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
March 31, 2009.




or




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




For the
transition period from _________________________ to
_________________________________




Commission
File Number:  000-53205




Diligent
Board Member Services, Inc.


(Exact name of registrant as specified
in its charter)




Delaware
            26-1189601(State
      or other jurisdiction 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. o Yes x 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 May 12, 2009 was
90,440,000.









(This
page intentionally left blank)







CONTENTS




PAGEForward
      Looking Statements
                iiAvailable
      Information
                iiPART
      I – Financial InformationItem
      1.
                Financial
      Statements
                1Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                9Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                16Item 4T.
                Controls
      and Procedures
                16PART
      II – Other InformationItem
      1.
                Legal
      Proceedings
                16Item
      1A.
                Risk
      Factors
                16Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                16Item
      3.
                Defaults
      Upon Senior Securities
                18Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                18Item
      5.
                Other
      Information
                19Item
      6.
                Exhibits
                19SIGNATURES
                20




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. Consolidated Financial Statements.





Diligent
Board Member Services, Inc.


Consolidated
Balance Sheets




March
      31,
                                    
                                    
                                    December
      31,2009
                                    
                                    
                                    2008(Unaudited)ASSETSCash
      and cash equivalents
                                    
                                    $
                                    3,118,312
                                    
                                    
                                    $
                                    1,265,347Term
      deposit
                                    
                                    
                                    56,840
                                    
                                    
                                    
                                    58,150Accounts
      receivable, net
                                    
                                    
                                    304,112
                                    
                                    
                                    
                                    390,180Prepaid
      expenses and other current assets
                                    
                                    
                                    236,183
                                    
                                    
                                    
                                    222,617Total
      current assets
                                    
                                    
                                    3,715,447
                                    
                                    
                                    
                                    1,936,294Property
      and equipment, net
                                    
                                    
                                    1,100,237
                                    
                                    
                                    
                                    1,116,007Note
      receivable from affiliate, net of valuation allowance
                                    
                                    
                                    1,361,791
                                    
                                    
                                    
                                    1,361,791Restricted
      cash - security deposits
                                    
                                    
                                    237,064
                                    
                                    
                                    
                                    246,685Total
      assets
                                    
                                    $
                                    6,414,539
                                    
                                    
                                    $
                                    4,660,777LIABILITIES, REDEEMABLE
      PREFERRED STOCK AND STOCKHOLDERS'
      EQUITYAccounts
      payable and accrued expenses
                                    
                                    $
                                    638,067
                                    
                                    
                                    $
                                    474,860Deferred
      revenue
                                    
                                    
                                    751,415
                                    
                                    
                                    
                                    601,408Current
      portion of obligations under capital leases
                                    
                                    
                                    115,454
                                    
                                    
                                    
                                    114,308Payables
      to affiliates
                                    
                                    
                                    47,617
                                    
                                    
                                    
                                    49,578Total
      current liabilities
                                    
                                    
                                    1,552,553
                                    
                                    
                                    
                                    1,240,154Obligations
      under capital leases, less current portion
                                    
                                    
                                    64,136
                                    
                                    
                                    
                                    50,816Other
      noncurrent liabilities
                                    
                                    
                                    36,100
                                    
                                    
                                    
                                    -Commitments
      and contingenciesRedeemable
      preferred stock:Series
      A convertible redeemable preferred stock, $.001 par value, 50,000,000
      shares authorized, 30,000,000 and 0 shares issued and outstanding
      (liquidation value $4,500,000)
                                    
                                    
                                    2,861,150
                                    
                                    
                                    
                                    -Stockholders'
      equity:Common
      Stock, $.001 par value, 250,000,000 shares authorized, 90,440,000 shares
      issued and outstanding
                                    
                                    
                                    90,440
                                    
                                    
                                    
                                    90,440Additional
      paid-in capital
                                    
                                    
                                    24,638,096
                                    
                                    
                                    
                                    24,618,070Accumulated
      deficit
                                    
                                    
                                    (22,799,463
                                    )
                                    
                                    
                                    (21,318,658
                                    )Accumulated
      other comprehensive loss
                                    
                                    
                                    (28,473
                                    )
                                    
                                    
                                    (20,045
                                    )Total
      stockholders' equity
                                    
                                    
                                    1,900,600
                                    
                                    
                                    
                                    3,369,807Total
      liabilities, redeemable preferred stock and stockholders'
      equity
                                    
                                    $
                                    6,414,539
                                    
                                    
                                    $
                                    4,660,777




See
accompanying notes to consolidated financial statements


1


Diligent
Board Member Services, Inc.


Consolidated
Statements of Operations


(Unaudited)





Three Months Ended March 312009
                                            
                                            
                                            2008Revenues
                                            
                                            $
                                            997,172
                                            
                                            
                                            $
                                            591,804Cost
      of revenues
                                            
                                            
                                            455,733
                                            
                                            
                                            
                                            442,963Gross
      profit
                                            
                                            
                                            541,439
                                            
                                            
                                            
                                            148,841Operating
      expenses:Selling
      and marketing expenses
                                            
                                            
                                            680,597
                                            
                                            
                                            
                                            1,588,727General
      and administrative expenses
                                            
                                            
                                            1,128,443
                                            
                                            
                                            
                                            1,348,995Research
      and development expenses
                                            
                                            
                                            159,689
                                            
                                            
                                            
                                            284,200Depreciation
      and amortization
                                            
                                            
                                            89,557
                                            
                                            
                                            
                                            52,713Total
      operating expenses
                                            
                                            
                                            2,058,286
                                            
                                            
                                            
                                            3,274,635Operating
      loss
                                            
                                            
                                            (1,516,847
                                            )
                                            
                                            
                                            (3,125,794
                                            )Other
      income (expenses):Interest
      income, net
                                            
                                            
                                            84,787
                                            
                                            
                                            
                                            206,963Foreign
      exchange transaction (loss)/gain
                                            
                                            
                                            (42,689
                                            )
                                            
                                            
                                            79,539Total
      other income (expenses)
                                            
                                            
                                            42,098
                                            
                                            
                                            
                                            286,502Loss
      before provision for income taxes
                                            
                                            
                                            (1,474,749
                                            )
                                            
                                            
                                            (2,839,292
                                            )Provision
      for income taxes
                                            
                                            
                                            6,056
                                            
                                            
                                            
