UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
  FORM
10-Q
  (Mark
One)
  x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For
the quarterly period ended September 30, 2010.
  or
   ̈ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
transition period from _________________________ to
_________________________________
  Commission
File Number:  000-53205
  Diligent
Board Member Services, Inc.
 (Exact
name of registrant as specified in its charter)
  Delaware
                
                26-1189601(State or other jurisdiction of incorporation or organization)
                
                (I.R.S. Employer Identification No.)
 
 39
West 37 St. 8th Floor
 New
York, NY 10018
 (Address
of principal executive offices)(Zip Code)
 
 (212)
741-8181
 (Registrant’s
telephone number, including area code)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  x Yes  ̈ No
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   ̈ Yes  ̈ No
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check One)
   ̈ Large accelerated
      filer
               ̈ Accelerated
      filer ̈ Non-accelerated
      filer
              x Smaller Reporting
      Company
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  ̈ Yes x No
  The
number of shares of the registrant’s common stock outstanding as of November 8,
2010 was 81,941,334.
  
 (This
page intentionally left blank)
 
  CONTENTS
  PAGEForward
      Looking Statements
                iiAvailable
      Information
                iiPART
      I – Financial InformationItem
      1.
                Condensed
      Consolidated Financial Statements
                1Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                14Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                24Item
      4T.
                Controls
      and Procedures
                24PART
      II – Other InformationItem
      1.
                Legal
      Proceedings
                25Item
      1A.
                Risk
      Factors
                25Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                25Item
      3.
                Defaults
      Upon Senior Securities
                25Item
      4.
                [Reserved]
                25Item
      5.
                Other
      Information
                25Item
      6.
                Exhibits
                25SIGNATURES
                
                26
 
 i
 
 FORWARD
LOOKING STATEMENTS
 
 Except for statements of historical
fact, certain information described in this document contains "forward-looking
statements" that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "should," "will," "would" or
similar words. The statements that contain these or similar words should be read
carefully because these statements discuss our future expectations, contain
projections of our future results of operations or of our financial position, or
state other "forward-looking" information. Diligent Board Member Services, Inc.
believes that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able
accurately to predict or control. Further, we urge you to be cautious of the
forward-looking statements which are contained in this Form 10-Q because they
involve risks, uncertainties and other factors affecting our operations, market
growth, service, products and licenses. Events in the future may cause our
actual results and achievements, whether expressed or implied, to differ
materially from the expectations we describe in our forward-looking statements.
The occurrence of future events could have a material adverse effect on our
business, results of operations and financial position.
 
 AVAILABLE
INFORMATION
  We file
reports, proxy statements, information statements and other information with the
Securities and Exchange Commission. You may read and copy this information, for
a copying fee, at the SEC’s public reference room at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on its public reference rooms. Our Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services, and at the web site maintained by the Securities and
Exchange Commission at http://www.sec.gov. Our internet address is
http://www.boardbooks.com.  We will make available through a link to
the SEC’s web site, electronic copies of the materials we file with the SEC
(including our annual reports on Form 10-K, our quarterly reports on Form 10-Q,
our current reports on Form 8-K, the Section 16 reports filed by our executive
officers, directors and 10% stockholders and amendments to those
reports).  To receive paper copies of our SEC materials, please
contact us by mail addressed to Robert E. Norton, Corporate Secretary, Diligent
Board Member Services, Inc., 39 West 37 St. 8th Floor, New York, NY 10018, (212)
741-8181.
 
 ii
 
 PART
I—FINANCIAL INFORMATION
 
 Item 1.
Condensed Consolidated Financial Statements.
 Diligent
Board Member Services, Inc.
 Consolidated
Balance Sheets
 
 September 30,
                        
                        
                        December 31,2010
                        
                        
                        2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        1,217,113
                        
                        
                        $
                        1,129,591Term
      deposit
                        
                        
                        73,270
                        
                        
                        
                        72,530Accounts
      receivable, net
                        
                        
                        344,311
                        
                        
                        
                        303,331Prepaid
      expenses and other current assets
                        
                        
                        272,975
                        
                        
                        
                        183,368Total
      current assets
                        
                        
                        1,907,669
                        
                        
                        
                        1,688,820Property
      and equipment, net
                        
                        
                        1,117,290
                        
                        
                        
                        1,312,959Note
      receivable from affiliate, net of valuation allowance
                        
                        
                        1,875,685
                        
                        
                        
                        1,661,791Restricted
      cash - security deposits
                        
                        
                        225,907
                        
                        
                        
                        221,886Total
      assets
                        
                        $
                        5,126,551
                        
                        
                        $
                        4,885,456LIABILITIES AND STOCKHOLDERS'
      (DEFICIENCY)Current
      liabilities:Accounts
      payable and accrued expenses
                        
                        $
                        599,616
                        
                        
                        $
                        397,840Deferred
      revenue
                        
                        
                        2,106,780
                        
                        
                        
                        1,593,351Current
      portion of obligations under capital leases
                        
                        
                        85,172
                        
                        
                        
                        113,418Payables
      to affiliates
                        
                        
                        -
                        
                        
                        
                        5,762Total
      current liabilities
                        
                        
                        2,791,568
                        
                        
                        
                        2,110,371Non-current
      liabilities:Obligations
      under capital leases, less current portion
                        
                        
                        82,331
                        
                        
                        
                        147,091Other
      noncurrent liabilities
                        
                        
                        49,160
                        
                        
                        
                        44,252Total
      non-current liabilities
                        
                        
                        131,491
                        
                        
                        
                        191,343Total
      liabilities
                        
                        
                        2,923,059
                        
                        
                        
                        2,301,714Commitments
      and contingenciesRedeemable
      preferred stock:Series
      A convertible redeemable preferred stock, $.001 par value, 50,000,000
      shares authorized, 32,667,123 and 30,000,000 shares issued and outstanding
      (liquidation value $5,147,568 and $4,766,712)
                        
                        
                        3,170,350
                        
                        
                        
                        3,149,851Stockholders'
      (deficiency):Common
      Stock, $.001 par value, 250,000,000 shares authorized, 78,790,000 and
      90,440,000 shares issued and outstanding
                        
                        
                        78,790
                        
                        
                        
                        90,440Additional
      paid-in capital
                        
                        
                        21,711,771
                        
                        
                        
                        24,532,622Accumulated
      deficit
                        
                        
                        (22,742,510
                        )
                        
                        
                        (25,180,648
                        )Accumulated
      other comprehensive loss
                        
                        
                        (14,909
                        )
                        
                        
                        (8,523
                        )Total
      stockholders' (deficiency)
                        
                        
                        (966,858
                        )
                        
                        
                        (566,109
                        )Total
      liabilities and stockholders' (deficiency)
                        
                        $
                        5,126,551
                        
                        
                        $
                        4,885,456
 
 See
accompanying notes to consolidated financial statements
 
 1
 
 Diligent Board Member Services,
Inc.
 Consolidated
Statements of Operations
 (Unaudited)
 
 Three Months Ended September 30,
                            
                            
                            Nine Months Ended September 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Revenues
                            
                            $
                            2,188,613
                            
                            
                            $
                            1,303,764
                            
                            
                            $
                            5,851,494
                            
                            
                            $
                            3,457,668Cost
      of revenues
                            
                            
                            704,595
                            
                            
                            
                            548,555
                            
                            
                            
                            1,986,815
                            
                            
                            
                            1,544,122Gross
      profit
                            
                            
                            1,484,018
                            
                            
                            
                            755,209
                            
                            
                            
                            3,864,679
                            
                            
                            
                            1,913,546Operating
      expenses:Selling
      and marketing expenses
                            
                            
                            688,315
                            
                            
                            
                            579,414
                            
                            
                            
                            1,995,191
                            
                            
                            
                            1,853,075General
      and administrative expenses
                            
                            
                            1,007,848
                            
                            
                            
                            931,096
                            
                            
                            
                            2,892,285
                            
                            
                            
                            3,055,137Research
      and development expenses
                            
                            
                            253,663
                            
                            
                            
                            183,826
                            
                            
                            
                            664,551
                            
                            
                            
                            542,753Depreciation
      and amortization
                            
                            
                            117,274
                            
                            
                            
                            102,775
                            
                            
                            
                            347,177
                            
                            
                            
                            286,736Total
      operating expenses
                            
                            
                            2,067,100
                            
                            
                            
                            1,797,111
                            
                            
                            
                            5,899,204
                            
                            
                            
                            5,737,701Operating
      loss
                            
                            
                            (583,082
                            )
                            
                            
                            (1,041,902
                            )
                            
                            
                            (2,034,525
                            )
                            
                            
                            (3,824,155
                            )Other
      income (expenses):Impairment
      recovery on note receivable from affiliate
                            
                            
                            1,100,000
                            
                            
                            
                            -
                            
                            
                            
                            4,300,000
                            
                            
                            
                            -Interest
      income, net
                            
                            
                            43,791
                            
                            
                            
                            90,919
                            
                            
                            
                            188,173
                            
                            
                            
                            276,561Foreign
      exchange transaction gain (loss)
                            
                            
                            34,522
                            
                            
                            
                            54,820
                            
                            
                            
                            (4,089
                            )
                            
                            
                            53,927Other
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            170,954Total
      other income
                            
