UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q




(Mark
One)




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




For the quarterly period ended
September 30, 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.   ̈ Yes x No




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




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




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




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


 ̈ Yes
x
No




The number of shares of the
registrant’s common stock outstanding as of November 9, 2009 was
90,440,000.









(This
page intentionally left blank)





CONTENTS




PAGEForward
      Looking Statements
                                              .iiAvailable
      Information
                                              iiPART
      I – Financial InformationItem
      1.
                                              Consolidated
      Financial Statements
                                              1Item
      2.
                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                              10Item
      3.
                                              Quantitative
      and Qualitative Disclosures About Market Risk
                                              20Item
      4T.
                                              Controls
      and Procedures
                                              20PART
      II – Other InformationItem
      1.
                                              Legal
      Proceedings
                                              21Item
      1A.
                                              Risk
      Factors
                                              21Item
      2.
                                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                                              21Item
      3.
                                              Defaults
      Upon Senior Securities
                                              21Item
      4.
                                              Submission
      of Matters to a Vote of Security Holders
                                              21Item
      5.
                                              Other
      Information
                                              21Item
      6.
                                              Exhibits
                                              21SIGNATURES
                                              22


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




September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008(Unaudited)ASSETSCash
      and cash equivalents
                    
                    $
                    1,308,928
                    
                    
                    $
                    1,265,347Term
      deposit
                    
                    
                    72,270
                    
                    
                    
                    58,150Accounts
      receivable, net
                    
                    
                    313,495
                    
                    
                    
                    390,180Prepaid
      expenses and other current assets
                    
                    
                    244,778
                    
                    
                    
                    222,617Total
      current assets
                    
                    
                    1,939,471
                    
                    
                    
                    1,936,294Property
      and equipment, net
                    
                    
                    1,164,184
                    
                    
                    
                    1,116,007Note
      receivable from affiliate, net of valuation allowance
                    
                    
                    1,361,791
                    
                    
                    
                    1,361,791Restricted
      cash - security deposits
                    
                    
                    247,675
                    
                    
                    
                    246,685Total
      assets
                    
                    $
                    4,713,121
                    
                    
                    $
                    4,660,777LIABILITIES,
      REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIENCY)
      EQUITYAccounts
      payable and accrued expenses
                    
                    $
                    388,507
                    
                    
                    $
                    474,860Deferred
      revenue
                    
                    
                    1,108,549
                    
                    
                    
                    601,408Current
      portion of obligations under capital leases
                    
                    
                    105,182
                    
                    
                    
                    114,308Payables
      to affiliates
                    
                    
                    5,530
                    
                    
                    
                    49,578Total
      current liabilities
                    
                    
                    1,607,768
                    
                    
                    
                    1,240,154Obligations
      under capital leases, less current portion
                    
                    
                    81,180
                    
                    
                    
                    50,816Other
      noncurrent liabilities
                    
                    
                    41,535
                    
                    
                    
                    -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 $4,684,438)
                    
                    
                    3,060,701
                    
                    
                    
                    -Stockholders'
      (deficiency) equity:Common
      Stock, $.001 par value, 250,000,000 shares authorized, 90,440,000
      shares issued and outstanding
                    
                    
                    90,440
                    
                    
                    
                    90,440Additional
      paid-in capital
                    
                    
                    24,498,273
                    
                    
                    
                    24,618,070Accumulated
      deficit
                    
                    
                    (24,656,856
                    )
                    
                    
                    (21,318,658
                    )Accumulated
      other comprehensive loss
                    
                    
                    (9,920
                    )
                    
                    
                    (20,045
                    )Total
      stockholders' (deficiency) equity
                    
                    
                    (78,063
                    )
                    
                    
                    3,369,807Total
      liabilities, redeemable preferred stock and stockholders' (deficiency)
      equity
                    
                    $
                    4,713,121
                    
                    
                    $
                    4,660,777





See
accompanying notes to consolidated financial statements


1





Diligent
Board Member Services, Inc.


Consolidated
Statements of Operations


(Unaudited)





Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues
                  
                  $
                  1,303,764
                  
                  
                  $
                  797,721
                  
                  
                  $
                  3,457,668
                  
                  
                  $
                  2,089,893Cost
      of revenues
                  
                  
                  548,555
                  
                  
                  
                  522,588
                  
                  
                  
                  1,544,122
                  
                  
                  
                  1,422,584Gross
      profit
                  
                  
                  755,209
                  
                  
                  
                  275,133
                  
                  
                  
                  1,913,546
                  
                  
                  
                  667,309Operating
      expenses:Selling
      and marketing expenses
                  
                  
                  579,414
                  
                  
                  
                  1,480,228
                  
                  
                  
                  1,853,075
                  
                  
                  
                  4,865,123General
      and administrative expenses
                  
                  
                  931,096
                  
                  
                  
                  1,557,457
                  
                  
                  
                  3,055,137
                  
                  
                  