                                            -Net
      loss
                                            
                                            $
                                            (1,480,805
                                            )
                                            
                                            $
                                            (2,839,292
                                            )Net
      loss per share (basic and diluted)
                                            
                                            $
                                            (0.02
                                            )
                                            
                                            $
                                            (0.03
                                            )Weighted
      average shares  outstanding (basic and diluted)
                                            
                                            
                                            90,212,222
                                            
                                            
                                            
                                            102,071,000




See
accompanying notes to consolidated financial statements


2


Diligent
Board Member Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)




Three
      Months Ended March 31,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (1,480,805
                          )
                          
                          $
                          (2,839,292
                          )Adjustments to reconcile net
      loss to cashused
      in operating activities:Depreciation
      and amortization
                          
                          
                          89,557
                          
                          
                          
                          52,713Share-based
      compensation
                          
                          
                          20,026
                          
                          
                          
                          240,574Accrued
      interest receivable
                          
                          
                          -
                          
                          
                          
                          (86,192
                          )Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          86,068
                          
                          
                          
                          (67,973
                          )Prepaid
      expenses and other current assets
                          
                          
                          (13,566
                          )
                          
                          
                          (4,353
                          )Restricted
      cash - security deposits
                          
                          
                          9,621
                          
                          
                          
                          (212,416
                          )Accounts
      payable and accrued expenses
                          
                          
                          163,207
                          
                          
                          
                          35,165Deferred
      revenue
                          
                          
                          150,007
                          
                          
                          
                          (34,331
                          )Payables
      to affiliates
                          
                          
                          (1,961
                          )
                          
                          
                          (133,702
                          )Other
      noncurrent liabilities
                          
                          
                          36,100
                          
                          
                          
                          -Net
      cash used in operating activities
                          
                          
                          (941,746
                          )
                          
                          
                          (3,049,807
                          )Cash
      flows from investing activities:Cash
      acquired in acquisition, net of purchase price
                          
                          
                          -
                          
                          
                          
                          83,593Purchase
      of property and equipment
                          
                          
                          (27,586
                          )
                          
                          
                          (513,211
                          )Net
      cash used in investing activities
                          
                          
                          (27,586
                          )
                          
                          
                          (429,618
                          )Cash
      flows from financing activities:Proceeds
      from issuance of Series A preferred stock, net
                          
                          
                          2,861,150
                          
                          
                          
                          -Cash
      paid for note receivable from affiliate
                          
                          
                          -
                          
                          
                          
                          (100,000
                          )Payments
      of obligations under capital leases
                          
                          
                          (31,735
                          )
                          
                          
                          (24,837
                          )Net
      cash provided by (used in) financing activities
                          
                          
                          2,829,415
                          
                          
                          
                          (124,837
                          )Effect
      of exchange rates on cash and cash equivalents
                          
                          
                          (7,118
                          )
                          
                          
                          1,900Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          1,852,965
                          
                          
                          
                          (3,602,362
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          1,265,347
                          
                          
                          
                          13,675,080Cash
      and cash equivalents at end of period
                          
                          $
                          3,118,312
                          
                          
                          $
                          10,072,718Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
                          
                          $
                          8,288
                          
                          
                          $
                          10,918Income
      taxes
                          
                          $
                          7,920
                          
                          
                          $
                          -Supplemental
      disclosure of noncash investing and financing activities:Share-based
      compensation
                          
                          $
                          20,026
                          
                          
                          $
                          240,574Property
      and equipment acquired under capital leases
                          
                          $
                          46,201
                          
                          
                          $
                          -Conversion
      of accrued interest to loan principal
                          
                          $
                          -
                          
                          
                          $
                          86,192




See
accompanying notes to consolidated financial statements


3


Diligent
Board Member Services, Inc.


Notes to
Consolidated Financial Statements





1)
            Organization
      and nature of the business





Diligent Board Member Services, Inc.
(“Diligent” or the “Company”) provides worldwide online management of corporate
governance documents (“Boardbooks”) to corporate clients.  Boardbooks
is a web-based portal that directors and administrative staff use to compile,
update and examine board materials prior to and during board
meetings.  Each client of the Company enters into a service agreement
whereby the Company agrees to provide and support the Boardbooks
service.





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





The Company’s predecessor entity was
Services Share Holding, LLC (previously called Diligent Board Member Services,
LLC), a Delaware limited liability company (herein referred to as “SSH
LLC”).





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.  Prior to January
1, 2008, DBMS NZ was owned by a stockholder and officer of the
Company.  DBMS NZ provides research and development services to the
Company.





The Company also has a wholly-owned
subsidiary, Diligent Boardbooks Limited (“DBL”), an England and Wales limited
liability company which was formed on December 14, 2006, and provides European
sales and marketing services.  DBL was inactive until April
2008.





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.





2)
            Liquidity





Despite growth in net sales during
2008, the Company’s growth rate lagged behind its projections.  Amid
liquidity concerns, the Company initiated plans to scale back its growth plans
in order to reduce operating expenses.  During the fourth quarter of
2008, the Company significantly reduced its sales force, reduced salaries for
some of its more highly compensated employees and reduced the number of members
of the board of directors.  The Company also actively sought
additional sources of financing and, in March 2009, issued 30,000,000 shares of
newly-created Series A Preferred Stock for US$0.10 per share, providing
additional capital of $2,861,150, net of issuance costs (See Note
7).





At the
current level of reduced expenses, coupled with current sales growth forecasts,
management believes this funding will be sufficient to support the operations
and obligations of the Company through the third quarter of 2010.  The
primary uncertainty concerning the Company’s capital needs pertains to its
ability to achieve the expected sales growth in a timely manner such that
recurring revenues exceed operating expenditures prior to the depletion of
capital.




4




The note
receivable from affiliate, due from SSH LLC, provides for six remaining
quarterly interest payments of approximately $90 thousand each due from July 1,
2009 through October 1, 2010, and a $7,161,791 principal payment due October 1,
2010.  This note is collateralized with 22,612,737 shares of Diligent
common stock.  The Company believes that collection of the note
receivable is dependent upon, and limited to, the amount of cash that SSH LLC
can receive from the sale of the underlying collateral as payments become due
and has recorded a valuation allowance on the note (see Note
6).  Although management believes a portion of the principal will be
collected when due in October 2010, with the exception of interest payments due
under the note, the Company has not included the collection of the note
receivable in its liquidity planning.