                            
                            1,178,313
                            
                            
                            
                            145,739
                            
                            
                            
                            4,484,084
                            
                            
                            
                            501,442Income
      (loss) before provision for income taxes
                            
                            
                            595,231
                            
                            
                            
                            (896,163
                            )
                            
                            
                            2,449,559
                            
                            
                            
                            (3,322,713
                            )Income
      tax expense
                            
                            
                            1,344
                            
                            
                            
                            9,429
                            
                            
                            
                            11,421
                            
                            
                            
                            15,485Net
      income (loss)
                            
                            $
                            593,887
                            
                            
                            $
                            (905,592
                            )
                            
                            $
                            2,438,138
                            
                            
                            $
                            (3,338,198
                            )Net
      income (loss) per share:Basic
                            
                            $
                            0.01
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.03
                            
                            
                            $
                            (0.04
                            )Diluted
                            
                            $
                            0.01
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.02
                            
                            
                            $
                            (0.04
                            )Weighted
      average shares outstanding:Basic
                            
                            
                            78,790,000
                            
                            
                            
                            90,440,000
                            
                            
                            
                            85,532,491
                            
                            
                            
                            90,348,425Diluted
                            
                            
                            113,438,232
                            
                            
                            
                            90,440,000
                            
                            
                            
                            120,180,723
                            
                            
                            
                            90,348,425
 
 See
accompanying notes to consolidated financial statements
 
 2
 
 Diligent Board Member Services,
Inc.
 Consolidated
Statement of Changes in Stockholders’ (Deficiency)
 And
Comprehensive Loss
 Nine
Months Ended September 30, 2010
 (Unaudited)
  AccumulatedCommon
                    
                    
                    Additional
                    
                    
                    
                    
                    
                    Other
                    
                    
                    TotalCommon
                    
                    
                    Stock
                    
                    
                    Paid-in-
                    
                    
                    Accumulated
                    
                    
                    Comprehensive
                    
                    
                    Stockholders'Shares
                    
                    
                    $.001 Par Value
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    (Loss)
                    
                    
                    (Deficiency)Balance at January 1, 2010
                    
                    
                    90,440,000
                    
                    
                    $
                    90,440
                    
                    
                    $
                    24,532,622
                    
                    
                    $
                    (25,180,648
                    )
                    
                    $
                    (8,523
                    )
                    
                    $
                    (566,109
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,438,138
                    
                    
                    
                    -Foreign
      exchange translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (6,386
                    )Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,431,752Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    511,174
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    511,174Cancellation
      of common stock
                    
                    
                    (11,650,000
                    )
                    
                    
                    (11,650
                    )
                    
                    
                    (3,064,026
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,075,676
                    )Amortization
      of offering costs
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (20,499
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (20,499
                    )Accrued
      preferred stock dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (247,500
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (247,500
                    )Balance
      at September 30, 2010
                    
                    
                    78,790,000
                    
                    
                    $
                    78,790
                    
                    
                    $
                    21,711,771
                    
                    
                    $
                    (22,742,510
                    )
                    
                    $
                    (14,909
                    )
                    
                    $
                    (966,858
                    )
  See
accompanying notes to consolidated financial statements
 
 3
 
 
 Diligent
Board Member Services, Inc.
 Consolidated
Statements of Cash Flows
 (Unaudited)
 Nine Months Ended September 30,2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  2,438,138
                  
                  
                  $
                  (3,338,198
                  )Adjustments
      to reconcile net income (loss) to net cash and cash equivalents used in
      operating activities:Impairment
      recovery on note receivable from affiliate
                  
                  
                  (4,300,000
                  )
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  347,177
                  
                  
                  
                  286,736Share-based
      compensation
                  
                  
                  511,174
                  
                  
                  
                  79,754Straight-line
      rent adjustment
                  
                  
                  4,908
                  
                  
                  
                  41,535Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (40,980
                  )
                  
                  
                  76,685Prepaid
      expenses and other current assets
                  
                  
                  (89,607
                  )
                  
                  
                  (22,161
                  )Restricted
      cash - security deposits
                  
                  
                  (4,021
                  )
                  
                  
                  (990
                  )Accounts
      payable and accrued expenses, net
                  
                  
                  (45,724
                  )
                  
                  
                  (86,353
                  )Deferred
      revenue
                  
                  
                  513,429
                  
                  
                  
                  507,141Payables
      to affiliates
                  
                  
                  (5,762
                  )
                  
                  
                  (44,048
                  )Net
      cash and cash equivalents used in operating activities:
                  
                  
                  (671,268
                  )
                  
                  
                  (2,499,899
                  )Cash
      flows from investing activities:Purchase
      of property and equipment
                  
                  
                  (146,465
                  )
                  
                  
                  (204,827
                  )Net
      cash and cash equivalents used in investing activities:
                  
                  
                  (146,465
                  )
                  
                  
                  (204,827
                  )Cash
      flows from financing activities:Proceeds
      from preferred stock issuance
                  
                  
                  -
                  
                  
                  
                  2,861,150Cash
      received from partial prepayment of note receivable from
      affiliate
                  
                  
                  1,010,430
                  
                  
                  
                  -Payments
      of obligations under capital leases
                  
                  
                  (93,006
                  )
                  
                  
                  (102,147
                  )Net
      cash and cash equivalents provided by financing activities
                  
                  
                  917,424
                  
                  
                  
                  2,759,003Effect
      of exchange rates on cash and cash equivalents
                  
                  
                  (12,169
                  )
                  
                  
                  (10,696
                  )Net
      increase in cash and cash equivalents
                  
                  
                  87,522
                  
                  
                  
                  43,581Cash
      and cash equivalents at beginning of period
                  
                  
                  1,129,591
                  
                  
                  
                  1,265,347Cash
      and cash equivalents at end of period
                  
                  $
                  1,217,113
                  
                  
                  $
                  1,308,928Supplemental
      disclosure of cash flow information:Cash
      paid during the period for :Interest
                  
                  $
                  34,903
                  
                  
                  $
                  21,775Income
      taxes
                  
                  $
                  18,405
                  
                  
                  $
                  19,948Supplemental
      disclosure of noncash investing and financing activities:Property
      and equipment acquired under capital leases
                  
                  $
                  -
                  
                  
                  $
                  123,385Prepayment
      of principal on note receivable from affiliate in exchange for 11,650,000
      shares
                  
                  $
                  3,075,676
                  
                  
                  $
                  -Accrual
      of preferred stock dividend
                  
                  $
                  247,500
                  
                  
                  $
                  -
 
 See
accompanying notes to consolidated financial statements
  4
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 1)
              Organization
      and nature of the business
 
 Diligent Board Member Services, Inc.
(“Diligent” or the “Company”) is a global leader in web-based portals for Boards
of Directors.  The Company develops and sells an online software
application called Diligent Boardbooks®, a web based portal that board members,
management and administrative staff use to compile, update, review and archive
board materials during and after board meetings.  Diligent provides
clients with subscription-based access to the software and also provides
associated services including securely hosting the clients’ data and customer
service and support for the application.
 
 The Company was incorporated in the
State of Delaware on September 27, 2007 and is listed on the New Zealand Stock
Exchange (“NZSX”).  On December 12, 2007, the Company completed its
initial public offering on the NZSX.  In April 2008, the Company filed
a Form 10 registration statement with the United States Securities and
Exchange Commission (“SEC”), which became effective on June 30,
2008.  The Company’s corporate headquarters are located in New
York.
 
 The Company has a wholly-owned
subsidiary located in New Zealand, Diligent Board Member Services NZ Limited
(“DBMS NZ”), which was acquired on January 1, 2008.  DBMS NZ provides
research and development services to the Company.  The Company also
has a wholly-owned subsidiary, Diligent Boardbooks Limited (“DBL”), an England
and Wales limited liability company which provides European sales and marketing
services.  Diligent, together with its subsidiaries, are hereinafter
referred to as “the Company”.
 
 The Company’s consolidated financial
statements are presented in US dollars, rounded to the nearest dollar, which is
the Company’s functional and presentational currency.
 
 The
Company has evaluated all subsequent events through the filing date of this Form
10-Q with the SEC, to ensure that this Form 10-Q includes subsequent events that
should be recognized in the financial statements as of September 30, 2010, and
appropriate disclosure of subsequent events which were not recognized in the
financial statements.
 
 2)
              Liquidity
 
 Historically,
as we grew our business and sustained negative cash flow, our primary source of
liquidity had been the cash received from stock issuances, including $16.4
million obtained in December 2007 from our initial public offering and $2.9
million obtained from our Series A Preferred Stock issued in March
2009.  Additionally, in June 2010, we received a $1.0 million
principal prepayment on the Note receivable from affiliate (See Note 5), and on
October 19, 2010, the Company received $1.4 million in an offshore private
placement of 3 million shares of newly issued common stock by First NZ Capital
Securities Limited (See Note 11).
 
 Although
our 2010 year-to-date results show net cash used in operations of $0.7 million,
in the quarter ended September 30, 2010 we achieved positive cash flow from
operations of approximately $0.2 million. This is the first quarter since
inception of the Company in which we achieved positive cash flow from
operations.
 
