10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014.

or

oTRANSITION 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.)

1385 Broadway, 19th Floor

New York, NY 10018

(Address of principal executive offices) (Zip Code)

(212) 741-8181

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o 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).  x Yes  o 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)

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

THE NUMBER OF SHARES OF THE REGISTRANT’S COMMON STOCK OUTSTANDING AS OF November 5, 2014 WAS 86,802,226.

CONTENTS

			PAGE
Forward Looking Statements			ii
PART I — Financial Information			1
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	27
PART II — Other Information			28
	Item 1.	Legal Proceedings	28
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.	Defaults Upon Senior Securities	28
	Item 4.	Mine Safety Disclosures	28
	Item 5.	Other Information	28
	Item 6.	Exhibits	28
SIGNATURES			30

i

FORWARD LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the safe harbor provision of the Securities Litigation Reform Act of 1995. Terms such as “expect,” “believe,” “continue,” and “intend,” as well as similar comments, are forward-looking in nature.  There are numerous risks and uncertainties that could cause actual results and the timing of events to differ materially from those anticipated by the forward-looking statements in this Quarterly Report on Form 10-Q. Such risks and uncertainties may give rise to future claims and increase our exposure to contingent liabilities. These risks and uncertainties arise from the following issues (among other factors):

·As of December 31, 2013, we identified material weaknesses in our internal controls over financial reporting and concluded that our disclosure controls were not effective as of such date;  in connection with the preparation of this Form 10-Q we concluded that our disclosure controls were not effective as of September 30, 2014;  we must address the material weaknesses in our internal controls and our disclosure controls, which otherwise may impede our ability to produce timely and accurate financial statements and periodic reports;

·As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (as amended, the “2013 Form 10-K”), we had to restate certain of our historical financial statements and as a result were not able to timely file periodic reports with the New Zealand Stock Exchange (the “NZX”) or the United States Securities and Exchange Commission (the “SEC”)  for certain fiscal periods in 2013 and 2014;

·We face the risk of litigation or governmental investigations or proceedings relating to the restatement and the matters covered by a Special Committee investigation concluded in 2013, which identified a number of instances in which we were not, or may not have been, in compliance with applicable New Zealand and U.S. regulatory obligations;

·Certain of our past stock issuances and stock option grants may expose us to potential contingent liabilities, including potential rescission rights;

·We are subject to New Zealand Stock Exchange Listing Rules and compliance with securities and financial reporting laws and regulations in the U.S. and New Zealand and face higher costs and compliance risks than a typical US public company due to the need to comply with these dual regulatory regimes;

·If our security measures are breached and unauthorized access is obtained to a client’s data or our data or our IT systems, our services may be perceived as not being secure, clients may curtail or stop using our services and we may incur significant legal and financial exposure and liabilities;

·Our business is highly competitive and we face the risk of declining customer renewals or upgrades;

·If we do not successfully develop or introduce new product offerings, or enhancements to our existing Diligent Boardbooks offering, or keep pace with technological changes that impact the use of our product offerings, we may lose existing customers or fail to attract new customers; and

·We may fail to manage our growth effectively.

We also refer you to Part I, Item 1A, “Risk Factors” in our 2013 Form 10-K for an extended discussion of the risks confronting our business. The forward-looking statements in this Quarterly Report on Form 10-Q should be considered in the context of these risk factors.  The Company makes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required by the federal securities laws or the NZX Listing Rules.

ii

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

Diligent Board Member Services, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

	September 30,			December 31,
	2014			2013
A S S E T S
Current assets:
Cash and cash equivalents	$	66,837		$	43,583
Short-term investments	—			12,497
Accounts receivable, net	1,685			1,750
Deferred commissions	1,343			1,532
Prepaid expenses and other current assets	2,936			1,936
Deferred tax assets	4,476			3,111
Income tax receivable	—			1,430
Total current assets	77,277			65,839
Property and equipment, net	10,924			8,228
Intangible Assets	25			—
Deferred tax assets	3,654			3,607
Security deposits	704			676
Total assets	$	92,584		$	78,350
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,095		$	2,402
Accrued expenses and other liabilities	9,530			8,856
Income taxes payable	350			—
Deferred revenue	31,651			27,428
Obligations under capital leases	762			847
Total current liabilities	43,388			39,533
Non-current liabilities:
Deferred revenue, less current portion	11,584			10,471
Obligations under capital leases	156			767
Other non-current liabilities	3,302			2,634
Total non-current liabilities	15,042			13,872
Total liabilities	58,430			53,405
Commitments and contingencies	—			—
Redeemable preferred stock:
Series A convertible redeemable preferred stock, $.001 par value, 50,000,000 shares authorized 30,000,000 and 32,667,123 shares issued and outstanding (liquidation value $4,753)	3,000			3,261
Stockholders’ equity:
Common Stock, $.001 par value, 250,000,000 shares authorized, 86,765,836 and 83,776,155 shares issued and outstanding	87			84
Additional paid-in capital	31,186			28,861
Accumulated deficit	(69		)	(7,220		)
Accumulated other comprehensive income (loss)	(50		)	(41		)
Total stockholders’ equity	31,154			21,684
Total liabilities, redeemable preferred stock and stockholders’ equity	$	92,584		$	78,350

See accompanying notes to condensed consolidated financial statements

1

Diligent Board Member Services, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues	$	21,423		$	17,235		$	60,893		$	46,573
Cost of revenues (excluding depreciation and amortization)	4,133			3,244			11,827			9,017
Gross profit	17,290			13,991			49,066			37,556
Operating expenses:
Selling and marketing	2,726			2,473			8,084			7,089
General and administrative	6,437			5,371			21,086			13,664
Research and development	2,486			1,209			5,259			3,088
Depreciation and amortization	765			515			1,953			1,130
Investigation and restatement	—			939			916			3,282
Total operating expenses	12,414			10,507			37,298			28,253
Operating income	4,876			3,484			11,768			9,303
Other income (expense), net:
Interest expense, net	59			(24		)	30			(58		)
Foreign exchange transaction (loss) gain	(126		)	32			(25		)	(149		)
Total other income (expense), net	(67		)	8			5			(207		)
Income before provision for income taxes	4,809			3,492			11,773			9,096
Income tax expense	2,107			1,339			4,622			3,485
Net income	$	2,702		$	2,153		$	7,151		$	5,611
Accrued preferred stock dividends	(83		)	(89		)	(253		)	(270		)
Net income attributable to common stockholders	$	2,619		$	2,064		$	6,898		$	5,341
Earnings per share:
Basic	$	0.02		$	0.02		$	0.06		$	0.05
Diluted	$	0.02		$	0.02		$	0.06		$	0.04
Weighted average shares outstanding:
Basic	117,611			116,443			116,872			116,422
Diluted	122,020			121,744			120,849			121,863

See accompanying notes to condensed consolidated financial statements

2

Diligent Board Member Services, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014			2013
Net income	$	2,702	$	2,153	$	7,151		$	5,611
Other comprehensive loss:
Foreign exchange translation adjustment	19		55		(9		)	(89		)
Comprehensive income	$	2,721	$	2,208	$	7,142		$	5,522

See accompanying notes to condensed consolidated financial statements

3

Diligent Board Member Services, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

Nine Months Ended September 30, 2014

(Unaudited)

(in thousands)

										Accumulated
				Additional						Other			Total
	Common	Common		Paid-in-			Accumulated			Comprehensive			Stockholders’
	Shares	Stock		Capital			Deficit			Income (Loss)			Equity
Balance at January 1, 2014	83,776	$	84	$	28,861		$	(7,220	)	$	(41	)	$	21,684
Net Income	—	—		—			7,151			—			7,151
Other comprehensive loss	—	—		—			—			(9		)	(9		)
Total comprehensive income	—	—		—			—			—			7,142
Conversion of preferred stock to common stock	2,667	3		264			—			—			267
Shares issued to the Board of Directors	137	—		538			—			—			538
Share-based compensation	—	—		1,768			—			—			1,768
Exercise of stock options	95	—		14			—			—			14
Amortization of preferred stock offering costs	—	—		(6		)	—			—			(6		)
Preferred stock dividend ($0.00825 per share)	—	—		(253		)	—			—			(253		)
Issuance of shares from vesting of restricted stock units	91	—		—			—			—			—
Balance at September 30, 2014	86,766	$	87	$	31,186		$	(69	)	$	(50	)	$	31,154

See accompanying notes to condensed consolidated financial statements

4

Diligent Board Member Services, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	7,151		$	5,611
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	(1,411		)	(1,245		)
Excess tax benefits realized from share-based compensation	—			(302		)
Depreciation and amortization	1,953			1,130
Share-based compensation	2,057			1,225
Changes in operating assets and liabilities:
Accounts receivable	65			(684		)
Deferred commissions	189			248
Prepaid expenses and other current assets	(1,000		)	(268		)
Security deposits	—			13
Accounts payable and accrued expenses	(766		)	3,490
Income taxes receivable/payable	1,780			(1,600		)
Deferred revenue	5,335			8,970
Other non-current liabilities	748			424
Other	—			50
Net cash provided by operating activities	16,101			17,062
Cash flows from investing activities:
Purchases of short-term investments	—			(10,999		)
Proceeds from maturity of short-term investments	12,497			103
Restricted cash-security deposits	(28		)	(462		)
Purchases of property and equipment	(4,160		)	(2,282		)
Purchases of intangible assets	(25		)	—
Net cash provided by (used in) investing activities	8,284			(13,640		)
Cash flows from financing activities:
Payment of preferred stock dividend	(359		)	(120		)
Proceeds from exercise of stock options and purchases of shares under stock purchase plan	14			74
Excess tax benefits realized from share-based compensation	—			302
Repayments of obligations under capital leases	(695		)	(418		)
Payments of obligations under software licensing agreements	(82		)	(109		)
Net cash used in financing activities	(1,122		)	(271		)
Effect of exchange rates on cash and cash equivalents	(9		)	(93		)
Net increase in cash and cash equivalents	23,254			3,058
Cash and cash equivalents at beginning of period	43,583			33,311
Cash and cash equivalents at end of period	$	66,837		$	36,369
Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest	$	41		$	67
Income taxes	$	3,862		$	5,558
Supplemental disclosure of noncash investing and financing activities:
Capital contribution in lieu of preferred stock dividend	$	—		$	240
Conversion of preferred stock to common stock shares	$	267		$	—
Property and equipment acquired under capital lease agreements	$	—		$	1,306
Accounts payable for property and equipment	$	489		$	545

See accompanying notes to condensed consolidated financial statements

5

Diligent Board Member Services, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1)Organization and nature of the business

Diligent Board Member Services, Inc. (“we”, “Diligent” or the “Company”) provides one of the world’s most widely used board portals. The Company develops and commercializes Diligent Boardbooks®, a secure software application available online, on iPad and Windows 8.1 supported devices. The application allows board members, management and administrative staff to simplify how board materials are produced, delivered, reviewed and voted on. We provide clients with subscription-based access to our software along with associated services including securely hosting the clients’ data, and customer service and support for the application.

The Company was incorporated in the State of Delaware on September 27, 2007 and is listed on the New Zealand Stock Exchange (the “NZSX”).  On December 12, 2007, Diligent completed an offshore public offering in connection with its listing on the NZSX.  Diligent’s corporate headquarters are located in New York, New York.

The Company has a wholly-owned subsidiary located in New Zealand, Diligent Board Member Services NZ Limited (“DBMS NZ”), which provides research and development services for the Company.  The Company has a wholly-owned subsidiary in the United Kingdom, Diligent Boardbooks Limited (“DBL”) and a wholly-owned subsidiary in Australia, Diligent Board Services Australia Pty Ltd. (“DBA”), which provide sales, marketing and customer support services in their respective regions.  The Company’s Singapore subsidiary, Diligent APAC Board Services Pte. Ltd.  (“APAC”) provides sales support in the Asia-Pacific region.  The Company’s subsidiary in Hong Kong, Diligent APAC LTD. was established in 2012 to support its Asia-Pacific sales and marketing and has had no operations to date. In February 2014, the Company established a German subsidiary, Diligent Boardbooks GmbH, to offer dedicated, private data hosting solutions and data recovery support, primarily for European customers.

Diligent’s condensed consolidated financial statements are presented in U.S. dollars, which is the Company’s functional and reporting currency.

2)Investigations and restatement

Special Committee

In December 2012, the Board of Directors (the “Board”) of Diligent appointed a Special Committee of independent directors to examine certain of Diligent’s past stock issuances and stock option grants that may not have been issued in compliance with the relevant stock option and incentive plans. The Special Committee’s members were not on the Board at the time of the issuance of such grants, were not involved in their issue, and are not the recipients of any option grants. The Special Committee was delegated broad powers from the Board to take all such action in respect of the issuances as it deemed necessary and advisable.

The Special Committee, assisted by attorneys in the U.S. and New Zealand, conducted a thorough review and analysis of all stock issuances and stock option grants during the relevant period.  As discussed in Note 7, the Special Committee found that three option awards exceeded the applicable plan caps on the number of shares covered by an award issued to a single recipient in a particular year. The Special Committee was delegated the authority to develop appropriate alternative compensation packages for the affected employees.  These awards were determined by the Board to be reasonable compensation at the time, and were an important incentive component of the employees’ compensation packages.

As part of its work, the Special Committee also reviewed the Company’s compliance with applicable regulations, including U.S. and New Zealand securities regulations and the NZSX Listing Rules. The Special Committee identified a number of instances where it appears that Diligent was not, or may not have been, in compliance with its U.S. and New Zealand regulatory obligations.

The Special Committee determined that these instances of non-compliance were inadvertent and attributable in part to the constrained resources of Diligent in a period of financial difficulty in the years following its listing on the NZSX, and the complex regulatory and compliance obligations across multiple jurisdictions with differing regulations and requirements. It recommended, and the Board fully endorsed, that the Company work with its regulators to resolve these issues. In September 2013 the NZ Markets Disciplinary Tribunal approved a settlement reached by the Company and the New Zealand Stock Exchange regarding the previously disclosed breaches of the NZSX Listing Rules by the Company. The settlement provided for the payment of fines and costs by the Company, consisting of NZ $15 thousand as a penalty to the NZX Discipline Fund and NZ $4 thousand towards the costs of NZSX.

6

Costs for the Special Committee for the three and nine months ended September 30, 2013 were $0 and $2.3 million, respectively. An additional $0.3 million was incurred in the fourth quarter of 2012.  Included in Special Committee expenses were professional fees incurred for legal, accounting and compensation consultants, NZX penalties and compensation paid to Special Committee members. During the second quarter of 2013, the Special Committee was disbanded and the Company is in the process of implementing the recommendations of the Special Committee to remediate the compliance and internal control weaknesses identified.

Audit Committee Investigation

On July 2, 2013, the Audit Committee of the Board engaged outside company counsel to investigate the accounting errors that gave rise to the need to restate the Company’s financial statements, as well as other historical accounting practices impacting the timing of recognition of revenue. In connection with the investigation, it was determined that the Company included in its financial results certain customer agreements that, while having an effective date within a quarter, had not been signed by all parties within the quarter, as would be required to commence revenue recognition under U.S. GAAP. The early inclusion of such contracts did not have a material impact on previously reported revenue for fiscal quarters including the first quarter of 2010 through the first quarter of 2013. The Audit Committee investigation resulted in no finding of intentional misconduct or fraud. Costs of the investigation for the three months ended September 30, 2014 and 2013 were $0 and $0.2 million, respectively. Costs of the investigation for the nine months ended September 30, 2014 and 2013 were $0 and $2.5 million, respectively.

Restatement and Re-audit Engagements

In August, 2013, we announced that Diligent’s historical financial statements for the years ended December 31, 2012, 2011 and 2010 and the quarter ended March 31, 2013 would be restated due to revenue recognition errors. The Company completed the restatement process in April 2014. Costs for the restatement and re-audits incurred during the three months ended September 30, 2014 and 2013 were $0 and $0.8 million, respectively. Costs for the restatement and re-audits incurred during the nine months ended September 30, 2014 and 2013 were $0.9 and $0.8 million, respectively. These costs are comprised of professional fees incurred for accounting, auditing and consulting services and restatement bonuses.

3)Significant accounting policies

Basis of presentation — The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2013 Form 10-K.

In the opinion of management, the accompanying unaudited condensed 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, 2014 are not necessarily indicative of results expected for the full year.

The preparation of financial statements in conformity with U.S. 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. Significant estimates and assumptions made by management include the deferral and recognition of revenue, the fair value of share-based compensation, accounting for income taxes, including the realization of deferred tax assets and uncertain tax positions, and the useful lives of tangible and intangible assets. Actual results could differ from those estimates.

Principles of consolidation — The condensed consolidated financial statements include the accounts of Diligent and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated.

Cash and cash equivalents — The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.  The Company invests its excess cash primarily in bank and money market funds of major financial institutions.  Accordingly, its cash equivalents are subject to minimal credit and market risk.

Short-term investments — Short-term investments consist of U.S. treasury bills with original maturities of more than three months at the time of purchase and term deposits with banks, with maturities greater than three months at inception.

Fair value of financial instruments — The fair value of Diligent’s accounts receivable, accounts payable and accrued expenses and other liabilities approximates book value due to their short term settlements.

7

Revenue Recognition — Diligent derives revenues primarily from subscription fees and installation fees, including training. The Company sells subscriptions to Diligent’s cloud-based application that are generally one year in length. Diligent’s arrangements do not include a general right of return and automatically renew unless the Company is notified 30 days prior to the expiration of the subscription term. Diligent’s subscription agreements do not provide the customer the right to take possession of the software that supports the application. Installation fees consist of the configuration of the Company’s service and training of its customers.

Revenue recognition commences when all of the following conditions are met:

·There is persuasive evidence of the arrangement;

·The service has been made available to the customer;

·The fee is fixed or determinable; and

·The collectability of the fees is reasonably assured.

To qualify as a separate unit of accounting, the delivered item in a multiple element arrangement must have value to the customer on a standalone basis. The Company has determined that the installation fee does not have standalone value, so accordingly it accounts for its arrangements as a single unit of accounting.

Revenue from Diligent’s subscription service is recognized on a daily basis over the subscription term as the services are delivered. The service is considered delivered, and hence revenue recognition commences, when the customer has access to the Diligent Boardbooks product. Revenue is recorded ratably through the end of the subscription term, which is generally twelve months from the date of the contract.

Installation fees paid by customers in connection with the subscription service are deferred and are recognized ratably over the expected life of the customer relationships, generally nine years. In estimating the expected customer relationship period, the Company looked to guidance on the determination of the useful life of an intangible asset for the appropriate factors to be considered in estimating expected customer life and specifically focused on its customer renewal rate. Diligent’s customer contracts contain a standard “autorenew” feature which provides for one-year renewals unless either party provides written notice of termination. In addition, Diligent’s renewal history with its customers has been and remains at very high rates. As a result, we believe that Diligent’s customers will renew numerous times during their tenure with us.  Consequently, Diligent has had a very low annual attrition rate which historically has been less than 5.0%. After considering these factors, we determined that a nine year estimated customer life was appropriate as of September 30, 2014.  The Company evaluates its estimated customer life on an annual basis.

Deferred Revenue — Deferred revenue represents installation and subscription fees for which cash has been received but for which we have not yet delivered services or the criteria for the recognition of revenue have not yet been met.  Deferred revenues presented in the consolidated balance sheet do not include amounts receivable (both billed and unbilled) for executed subscription agreements for which we have not yet received payment.  Accordingly, the deferred revenue balance does not represent the total contract value of annual, non-cancelable subscription agreements.