                  4,101,415Research
      and development expenses
                  
                  
                  183,826
                  
                  
                  
                  235,033
                  
                  
                  
                  542,753
                  
                  
                  
                  810,871Depreciation
      and amortization
                  
                  
                  102,775
                  
                  
                  
                  74,623
                  
                  
                  
                  286,736
                  
                  
                  
                  196,368Total
      operating expenses
                  
                  
                  1,797,111
                  
                  
                  
                  3,347,341
                  
                  
                  
                  5,737,701
                  
                  
                  
                  9,973,777Operating
      loss
                  
                  
                  (1,041,902
                  )
                  
                  
                  (3,072,208
                  )
                  
                  
                  (3,824,155
                  )
                  
                  
                  (9,306,468
                  )Other
      income (expenses):Interest
      income, net
                  
                  
                  90,919
                  
                  
                  
                  133,407
                  
                  
                  
                  276,561
                  
                  
                  
                  513,023Foreign
      exchange transaction gain/(loss)
                  
                  
                  54,820
                  
                  
                  
                  (296,873
                  )
                  
                  
                  53,927
                  
                  
                  
                  (278,061
                  )Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  170,954
                  
                  
                  
                  -Total
      other income (expenses)
                  
                  
                  145,739
                  
                  
                  
                  (163,466
                  )
                  
                  
                  501,442
                  
                  
                  
                  234,962Loss
      before provision for income taxes
                  
                  
                  (896,163
                  )
                  
                  
                  (3,235,674
                  )
                  
                  
                  (3,322,713
                  )
                  
                  
                  (9,071,506
                  )Provision
      for income taxes
                  
                  
                  9,429
                  
                  
                  
                  26,652
                  
                  
                  
                  15,485
                  
                  
                  
                  44,239Net
      loss
                  
                  $
                  (905,592
                  )
                  
                  $
                  (3,262,326
                  )
                  
                  $
                  (3,338,198
                  )
                  
                  $
                  (9,115,745
                  )Net
      loss per share (basic and diluted)
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.09
                  )Weighted
      average shares outstanding (basic and diluted)
                  
                  
                  90,440,000
                  
                  
                  
                  102,071,000
                  
                  
                  
                  90,348,425
                  
                  
                  
                  102,071,000


See
accompanying notes to consolidated financial statements


2


Diligent
Board Member Services, Inc.


Consolidated
Statements of Cash Flows


(Unaudited)




Nine Months Ended September 30,2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (3,338,198
                  )
                  
                  $
                  (9,115,745
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  286,736
                  
                  
                  
                  196,368Share-based
      compensation
                  
                  
                  79,754
                  
                  
                  
                  697,370Accrued
      interest receivable
                  
                  
                  -
                  
                  
                  
                  (258,141
                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  76,685
                  
                  
                  
                  (294,446
                  )Prepaid
      expenses and other current assets
                  
                  
                  (22,161
                  )
                  
                  
                  (35,027
                  )Restricted
      cash - security deposits
                  
                  
                  (990
                  )
                  
                  
                  (204,544
                  )Accounts
      payable and accrued expenses
                  
                  
                  (86,353
                  )
                  
                  
                  83,744Deferred
      revenue
                  
                  
                  507,141
                  
                  
                  
                  115,746Payables
      to affiliates
                  
                  
                  (44,048
                  )
                  
                  
                  (121,897
                  )Other
      noncurrent liabilities
                  
                  
                  41,535
                  
                  
                  
                  -Net
      cash used in operating activities
                  
                  
                  (2,499,899
                  )
                  
                  
                  (8,936,572
                  )Cash
      flows from investing activities:Cash
      acquired in acquisition, net of purchase price
                  
                  
                  -
                  
                  
                  
                  83,593Investment
      in term deposit
                  
                  
                  -
                  
                  
                  
                  (993,620
                  )Purchase
      of property and equipment
                  
                  
                  (204,827
                  )
                  
                  
                  (856,967
                  )Net
      cash used in investing activities
                  
                  
                  (204,827
                  )
                  
                  
                  (1,766,994
                  )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
                  )Due
      from officers
                  
                  
                  -
                  
                  
                  
                  (145,843
                  )Payments
      of obligations under capital leases
                  
                  
                  (102,147
                  )
                  
                  
                  (77,468
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  2,759,003
                  
                  
                  
                  (323,311
                  )Effect
      of exchange rates on cash and cash equivalents
                  
                  
                  (10,696
                  )
                  
                  
                  8,691Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  43,581
                  
                  
                  
                  (11,018,186
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  1,265,347
                  
                  
                  
                  13,675,080Cash
      and cash equivalents at end of period
                  
                  $
                  1,308,928
                  
                  
                  $
                  2,656,894Supplemental
      disclosure of cash flow information:Cash
      paid during the period for :Interest
                  
                  $
                  21,775
                  
                  
                  $
                  30,563Income
      taxes
                  
                  $
                  19,948
                  
                  
                  $
                  7,184Supplemental
      disclosure of noncash investing and financing activities:Share-based
      compensation
                  
                  $
                  79,754
                  
                  
                  $
                  697,370Property
      and equipment acquired under capital leases
                  
                  $
                  123,385
                  
                  
                  $
                  -Conversion
      of accrued interest to loan principal
                  
                  $
                  -
                  
                  
                  $
                  258,141


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.