 At
September 30, 2010, our sources of liquidity consist of cash and term deposits
of approximately $1.3 million.  As noted above, we received an
additional $1.4 million from the sale of newly issued stock in October
2010.  The Company also has a $1.0 million revolving line of credit
facility with Spring Street Partners, L.P. (See Note 7).  This line of
credit offers the Company additional cash flow support if needed.  As
of September 30, 2010, the Company has had no borrowings under this credit
facility.
 
 Our current operating
expenses and expected capital expenditures are predictable and adequate to
support our budgeted growth.  However, with the recent acquisition of
additional capital, the Company may evaluate strategic growth opportunities that
could change our current expense and capital forecasts.  The primary
uncertainty concerning the Company’s capital needs pertains to its ability to
continue to achieve expected sales growth in a timely manner.
 
 5
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 3)
              Significant
      accounting policies
 
 Basis of
presentation– The accompanying
interim consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and the instructions for Form 10-Q
pursuant to the rules and regulations of the SEC.  Accordingly, they
do not include all information and notes required by GAAP and provided in the
annual consolidated financial statements.  These financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in Form 10-K of the Company for the year ended
December 31, 2009, as filed with the SEC on March 18, 2010.
 
 In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements.  The
results of operations for the nine months ended September 30, 2010 are not
necessarily indicative of the results to be expected for the full
year.
 
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
 
 Fair
value of financial instruments – The fair value of our cash and cash
equivalents, term deposits, accounts receivable, accounts payable and accrued
expenses approximates book value due to their short term
settlements.  See Note 5 for the valuation of the Note receivable from
affiliate.
 
 Share-based
compensation–
The Company measures the cost of employee services received in exchange for an
equity-based award using the fair value of the award on the date of the grant,
and recognizes the cost over the period that the award recipient is required to
provide services to the Company in exchange for the award.
 
 The Company measures compensation cost
for awards granted to non-employees based on the fair value of the award at the
measurement date, which is the date performance is satisfied or services are
rendered by the non-employee.
 
 Net
income (loss) per share – Basic net income (loss) per share is
computed by dividing the net income (loss) attributable to common stockholders,
after deducting accrued preferred stock dividends, by the weighted average
number of common shares outstanding for the period.
 
 Diluted net income (loss) per share
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
unless the effect is anti-dilutive.  Stock options and convertible
preferred stock are included as potential dilutive securities for the periods
applicable.  All potentially dilutive securities have been excluded
from the calculation for the three and nine months ended September 30,
2009 as they were anti-dilutive.  There were 33,750,000
potentially dilutive securities for the three and nine months ended September
30, 2009.
 
 The components of the calculation of
basic and diluted net income (loss) per common share are as
follows:
 
 6
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
  Three months ended September 30,
                  
                  
                  Nine months ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Numerator:Net
      income (loss)
                  
                  $
                  593,887
                  
                  
                  $
                  (905,592
                  )
                  
                  $
                  2,438,138
                  
                  
                  $
                  (3,338,198
                  )Preferred
      stock dividends
                  
                  
                  (82,500
                  )
                  
                  
                  -
                  
                  
                  
                  (247,500
                  )
                  
                  
                  -Basic
      net income (loss) available to common shareholders
                  
                  $
                  511,387
                  
                  
                  $
                  (905,592
                  )
                  
                  $
                  2,190,638
                  
                  
                  $
                  (3,338,198
                  )Diluted
      net income (loss) available to common shareholders
                  
                  $
                  593,887
                  
                  
                  $
                  (905,592
                  )
                  
                  $
                  2,438,138
                  
                  
                  $
                  (3,338,198
                  )Denominator:Basic
      weighted average shares outstanding
                  
                  
                  78,790,000
                  
                  
                  
                  90,440,000
                  
                  
                  
                  85,532,491
                  
                  
                  
                  90,348,425Dilutive
      effect of stock options
                  
                  
                  1,981,109
                  
                  
                  
                  -
                  
                  
                  
                  1,981,109
                  
                  
                  
                  -Dilutive
      effect of convertible preferred stock
                  
                  
                  32,667,123
                  
                  
                  
                  -
                  
                  
                  
                  32,667,123
                  
                  
                  
                  -Diluted
      weighted average shares outstanding
                  
                  
                  113,438,232
                  
                  
                  
                  90,440,000
                  
                  
                  
                  120,180,723
                  
                  
                  
                  90,348,425Basic
      earnings (loss) per share
                  
                  $
                  0.01
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.03
                  
                  
                  $
                  (0.04
                  )Diluted
      earnings (loss) per share
                  
                  $
                  0.01
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.02
                  
                  
                  $
                  (0.04
                  )
 
 Recent
accounting pronouncements– In October 2009,
the Financial Accounting Standards Board (“FASB”) issued new guidance for
revenue recognition with multiple deliverables.  This new guidance
impacts the determination of when the individual deliverables included in a
multiple-element arrangement may be treated as separate units of accounting.
Additionally, it modifies the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. This new guidance
is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, however early adoption is
permitted. The Company does not expect this new guidance to have a material
effect on the consolidated financial statements.
 
 In
January 2010, the FASB issued new guidance which improves disclosures about fair
value measurements.  The new standard was effective for interim and
annual periods beginning after December 15, 2009, except for certain
disclosures regarding Level 3 measurements which are effective for fiscal years
beginning after December 15, 2010.  The Company does not expect this
new guidance to have a material effect on the consolidated financial
statements.
 
 In
February 2010, the FASB issued updated guidance to address certain
implementation issues related to an entity’s requirements to perform and
disclose subsequent events procedures.  This update requires SEC
filers to evaluate subsequent events through the date financial statements are
issued and exempts SEC filers from disclosing the date through which subsequent
events have been evaluated.  The updated guidance was effective upon
issuance, and did not have a material impact on the Company’s consolidated
financial statements.
 
 From time
to time, new accounting pronouncements are issued by the FASB and are adopted by
us as of the specified effective date. Unless otherwise discussed, we believe
that the impact of other recently issued accounting pronouncements will not have
a material impact on consolidated financial position, results of operations, and
cash flows, or do not apply to our operations.
 7
  Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 4)
              Term
      deposit
 
 At
September 30, 2010, the Company has a term deposit with a New Zealand bank with
an initial term of 365 days.  The term deposit in the amount of NZD
100,000 (US$73,270) bears interest at 4.20% and matures in March
2011.
 
 5)
              Note receivable from
      affiliate
 
 The note receivable from affiliate
represents amounts due from Services Share Holding, LLC (“SSH LLC”, the
Company’s predecessor entity), under a Promissory Note and Security Agreement
dated October 1, 2007 (the “Note”), as amended by the Prepayment and Amendment
Agreement entered into in February 2010 and approved by our stockholders in June
2010.
 
 Prior to the prepayment and amendment,
the principal balance of the Note was $7,161,791, which bore interest at 5% per
annum, and was scheduled to mature on October 1, 2010.  It was
originally secured by 25,000,000 shares of the Company’s stock which was pledged
as collateral by members of SSH LLC. A portion of the pledged shares were
subsequently sold by SSH LLC in order to obtain funds to make the quarterly
interest payments.  At December 31, 2009, there were 21,678,597
shares securing the Note.
  The Prepayment and Amendment Agreement
with SSH LLC provided for:
  ·
              The
      sale in February 2010 by SSH LLC of a block of 4,823,000 shares of the
      pledged stock to a third party for US$0.24 per share, for a total of
      US$1,157,011 (after commissions), which would be applied to the interest
      due for the period from January through May 2010 ($146,581) and prepayment
      of principal ($1,010,430).  The proceeds of this sale were
      placed in escrow pending stockholder approval of the
      agreement.
 ·
              The
      prepayment of an additional US$3,075,676 of principal through the
      surrender of 11,650,000 pledged shares to the Company at US$0.26 per
      share,
 ·
              The
      extension of the maturity date on the Note from October 1, 2010 to October
      1, 2012, and
 ·
              Effective
      in June 2010, adjustment of the annual interest rate from 5.0% to 6.5%,
      payable annually on January 1 of each year, in
    arrears.
  This agreement was subject to the
approval of the Company’s shareholders at the annual meeting on June 8, 2010,
and was contingent on the receipt of an appraisal attesting to the fairness of
the transaction to the shareholders unrelated to SSH LLC. The agreement was
approved and the amended Note at September 30, 2010 had an outstanding principal
balance of $3,075,685 and is secured by 5,205,597 shares of the Company’s common
stock pledged by the members of SSH LLC.  The proceeds from the
February 2010 sale which had been placed in escrow were delivered to the Company
on June 8, 2010.
 
 The contractual outstanding loan
balance of $3,075,685 at September 30, 2010 is reduced on our balance sheet by a
valuation allowance of $1,200,000, resulting in a net receivable balance of
$1,875,685.  The Note is considered to be collateral dependent, as SSH
LLC’s only means of repayment is through liquidation of the underlying
collateral.  At December 31, 2008, the then-outstanding loan balance
of $7,161,791 was reduced by a $5.8 million valuation allowance, which was based
on the estimated fair value of the underlying collateral at that time. In the
fourth quarter of 2009, the Company recorded a recovery in the value of the Note
of $300,000 and a corresponding decrease in the valuation allowance to $5.5
million. At March 31, 2010, the Company recorded an additional recovery in the
value of the note of $3.2 million, and at September 30, 2010 the Company
recorded a further recovery of $1.1 million, as described
below.