Long term deferred revenue consists of installation fees that will be recognized over the estimated life of the customer relationship which is generally nine years.  Installation fees expected to be recognized within the next 12 months of the balance sheet date are included in the current portion of deferred revenue.

Accounts receivable —The Company generally invoices our customers on an annual or quarterly basis.  Accounts receivable represents amounts due from Diligent’s customers for which revenue has been recognized.  A provision for doubtful accounts is recorded based on management’s assessment of amounts considered uncollectable for specific customers based on age of the receivable, history of payments and other relevant information.  At each of September 30, 2014 and December 31, 2013, the Company recorded a provision for doubtful accounts of $100 thousand.

Research and development — Research and development expenses are incurred as we upgrade and maintain the Diligent Boardbooks software, and develop product enhancements.  Such expenses include compensation and employee benefits of engineering and testing personnel, materials, travel and direct costs associated with the design and required testing of the product line.  Diligent does not allocate indirect overhead to research and development. Direct development costs related to software enhancements that add functionality have been expensed as incurred as we have not historically maintained sufficiently detailed records of development efforts to be able to capitalize such costs.

8

Share-based compensation — Diligent measures the cost of employee services received in exchange for an equity-based award using the fair value of the award on the date of the grant, and recognizes the cost over the period that the award recipient is required to provide services to the Company in exchange for the award. The fair value of restricted stock units and performance stock units are estimated using the market price of Diligent’s common stock at the date of the grant and we recognize compensation expense for the portion of the award that is expected to vest. Diligent measures compensation cost for awards granted to non-employees based on the fair value of the award at the measurement date, which is the date performance is satisfied or services are rendered by the non-employee.

Earnings per share - Basic earnings per share is computed by dividing the net income attributable to common stockholders, after deducting accrued preferred stock dividends, by the weighted average number of common and preferred shares outstanding for the period. The preferred stockholders are entitled to participate on an “as converted” basis in any dividends paid on Diligent’s common stock, and as such are considered participating securities to which earnings should be allocated using the two-class method.

Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, settled or converted into common stock, unless the effect is anti-dilutive. Stock options and employee share awards are included as potential dilutive securities for the applicable periods, except 1.5 million stock options which have been excluded for the three and nine months ended September 30, 2014, respectively because their effect is anti-dilutive. There were 360,000 anti-dilutive equity instruments for the comparable three and nine month periods in 2013.

The computation of shares used in calculating basic and diluted earnings per common share are as follows:

	Three months ended September 30,		Nine months ended September 30,
	2014	2013	2014	2013
	(in thousands)
Basic weighted average common shares outstanding	87,611	83,776	86,240	83,755
Basic weighted average preferred shares outstanding	30,000	32,667	30,632	32,667
Basic weighted average shares outstanding	117,611	116,443	116,872	116,422
Dilutive effect of stock options	2,577	5,218	2,552	5,404
Dilutive effect of performance stock units	1,171	—	1,105	—
Dilutive effect of restricted stock units	661	83	320	37
Dilutive weighted average shares outstanding	122,020	121,744	120,849	121,863

Recent accounting pronouncements — In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. The new guidance is effective for annual and interim periods beginning after December 15, 2016 with no early adoption permitted. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on Diligent’s financial position, results of operations and cash flows.

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

4)Obligations Under Capital Leases

During the first nine months of 2013, we entered into two capital leases for computer equipment which mature in February 2016.  The leases have a total obligation of $1.3 million and bear interest at rates of 5.449% and 3.804%, with monthly payments of $28 thousand and $14 thousand, respectively.  We did not enter into any new capital leases during the first nine months of 2014.

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5)Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants. As of September 30, 2014 and December 31, 2013, the carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses and other liabilities approximated fair value due to the short-term nature of these instruments. ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for input into valuation techniques as follows:

i.Level 1 input - unadjusted quoted prices in active markets for identical instrument;

ii.Level 2 input - observable market data for the same or similar instrument but not Level 1, including quoted prices for identical or similar assets or liabilities in markets that are active or not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

iii.Level 3 input - unobservable inputs developed using management’s assumptions about the inputs used for pricing the asset or liability.

Level 2 inputs were utilized to determine the fair value of the Company’s investments in U.S. treasury bills, U.S treasury money market funds, and term deposits.  Due to the short-term nature of these investments, which mature between 90 days and 365 days, amortized cost is used to estimate the fair value.

At September 30, 2014, cash equivalents include investments in U.S. treasury money market funds and treasury bills totaling $31 million, which are carried at cost, which approximates fair value. The fair value of money market funds was determined by reference to quoted market prices.

At December 31, 2013, cash and cash equivalents include investments in U.S. treasury bills of $4.5 million and U.S. treasury money market funds of $23 million, which are carried at cost, which approximates fair value. The fair value of money market funds was determined by reference to quoted market prices. At December 31, 2013, short-term investments include investments in U.S. treasury bills of $12.5 million, which are carried at cost which approximates fair value.

6)Redeemable Preferred Stock

On March 11, 2009, Diligent issued 30 million shares of Series A Preferred Stock at $0.10 per share in a private offering, for aggregate gross proceeds of $3.0 million.  Expenses relating to the preferred stock issuance were $139 thousand.

The carrying value of the Preferred Stock at September 30, 2014 and December 31, 2013 was as follows:

	September 30,			December 31,
	2014			2013
	(in thousands)
Gross proceeds	$	3,000		$	3,000
Less: Issuance costs	(139		)	(139		)
	2,861			2,861
Issuance of PIK shares	267			267
Conversion of PIK shares	(267		)	—
Cumulative amortization of offering costs	139			133
Carrying value	$	3,000		$	3,261

The Preferred Stock is entitled to 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 Stock (paid-in-kind 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 Stock will have preference over the declaration or payment of any dividends on the Company’s common stock.  In addition to the 11% preferred dividend, the holders of the Preferred Stock will also be entitled to participate pro rata in any dividend paid on the Company’s common stock.

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In 2014, Diligent anticipates that accumulated unpaid dividends will be paid in cash on the Series A Preferred Stock.  Accordingly, preferred stock dividends of $83 thousand and $253 thousand for the three and nine months ended September 30, 2014 are included in accrued expenses.

Spring Street Partners, L.P., a holder of the Series A Preferred Stock, waived its right to the preferred stock dividend payable on January 3, 2013 of $240 thousand.  This was recorded as a capital contribution in 2013 when waived. The founder and managing partner of Spring Street Partners, L.P. is also the Chairman of the Board and the holder of 5.9 million shares of common stock of the Company.

On March 3 and 5, 2014, Carroll Capital Holdings and Spring Street Partners, L.P. converted 889,219 and 1,777,904 shares of Series A Preferred Stock, respectively, to an equivalent number of shares of common stock.

7)Stock option and incentive plan

On May 3, 2013, the Board adopted the Diligent Board Member Services, Inc. 2013 Incentive Plan (the “2013 Plan”), which was approved by the Diligent’s stockholders in June 2013. An aggregate of 8.5 million shares of the Company’s common stock may be issued pursuant to the Plan to employees, directors and consultants of Diligent and its affiliates. Of the shares available under the Plan, 4.1 million were utilized in connection with the replacement incentive awards issued in accordance with the CEO Replacement Grant Agreement as discussed below. Upon approval of the 2013 Plan the Company discontinued the use of the Company’s 2007 Stock Option and Incentive Plan (the “2007 Plan”) and the 2010 Stock Option and Incentive Plan (the “2010 Plan”).

Awards under the 2013 Plan may be made in the form of stock options (which may constitute incentive stock options or nonqualified stock options), share appreciation rights, restricted shares, restricted share units, performance awards, bonus shares and other awards.  In addition, certain awards under the 2013 Plan may be denominated or settled in cash, including performance awards.

In 2013, the Board and the Company’s stockholders approved a remuneration package for non-executive directors for the 2013 and subsequent fiscal years (the “New Remuneration Package”). The New Remuneration Package consists of both a cash component, designed to compensate members for their service on the Board and its Committees, and an equity component. The total value of the New Remuneration Package for standard board service is $130 thousand per annum, $50 thousand of which will be payable in cash.

Diligent’s non-executive directors, other than the chairman of the Board, are to receive an annual stock grant with a total value of $80 thousand, which would generally be paid to such non-executive directors in equal installments at the end of each quarter of the calendar year. In connection with the non-executive directors’ 2013 service, on March 14, 2014, the Company issued 86.5 thousand restricted shares to its directors based on the volume weighted average trading price of our common stock on its primary trading market for the 20 trading days immediately prior to such date. In connection with the non-executive directors’ 2014 service, on April 9, 2014, the Company issued 27 thousand restricted shares to its directors and on July 10, 2014, the Company issued 24 thousand restricted shares to its directors, in each case based on the volume weighted average trading price of our common stock on its primary trading market for the 20 trading days immediately prior to such date. The grants for 2013 and 2014 services were pro-rated for any director who served on the Board for less than the full calendar year.

In December of 2012 Diligent’s Board authorized a Special Committee of independent directors to conduct a review of certain of the Company’s past stock issuances and stock option grants to determine whether they were in accordance with the relevant incentive plans.  The Special Committee found that three option awards exceeded the applicable plan caps on the number of shares covered by an award issued to a single recipient in a particular year. Specifically, a 2009 award to the chief executive officer exceeded the cap in the 2007 Plan by 1.6 million shares, a 2011 award to the chief executive officer exceeded the cap in the 2010 Plan by 2.5 million shares, and a 2011 award to another employee exceeded the cap in the 2010 Plan by 250 thousand shares.

In May 2013, we entered into a Replacement Grant Agreement with our CEO providing for the cancellation of certain stock options and the issuance of a replacement award, which was to become effective upon the occurrence of certain future events.

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On June 12, 2013, Diligent entered into an agreement providing for the cancellation of options for 250 thousand shares issued to the other employee in excess of the applicable plan cap, under which the vesting schedule for the remaining nonvested options was extended over a four and a half year period and replaced with 150 thousand restricted stock units, with graded vesting over four and a half years.  The modification of this award resulted in additional expense of $66 thousand, which will be recognized on a graded basis through December 2017.

On December 23, 2013, we entered into an Amendment to Replacement Grant Agreement with our CEO which finalized the terms of the incentive compensation package to be provided to our CEO in substitution for certain awards that exceeded the applicable plan caps.

Under the terms of the Amendment to Replacement Grant Agreement, on December 23, 2013 (the “Grant Date”), our CEO’s fully vested option to purchase 2.4 million shares of Diligent’s common stock for an exercise price of U.S. $0.14 per share was cancelled to the extent it was in excess of the applicable plan cap, consisting of 1.6 million of such shares. In exchange for the cancellation of the relevant portion of the award, our CEO received:

·An option to purchase 1.6 million shares of common stock having an exercise price of U.S. $2.79, which was the Company’s closing price per share expressed in U.S. dollars on the last trading day on the NZSX immediately prior to the Grant Date (the “Exercise Price”) of December 23, 2013. The option vested on December 31, 2013, and will have a term of ten years from the Grant Date.

·A performance cash award of U.S. $4.2 million, determined based on 1.6 million multiplied by the excess of the Exercise Price of U.S. $2.79 over U.S. $0.14. The CEO’s right to receive such cash award was contingent on the Company achieving revenue growth of at least 7% during the twelve month period ended June 30, 2014 and his continued employment through such date. This revenue target was achieved and the cash award will be paid in three equal annual installments. The first installment in the amount of $1.4 million was paid in August 2014, the second installment will be paid in the first quarter of 2015 and the final installment will be paid in the first quarter of 2016, or, if earlier, upon a change in control of the Company or the CEO’s separation from service. Any payment due on any installment date will be proportionally reduced if the sum of our stock price plus dividends for a measurement period prior to each payment date falls below 75% of the Exercise Price.

In addition, the CEO held an option to purchase 3 million shares of Diligent’s common stock for an exercise price of U.S. $0.82 per share, which remained subject to vesting. Under the terms of the Amendment to Replacement Grant Agreement, we cancelled the portion of such option in excess of the applicable plan cap, consisting of 2.5 million of such shares. In exchange for the cancellation of the relevant portion of the award, the CEO received:

·Performance share units for 2.25 million shares of common stock contingent on Diligent achieving revenue growth of at least 7% during the twelve month period ended June 30, 2014. For purposes of clarification, performance share units in this context are units of common stock issued to Diligent’s CEO upon satisfaction of the performance criteria outlined herein. Effective June 30, 2014, the Company’s revenues met the performance requirement of at least seven percent (7%) growth over the performance period as compared to the period from July 1, 2012 through June 30, 2013. The performance share units were determined to be earned and the award will vest in four equal installments based on continued employment, commencing June 30, 2015, with full vesting occurring on June 30, 2018. The delivery dates for the vested performance shares will be 50% in 2018 and 50% in 2019 or, if earlier, upon a change in control of the Company or the CEO’s separation from service.

·Performance share units for up to 250 thousand shares of common stock contingent on Diligent achieving either at least 15% fully diluted EPS growth (adjusted to exclude stock-based compensation expense and extraordinary items) or 15% total stockholder return (“TSR”) growth in four one-year measurement periods beginning April 1, 2013. As of June 30, 2014, the first TSR performance goal was not achieved. TSR growth is measured based on Diligent’s stock price performance during the 20 trading days prior to the relevant measurement date. Performance share units for 62.5 thousand shares of common stock will be earned in each year for which the applicable target is met, with the additional opportunity to earn such shares at the end of the four year performance period if the cumulative fully diluted EPS growth or TSR growth meet the cumulative performance target. The delivery dates for the vested performance shares will be in 2018 or, if earlier, upon a change in control of the Company or the CEO’s separation from service.

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The vesting of the options, performance cash award and performance stock units described above will be subject to certain acceleration provisions in the event of a change in control of the Company, upon death or disability or if the CEO is terminated without cause or resigns for good reason.

$1.4 million of the liability for the performance cash award is recorded in “Accrued expenses and other current liabilities” and $1.4 million is recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheet as of September 30, 2014. At December 31, 2013, $1.6 million of the liability for the performance cash award was recorded in “Accrued expenses and other current liabilities” and $0.6 million was recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheet.

The Company recorded performance stock and cash award compensation expense of $0.2 million and $2.8 million during the three and nine months ended September 30, 2014, respectively, and $2.9 million in 2013 relating to the replacement award. The replacement award is expected to result in compensation cost of $0.2 million for the remainder of 2014, $0.7 million in 2015, $0.4 million in 2016, $0.2 million in 2017 and $0.1 million in 2018.

On July 24, 2014, Diligent entered into an agreement providing for the cancellation of 250 thousand shares issued to an employee and replaced with 217,760 restricted stock units, under the 2013 Plan. The restricted stock units vest in five equal installments, the first vesting on the grant date and the remaining installments vesting on each anniversary of December 9, 2013.

On September 15, 2014, the Company entered into a new employment agreement with an executive, pursuant to which the Company issued options to purchase 250 thousand shares of stock and 125 thousand restricted stock units under the 2013 Plan. The options have an exercise price of $3.79 per share and vest in two equal installments on September 15, 2015 and September 15, 2016. The restricted stock units also vest in two equal installments on September 15, 2015 and September 15, 2016, upon which the vested portion will convert into an equal number of shares of common stock.

Stock Options — On June 20, 2014, the Company agreed to issue 1,120,000 stock options to executives and employees under the 2013 Plan. These options vest 25% per year over the next four years, as long as such executive or employee remains in the employ of the Company on each vesting date. On September 15, 2014, the Company agreed to issue 250,000 options to an executive of the Company under the 2013 Plan. These options vest in two equal installments on September 15, 2015 and September 15, 2016, as long as such executive remains in the employ of the Company on each vesting date. Upon the final vesting date, the vested portion will convert into an equal number of shares of common stock. A summary of stock option activity for the nine months ended September 30, 2014 is as follows:

					Weighted average
			Weighted average		remaining
	Options		exercise price		contractual term
	(in thousands)
Outstanding at January 1, 2014	5,758		$	1.97	7.97 years
Granted	1,370		3.83
Exercised	(95	)	0.15
Cancelled	(250	)	0.46
Forfeited	(260	)	6.12
Outstanding at September 30, 2014	6,523		$	2.28	7.75 years
Exercisable at September 30, 2014	3,633		$	1.44	7.05 years

Performance Stock Units — As noted above, in 2013, the Company issued Performance Stock Units (“PSUs”) to its CEO as part of his substitute compensation package.  A summary of activity in PSUs for the nine months ended September 30, 2014 is as follows:

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		Weighted Average Grant
	Performance Stock Units	Date Fair Value Per Share
	(in thousands)
Nonvested January 1, 2014	2,500	$	2.79
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested September 30, 2014	2,500	$	2.79

The Company estimates the fair value of the PSU’s as of the grant date utilizing the closing price of its common stock on that date.

Restricted Stock Units — As noted above, in June 2013, the Company agreed to issue 150,000 Restricted Stock Units (“RSUs”) as replacement compensation for the 250,000 stock options issued to an employee of the Company in excess of the 2010 Plan cap. In June 2013, the shareholders of the Company approved the 2013 Plan, under which the Company had agreed to issue 164,000 RSUs to two officers, which vest 25% per year over the next four years, as long as the officers remain in the employ of the Company on each vesting date. 110,000 of these awards were forfeited as of June 30, 2014.  The fair market value of the stock on the date of grant of the RSUs was $5.38 per share.

On June 20, 2014, the Company issued 846,000 RSUs to executives and employees under the 2013 Plan. These RSUs, which vest 25% per year over the next four years, as long as such executive or employee remains in the employ of the Company on each vesting date, have a grant date fair market price of $3.84 per share for an aggregate of $3.3 million to be recognized over the vesting period. On July 24, 2014, the Company agreed to issue 217,760 RSUs to an employee of the Company as replacement compensation for 250,000 stock options which were cancelled. These RSUs have a grant date fair market price of $3.57 per share and did not result in any incremental stock compensation expense. On September 15, 2014, the Company issued 125,000 RSUs to an executive under the 2013 plan. These RSUs vest in two equal installments on September 15, 2015 and September 15, 2016 and have a grant date fair market price of $3.79 per share for an aggregate of $474 thousand to be recognized over the vesting period.

A summary of RSU activity for the nine months ended September 30, 2014 is as follows:

			Weighted Average Grant
	Restricted Stock Units		Date Fair Value Per Share
	(in thousands)
Nonvested January 1, 2014	314		$	5.38
Granted	1,189		3.79
Vested	(87	)	3.58
Forfeited	(110	)	5.38
Nonvested September 30, 2014	1,306		$	4.05

The Company estimates the fair value of the RSUs as of the grant date utilizing the closing price of Diligent’s common stock on the grant date.

For the three months ended September 30, 2014, the Company recognized aggregate share-based compensation expense related to stock options, PSUs and RSUs of $495 thousand, $238 thousand and $459 thousand, respectively, which is included in General and administrative expenses in the Condensed Consolidated Statement of Income. For the nine months ended September 30, 2014, Diligent recognized aggregate share-based compensation expense related to stock options, PSUs and RSUs of $578 thousand, $771 thousand and $419 thousand, respectively, which is included in general and administrative expenses in the Condensed Consolidated Statement of Income. Awards granted to the Company’s former CFO were forfeited upon his resignation during the second quarter of 2014 resulting in expense adjustments in the amount of $570 thousand. Total share-based compensation expense recognized for the three and nine months ended September 30, 2013 was $433 thousand and $1.0 million, respectively, which was entirely related to outstanding stock options. At September 30, 2014, there was $8.0 million of unrecognized share-based

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compensation expense which includes $3.0 million for stock options, $1.6 million for PSUs and $3.4 million for RSUs. The weighted average period for this cost to be recognized is 1.26 years.  Such amounts do not include any impact of the CEO performance cash award.