The
Company has evaluated all subsequent events through November 9, 2009, which
represents the filing date of this Form 10-Q with the SEC, to ensure that this
Form 10-Q includes subsequent events that should be recognized in the financial
statements as of September 30, 2009, and appropriate disclosure of subsequent
events which were not recognized in the financial statements.




2)
            Liquidity





Despite growth in net sales during
2008, the Company’s growth rate lagged behind its projections.  Amid
liquidity concerns, the Company initiated plans to scale back its growth plans
in order to reduce operating expenses.  During the fourth quarter of
2008, the Company significantly reduced its sales force, reduced salaries for
some of its more highly compensated employees and reduced the number of members
of the board of directors.  The Company also actively sought
additional sources of financing and, in March 2009, issued 30,000,000 shares of
newly-created Series A Preferred Stock for $0.10 per share, providing additional
capital of $2,861,150, net of issuance costs (See Note 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 an expected cash flow break even by the
end of 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 quarterly interest payments of approximately $90,000
due through October 1, 2010, and a $7,161,791 principal payment due October 1,
2010.  This note is collateralized with 21,992,597 shares of Diligent
common stock.  Management 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 and nine months ended September 30, 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.





Fair value of financial
instruments – The Company’s financial instruments include cash and cash
equivalents, term deposits, accounts receivable, accounts payable and accrued
expenses.  The fair value of these financial instruments approximates
book value due to their short term settlements.





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 or stock options issued to employees and
contractors for services rendered.  The Company 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
the Company in exchange for the award.





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.





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 and stock
options.  Because the Company reported a net loss for all periods
presented, all potential common shares attributable to unvested restricted stock
and stock options have been excluded from the computation of the diluted net
loss per share because the effect would have been anti-dilutive.





Recent accounting pronouncements–In April 2009, the
Financial Accounting Standards Board (“FASB”) issued new accounting guidance
intended to provide additional application guidance and enhance disclosures
regarding fair value measurements and impairments of securities. The guidance is
effective for interim and annual periods ending after June 15, 2009. The Company
adopted this guidance upon its issuance and it had no material impact on the
Company’s consolidated financial statements.


5





In May
2009, the FASB issued new guidance on management’s assessment of subsequent
events, which establishes the accounting and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. It requires the disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date. The new
guidance was effective for interim and annual periods ending after June 15,
2009, and the implementation did not have a material impact on the Company’s
consolidated financial statements.





In June
2009, the FASB issued new accounting guidance which will change the way entities
account for securitizations and special-purpose entities.  The new
guidance eliminates existing exceptions, strengthens the standards relating to
securitizations and special-purpose entities, and enhances disclosure
requirements, and is effective for fiscal years beginning after November 15,
2009.  The adoption of this guidance will not have a material effect
on the Company’s consolidated financial statements.





In July
2009, the FASB issued the Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (“Codification”), which is the single
source of authoritative U.S. nongovernmental GAAP.  The Codification
does not change GAAP, but is intended to make it easier to find and research
issues and will change the way GAAP is referenced.   The Codification
is effective for interim and annual periods ending after September 15,
2009.  The Company has begun to use the new Codification when
referring to GAAP in this Form 10-Q.





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.





5)
            Term
      deposit





At September 30, 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 (US$72,270 at
September 30, 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 (US$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 Note bears interest at 5% per
annum, which is payable in arrears on the first day of each calendar quarter,
commencing April 1, 2008.  SSH LLC elected, under the terms of the
Note, to defer each of the first four quarterly interest payments through
January 1, 2009, in which case the interest was added to the principal balance
and continues to accrue 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 September 30, 2009 and December 31,
2008, the contractual outstanding loan balance was $7,161,791 (including accrued
interest through December 31, 2008 of $371,778).  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.





On March 30, 2009, SSH LLC sold
2,387,263 pledged shares to Spring Street Partners, L.P. in a private
transaction valued at $0.075 per share, or $179,045 in the
aggregate.  The proceeds were applied against the Note interest
payments due April 1 and July 1, 2009.  In September 2009, SSH LLC
sold an additional 620,140 shares to Spring Street Partners, L.P. in a private
transaction valued at $0.144 per share.  The proceeds of $89,523 were
used to pay the interest due October 1, 2009.  As a result, the number
of shares securing the Note at September 30, 2009 is 21,992,597.