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


8
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 The recovery of $3.2 million at March
31, 2010 was based on the re-measurement of a significant input used to value
the underlying collateral of the Note.  The February 2010 sale of
shares to a third party indicated that the preferred stock price was no longer
the best measure of the fair value of our common stock.  The Company
believed that a better benchmark for fair value was the US$0.24 per share
obtained by SSH LLC for the 4.8 million shares sold to a third party in February
2010.  The additional recovery at September 30, 2010 is based on the
subsequent re-measurement of the underlying collateral based on the price
obtained for the 3 million shares issued by the Company in an offshore private
placement in October 2010 (See Note 11).  The Company reviews the
valuation of the Note each reporting period and believes the value is properly
stated at September 30, 2010.
 
 6)
              Fair value
      measurements
 
 The Note is the only financial
instrument held by the Company for which a fair value measurement is made using
significant unobservable inputs (Level 3).  A reconciliation of the
beginning and ending balances of the Note is as follows:
 
 Nine months
                    
                    
                    Nine monthsended
                    
                    
                    endedSeptember 30,
                    
                    
                    September 30,2010
                    
                    
                    2009Balance
      at beginning of period
                    
                    $
                    1,661,791
                    
                    
                    $
                    1,361,791Total
      gains or losses (unrealized/realized)Included
      in earnings (or changes in net assets)
                    
                    
                    4,300,000
                    
                    
                    
                    -Included
      in other comprehensive income
                    
                    
                    -
                    
                    
                    
                    -Purchases,
      issuances and settlements
                    
                    
                    (4,086,106
                    )
                    
                    
                    -Transfers
      in and/or out of Level 3
                    
                    
                    -
                    
                    
                    
                    -Ending
      balance
                    
                    $
                    1,875,685
                    
                    
                    $
                    1,361,791The
      amount of total gains or losses for the period included in earnings (or
      changes in net assets) attributable to the change in unrealized gains or
      losses relating to assets still held at the reporting date
                    
                    $
                    4,300,000
                    
                    
                    $
                    -
 
 7)
              Line
      of credit facility
 
 In March
2010, the Company entered into an agreement with Spring Street Partners, L.P.
(“the Lender”) pursuant to which the Lender extended a $1.0 million revolving
line of credit facility to the Company.  The Lender is the holder of
approximately 22 million shares of the Company’s Series A Preferred Stock and 5
million shares of the Company’s common stock.  The founder and
managing partner of the Lender is also the chairman of the board of directors of
the Company.
 
 The line
of credit bears interest at a fixed rate of 9.50% per annum on outstanding
borrowings.  Upon an event of default, the Lender has the option to
increase the interest rate on all outstanding obligations to 14.50% per
annum.  The line of credit is subject to a 0.5% per annum commitment
fee on the unused portion, paid quarterly in arrears.  Accrued
interest must be paid quarterly on the last business day of each
quarter.  The credit facility matures in September 2011, at which time
all outstanding principal and unpaid interest and commitment fees are due in
full.
 
 9
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 The
Lender has a first priority lien on all of the Company’s accounts
receivable.  The line of credit agreement includes restrictive
covenants regarding liens, additional indebtedness, sales of assets and dividend
payments on common stock.  Additionally, the line of credit includes
financial covenants with respect to the achievement of budgeted revenues and
expenses.
 
 As of
September 30, 2010, the Company has no outstanding borrowings under this credit
facility.
 
 8)
              Redeemable Preferred
      Stock
 
 On March
11, 2009, the Company issued 30,000,000 shares of newly-created Series A
Preferred Stock for $0.10 per share in a private offering, for aggregate
proceeds of $3,000,000 in additional capital.  Expenses relating to
the share issuance were $138,850.  The principal terms of the
Preferred Shares are as follows:
 
 Dividend
rights – The Preferred Shares carry a fixed, cumulative, dividend of 11% per
annum (adjusted for stock splits, consolidation, etc).  The dividend,
which is due on the first business day of each calendar year for the prior year,
may (at the Company’s option) be paid either in cash or in kind by the issuance
of additional Preferred Shares (PIK Shares), to be issued at the same issue
price as the Series A Preferred Stock of $0.10 per share.  The 11%
annual dividend on the Preferred Shares will have preference over the
declaration or payment of any dividends on the Company’s common stock (ordinary
shares).  In addition to the 11% preferred dividend, the holders of
the Preferred Shares will also be entitled to participate pro rata in any
dividend paid on the Company’s common stock.
 
 Conversion
rights – The Preferred Shares are convertible at any time at the option of the
holders into the Company’s common stock on a one-for-one basis. In addition,
Preferred Shares will automatically be converted into common stock upon the
closing of an underwritten share offering by the Company on a registered stock
exchange which realizes at least $40,000,000 of gross proceeds.
 
 Redemption
rights – The holders of the Preferred Shares have the option to require the
Preferred Shares (including any PIK shares) to be redeemed in cash, at $0.10 per
share plus accrued and unpaid dividends, at any time after March 11,
2014.
 
 Anti-Dilution
Provision – In the event of a future offering of the Company’s stock at a price
per common share which is less than the Preferred Share conversion price
immediately before such offering, the conversion price for the Preferred Shares
is adjusted according to a weighted average formula.
 
 Liquidation
entitlement – In the event of any voluntary or involuntary liquidation of the
Company, the holders of Preferred Shares are entitled to an amount per Preferred
Share equal to 1.5 times the original issue price of $0.10 plus any dividends
which have become due but have not been paid.
 
 Voting
rights – Preferred Shares have equal voting rights (one vote per share) to
common stock, except that Preferred Shares do not vote in the general election
of directors.
 
 Other
provisions – For as long as not less than 15,000,000 Preferred Shares are
outstanding, the holders of the Preferred Shares have the right between them to
appoint one director, and the Company may not take action relating to certain
major transactions without obtaining the consent of not less than 60% of the
Preferred Shares or without obtaining the approval of the director appointed by
the holder of the Preferred Shares (for matters requiring Board of Directors
approval).
 
 10
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 Accounting
for Preferred Shares – If certain criteria are met, companies must bifurcate
conversion options from their host instruments and account for them as free
standing derivative instruments.  The Company has evaluated the
conversion option on the Preferred Shares and determined that the embedded
conversion option should not be bifurcated.  Additionally, the Company
analyzed the conversion feature and determined that the effective conversion
price was higher than the market price at date of issuance; therefore no
beneficial conversion feature was recorded.  The Company has
classified the Preferred Shares as temporary equity because they are redeemable
upon the occurrence of an event that is not solely within the control of the
issuer.  As noted above, the holders of the Preferred Shares may
demand redemption any time after March 11, 2014.  The securities are
carried at their face value net of issuance costs plus accrued dividends
(representing fair value) because the contingency has not been met and it is not
probable that it will be met.  If the redemption were considered
likely to occur, the carrying value would be adjusted to its liquidation
value.
 
 For the
year 2009, the Board of Directors of the Company approved the issuance of PIK
Shares in lieu of cash, which dividend was effective January 4,
2010.  Accordingly, the holders of the Series A Preferred Stock
received an aggregate of 2,667,123 PIK shares, and total issued and outstanding
preferred shares at September 30, 2010 are 32,667,123.
 
 The
carrying value of the Preferred Shares at September 30, 2010 and December 31,
2009 is as follows:
 
 September 30,
                      
                      
                      December 31,2010
                      
                      
                      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
                      
                      
                      42,488
                      
                      
                      
                      21,989Cumulative
      in-kind dividend
                      
                      
                      -
                      
                      
                      
                      266,712Balance
                      
                      $
                      3,170,350
                      
                      
                      $
                      3,149,851
 
 In 2010,
the Company anticipates that cash dividends will be paid on the Series A
Preferred Stock.  Accordingly, preferred stock dividends of $247,500
for the nine months ended September 30, 2010 are included in accrued
expenses and other current liabilities.
 
 9)
              Stock
      option and incentive plan
  In
November 2007, the Company adopted the 2007 Stock Option and Incentive Plan
(“the 2007 Plan”) authorizing the issuance of up to 10,000,000 shares of the
Company’s common stock as awards to be granted to selected employees, directors
and consultants of the Company, and its affiliates in the form of incentive
stock options, non-qualified stock options, and stock awards. The 2007 Plan is
administered by the Company's Board of Directors. Pursuant to delegation by the
Company's Board of Directors, the Remunerations and Nominations Committee
determines the number of shares, the term, the frequency and date, the type, the
exercise periods, any performance criteria pursuant to which stock option awards
may be granted and the restrictions and other terms and conditions of each grant
of restricted shares in accordance with the terms of the 2007 Plan.
 
 In June
2010, the Company adopted the 2010 Stock Option and Incentive Plan (“the 2010
Plan”) authorizing the issuance of up to 5,000,000 shares of the Company’s
common stock as Incentive Stock Options and Non-Qualified Stock
Options.  Under the 2010 Plan, only employees are eligible for
Incentive Stock Options.  The 2010 Plan is to be administered by the
Remunerations and Nominations Committee pursuant to delegation by the Company's
Board of Directors, which will determine the number of shares, the term, the
frequency and date, the type, the exercise periods, and any performance criteria
pursuant to which stock option awards may be granted.
 