8)Income taxes

Income tax expense is provided on an interim basis based upon management’s estimate of the annual effective tax rate.  The income tax provision for the three and nine months ended September 30, 2014 provides income taxes at an effective rate of 44% and 39%, respectively.  The tax rate increased compared to comparable periods in 2013 primarily due to discrete events that are recorded in the period in which they occur. The Company recorded an income tax provision for the three and nine months ended September 30, 2013, based on an effective tax rate of 38% and 38%, respectively.

Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that can be used to offset taxable income when a corporation has undergone significant changes in stock ownership.  Beginning in 2013, the Company’s annual net operating loss carryforward is subject to a limitation of approximately $350 thousand to offset expected taxable income until expiration of the carryforwards. Based on this limitation, the Company expects that approximately $4.9 million of its total net operating loss carryforwards will expire unutilized in 2029. A full valuation allowance had previously been provided on the related deferred tax asset, and therefore the deferred tax asset and valuation allowance relating to the net operating loss carryforwards expected to expire unutilized were written off.

Diligent 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 U.S. federal and state income tax returns for the tax years 2010 and forward are open for examination by the taxing jurisdictions. The Company’s foreign income tax returns are open for examination by the local taxing jurisdictions for the following years: New Zealand — 2009 and forward; U.K. — 2010 and forward; Australia — 2012.

9)Contingencies

Sales tax risk - States and some local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to the Company’s subscription services in various jurisdictions is unclear. The Company’s cumulative provisions as of September 30, 2014, related to uncollected sales tax is $1.9 million. The provision increased by $0.1 million and $0.4 million during the three and nine months ended September 30, 2014, respectively. The Company recorded a provision related to uncollected sales tax of $183 thousand and $549 thousand for the three and nine months ended September 30, 2013, respectively.  The cumulative provision related to uncollected sales tax was $1.3 million at September 30, 2013. It is possible that the Company could face sales tax audits and that its liability for these taxes could exceed its estimates as state tax authorities could still assert that it is obligated to collect additional amounts as taxes from its customers and remit those taxes to those authorities. The Company could also be subject to audits with respect to states and international jurisdictions for which it has not accrued tax liabilities. A successful assertion that Diligent should be collecting additional sales or other taxes on its services in jurisdictions where it has not historically done so and does not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing its application or otherwise harm our business and operating results.

NZSX Listing Rules - On June 13, 2014, New Zealand time, the Company received notification from the NZX Limited (“NZX”) in respect to alleged breaches of the NZSX Listing Rules for the delayed release of the 2013 annual report, the 2013 half year preliminary announcement and the 2013 interim report. The notification informed the Company that the NZX has determined to refer the Company’s alleged breaches to the NZ Markets Disciplinary Tribunal. Any actions by the NZX Limited, and any action taken by the NZX Markets Disciplinary Tribunal, does not foreclose the risk of litigation or other regulatory actions relating to the historical instances of non-compliance identified. Due to the instances of non-compliance, we may be subject to an increased risk of regulatory actions, claims or litigation, the defense of which would require the Company’s management to devote significant attention and to incur significant legal expense and which could require us to pay substantial judgments, settlements, fines or other penalties.

In September 2014 the NZ Markets Disciplinary Tribunal approved a settlement reached by the Company and the New Zealand Stock Exchange regarding the previously disclosed breaches of the NZSX listing rules by the Company relating to the delayed reports described above. The settlement provided for the payment of fines and costs by the Company, consisting of NZ $100 thousand as a penalty to the NZX Discipline Fund which is included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under “Risk Factors” in Part I, Item 1A of the 2013 Form 10-K.

Overview

We develop and commercialize Diligent Boardbooks®, a secure software application available online, on iPad and Windows 8.1 supported devices. This is one of the world’s most widely used board portal, allowing board members, management and administrative staff to simplify how board materials are produced, delivered, reviewed and voted on. We provide clients with subscription-based access to our software along with associated services including securely hosting the client’s data, and customer service and support for the application.

Our goal is to help companies streamline the creation and delivery of board materials through an easy-to-use and secure online software platform. Key elements of our strategy include:

·Strengthening the existing product and offering new functionality,

·Further building our existing client base through geographic expansion and new client acquisition,

·Deepening relationships with existing client base, and

·Minimizing client cancellations by offering superior customer service and support.

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

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

Our SaaS model addresses several difficulties found in the traditional software model and offers the following critical advantages for our company:

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

·Better revenue visibility. By offering renewable annual subscriptions instead of one-time perpetual licenses, we have much better revenue foresight. This high revenue visibility allows us to undertake better planning and budgeting, with significant advantages for corporate strategy and profitability.

·Lower cost of development. We have developed an application that is cost-effectively shared across thousands of end users. This is considerably less expensive than developing all the permutations (databases, operating systems, etc.) needed by clients who want to run the software on their own premises.  These economies allow us to spend resources on developing increased functionalities for our Diligent Boardbooks application instead of on creating multiple versions of the same code.

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

·Optimal expense planning. Because of the recurring nature of the SaaS model our revenue is more predictable and that allows us to better plan expenses.

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We began developing components of the Diligent Boardbooks system in 1998, culminating in the roll-out of an international sales force in 2007.

On December 12, 2007 we completed an offshore offering of 24,000,000 shares of our common stock in conjunction with a listing of our stock on the New Zealand Stock Exchange under the symbol “DIL.”  As a result, we are subject to the regulation and reporting requirements imposed by the New Zealand Stock Exchange.  While our common stock trades on a periodic basis on the over-the counter bulletin board (“OTCBB”), there is no established public trading market for our common stock in the United States.  However, because Diligent is a U.S. company incorporated in Delaware with over 500 shareholders, it is also treated as a public company in the United States and is subject to the reporting and regulatory requirements of the SEC and the Securities Exchange Act of 1934.  We are subject to the Listing Rules of the New Zealand Stock Exchange, New Zealand securities and financial reporting laws and United States securities laws and regulations applicable to a U.S. public company not listed on a U.S. national securities exchange.  Our need to comply with both New Zealand and U.S. regulatory regimes increases the focus we must place on compliance as well as the cost of compliance.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies during the three and nine months ended September 30, 2014 from those disclosed in our 2013 Form 10-K.

Revenue Recognition —We derive our revenues primarily from subscription fees and installation fees, including training. We sell subscriptions to our cloud-based application that are generally one year in length. Our arrangements do not include a general right of return and automatically renew unless we are notified 30 days prior to the expiration of the subscription term. Our subscription agreements do not provide the customer the right to take possession of the software that supports the application. Installation fees consist of the configuration of our service and training of our customers.

Revenue recognition commences when all of the following conditions are met:

·There is persuasive evidence of the arrangement;

·The service has been made available to the customer;

·The fee is fixed or determinable; and

·The collectability of the fees is reasonably assured.

To qualify as a separate unit of accounting, the delivered item in a multiple element arrangement must have value to the customer on a standalone basis. We have determined that the installation fee does not have standalone value, so accordingly we account for our arrangements as a single unit of accounting.

Revenue from our subscription service is recognized on a daily basis over the subscription term as the services are delivered. The service is considered delivered, and hence revenue recognition commences, when the customer has access to the Diligent Boardbooks product. Revenue is recorded ratably through the end of the subscription term, which is generally twelve months from the date of the contract.

Installation fees paid by customers in connection with the subscription service are deferred and are recognized ratably over the expected life of our customer relationships which is generally nine years. In estimating the expected customer relationship period, we looked to guidance on the determination of the useful life of an intangible asset for the appropriate factors to be considered in estimating expected customer life and specifically focused on its customer renewal rate. Our customer contracts contain a standard “autorenew” feature which provides for one-year renewals unless either party provides written notice of termination. In addition, our renewal history with our customers has been, and remains, at very high rates. As a result, we believe that our customers will renew numerous times during their tenure with us.  Consequently, we believe we will have a very low annual attrition rate. After considering these factors, we determined that a nine year estimated customer life was appropriate as of September 30, 2014.

Deferred Revenue — Deferred revenue represents installation and subscription fees for which cash has been received but for which we have not yet delivered services or the criteria for the recognition of revenue have not yet been met.  Deferred revenues presented in the Condensed Consolidated Balance Sheet do not include amounts receivable (both billed and unbilled) for executed subscription agreements for which we have not yet received payment.  Accordingly, the deferred revenue balance does not represent the total contract value of annual, non-cancelable subscription agreements.

Long term deferred revenue consists of installation fees that will be recognized over the estimated life of the customer relationship, generally nine years.  Installation fees expected to be recognized within the next 12 months of the balance sheet date are included in the current portion of deferred revenue.

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We also provide gross deferred revenue which consists of deferred revenue and installation and subscription fees which have been billed to the customer pursuant to an executed subscription agreement, but for which payment may have not yet been received and the criteria for the recognition of revenue has not yet been met.  As a result of our subscription-based model and historically high renewal rates, at the end of any period, we generally have subscription contracts in place for a high percentage of our total revenues for the next 12 months.  Therefore, we believe it is useful to provide gross deferred revenues.

Accounts receivable — We generally invoice our customers on an annual or quarterly basis.  Accounts receivable represents amounts due from our customers for which revenue has been recognized.  A provision for doubtful accounts is recorded based on management’s assessment of amounts considered uncollectable for specific customers based on age of the receivable, history of payments and other relevant information.  At each of September 30, 2014 and December 31, 2013, we have recorded a provision for doubtful accounts of $100 thousand.  We also provide gross accounts receivable which consists of all billings to customers for installation and subscription fees.

The reconciliation of gross accounts receivable and deferred revenue to net accounts receivable and deferred revenue at September 30, 2014, is as follows:

	Gross		Adjustment (1)		Net
	(in thousands)
Accounts receivables, net	$	17,875	(16,190	)	1,685
Deferred revenue — current	47,841		(16,190	)	31,651
Deferred revenue — less current portion	11,584		—		11,584
Total deferred revenue	$	59,425	(16,190	)	43,235

The reconciliation of gross accounts receivable and deferred revenue to net accounts receivable and deferred revenue at December 31, 2013, is as follows:

	Gross		Adjustment (1)			Net
	(in thousands)
Accounts receivable, net	$	16,443	$	(14,693	)	$	1,750
Deferred revenue - current	42,121		(14,693		)	27,428
Deferred revenue - less current portion	10,471		—			10,471
Total deferred revenue	$	52,592	$	(14,693	)	$	37,899

(1) Represents installation and subscription fees which have been billed to customers but for which payment has not been received and the criteria for revenue recognition has not been met.

Cost of Revenues and Operating Expenses

Cost of Revenues (exclusive of depreciation and amortization). Cost of revenues consists of direct expenses related to account management, customer support and IT services. We do not allocate depreciation, amortization or indirect overhead to cost of revenues.

Selling and Marketing. 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. General and administrative expenses consist of compensation and related expenses for executive, finance, accounting, administrative and legal personnel, professional fees, other corporate expenses and costs such as office space and utilities. We have also included in general and administrative expense, all corporate bonus plans, all office rental expense and all share based compensation.

Research and Development. 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 direct costs associated with the design and required testing of our product line.

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We do not allocate indirect overhead to research and development. Direct development costs related to software enhancements that add functionality are permitted to be capitalized and amortized over their useful lives, however we have not historically maintained sufficient detail records of our development efforts to be able to capitalize such costs.

Investigations and Restatement. Our Board of Directors authorized and empowered a Special Committee of independent directors to conduct a review of our past stock issuances and stock option grants to determine if they were in accordance with the relevant incentive plans. Included in investigations and restatement are the expenses relating to the Special Committee investigation, including professional fees incurred for legal, accounting and compensation consultants and compensation to be paid to Special Committee members. Investigation and restatement costs also include the costs of our Audit Committee’s investigation of the accounting errors that gave rise to the need to restate our financial statements and the costs related to the restatement of our financial statements and re-audits of the years ended December 31, 2012, 2011 and 2010, which are comprised of legal, accounting and consulting fees.

Share-Based Compensation.  Share-based compensation consists of restricted stock units, stock options and other share-based compensation awards issued to employees and contractors for services rendered. We measure the cost of employee services received in exchange for an equity-based award using the fair value of the award on the date of the grant, and recognize the cost over the period that the award recipient is required to provide services to us in exchange for the award.  The fair value of restricted stock units and performance stock units are estimated using the market price of our common stock at the date of the grant and we recognize compensation expense for the portion of the award that is expected to vest.

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

Results of Operations for the three months ended September 30, 2014 and 2013

Total Revenues

	Three months ended September 30,		Increase /
	2014	2013	(Decrease)	% Change
	(in thousands)
Revenues	21,423	17,235	4,188	24	%

The growth in total revenues of $4.2 million or 24% for the third quarter of 2014 when compared with the third quarter of 2013 is primarily the result of the increase in new users, as well as our retention of existing customers.  Our customer retention rate continues to exceed 95% for the trailing twelve months ended September 30, 2014. We have continued to add users each quarter since inception.  At September 30, 2014, the total number of users was 87,782 compared with 72,632 at December 31, 2013, and 68,448 at September 30, 2013. North America, EMEA (Europe, Middle East and Africa) and Asia/Pacific accounted for 59%, 22%, and 19%, respectively, of the dollar value of new subscriptions added in the third quarter. Upgrades from existing customers represented 31% and 58% of new sales for the three months ended September 30, 2014 and 2013, respectively.

We recognize subscription revenue ratably over the contract period, which is generally twelve months.  Accordingly, the majority of the impact of growth in new user subscription agreements will be recognized over the next twelve months.

Cost of Revenues and Operating Expenses

	Three months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Cost of revenues (1)	4,133		3,244		889	27	%
% of Revenues	19	%	19	%

(1) Excluding depreciation and amortization

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Cost of revenues is comprised of account management, customer support and information technology (“IT”) services.  The increase in costs of revenues is predominantly due to the increase in headcount in IT services in support of our larger client base.  Worldwide employee salaries and incentive pay increased by $0.4 million, consisting of $0.3 million in IT services and $0.1 million in customer support.  Costs relating to hosting increased by $0.2 million due to the increase in capacity of our existing centers along with the addition of a hosting center in Germany.  Additional increases to cost of revenues include IT expenses of $0.2 million and miscellaneous expenses of $0.1 million.

Cost of revenues increased at a consistent rate with revenue, resulting in a gross profit margin of 81% for the three months ended September 2014, and 2013, respectively.

	Three months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Selling and Marketing	2,726		2,473		253	10	%
% of Revenues	13	%	14	%

Selling and marketing expenses consist of $1.2 million of selling expense and $1.5 million of marketing expense. Selling expenses in the third quarter of 2014 were lower than the comparable quarter of 2013 by $0.3 million, primarily due to the decrease in sales commissions as a result of lower revenue growth.  Marketing expenses increased $0.6 million in the third quarter of 2014 compared to the third quarter of 2013.

The increase in marketing expenses of $0.6 million represents primarily U.S. based activity.  We have increased our marketing initiatives, including sponsorships of conferences advertising and content with leading organizations.

	Three months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
General and Administrative	6,437		5,371		1,066	20	%
% of Revenues	30	%	31	%

The increase in general and administrative expenses of $1.1 million in relation to the third quarter of 2013 is comprised of $0.4 million in the U.S., $0.2 million in the U.K., $0.4 million in New Zealand and $0.1 million in Australia.  The U.S. increase consists of $0.7 million relating to employee share based compensation, $0.2 million relating to accounting fees, $0.1 million increase in contractor fees, $0.1 million in increase in interest and penalties, $0.1 million increase in insurance cost.  These increases were offset by a $0.2 million decrease in legal fees, a $0.2 million decrease relating to costs associated with an Enterprise Resource Planning (ERP) implementation and other consultant matters, a $0.1 million decrease in salaries, a $0.1 million decrease in recruiting costs, a $0.1 million decrease in rent expense due to sub-leasing certain office space and a $0.1 million decrease in the spend on bandwidth for our internal servers.

The increase in the U.K of $0.2 million, $0.4 million in New Zealand and $0.1 million in Australia are primarily related to the implementation of a 2014 Corporate Bonus Plan for executives and employees and various other miscellaneous costs.

	Three months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Research and development	2,486		1,209		1,277	106	%
% of Revenues	12	%	7	%

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The increase in research and development expenses is primarily due to increased staffing.  In the third quarter of 2014, we had an additional 28 people in research and development when compared to the third quarter of 2013.  Of these 28 people, 24 were added in the U.S. due to the opening of our Charlotte, North Carolina development center in June 2014 and the remaining 4 people were additions to the New Zealand team. We maintain a small research and development department at our New York headquarters.  Worldwide labor costs in the third quarter of 2014 were $1.1 million higher than the third quarter of 2013.  The remaining increase relates to $0.4 million for recruiting fees, offset by a decrease in outside contractor fees of $0.2 million. We expect to further increase our investment in research and development over the remainder of 2014.

	Three months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Depreciation and amortization	765		515		250	49	%
% of Revenues	4	%	3	%

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

	Three months ended September 30,			Increase /
	2014	2013		(Decrease)		% Change
	(in thousands)
Investigations and restatement	—	939		(939	)	-100	%
% of Revenues	—	5	%

For the three months ended September 30, 2014, there were no further costs related to the restatement of our historical financial statements compared to costs of $757 thousand for the three month period ended September 30, 2013. The majority of the costs relating to the restatement of our historical financial statements occurred during 2013 and the restatement was completed in May 2014. These costs included re-audits of our financial statements for the years ended 2012, 2011 and 2010. During the three months ended September 30, 2013, we incurred costs of $182 thousand related to the Audit Committee investigation.

	Three months ended September 30,			Increase /
	2014	2013		(Decrease)	% Change
	(in thousands)
Interest expense, net	59	(24	)	83	347	%
% of Revenues	—	—

Interest expense, net, includes interest expense on capital lease obligations offset by interest on our cash and cash equivalents and short-term investments which are interest-bearing.

	Three months ended September 30,			Increase /
	2014		2013	(Decrease)		% Change
	(in thousands)
Foreign exchange gain (loss)	(126	)	32	(158	)	494	%
% of Revenues	—		—

Our U.S. and foreign operations have transactions with clients and suppliers denominated in currencies other than their functional currencies, and the U.S. parent company has transactions with its foreign subsidiaries in the subsidiaries’ functional currencies which create foreign currency intercompany receivables and payables.

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Additionally, the U.S. parent company maintains a portion of its cash balances in foreign currencies, primarily the Canadian dollar (CAD), the New Zealand dollar (NZ$), the British Pound (GBP) and the Australian dollar (AUD).  Foreign exchange transaction gains and losses arise on the settlement of foreign currency transactions at amounts different from the recorded amounts, and the measurement of the unrealized foreign currency gains and losses in the related assets and liabilities at the end of the period.  The net gain or loss is an accumulation of the effects of the foregoing transactions.  The loss in the third quarter of 2014 is due to the strengthening of the U.S. dollar against the GBP which resulted in losses on the settlement of intercompany receivables and on cash held in GBP. During the three months ended September 30, 2014 and 2013, we did not engage in any foreign currency hedging activities.

	Three months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Income tax expense	2,107		1,339		768	57	%
Effective tax rate	44	%	38	%

Our income tax provision for the three months ended September 30, 2014 and 2013 was 44% and 38%, respectively, and reflects the effective tax rate expected to be applicable for the full year, adjusted for an increase in discrete events that are recorded in the period in which they occurred. The Company’s effective tax rate for the three months ended September 30, 2014 and 2013, differs from the federal statutory rate primarily due to changes in state pretax income as well as local tax.