At September 30, 2009, the Company
reviewed the valuation of the Note and determined that no further adjustment to
the valuation allowance 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 $0.10 per share in a private offering, for an aggregate of $3,000,000
in additional capital.  Expenses relating to the share issuance were
$138,850.  The principal terms of the Preferred Shares are as
follows:





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





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





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





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





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





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





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


7





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





The
carrying value of the Preferred Shares at September 30, 2009 is as
follows:




Gross
      proceeds
                    
                    $
                    3,000,000Less:
      Issuance costs
                    
                    
                    (138,850
                    )$
                    2,861,150Cumulative
      amortization of offering costs
                    
                    
                    15,113Cumulative
      in kind dividend
                    
                    
                    184,438Balance
      at September 30, 2009
                    
                    $
                    3,060,701




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. Pursuant to delegation by the
Company's Board of Directors, the Remunerations and Nominations Committee
determines the number of shares, the term, the frequency and date, the type, the
exercise periods, any performance criteria pursuant to which stock option awards
may be granted and the restrictions and other terms and conditions of each grant
of restricted shares in accordance with the terms of the Plan.  The
Plan authorizes the issuance of up to 10,000,000 shares of the Company’s common
stock.





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





On October 23, 2008, the Company
granted 600,000 shares of restricted stock to two officers in accordance with
the terms of their employment agreements, which included 250,000 shares which
vested immediately, 250,000 shares which vested on February 15, 2009, and
100,000 shares which vested on May 15, 2009, based on continued employment
through 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.


8





During the nine months ended September
30, 2009 and 2008, the Company recognized share-based compensation costs related
to restricted stock awards of $23,099 and $697,370, respectively.





There
were 2,119,000 shares of nonvested restricted stock outstanding 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 became fully vested in
May 2009.  Accordingly, at September 30, 2009 restricted stock is
fully vested and there is no unrecognized compensation cost.





Stock Option Awards
– On August 20, 2009 the
Board of Directors approved the Stock Option Agreement, which contains the terms
and conditions with respect to stock options granted by the Company under the
Plan.  On that date, the Board of Directors awarded 3,650,000 stock
options to officers and an additional 100,000 options to two former outside
directors of the Company.  The exercise price of each option is the
market price of the Company’s stock for the last sale prior to the grant date,
converted to U.S. dollars using the exchange rate in effect on the grant
date.  The options generally expire after a period not to exceed ten
years, except in the event of termination, whereupon vested options must be
exercised generally within three months, or upon death or disability, in which
cases the vested options may be exercised within twelve months, but in all cases
the exercise date may not exceed the expiration date.





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





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





Expected
      volatility (1)
                    
                    
                    183.98
      - 186.94
                    %Expected
      term (2)
                    
                    5.35
      – 6.00 yearsRisk-free
      interest rate (3)
                    
                    
                    2.43
      - 2.75
                    %Dividend
      yield
                    
                    
                    -





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


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


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





The
weighted average grant-date fair value of the options granted was
$0.1369.





A summary of stock option activity for
the nine months ended September 30, 2009 is as follows:





Options
                          
                          
                          Weighted
                            average
                            exercise price
                          
                          Weighted average
                            remaining
                            contractual termOutstanding
      at January 1, 2009
                          
                          
                          -
                          
                          
                          $
                          -Granted
                          
                          
                          3,750,000
                          
                          
                          
                          .14Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          -
                          
                          
                          
                          -Outstanding
      at September 30, 2009
                          
                          
                          3,750,000
                          
                          
                          
                          .14
                          
                          9.89
      yearsExercisable
      at September 30, 2009
                          
                          
                          -
                          
                          
                          $
                          .14


9





During the nine months ended September
30, 2009, the Company recognized share-based compensation costs related to stock
options of $56,655.  At September 30, 2009 there was $456,802 of
unrecognized share-based compensation expense related to options granted that
will be recognized over the next three years.





10)          Income taxes –The Company
records 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 more likely than not that
the deferred tax assets will not be realized.





The
Company and its subsidiaries are subject to regular audits by federal, state and
foreign tax authorities.  These audits may result in additional tax
liabilities.  The Company’s federal, state and foreign income tax
returns for the tax years ended December 31, 2008 and 2007 are open for
examination by the respective taxing jurisdictions.





11)          Subsequent events –On October 9, 2009, the
Company issued 910,000 stock option awards to employees, at an exercise price of
$0.16 per share, which vest one year from the date of grant and
expire  ten years from the date of grant





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.





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.





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 the end of the third quarter of 2010.


10





The third
quarter of 2009 was the best quarter since inception for new sales, with the
addition of 30 new agreements for Boardbook licenses and $0.65 million in annual
recurring revenue.  For the nine months ended September 30, 2009, we
added 69 new agreements and $1.64 million in annual recurring
revenue.  The Company now has 243 worldwide clients and more than
6,500 users of its Boardbooks products, servicing customers across a wide range
of industry segments.  Significantly for the Company, the third
quarter performance reflects a positive shift in the confidence level of US
companies, which had been particularly hard hit by the global financial
crisis.  While the global economic climate continues to be
challenging, interest in Boardbooks remains strong with the level of inquiry
high, the sales pipeline growing, and a significant number of discussions with
prospective clients in the well-developed stage.  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.