 11
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 Restricted
stock awards – On
October 23, 2008, the Company granted 600,000 shares of restricted stock to two
officers in accordance with the terms of their employment agreements, which
included 250,000 shares which vested immediately, 250,000 shares which vested on
February 15, 2009, and 100,000 shares which vested on May 15, 2009, based on
continued employment through those dates.  The estimated fair value of
the shares at the award date was measured using the closing price of NZD0.25
(US$0.14) per share on the date of grant.
 
 During the nine months ended September
30, 2010 and 2009, the Company recognized share-based compensation costs related
to restricted stock awards of $0 and $23,099, respectively.  At
September 30, 2010 all restricted stock is fully vested and there is no
unrecognized compensation cost.
 
 Stock
option awards –
On August 20, 2009 the Board of Directors approved the Stock Option Agreement,
which contains the terms and conditions with respect to stock options granted by
the Company under the 2007 Plan.  On that date, the Board of Directors
awarded 3,650,000 stock options to officers and an additional 100,000 options to
two former outside directors of the Company.  In October 2009, the
Company granted an additional 910,003 options to employees under the 2007
Plan.
 
 In July 2010, the Company awarded
800,000 options to outside consultants, pursuant to the 2010 Plan.
 
 The exercise price of each option is
the market price of the Company’s stock for the last sale prior to the grant
date, converted to U.S. dollars using the exchange rate in effect on the grant
date.  The options generally expire after a period not to exceed ten
years, except in the event of termination, whereupon vested options must be
exercised generally within three months, or upon death or disability, in which
cases the vested options may be exercised within twelve months, but in all cases
the exercise date may not exceed the expiration date.
 
 The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model and
the resulting fair value is recorded as share-based compensation expense on a
straight line basis over the option vesting period, ranging from six months to
three years.  The value of the options granted to former directors was
charged to expense as of the grant date.
 
 The fair values of options were
estimated based on the following assumptions:
 
 Expected
      volatility (1)
                          
                          
                          167.69
      - 186.94%Expected
      term (2)
                          
                          5.25
      – 6.00 yearsRisk-free
      interest rate (3)
                          
                          
                          1.85
      - 2.75%Dividend
      yield
                          
                          
                          -
 
 (1)
              The
      expected volatility was determined using historical volatility data for
      comparable companies.
 (2)
              The
      expected term of the options has been estimated using the simplified
      method allowed by the SEC, which calculates the average of the vesting
      period and the contractual term of the
options.
 (3)
              The
      risk free interest rate is based on the U.S. Treasury constant maturity
      nominal yield with a term approximately equal to the expected terms of the
      options.
 
 The
weighted average grant-date fair value of the options granted was $0.1825 per
share.
 
 A summary of stock option activity for
the nine months ended September 30, 2010 is as follows:
 
 Options
                    
                    
                    Weighted
                      average
                      exercise price
                    
                    Weighted average
                      remaining
                      contractualtermOutstanding
      at January 1, 2010
                    
                    
                    4,660,003
                    
                    
                    $
                    0.14Granted
                    
                    
                    800,000
                    
                    
                    
                    0.45Exercised
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    91,667
                    
                    
                    
                    0.14Outstanding
      at September 30, 2010
                    
                    
                    5,368,336
                    
                    
                    
                    0.19
                    
                    9.04
      yearsExercisable
      at September 30, 2010
                    
                    
                    1,958,333
                    
                    
                    
                    0.19
 
 12
 
 Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 During the nine months ended September
30, 2010, the Company recognized share-based compensation costs related to stock
options of $511,174.  At September 30, 2010 there was $290,715 of
unrecognized share-based compensation expense related to options granted that
will be recognized over the next two years.
 
 10)
              Income
      taxes
 
 The
Company records a current income tax provision for foreign tax obligations in
New Zealand.  No US or UK current income taxes have been provided due
to tax losses incurred.  The Company has recorded a full valuation
allowance against all US deferred tax assets because management is unable to
conclude that it is more likely than not that the deferred tax assets will be
realized.
 
 The Company and its subsidiaries are
subject to regular audits by federal, state and foreign tax
authorities.  These audits may result in additional tax
liabilities.  The Company’s federal, state and foreign income tax
returns for the 2007 through 2009 tax years are open for examination by the
respective taxing jurisdictions.
 
 11)
              Subsequent
      events
 
 On October 19, 2010, the Company
completed an offshore private placement for 3 million shares of newly issued
common stock by First NZ Capital Securities Limited at NZ$0.62 (US$0.47) per
share, for total proceeds of NZ$1,824,000 (US$1,380,950), net of expenses.
 
 In October 2010, 151,334 stock options
issued to employees in October 2009 were exercised.
 
 13
 
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear elsewhere in this Form 10-Q. In
addition to historical consolidated financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements.
 
 Overview
 
 The Company develops and makes
available an online software application called Diligent Boardbooks, a web based
portal that board members, management and administrative staff use to compile,
update, review and archive board materials before, during and after board
meetings. The Company provides clients with subscription-based access to its
software and also provides associated services including securely hosting the
client’s data and customer service and support for the application.
 
 Software-as-a-Service
(“SaaS”) Model
 
 The
Company uses the Software-as-a-Service (“SaaS”) model to distribute its Diligent
Boardbooks application to the market and maintain the security and integrity of
its clients’ data. Under this model, the Company offers annual renewable
subscriptions for customer access to its Boardbook product which is hosted on
the Company’s secure servers, and offers a complete suite of related services
including training, support, data migration and data
security/backup.
 
 The SaaS
model allows the Company to differentiate itself through technological
innovation and customer service while the subscription billing approach results
in a predictable and recurring revenue stream. This SaaS model also allows
clients to retain control over access to the application while outsourcing to
the Company the support activities, such as managing the IT infrastructure and
maintaining the software.
 
 SaaS
Benefits
 
 The
Company’s SaaS model addresses several difficulties found in the traditional
software model and offers the following critical advantages for our
company:
 
 •
              Highly scalable operations.Because our clients’ boards do not ordinarily meet on a daily or
      monthly basis, our system has the capability to support many more Boards
      without absorbing increased costs associated with customer
      growth.
 
 •
              Better revenue visibility.By offering renewable annual subscriptions instead of one time
      perpetual licenses, the Company has much better revenue foresight. This
      high revenue visibility allows the Company to undertake much better
      planning and budgeting, with significant advantages for corporate strategy
      and profitability.
 
 •
              Lower cost of development.The Companyhas developed one
      application that is cost effectively shared across thousands of end users.
      This is considerably less expensive than developing all the permutations
      (data bases, operating systems, etc) needed by customers who want to run
      the software on their own premises.  These economies allow the
      Company to spend resources on developing increased functionalities for its
      Boardbooks application instead of on creating multiple versions of the
      same code.
 
 •
              Longer corporate life.The SaaS model has a long tail of recurring revenue that reduces
      investment risk, simplifies corporate planning and leads to extended
      corporate life.
 
 •
              Better expense visibility.Because revenue is more predictable, the Company is able to better
      plan expenses.
 
 14
  Diligent’s
History
 
 We began
developing components of the Diligent Boardbooks system starting in
1998.  In 2001, SunAmerica Funds requested a solution to automate the
management of its board meeting papers.  With this request, the
founders of the Company launched the Diligent Boardbooks concept and produced
and tested a working concept that was delivered to SunAmerica
Funds.  By 2002, the founders of the Company believed the end product
could become an extremely valuable licensing opportunity.  With
SunAmerica Funds as one of our anchor clients, the Company spent a year selling
Boardbooks licenses to other major accounts in a market that had yet to deal
with the implications of the Sarbanes-Oxley Act.  Starting in 2006,
after fully developing the capabilities of our product with our anchor clients,
we began establishing our own credentials. Our marketing group produced
promotional marketing materials featuring our anchor clients which described the
Boardbooks product and explained its benefits for boards of
directors.  For the next two years, before undertaking an
international rollout of a large licensing sales force, we tested several key
growth assumptions relating to scaling the Diligent Boardbooks
product.
 
 On
December 12, 2007 we completed a public share offering of 24,000,000 shares of
our common stock in conjunction with a listing of our stock on the New Zealand
Stock Exchange under the symbol “DIL.”  As a result, the Company is
subject to the regulation and reporting requirements imposed by the New Zealand
Stock Exchange.  There is no United States established public trading
market for our common stock.  However, because the Company is a U.S.
company incorporated in Delaware with over 500 shareholders, it is also subject
to the U.S. reporting and regulatory requirements of the Securities and Exchange
Commission (“SEC”) and the Securities Exchange Act of 1934.  Because
of this dual regulation in New Zealand and the U.S., the Company is required to
meet both standards, which means the Company sometimes is faced with conflicting
requirements and always must comply with the more stringent rule.
 