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, 2008, as filed with the SEC on March 30, 2009 and amended on May
14, 2009.





In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements.  The
results of operations for the three months ended March 31, 2009 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.





Earnings per share –In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128,
Earnings Per Share,
basic net loss per share is computed by dividing the net loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the period, excluding unvested restricted common shares.  Diluted
net loss per share is computed using the weighted average number of common
shares outstanding and, when dilutive, unvested restricted common
shares.  Because the Company reported a net loss for all periods
presented, all potential common shares attributable to unvested restricted stock
have been excluded from the computation of the diluted net loss per share
because the effect would have been anti-dilutive.





Recent accounting pronouncements–In April 2009, the
Financial Accounting Standards Board (“FASB”) issued three final Staff Positions
(“FSP”) intended to provide additional application guidance and enhance
disclosures regarding fair value measurements and impairments of securities. The
FSPs are effective for interim and annual periods ending after June 15,
2009.





FSP
157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, provides additional guidance on estimating fair value when
the volume and level of activity for an asset or liability have significantly
decreased in relation to normal market activity for the asset or liability. This
FSP also provides additional guidance on circumstances that may indicate that a
transaction is not orderly. The Company is currently evaluating the impact
the adoption of this FSP will have on its financial
statements.





FSP
115-2 and 124-2, Recognition and Presentation of
Other-Than-Temporary
Impairments, amends existing guidance for determining whether an other
than temporary impairment of debt securities has occurred. Among other changes,
the FASB replaced the existing requirement that an entity’s management assert it
has both the intent and ability to hold an impaired security until recovery with
a requirement that management assert (a) it does not have the intent to
sell the security, and (b) it is more likely than not it will not have to
sell the security before recovery of its cost basis. The Company is currently
evaluating the impact the adoption of this FSP will have on its
financial statements.




5





FSP FAS
107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments requires an entity to
provide the annual disclosures required by SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, in its interim financial statements. The Company
will provide the additional disclosures required by FSP 107-1 and APB 28-1 in
its quarterly report on Form 10-Q for the period ended June 30,
2009.





4)
            Acquisition
      of DBMS NZ





On January 1, 2008, the Company
acquired all the outstanding shares of DBMS NZ, for NZD 5,000
(US$3,804).  Prior to the acquisition, DBMS NZ provided research and
development services for the Company.  The purchase price was
allocated to the assets and liabilities as follows:





AssetsCash
                                
                                $
                                87,397Accounts
      receivable
                                
                                
                                24,809Other
      current assets
                                
                                
                                24,300Property
      and equipment, net
                                
                                
                                4,688141,194LiabilitiesAccounts
      payable
                                
                                
                                52,271Accrued
      employee entitlements
                                
                                
                                85,119137,390Net
      assets acquired
                                
                                $
                                3,804




5)
            Term
      deposit





At March 31, 2009, the Company had a
term deposit with a New Zealand bank with an original term of 365
days.  The term deposit in the amount of NZD 100,000 ($56,840 at March
31, 2009) bears interest at 4.50% and matures in March 2010.





At December 31, 2008, the Company had a
term deposit with a New Zealand bank with an original term of 100
days.  The term deposit in the amount of NZD 100,000 ($58,150 at
December 31, 2008) bore interest at 6.00% and matured in March
2009.





6) Note receivable from affiliate
- The note receivable from affiliate represents amounts due from SSH LLC under a
Promissory Note and Security Agreement dated October 1, 2007 (the
“Note”).





The loan bears interest at 5% per
annum, which is payable in arrears on the first day of each calendar quarter,
commencing April 1, 2008.  SSH LLC elected, under the terms of the
Note, to defer each of the first four quarterly interest payments through
January 1, 2009, in which case they were added to the principal balance and bear
interest from the date the payment was due. The loan matures on October 1, 2010,
when the entire principal balance and all accrued interest will be due and
payable.  At December 31, 2008, the Note was secured by 25,000,000
shares of the Company’s stock which were pledged as collateral by members of SSH
LLC.





At March 31, 2009 and December 31,
2008, the contractual outstanding loan balance was $7,161,791 (including accrued
interest through December 31, 2008 of $371,778).  In accordance with
SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, the Company evaluated the
collectability of the loan and determined that at December 31, 2008 it was
probable that the Company would be unable to collect all amounts contractually
due under the Note.  This conclusion was principally based on the
deterioration in the value of the underlying collateral and the worsening
economic environment.




6




At
December 31, 2008, the Company recorded a $5.8 million valuation allowance and a
corresponding charge to impairment loss in order to write down the Note to the
estimated fair value of the underlying collateral.  In the absence of
an active market for the Company’s stock, or other observable inputs for similar
instruments, the Company based its valuation principally on the value of the
recent issue of preferred stock, adjusted using an assumed discount rate of 20%,
which is management’s estimate based on the value of the preferred features of
the Series A Preferred Stock.  In addition, management assumed that
SSH LLC and/or its members would sell a portion of the underlying collateral to
meet their quarterly interest payments, thereby reducing the amount of
collateral expected to be available when the Note matures in
2010.  These are considered unobservable inputs falling within the
definition of Level 3 inputs pursuant to SFAS No. 157, Fair Value
Measurements.





On March 30, 2009, SSH LLC sold
2,387,263 pledged shares to Spring Street Partners, L.P. in a private
transaction valued at $0.075 per share or $179,045 in the
aggregate.  The proceeds were applied against the Note interest
payment due April 1, 2009 and will be applied against the next interest payment
when due July 1, 2009.  As a result, the number of shares securing the
Note at March 31, 2009 was reduced to 22,612,737.





At March 31, 2009, the Company reviewed
the valuation of the Note and determined that no further adjustment to the
valuation allowance of $5.8 million is necessary.





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





Dividend
rights – The Preferred Shares carry a fixed, cumulative, dividend of 11% per
annum (adjusted for stock splits, consolidation, etc).  The dividend,
which is due on the first business day of each calendar year for the prior year,
may (at the Company’s option) be paid either in cash or in kind by the issuance
of additional Preferred Shares (PIK Shares), to be issued at the same issue
price of US$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
holders into the Company’s common stock on a one-for-one basis at a conversion
price of US$0.10 per share. In addition, Preferred Shares will automatically be
converted into common stock upon the closing of an underwritten share offering
by the Company on a registered stock exchange which realizes at least
$40,000,000 of gross proceeds.





