UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 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 March 31, 2010




OR




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




For
the transition period from   to _________________




Commission
file number 000-53205




Diligent
Board Member Services, Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
              
              26-1189601(State
      or Other Jurisdiction
              
              (I.R.S.
      Employerof
      Incorporation or Organization)
              
              Identification
      No.)





39
West 37 St. 8th Floor, New York, NY, 10018


(Address
of Principal Executive Offices)(Zip Code)




(212)
741-8181


(Registrant’s
telephone number, including area code)





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 “accelerated filer, “large accelerated
filer” and smaller company: in Rule 12b-2 of the Exchange Act. (Check
One):




 ̈
      Large accelerated filer
                 ̈
      Accelerated filer ̈
      Non-accelerated filer
                xSmaller Reporting
      Company





Indicate
by checkmark 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 May 3, 2010
was 90,440,000.







(THIS
PAGE INTENTIONALLY LEFT BLANK)







CONTENTS




PAGEForward
      Looking Statements
                                            iiAvailable
      Information
                                            iiPART
      I – Financial InformationItem
      1.
                                            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
                                            22Item
      4T.
                                            Controls
      and Procedures
                                            22PART
      II – Other InformationItem
      1.
                                            Legal
      Proceedings
                                            22Item
      1A.
                                            Risk
      Factors
                                            22Item
      2.
                                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                                            22Item
      3.
                                            Defaults
      Upon Senior Securities
                                            22Item
      4.
                                            [Reserved]
                                            22Item
      5.
                                            Other
      Information
                                            22Item
      6.
                                            Exhibits
                                            23SIGNATURES
                                            24




i





FORWARD
LOOKING STATEMENTS





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





AVAILABLE
INFORMATION




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


ii




PART
1 – FINANCIAL INFORMATION


Item
1.  Consolidated Financial Statements.


Diligent
Board Member Services, Inc.


Consolidated
Balance Sheets




March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      622,135
                      
                      
                      $
                      1,129,591Term
      deposit
                      
                      
                      70,950
                      
                      
                      
                      72,530Accounts
      receivable, net
                      
                      
                      296,371
                      
                      
                      
                      303,331Prepaid
      expenses and other current assets
                      
                      
                      297,028
                      
                      
                      
                      183,368Total
      current assets
                      
                      
                      1,286,484
                      
                      
                      
                      1,688,820Property
      and equipment, net
                      
                      
                      1,252,464
                      
                      
                      
                      1,312,959Note
      receivable from affiliate, net of valuation allowance
                      
                      
                      4,861,791
                      
                      
                      
                      1,661,791Restricted
      cash - security deposits
                      
                      
                      222,525
                      
                      
                      
                      221,886Total
      assets
                      
                      $
                      7,623,264
                      
                      
                      $
                      4,885,456LIABILITIES AND STOCKHOLDERS' EQUITY
      (DEFICIENCY)Current
      liabilities:Accounts
      payable and accrued expenses
                      
                      $
                      580,918
                      
                      
                      $
                      397,840Deferred
      revenue
                      
                      
                      1,657,385
                      
                      
                      
                      1,593,351Current
      portion of obligations under capital leases
                      
                      
                      102,319
                      
                      
                      
                      113,418Payables
      to affiliates
                      
                      
                      5,272
                      
                      
                      
                      5,762Total
      current liabilities
                      
                      
                      2,345,894
                      
                      
                      
                      2,110,371Non-current
      liabilities:Obligations
      under capital leases, less current portion
                      
                      
                      126,325
                      
                      
                      
                      147,091Other
      noncurrent liabilities
                      
                      
                      46,970
                      
                      
                      
                      44,252Total
      non-current liabilities
                      
                      
                      173,295
                      
                      
                      
                      191,343Total
      liabilities
                      
                      
                      2,519,189
                      
                      
                      
                      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 $4,982,568 and $4,766,712)
                      
                      
                      3,156,593
                      
                      
                      
                      3,149,851Stockholders'
      equity (deficiency):Common
      Stock, $.001 par value, 250,000,000 shares authorized, 90,440,000 shares
      issued and outstanding
                      