 In the
third quarter of 2010, the Company produced its strongest quarterly sales
performance since inception by adding a record $0.86 million of new annualized
license fee income.  This quarter builds on the momentum established
in the first six months of this year, which saw the Company’s best first half
since inception, with $1.28 million in new annualized licenses through June 30,
2010.  The Company continues to see a high level of interest in
Diligent’s Boardbooks product and has a strong sales pipeline as we enter the
fourth quarter of 2010.   The Company’s annualized fee income was
up 32% against the same quarter a year ago and a total of 41 new licenses were
added during the third quarter compared to 30 for the third quarter of 2009 – an
improvement of 37% and an all-time record quarterly performance.  The
Company now has approximately 400 worldwide clients and over 10,400 users of its
Boardbooks product.  Moreover, the third quarter of 2010 was the first
quarter to achieve positive cash flow from operations.  The Company’s
ability to deliver on its projection to be cash flow breakeven by the third
quarter of 2010 is a noteworthy milestone for the Company and its investors and
sets the stage for an exciting chapter in Diligent’s development.
 
 Critical
Accounting Policies and Estimates
 
 Our consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including those
related to revenue recognition, deferral of costs, the allowance for accounts
receivable, software development costs, the impairment of long-lived assets and
note receivable, income taxes and assumptions for stock-based compensation.
Management bases its estimates and judgments on historical experience, known
trends or events and various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
  We define
our “critical accounting policies” as those that require us to make subjective
estimates about matters that are uncertain and are likely to have a material
impact on our financial condition and results of operations or that concern the
specific manner in which we apply GAAP. Our estimates are based upon assumptions
and judgments about matters that are highly uncertain at the time the accounting
estimate is made and applied and require us to assess a range of potential
outcomes.
 
 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
their estimated net realizable value.  A provision for doubtful
accounts is based on management’s assessment of amounts considered uncollectable
for specific customers based on age of debt, history of payments and other
relevant information.  An allowance for doubtful accounts is provided
for accounts receivable which management determines will not be collectable in
full.
 
 Cost
of Revenues and Operating Expenses
 
 Cost of
Revenues.  Cost of revenues consists of direct expenses related
to account management, customer support and IT hosting.  We do not
allocate indirect overhead to cost of revenues.
 
 Selling and Marketing Expenses.  Selling
and marketing expenses are comprised of sales commissions, salaries for sales
and marketing employees, and direct advertising expenses, including mailings and
travel.  We do not allocate indirect overhead to selling and
marketing.
 
 General and Administrative
Expenses.  General
and administrative expenses consist of compensation and related expenses for
executive, finance, accounting, administrative, legal, professional fees, other
corporate expenses and overhead costs such as rents, utilities etc.
 
 Research and Development
Expenses.  Research
and development expenses are incurred as we upgrade and maintain our
software, and develop product enhancements.  Such expenses include
compensation and employee benefits of engineering and testing personnel,
materials, travel and all direct overhead associated with design and required
testing of our product line.  We do not allocate indirect overhead to
research and development.
 
 Software
development costs are expensed as they are incurred until technological
feasibility has been established, at which time those costs are capitalized
until the product is available for general release to customers.  To
date, software has been available for general release concurrent with the
establishment of technological feasibility and, accordingly, the Company has not
capitalized any development costs.  Costs incurred to enhance products
after the general release of the service using the product are expensed in the
period they are incurred and included in research and development costs in our
consolidated statements of operations.
 
 Share-Based
Compensation.  In November 2007, we adopted our 2007 Stock
Option and Incentive Plan pursuant to which we have issued share-based
compensation from time to time, in the form of stock options and other equity
based awards.  In June 2010, we adopted the 2010 Stock Option and
Incentive Plan pursuant to which we issued stock options in July
2010.
 
 Share-based
compensation consists of stock issued to employees and contractors for services
rendered.  The Company measures the cost of employee services received
in exchange for an equity-based award using the fair value of the award on the
date of the grant, and recognizes the cost over the period that the award
recipient is required to provide services to the Company in exchange for the
award.
 
 16
 
 The
Company measures compensation cost for awards granted to non-employees based on
the fair value of the award at the measurement date, which is the date
performance is satisfied or services are rendered by the
non-employee.
 
 Interest
Income (Expense), net
 
 Interest
income is derived from interest bearing bank deposits held by US, UK and New
Zealand bank accounts, together with investment income from the Note receivable
due from our affiliate, SSH LLC.
 
 Foreign
Exchange
 
 As a
worldwide company, certain of Diligent’s revenues and expenses are denominated
in foreign currencies, which are recorded at the approximate rates of exchange
in effect at the transaction dates.  Assets and liabilities are
translated at the exchange rates in effect at the balance sheet dates, with
differences recorded as foreign exchange gains or losses in the statements of
operations.  Additionally, the Company has cash balances maintained in
New Zealand Dollars (NZD) and British Pound Sterling (GBP).
 
 The
Company’s wholly-owned subsidiaries, DBL and DBMS NZ, utilize the GBP and the
NZD, respectively, as their functional currencies.  Assets and
liabilities of these subsidiaries are translated to US dollars at exchange rates
in effect at the balance sheet dates, with the resulting translation adjustments
directly recorded to a separate component of accumulated other comprehensive
income.
 
 From time
to time, the Company uses foreign currency option contracts that are not
designated as hedging instruments to manage exposure to fluctuations in foreign
currency.  The Company uses these instruments as economic hedges and
not for speculative or trading purposes.  All foreign currency option
contracts are recorded at fair value in other current assets on the balance
sheet and unrealized gains or losses at the balance sheet date are recorded in
the income statement.  The Company has no open foreign currency option
contracts as of September 30, 2010.
 
 Income
taxes
 
 Diligent
Board Member Services, Inc. files U.S. federal and state income tax
returns.  Foreign operations file income tax returns in their
respective foreign jurisdictions. The Company accounts for deferred income taxes
under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
 
 The Company and its subsidiaries are
subject to regular audits by federal, state and foreign tax
authorities.  These audits may result in additional tax
liabilities.  The Company’s federal, state and foreign income tax
returns for the 2007 through 2009 tax years are open for examination by the
respective taxing jurisdictions.
 
 Note
receivable from affiliate
 
 The note receivable from affiliate
represents amounts due from Services Share Holding, LLC (“SSH LLC”, the
Company’s predecessor entity), under a Promissory Note and Security Agreement
dated October 1, 2007 (the “Note”), as amended by the Prepayment and Amendment
Agreement entered into in February 2010 and approved by our stockholders in June
2010.
 
 Prior to the prepayment and amendment,
the principal balance of the Note was $7,161,791, which bore interest at 5% per
annum, and was scheduled to mature on October 1, 2010.  It was
originally secured by 25,000,000 shares of the Company’s stock which was pledged
as collateral by members of SSH LLC. A portion of the pledged shares were
subsequently sold by SSH LLC in order to obtain funds to make the quarterly
interest payments.  At December 31, 2009, there were 21,678,597
shares securing the Note.
 
 17
  The Prepayment and Amendment Agreement
with SSH LLC provided for:
  ·
              The
      sale in February 2010 by SSH LLC of a block of 4,823,000 shares of the
      pledged stock to a third party for US$0.24 per share, for a total of
      US$1,157,011 (after commissions), which would be applied to the interest
      due for the period from January through May 2010 ($146,581)
      and  prepayment of principal ($1,010,430).  The
      proceeds of this sale were placed in escrow pending stockholder approval
      of the agreement.
 ·
              The
      prepayment of an additional US$3,075,676 of principal through the
      surrender of 11,650,000 pledged shares to the Company at US$0.26 per
      share,
 ·
              The
      extension of the maturity date on the Note from October 1, 2010 to October
      1, 2012, and
 ·
              Effective
      in June 2010, adjustment of the annual interest rate from 5.0% to 6.5%,
      payable annually on January 1 of each year, in
    arrears.
  This agreement was subject to the
approval of the Company’s shareholders at the annual meeting on June 8, 2010,
and was contingent on the receipt of an appraisal attesting to the fairness of
the transaction to the shareholders unrelated to SSH LLC. The agreement was
approved and the amended Note as of September 30, 2010 had an outstanding
principal balance of $3,075,685 and is secured by 5,205,597 shares of the
Company’s common stock pledged by the members of SSH LLC.  The
proceeds from the February 2010 sale which had been placed in escrow were
delivered to the Company on June 8, 2010.
 
 The contractual outstanding loan
balance at September 30, 2010 of $3,075,685 is reduced on our balance sheet by a
valuation allowance of $1,200,000, resulting in a net receivable balance of
$1,875,685.  The Note is considered to be collateral dependent, as SSH
LLC’s only means of repayment is through liquidation of the underlying
collateral.  At December 31, 2008, the then-outstanding loan balance
of $7,161,791 was reduced by a $5.8 million valuation allowance, which was based
on the estimated fair value of the underlying collateral at that time. In the
fourth quarter of 2009, the Company recorded a recovery in the value of the Note
of $300,000 and a corresponding decrease in the valuation allowance to $5.5
million. At March 31, 2010, the Company recorded an additional recovery in the
value of the note of $3.2 million, and at September 30, 2010 the Company
recorded a further recovery of $1.1 million, as described below.
 
 In the absence of an active market for
the Company’s common stock, or other observable inputs for similar instruments,
the Company originally based its valuation of the underlying collateral on the
value of the March 2009 issuance of Series A Preferred Stock, adjusted using an
assumed discount rate of 20%, which was management’s estimate of the fair value
of the preferred features of the Series A Preferred Stock.  In
addition, management assumed that SSH LLC and/or its members would sell a
portion of the underlying collateral to meet their quarterly interest payments,
thereby reducing the amount of collateral expected to be available when the Note
was to mature in October 2010.
 