Results of Operations for the Nine months Ended September 30, 2014 and 2013

Total Revenues

	Nine months ended September 30,		Increase /
	2014	2013	(Decrease)	% Change
	(in thousands)
Revenues	60,893	46,573	14,320	31	%

The growth in total revenues of $14.3 million or 31% for the nine months of 2014 when compared with the first nine months of 2013 is primarily the result of the increase in new users, as well as our customer retention rate.  Our customer retention rate continues to exceed 95% for the trailing twelve months ended September 30, 2014.  At September 30, 2014, the total number of users was 87,782 compared with 72,632 at December 31, 2013, and 68,448 at September 30, 2013. North America, EMEA (Europe, Middle East and Africa) and Asia/Pacific accounted for 59%, 21%, and 20%, respectively, of the dollar value of new subscriptions added during the first nine months of 2014. Upgrades from existing customers represented 46% and 47% of new sales for the nine months ended September 30, 2014 and 2013, respectively.

We recognize subscription revenue ratably over the contract period, which is generally twelve months.  Accordingly, the majority of the impact of the growth in new user subscription agreements will be recognized over the next twelve months.

Cost of Revenues and Operating Expenses

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Cost of revenues (1)	11,827		9,017		2,810	31	%
% of Revenues	19	%	19	%

(1) Excluding depreciation and amortization

Cost of revenues is comprised of account management, customer support and information technology (“IT”) services.  The increase in costs of revenues is predominantly due to the increase in headcount in IT services in support of our larger client base.

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Worldwide employee salaries and incentive pay increased by $1.5 million, consisting of $0.3 million in account management, $0.2 million in customer support and $1 million in IT services.  Hosting costs increased by $0.2 million due to the increase in capacity of our existing centers along with the addition of a hosting center in Germany.  Additional increases to cost of revenues include maintenance cost of $0.3 million, recruiting fees of $0.1 million, travel related expenses of $0.3 million, audit fees of $0.1 and other IT costs of $0.3 million.

Cost of revenues increased at a consistent rate with revenue, resulting in a gross profit margin of 81% for the nine months ended September 2014, and 2013, respectively.

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Selling and Marketing	8,084		7,089		995	14	%
% of Revenues	13	%	15	%

Selling and marketing expenses consist of $3.7 million of selling expense and $4.3 million of marketing expense. Selling expenses in the first nine months of 2014 were lower than the comparable period in 2013 by $0.9 million, primarily due to the decrease in sales commissions as a result of lower revenue growth.  Marketing expenses increased $1.9 million in the first nine months of 2014 compared to the nine months of 2013.

The increase in marketing expenses of $1.9 million consists of $1.5 million in the U.S., $0.2 million in the U.K. and $0.2 million in Australia.  We have significantly increased our marketing initiatives including trade show activity and increased headcount in both the U.S. and the U.K.  We expect to further increase our marketing expenditures during the remainder of 2014.

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
General and Administrative	21,086		13,664		7,422	54	%
% of Revenues	35	%	29	%

The increase in general and administrative expenses of $7.5 million during the first nine months of 2014 is comprised of $5.9 million increase in the U.S., $0.5 million in the U.K., $0.9 million in New Zealand and $0.2 million in Australia over the comparable period in 2013.  The U.S. increase consists of $3.7 million relating to salaries (inclusive of bonuses). Other increases include occupancy costs of $0.3 million, insurance costs of $0.2 million; outside consultants of $0.8 million; state and local accrued tax expense of $0.3 million, Directors’ fees and expenses of $0.2 million due to the increase in our Board of Directors compensation, $0.8 million for accounting and auditing fees, $0.4 million for software license, a $0.6 million increase in employee stock based compensation, a decrease of $0.8 million for legal fees, a decrease of $0.2 million for recruiting fees and a $0.4  million decrease of costs associated with the implementation of a new ERP system.

The increase in the UK of $0.5 million, $0.9 in New Zealand and $0.1 million in Australia relate to the implementation of a 2014 Corporate Bonus Plan for executives and employees and various other miscellaneous costs.

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Research and development	5,259		3,088		2,171	70	%
% of Revenues	9	%	7	%

The increase in research and development expenses is primarily due to increased staffing.  In the first nine months of 2014, we had an additional 41 people in research and development when compared to the first nine months of 2013. Of these 41 people, 24 were added in the U.S. due to the opening of our Charlotte, North Carolina Development Center, 12 were added to our New Zealand team and the remaining 5 were additions to our New York Team.

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Worldwide labor costs in the first nine months of 2014 were $1.9 million higher than the first nine months of 2013. The remaining increase related to $0.3 million of recruiting costs. We expect to further increase our investment in research and development over the remainder of 2014.

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Depreciation and amortization	1,953		1,130		823	73	%
% of Revenues	3	%	2	%

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

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)		% Change
	(in thousands)
Investigations and restatement	916		3,282		(2,366	)	-72	%
% of Revenues	2	%	7	%

For the nine months ended September 30, 2014 and 2013, we incurred costs of $916 thousand and $757 thousand, respectively, related to the restatement of our financial statements. The majority of the costs relating to the restatement of our historical financial statements occurred during 2013 and the restatement was completed in May 2014. These costs included re-audits of our financial statements for the years ended 2012, 2011 and 2010. During the nine months ended September 30, 2014 and 2013, we incurred costs of $0 and $2.5 million, respectively related to the Audit Committee investigation.

	Nine months ended September 30,			Increase /
	2014	2013		(Decrease)	% Change
	(in thousands)
Interest expense, net	30	(58	)	88	153	%
% of Revenues	—	—

Interest expense, net, includes interest expense on capital lease obligations offset by interest on our cash and cash equivalents and short-term investments which are interest-bearing.

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Foreign exchange gain (loss)	(25	)	(149	)	124	83	%
% of Revenues	—		—

Our U.S. and foreign operations have transactions with clients and suppliers denominated in currencies other than their functional currencies, and the U.S. parent company has transactions with its foreign subsidiaries in the subsidiaries’ functional currencies which create foreign currency intercompany receivables and payables.  Additionally, the U.S. parent company maintains a portion of its cash balances in foreign currencies, primarily the Canadian dollar (CAD), the New Zealand dollar (NZ$), the British Pound (GBP) and the Australian dollar (AUD).  Foreign exchange transaction gains and losses arise on the settlement of foreign currency transactions at amounts different from the recorded amounts, and the measurement of the unrealized foreign currency gains and losses in the related assets and liabilities at the end of the period.  The net gain or loss is an accumulation of the effects of the foregoing transactions.  The decrease in the loss during the first nine months of 2014 is due to the weakening of the U.S. dollar against the GBP which resulted in gains on the settlement of intercompany receivables and on cash held in GBP. During the nine months ended September 30, 2014 and 2013, we did not engage in any foreign currency hedging activities.

24

	Nine months ended September 30,				Increase /
	2014		2013		(Decrease)	% Change
	(in thousands)
Income tax expense	4,622		3,485		1,137	33	%
Effective tax rate	39	%	38	%

Our income tax provision for the nine months ended September 30, 2014 and 2013 was 39% and 38%, respectively, and reflects the effective tax rate expected to be applicable for the full year, adjusted for an increase in discrete events that are recorded in the period in which they occurred. The Company’s effective tax rate for the nine months ended September 30, 2014 and 2013 differs from the federal statutory rate primarily due to changes in state pretax income as well as local tax.

Liquidity and Capital Resources

At September 30, 2014, our sources of liquidity consist of cash and cash equivalents of approximately $67 million. We have no long-term debt, except for obligations under capital leases and software licensing agreements and, thus far, our financing costs have consisted principally of the annual dividend on the preferred stock and repayments of capital lease and software licensing obligations.

On April 15, 2013, we announced that the Board of Directors approved a term sheet for an incentive compensation package to be provided to our chief executive officer in substitution for certain awards that would be cancelled, subject to stockholder approval of the terms of the substitute incentive compensation package and a new incentive plan.  On May 3, 2013, in order to effectuate the substitute incentive compensation provided for in the term sheet, we and the chief executive officer entered into a definitive Replacement Grant Agreement and certain agreed upon ancillary award agreements related thereto.  In June 2013, the substitute remuneration package was approved by our stockholders, and on December 23, 2013 we and the chief executive officer entered into an amendment to the Replacement Grant Agreement which fixed the terms of the incentive compensation package.  In addition to stock options and performance shares, the amended Replacement Grant Agreement includes a performance fixed cash award of $4.2 million, which was earned as a result of our achievement of a specified growth in revenue over the performance period from July 1, 2013 through June 30, 2014. The award is payable in three installments of $1.4 million each, with the first payment being paid in the third quarter of 2014 and the remaining two payments due March 30, 2015 and March 30, 2016

In order to minimize credit and market risk, we have invested $31 million of our cash in short-term U.S. treasury instruments, through the direct purchase of treasury bills and through a U.S. treasury money market fund.  The remainder of our cash is held in various financial institutions by the parent company and its subsidiaries based on our projected cash needs. To minimize our foreign currency exposure, we maintain funds in foreign currency bank accounts, based on projected foreign currency expenditures.

Cash flows

	Nine months ended September 30,
	2014		2013
Cash provided by (used in):
Operating activities	16,101		17,062
Investing activities	8,284		(13,640	)
Financing activities	(1,122	)	(271	)

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Net Cash Flows from Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2014 decreased $1 million compared with the nine months ended September 30, 2013, primarily due to a decrease in the amount of cash provided by the growth in deferred revenue compared to the prior year and increases in other non-current liabilities and income tax payable.

Net Cash Flows from Investing Activities

Cash provided by investing activities in the first nine months of 2014 increased $21.9 million over the comparable period of 2013. This increase primarily consists of proceeds from maturity of short-term investments of $12.5 million in 2014 versus purchases of short-term investments of $11 million in 2013.

Net Cash Flows from Financing Activities

Cash used in financing activities consist of payments under capital leases and software licensing obligations of $712 thousand and dividends paid on the Company’s preferred stock of $359 thousand.

Recent Accounting Pronouncements

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Foreign currency exchange risk

Our wholly-owned subsidiaries, Diligent Boardbooks Limited, Diligent Board Member Services NZ Limited and Diligent Board Services Australia Pty Ltd, utilize the British Pound Sterling (GBP), New Zealand Dollar (NZ$) and Australian Dollar (AUD), respectively, as their functional currencies.  Assets and liabilities of these subsidiaries are translated to U.S. 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 or loss.  Our Singapore subsidiary uses the U.S. dollar as its functional currency.

Transactions in foreign currencies are reported at the rates of exchange at the transaction date.  Assets and liabilities are translated at the rates of exchange in effect at the balance sheet date.  All differences are recorded in results of operations.

From time to time, we use foreign currency option contracts or foreign currency forward contracts that are not designated as hedging instruments to manage exposure to fluctuations in foreign currency.  We use these instruments as economic hedges and not for speculative or trading purposes.  The fair value of the foreign currency contracts represents the amount we would receive or pay to terminate the contract at the reporting date, and is recorded in other assets or liabilities, depending on whether the net amount is a gain or loss.  During the three and nine months ended September 30, 2014 and 2013, we did not enter into any foreign currency contracts.

Interest Rate Sensitivity

We had cash and cash equivalents totaling $67 million at September 30, 2014.  This amount was invested primarily in money market funds and government securities. The cash and cash equivalents are held for general corporate purposes including possible acquisitions of, or investments in, services or technologies, working capital and capital expenditures. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.

Our cash and cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

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Item 4. Controls and Procedures.

Introduction

As disclosed in Item 9A of our 2013 Form 10-K, management concluded that as of December 31, 2013, our internal controls over financial reporting were not effective due to material weaknesses in our control environment, control activities and information and communication relative to stock option grants and stock issuances.  In addition, we lacked a sufficient complement of trained finance, accounting and tax personnel and did not establish adequate accounting and financial reporting policies and procedures as a general matter.  In particular, there were material weaknesses in our financial reporting control environment and the design, establishment, maintenance and communication of effective controls relating to revenue recognition, income taxes and certain transactions with our predecessor entity. In addition, our accounting and financial reporting processes were dependent on the maintenance of spreadsheets that had become inadequate to ensure accurate and timely financial reporting given the growth of the Company and the volume of transactions.  Management also evaluated the effectiveness of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective as of December 31, 2013.  Information relating to the identified material weaknesses in internal control over financial reporting, and related remedial measures, is contained in the 2013 Form 10-K.

(a)Evaluation of disclosure controls and procedures

Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are controls and other procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Form 10-Q, we evaluated, as of September 30, 2014, under the supervision of and with participation from our management, including our Chief Executive Officer and Interim Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based upon such evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, because of the material weaknesses in our internal control over financial reporting described in the 2013 Form 10-K, which material weaknesses have not been fully remediated as of September 30, 2014, our disclosure controls and procedures were not effective as of September 30, 2014.

(b)Changes in Internal Controls.

As disclosed in Item 9A of the 2013 Form 10-K, we determined that as of December 31, 2013, we had material weaknesses in internal controls over financial reporting and that we are committed to improving our overall control environment and financial reporting processes.

Our remediation efforts are ongoing and have not been completed.  During the second quarter of 2014, we hired a new Assistant Controller with significant financial reporting experience as well as engaged PricewaterhouseCoopers to assist in the accounting and related disclosure requirements for income taxes.  We are also in the process of implementing an enterprise wide reporting system for managing our customer information, revenue, accounting and reporting processes. For further information about our planned remedial measures, please see Item 9A “Controls and Procedures” included in the 2013 Form 10-K.

Additional remediation measures may be required, which may require additional implementation time.  We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting. Prior to the completion of our remedial measures, there remains risk that the processes and procedures on which we currently rely will fail to be sufficiently effective, which could result in material misstatement of our financial position or results of operations and require a restatement. Moreover, because of the inherent limitations in all control systems, no evaluation of controls, even where we conclude the controls are operating effectively, can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our control systems, as we develop them, may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

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PART II—OTHER INFORMATION

Legal Proceedings. The Company is not a party to any material legal proceeding required to be disclosed under Item 103 of Regulation S-K.

PART II—OTHER INFORMATION

Item 1. Risk Factors.

An investment in our common stock is subject to risks inherent in our business. There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. of our 2013 Form 10-K. Before making an investment decision, you should carefully consider the risks and uncertainties described in the Company’s 2013 Form 10-K together with all of the other information included in this report and in our other public filings. In addition to the risks and uncertainties described in the 2013 Form 10-K, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. If any of the risks and uncertainties described in the 2013 Form 10-K, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

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

On July 10, 2014, the Company issued 24 thousand restricted stock shares under the 2013 Plan to five directors in respect of service during the second quarter of 2014, based on the volume weighted average trading price of the Company’s common stock on its primary trading market for the twenty trading days immediately prior to such date. The issuance of these shares of restricted stock were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Regulation D due to the status of the individuals as our directors.

Item 3.   Defaults Upon Senior Securities.  Not applicable.

Item 4.   Mine Safety Disclosures.  Not applicable.

Item 5.   Other Information.  Not applicable.

Item 6. Exhibits.

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ExhibitNumbers	Exhibits
10.1	Employment Agreement, by and between Diligent Board Member Services, Inc. and Greg B. Petersen dated as of September 15, 2014
31.1	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. 1350
32.2	CFO Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C. 1350
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.INS	XBRL Instance Document
101.LAB	XBRL Labels Linkbase Document
101.PRE	XBRL Presentation Linkbase Document
101.SCH	XBRL Schema Document

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SIGNATURES

Pursuant to the requirements of 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 6, 2014	By:	/s/ Alessandro Sodi
			Alessandro Sodi, Chief Executive Officer (Principal Executive Officer)
Dated:	November 6, 2014	By:	/s/ Alexander Sanchez
			Alexander Sanchez, Interim Chief Financial Officer
			(Principal Financial Officer)

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EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (this “Agreement”), dated as of September 15, 2014 (the “Effective Date”), is by and between Diligent Board Member Services, Inc., a Delaware corporation (the “Company”) and Greg B. Petersen (“Executive”).  Certain other capitalized terms used herein are defined in Section 7.18 below and throughout this Agreement.

W I T N E S S E T H:

WHEREAS, the Company desires to employ Executive as its Executive Vice Chairman and Executive desires to be so employed by the Company on the terms and conditions specified herein; and

WHEREAS, the Company and Executive each believe it is in their respective best interests to enter into this Agreement setting forth the mutual understandings and agreements reached between the Company and Executive with respect to Executive’s employment with the Company and certain restrictions on Executive’s conduct benefiting the Company during such time and thereafter, all as set forth herein.

NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intended to be legally bound hereby, agree as follows:

ARTICLE 1
TERM OF AGREEMENT AND EMPLOYMENT

Section 1.1.Employment and Acceptance.  During the Term (as defined in Section 1.2 below), the Company shall employ Executive, and Executive shall accept such employment and serve the Company, in each case, subject to the terms and conditions of this Agreement.

Section 1.2.Term.  The term of Executive’s employment hereunder shall commence on the Effective Date and shall continue until the termination of Executive’s employment hereunder by either party pursuant to the provisions of Article 5 herein (the “Term”).

ARTICLE 2
TITLE; DUTIES AND OBLIGATIONS; LOCATION

Section 2.1.Title.  During the Term, Executive shall serve in the capacity of Executive Vice Chairman, subject to the terms of this Agreement.

Section 2.2.Duties.  During the Term, Executive agrees to perform to the best of his ability, experience and talent those acts and duties commensurate with the position of Executive Vice Chairman, or as otherwise may be directed by the Board of Directors of the Company (the “Board”) or the Chairman of the Board (the “Chairman”).  It is agreed and understood that as Executive Vice Chairman, the Executive shall not be deemed to be the principal executive officer of the Company and therefore shall not be required to certify the Company’s periodic

reports filed with the Securities and Exchange Commission.  Executive shall report to the Board through its Chairman.  Executive may not engage, directly or indirectly, in any other business, investment or other activity that interferes with Executive’s performance of his duties and responsibilities hereunder, is contrary to the interest of the Company or any of its subsidiaries or violates Executive’s obligations under Article 6 below and/or the Non-Disclosure Agreement (as defined in Section 6.1(a) below).  The foregoing notwithstanding, the parties hereto recognize and agree that Executive may (a) manage his passive personal investments, (b) engage in civic, charitable or religious activities, (c) serve as a director, trustee or member of a committee of any non-profit or charitable organization involving no conflict of interests with the interests of the Company (as determined by the Board), (d) serve on the board of directors and committees of the board of directors of PROS Holdings, Inc. and Piksel, Inc. and (e) fulfill speaking engagements, teaching at continuing education seminars or fulfilling other professional or business educational opportunities, that, individually or in the aggregate, do not conflict with the business and affairs of the Company or interfere with Executive’s performance of his duties and responsibilities hereunder.  Except as provided for in clause (c) or clause (d) of the preceding sentence, Executive may not serve on the board of directors (or similar governing body) of any entity other than the Company or its subsidiaries during the Term without the prior written approval of the Board.

Section 2.3.Other Positions. During the Term, upon determination of the Board, Executive may be appointed as an officer and/or or nominated for election to any governing body of, any subsidiary of the Company for no additional compensation.

Section 2.4.Compliance With Policies, etc.  During the Term, Executive shall adhere to the Company’s policies, rules and regulations governing the conduct of its employees, now in effect, or as subsequently adopted or amended, including, but not limited to, the Company’s Code of Conduct.