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





Anti-Dilution
Provision – In the event of a future offering of the Company’s stock at a price
per common share which is less than the Preferred Share conversion price
immediately before such offering, the conversion price for the Preferred Shares
will be 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 will be entitled to an amount per
Preferred Share equal to 1.5 times the original issue price of US$0.10 plus any
dividends which have become due but have not been paid.





Voting
rights – Preferred Shares will 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).




7





Accounting
for Preferred Shares – SFAS No. 133, Accounting for Derivative Financial
Interests and Hedging Activities, provides certain criteria that, if met,
require companies to 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 has considered the provisions
of Emerging Issues Task Force (“EITF”) Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features, and EITF Issue No. 00-27,
Application of EITF 98-5 to
Certain Convertible Instruments,which require that a beneficial
conversion feature be valued separately at issuance.  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 followed the
guidance of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, and EITF
Topic D-98, Classification and
Measurement of Redeemable Securities, which provide that preferred
securities that are redeemable for cash be classified outside of permanent
equity if they are redeemable upon the occurrence of an event that is not solely
within the control of the issuer.  As noted above, the holders of the
Preferred Shares may demand redemption any time after 60 months from the date of
issue.  Accordingly, the Preferred Shares have been classified as
temporary equity.  The securities are carried at their face value net
of issuance costs (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.





8)            
Stockholders’ equity –In March 2009, the stockholders of the Company approved an increase in
the number of authorized shares of common stock from 200,000,000 to
250,000,000.





9)           
Stock option and incentive
plan – In
November 2007, the Company adopted the 2007 Stock Option and Incentive Plan
(“the Plan”) authorizing the granting of awards to selected employees, directors
and consultants of the Company, and its affiliates in the form of incentive
stock options, non-qualified stock options, and stock awards. The Plan is
administrated by the Company's Board of Directors. The Company's Board of
Directors determines the number of shares, the term, the frequency and date, the
type, the exercise periods, any performance criteria pursuant to which awards
may be granted and the restrictions and other terms and conditions of each grant
of restricted shares in accordance with the terms of the Plan.  The
Plan authorizes the issuance of up to 10,000,000 shares of the Company’s common
stock.





On November 8, 2007, the Company
granted 4,000,000 shares of common stock to selected employees (3,064,000
shares), directors (200,000 shares) and consultants (736,000 shares) of the
Company, and its affiliates. Of these shares, 2,071,000 shares were fully vested
upon issuance on December 12, 2007, 160,000 shares were forfeited during 2008
and 1,769,000 shares vested on January 1, 2009, based on continued employment
through that date. The fair value of the awards to employees was estimated to be
NZD 0.90(US$0.69) per share, which is the closing price of the Company's stock
on December 12, 2007. The fair values of the awards to non-employees were
closing prices on various measurement dates.





On October 23, 2008, the Company
granted 600,000 shares of restricted stock to two officers in accordance with
the terms of their employment agreements, which included 250,000 shares which
vested immediately, 250,000 shares which vested on February 15, 2009, and
100,000 shares which vest on May 15, 2009, based on continued employment through
that date.  The estimated fair value of the shares at the award date
was measured using the closing price of NZD 0.25 (US$0.14) per share on the date
of grant.





During the three months ended March 31,
2009 and 2008, share-based compensation costs of $20,026 and $240,574,
respectively, were recognized.  Total unrecognized compensation cost
related to non-vested restricted stock at March 31, 2009 is $3,073 and is
expected to be recognized through May 2009.





There
were 2,119,000 shares of nonvested restricted stock at December 31, 2008, of
which 1,769,000 became fully vested on January 1, 2009, 250,000 became fully
vested in February 2009, and the remaining 100,000 will vest in May
2009.





No stock
options have been granted under the Plan.




8





10)          Income taxes –The Company
recorded an income tax provision for foreign tax obligations in New
Zealand.  No US current income taxes have been provided due to losses
incurred.  The Company has recorded a full valuation allowance
against all US deferred tax assets because it is not more likely than not
that the deferred tax assets will be realized.




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





The
following discussions of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes
thereto included 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





We
develop and sell an online software application called Diligent Boardbooks,
which is a web-based portal that directors and administrative staff use to
compile, update and examine board materials prior to and during board
meetings.  Each of our clients enters into a service agreement whereby
we agree to provide and support the Diligent Boardbooks service.





The Diligent Boardbooks product
features an on-screen interface that resembles a book and displays documents in
single web-viewable pages, from a secure central database.  The
software is accessed via the internet and is a “point and click” system that
gives directors the ability to navigate throughout the entire virtual
book.





The first phase of our business focus
was developing and testing the Diligent Boardbooks system, building a loyal core
of blue chip customers to become champions of the product, and promoting product
awareness through exposure in print media.  During this phase we did
not focus on revenue growth or profitability, and sales and marketing had been
conducted by two to three staff members, who fit this role alongside their other
responsibilities.  By 2007 we had a commercially viable product and
shifted our focus to commit substantial resources to the sales and marketing of
our Diligent Boardbooks product.  We are now in the customer
acquisition phase of our business and currently provide the Diligent Boardbooks
service to over 190 companies and over 4,800 users.





In December 2007, the Company raised
$16.4 million, net of expenses, in its initial public offering on the New
Zealand Stock Exchange.  Our plan was to use the proceeds of the IPO
to significantly expand our sales force and aggressively target
growth.  By the first quarter of 2008, much of the infrastructure for
this growth was set up.





Despite growth in net sales, our growth
rate lagged behind the projections we had set for the Company, which was
exacerbated by the global financial crisis.  By the third quarter of
2008, we initiated plans to scale back our growth plans in order to reduce our
operating expenses.  We significantly reduced our sales force, reduced
salaries for some of our more highly compensated employees and reduced the
number of members of the board of directors from nine to six.  The
cost cutting continues into 2009, as we look for further opportunities to reduce
overhead.





In March 2009, the Company secured $2.9
million of financing, net of issuance costs, through the issuance of Series A
Convertible Preferred Stock.  At the current level of reduced
expenses, coupled with conservative sales growth forecasts, management believes
this funding will be sufficient to support sales growth and achieve cash flow
breakeven by approximately the third quarter of 2010.