 The recovery of $3.2 million at March
31, 2010 was based on the re-measurement of a significant input used to value
the underlying collateral of the Note.  The February 2010 sale of
shares to a third party indicated that the preferred stock price was no longer
the best measure of the fair value of our common stock.  The Company
believed that a better benchmark for fair value was the US$0.24 per share
obtained by SSH LLC for the 4.8 million shares sold to a third party in February
2010.  The additional recovery at September 30, 2010 is based on the
subsequent re-measurement of the underlying collateral based on the price
obtained for the 3 million shares issued by the Company in a private placement
in October 2010 (See Note 11).  The Company reviews the valuation of
the Note each reporting period and believes the value is properly stated at
September 30, 2010.
 
 Recent
Accounting Pronouncements
  See Note 3 to the condensed
consolidated financial statements at Item 1 of this Form 10-Q
 
 18
 
 Results
of Operations for the Three Months Ended September 30, 2010 and
2009
 
 Revenues
 
 Three months ended September 30,2010
                      
                      
                      2009
                      
                      
                      Increase/(Decrease)Revenues
                      
                      $
                      2,188,613
                      
                      
                      $
                      1,303,764
                      
                      
                      $
                      884,849
 
 The growth in total revenues of 68% in
the third quarter of 2010 when compared with the 2009 third quarter is a result
of the cumulative addition of license agreements each quarter.  The
Company has continued to add license agreements each quarter since
inception.  At September 30, 2010, the cumulative license agreements
were 397, compared with 243 at September 30, 2009.  A net of 41 new
licenses were added during the third quarter of 2010, compared with 30 for the
third quarter of 2009.  This increase in revenues is in line with our
targets and was achieved at a significantly lower customer acquisition
cost.  All of the deferred revenue of $2.1 million recorded on the
balance sheet at September 30, 2010 will be recognized as revenue in the next
twelve months.
 
 Cost
of Revenues and Operating Expenses
 
 Cost
of Revenues
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Cost
      of Revenues
                  
                  $
                  704,595
                  
                  
                  $
                  548,555
                  
                  
                  $
                  156,040
 
 Cost of revenues is comprised of
account management, customer support and IT services.  For the three
months ended September 30, 2010, employee costs included in cost of revenues
increased by approximately $96 thousand as compared to the three months ended
September 30, 2009, primarily as a result of a realignment of certain management
responsibilities from research and development to account management, and an
increase in head count to support our larger client base. The remainder of the
increase in cost of revenues is primarily attributable to an increase in hosting
costs of approximately $31 thousand, which increased primarily due to hosting
facilities the Company has added as a result of the growth in the number of
users.  Additional cost increases attributable to our larger client
base include printing and production of user materials of $11 thousand,
equipment maintenance of $7 thousand, and travel costs of $4
thousand.
 
 Cost of revenues as a percentage of
revenues decreased to 32.2% for the third quarter of 2010, compared with 42.1%
for the third quarter of 2009, as a result of the greater economies that we have
achieved as our client base increased.
 
 Selling
and Marketing Expenses
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Selling
      and Marketing Expenses
                  
                  $
                  688,315
                  
                  
                  $
                  579,414
                  
                  
                  $
                  108,901
 
 Selling and marketing expenses are
higher in the third quarter of 2010 as compared to the comparable 2009 quarter
as a result of an increase in outside consultant costs of $25 thousand, salaries
and commissions of $14 thousand, marketing expenses of $25 thousand and foreign
selling expenses of $31 thousand, primarily in the UK.
 
 General
and Administrative Expenses
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)General
      and Administrative Expenses
                  
                  $
                  1,007,848
                  
                  
                  $
                  931,096
                  
                  
                  $
                  76,752
 
 19
 
 The increase in general and
administrative expenses is comprised of an increase in share-based compensation
expense of $231 thousand primarily relating to stock options issued in the third
quarter of 2010, offset by decreases in professional fees of $69 thousand,
employee related costs of $25 thousand, director related costs of $23 thousand
and state and city capital taxes of $42 thousand.
 
 Research
and Development Expenses
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Research
      and Development Expenses
                  
                  $
                  253,663
                  
                  
                  $
                  183,826
                  
                  
                  $
                  69,837
 
 Our research and development is
performed primarily by our New Zealand subsidiary.  The New Zealand
expenses in local currency increased due to additional headcount. The difference
in the average US$/NZD exchange rates for the periods resulted in an additional
increase when measured in US dollars.
 
 Depreciation
and Amortization
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Depreciation
      and Amortization
                  
                  $
                  117,274
                  
                  
                  $
                  102,775
                  
                  
                  $
                  14,499
 
 The increase in depreciation and
amortization is attributable to the net increase in property and equipment,
consisting principally of computer equipment and computer software.
 
 Impairment
recovery on note receivable from affiliate
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Impairment
      recovery on note receivable from affiliate
                  
                  $
                  1,100,000
                  
                  
                  $
                  -
                  
                  
                  $
                  1,100,000
 
 The
carrying value of the Note had previously been reduced by a valuation allowance
to reflect the estimated fair value of the Company’s common stock which is held
as collateral for the Note, as the Note is deemed to be collateral
dependent.  At September 30, 2010, the Company re-measured a
significant input used to value the underlying collateral and recorded a
recovery of $1.1 million, based on recent events and activity which indicated
that the revised measurement is the best representation of fair value of the
underlying collateral for the Note.
 
 Interest
Income, net
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Interest
      Income, net
                  
                  $
                  43,791
                  
                  
                  $
                  90,919
                  
                  
                  $
                  (47,128
                  )
 
 Interest income, net, includes interest
income on the Note Receivable from our affiliate, as well as interest on the
Company’s cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the prepayment and amendment of the Note in June 2010.  Although the
interest rate increased from 5.0% to 6.5%, the principal balance decreased by
almost $4.1 million, resulting in less interest income overall.
  20
  Foreign
Exchange Transaction Gain(Loss)
 
 Three months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Foreign
      Exchange Transaction Gain(Loss)
                  
                  $
                  34,522
                  
                  
                  $
                  54,820
                  
                  
                  $
                  (20,298
                  )
 
 The parent Company maintains a portion
of its cash and receivable balances in foreign currencies, primarily the NZD and
GBP.  The gain for the three months ended September 30, 2010 is due to
a weakening of the US dollar against both NZD and GBP.  During the
third quarter of 2009 there was a more significant weakening of the US dollar
against both NZD and GBP.
  Results
of Operations for the Nine Months Ended September 30, 2010 and 2009
 
 Revenues
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Revenues
                  
                  $
                  5,851,494
                  
                  
                  $
                  3,457,668
                  
                  
                  $
                  2,393,826
 
 The
growth in revenues of 69% in the first three quarters of 2010 when compared with
the first three quarters of 2009 is a result of the cumulative addition of
license agreements each quarter.  The Company has continued to add
license agreements each quarter since inception.  At September 30,
2010, the cumulative license agreements were 397, compared with 243 at September
30, 2009.  A net of 113 new licenses were added during the first three
quarters of 2010, compared with 69 for the first three quarters of
2009.  This increase in revenues is in line with our targets and was
achieved at a significantly lower customer acquisition cost. All of the deferred
revenue of $2.1million recorded on the balance sheet at September 30, 2010 will
be recognized as revenue in the next twelve months.
 
 Cost
of Revenues and Operating Expenses
 
 Cost
of Revenues
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Cost
      of Revenues
                  
                  $
                  1,986,815
                  
                  
                  $
                  1,544,122
                  
                  
                  $
                  442,693
 
 Cost of revenues is comprised of
account management, customer support and IT services.  For the nine
months ended September 30, 2010, employee costs included in cost of revenues
increased by approximately $325 thousand as compared to the nine months ended
September 30, 2009, primarily as a result of a realignment of certain management
responsibilities from research and development to account management, and an
increase in head count to support our larger client base. The remainder of the
increase in cost of revenues is primarily attributable to an increase in hosting
costs of approximately $24 thousand, which increased primarily due to hosting
facilities the Company has added as a result of the growth in the number of
users.  Additional cost increases attributable to our larger client
base include printing and production of user materials of $25 thousand,
equipment maintenance of $27 thousand, and travel costs of $25
thousand.
 
 Cost of revenues as a percentage of
revenues decreased to 33.9% for the first three quarters of 2010, compared with
44.7% for the first three quarters of 2009, as a result of the greater economies
that we have achieved as our client base increased.
 
 Selling
and Marketing Expenses
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Selling
      and Marketing Expenses
                  
                  $
                  1,995,191
                  
                  
                  $
                  1,853,075
                  
                  
                  $
                  142,116
  21
  Selling and marketing expenses are
higher for the first three quarters of 2010 as compared to the comparable 2009
period as a result of an increase in outside consultant costs of $23 thousand,
marketing expenses of $66 thousand and foreign selling expenses of $31 thousand,
primarily in the UK.  Salaries and commissions were consistent with
the prior year as a result of an increase in commissions due to increased sales,
offset by a slight reduction in headcount.
 
