, and fully anticipated that stockholder approval of the Prepayment
and Amendment Agreement would be obtained at the Company’s annual
meeting.  In addition, the Company continued to meet growth
projections. Based on all of these factors evaluated together, we believe the
revised measurement is the best representation of fair value for our common
stock.   The Company reviews the valuation of the Note each
reporting period and believes the value is properly stated at June 30,
2010.


18




Recent
Accounting Pronouncements





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


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





Revenues





Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Revenues
                
                $
                1,915,405
                
                
                $
                1,156,732
                
                
                $
                758,673





The growth in total revenues of 66% in
the second quarter of 2010 when compared with the 2009 second quarter is a
result of the cumulative addition of license agreements each
quarter.  The Company has continued to add license agreements each
quarter since inception.  At June 30, 2010, the cumulative license
agreements were 356, compared with 213 at June 30, 2009.  A net of 36
new licenses were added during the second quarter of 2010, compared with 20 for
the second quarter of 2009.  This increase in revenues is in line with
our targets and was achieved at a significantly lower customer acquisition
cost.  All of the deferred revenue of $1.7 million recorded on the
balance sheet at June 30, 2010 will be recognized as revenue in the next twelve
months, including $0.9 million which will be recognized in the third and fourth
quarters of 2010.





Cost
of Revenues and Operating Expenses





Cost
of Revenues





Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Cost
      of Revenues
                
                $
                659,556
                
                
                $
                539,834
                
                
                $
                119,722





Cost of revenues is comprised of
account management, customer support and IT services.  For the three
months ended June 30, 2010, employee costs included in cost of revenues
increased by approximately $109 thousand as compared to the three months ended
June 30, 2009, primarily as a result of a realignment of certain management
responsibilities from research and development to account management, and an
increase in head count to support our larger client base. The remainder of the
increase in cost of revenues is primarily attributable to an increase in hosting
costs of approximately $13 thousand, which has increased primarily due to
hosting facilities the Company has added as a result of the growth in the number
of users.





Cost of revenues as a percentage of
revenues decreased to 34.4% for the second quarter of 2010, compared with 46.7%
for the second quarter of 2009, as a result of the greater economies that we
have achieved as our client base increased.





Selling
and Marketing Expenses





Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Selling
      and Marketing Expenses
                
                $
                739,991
                
                
                $
                593,064
                
                
                $
                146,927





Selling and marketing expenses are
higher in the second quarter of 2010 as compared to the comparable 2009 quarter
as a result of an increase in salaries and commissions of $44 thousand,
advertising expenses of $74 thousand and foreign selling expenses of $21
thousand, primarily in the UK.


19




General
and Administrative Expenses




Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)General
      and Administrative Expenses
                
                $
                882,818
                
                
                $
                995,598
                
                
                $
                (112,780
                )





The decrease in general and
administrative expenses is comprised of an increase in share-based compensation
expense of $103 thousand relating to stock options issued at the second half of
2009, offset by decreases in professional fees of $143 thousand, employee
compensation of $40 thousand, rent and office costs of $20 thousand and travel
expenses of $18 thousand.  The decrease in professional fees is
attributable to the inclusion in the first half of 2009 of incremental
professional fees associated with the requirements of becoming a public company
in the U.S.





Research
and Development Expenses





Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Research
      and Development Expenses
                
                $
                233,742
                
                
                $
                199,238
                
                
                $
                34,504





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





Depreciation
and Amortization





Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Depreciation
      and Amortization
                
                $
                114,707
                
                
                $
                94,404
                
                
                $
                20,303





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




Interest
Income, net





Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Interest
      Income, net
                
                $
                68,535
                
                
                $
                100,855
                
                
                $
                (32,320
                )





Interest income, net, includes interest
income on the Note Receivable from our affiliate, as well as interest on the
Company’s cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the decrease in our cash and term deposit balances from $1.9 million at June 30,
2009 to $1.1 million at June 30, 2010.