Our results for the first quarter 2009
are encouraging.  We started the year strong, posting our second
highest quarterly new license sales figures since we began offering our product
five years ago.  This achievement comes despite the impact of the
global financial crisis.  In these difficult economic conditions,
companies still seek to implement and upgrade Diligent Boardbooks as a way to
save costs, improve efficiencies and broaden their corporate governance and
compliance standards.




9





Despite
these encouraging trends, our overall performance continues to depend in part on
worldwide economic conditions. The United States and other key international
economies are currently undergoing a period of severe recession, characterized
by falling demand for a variety of goods and services, restricted credit, going
concern threats to financial institutions and major multi-national companies,
poor liquidity, declining asset values, reduced corporate
profitability, extreme volatility in credit, equity and foreign exchange markets
and increased bankruptcies. These conditions could adversely affect our
customers’ ability or willingness to purchase our service, delay prospective
customers’ purchasing decisions, reduce the value or duration of their
subscription contracts, or affect renewal rates, all of which could adversely
affect our operating results.





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.




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.





Diligent recognizes revenue in
accordance with the provisions of the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition which
states that revenue is realized and earned 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 Diligent Boardbooks licenses is accrued ratably
over the contract period.  License fees paid in advance are recorded
as deferred revenue until recognized.  Through September 30, 2008,
revenue from installations was recognized upon completion of the
installation.  Effective October 1, 2008, revenue from installations
is accrued ratably over the contract period.  The effect of this
change is not material to the Company’s financial condition, operations or cash
flow.





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




10





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.





Statement
of Financial Accounting Standards (SFAS) 86, “Accounting for Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed,” requires companies
to expense software development costs as they incur them 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, our software has been available for general release concurrent with
the establishment of technological feasibility and, accordingly, we have not
capitalized any development costs.  SFAS 2, “Accounting for Research and
Development Costs,”establishes accounting
and reporting standards for research and development.  In accordance
with SFAS 2, costs we incur to enhance products or after the general release of
the service using the product are expensed in the period they are incurred and
included in research and development costs in our consolidated statements of
operations.





Prior to January 1, 2008, our research
and development was outsourced to Diligent Board Member Services NZ Limited
(“DBMS NZ”), an affiliate through common ownership by a stockholder and former
director of the Company.  Effective January 1, 2008, the Company
acquired DBMS NZ and now the research and development activities are fully
integrated into the Company.





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





Share-based
compensation consists of stock issued to employees and contractors for services
rendered.  In accordance with SFAS 123(R), Share-Based Payment, Diligent
measures the cost of employee services received in exchange for an award of
equity-based securities 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 Diligent in exchange for the award.





Diligent
measures the cost of nonemployee services received in exchange for an award of
equity-based securities using the fair value method prescribed by Emerging
Issues Task Force (“EITF”) 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.Compensation cost for awards
granted to non-employees is measured 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.  Compensation costs are amortized over
the underlying awards’ vesting terms, and are recorded as share-based
compensation expense.  These costs are included in general and
administrative expense in our statement of operations.




11





Interest
Income, net





Interest
income is derived from interest bearing bank deposits held by US, UK and New
Zealand bank accounts, together with investment income from a loan receivable
due from a related party, DBMS LLC.  Interest expense is attributable
to financing costs of capital leases.





Foreign
Exchange Transactions





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 Pounds Sterling (GBP).





The
Company’s wholly-owned subsidiaries, Diligent Boardbooks Limited (“DBL”) and
DBMS NZ, utilize the GBP and the NZD, respectively, as their functional
currencies.  Assets and liabilities of these subsidiaries are
translated to US dollars at exchange rates in effect at the balance sheet dates,
with the resulting translation adjustments directly recorded to a separate
component of accumulated other comprehensive income.





Income
taxes





The
parent Company 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 carry-forwards.
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.





In June 2006, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 48
(FIN 48) Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109. FIN 48 clarifies the criteria that must be met for
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. This Interpretation also addresses
recognition and derecognition of related penalties and interest, classification
of liabilities and disclosures of unrecognized tax benefits. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 as of October 1, 2007.  The adoption of FIN 48 did
not have a material impact on the Company.





Note
receivable from affiliate





The note receivable from affiliate
represents amounts due from SSH LLC under a Promissory Note and Security
Agreement dated October 1, 2007 (the “Note”).





The loan bears interest at 5% per
annum, which is payable in arrears on the first day of each calendar quarter,
commencing April 1, 2008.  SSH LLC elected, under the terms of the
Note, to defer each of the first four quarterly interest payments through
January 1, 2009, in which case they were added to the principal balance and bear
interest from the date the payment was due. The loan matures on October 1, 2010,
when the entire principal balance and all accrued interest will be due and
payable.  At December 31, 2008, the Note was secured by 25,000,000
shares of the Company’s stock which were pledged as collateral by members of SSH
LLC.





At March 31, 2009 and December 31,
2008, the contractual outstanding loan balance was $7,161,791 (including accrued
interest through December 31,2008 of $371,778).  In accordance with
SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, the Company evaluated the
collectability of the loan and determined that at December 31, 2008 it was
probable that the Company would be unable to collect all amounts contractually
due under the Note.  This conclusion was principally based on the
deterioration in the value of the underlying collateral and the worsening
economic environment.




12





At December 31, 2008, the Company
recorded a $5.8 million valuation allowance and a corresponding charge to
impairment loss in order to write down the Note to the estimated fair value of
the underlying collateral.  In the absence of an active market for the
Company’s stock, or other observable inputs for similar instruments, the Company
based its valuation principally on the value of the recent issue of preferred
stock, adjusted using an assumed discount rate of 20%, which is management’s
estimate based on the value of the preferred features of the Series A Preferred
Stock.  In addition, management assumed that SSH LLC and/or its
members would sell a portion of the underlying collateral to meet their
quarterly interest payments, thereby reducing the amount of collateral expected
to be available when the Note matures in 2010.  These are considered
unobservable inputs falling within the definition of Level 3 inputs pursuant to
SFAS No. 157, Fair Value
Measurements.





On March 30, 2009, SSH LLC sold
2,387,263 pledged shares to Spring Street Partners, L.P. in a private
transaction valued at $0.075 per share or $179,045 in the
aggregate.  The proceeds were applied against the Note interest
payment due April 1, 2009 and will be applied against the next interest payment
when due July 1, 2009.  As a result, the number of shares securing the
Note at March 31, 2009 was reduced to 22,612,737.