Section 2.5.Time Commitment.  The parties anticipate that, initially, Executive will be required to devote approximately fifty percent (50%) of his business time (twenty (20) hours per week on average) to the performance of his duties hereunder.  However, as an exempt employee, Executive acknowledges and agrees that he (a) will be required to work any such additional hours as are reasonably necessary to satisfactorily perform his job duties hereunder and (b) is not entitled to additional or overtime compensation for hours worked in excess of twenty (20) per week.  For the avoidance of doubt, the Executive understands that, during the Term, the number of hours that he will need to devote to the performance of his duties hereunder may materially increase (either periodically or on a regular basis, as necessary).  If the time commitment of Executive hereunder regularly exceeds, or is less than, fifty percent (50%) of his business time, Executive and the Compensation Committee of the Board (the “Compensation Committee”) will discuss in good faith an appropriate adjustment to Executive’s compensation hereunder.

Section 2.6.Location.  The principal locations for the performance of Executive’s services under this Agreement shall be at the Company’s headquarters in New York, New York and the Company’s offices in Charlotte, North Carolina, provided, that, Executive also shall be required to travel to other locations to perform his duties hereunder.  Notwithstanding the foregoing, Executive will be permitted to perform his duties hereunder from his home office in Austin, Texas during such times that it is not necessary (as reasonably determined by the

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Chairman) for him to provide his services from the Company’s headquarters in New York, New York, the Company’s offices in Charlotte, North Carolina, or to travel to other locations.

ARTICLE 3
COMPENSATION

Section 3.1.Base Compensation.  During the Term, the Company shall pay Executive a base salary at the annualized rate of $450,000, which shall be subject to withholding and customary deductions and be payable in equal installments in accordance with the Company’s then-customary payroll practices for its executives (the “Base Salary”), and may be increased at the sole discretion of the Compensation Committee or adjusted upward or downward as contemplated by Section 2.5 hereof.

Section 3.2.Awards.  The Compensation Committee has approved, effective upon Executive’s commencement of services as an employee hereunder, a grant to Executive of an option to purchase 250,000 shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) pursuant to the Company’s 2013 Incentive Plan (the “Plan”) (the “Option”), with a fair market value per share exercise price determined in accordance with the Plan.  In addition, the Compensation Committee has approved, effective upon Executive’s commencement of services as an employee hereunder, a grant to Executive of 125,000 Restricted Share Units (as defined in the Plan) covering shares of Common Stock pursuant to the Plan (the “Restricted Share Units”).  The grants of the Option and the Restricted Share Units (collectively, the “Awards”) shall be documented in Award Agreements (as defined in the Plan) between the Company and Executive in the forms attached as Exhibit A-1 and Exhibit A-2 hereto.

ARTICLE 4
BENEFITS AND EXPENSES

Section 4.1.Benefit Plans.  Executive shall be entitled to participate in all benefit plans (excluding severance plans, if any) generally made available to other senior executives of the Company, to the extent permissible under the general terms and provisions of such plans and programs in accordance with the provisions thereof.  The Company reserves the right to change or rescind its benefit plans and programs and/or change employee contribution amounts to benefit costs without advance notice in its discretion.

Section 4.2.Expense Reimbursement.  The Company shall reimburse Executive for all necessary out-of-pocket expenses reasonably incurred by Executive during the Term in connection with the performance of Executive’s duties hereunder, in accordance with the Company’s policies in place from time to time.  Without limitation of (but not in duplication of) the foregoing, the Company shall reimburse Executive for reasonable and necessary expenses directly associated with (a) his travel between Austin, Texas and New York, New York, Charlotte, North Carolina or any other Company office, between Company offices or to any other location (in each case, as required to perform his duties hereunder) and meals and lodging associated with such travel, and (b) Executive’s use of his office at his primary residence in Austin, Texas, in the performance of his duties hereunder, up to $150 per month.  In order to receive such reimbursement pursuant to this Section 4.2, Executive shall furnish to the Company

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documentary evidence of each such expense in the form required to comply with the Company’s policies.

Section 4.3.Paid Vacation.  Executive shall be entitled to four (4) weeks paid vacation days annually during the Term (pro-rated for partial years), which Executive shall take during such times as shall be consistent with Executive’s responsibilities and the time of which shall be subject to the reasonable approval of the Company.  It is understood and agreed that unused vacation time shall not carryover from year-to-year and is not payable upon termination of Executive’s employment hereunder.

ARTICLE 5
TERMINATION OF EMPLOYMENT

Section 5.1.Termination Without Cause or Resignation For Good Reason.

(a)The Company may terminate Executive’s employment hereunder at any time without Cause (other than by reason of Disability) upon written notice to Executive.  Executive may terminate his employment hereunder for Good Reason upon written notice to the Company in accordance with the definition thereof.

(b)If Executive’s employment is terminated by the Company without Cause (other than by reason of Disability) or by Executive for Good Reason pursuant to Section 5.1(a) and provided that (i) the effective date of such termination occurs on or following the one (1) year anniversary of the Effective Date and (ii) a Board Removal Event has not occurred on or prior to the effective date of such termination, then, in full discharge of all of the Company’s obligations to Executive hereunder or otherwise, the Company shall pay to Executive, and Executive shall be entitled to, the Accrued Obligations.

(c)If Executive’s employment is terminated by the Company without Cause (other than by reason of Disability) or by Executive for Good Reason pursuant to Section 5.1(a) and provided that either (i) the effective date of such termination occurs prior to the one (1) year anniversary of the Effective Date or (ii) (A) the effective date of such termination occurs on or following the one (1) year anniversary of the Effective Date and (B) a Board Removal Event has occurred on or prior to the effective date of such termination, then, in full discharge of all of the Company’s obligations to Executive hereunder or otherwise, the Company shall pay to Executive, and Executive shall be entitled to:

(i) the Accrued Obligations; and

(ii)   an annualized amount equal to Executive’s Base Salary (as in effect immediately prior to the Termination Date), which amount shall be paid, subject to Section 5.1(d) and Section 5.6, in equal installments over the twelve (12) month period following the Termination Date in accordance with the Company’s then-customary payroll practices for executives.

(d)With the exception of the Accrued Obligations, the Company’s payment of the amounts set forth in Section 5.1(c) shall be contingent upon Executive executing the Release described in Section 7.12 below, which must be executed by Executive and become effective

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(and non-revocable) within sixty (60) days after the Termination Date.  Subject to Section 5.6 hereof, the payments set forth in Section 5.1(c)(ii), if applicable, shall commence on the first regular payroll date of the Company that occurs after the date that is sixty (60) days after the Termination Date and the first installment of such payments shall include the cumulative amount of payments that would have been paid to Executive during the period of time between the Termination Date and the commencement date had such payments commenced immediately following the Termination Date.  With the exception of the Accrued Obligations, the Company shall have no obligation to provide any of the payments set forth in Section 5.1 in the event that Executive breaches the provisions of Article 6 of this Agreement.

Section 5.2.Termination for Cause; Voluntary Termination.

(a)The Company may terminate Executive’s employment hereunder at any time for Cause upon written notice to Executive.  Executive may voluntarily terminate his employment hereunder at any time without Good Reason upon sixty (60) days prior written notice to the Company.

(b)If Executive’s employment terminates pursuant to Section 5.2(a), in full discharge of all of the Company’s obligations to Executive hereunder or otherwise, the Company shall pay to Executive the Accrued Obligations.

Section 5.3.Termination Resulting from Death or Disability.

(a)As the result of any Disability suffered by Executive, the Company may, upon five (5) days prior notice to Executive, terminate Executive’s employment under this Agreement.  Executive’s employment shall automatically terminate upon his death.

(b)If Executive’s employment is terminated pursuant to Section 5.3(a), Executive or Executive’s estate, as the case may be, shall be entitled to receive, and the Company’s sole obligation under this Agreement or otherwise shall be to pay or provide to Executive or Executive’s estate, as the case may be, the Accrued Obligations.

Section 5.4.Mutual Agreement.

(a)This Agreement and Executive’s employment hereunder may be terminated at any time by the mutual agreement of the Company and Executive.

(b)If this Agreement is terminated pursuant to Section 5.4(a), Executive shall be entitled to receive and the Company’s sole obligation under this Agreement or otherwise shall be to pay or provide to Executive the Accrued Obligations.

Section 5.5.Removal from any Boards and Position.  If Executive’s employment is terminated for any reason under this Agreement, he shall be deemed (without further action, deed or notice) to resign (i) if a member, from the board of directors of any subsidiary of the Company or any other board to which he has been appointed or nominated by or on behalf of the Company and (ii) from all other positions with the Company or any subsidiary of the Company, including, but not limited to, as an officer of the Company and any of its subsidiaries.

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Section 5.6.409A Compliance.  All payments under this Agreement are intended to comply with or be exempt from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).  To the extent that any provision in this Agreement is ambiguous as to its compliance with Section 409A, or to the extent any provision in this Agreement must be modified to comply with Section 409A, such provision shall be read, or shall be modified, as the case may be, in such a manner so that no payment due to Executive shall be subject to an “additional tax” within the meaning of Section 409A(a)(1)(B).  If necessary to comply with the restriction in Section 409A(a)(2)(B) of the Code concerning payments to “specified employees,” any payment on account of Executive’s separation from service that would otherwise be due hereunder within six (6) months after such separation shall be delayed until the first business day of the seventh month following the Termination Date and the first such payment shall include the cumulative amount of any payments (without interest) that would have been paid prior to such date if not for such restriction.  Each payment in a series of payments hereunder shall be deemed to be a separate payment for purposes of Section 409A. To the extent required to avoid an accelerated or additional tax under Section 409A, amounts reimbursable to Executive under this Agreement shall be paid to Executive on or before the last day of the year following the year in which the expense was incurred and the amount of expenses eligible for reimbursement (and in-kind benefits provided to Executive) during any one year may not affect amounts reimbursable or provided in any subsequent year.  In no event whatsoever shall the Company be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.

ARTICLE 6
NON-COMPETITION, CONFIDENTIALITY AND
 NON-SOLICITATION COVENANTS

Section 6.1.Non-Competition, Confidentiality, etc.

(a)Executive acknowledges that Executive’s employment hereunder will provide Executive with access on a continual basis to confidential and proprietary information concerning the Business, the Company and its Affiliates, which is not readily available to the public and that the Company would not enter into this Agreement but for the covenants (the “Restrictive Covenants”) contained in this Article 6 and the Company’s Assignment of Inventions, Non-Disclosure and Non-Solicitation Agreement, attached hereto as Exhibit B (“Non-Disclosure Agreement”), which shall be executed on the Effective Date by Executive.

(b)To the extent permitted by applicable law, in consideration for the salary and other payments to be provided to Executive pursuant to this Agreement, during the Term and for a period of twelve (12) months thereafter (the Term and such twelve (12) month period, the “Restricted Period”), Executive agrees not to directly or indirectly, whether as an officer, employee, agent, partner, owner, lender, investor, consultant or otherwise, anywhere in the world: (i) compete with the Business or engage in the Business for his own account or for the account of any other person or entity, or (ii) engage in any other Material Competitive Business, provided, however, that Executive may own, directly or indirectly, solely as a passive investment, securities of any entity which are traded on any national securities exchange, if Executive is not a controlling person of, or a member of a group which controls, such entity, and

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in any event, does not, directly or indirectly, beneficially own two percent (2%) or more of any class of securities of such publicly traded entity.

(c)The Restricted Period shall be extended for an amount of time equal to the time period during which Executive was in violation of any provision of this Article 6 and shall continue through any action, suit or proceedings arising out of or relating to this Article 6.

(d)This Article 6 and the Non-Disclosure Agreement shall survive any termination or expiration of this Agreement or the Term.

Section 6.2.Reasonableness; Injunction.  Executive acknowledges and agrees that (i) Executive has had an opportunity to seek advice of counsel in connection with this Agreement and the Non-Disclosure Agreement, (ii) the Restrictive Covenants are reasonable in scope and in all other respects, (iii) any violation of the Restrictive Covenants will result in irreparable injury to the Company, (iv) money damages would be an inadequate remedy at law for the Company in the event of a breach of any of the Restrictive Covenants by Executive, (v) specific performance in the form of injunctive relief would be an adequate remedy for the Company, and (vi) the Restrictive Covenants shall be deemed a series of independent covenants in each jurisdiction in which they apply, and the invalidity or impairment of any Restrictive Covenant in any one such jurisdiction shall not affect the enforceability of the Restrictive Covenants in each and every other jurisdiction.  If Executive breaches or threatens to breach a Restrictive Covenant, the Company shall be entitled, in addition to all other remedies, to an injunction restraining any such breach, without any bond or other security being required and without the necessity of showing actual damages.  In addition, the Company shall be entitled to recover all reasonable attorneys’ fees and expenses incurred in connection with enforcing its rights under this Agreement and the Non-Disclosure Agreement.  Executive further agrees that a copy of a summons and complaint seeking the entry of an order to enforce its rights hereunder may be served upon Executive by certified mail, return receipt requested, at the address set forth in Section 7.5 below or at any other address which Executive shall designate in accordance with Section 7.5.

Section 6.3.Nondisparagement.  Executive agrees that he will not at any time (whether during or after the Term) publish or communicate to any person or entity any Disparaging (as defined below) remarks, comments or statements concerning the Company and its subsidiaries, and their respective present and former members, partners, directors, officers, shareholders, employees, agents, attorneys, successors and assigns (the “Protected Parties”).  The Company agrees that it will not at any time (whether during or after the Term) publish or communicate to any person or entity any Disparaging (as defined below) remarks, comments or statements concerning Executive.

ARTICLE 7
GENERAL PROVISIONS

Section 7.1.Expenses.  The Company shall pay up to $5,000 for legal counsel for Executive in connection with the negotiation, preparation and execution of this Agreement to facilitate analysis and review necessary to enter into this Agreement, which the Company has requested.  Notwithstanding the foregoing to the contrary, the prevailing party in any dispute under this Agreement shall be entitled to recover from the losing party all fees, expenses and

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costs (including without limitation, attorneys’ fees and expenses) incurred by the prevailing party in connection with such dispute.

Section 7.2.Key-Man Insurance.  Upon the Company’s request, Executive shall cooperate (including, without limitation, taking any required physical examinations) in all respects in obtaining a key-man life insurance policy on the life of Executive in which the Company is named as the beneficiary.

Section 7.3.Entire Agreement.  This Agreement when executed, contains a complete statement of all of the terms of the arrangements between Executive and the Company with respect to Executive’s employment by the Company and supersedes any and all other agreements and understandings, whether oral or in writing, between the parties hereto with respect to the subject matter hereof.  Each party acknowledges that no representations, inducements, promises or agreements, whether oral or in writing, have been made by any party, or on behalf of any party, which are not embodied herein.  No agreement, promise or statement not contained in this Agreement shall be valid and binding, unless agreed to in writing and signed by the parties sought to be bound thereby.

Section 7.4.No Other Contracts.  Executive represents and warrants to the Company that neither the execution and delivery of this Agreement by Executive nor the performance by Executive of Executive’s obligations hereunder, shall constitute a default under or a breach of the terms of any other agreement, contract or other arrangement, whether written or oral, to which Executive is a party or by which Executive is bound, nor shall the execution and delivery of this Agreement by Executive nor the performance by Executive of his duties and obligations hereunder give rise to any claim or charge against either Executive, the Company or any Affiliate, based upon any other contract or other arrangement, whether written or oral, to which Executive is a party or by which Executive is bound.  Executive further represents and warrants to the Company that he is not a party to or subject to any restrictive covenants, legal restrictions or other agreement, contract or arrangement, whether written or oral, in favor of any entity or person which would in any way preclude, inhibit, impair or limit Executive’s ability to perform his obligations under this Agreement, including, but not limited to, non-competition agreements, non-solicitation agreements or confidentiality agreements.  Executive shall defend, indemnify and hold the Company harmless from and against all claims, actions, losses, liabilities, damages, costs and expenses (including reasonable attorney’s fees and amounts paid in settlement in good faith) arising from or relating to any breach of the representations and warranties made by Executive in this Section 7.4.

Section 7.5.Notices.  Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, faxed, or sent by nationally recognized overnight courier service (with next business day delivery requested).  Any such notice or communication shall be deemed given and effective, in the case of personal delivery, upon receipt by the other party, in the case of faxed notice, upon written receipt of transmission of the fax, in the case of a courier service, upon the next business day, after dispatch of the notice or communication.  Any such notice or communication shall be addressed as follows:

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If to the Company, to:

Diligent Board Member Services, Inc.

1385 Broadway, 19th Floor

New York, New York 10018

Attn: Corporate Secretary

With a copy to:

Lowenstein Sandler LLP

1251 Avenue of the Americas

New York, New York 10020

Telephone:  212.419.5843

Facsimile:  973.535.3357

Attn: Marita A. Makinen, Esq.

If to Executive, to:

Greg B. Petersen

[·]

[·]

With a copy to:

[Executive’s Attorney]

Any person named above may designate another address or fax number by giving notice in accordance with this Section to the other persons named above.

Section 7.6.Governing Law.  This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of law.

Section 7.7.Waiver.  Either party may waive compliance by the other party with any provision of this Agreement.  The failure of a party to insist on strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.  No waiver of any provision shall be construed as a waiver of any other provision.  Any waiver must be in writing.

Section 7.8.Severability.  If any one or more of the terms, provisions, covenants and restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute for such invalid and unenforceable provision in light of the tenor of this Agreement, and, upon so agreeing, shall incorporate such substitute provision in this

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Agreement.  In addition, if any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed, by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law.

Section 7.9.Counterparts.  This Agreement may be executed in any number of counterparts and each such duplicate counterpart shall constitute an original, any one of which may be introduced in evidence or used for any other purpose without the production of its duplicate counterpart.  Moreover, notwithstanding that any of the parties did not execute the same counterpart, each counterpart shall be deemed for all purposes to be an original, and all such counterparts shall constitute one and the same instrument, binding on all of the parties hereto.

Section 7.10.Advice of Counsel.  Both parties hereto acknowledge that they have had the opportunity to seek and obtain the advice of counsel before entering into this Agreement and have done so to the extent desired, and have fully read the Agreement and understand the meaning and import of all the terms hereof.

Section 7.11.Assignment.  This Agreement shall inure to the benefit of the Company and its successors and assigns and shall be binding upon the Company and its successors and assigns.  This Agreement is personal to Executive, and Executive shall not assign or delegate his rights or duties under this Agreement, and any such assignment or delegation shall be null and void.

Section 7.12.Release.  Notwithstanding anything to the contrary in this Agreement, with the exception of the Accrued Obligations, Executive shall not be entitled to receive any post-employment compensation pursuant to Section 5.1(c) hereof, unless prior to the receipt of such compensation, Executive executes and delivers to the Company a release, in form and substance satisfactory to the Company under which Executive releases and discharges the Company and its subsidiaries and Affiliates and each of their respective officers, directors, shareholders, partners, managers, agents, employees and other related parties, from any claims and causes of action of any kind, including, but not limited to, claims and causes of actions arising out of Executive’s employment or termination of employment, but excluding claims and causes of action arising solely out of the obligations of the Company to make payments or provide benefits to Executive after the termination of such employment pursuant to the express provisions of the Agreement.

Section 7.13.Agreement to Take Actions.  Each party to this Agreement shall execute and deliver such documents, certificates, agreements and other instruments, and shall take all other actions, as may be reasonably necessary or desirable in order to perform his or its obligations under this Agreement.

Section 7.14.No Attachment.  Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect; provided, however, that nothing in this

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Section 7.14 shall preclude the assumption of such rights by executors, administrators or other legal representatives of Executive or Executive’s estate and their assigning any rights hereunder to the person or persons entitled thereto.