Despite
the encouraging results of the third quarter, 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 share-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.


11


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.





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.





The
Company expenses software development costs as they are incurred, until
technological feasibility has been established, at which time those costs are
capitalized until the product is available for general release to
customers.  To date, our software has been available for general
release concurrent with the establishment of technological feasibility and,
accordingly, we have not capitalized any development
costs.  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, thus 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.  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.





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.


12





The fair value of stock options is
estimated on the date of grant using the Black-Scholes option pricing model and
the resulting fair value is recorded as compensation expense on a straight line
basis over the option vesting period for employee stock options.





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





Expected
      volatility (1)
                  
                  
                  183.98
      - 186.94
                  %Expected
      term (2)
                  
                  5.35
      – 6.00 yearsRisk-free
      interest rate (3)
                  
                  
                  2.43
      - 2.75
                  %Dividend
      yield
                  
                  
                  -





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


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


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





Interest
Income, net





Interest
income is derived from interest bearing bank deposits held in US, UK and New
Zealand bank accounts, together with investment income from a note receivable
due from a related party, SSH 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 of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.





The Company and its subsidiaries are
subject to regular audits by federal, state and foreign tax
authorities.  These audits may result in additional tax
liabilities.  The Company’s federal, state and foreign income tax
returns for the tax years ended December 31, 2008 and 2007 are open for
examination by the respective taxing jurisdictions.


13


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 Note bears interest at 5% per
annum, which is payable in arrears on the first day of each calendar quarter,
commencing April 1, 2008.  SSH LLC elected, under the terms of the
Note, to defer each of the first four quarterly interest payments through
January 1, 2009, in which case the interest was added to the principal balance
and continues to accrue 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 September 30, 2009 and December 31,
2008, the contractual outstanding loan balance was $7,161,791 (including accrued
interest through December 31, 2008 of $371,778).  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.





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.





On March 30, 2009, SSH LLC sold
2,387,263 pledged shares to Spring Street Partners, L.P. in a private
transaction valued at $0.075 per share, or $179,045 in the
aggregate.  The proceeds were applied against the Note interest
payments due April 1 and July 1, 2009.  In September 2009, SSH LLC
sold an additional 620,140 shares to Spring Street Partners, L.P. in a private
transaction valued at $0.144 per share.  The proceeds of $89,523 were
used to pay the interest due October 1, 2009.  As a result, the number
of shares securing the Note at September 30, 2009 is 21,992,597.





At September 30, 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 new accounting
guidance intended to provide additional application guidance and enhance
disclosures regarding fair value measurements and impairments of securities. The
guidance is effective for interim and annual periods ending after June 15, 2009.
The Company adopted this guidance upon its issuance and it had no material
impact on the Company’s consolidated financial statements.





In May
2009, the FASB issued new guidance on management’s assessment of subsequent
events, which establishes the accounting and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date. The new
guidance was effective for interim and annual periods ending after June 15,
2009, and the implementation did not have a material impact on the Company’s
consolidated financial statements.





In June
2009, the FASB issued new accounting guidance which will change the way entities
account for securitizations and special-purpose entities.  The new
guidance eliminates existing exceptions, strengthens the standards relating to
securitizations and special-purpose entities, and enhances disclosure
requirements, and is effective for fiscal years beginning after November 15,
2009.  The adoption of this guidance will not have a material effect
on the Company’s consolidated financial statements.


14





In July
2009, the FASB issued the Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (“Codification”), which is the single
source of authoritative U.S. nongovernmental GAAP.  The Codification
does not change GAAP, but is intended to make it easier to find and research
issues and will change the way GAAP is referenced.   The Codification
is effective for interim and annual periods ending after September 15,
2009.  The Company has begun to use the new Codification when
referring to GAAP in this Form 10-Q.





Results
of Operations for the Three Months Ended September 30, 2009 and
2008





Revenues





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Revenues
                    
                    $
                    1,303,764
                    
                    
                    $
                    797,721
                    
                    
                    $
                    506,043





The growth in total revenues of 63% in
the third quarter of 2009 when compared with the 2008 third quarter is a result
of the cumulative addition of license agreements each quarter.  The
Company has continued to add license agreements each quarter since
inception.  At September 30, 2009, the cumulative license agreements
were 243, compared with 144 at September 30, 2008.  A net of 30 new
licenses were added during the third quarter of 2009, compared with 27 for the
third quarter of 2008.  This increase in revenues is in line with our
targets and was achieved at a significantly lower customer acquisition
cost.  All of the deferred revenue of $1.1 million recorded on the
balance sheet at September 30, 2009 will be recognized as revenue in the next
twelve months, including $0.5 million which will be recognized in the fourth
quarter of 2009.