                      
                      90,440
                      
                      
                      
                      90,440Additional
      paid-in capital
                      
                      
                      24,560,726
                      
                      
                      
                      24,532,622Accumulated
      deficit
                      
                      
                      (22,694,102
                      )
                      
                      
                      (25,180,648
                      )Accumulated
      other comprehensive loss
                      
                      
                      (9,582
                      )
                      
                      
                      (8,523
                      )Total
      stockholders' equity (deficiency)
                      
                      
                      1,947,482
                      
                      
                      
                      (566,109
                      )Total
      liabilities, redeemable preferred stock and stockholders' equity
      (deficiency)
                      
                      $
                      7,623,264
                      
                      
                      $
                      4,885,456




See
accompanying notes to consolidated financial statements





1




Diligent
Board Member Services, Inc.


Consolidated
Statements of Operations


(Unaudited)





ThreeMonthsEndedMarch31,2010
                
                
                2009Revenues
                
                $
                1,747,476
                
                
                $
                997,172Cost
      of revenues
                
                
                622,664
                
                
                
                455,733Gross
      profit
                
                
                1,124,812
                
                
                
                541,439Operating
      expenses:Selling
      and marketing expenses
                
                
                566,885
                
                
                
                680,597General
      and administrative expenses
                
                
                1,001,619
                
                
                
                1,128,443Research
      and development expenses
                
                
                177,146
                
                
                
                159,689Depreciation
      and amortization
                
                
                115,196
                
                
                
                89,557Total
      operating expenses
                
                
                1,860,846
                
                
                
                2,058,286Operating
      loss
                
                
                (736,034
                )
                
                
                (1,516,847
                )Other
      income:Impairment
      recovery on note receivable from affiliate
                
                
                3,200,000
                
                
                
                -Interest
      income, net
                
                
                75,847
                
                
                
                84,787Foreign
      exchange transaction loss
                
                
                (39,629
                )
                
                
                (42,689
                )Total
      other income
                
                
                3,236,218
                
                
                
                42,098Income
      (loss) before provision for income taxes
                
                
                2,500,184
                
                
                
                (1,474,749
                )Provision
      for income taxes
                
                
                13,638
                
                
                
                6,056Net
      income (loss)
                
                $
                2,486,546
                
                
                $
                (1,480,805
                )Net
      income (loss) per share:Basic
                
                $
                0.03
                
                
                $
                (0.02
                )Diluted
                
                $
                0.02
                
                
                $
                (0.02
                )Weighted
      average shares outstanding:Basic
                
                
                90,440,000
                
                
                
                90,212,222Diluted
                
                
                124,827,532
                
                
                
                90,212,222




See
accompanying notes to consolidated financial statements


2




Diligent
Board Member Services, Inc.


Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency)


and
Comprehensive Loss


Three
Months Ended March 31, 2010





Accumulated
                            
                            
                            TotalCommon
                            
                            
                            Additional
                            
                            
                            
                            
                            
                            Other
                            
                            
                            Stockholders'Common
                            
                            
                            Stock
                            
                            
                            Paid-in-
                            
                            
                            Accumulated
                            
                            
                            Comprehensive
                            
                            
                            Equity/Shares
                            
                            
                            $.001
      Par Value
                            
                            
                            Capital
                            
                            
                            Deficit
                            
                            
                            (Loss)
                            
                            
                            (Deficiency)Balance
      at January 1, 2010
                            
                            
                            90,440,000
                            
                            
                            $
                            90,440
                            
                            
                            $
                            24,532,622
                            
                            
                            $
                            (25,180,648
                            )
                            
                            $
                            (8,523
                            )
                            
                            $
                            (566,109
                            )Net
      income
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,486,546
                            
                            
                            
                            -Foreign
      exchange translation adjustment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,059
                            )Total
      comprehensive income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,485,487Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            117,346
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            117,346Amortization
      of offering costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (6,742
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (6,742
                            )Accrued
      preferred stock dividend
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (82,500
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (82,500
                            )Balance
      at March 31, 2010
    (Unaudited)
                            