Section 7.15.Tax Withholding.  The Company or other payor is authorized to withhold from any benefit provided or payment due hereunder, the amount of withholding taxes due any federal, state or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Board to satisfy all obligations for the payment of such withholding taxes.

Section 7.16.Limitation on Parachute Payments.

(a)  In the event that the payments or other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute “parachute payments” within the meaning of Section 280G(b)(2) of the Code, and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s benefits under this Agreement shall be either (x) delivered in full, or (y) delivered to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. If a reduction in payments or benefits constituting “parachute payments” is necessary pursuant to the foregoing provision, reduction shall occur in the following order: reduction of cash payments; cancellation of accelerated vesting of stock awards; and reduction of employee benefits. If acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of Executive’s stock awards.

(b)  Unless the Company and Executive otherwise agree in writing, any determination required under this Section 7.16 shall be made in writing by the Company’s independent public accountants (the “Accountants”), whose determination shall be conclusive and binding upon Executive and the Company for all purposes and may be relied upon by the Company. For purposes of making the calculations required by this Section 7.16, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Employee shall provide to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 7.16. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 7.16.

Section 7.17.Board Fees.  Notwithstanding anything contained herein to the contrary, it is understood and agreed that (a) Executive will be entitled to receive his board fees for the quarter ending September 30, 2014, prorated based upon the portion of such quarter that he served as a non-executive director of the Company (anticipated to be through September 15, 2014), which prorated board fees shall be paid at the same time as board fees are payable to the Company’s other non-executive directors, (b) during the Term, Executive will not be entitled to receive board fees in addition to the compensation set forth in this Agreement, and (c) if Executive remains on the Board as a non-executive director following the Termination Date, he

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shall be entitled to earn board fees during his remaining tenure on the Board in accordance with the Company’s policies (in effect from time to time) relating to payments to non-executive board members.

Section 7.18.Definitions.  The following definitions apply to this Agreement:

(a)“Accrued Obligations” means (i) Executive’s accrued but unpaid Base Salary through the final date of Executive’s employment by the Company (the “Termination Date”), payable in accordance with the Company’s standard payroll practices, (ii) expenses reimbursable under Section 4.2 incurred on or prior to the Termination Date but not yet reimbursed and (iii) if applicable, any accrued and unpaid amounts due and owing under any Company health plan in which Executive participates, in accordance with the terms of such plan(s).

(b)“Affiliate” means, with respect to a specified entity, any individual or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified entity.

(c)“Board Removal Event” means Executive has ceased to be a member of the Board due to an event other than Executive’s resignation from the Board, his removal from the Board for cause or the failure of the Company’s shareholders to re-elect Executive to serve following his nomination for election by the Board.

(d)“Business” means the business of manufacturing, providing or marketing software for digital board books or board portals—whether delivered via the Application Service Provider model or as installed software—to desktop PCs, laptops, PDAs, mobile phones and computing devices (or other form of computing or electronic device) and any additional Material Competitive Businesses presently or hereafter conducted by the Company and its Affiliates.  “Material Competitive Business” for purposes of this Section 7.18(d) shall mean a product or line of business which accounted for 10% or more of the Company’s revenues over the last two fiscal quarters immediately prior to the time of Executive’s termination of services, or a product or line of business in which the Company had invested $5 million or more in pursuing.

(e)“Cause” means (i) Executive commits a material act of dishonesty, deceit, or breach of fiduciary duty in the performance of Executive’s duties as an employee of the Company; (ii) Executive neglects or fails on a recurring basis and in a material respect, to perform Executive’s job duties as defined in Section 2.2 hereof and such neglect or failure continues for at least thirty (30) days after the Company notifies Executive in writing of such neglect or failure; (iii) Executive substantially violates any written policy or reasonable expectation of the Company regarding employee behavior or conduct that has been communicated to Executive by the Company and Executive does not cure such breach within thirty (30) days after written notice from the Company; (iv) Executive is convicted of, or pleads nolo contendere, to (a) any felony, or any misdemeanor involving moral turpitude or (b) any crime or offense involving dishonesty with respect to the Company or (v) Executive materially breaches any provision of this Agreement and does not cure such breach within thirty (30) days after written notice from the Company, except that such cure period shall not apply to any breach by Executive of the Restrictive Covenants.

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(f)“Code” means the Internal Revenue Code of 1986, as amended.

(g)“Disability” means a determination by the Company in accordance with applicable law that as a result of a physical or mental injury or illness, Executive is unable to perform the essential functions of his job with or without reasonable accommodation for a period of (i) ninety (90) consecutive days; or (ii) ninety (90) days during any twelve (12) month period.

(h)“Disparaging” refers to those remarks, comments or statements that impugn the character, honesty, integrity or morality or business acumen or abilities in connection with any aspect of the operation of business of the individual or entity being disparaged.

(i)“Good Reason” means a material breach by the Company of the terms of this Agreement; provided, however, that Executive must notify the Company within 30 days of the material breach that he considers it to be a “Good Reason” condition and provide the Company with at least 30 days in which to cure the condition.  If Executive fails to provide this notice and cure period prior to his resignation, or resigns more than 90 days after the initial existence of the condition, his resignation will not be deemed to be for “Good Reason.”

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

COMPANY
DILIGENT BOARD MEMBER SERVICES, INC.
By:	/s/ Alessandro Sodi
Name:	Alessandro Sodi
Title:	Chief Executive Officer
EXECUTIVE
/s/ Greg B. Petersen
Greg B. Petersen

[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]

EXHIBIT A-1

Form of Award Agreement (Option Award)

STOCK OPTION AWARD AGREEMENT

THIS STOCK OPTION AWARD AGREEMENT (the “Option Award Agreement”) is entered into on the date set forth on Exhibit A (the “Grant Date”) by and between DILIGENT BOARD MEMBER SERVICES, INC., a Delaware corporation (the “Company”), and GREG B. PETERSEN (the “Awardee”).

WHEREAS, the Company is entering into this Option Award Agreement in order to effectuate the Award set forth in the Employment Agreement dated September 15, 2014 between the Company and the Awardee (the “Employment Agreement”) of incentive stock options (the “Option”) with respect to the Company’s common stock, par value $0.001 per share (the “Common Stock”) pursuant to the Diligent Board Member Services, Inc. 2013 Incentive Plan (the “2013 Plan”) on the terms and conditions provided herein.

NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.Award.  Subject to the terms and conditions of this Option Award Agreement, the Company hereby grants to the Awardee an Option to purchase the number of Shares set forth in Exhibit A on the terms and conditions set forth in Exhibit A.  This award is made pursuant to and is subject to the terms of the 2013 Plan.  Capitalized terms used but not otherwise defined in this Agreement shall have the meanings as set forth in the 2013 Plan.  To the extent designated as an incentive stock option (“ISO”), this Option is intended to qualify as an incentive stock option under Section 422 of the Code.  However, notwithstanding such designation, if the Awardee becomes eligible in any given year to exercise ISOs for Shares having a Fair Market Value in excess of $100,000, those Options representing the excess shall be treated as non-qualified stock options (“NSOs”).  In the previous sentence, “ISOs” include ISOs granted under any plan of the Company or any parent or any subsidiary.  For the purpose of deciding which Options apply to Shares that “exceed” the $100,000 limit, ISOs shall be taken into account in the same order as granted.  The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.  The Awardee hereby acknowledges that there is no assurance that the Option will, in fact, be treated as an incentive stock option under Section 422 of the Code.

2.Conditions of Exercise.  This Option may not be exercised unless all of the following conditions are met:

(a)Counsel for the Company must be satisfied at the time of exercise that the issuance of Shares upon exercise of this Option will be in compliance with the Securities Act of 1933, as amended, and all other applicable federal and state laws.

(b)The Awardee must give the Company written notice of exercise specifying

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the number of Shares with respect to which this Option is being exercised, and at the time of exercise pay the full purchase price for the Shares being acquired (i) in cash or check acceptable to the Company, (ii) by surrender of Shares that otherwise would have been delivered to the Awardee upon exercise of the Option, up to the largest whole number of Shares having an aggregate Fair Market Value that does not exceed the aggregate exercise price (plus tax withholdings, if applicable) and any remaining balance of the aggregate exercise price (and/or applicable tax withholdings) not satisfied by such reduction in the number of whole Shares to be issued shall be paid by the Awardee in cash or other form of payment permitted under this Option, or (iii) by such other manner as the Committee may authorize.

(c)The Awardee must at all times during the period beginning with the Grant Date and ending on the date of such exercise have been an employee or a member of the board of directors of the Company (or of a corporation or a parent or subsidiary of a corporation assuming this Option by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation in a transaction to which Section 424(a) of the Code applies), provided, however, that:

(i)if the Awardee ceases to be an employee of the Company due to termination of employment by the Company without Cause (as defined in the Employment Agreement) or the Awardee’s resignation from employment with the Company with or without Good Reason (as defined in the Employment Agreement) and the Awardee ceases to be a member of the board of directors of the Company, this Option will remain in full force and effect and may be exercised, to the extent exercisable on the date of termination, until the earlier of (x) ninety (90) days from the date of the Awardee’s termination of employment or (y) the expiration of this Option, and

(ii)if the Awardee ceases to be an employee of the Company due to death or Disability (as defined in the Employment Agreement) and the Awardee ceases to be a member of the board of directors of the Company, this Option will remain in full force and effect and may be exercised, to the extent exercisable on the date of termination, until the earlier of (x) one (1) year from the date of the Awardee’s termination of employment or (y) the expiration of this Option.

For avoidance of doubt, it the Awardee ceases to be an employee of the Company due to termination of employment by the Company for Cause, this Option shall immediately terminate on the date of such termination and shall not be exercisable for any period following such date.

(d)The Company shall have the right to withhold from amounts payable to the Awardee, as compensation or otherwise, or alternatively, to require the Awardee to remit to the Company, an amount sufficient to satisfy all federal, state and local withholding tax requirements.  Notwithstanding the foregoing, if so requested by the Awardee, the Company shall provide for such withholding by withholding Common Stock that otherwise would be issued to the Awardee upon exercise of the Option having

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a Fair Market Value equal to the amount necessary to satisfy the minimum statutory withholding amount.

(e)The Shares covered by this Option have been listed (subject only to official notice of issuance) on any national securities exchange on which the Common Stock is then listed.

3.Restrictions on Transfer and Exercise.

(a)Except as provided in this Section 3, this Option, and rights under this Option, may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Awardee and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company.

(b)This Option shall be exercisable only by the Awardee (or, in the case of Awardee’s Disability, by Awardee’s personal representative) during the Awardee’s lifetime, or by the person to whom the Awardee’s rights shall pass by will or the laws of descent and distribution.  Notwithstanding anything in the 2013 Plan to the contrary, an award of NSOs shall be transferable pursuant to a domestic relations order.

(c)If at the time of the Awardee’s death this Option has not been fully exercised, the Awardee’s estate or any person who acquires the right to exercise this Option by bequest or inheritance or by reason of the Awardee’s death may, at any time within one year after the date of the Awardee’s death, exercise this Option with respect to up to the entire remaining number of Shares subject to this Option.  It shall be a condition to the exercise of this Option after the Awardee’s death that the Company shall have been furnished evidence satisfactory to it of the right of the person exercising this Option to do so and that all estate, transfer, inheritance or death taxes payable with respect to this Option or the Shares to which it relates have been paid or otherwise provided for to the satisfaction of the Company.

4.Awardee Representations.  The Awardee understands that the Awardee (and, subject to Section 2(d) above, not the Company) shall be responsible for the Awardee’s own tax liability arising as a result of the transactions contemplated by this Agreement.

5.No Right to Continued Employment.  By accepting this Option Award Agreement, the Awardee acknowledges and agrees that neither the grant of this Option nor any of the terms herein (including the exercise schedule) constitute an express or implied promise of continued employment or service for the exercise period or for any other period, and shall not interfere with the Awardee’s right or the right of the Company to terminate the employment or service relationship at any time, with or without cause, subject to the terms of any written employment agreement that the Awardee may have entered into with the Company.

6.Notices.  Notices or communications to be made hereunder shall be in writing and shall be made in accordance with the Employment Agreement.

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7.Governing Law.  This Option Award Agreement shall be construed under the laws of the State of New York, without regard to conflict of laws principles.

8.Entire Agreement.  This Option Award Agreement, together with the Employment Agreement, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings relating to the subject matter of this Option Award Agreement.  Notwithstanding the foregoing, this Option Award Agreement and the Award made hereby shall be subject to the terms of the 2013 Plan.

9.Section 409A.  This Option Award Agreement is intended to comply with the requirements of Section 409A of the Code and regulations promulgated thereunder (“Section 409A”).  To the extent that any provision in this Option Award Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such a manner so that no payments due under this Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code.  In no event shall the Committee, the Board, or the Company (or their respective employees, officers or directors) have any liability to the Awardee (or any other person) due to the failure of an award to satisfy the requirements of Section 409A.  Although the parties endeavor to have this Option Award Agreement comply with the requirements of Section 409A, there is no guarantee that the Awardee will not be subjected to the payment of any tax or interest under Section 409A, and the Awardee shall not have any right to indemnification with respect thereto.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused their duly authorized officer to execute this Agreement on the date first written above.

DILIGENT BOARD MEMBER SERVICES, INC.
By:	/s/ Alessandro Sodi
	Name: Alessandro Sodi
	Title:   Chief Executive Officer
AWARDEE
/s/ Greg B. Petersen
Name: Greg B. Petersen

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EXHIBIT A

(a).Awardee’s Name:  Greg B. Petersen

(b).Grant Date:  September 15, 2014

(c)Number of Shares Covered By This Option:

250,000 Shares, as follows:

Number Covered by Incentive Stock Options:  250,000

Number Covered by Non-Qualified Stock Options:  0

(d)Exercise Price: $3.79 USD

(e)Expiration Date: September 15, 2024

(f)Exercise Schedule:  The Shares shall vest as follows:

(i)  One-half of the Shares covered by this Option shall become vested on each of the first two anniversaries of the Effective Date (as defined in the Employment Agreement), provided that the Awardee is in the employ of the Company as an executive officer on such anniversary of the Effective Date.

(ii)  If the Awardee’s employment is terminated without Cause (as defined in the Employment Agreement) or the Awardee Resigns for Good Reason (as defined in the Employment Agreement) and provided that the effective date of such termination occurs prior to the one (1) year anniversary of the Effective Date, then those Shares covered by this Option that would have vested on the first anniversary of the Effective Date shall become vested and exercisable as of the effective date of such termination.

(iii)  Notwithstanding the foregoing, in the event the Company consummates a Change in Control, and Awardee’s employment is terminated without Cause (as defined in the Employment Agreement) or the Awardee resigns for Good Reason (as defined in the Employment Agreement) upon or within six (6) months following the date of such Change in Control, the Shares covered by this Option, to the extent not fully vested by the date on which such termination of employment occurs, will become vested upon such termination of employment.

/s/ GP	(Initials)
Greg B. Petersen
/s/ AS	(Initials)
Company Signatory

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EXHIBIT A-2

Form of Award Agreement (RSU Award)

RESTRICTED SHARE UNIT AWARD AGREEMENT

THIS RESTRICTED SHARE UNIT AWARD AGREEMENT (the “RSU Agreement”) is entered into on the date set forth in Exhibit A (the “Grant Date”) by and between DILIGENT BOARD MEMBER SERVICES, INC., a Delaware corporation (the “Company”), and GREG B. PETERSEN (the “Awardee”).

WHEREAS, the Company is entering into this RSU Agreement in order to effectuate the Award set forth in the Employment Agreement dated September 15, 2014 between the Company and the Awardee (the “Employment Agreement”) of a restricted share unit award with respect to the Company’s common stock, par value $0.001 per share (the “Common Stock”) pursuant to the Diligent Board Member Services, Inc. 2013 Incentive Plan (the “2013 Plan”) on the terms and conditions provided herein.

NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Award.  The Company hereby grants the Awardee the number of Restricted Stock Units (each an “RSU,” and collectively the “RSUs”) set forth on Exhibit A.  This Award is made pursuant to and is subject to the terms of the 2013 Plan.  Capitalized terms used but not otherwise defined in this RSU Agreement shall have the meanings as set forth in the 2013 Plan.

2.Vesting.  The Award shall be subject to the vesting conditions set forth in Exhibit A.  Each RSU shall automatically convert into one share of Common Stock on the date that it becomes vested.  Subject to the terms of this Agreement, the Awardee shall forfeit the RSUs to the extent that the Awardee does not satisfy the applicable vesting requirements set forth in Exhibit A.

3.Transfer Restrictions.  Prior to the vesting of any RSUs, the Awardee shall not be deemed to have any ownership or shareholder rights (including, without limitation, voting rights and rights to dividends or dividend equivalents) with respect to such unvested RSUs, nor may the Awardee sell, assign, pledge or otherwise transfer (voluntarily or involuntarily) unvested RSUs.

4.Withholding Taxes.  The Company shall have the right to withhold from amounts payable to the Awardee, as compensation or otherwise, or alternatively, to require the Awardee to remit to the Company, an amount sufficient to satisfy all federal, state and local withholding tax requirements.  Notwithstanding the foregoing, if so requested by the Awardee, the Company shall, upon conversion of RSUs, provide for such withholding by withholding Common Stock that otherwise would be issued to the Awardee having a Fair Market Value on the date of such

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conversion that is equal to the amount necessary to satisfy the minimum statutory withholding amount.

5.Awardee Representations.  The Awardee understands that the Awardee (and, subject to Section 4 above, not the Company) shall be responsible for the Awardee’s own tax liability arising as a result of the transactions contemplated by this RSU Agreement.

6.Employment.  Neither this RSU Agreement nor any action taken hereunder shall be construed as giving the Awardee any right of continuing employment by the Company.

7.Notices.  Notices or communications to be made hereunder shall be in writing and shall be made in accordance with the Employment Agreement.

8.Governing Law.  This RSU Agreement shall be construed under the laws of the State of New York, without regard to conflict of laws principles.

9.Entire Agreement.  This RSU Agreement, together with the Employment Agreement, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings relating to the subject matter of this RSU Agreement.  Notwithstanding the foregoing, this RSU Agreement and the Award made hereby shall be subject to the terms of the 2013 Plan.

10.Binding Effect.  This RSU Agreement shall be binding upon and inure to the benefit of the Company and the Awardee and their respective permitted successors, assigns, heirs, beneficiaries and representatives.  This RSU Agreement is personal to the Awardee and may not be assigned by the Awardee without the prior consent of the Company.  Any attempted assignment in violation of this Section shall be null and void.

11.Amendment.  This RSU Agreement may be amended or modified only by a written instrument executed by both the Company and the Awardee.

12.Section 409A.  This RSU Agreement is intended to comply with the requirements of Section 409A of the Code and regulations promulgated thereunder (“Section 409A”).  To the extent that any provision in this RSU Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such a manner so that no payments due under this RSU Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code.  For purposes of Section 409A, each payment made under this RSU Agreement shall be treated as a separate payment.  In no event may the Awardee, directly or indirectly, designate the calendar year of payment.  Notwithstanding anything contained herein to the contrary, the Awardee shall not be considered to have terminated employment with the Company for purposes of Section 3 hereof unless he would be considered to have incurred a “termination of employment” from the Company within the meaning of Treasury Regulation §1.409A-1(h)(1)(ii).  In no event shall the Committee, the Board, or the Company (or their respective employees, officers or directors) have any liability to the Awardee (or any other person) due to the failure of an Award to satisfy the requirements of Section 409A.  Although the parties endeavor to have this RSU Agreement comply with the requirements of Section 409A, there is

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no guarantee that the Awardee will not be subjected to the payment of any tax or interest under Section 409A, and the Awardee shall not have any right to indemnification with respect thereto.