Cost
of Revenues and Operating Expenses





Cost
of Revenues





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Cost
      of Revenues
                    
                    $
                    548,555
                    
                    
                    $
                    522,588
                    
                    
                    $
                    25,967





Cost of revenues is comprised of
account management, customer support and IT services.  For the three
months ended September 30, 2009, employee costs included in cost of revenues
increased by approximately $49 thousand as compared to the 2008 third quarter,
primarily as a result of a realignment of certain management responsibilities
from research and development to account management and customer support, offset
by reductions in headcount.  This increase was offset by a decrease of
approximately $23 thousand in hosting costs for the
quarter.  Commencing in the third quarter of 2008, we added additional
hosting facilities to accommodate growth, so although hosting costs are higher
overall for 2009, the quarter to quarter costs are slightly lower due to the
significant increase which occurred in the third quarter of 2008 and then
leveled off.





Cost of revenues as a percentage of
revenues decreased to 42.1% for the 2009 third quarter, compared with 65.5% for
the third quarter of 2008, as a result of the greater economies of scale that we
have achieved as our client base increased.





Selling
and Marketing Expenses





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Selling
      and Marketing Expenses
                    
                    $
                    579,414
                    
                    
                    $
                    1,480,228
                    
                    
                    $
                    (900,814
                    )


15


Subsequent to our initial public
offering at the end of 2007, we significantly increased our sales and marketing
efforts, and the first half of 2008 includes the effect of this
initiative.  By the third quarter of 2008, we initiated plans to scale
back our growth plans in order to reduce our operating
expenses.  These cost reductions were fully implemented by the first
quarter of 2009, and resulted in the significant decrease in selling and
marketing expenses for the three months ended September 30, 2009 as compared to
the comparable 2008 period. Despite this decrease in sales and marketing
expenditures, we were able to achieve an increase in revenues, in large part
because our smaller sales force was more experienced, fully trained and better
focused.





We reduced our total sales force to 8
at September 30, 2009 from 23 at September 30, 2008, and our fully trained sales
force to a quarterly average of 8.3 for the third quarter of 2009 from 21.3 for
the comparable 2008 quarter, resulting in a decrease in salaries and benefits of
approximately $0.39 million for the three months ended September 30, 2009, as
compared to the third quarter of 2008.  In addition, we refocused our
efforts on the North American market, resulting in a decrease in costs of our UK
sales office of $0.10 million.  Other significant decreases included
outside contractors ($0.13 million), travel and entertainment ($0.05) and other
marketing costs ($0.23 million).





General
and Administrative Expenses





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)General
      and Administrative Expenses
                    
                    $
                    931,096
                    
                    
                    $
                    1,557,457
                    
                    
                    $
                    (626,361
                    )





General and administrative expenses
includes $0.06 million of share-based compensation expense for the three months
ended September 30, 2009, compared with $0.24 million for the three months ended
September 30, 2008.  General and administrative expenses, excluding
share-based compensation, were $0.87 million and $1.32 million for the three
months ended September 30, 2009 and 2008, respectively.  The decrease
in general and administrative expenses excluding share-based compensation is
$0.45 million.  This includes a decrease in general and administrative
expenses for our UK and New Zealand subsidiaries of $0.17 million which is a
result of the refocusing of our efforts on our North American
operations.  It also includes a net decrease in professional fees of
approximately $0.13 million, a decrease of $0.05 million in rent, office and
employee costs, a decrease of $0.03 million in travel, meals and directors’
costs, and other decreases of $0.07 million, all resulting from our cost
reduction initiative.





Research
and Development Expenses





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Research
      and Development Expenses
                    
                    $
                    183,826
                    
                    
                    $
                    235,033
                    
                    
                    $
                    (51,207
                    )





Research and development expenses
decreased 22% in the third quarter of 2009 as compared to the third quarter of
2008.  Our research and development is performed primarily by our New
Zealand subsidiary, whose expenses in NZD decreased by 15% as a result of a
reduction in R&D staffing after the achievement of certain key product
enhancements.  The remainder of the decrease in R&D expense is due
to the decline in the average NZD/US$ exchange rate by 6% for the third quarter
of 2009 when compared with the average exchange rate for the third quarter of
2008.





Depreciation
and Amortization





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Depreciation
      and Amortization
                    
                    $
                    102,775
                    
                    
                    $
                    74,623
                    
                    
                    $
                    28,152





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


16


Interest
Income, net





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Interest
      Income, net
                    
                    $
                    90,919
                    
                    
                    $
                    133,407
                    
                    
                    $
                    (42,488
                    )





Interest income, net, includes interest
income on the Note Receivable from our affiliate, as well as interest on the
Company’s cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the decrease in our cash and term deposit balances to $1.4 million at September
30, 2009 from $3.7 million at September 30, 2008.