Foreign
Exchange Transaction Gain(Loss)





Three months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Foreign
      Exchange Transaction Gain(Loss)
                
                $
                1,018
                
                
                $
                41,796
                
                
                $
                (40,778
                )





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


20




Other
Income





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





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




Results
of Operations for the Six Months Ended June 30, 2010 and 2009





Revenues





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Revenues
                
                $
                3,662,882
                
                
                $
                2,153,904
                
                
                $
                1,508,978





The
growth in revenues of 70% in the first two quarters of 2010 when compared with
the first two quarters of 2009 is a result of the cumulative addition of license
agreements each quarter.  The Company has continued to add license
agreements each quarter since inception.  At June 30, 2010, the
cumulative license agreements were 356, compared with 213 at June 30,
2009.  A net of 72 new licenses were added during the first two
quarters of 2010, compared with 39 for the first two quarters of
2009.  This increase in revenues is in line with our targets and was
achieved at a significantly lower customer acquisition cost. All of the deferred
revenue of $1.7 million recorded on the balance sheet at June 30, 2010 will be
recognized as revenue in the next twelve months, including $0.9 million which
will be recognized in the third and fourth quarters of 2010.





Cost
of Revenues and Operating Expenses





Cost
of Revenues





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Cost
      of Revenues
                
                $
                1,282,220
                
                
                $
                995,567
                
                
                $
                286,653





Cost of revenues is comprised of
account management, customer support and IT services.  For the six
months ended June 30, 2010, employee costs included in cost of revenues
increased by approximately $227 thousand as compared to the six months ended
June 30, 2009, primarily as a result of a realignment of certain management
responsibilities from research and development to account management, and an
increase in head count to support our larger client base. Additionally, travel
costs increased by approximately $22 thousand due to increased client visits by
account management.  The remainder of the increase in cost of revenues
is attributable to an increase in hosting costs of approximately $30 thousand,
which has increased primarily due to hosting facilities the Company has added as
a result of the growth in the number of users.





Cost of revenues as a percentage of
revenues decreased to 35.0% for the first half of 2010, compared with 46.2% for
the first half of 2009, as a result of the greater economies that we have
achieved as our client base increased.





Selling
and Marketing Expenses





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Selling
      and Marketing Expenses
                
                $
                1,306,877
                
                
                $
                1,273,661
                
                
                $
                33,216





Selling and marketing expenses are
slightly higher in the first half of 2010 as compared to the comparable 2009
period as a result of a slight decrease in our North American sales force offset
by an increase in advertising expenses.


21




General
and Administrative Expenses





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)General
      and Administrative Expenses
                
                $
                1,884,437
                
                
                $
                2,124,041
                
                
                $
                (239,604
                )





The decrease in general and
administrative expenses is comprised of an increase in share-based compensation
expense of $200 thousand relating to stock options issued at the second half of
2009, offset by decreases in professional fees of $334 thousand, employee
compensation of $52 thousand, rent and office costs of $43 thousand and travel
expenses of $11 thousand.  The decrease in professional fees is
attributable to the inclusion in the first half of 2009 of incremental
professional fees associated with the requirements of becoming a public company
in the U.S.





Research
and Development Expenses





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Research
      and Development Expenses
                
                $
                410,888
                
                
                $
                358,927
                
                
                $
                51,961





Our research and development is
performed primarily by our New Zealand subsidiary.  The New Zealand
expenses for the first six months of 2010 in local currency decreased slightly
over the comparable 2009 period due to the realignment of certain management
responsibilities from research and development to account management, offset
slightly by an increase in headcount in the second quarter of
2010.  This was offset by the difference in the average US$/NZD
exchange rates for the periods resulting in an additional increase when measured
in US dollars.





Depreciation
and Amortization





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Depreciation
      and Amortization
                
                $
                229,903
                
                
                $
                183,961
                
                
                $
                45,942





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





Impairment
recovery on note receivable from affiliate





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Impairment
      recovery on note receivable from affiliate
                
                $
                3,200,000
                
                
                $
                -
                
                
                $
                3,200,000





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





Interest
Income, net





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Interest
      Income, net
                
                $
                144,382
                
                
                $
                185,642
                
                
                $
                (41,260
                )





Interest income, net, includes interest
income on the Note Receivable from our affiliate, as well as interest on the
Company’s cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the decrease in our cash and term deposit balances from $1.9 million at June 30,
2009 to $1.1 million at June 30, 2010.