13.Counterparts.  This RSU Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this RSU Agreement or caused their duly authorized officer to execute this RSU Agreement on the date first written above.

DILIGENT BOARD MEMBER SERVICES, INC.
By:	/s/ Alessandro Sodi
	Name: Alessandro Sodi
	Title:   Chief Executive Officer
AWARDEE
/s/ Greg B. Petersen
Name: Greg B. Petersen

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EXHIBIT A

(a).Awardee’s Name:  Greg B. Petersen

(b).Grant Date:  September 15, 2014

(c).Number of RSUs Granted:  125,000

(d).Vesting Dates:  The RSUs shall vest as follows:

(i)  Fifty percent (50%) of the RSUs shall become vested on each of the first two anniversaries of the Effective Date (as defined in the Employment Agreement), provided that the Awardee is in the employ of the Company as an executive officer on such anniversary of the Effective Date.

(ii)  If the Awardee’s employment is terminated without Cause (as defined in the Employment Agreement) or the Awardee resigns for Good Reason (as defined in the Employment Agreement) and provided that the effective date of such termination occurs prior to the one (1) year anniversary of the Effective Date, then those RSUs covered by this Award that would have vested on the first anniversary of the Effective Date shall become vested (and no longer subject to forfeiture) as of the effective date of such termination.

(iii)  Notwithstanding the foregoing, in the event the Company consummates a Change in Control, and the Awardee’s employment is terminated without Cause (as defined in the Employment Agreement) or the Awardee resigns for Good Reason (as defined in the Employment Agreement) upon or within six (6) months following the date of such Change in Control, the RSUs covered by this Award, to the extent not fully vested by the date on which such termination of employment occurs, will become vested (and no longer subject to forfeiture) upon such termination of employment.

/s/ GP	(Initials)
Greg B. Petersen
/s/ AS	(Initials)
Company Signatory

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EXHIBIT B

Assignment of Invention, Non-Disclosure and Non-Solicitation Agreement

ASSIGNMENT OF INVENTIONS, NON-DISCLOSURE AND NON-SOLICITATION AGREEMENT

Employee Name: Greg B. Petersen

In order for Diligent Board Member Services, Inc. and its direct and indirect subsidiaries and its and their successors and assigns (herein collectively referred to as the “Company”) to maintain a competitive edge, the Company must protect its inventions, discoveries, works of authorship and its proprietary technical and business information. Therefore, as a condition of employment with the Company, I agree as follows.

DEFINITIONS

1.“Inventions” means any new or useful art, discovery, new contribution, finding or improvement (including without limitation any technology, computer programs, test, concept, idea, apparatus, device, mechanism, equipment, machinery, process, method, composition of matter, formula or technique), whether or not patentable, and all know-how related thereto, that has been made, created, developed, written or conceived by me (i) in the course of my employment, (ii) relating to the actual or anticipated business of the Company, or (iii) with the use of the Company’s time, material, proprietary information or facilities.

2.“Works” means any materials for which copyright protection may be obtained, including without limitation literary works (including books, pamphlets, articles and other writings), mask works, artistic works (including designs, graphs, drawings, blueprints and other graphic works), computer programs, compilations, recordings, photographs, motion pictures and other audio-visual works that have been made, created, developed, written or conceived by me (i) in the course of my employment, (ii) relating to the actual or anticipated business of the Company, or (iii) with the use of the Company’s time, material, proprietary information or facilities.

3.“Confidential Information” means information (i) disclosed to or known by me as a consequence of my employment with the Company (or as a consequence of my service as a member of the board of directors of the Company (the “Board”), whether prior to, during or after my employment with the Company), (ii) not generally known to others outside the Company, and (iii) which relates to the trade secrets or otherwise to the research, development efforts and methodologies, testing, engineering, manufacturing, marketing, sales, finances, operation (including without limitation any processes, formulae, methods, techniques, devices, know-how, manufacturing, processes, customer and prospect lists, sales statistics, tactics and projections, marketing strategies and plans, and personnel information or data), or other non-

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public information of the Company or of any other party which has entrusted such information to the Company in confidence.

DISCLOSURE AND ASSIGNMENT OF INVENTIONS AND WORKS

4.I will promptly disclose to the Company in writing, all Inventions and Works which are conceived, made, discovered, written or created by me alone or jointly with someone else on the Company’s time or on my own time, while I have been or continued to be employed by the Company or as a consequence of my service as a member of the Board, whether prior to, during or after my employment with the Company.

5.All Works created by me, alone or with others, are and shall be deemed “works made for hire” under the copyright laws and are and shall be owned by the Company.

6.I hereby assign to the Company all of my rights in all Inventions, and in all Works to the extent such Works may not, by operation of law, be works made for hire.

7.I will give the Company all assistance it reasonably requires to perfect, protect, and use its rights to Inventions and Works. In particular, I will sign all documents, do all things, and supply all information that the Company considers necessary or desirable to transfer or record the transfer of my entire right, title and interest in Inventions and Works; and to enable the Company to obtain patent, copyright, or other legal protection for Inventions and Works. Any out-of-pocket expenses will be paid by the Company.

8.I acknowledge that my work responsibilities may require me to create, develop or work on Inventions on behalf of the Company. I will immediately communicate to the President of the Company (or such other individual as the President may designate from time to time) a full and complete disclosure of each and every Invention conceived or made by me whether solely or jointly with others (a) while in the employ of the company, whether or not while actually engaged in the Company’s affairs, and (b) within two years subsequent to termination of said employment for any reason.

I agree to assign and transfer to the Company, without any separate remuneration or compensation other than the wages or salary received or compensation paid to me from time to time in the course of my employment by the Company, my entire right, title and interest in and to all inventions conceived or made by me, together with all United States and foreign patent rights and any other legal protection in and with respect to any and all such inventions (a) while in the employ of the Company,

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whether or not while I was actually engaged in the Company’s affairs, or (b) within two years subsequent thereto and as a direct or indirect result of such employment.  Upon request by the Company, I agree to execute and deliver all appropriate patent applications for securing all United States and foreign patents on all such inventions, and to do, execute, and deliver any and all acts and instruments that may be necessary or proper to vest all such inventions and patents in the Company or its designee, and to enable the Company or its designee to obtain all such letters patent. I agree to render to the Company or its designee all such assistance as it may require in the prosecution of all such patent applications and applications for the reissue of such patents and in the prosecution or defense of all interferences which may be declared involving any of said patent applications or patents. I further agree not to contest the validity of any patent, United States or foreign, which is issued to the Company or its designee, on which I made any contribution, or in which I participated in any way, and not to assist any other party in any way in contesting the validity of any such patent. I further agree that the obligations and undertakings stated in this paragraph shall continue beyond the termination of my employment by the Company, but if I shall be called upon to render such assistance after the termination of my employment, I shall be entitled to a fair and reasonable per diem fee in addition to reimbursement of any expenses incurred at the request of the Company.

9.As a matter of record, I understand that I may include a complete list of inventions made by me prior to the date of employment by the Company as an appendix to this Agreement. Only those inventions so listed shall be deemed to be excluded from the terms and conditions of this Agreement.

Other than these, I do not claim to own or control rights in any inventions or works subject to copyright and will not assert any such rights against the Company.

NONDISCLOSURE OF CONFIDENTIAL INFORMATION

10.I will not, during my employment with the Company or any time thereafter, disclose or use any of the Confidential Information for the benefit of myself or another, unless directed or authorized in writing by the Company to do so.

11.I understand that if I possess any proprietary information of another person or company as a result of prior employment or otherwise, the Company expects and requires that I will honor any and all legal obligations that I have to that person or company with respect to proprietary information, and I will refrain from any unauthorized use or disclosure of such information.

3

INSIDER TRADING

12.I hereby affirm that I am aware of and understand my responsibility to safeguard Confidential Information, and will not use or share such information for securities trading purposes or for any other purpose except to conduct Company business.  To use non-public information for personal financial benefit or to “tip” others who might make an investment decision on the basis of this information is not only unethical but also illegal.  Unauthorized use, disclosure or distribution of this information may result in disciplinary action and could also be illegal and result in criminal and civil penalties.

RETURN OF COMPANY PROPERTY

13.All documents and other tangible property relating in any way to the business of the Company are the exclusive property of the Company (even if I authored or created them). I agree to return all such documents and tangible property to the Company upon termination of employment or at such earlier time as the Company may request me to do.

NON-SOLICITATION OF ACCOUNTS

14.During my employment, and for one (1) year after termination of employment with the Company, I will not solicit, induce, or attempt to induce any past or current customer of the Company whose identities as such were first made known to me or with whom I first had direct contact in the course of my employment (or, in the course of my service as a member of the Board, prior to my employment) (a) to stop doing business with or through the Company, or (b) to do business with any other person, firm, partnership, corporation or other entity that provides products or services materially similar to or competitive with those provided by the Company.

NON-SOLICITATION OF EMPLOYEES

15.During my employment by the Company and (with respect to employment or affiliation involving products or services competitive with those of the Company) for one (1) year thereafter, I shall not, directly or indirectly, induce or attempt to induce any employee of the Company to accept employment or affiliation with another firm or entity of which I am an employee, owner, partner or consultant.

SEVERABILITY

16.If a provision of this Agreement is held invalid by a court of competent jurisdiction, the remaining provisions will nonetheless be enforceable according to their terms. Further, if any provision is held to be overbroad as written, that provision should be

4

considered to be amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended.

GOVERNING LAW

17.This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the United States of America and of the State of New York, without reference to the choice of law rules of New York.

BURDEN AND BENEFIT

18.The Company may assign its rights and delegate its duties and obligations under this Agreement to any successor in interest, whether by merger, consolidation, sale of assets, or otherwise. This Agreement shall be binding whether it is between me and the Company or between me and any successor or assigns of the Company.

NO EFFECT ON TERM OF EMPLOYMENT; TERM

19.Nothing in this Agreement prevents or limits my right to terminate my employment at any time for any reason, and nothing in this Agreement prevents or limits the Company from terminating my employment at any time for any reason. I understand and agree that there exist no promises or guarantees of permanent employment or employment for any specified term by the Company. I acknowledge and agree that the terms and conditions hereof memorialize the agreement that has governed my employment by the Company since I was first employed by the Company, whether as an employee or independent contractor.

20.I agree that injunctive or other equitable relief would be necessary to remedy any breach of my duties or obligations under this Agreement, and I waive the posting of a bond by the Company in connection with such relief.

ENTIRE AGREEMENT

21.I understand that this Agreement contains the entire agreement and understanding between the Company and me with respect to the provisions contained in this Agreement, and that no representations, promises, agreements, or understandings, written or oral, related thereto which are not contained in this Agreement will be given any force or effect. No change or modification of this Agreement will be valid or binding unless it is in writing and signed by the party against whom the change or modification is sought to be enforced. I further understand that even if the Company waives or fails to enforce any provision of this Agreement in one instance that will not constitute a waiver of any other provisions of this Agreement at this time, or a waiver of that provision at any other time.

5

AGREED:
		Diligent Board Member Services, Inc.
Employee:
By:	/s/ Greg B. Petersen	By:	/s/ Alessandro Sodi
Name: Greg B. Petersen		Name: Alessandro Sodi
Date: September 15, 2014		Title: Chief Executive Officer

6

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Alessandro Sodi, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Diligent Board Member Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 6, 2014
		/s/ Alessandro Sodi
		Alessandro Sodi
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Alexander Sanchez, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Diligent Board Member Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 6, 2014
		/s/ Alexander Sanchez
		Alexander Sanchez
		Interim Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION

OF

PERIODIC REPORT

I, Alessandro Sodi, the Chief Executive Officer of Diligent Board Member Services, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:

(1)the Quarterly Report on Form 10-Q of the Company for the three and nine months ended September 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	November 6, 2014
		/s/ Alessandro Sodi
		Alessandro Sodi
		President and Chief Executive Officer
		(Principal Executive Officer)

[A signed original of this written statement required by Section 906 has been provided to Diligent Board Member Services, Inc. and will be retained by Diligent Board Member Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]

EX-32.2

EXHIBIT 32.2

CERTIFICATION

OF

PERIODIC REPORT

I, Alexander Sanchez, the Interim Chief Financial Officer of Diligent Board Member Services, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:

(1)the Quarterly Report on Form 10-Q of the Company for the three and nine months ended September 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	November 6, 2014
		/s/ Alexander Sanchez
		Alexander Sanchez
		Interim Chief Financial Officer
		(Principal Financial Officer)

[A signed original of this written statement required by Section 906 has been provided to Diligent Board Member Services, Inc. and will be retained by Diligent Board Member Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]

XML

Obligations Under Capital Leases (Details) (USD $)	9 Months Ended
	Sep. 30, 2013 item
Obligations under capital leases
Number of capital leases	2
Total obligation under capital leases	$ 1,300,000
Computer equipment
Obligations under capital leases
Interest rate under capital leases (as a percent)	5.449%
Monthly payments of capital leases	28,000
Computer equipment 1
Obligations under capital leases
Interest rate under capital leases (as a percent)	3.804%
Monthly payments of capital leases	$ 14,000

XML

Organization and nature of the business

9 Months Ended

Sep. 30, 2014

Organization and nature of the business

Organization and nature of the business

1)Organization and nature of the business

Diligent Board Member Services, Inc. (“we”, “Diligent” or the “Company”) provides one of the world’s most widely used board portals. The Company develops and commercializes Diligent Boardbooks®, a secure software application available online, on iPad and Windows 8.1 supported devices. The application allows board members, management and administrative staff to simplify how board materials are produced, delivered, reviewed and voted on. We provide clients with subscription-based access to our software along with associated services including securely hosting the clients’ data, and customer service and support for the application.

The Company was incorporated in the State of Delaware on September 27, 2007 and is listed on the New Zealand Stock Exchange (the “NZSX”).  On December 12, 2007, Diligent completed an offshore public offering in connection with its listing on the NZSX.  Diligent’s corporate headquarters are located in New York, New York.

The Company has a wholly-owned subsidiary located in New Zealand, Diligent Board Member Services NZ Limited (“DBMS NZ”), which provides research and development services for the Company.  The Company has a wholly-owned subsidiary in the United Kingdom, Diligent Boardbooks Limited (“DBL”) and a wholly-owned subsidiary in Australia, Diligent Board Services Australia Pty Ltd. (“DBA”), which provide sales, marketing and customer support services in their respective regions.  The Company’s Singapore subsidiary, Diligent APAC Board Services Pte. Ltd.  (“APAC”) provides sales support in the Asia-Pacific region.  The Company’s subsidiary in Hong Kong, Diligent APAC LTD. was established in 2012 to support its Asia-Pacific sales and marketing and has had no operations to date. In February 2014, the Company established a German subsidiary, Diligent Boardbooks GmbH, to offer dedicated, private data hosting solutions and data recovery support, primarily for European customers.

Diligent’s condensed consolidated financial statements are presented in U.S. dollars, which is the Company’s functional and reporting currency.

XML

Stock option and incentive plan (Details 2) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended	9 Months Ended	12 Months Ended
	Mar. 31, 2014	Sep. 30, 2014	Dec. 31, 2013
Options
Option, Outstanding at Beginning	5,758	5,758
Granted (in shares)		1,370
Option, Exercised		(95)
Cancelled (in shares)		(250)
Forfeited (in shares)		(260)
Option, Outstanding at Ending		6,523	5,758
Exercisable at the end of the period (in shares)		3,633
Weighted average exercise price
Weighted average exercise price, Outstanding at January 1	$ 1.97	$ 1.97
Granted (in dollars per share)		$ 4
Exercised (in dollars per share)		$ 0
Cancelled (in dollars per share)		$ 0
Forfeited (in dollars per share)		$ 6
Weighted average exercise price, Outstanding at September 30		$ 2.28	$ 1.97
Exercisable at the end of the period (in dollars per share)		$ 1.44
Weighted average remaining contractual term
Balance at the beginning of the period	7 years 9 months	7 years 9 months	7 years 11 months 19 days
Balance at the end of the period	7 years 9 months	7 years 9 months	7 years 11 months 19 days
Exercisable	7 years 18 days	7 years 18 days

XML

Stock option and incentive plan (Details) (USD $)	0 Months Ended	3 Months Ended	9 Months Ended							0 Months Ended	1 Months Ended	0 Months Ended	3 Months Ended	9 Months Ended	12 Months Ended							9 Months Ended	0 Months Ended	1 Months Ended	3 Months Ended	9 Months Ended	0 Months Ended	3 Months Ended	9 Months Ended	3 Months Ended	9 Months Ended	3 Months Ended	1 Months Ended	0 Months Ended				1 Months Ended				0 Months Ended
	Jun. 12, 2013	Sep. 30, 2013	Sep. 30, 2014 item	Sep. 30, 2013	Dec. 31, 2012 item	Sep. 30, 2014 Accrued expenses and other current liabilities	Dec. 31, 2013 Accrued expenses and other current liabilities	Sep. 30, 2014 Other non-current liabilities	Dec. 31, 2013 Other non-current liabilities	Dec. 23, 2013 Replacement grant agreement item	Aug. 31, 2014 Replacement grant agreement	Dec. 23, 2013 Replacement incentive awards	Sep. 30, 2014 Replacement incentive awards	Sep. 30, 2014 Replacement incentive awards	Dec. 31, 2013 Replacement incentive awards	May 03, 2013 Replacement incentive awards	Sep. 30, 2014 Replacement incentive awards Remainder of 2014	Sep. 30, 2014 Replacement incentive awards 2015	Sep. 30, 2014 Replacement incentive awards 2016	Sep. 30, 2014 Replacement incentive awards 2017	Sep. 30, 2014 Replacement incentive awards 2018	Sep. 30, 2014 New remuneration package	Jun. 12, 2013 RSU	Jun. 30, 2013 RSU	Sep. 30, 2014 RSU	Sep. 30, 2014 RSU	Jun. 12, 2013 Stock options	Sep. 30, 2014 Stock options	Sep. 30, 2014 Stock options	Sep. 30, 2014 PSU	Sep. 30, 2014 PSU	Jun. 30, 2014 Officer	Jun. 30, 2013 Officer RSU	Jul. 10, 2014 Director	Apr. 09, 2014 Director	Mar. 14, 2014 Director	Dec. 31, 2012 2007 Plan Chief executive officer item	Jun. 30, 2013 2010 Plan	Dec. 31, 2012 2010 Plan Employees item	Dec. 31, 2012 2010 Plan Chief executive officer item	May 03, 2013 2013 Plan	Jul. 24, 2014 2013 Plan Employees RSU	Jul. 24, 2014 2013 Plan Employees RSU installment	Sep. 15, 2014 2013 Plan Executive officer installment	Sep. 15, 2014 2013 Plan Executive officer RSU	Sep. 15, 2014 2013 Plan Executive officer RSU installment	Sep. 15, 2014 2013 Plan Executive officer Stock options installment	Jun. 20, 2014 2013 Plan Executive officer and employee RSU	Jun. 20, 2014 2013 Plan Executive officer and employee Stock options	Jul. 24, 2014 2013 Plan Common Stock Employees	Sep. 15, 2014 2013 Plan Common Stock Executive officer
Stock option and incentive plans
Number of option awards exceeded the applicable plan cap			3		3																																1,600,000		250,000	2,500,000
Number of shares issued in excess of cap																																						250,000
Number of shares authorized for issuance under the plan																																									8,500,000						250,000
Number of shares available for grant under the plan																4,100,000
Total value of compensation payable																						$ 130,000
Value of compensation payable in cash																						50,000
Total value of annual stock grant received																						80,000
Number of shares issued (in shares)																							150,000	150,000									164,000										217,760			125,000		846,000		250,000
Number of restricted shares issued in satisfaction of grant (in shares)																																		24,000	27,000	86,500						217,760
Number of equal vesting installments																																											5	2		2	2
Exercise price, deferred compensation (in dollars per share)																																												$ 3.79
Number of trading days required to calculate weighted average price																																		20 days	20 days	20 days
Cancelled (in shares)			(250,000)																								250,000
Vesting period										10 years													4 years 6 months				4 years 6 months						4 years															4 years	4 years
Annual vesting percent																																																25.00%	25.00%
Additional share-based expense recognized	66,000	433,000		1,000,000									200,000	2,800,000	2,900,000										459,000	419,000		495,000	578,000	238,000	771,000	(570,000)
Number of options vested subject to cancellation (in shares)										2,400,000
Weighted average exercise price of options vested subject to cancellation (in dollars per share)										$ 0.14
Maximum number of vested shares applicable under the plan (in shares)										1,600,000
Number of options to be granted in lieu of cancellation (in shares)										1,600,000
Exercise price of options to be granted in lieu of cancellation (in dollars per share)										$ 2.79
Fair value of awards (in dollars)												4,200,000
Minimum revenue growth rate (as a percent)										7.00%
Number of equal annual installments payable on cash awards earned										3
Minimum percentage of exercise price used to determine measurement period prior to each payment due										75.00%
Number of options expected to vest subject to cancellation (in shares)										3,000,000
Weighted average exercise price of options expected to vest subject to cancellation (in dollars per share)										$ 0.82
Maximum number of expected to vest shares applicable under the plan (in shares)										2,500,000
Number of options to be granted in lieu of cancellation on achieving revenue growth (in shares)										2,250,000
Number of equal annual installments based on continued employment										4
Percentage of delivery dates for vested performance shares in 2018										50.00%
Percentage of delivery dates for vested performance shares in 2019										50.00%
Number of options to be granted in lieu of cancellation on achieving EPS growth or stockholder return (in shares)										250,000
Minimum percentage of fully diluted EPS growth										15.00%
Minimum percentage of total stockholder return growth										15.00%
Number of annual measurement period used to determine total stockholder return growth										4
Annual measurement period used to determine total stockholder return growth										1 year
Period of trailing days used to determine TSR growth which is measured based on the entity's stock price performance										20 days
Performance shares to be earned										62,500
Liability for the performance cash award						1,400,000	1,600,000	1,400,000	600,000
Performance revenue target cash award paid											1,400,000
Unrecognized share-based compensation expense (in dollars)			$ 8,000,000														$ 200,000	$ 700,000	$ 400,000	$ 200,000	$ 100,000																									$ 474,000		$ 3,300,000
Granted (in shares)			1,370,000																																										125,000						250,000
Number of additional shares authorized for issuance under the plan																																																	1,120,000