At March 31, 2009, the Company reviewed
the valuation of the Note and determined that no further adjustment to the
valuation allowance of $5.8 million is necessary.





Recent accounting pronouncements–In April 2009, the
Financial Accounting Standards Board (“FASB”) issued three final Staff Positions
(“FSP”) intended to provide additional application guidance and enhance
disclosures regarding fair value measurements and impairments of securities. The
FSPs are effective for interim and annual periods ending after June 15,
2009.





FSP
157-4, Determining Fair
Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly, provides additional
guidance on estimating fair value when the volume and level of activity for an
asset or liability have significantly decreased in relation to normal market
activity for the asset or liability. This FSP also provides additional guidance
on circumstances that may indicate that a transaction is not
orderly.  The Company is currently evaluating the impact the adoption
of this FSP will have on its financial statements.





FSP
115-2 and 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends existing guidance for
determining whether an other than temporary impairment of debt securities has
occurred. Among other changes, the FASB replaced the existing requirement that
an entity’s management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that management assert
(a) it does not have the intent to sell the security, and (b) it is
more likely than not it will not have to sell the security before recovery of
its cost basis. The Company is currently evaluating the impact the adoption
of this FSP will have on its financial statements.





FSP FAS
107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments requires an entity to provide the annual
disclosures required by SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, in its interim financial statements. The Company
will provide the additional disclosures required by FSP 107-1 and APB 28-1 in
its quarterly report on Form 10-Q for the period ended June 30,
2009.





Results
of Operations





Comparisons
of the Three Months Ended March 31, 2009 and 2008





Revenues





The Company’s total revenues were $997
thousand for the first quarter of 2009 compared to $592 thousand for the
comparable 2008 quarter, an increase of 68%.  A net of 19 new licenses
were added during the first quarter of 2009, compared with 15 for the first
quarter of 2008, a growth of 27%.  We also added an additional $102
thousand in recurring revenue from existing clients who upgraded their service
by adding more boards, committees or users to their licenses.




13





Cost
of Revenues and Operating Expenses





Cost
of Revenues





Cost of revenues were $456 thousand and
$443 thousand for the three months ended March 31, 2009 and 2008, respectively,
an increase of 3%.  Cost of revenues as a percentage of revenue
decreased to 45.9% for the 2009 first quarter, compared with 74.9% for the first
quarter of 2008.  The largest contributor to cost of revenues is the
salaries and labor burden cost for account management, customer support and IT
services staff.  These costs have increased only slightly as we have
been able to achieve greater economies of scale as our client base
increased.





Selling
and Marketing Expenses





Subsequent to our initial public
offering at the end of 2007, we significantly increased our sales and marketing
efforts, and the first quarter of 2008 includes the effect of this
initiative.  By the third quarter of 2008, we initiated plans to scale
back our growth plans in order to reduce our operating
expenses.  These costs reductions were fully implemented by the first
quarter of 2009, and resulted in the marked decrease in selling and marketing
expenses, to $680 thousand in the first quarter of 2009 from $1,588 thousand for
the comparable 2008 quarter, a decrease of $908 thousand or
57%.  Despite this decrease in sales and marketing expenditures, we
were able to achieve an increase in revenues of 68% over the comparable 2008
quarter, in large part because our smaller sales force was more experienced,
fully trained and better focused.  We reduced our sales force from 31
at March 31, 2008 (including ten fully trained) to nine at March 31, 2009 (all
fully trained), resulting in a decrease in salaries, commissions and benefits of
$306 thousand.  In addition, we refocused our efforts on the North
American market, resulting in a decrease in UK costs of $260 thousand and New
Zealand costs of $51 thousand.  Other significant decreases included
printing and mailing costs ($118 thousand), travel and entertainment ($50
thousand), outside contractors ($45 thousand) and other marketing costs ($32
thousand).





General
and Administrative Expenses





General and administrative expenses
were $1.1 million for the three months ended March 31, 2009, compared with $1.3
million for the comparable 2008 quarter.  General and administrative
expenses in the first quarters of 2009 and 2008 include $20 thousand and $241
thousand, respectively, of share-based compensation expense relating to stock
awards made to employees and non-employees under the Company’s 2007 Stock Option
and Incentive Plan.





General and administrative expenses,
excluding share-based compensation, were $1.1 million and $1.1 million for the
three months ended March 31, 2009 and 2008, respectively.  While the
total general and administrative expenses for each quarter has remained level,
the first quarter of 2009 included increases of approximately $111 thousand in
legal and accounting services and $89 thousand in salaries and wages as a result
of additional staffing requirements.  Additionally, the increase in
our staffing levels resulted in increased costs for office rentals and related
overhead.  These increases were offset by a decrease of $170 thousand
in directors’ fees and travel expenses, as we decreased the number of directors
from nine at March 31, 2008 to six at March 31, 2009, as part of our cost
reduction initiative.





Research
and Development Expenses





Research and development expenses were
$160 thousand for the first quarter of 2009 compared to $284 thousand for the
comparable 2008 quarter, a decrease of 44%.  This decrease is due to
two factors.  First, there was a leveling off of research and
development expenses after the achievement of certain key product
enhancements.  Second, our research and development is performed by
our New Zealand subsidiary and the Company benefitted from the weakening of the
New Zealand dollar versus the US dollar.





Depreciation
and Amortization





Depreciation and amortization increased
to $90 thousand from $53 thousand for the three months ended March 31, 2009 and
2008, respectively.  This is attributable to the net increase in
property and equipment of $130 thousand from March 31, 2008 to March 31, 2009,
consisting principally of computer software, computer equipment and leasehold
improvements.




14





Interest
Income, net





Net interest income decreased to $85
thousand for the three months ended March 31, 2009 from $207 thousand for the
comparable 2008 period.  Net interest income includes interest income
on the Note Receivable from our affiliate, as well as interest on the Company’s
cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the decrease in our cash balances from $10.1 million at March 31, 2008 to $3.1
million at March 31, 2009.