                            
                            90,440,000
                            
                            
                            $
                            90,440
                            
                            
                            $
                            24,560,726
                            
                            
                            $
                            (22,694,102
                            )
                            
                            $
                            (9,582
                            )
                            
                            $
                            1,947,482




See
accompanying notes to consolidated financial statements


3


Diligent
Board Member Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)





ThreeMonthsEndedMarch31,2010
                
                
                2009Cash
      flows from operating activities:Net
      income (loss)
                
                $
                2,486,546
                
                
                $
                (1,480,805
                )Adjustments
      to reconcile net income (loss) to cash used in operating
      activities:Impairment
      recovery on note receivable from affiliate
                
                
                (3,200,000
                )
                
                
                -Depreciation
      and amortization
                
                
                115,196
                
                
                
                89,557Share-based
      compensation
                
                
                117,346
                
                
                
                20,026Straight-line
      rent adjustment
                
                
                2,718
                
                
                
                36,100Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                6,960
                
                
                
                86,068Prepaid
      expenses and other current assets
                
                
                (113,660
                )
                
                
                (13,566
                )Restricted
      cash - security deposits
                
                
                (639
                )
                
                
                9,621Accounts
      payable and accrued expenses, net
                
                
                100,578
                
                
                
                163,207Deferred
      revenue
                
                
                64,034
                
                
                
                150,007Payable
      to affiliates
                
                
                (490
                )
                
                
                (1,961
                )Net
      cash used in operating activities
                
                
                (421,411
                )
                
                
                (941,746
                )Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (50,084
                )
                
                
                (27,586
                )Net
      cash used in investing activities
                
                
                (50,084
                )
                
                
                (27,586
                )Cash
      flows from financing activities:Net
      proceeds from preferred stock issuance
                
                
                -
                
                
                
                2,861,150Payments
      of obligations under capital leases
                
                
                (31,865
                )
                
                
                (31,735
                )Net
      cash (used in) provided by financing activities
                
                
                (31,865
                )
                
                
                2,829,415Effect
      of exchange rates on cash and cash equivalents
                
                
                (4,096
                )
                
                
                (7,118
                )Net
      (decrease) increase in cash and cash equivalents
                
                
                (507,456
                )
                
                
                1,852,965Cash
      and cash equivalents at beginning of period
                
                
                1,129,591
                
                
                
                1,265,347Cash
      and cash equivalents at end of period
                
                $
                622,135
                
                
                $
                3,118,312Supplemental
      disclosure of cash flow information:Cash
      paid during the period for :Interest
                
                $
                16,760
                
                
                $
                8,288Income
      taxes
                
                $
                4,686
                
                
                $
                7,920Supplemental
      disclosure of noncash investing and financing activities:Property
      and equipment acquired under capital leases
                
                $
                -
                
                
                $
                46,201





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
was formed on December 14, 2006, to provide European sales and marketing
services.  DBL was inactive until April 2008.  Diligent,
together with its subsidiaries, are hereinafter referred to as “the
Company”.





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





The
Company has evaluated all subsequent events through the filing date of this Form
10-Q with the SEC, to ensure that this Form 10-Q includes subsequent events that
should be recognized in the financial statements as of March 31, 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 March 31, 2010, our sources of liquidity consist of cash and
term deposits of approximately $700 thousand.





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 in June 2010,
as required by the New Zealand Stock Exchange listing rules (See Note
5).  If approved by our stockholders at our annual meeting in June
2010, we will then receive approximately $0.2 million interest through May 2010
and a $1.0 million principal prepayment in cash,  providing us with
additional liquidity.  If the transaction is not ratified by the
stockholders at the annual meeting, the $1.0 million will be received by the
Company on October 1, 2010,  the original maturity date of the Note.
With the exception of scheduled interest payments, the Company has not included
the collection of the principal balance of the Note receivable in its liquidity
planning.





In March
2010, the Company entered into an agreement with Spring Street Partners, L.P.
(“the Lender”) pursuant to which the Lender extended a $1.0 million revolving
line of credit facility to the Company (See Note 6).  This line of
credit offers the Company additional cash flow support if
needed.