Foreign
Exchange Transaction Gain/(Loss)





Three months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Foreign
      Exchange Gain (Loss)
                    
                    $
                    54,820
                    
                    
                    $
                    (296,873
                    )
                    
                    $
                    351,693





The parent Company maintains a portion
of its cash balances in NZD and GBP.  The foreign exchange gain of $55
thousand for the three months ended September 30, 2009 is a result of the
Company holding less cash in foreign currency accounts during the third quarter
of 2009 while the US dollar has weakened.  The loss in 2008 was a
result of the Company holding significantly higher cash balances in NZD and the
strengthening of the US dollar.





Results
of Operations for the Nine months Ended September 30, 2009 and 2008





Revenues





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Revenues
                    
                    $
                    3,457,668
                    
                    
                    $
                    2,089,893
                    
                    
                    $
                    1,367,775





The
growth in revenues of 65% in the first three quarters of 2009 when compared with
the first three quarters of 2008 is a result of the cumulative addition of
license agreements each quarter.  The Company has continued to add
license agreements each quarter since inception.  At September 30,
2009, the cumulative license agreements were 243, compared with 144 at September
30, 2008.  A net of 69 new licenses were added during the first three
quarters of 2009, compared with 70 for the first three quarters of
2008.  This increase in revenues is in line with our targets and was
achieved at a significantly lower customer acquisition cost. All of the deferred
revenue of $1.1 million recorded on the balance sheet at September 30, 2009 will
be recognized as revenue in the next twelve months, including $0.5 million which
will be recognized in the fourth quarter of 2009.





Cost
of Revenues and Operating Expenses





Cost
of Revenues





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Cost
      of Revenues
                    
                    $
                    1,544,122
                    
                    
                    $
                    1,422,584
                    
                    
                    $
                    121,538





Cost of revenues is comprised of
account management, customer support and IT services.  For the nine
months ended September 30, 2009, employee costs included in cost of revenues
increased by approximately $52 thousand as compared to the nine months ended
September 30, 2008, primarily as a result of a realignment of certain management
responsibilities from research and development to account management and
customer support, offset by reductions in headcount.  The remainder of
the increase in cost of revenues is attributable to IT services.  IT
services costs have increased primarily due to additional hosting facilities the
Company has added as a result of the growth in the number of
users.


17





Cost of revenues as a percentage of
revenues decreased to 44.7% for the first three quarters of 2009, compared with
68.1% for the comparable 2008 period, as a result of the greater economies of
scale that we have achieved as our client base increased.





Selling
and Marketing Expenses





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Selling
      and Marketing Expenses
                    
                    $
                    1,853,075
                    
                    
                    $
                    4,865,123
                    
                    
                    $
                    (3,012,048
                    )





Subsequent to our initial public
offering at the end of 2007, we significantly increased our sales and marketing
efforts, and the first half of 2008 includes the effect of this
initiative.  By the third quarter of 2008, we initiated plans to scale
back our growth plans in order to reduce our operating
expenses.  These cost reductions were fully implemented by the first
quarter of 2009, and resulted in the significant decrease in selling and
marketing expenses for the nine months ended September 30,
2009.  Despite this decrease in sales and marketing expenditures, we
were able to achieve an increase in revenues, in large part because our smaller
sales force was more experienced, fully trained and better focused.





We reduced our total sales force to 8
at September 30, 2009 from 23 at September 30, 2008, and our fully trained sales
force to a quarterly average of 8.3 for the third quarter of 2009 from 21.3 for
the comparable 2008 quarter, resulting in a decrease in salaries and benefits of
approximately $1.24 million for the nine months ended September 30, 2009, as
compared to the first nine months of 2008.   In addition, we
refocused our efforts on the North American market, resulting in a decrease in
costs of our UK sales office of $0.62 million.  Other significant
decreases included travel and entertainment ($0.14 million), outside contractors
($0.28 million), marketing salaries and wages ($0.15 million) and other
marketing costs ($0.51 million).





General
and Administrative Expenses





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)General
      and Administrative Expenses
                    
                    $
                    3,055,137
                    
                    
                    $
                    4,101,415
                    
                    
                    $
                    (1,046,278
                    )





General and administrative expenses
includes $0.08 million of share-based compensation expense for the nine months
ended September 30, 2009, compared with $0.70 million for the nine months ended
September 30, 2008.  General and administrative expenses, excluding
share-based compensation, were $2.98 million and $3.40 million for the nine
months ended September 30, 2009 and 2008, respectively.  The decrease
in general and administrative expenses excluding share-based compensation is
$0.42 million.  This includes a decrease in general and administrative
expenses for our UK and New Zealand subsidiaries of $0.26 million which is a
result of the refocusing of our efforts on our North American
operations.  It also includes a decrease of $0.31 million in travel,
meals and directors’ costs as we decreased the number of directors from nine at
September 30, 2008 to six at September 30, 2009, and decreases of $0.03 million
in rent, office and professional fees resulting from our cost reduction
initiative.  These decreases were offset by an increase in employee
costs of $0.17 million due to additional staffing requirements.