Foreign
Exchange (Loss) Gain





Our functional currency is the U.S.
dollar.  As a worldwide company, certain of our 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 resulting from these transactions 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, during 2008, the parent Company maintained
significant cash balances in foreign currencies, primarily in NZD and, to a
lesser extent, GBP.  The foreign exchange gain of $79 thousand for the
three months ended March 31, 2008 is a result of favorable movements in the
rates of exchange between the US dollar and NZD during that period, whereas the
loss of $43 thousand for the three months ended March 31, 2009 resulted from
unfavorable movements in these currencies.





Liquidity
and Capital Resources





As of March 31, 2009, our principal
sources of liquidity were cash and cash equivalents and term deposits totaling
approximately $3.2 million, and accounts receivable of approximately $0.3
million.  On March 11, 2009, the Company secured $2.9 million (net) of
financing from Spring Street Partners, L.P. and Carroll Capital Holdings, LLC,
who collectively purchased 30 million shares of newly-created Series A Preferred
Stock for $0.10 per share.  Prior to March 2009, our primary source of
financing was the proceeds of our New Zealand public offering completed in
December 2007, which raised $16.4 million (net) from the issuance of 24 million
shares of common stock.





Despite growth in net sales, our growth
rate lagged behind the projections we had set for the Company at the time of the
IPO, which was exacerbated by the global financial crisis.  Amid
liquidity concerns, we initiated plans to scale back our growth plans in order
to reduce our operating expenses.  During the fourth quarter of 2008,
we significantly reduced our sales force, reduced salaries for some of our more
highly compensated employees and reduced the number of members of the board of
directors.  The cost cutting continues into 2009, as we look for
further opportunities to reduce overhead.





At the
current level of reduced expenses, coupled with conservative sales growth
forecasts, management believes this funding will be sufficient to support sales
growth and achieve cash flow breakeven by approximately the third quarter of
2010.





The Company continues to consider and
evaluate strategic growth opportunities that could result in additional capital
requirements and are not currently within the budget.  Our current
operating expenses and expected capital expenditures are fixed, predictable and
adequate to support our budgeted growth.  The primary uncertainty
concerning our capital needs pertains to our ability to achieve the expected
sales growth in a timely manner such that recurring revenues exceed operating
expenditures prior to the depletion of capital.





Net Cash Flows from Operating
Activities





Cash used in operating activities for
the first quarter of 2009 was $0.9 million, compared with $3.0 million for the
first quarter of 2008.  This reduction in cash used in operations
resulted from an increase in sales of $400 thousand and a decrease in operating
expenses of $1.2 million.  During the first quarter of 2008, the
Company incurred significant expenses to expand our sales and marketing
efforts.  By the end of 2008, we had scaled back expenses, which is
reflected in the results for the first quarter of 2009.




15





Net Cash Flows from Investing
Activities





Cash used in investing activities
decreased from $430 thousand in the first quarter of 2008 to $28 thousand in the
first quarter of 2009, predominantly used for purchases of property and
equipment.  Subsequent to the IPO in December 2007, we invested
significant amounts in our infrastructure, which was largely set up by the first
quarter of 2009.





Net Cash Flows from Financing
Activities





During
the first quarter of 2009, the Company secured $2.9 million in financing, net of
issuance costs, from the issuance of Series A preferred stock.  During
the first quarter of 2008, the Company incurred $0.1 million in financing
activities, primarily due to an increase in the loan to an
affiliate.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable.





Item
4T. Controls and Procedures.





(a)  Evaluation of
disclosure controls and procedures.As of the end of the
quarter ended March 31, 2009, our Chief Executive Officer and Chief Financial
Officer have each reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act).  Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have each concluded that our current disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.





(b)  Changes in Internal
Controls.There has been no change in the Company’s internal
control over financial reporting required by Exchange Act Rule 13a-15 or 15d-15
that occurred during the fiscal quarter ended March 31, 2009 that has materially
affected, or is reasonably likely to materially affect Diligent Board Member
Services, Inc.’s internal control over financial reporting.





PART
II—OTHER INFORMATION




Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





Not
required.





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





On March
11, 2009, we issued 30,000,000 shares of newly created Series A Preferred Stock
to Spring Street Partners, L.P. and Carroll Capital Holdings, LLC for US$0.10
per share.  The Series A Preferred Stock
was issued pursuant to the exemption from registration provided by Rule 506 of
Regulation D and/or Section 4(2) ofthe
Securities Act of 1933 (based on the issuance not involving any public offering
and the shares being issued solely to accredited investors).The Preferred Shares carry a fixed,
cumulative, dividend of 11% per annum (adjusted for stock splits, consolidation,
etc).  The dividend may (at Diligent’s option) be paid on the first
business day of each calendar year for the prior year either in cash or in kind
by the issuance of additional Preferred Shares (PIK Shares), to be issued at the
same issue price of US$0.10 per share.  The 11% annual dividend on the
Preferred Shares will rank ahead of the declaration or payment of any dividends
on Diligent’s common stock (ordinary shares).  In addition to the 11%
preferred dividend, the holders of the Preferred Shares will also be entitled to
participate pro rata in any dividend paid on Diligent’s common
stock.  The Preferred Shares will be convertible at any time at the
option of the holders into Diligent common stock on a one-for-one basis based on
a conversion price of US$0.10 per share.  The holders of Series A
Preferred Stock are also entitled to exercise preemptive rights with respect to
any future securities offerings conducted by the Company except for certain
specified exceptions.




16





The
holders of the Series A Preferred Stock are entitled to vote on an as-converted
basis with the holders of our common stock except in the general election of
directors.  However, the holders of Series A Preferred Stock voting as
a class are entitled to elect one director.  The Series A director may
only be removed by the holders of Series A Preferred Stock.