5


Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements


(Unaudited)





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.





3)
            Significant
      accounting policies





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





In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements.  The
results of operations for the three months ended March 31, 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 Company’s financial instruments
include cash and cash equivalents, term deposits, accounts receivable, accounts
payable and accrued expenses.  The fair value of these financial
instruments approximates book value due to their short term
settlements.  Financial instruments also include the Note receivable
from affiliate (see Note 5).





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





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





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





Diluted
net income (loss) per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, unless the effect is anti-dilutive.  Stock options,
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 the
three months ended March 31, 2009 as they were anti-dilutive.





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)





ThreemonthsendedMarch31,2010
                  
                  
                  2009Numerator:Net
      income (loss)
                  
                  $
                  2,486,546
                  
                  
                  $
                  (1,480,805
                  )Preferred
      stock dividends
                  
                  
                  (82,500
                  )
                  
                  
                  -Basic
      net income (loss) available to common shareholders
                  
                  $
                  2,404,046
                  
                  
                  $
                  (1,480,805
                  )Diluted
      net income (loss) available to common shareholders
                  
                  $
                  2,486,546
                  
                  
                  $
                  (1,480,805
                  )Denominator:Basic
      weighted average shares outstanding
                  
                  
                  90,440,000
                  
                  
                  
                  90,212,222Dilutive
      effect of stock options
                  
                  
                  1,720,409
                  
                  
                  
                  -Dilutive
      effect of convertible preferred stock
                  
                  
                  32,667,123
                  
                  
                  
                  -Diluted
      weighted average shares outstanding
                  
                  
                  124,827,532
                  
                  
                  
                  90,212,222Basic
      earnings (loss) per share
                  
                  $
                  0.03
                  
                  
                  $
                  (0.02
                  )Diluted
      earnings (loss) per share
                  
                  $
                  0.02
                  
                  
                  $
                  (0.02
                  )





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





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





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





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





4)
            Term
      deposit





At March
31, 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$70,950)
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”).





The Note
bears interest at 5% per annum, which is payable in arrears on the first day of
each calendar quarter, commencing April 1, 2008.  The loan matures on
October 1, 2010, when the entire principal balance and all accrued interest will
be due and payable.  It was secured by 25,000,000 shares of the
Company’s stock which were pledged as collateral by members of SSH LLC. As
permitted under the Note agreement, a portion of the pledged shares have been
sold by SSH LLC in order to obtain funds to make the quarterly interest
payments.  At March 31, 2010, the remaining number of shares
securing the Note was 16,855,597.




In
February 2010, the Company entered into the Prepayment and Amendment Agreement
with SSH LLC, which provides for:




·
            The
      sale 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 will be applied to the interest due for the period from
      January through May 2010 ($146,581) and as a prepayment of principal
      ($1,010,430),




·
            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 is subject to the approval of the Company’s shareholders at the annual
meeting on June 8, 2010, and is contingent on the receipt of an appraisal
attesting to the fairness of the transaction to the shareholders unrelated to
SSH LLC. If approved, the amended Note will have an outstanding principal
balance of $3,075,685 and will be secured by 5,205,597 shares of the Company’s
common stock pledged by the members of SSH LLC.  The sale of the 4.8
million shares by SSH LLC to a third party occurred in February 2010 and the
proceeds were placed in escrow pending the shareholder approval of the
agreement.  If not approved, the proceeds will be delivered to the
Company on October 1, 2010, the original maturity date of the Note.