 General
and Administrative Expenses
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)General
      and Administrative Expenses
                  
                  $
                  2,892,285
                  
                  
                  $
                  3,055,137
                  
                  
                  $
                  (162,852
                  )
 
 The decrease in general and
administrative expenses is comprised of an increase in share-based compensation
expense of $451 thousand, relating to stock options issued through the third
quarter of 2010, offset by decreases in professional fees of $404 thousand,
employee compensation of $77 thousand, rent and office costs of $41 thousand,
director related costs of $26 thousand and state and city capital taxes of $58
thousand.  The decrease in professional fees is attributable to the
inclusion in the first nine months of 2009 of incremental professional fees
associated with the requirements of becoming a public company in the
U.S.
 
 Research
and Development Expenses
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Research
      and Development Expenses
                  
                  $
                  664,551
                  
                  
                  $
                  542,753
                  
                  
                  $
                  121,798
 
 Our research and development is
performed primarily by our New Zealand subsidiary.  The New Zealand
expenses for the first three quarters of 2010 in local currency increased
slightly over the comparable 2009 period due to an increase in headcount and
consulting costs throughout the three quarters of 2010, offset by the
realignment of certain management responsibilities from research and development
to account management.  An additional increase was due to the
difference in the average US$/NZD exchange rates for the three quarters of 2010
compared with the same periods in 2009, resulting in higher expense when
measured in US dollars.
 
 Depreciation
and Amortization
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Depreciation
      and Amortization
                  
                  $
                  347,177
                  
                  
                  $
                  286,736
                  
                  
                  $
                  60,441
 
 The increase in depreciation and
amortization is attributable to the net increase in property and equipment,
consisting principally of computer equipment and computer software.
 
 Impairment
recovery on note receivable from affiliate
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Impairment
      recovery on note receivable from affiliate
                  
                  $
                  4,300,000
                  
                  
                  $
                  -
                  
                  
                  $
                  4,300,000
 
 The
carrying value of the Note had previously been reduced by a valuation allowance
to reflect the estimated fair value of the Company’s common stock which is held
as collateral for the Note, as the Note is deemed to be collateral
dependent.  At March 31, 2010, the Company re-measured a significant
input used to value the underlying collateral and recorded a recovery of $3.2
million.  An additional recovery of $1.1 million was recorded at
September 30, 2010, based on recent events which indicated that the revised
measurement was the best representation of fair value of the underlying
collateral for the Note.
 
 22
  Interest
Income, net
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Interest
      Income, net
                  
                  $
                  188,173
                  
                  
                  $
                  276,561
                  
                  
                  $
                  (88,388
                  )
 
 Interest income, net, includes interest
income on the Note Receivable from our affiliate, as well as interest on the
Company’s cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the prepayment and amendment of the Note in June 2010.  Although the
interest rate increased from 5.0% to 6.5%, the principal balance decreased by
almost $4.1 million, resulting in less interest income overall.
 
 Foreign
Exchange Transaction Gain/(Loss)
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Foreign
      Exchange Gain/(Loss)
                  
                  $
                  (4,089
                  )
                  
                  $
                  53,927
                  
                  
                  $
                  (58,016
                  )
 
 The parent Company maintains a portion
of its cash and receivable balances in foreign currencies, primarily the NZD and
GBP.  The foreign exchange differences for the nine months ended
September 30, 2010 and 2009, are a result of the strengthening of the US dollar
against NZD from January through June of 2010 followed by a strengthening in the
third quarter, while the US dollar strengthened against GPB over the same nine
months of 2010.  In the first three quarters of 2009, the US dollar
significantly weakened against both NZD and GBP.
  Other
Income
 
 Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  Increase/(Decrease)Other
      Income
                  
                  $
                  -
                  
                  
                  $
                  170,954
                  
                  
                  $
                  (170,954
                  )
 
 Other income in 2009 consists of a
recovery of UK Value Added Tax (VAT) on prior year expenses.
  Liquidity
and Capital
Resources
  Historically,
as we grew our business and sustained negative cash flow, our primary source of
liquidity had been the cash received from stock issuances, including $16.4
million obtained in December 2007 from our initial public offering and $2.9
million obtained from our Series A Preferred Stock issued in March
2009.  Additionally, in June 2010, we received a $1.0 million
principal prepayment on the Note receivable from affiliate (See Note 5), and on
October 19, 2010, the Company received $1.4 million in an offshore private
placement of 3 million shares of newly issued common stock by First NZ Capital
Securities Limited (See Note 11).
 
 Although
our 2010 year-to-date results show net cash used in operations of $0.7 million,
in the quarter ended September 30, 2010 we achieved positive cash flow from
operations of approximately $0.2 million. This is the first quarter since
inception of the Company in which we achieved positive cash flow from
operations.
 
 At
September 30, 2010, our sources of liquidity consist of cash and term deposits
of approximately $1.3 million.  As noted above, we received an
additional $1.4 million from the sale of newly issued stock in October
2010.  The Company also has a $1.0 million revolving line of credit
facility with Spring Street Partners, L.P. (See Note 7).  This line of
credit offers the Company additional cash flow support if needed.  As
of September 30, 2010, the Company has had no borrowings under this credit
facility.
 
 23
 
 Our current operating
expenses and expected capital expenditures are fixed, predictable and adequate
to support our budgeted growth.  However, with the recent acquisition
of additional capital, the Company may evaluate strategic growth opportunities
that could change our current expense and capital forecasts.  The
primary uncertainty concerning the Company’s capital needs pertains to its
ability to continue to achieve the expected sales growth in a timely
manner.
 
 Cash
flows
 
 Nine months ended
                    September 30,
                  
                  
                  Three months ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Cash
      provided by (used in):Operating
      activities
                  
                  $
                  (671,268
                  )
                  
                  $
                  (2,499,899
                  )
                  
                  $
                  248,731
                  
                  
                  $
                  (478,295
                  )Investing
      activities
                  
                  $
                  (146,465
                  )
                  
                  $
                  (204,827
                  )
                  
                  $
                  (57,490
                  )
                  
                  $
                  (20,614
                  )Financing
      activities
                  
                  $
                  917,424
                  
                  
                  $
                  2,759,003
                  
                  
                  $
                  (30,029
                  )
                  
                  $
                  (36,518
                  )
 
 Net Cash Flows from Operating
Activities
 
 Cash used in operating activities for
the nine months ended September 30, 2010 was $0.7 million, compared with $2.5
million for the first three quarters of 2009.  The Company has been
reducing its cash burn rate from operations, primarily from increased revenues
coupled with a reduction in operating expenses.  In the third quarter
of 2010, for the first time since inception, the Company generated positive cash
flow from operations of $0.2 million.
 
 Net Cash Flows from Investing
Activities
 
 Cash used in investing activities is
comprised entirely of purchases of property and equipment.
 
 Net Cash Flows from Financing
Activities
 
 For the
nine months ended September 30, 2010, cash received from financing activities
consists principally of the $1.0 million received from a prepayment of the Note
receivable from affiliate.  During the comparable 2009 period, the
Company secured $2.9 million in financing, net of issuance costs, from the
issuance of Series A Preferred Stock.  For the three months ended
September 30, 2010 and 2009, cash used in financing activities consists entirely
of payments of obligations under capital leases.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk.
 
 Because the Company qualifies as a
smaller reporting company, as defined by §229.10(f)(1) it is not required to
provide the information required by this Item.
 
 Item
4T. Controls and Procedures.
 
 (a)  Evaluation of
disclosure controls and procedures.As of the end of the
quarter ended September 30, 2010, our Chief Executive Officer and Chief
Financial Officer have each reviewed and evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act).  Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have each concluded that our
current disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms, and include controls and procedures designed to ensure that
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company’s management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
 
 (b)  Changes in Internal
Controls.There has been no change in the Company’s internal
control over financial reporting required by Exchange Act Rule 13a-15 or 15d-15
that occurred during the fiscal quarter ended September 30, 2010 that has
materially affected, or is reasonably likely to materially affect Diligent Board
Member Services, Inc.’s internal control over financial reporting.
  24
 
 PART
II—OTHER INFORMATION
 
 Item
1. Legal Proceedings.
 
 None
 
 Item
1A. Risk Factors.
 
 Not
required
 
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
 None
  Item
3. Defaults Upon Senior Securities.
 
 Not
applicable
 
 Item
4. [Reserved]
 
 Item
5. Other Information.
 
 Not applicable
 
 Item
6. Exhibits.
 
 ExhibitNumbers
                  
                  Exhibits31.1
                  
                  CEO
      Certification pursuant to Rule 13a-14(a)31.2
                  
                  CFO
      Certification pursuant to Rule 13a-14(a)32.1
                  
                  CEO
      Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C.
      135032.2
                  
                  CFO
      Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C.
      1350
 
 25
  SIGNATURES
 
 Pursuant
to the requirements on the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  DILIGENT
      BOARD MEMBER SERVICES, INC.Dated:  November
      8, 2010
                      
                      By:
                      /s/ Alessandro SodiAlessandro
      Sodi, Chief Executive Officer (Principal Executive
  Officer)Dated:  November
      8, 2010
                      
                      By:
                      /s/ Steven P. RuseSteven
      P. Ruse, Chief Financial Officer (Principal Financial
    Officer)
 
 26