As long
as not less than 15,000,000 shares of Series A Preferred Stock (adjusted for
stock splits, re-capitalizations and the like) remain outstanding, we may not
take actions related to certain major transactions, through merger or
consolidation with any other corporation or otherwise, without obtaining the
consent of not-less than 60% (or 81% where noted) of the shares of Series A
Preferred Stock voting separately as a class.  The major transactions
requiring consent include the following:





(i)            liquidate,
dissolve or wind-up the business and affairs of the Company, effect any merger
or sale of substantially all of our assets, or consent to any of the
foregoing;





(ii)           amend,
alter or repeal any provision of our certificate of incorporation, or take such
action with respect to the bylaws of the Company in a manner that adversely
affects the powers, preferences or rights of the Series A Preferred Stock
(except changes to the bylaws required by the listing rules of the New Zealand
Stock Exchange, which such changes shall not trigger the right provided herein);
provided, that any such
amendment, alteration or repeal shall require the written consent or affirmative
vote of the holder of at least 81% of the then outstanding shares of Series A
Preferred Stock;





(iii)          create,
or authorize the creation of, or issue or obligate itself to issue shares of,
any additional class or series of capital stock unless the same ranks junior to
the Series A Preferred Stock with respect to the distribution of assets on the
liquidation, dissolution or winding up of the Company, the payment of dividends
and redemption rights, or increase the authorized number of shares of Series A
Preferred Stock or increase the authorized number of shares of any additional
class or series of capital stock unless the same ranks junior to the Series A
Preferred Stock with respect to the distribution of assets on the liquidation,
dissolution or winding up of the Company, the payment of dividends and
redemption rights;





(iv)          purchase
or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any
dividend or make any distribution on, any shares of capital stock of the Company
other than (i) redemptions of or dividends or distributions on the Series A
Preferred Stock as expressly authorized herein, (ii) dividends or other
distributions payable on the common stock solely in the form of additional
shares of common stock, (iii) repurchases of stock from former employees,
officers, directors, consultants or other persons who performed services for the
Company or any subsidiary in connection with the cessation of such employment or
service at an amount no more than the greater of the original purchase price or
the then-current fair market value thereof, or (iv) as approved by the Board of
Directors, including the approval of the Series A Director;





(v)           create,
or authorize the creation of, or issue, or authorize the issuance of any debt
security, or permit any subsidiary to take any such action with respect to any
debt security, other than equipment leases, accounts payable, insurance premium
financing, bank loans and lines of credit and other similar corporate financings
available from commercial and banking sources;





(vi)          create,
or hold capital stock in, any subsidiary that is not wholly owned (either
directly or through one or more other subsidiaries) by the Company, or sell,
transfer or otherwise dispose of any capital stock of any direct or indirect
subsidiary of the Company, or permit any direct or indirect subsidiary to sell,
lease, transfer, exclusively license or otherwise dispose (in a single
transaction or series of related transactions) of all or substantially all of
the assets of such subsidiary;




17





(vii)         increase
the authorized number of directors constituting our board of directors to more
than seven (7) persons;





(viii)        increase
the aggregate number of shares available under the Company’s common stock plan,
its restricted stock plan, or any other plan involving the issuance of the
Company’s equity securities to its employees, agents or directors to more than
14.5 million shares under all such plans, or issue the Company’s securities
outside of such plan in exchange for services in excess of an aggregate of 1
million shares in any given twelve month period;





(ix)           forgive,
modify the terms of, value the stock held in escrow as security for, or
otherwise amend, waive or delay the enforcement of the obligations owed by
Services Share Holding, LLC (f/k/a Diligent Board Member Services, LLC) pursuant
to the Promissory Note and Security Agreement dated October 1, 2007 and related
obligations it has issued to the Company (the “LLC Note”), provided, that the
Company’s Board of Directors may, without the consent of the Series A Preferred
Stock, approve a complete prepayment of the LLC Note at a discount so long as
any prepayment discount rate is approved by a majority of the directors who do
not have an interest in the LLC Note; or





(x)       
    enter into any transaction with an affiliate in excess
of US$250,000 per year.





Item
3. Defaults Upon Senior Securities.





Not
applicable.





Item
4. Submission of Matters to a Vote of Security Holders.





We held a special meeting of our
shareholders on March 11, 2009, New Zealand time, to consider and vote upon the
following proposals:





(i)           A
proposal to amend and restate the Company’s Certificate of Incorporation to
increase the authorized common stock to 250 million shares and designating a new
Series A Preferred Stock and setting forth its rights, powers and preferences
(the “Amended and Restated Certificate”).




(ii)           The
Company’s initial issuance of 20,000,000 shares of Series A Preferred Stock for
US$0.10 per share to Spring Street Partners, L.P. (“Spring Street”), the
issuance by the Company of up to 13,333,333 additional shares of Series A
Preferred Stock payable as PIK dividends upon the Series A Preferred Stock in
accordance with the terms of the Series A Preferred Stock if declared by the
Company’s Board of Directors and the issuance by the Company of any shares of
the Company’s common stock into which the Series A Preferred Stock is
convertible in accordance with terms of the Series A Preferred Stock (the
"Spring Street Transaction").




(iii)           The
Company’s initial issuance of 10,000,000 shares of Series A Preferred Stock for
US$0.10 per share to Carroll Capital Holdings, LLC (“CCH”), the issuance by the
Company of up to 6,666,667 additional shares of Series A Preferred Stock payable
as PIK dividends upon the Series A Preferred Stock in accordance with the terms
of the Series A Preferred Stock if declared by the Company’s Board of Directors
and the issuance by the Company of any shares of the Company’s common stock into
which the Series A Preferred Stock is convertible in accordance with terms of
the Series A Preferred Stock (the "CCH Transaction").




The proposals were approved as
follows:





Votes
      For
                      
                      
                      Votes
      Against
                      
                      
                      Votes
      AbstainedApprove
      Amended and Restated Certificate
                      
                      
                      61,415,070
                      
                      
                      
                      149,000
                      
                      
                      
                      25,000Approve
      the Spring Street Transaction
                      
                      
                      61,415,070
                      
                      
                      
                      149,000
                      
                      
                      
                      25,000Approve
      the CCH Transaction
                      
                      
                      53,947,145
                      (1)
                      
                      
                      849,000
                      
                      
                      
                      6,792,925
                      (1)





(1) The number of votes approving the CCH Transaction is
significantly lower, and the number of votes abstained from the CCH Transaction
is significantly higher, as compared to the
other two proposals because the NZSX rules prohibited Carroll Capital Holdings,
LLC from voting on the CCH Transaction because it involved the issuance of stock
to itself.




18




Item
5. Other Information.





Not applicable.




Item
6. Exhibits.




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




19





SIGNATURES





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




DILIGENT
      BOARD MEMBER SERVICES, INC.Dated:  May
      14, 2009
            By:
            /s/ Alessandro SodiAlessandro
      Sodi, Chief Executive OfficerDated:  May
      14, 2009
            By:
            /s/ Hunter CohenHunter
      Cohen, Chief Financial Officer




20