At March
31, 2010 and December 31, 2009, 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.  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)





At March
31, 2010, the Company remeasured a significant input used to value the
underlying collateral of the Note and recorded a recovery of $3.2
million.  The remeasurement was based on recent events and activity
which indicate that the preferred stock price is 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.  The Company has received the results of the appraisal required
by the NZX, which indicates that the agreement is fair to the non-SSH LLC
shareholders. The Company anticipates that shareholder approval of the
Prepayment and Amendment Agreement related to the Note will be obtained at the
Company’s annual meeting.  In addition, the Company has continued to
meet growth projections through the first quarter of 2010, and the sustained
upward climb in our stock price shows that market confidence has been restored
by the Company’s steady but controlled growth. 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 Note
is the only financial instrument held by the Company for which a fair value
measurement is made using significant inputs.  A reconciliation of the
beginning and ending balances of the Note is as follows:





Three months
                  
                  
                  Three monthsended
                  
                  
                  endedMarch 31,
                  
                  
                  March 31,2010
                  
                  
                  2009Balance
      at beginning of period
                  
                  $
                  1,661,791
                  
                  
                  $
                  1,361,791Total
      gains or losses (unrealized/realized)Included
      in earnings (or changes in net assets)
                  
                  
                  3,200,000
                  
                  
                  
                  -Included
      in other comprehensive income
                  
                  
                  -
                  
                  
                  
                  -Purchases,
      issuances and settlements
                  
                  
                  -
                  
                  
                  
                  -Transfers
      in and/or out of Level 3
                  
                  
                  -
                  
                  
                  
                  -Ending
      balance
                  
                  $
                  4,861,791
                  
                  
                  $
                  1,361,791The
      amount of total gains or losses for the period included in earnings (or
      changes in net assets) attributable to the change in unrealized gains or
      losses relating to assets still held at the reporting date
                  
                  $
                  3,200,000
                  
                  
                  $
                  -





6)
            Line
      of Credit Facility





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





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


9


Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements


(Unaudited)





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





As of
March 31, 2010, the Company has not borrowed any amounts under this credit
facility.





7)
            Redeemable
      Preferred Stock





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





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





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





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





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





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





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





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





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


10


Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements


(Unaudited)





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 March 31, 2010 are 32,667,123.





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





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
                  
                  
                  28,731
                  
                  
                  
                  -Balance
      at March 31
                  
                  $
                  3,156,593
                  
                  
                  $
                  2,861,150





In 2010,
the Company anticipates that cash dividends will be paid on the Series A
Preferred Stock.  Accordingly, preferred stock dividends of $82,500
for the three months ended March 31, 2010 are included in accrued expenses and
other current liabilities.





8)
            Stockholders’
      equity (deficiency)





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





9)
            Stock
      option and incentive plan





In
November 2007, the Company adopted the 2007 Stock Option and Incentive Plan
(“the 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 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 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.


11


Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements


(Unaudited)





During
the three months ended March 31, 2010 and March 31, 2009, the Company recognized
share-based compensation costs related to restricted stock awards of $0 and
$20,026, respectively.  At March 31, 2010 all restricted stock is
fully vested and there is no unrecognized compensation cost.





Stock
Option Awards –
On August 20, 2009 the Board of Directors approved the Stock Option Agreement,
which contains the terms and conditions with respect to stock options granted by
the Company under the 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.





The
exercise price of each option is the market price of the Company’s stock for the
last sale prior to the grant date, converted to U.S. dollars using the exchange
rate in effect on the grant date.  The options generally expire after
a period not to exceed ten years, except in the event of termination, whereupon
vested options must be exercised generally within three months, or upon death or
disability, in which cases the vested options may be exercised within twelve
months, but in all cases the exercise date may not exceed the expiration
date.





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





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





Expected
      volatility (1)
                  
                  
                  183.98
      - 186.94%Expected
      term (2)
                  
                  5.35
      – 6.00 yearsRisk-free
      interest rate (3)
                  
                  
                  2.36
      - 2.75%Dividend
      yield
                  
                  
                  -





(1)
            The
      expected volatility was determined using historical volatility data for
      comparable companies.


(2)
            The
      expected term of the options has been estimated using the simplified
      method allowed by the SEC, which calculates the average of the vesting
      period and the contractual term of the
options.


(3)
            The
      risk free interest rate is based on the U.S. Treasury constant maturity
      nominal yield with a term approximately equal to the expected terms of the
      options.





The
weighted average grant-date fair value of the options granted was $0.1406 per
share.