22




Foreign
Exchange Transaction Gain/(Loss)





Six months ended June 30,2010
                
                
                2009
                
                
                Increase/(Decrease)Foreign
      Exchange Gain/(Loss)
                
                $
                (38,611
                )
                
                $
                (893
                )
                
                $
                (37,718
                )





The parent Company maintains a portion
of its cash and receivable balances in foreign currencies, primarily the NZD and
GBP.  The foreign exchange losses for the six months ended June 30,
2010 and 2009, are a result of the strengthening of the US dollar against both
NZD and GBP during those periods, more significantly so in 2010.




Other
Income





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





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




Liquidity
and Capital Resources





The primary source of our liquidity for
the past year has been the $2.9 million of financing obtained from our Series A
Preferred Stock issued in March 2009.  At June 30, 2010, our sources
of liquidity consist of cash and term deposits of approximately $1.1
million.





In February 2010, Services Share
Holding, LLC sold approximately 4.8 million shares of Company stock pledged as
collateral for the Note receivable from affiliate for approximately $1.2
million.  The proceeds were placed in escrow pending stockholder
approval at our annual stockholders’ meeting on June 8, 2010, as required by the
New Zealand Stock Exchange listing rules.  The sale was approved and
we received approximately $0.2 million interest in cash in April and May 2010
and a $1.0 million principal prepayment in cash in June
2010,  providing us with additional 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 $1.0 million revolving line of credit facility to the
Company.  This line of credit offers the Company additional cash flow
support if needed. As of June 30, 2010, the Company has no borrowings under this
credit facility.





The Company continues to consider and
evaluate strategic growth opportunities that could result in a need for
additional capital not currently within the Company’s 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.




Cash
flows





Six months ended June 30,2010
                  
                  
                  2009Cash
      provided by (used in):Operating
      activities
                  
                  $
                  (919,999
                  )
                  
                  $
                  (2,021,604
                  )Investing
      activities
                  
                  $
                  (88,975
                  )
                  
                  $
                  (184,213
                  )Financing
      activities
                  
                  $
                  947,453
                  
                  
                  $
                  2,795,521


23




Net Cash Flows from Operating
Activities





Cash used in operating activities for
the six months ended June 30, 2010 was $920 thousand, compared with $2,022
thousand for the first half of 2009.  The Company has been reducing
its cash burn rate from operations, primarily from increased revenues coupled
with a reduction in operating expenses.





Net Cash Flows from Investing
Activities





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





Net Cash Flows from Financing
Activities





In the
first half of 2010, cash received from financing activities consists principally
of the $1.0 million received from a prepayment of the Note receivable from
affiliate.  During the first half of 2009, the Company secured $2.9
million in financing, net of issuance costs, from the issuance of Series A
Preferred Stock.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





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





Item
4T. Controls and Procedures.





(a)  Evaluation of
disclosure controls and procedures.As of the end of the
quarter ended June 30, 2010, our Chief Executive Officer and Chief Financial
Officer have each reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act).  Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have each concluded that our current disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.





(b)  Changes in Internal
Controls.There has been no change in the Company’s internal
control over financial reporting required by Exchange Act Rule 13a-15 or 15d-15
that occurred during the fiscal quarter ended June 30, 2010 that has materially
affected, or is reasonably likely to materially affect Diligent Board Member
Services, Inc.’s internal control over financial reporting.





PART
II—OTHER INFORMATION





Item
1. Legal Proceedings.





None





Item
1A. Risk Factors.





Not
required





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





None


24




Item
3. Defaults Upon Senior Securities.





Not
applicable





Item
4. [Reserved]





Item
5. Other Information.





Not applicable





Item
6. Exhibits.





Exhibit
                  Numbers
                
                Exhibits31.1
                
                CEO
      Certification pursuant to Rule 13a-14(a)31.2
                
                CFO
      Certification pursuant to Rule 13a-14(a)32.1
                
                CEO
      Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C.
      135032.2
                
                CFO
      Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C.
      1350


25




SIGNATURES





Pursuant
to the requirements on the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




DILIGENT
      BOARD MEMBER SERVICES, INC.Dated:  August
      10, 2010
                    By:
                    /s/ Alessandro SodiAlessandro
      Sodi, Chief Executive Officer (Principal Executive
  Officer)Dated:  August
      10, 2010
                    By:
                    /s/ Steven P. RuseSteven
      P. Ruse, Chief Financial Officer (Principal Financial
    Officer)


26