Research
and Development Expenses





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Research
      and Development Expenses
                    
                    $
                    542,753
                    
                    
                    $
                    810,871
                    
                    
                    $
                    (268,118
                    )





Research and development expenses
decreased 33% in the first three quarters of 2009 as compared to the first three
quarters of 2008.  Our research and development is performed primarily
by our New Zealand subsidiary, whose expenses in NZD decreased by 17% as a
result of a reduction in R&D staffing after the achievement of certain key
product enhancements.  The remainder of the decrease in R&D
expense is due to the decline in the average NZD/US$ exchange rate by 21% for
the first nine months of 2009 when compared with the average exchange rate for
the first nine months of 2008.


18





Depreciation
and Amortization





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Depreciation
      and Amortization
                    
                    $
                    286,736
                    
                    
                    $
                    196,368
                    
                    
                    $
                    90,368





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





Interest
Income, net





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Interest
      Income, net
                    
                    $
                    276,561
                    
                    
                    $
                    513,023
                    
                    
                    $
                    (236,462
                    )





Interest income, net, includes interest
income on the Note Receivable from our affiliate, as well as interest on the
Company’s cash and cash equivalents and term deposits which are
interest-bearing.  The decrease in interest income is attributable to
the decrease in our cash and term deposit balances from $3.7 million at
September 30, 2008 to $1.4 million at September 30, 2009.





Foreign
Exchange Transaction Gain/(Loss)





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Foreign
      Exchange Gain/(Loss)
                    
                    $
                    53,927
                    
                    
                    $
                    (278,061
                    )
                    
                    $
                    331,988





The parent Company maintains a portion
of its cash balances in NZD and GBP.  The foreign exchange gain of $54
thousand for the nine months ended September 30, 2009 is a result of the Company
holding less cash in foreign currency accounts during the first three quarters
of 2009 while the US dollar has weakened.  The loss in 2008 was a
result of the Company holding significantly higher cash balances in NZD and the
strengthening of the US dollar.





Other
Income





Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Other
      Income
                    
                    $
                    170,954
                    
                    
                    $
                    -
                    
                    
                    $
                    170,954





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





Liquidity
and Capital Resources





As of September 30, 2009, our principal
sources of liquidity were cash and cash equivalents and term deposits totaling
approximately $1.4 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.


19


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.  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 an
expected cash flow break even by the end of the third quarter of
2010.





The Company continues to consider and
evaluate strategic growth opportunities that could result in additional capital
requirements that 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 nine months of 2009 was $2.50 million, compared with $8.94 million for
the nine months of 2008.  This reduction in cash used in operations
resulted from an increase in revenues of $1.37 million and a decrease in
operating expenses of $4.24 million.  During the three quarters 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 three quarters of 2009.





Net Cash Flows from Investing
Activities





Cash used in investing activities
decreased from $1.77 million in the first nine months of 2008 to $0.20 million
in the comparable 2009 period, predominantly used for purchases of property and
equipment.  Subsequent to the IPO in December 2007, the Company
invested significant amounts in our infrastructure, which resulted in additions
to property and equipment of over $0.85 million during the first three quarters
of 2008.  Additionally, approximately $1.0 million of cash was
invested in a term deposit during the first three quarters of 2008.





Net Cash Flows from Financing
Activities





For the
three quarters of 2009, cash provided by financing activities was $2.76 million,
compared with $0.32 million used in financing activities for the comparable 2008
period.  During the first quarter of 2009, the Company secured $2.9
million in financing, net of issuance costs, from the issuance of Series A
preferred stock.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable.





Item
4T. Controls and Procedures.





(a)  Evaluation of
disclosure controls and procedures.As of the end of the
quarter ended September 30, 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 September 30, 2009 that has
materially affected, or is reasonably likely to materially affect Diligent Board
Member Services, Inc.’s internal control over financial
reporting.


20





PART
II—OTHER INFORMATION





Item
1. Legal Proceedings.





None





Item
1A. Risk Factors.





Not
required





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





None





Item
3. Defaults Upon Senior Securities.





Not
applicable





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





None





Item
5. Other Information.





Not applicable





Item
6. Exhibits.





Exhibit
                Numbers
              
              Exhibits10.11
              
              Employment
      agreement of CFO Steven P. Ruse10.12
              
              Form
      of Stock Option Award Agreement for stock option under 2007 Stock Option
      and Incentive Plan31.1
              
              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)


21





SIGNATURES





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




DILIGENT
      BOARD MEMBER SERVICES, INC.Dated:  November
      9, 2009
                By:
                /s/ Alessandro SodiAlessandro
      Sodi, Chief Executive Officer (PrincipalExecutive
      Officer)Dated:  November
      9, 2009
                By:
                /s/ Steven P. RuseSteven
      P. Ruse, Chief Financial Officer (PrincipalFinancial
      Officer)





22