A summary
of stock option activity for the three months ended March 31, 2010 is as
follows:





Options
                  
                  
                  Weighted
                    average
                    exercise price
                  
                  Weighted average
                    remaining
                    contractual termOutstanding
      at January 1, 2010
                  
                  
                  4,660,003
                  
                  
                  $
                  .1439Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at March 31, 2010
                  
                  
                  4,660,003
                  
                  
                  
                  .1439
                  
                  9.42
      yearsExercisable
      at March 31, 2010
                  
                  
                  300,000
                  
                  
                  
                  .1439





During
the three months ended March 31, 2010, the Company recognized share-based
compensation costs related to stock options of $117,346.  At March 31,
2010 there was $350,435 of unrecognized share-based compensation expense related
to options granted that will be recognized over the next 2.50
years.


12


Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements


(Unaudited)





10)
            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 recorded a full valuation
allowance against all US deferred tax assets, because management is
unable to conclude that it is more likely than not that the deferred tax assets
will be realized.





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


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





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





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





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


14





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





Diligent’s
History





We began
developing components of the Diligent Boardbooks system starting in
1998.  In 2001, SunAmerica Funds requested a solution to automate the
management of its board meeting papers.  With this request, the
founders of the Company launched the Diligent Boardbooks concept and produced
and tested a working concept that was delivered to SunAmerica
Funds.  By 2002, the founders of the Company believed the end product
could become an extremely valuable licensing opportunity.  With
SunAmerica Funds as one of our anchor clients, the Company spent a year selling
Boardbooks licenses to other major accounts 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.





Today, as
a result of our commitment to sales and marketing, we are currently experiencing
outstanding financial growth.  The Company produced its strongest ever
first quarter results with the addition of 36 new agreements for Boardbooks
licenses and $0.59 million in annual recurring revenue.  This is the
third highest quarterly sales figure recorded by the Company since it began
offering Boardbooks licenses eight years ago and comes during what is
traditionally the slowest part 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.  The growth trajectory of the
Company is demonstrated by the increase in net sales revenues which, at $1.75
million for the first quarter 2010, is up 75% compared to the same quarter a
year ago. The Company now has 320 worldwide clients and more than 8,500 users of
its Boardbooks products, servicing customers across a wide range of industry
segments.





Critical
Accounting Policies and Estimates





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




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 intend to issue share-based
compensation from time to time, in the form of stock, stock options and other
equity based awards.


16





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





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





Interest
Income (Expense), net





Interest
income is derived from interest bearing bank deposits held by US, UK and New
Zealand bank accounts, together with investment income from 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.





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”).





The Note bears interest at 5% per
annum, which is payable in arrears on the first day of each calendar quarter,
commencing April 1, 2008.  The loan matures on October 1, 2010, when
the entire principal balance and all accrued interest will be due and
payable.  It was secured by 25,000,000 shares of the Company’s stock
which were pledged as collateral by members of SSH LLC. As permitted under the
Note agreement, a portion of the pledged shares have been sold by SSH LLC in
order to obtain funds to make the quarterly interest payments.  At
March 31, 2010, the remaining number of shares securing the Note was
16,855,597.




In February 2010, the Company entered
into the Prepayment and Amendment Agreement with SSH LLC, which provides
for:


17




·
            The
      sale 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 will be applied to the interest due for the period from
      January through May 2010 ($146,581) and as a prepayment of principal
      ($1,010,430),




·
            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 is subject to the
approval of the Company’s shareholders at the annual meeting on June 8, 2010,
and is contingent on the receipt of an appraisal attesting to the fairness of
the transaction to the shareholders unrelated to SSH LLC. If approved, the
amended Note will have an outstanding principal balance of $3,075,685 and will
be secured by 5,205,597 shares of the Company’s common stock pledged by the
members of SSH LLC.  The sale of the 4.8 million shares by SSH LLC to
a third party occurred in February 2010 and the proceeds were placed in escrow
pending the shareholder approval of the agreement.  If not approved,
the proceeds will be delivered to the Company on October 1, 2010, the original
maturity date of the Note.





At March 31, 2010 and December 31,
2009, 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.  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.





At March 31, 2010, the Company
remeasured a significant input used to value the underlying collateral of the
Note and recorded a recovery of $3.2 million.  The remeasurement was
based on recent events and activity which indicate that the preferred stock
price is 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.  The Company has received
the results of the appraisal required by the NZX, which indicates that the
agreement is fair to the non-SSH LLC shareholders. The Company anticipates that
shareholder approval of the Prepayment and Amendment Agreement related to the
Note will be obtained at the Company’s annual meeting.  In addition,
the Company has continued to meet growth projections through the first quarter
of 2010, and the sustained upward climb in our stock price shows that market
confidence has been restored by the Company’s steady but controlled growth.
Based on all of these factors evaluated together, we believe the revised
measurement is the best representation of fair value for our common
stock.





Recent
Accounting Pronouncements





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


18


Results
of Operations for the Three Months Ended March 31, 2010 and 2009





Revenues





Three months ended March 31,2010
                
                
                2009
                
                
                Increase/(Decrease)Revenues
                
                $
                1,747,476
                
                
                $
                997,172
                
                
                $
                750,304





The
growth in revenues of 75% in the quarter ended March 31, 2010 when compared with
2009 is a result of the cumulative addition of license agreements each
quarter.  The Company has continued to add license agreements each
quarter since inception.  At March 31, 2010, the cumulative license
agreements were 320, compared with 193 at March 31, 2009, a 66%
increase.  This increase in revenues is in line with our targets and
was achieved at a significantly lower customer acquisition cost. All of the
deferred revenue of $1.7 million recorded on the balance sheet at March 31, 2010
will be recognized as revenue in the next twelve months.





Cost
of Revenues and Operating Expenses





Cost
of Revenues





Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Cost
      of Revenues
                  
                  $
                  622,664
                  
                  
                  $
                  455,733
                  
                  
                  $
                  166,931





Cost of revenues is comprised of
account management, customer support and IT services.  For the quarter
ended March 31, 2010, employee costs included in cost of revenues increased by
approximately $109 thousand as compared to the quarter ended March 31, 2009,
primarily as a result of a realignment of certain management responsibilities
from research and development to account management, and an increase in head
count to support our larger client base. Additionally, travel costs increased by
approximately $14 thousand due to increased client visits by account
management.  The remainder of the increase in cost of revenues is
attributable to an increase in IT services of $28 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 35.6% in the first quarter of 2010, compared with 45.7%
for Q1 2009, as a result of the greater economies of scale that we have achieved
as our client base increased.





Selling
and Marketing Expenses





Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Selling
      and Marketing Expenses
                  
                  $
                  566,885
                  
                  
                  $
                  680,597
                  
                  
                  $
                  (113,712
                  )





Selling and marketing expenses are
lower in the first quarter of 2010 as compared to the comparable 2009 quarter as
a result of a slight decrease in our North American sales force and a decrease
in advertising expenses.





General
and Administrative Expenses





Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)General
      and Administrative Expenses
                  
                  $
                  1,001,619
                  
                  
                  $
                  1,128,443
                  
                  
                  $
                  (126,824
                  )General
      and Administrative Expenses, excluding share-based
      compensation
                  
                  $
                  884,273
                  
                  
                  $
                  1,108,417
                  
                  
                  $
                  (224,144
                  )




19





The decrease in general and
administrative expenses excluding share-based compensation is primarily
attributable to a decrease in professional fees from the first quarter of 2009.
The three months ended March 31, 2009 included costs associated with the
requirements of becoming a public company in the U.S.  Additionally,
office costs, rent expense and salaries and bonuses decreased in the first
quarter of 2010.





Research
and Development Expenses





Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Research
      and Development Expenses
                  
                  $
                  177,146
                  
                  
                  $
                  159,689
                  
                  
                  $
                  17,457





Research and development expenses
increased 10.9% for the first quarter of 2010 as compared to the first quarter
of 2009.  Our research and development is performed primarily by our
New Zealand subsidiary.  The New Zealand expenses in local currency
decreased due to the realignment of certain management responsibilities from
research and development to account management, offset by the difference in the
average exchange rates for the periods a slight increase in other
staffing.





Depreciation
and Amortization





Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Depreciation
      and Amortization
                  
                  $
                  115,196
                  
                  
                  $
                  89,557
                  
                  
                  $
                  25,639





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





Impairment
recovery on note receivable from affiliate





Three months ended March 31,2010
                  
                  
                  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 indicate that the revised measurement is the best representation of fair
value of the underlying collateral for the Note.





Interest
Income, net





Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Interest
      Income, net
                  
                  $
                  75,847
                  
                  
                  $
                  84,787
                  
                  
                  $
                  (8,940
                  )





Interest income, net, includes interest
income on the Note receivable from our affiliate, as well as interest on the
Company’s interest-bearing cash and cash equivalents and term
deposits.  The decrease in interest income is attributable to the
decrease in our average cash balances to $0.6 million for the quarter ended
March 31, 2010 from $3.1 million for the quarter ended March 31,
2009.





Foreign
Exchange Transaction Loss





Three months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Foreign
      Exchange Transaction Loss
                  
                  $
                  (39,629
                  )
                  
                  $
                  (42,689
                  )
                  
                  $
                  3,060




20


The parent Company maintains a portion
of its cash balances in NZD and GBP.  The foreign exchange losses for
the quarters ended March 31, 2010 and March 31, 2009, respectively, are a result
of strengthening of the US dollar against both NZD and GBP during those
periods.





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 March 31, 2010, our sources
of liquidity consist of cash and term deposits of approximately $700
thousand.





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 for approximately $1.2 million.  The proceeds
were placed in escrow pending stockholder approval at our annual stockholders’
meeting in June 2010, as required by the New Zealand Stock Exchange listing
rules.  If approved by our stockholders at our annual meeting in June
2010, we will then receive approximately $0.2 million interest through May 2010
and a $1.0 million principal prepayment in cash,  providing us with
additional liquidity.  If the transaction is not ratified by the
stockholders at the annual meeting, the $1.0 million will be received by the
Company on October 1, 2010,  the original maturity date of the Note.
With the exception of scheduled interest payments, the Company has not included
the collection of the principal balance of the Note receivable in its liquidity
planning.





In March 2010, the Company entered into
an agreement with Spring Street Partners, L.P. (“the Lender”) pursuant to which
the Lender extended a $1.0 million revolving line of credit facility to the
Company.  This line of credit offers the Company additional cash flow
support if needed.





The Company continues to consider and
evaluate strategic growth opportunities that could result in 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





Three months ended March 31,2010
                  
                  
                  2009Cash
      provided by (used in):Operating
      activities
                  
                  $
                  (421,411
                  )
                  
                  $
                  (941,746
                  )Investing
      activities
                  
                  $
                  (50,084
                  )
                  
                  $
                  (27,586
                  )Financing
      activities
                  
                  $
                  (31,865
                  )
                  
                  $
                  2,829,415





Net Cash Flows from Operating
Activities





Cash used in operating activities for
the quarter ended March 31, 2010 was $421 thousand, compared with $942 thousand
for the first quarter 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
increased to $50 thousand in the first quarter of 2010 from $28 thousand in the
comparable 2009 quarter, entirely due to purchases of property and
equipment.


21


Net Cash Flows from Financing
Activities





In the
first quarter of 2010, financing activities consisted solely of repayments of
obligations under capital leases.  During the first quarter of 2009,
the Company secured $2.9 million in financing, net of issuance costs, from the
issuance of Series A Preferred Stock.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





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 March 31, 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 March 31, 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





Item
3. Defaults Upon Senior Securities.





Not
applicable





Item
4. [Reserved]





Item
5. Other Information.





Not applicable


22


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




23




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:  May
      17, 2010
                            By:
                            /s/ Alessandro SodiAlessandro
      Sodi, Chief Executive Officer (Principal Executive
  Officer)Dated:  May
      17, 2010
                            By:
                            /s/ Steven P. RuseSteven
      P. Ruse, Chief Financial Officer (Principal Financial
    Officer)




24