XML

Stock option and incentive plan (Details 3) (USD $)	0 Months Ended	3 Months Ended		9 Months Ended		3 Months Ended	1 Months Ended	0 Months Ended	3 Months Ended	9 Months Ended	0 Months Ended	1 Months Ended	3 Months Ended	9 Months Ended	1 Months Ended	0 Months Ended				3 Months Ended	9 Months Ended	0 Months Ended
	Jun. 12, 2013	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2013	Dec. 31, 2013	Jun. 30, 2014 Officer	Jun. 30, 2013 2010 Plan	Sep. 15, 2014 2013 Plan Executive officer installment	Sep. 30, 2014 PSU	Sep. 30, 2014 PSU	Jun. 12, 2013 RSU	Jun. 30, 2013 RSU	Sep. 30, 2014 RSU	Sep. 30, 2014 RSU	Jun. 30, 2013 RSU Officer item	Sep. 15, 2014 RSU 2013 Plan Executive officer installment	Jul. 24, 2014 RSU 2013 Plan Employees installment	Jun. 20, 2014 RSU 2013 Plan Executive officer and employee	Jun. 12, 2013 Stock options	Sep. 30, 2014 Stock options	Sep. 30, 2014 Stock options	Sep. 15, 2014 Stock options 2013 Plan Executive officer installment	Jun. 20, 2014 Stock options 2013 Plan Executive officer and employee	Dec. 23, 2013 Replacement grant agreement	Jul. 24, 2014 Replacement grant agreement 2013 Plan Employees
Performance Stock Units and Restricted Stock Units
Nonvested at the beginning of the period (in shares)										2,500,000				314,000
Granted (in shares)														1,189,000
Vested (in shares)														(87,000)
Forfeited (in shares)														(110,000)
Nonvested at the end of the period (in shares)									2,500,000	2,500,000			1,306,000	1,306,000
Weighted Average Grant Date Fair Value Per Share
Nonvested at the beginning of the period (in dollars per share)										$ 2.79				$ 5.38
Nonvested at the end of the period (in dollars per share)									$ 2.79	$ 2.79		$ 5.38	$ 4.04	$ 4.04
Granted (in dollars per share)														$ 3.79		$ 3.79	$ 3.57	$ 3.84
Vested (in dollars per share)														$ 4.00
Forfeited (in dollars per share)														$ 5.00
Number of shares issued (in shares)											150,000	150,000			164,000	125,000	217,760	846,000
Options outstanding replaced by RSUs		6,523,000			5,758,000																				250,000
Number of shares issued in excess of cap							250,000
Number of officer covered															2
Vesting right percentage															25.00%
Vesting period											4 years 6 months				4 years			4 years	4 years 6 months				4 years	10 years
Number of equal vesting installments								2								2	5					2
Annual vesting percent																		25.00%					25.00%
Aggregate share-based compensation expense	$ 66,000		$ 433,000	$ 1,000,000		$ (570,000)			$ 238,000	$ 771,000			$ 459,000	$ 419,000						$ 495,000	$ 578,000
Unrecognized share-based compensation expense (in dollars)		8,000,000														474,000		3,300,000
Unrecognized share-based compensation expense related to stock options																				3,000,000	3,000,000
Unrecognized share-based compensation expense related to PSUs and RSUs									$ 1,600,000	$ 1,600,000			$ 3,400,000	$ 3,400,000
Weighted average period over which unrecognized compensation is expected to be recognized		1 year 3 months 4 days

XML

Income taxes (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Income taxes
Effective rate (as a percent)	44.00%	38.00%	39.00%	38.00%
Net operating loss carryforwards expected to expire unutilized in 2029	$ 4,900,000		$ 4,900,000
Operating loss carryforward utilized
Income taxes
Net operating loss carryforwards	$ 350,000		$ 350,000

XML

Consolidated Statments of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities:
Net income (loss)	$ 7,151	$ 5,611
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	(1,411)	(1,245)
Excess tax benefits realized from share-based compensation		(302)
Depreciation and amortization	1,953	1,130
Share-based compensation	2,057	1,225
Changes in operating assets and liabilities:
Accounts receivable	65	(684)
Deferred commissions	189	248
Prepaid expenses and other current assets	(1,000)	(268)
Security deposits		13
Accounts payable and accrued expenses	(766)	3,490
Income taxes payable	1,780	(1,600)
Deferred revenue	5,335	8,970
Other non-current liabilities	748	424
Other		50
Net cash provided by operating activities	16,101	17,062
Cash flows from investing activities:
Purchases of short-term investments		(10,999)
Proceeds from maturity of short-term investments	12,497	103
Restricted cash - security deposit	(28)	(462)
Purchases of property and equipment	(4,160)	(2,282)
Purchase of intangible assets	(25)
Net cash provided by (used in) investing activities	8,284	(13,640)
Cash flows from financing activities:
Payment of preferred stock dividend	(359)	(120)
Proceeds from Issuance of Shares under Incentive and Share-based Compensation Plans, Including Stock Options	14	74
Excess tax benefits realized from share-based compensation		302
Repayments of obligations under capital leases	(695)	(418)
Payments of obligations under software licensing agreements	(82)	(109)
Net cash (used in) provided by financing activities	(1,122)	(271)
Effect of exchange rates on cash and cash equivalents	(9)	(93)
Net increase in cash and cash equivalents	23,254	3,058
Cash and cash equivalents at beginning of period	43,583	33,311
Cash and cash equivalents at end of period	66,837	36,369
Supplemental disclosure of cash flow information:
Interest	41	67
Income taxes	3,862	5,558
Supplemental disclosure of noncash investing and financing activities:
Capital contribution in lieu of preferred stock dividend		240
Conversion of preferred stock to common stock	267
Property and equipment acquired under capital leases		1,306
Accounts payable for property and equipment	$ 489	$ 545

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Contingencies (Details) (USD $)	1 Months Ended	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
State and local taxes
Provision related to uncollected sales tax		$ 100,000	$ 183,000	$ 400,000	$ 549,000
Cumulative provision for uncollected sales tax	1,900,000	1,900,000	1,300,000	1,900,000	1,300,000
Litigation Settlement [Abstract]
Settlement for payment of fines and costs	$ 100,000

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 66,837	$ 43,583
Short-term investments		12,497
Accounts receivable, net	1,685	1,750
Deferred commissions	1,343	1,532
Prepaid expenses and other current assets	2,936	1,936
Deferred tax assets	4,476	3,111
Income tax receivable		1,430
Total current assets	77,277	65,839
Property and equipment, net	10,924	8,228
Intangible assets	25
Deferred tax assets	3,654	3,607
Security deposits	704	676
Total assets	92,584	78,350
Current liabilities:
Accounts payable	1,095	2,402
Accrued expenses and other liabilities	9,530	8,856
Income taxes payable	350
Deferred revenue	31,651	27,428
Obligations under capital leases	762	847
Total current liabilities	43,388	39,533
Non-current liabilities:
Deferred revenue, less current portion	11,584	10,471
Obligations under capital leases	156	767
Other non-current liabilities	3,302	2,634
Total non-current liabilities	15,042	13,872
Total liabilities	58,430	53,405
Commitments and contingencies
Redeemable preferred stock:
Series A convertible redeemable preferred stock, $.001 par value, 50,000,000 shares authorized 30,000,000 and 32,667,123 shares issued and outstanding (liquidation value $4,753)	3,000	3,261
Stockholders' equity:
Common Stock, $.001 par value, 250,000,000 shares authorized, 86,765,836 and 83,776,155 shares issued and outstanding	87	84
Additional paid-in capital	31,186	28,861
Accumulated deficit	(69)	(7,220)
Accumulated other comprehensive income (loss)	(50)	(41)
Total stockholders' equity	31,154	21,684
Total liabilities, redeemable preferred stock and stockholders' equity	92,584	78,350
Series A convertible redeemable preferred stock
Redeemable preferred stock:
Series A convertible redeemable preferred stock, $.001 par value, 50,000,000 shares authorized 30,000,000 and 32,667,123 shares issued and outstanding (liquidation value $4,753)	$ 3,000	$ 3,261

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Condensed Consolidated Statement of Changes in Stockholders' Equity (USD $) In Thousands, except Share data	Common Stock	Additional Paid-in-Capital	Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)	Total
Balance at Dec. 31, 2013	$ 84	$ 28,861	$ (7,220)	$ (41)	$ 21,684
Balance (in shares) at Dec. 31, 2013	83,776,000
Net income (loss)			7,151		7,151
Other comprehensive loss				(9)	(9)
Total comprehensive income (loss)					7,142
Conversion of preferred stock to common stock	3	264			267
Conversion of preferred stock to common stock (in shares)	2,667,000
Shares issued under employee stock purchase plan (in stock)		538			538
Shares issued under employee stock purchase plan (in shares)	137,000
Share-based compensation		1,768			1,768
Exercise of stock options		14			14
Exercise of stock options (in shares)	95,000				95,000
Amortization of preferred stock offering costs		(6)			(6)
Preferred stock dividend ($.00825 per share)		(253)			(253)
Issuance of shares from vesting of restricted stock units (in shares)	91,000
Balance at Sep. 30, 2014	$ 87	$ 31,186	$ (69)	$ (50)	$ 31,154
Balance (in shares) at Sep. 30, 2014	86,766,000

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Investigations and restatement (Details) (USD $)	3 Months Ended			9 Months Ended
	Sep. 30, 2014 item	Sep. 30, 2013	Dec. 31, 2012 item	Sep. 30, 2014 item	Sep. 30, 2013
Investigations and restatement
Number of option awards exceeded the applicable plan cap	3		3	3
Special committee expenses	$ 0		$ 300,000	$ 2,300,000
Cost of audit committee investigation	0	200,000		0	2,500,000
Cost for restatement and re-audits	0	800,000		900,000	800,000
NZX Discipline Fund
Investigations and restatement
Loss Contingency Penalty Damages Awarded Value				15,000
NZXR
Investigations and restatement
Loss Contingency Penalty Damages Awarded Value				$ 4,000

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Significant accounting policies (Details 2) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Significant accounting policies
Basic weighted average common shares outstanding (in shares)	87,611	83,776	86,240	83,755
Basic weighted average preferred shares outstanding (in shares)	30,000	32,667	30,632	32,667
Basic weighted average shares outstanding (in shares)	117,611	116,443	116,872	116,422
Dilutive effect of stock options (in shares)	2,577	5,218	2,552	5,404
Dilutive effect of performance stock units (in shares)	1,171		1,105
Dilutive effect of restricted stock units (in shares)	661	83	320	37
Diluted weighted average shares outstanding (in shares)	122,020	121,744	120,849	121,863

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Condensed Consolidated Statement of Changes in Stockholders' Equity (Parenthetical) (USD $)	9 Months Ended
	Sep. 30, 2014
Consolidated Statement of Changes in Stockholders' Equity
Accrued preferred stock dividend (in dollars per share)	$ 0.00825

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	250,000,000	250,000,000
Common stock, shares issued	86,765,836	83,776,155
Common stock, shares outstanding	86,765,836	83,776,155
Series A convertible redeemable preferred stock
Series A convertible redeemable preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Series A convertible redeemable preferred stock, shares authorized	50,000,000	50,000,000
Series A convertible redeemable preferred stock, shares issued	30,000,000	32,667,123
Series A convertible redeemable preferred stock, shares outstanding	30,000,000	32,667,123
Series A convertible redeemable preferred stock, liquidation value (in dollars)	$ 4,753	$ 4,753

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Contingencies

9 Months Ended

Sep. 30, 2014

Contingencies

Contingencies

9)Contingencies

Sales tax risk - States and some local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to the Company’s subscription services in various jurisdictions is unclear. The Company’s cumulative provisions as of September 30, 2014, related to uncollected sales tax is $1.9 million. The provision increased by $0.1 million and $0.4 million during the three and nine months ended September 30, 2014, respectively. The Company recorded a provision related to uncollected sales tax of $183 thousand and $549 thousand for the three and nine months ended September 30, 2013, respectively.  The cumulative provision related to uncollected sales tax was $1.3 million at September 30, 2013. It is possible that the Company could face sales tax audits and that its liability for these taxes could exceed its estimates as state tax authorities could still assert that it is obligated to collect additional amounts as taxes from its customers and remit those taxes to those authorities. The Company could also be subject to audits with respect to states and international jurisdictions for which it has not accrued tax liabilities. A successful assertion that Diligent should be collecting additional sales or other taxes on its services in jurisdictions where it has not historically done so and does not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing its application or otherwise harm our business and operating results.

NZSX Listing Rules - On June 13, 2014, New Zealand time, the Company received notification from the NZX Limited (“NZX”) in respect to alleged breaches of the NZSX Listing Rules for the delayed release of the 2013 annual report, the 2013 half year preliminary announcement and the 2013 interim report. The notification informed the Company that the NZX has determined to refer the Company’s alleged breaches to the NZ Markets Disciplinary Tribunal. Any actions by the NZX Limited, and any action taken by the NZX Markets Disciplinary Tribunal, does not foreclose the risk of litigation or other regulatory actions relating to the historical instances of non-compliance identified. Due to the instances of non-compliance, we may be subject to an increased risk of regulatory actions, claims or litigation, the defense of which would require the Company’s management to devote significant attention and to incur significant legal expense and which could require us to pay substantial judgments, settlements, fines or other penalties.

In September 2014 the NZ Markets Disciplinary Tribunal approved a settlement reached by the Company and the New Zealand Stock Exchange regarding the previously disclosed breaches of the NZSX listing rules by the Company relating to the delayed reports described above. The settlement provided for the payment of fines and costs by the Company, consisting of NZ $100 thousand as a penalty to the NZX Discipline Fund which is included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet.

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Document And Entity Information	9 Months Ended
	Sep. 30, 2014	Nov. 05, 2014
Document And Entity Information
Entity Registrant Name	Diligent Board Member Services, Inc.
Entity Central Index Key	0001433269
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		86,802,226
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2014
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2014
Entity Current Reporting Status	Yes

XML

Significant accounting policies (Policies)

9 Months Ended

Sep. 30, 2014

Significant accounting policies

Basis of presentation

Basis of presentation — The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2013 Form 10-K.

In the opinion of management, the accompanying unaudited condensed 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, 2014 are not necessarily indicative of results expected for the full year.

The preparation of financial statements in conformity with U.S. 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. Significant estimates and assumptions made by management include the deferral and recognition of revenue, the fair value of share-based compensation, accounting for income taxes, including the realization of deferred tax assets and uncertain tax positions, and the useful lives of tangible and intangible assets. Actual results could differ from those estimates.

Principles of consolidation

Principles of consolidation — The condensed consolidated financial statements include the accounts of Diligent and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated.

Cash and cash equivalents

Cash and cash equivalents — The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.  The Company invests its excess cash primarily in bank and money market funds of major financial institutions.  Accordingly, its cash equivalents are subject to minimal credit and market risk.

Short-term investments

Short-term investments — Short-term investments consist of U.S. treasury bills with original maturities of more than three months at the time of purchase and term deposits with banks, with maturities greater than three months at inception.

Fair value of financial instruments

Fair value of financial instruments — The fair value of Diligent’s accounts receivable, accounts payable and accrued expenses and other liabilities approximates book value due to their short term settlements.

Revenue recognition

Revenue Recognition — Diligent derives revenues primarily from subscription fees and installation fees, including training. The Company sells subscriptions to Diligent’s cloud-based application that are generally one year in length. Diligent’s arrangements do not include a general right of return and automatically renew unless the Company is notified 30 days prior to the expiration of the subscription term. Diligent’s subscription agreements do not provide the customer the right to take possession of the software that supports the application. Installation fees consist of the configuration of the Company’s service and training of its customers.

Revenue recognition commences when all of the following conditions are met:

· There is persuasive evidence of the arrangement;

· The service has been made available to the customer;

· The fee is fixed or determinable; and

· The collectability of the fees is reasonably assured.

To qualify as a separate unit of accounting, the delivered item in a multiple element arrangement must have value to the customer on a standalone basis. The Company has determined that the installation fee does not have standalone value, so accordingly it accounts for its arrangements as a single unit of accounting.

Revenue from Diligent’s subscription service is recognized on a daily basis over the subscription term as the services are delivered. The service is considered delivered, and hence revenue recognition commences, when the customer has access to the Diligent Boardbooks product. Revenue is recorded ratably through the end of the subscription term, which is generally twelve months from the date of the contract.

Installation fees paid by customers in connection with the subscription service are deferred and are recognized ratably over the expected life of the customer relationships, generally nine years. In estimating the expected customer relationship period, the Company looked to guidance on the determination of the useful life of an intangible asset for the appropriate factors to be considered in estimating expected customer life and specifically focused on its customer renewal rate. Diligent’s customer contracts contain a standard “autorenew” feature which provides for one-year renewals unless either party provides written notice of termination. In addition, Diligent’s renewal history with its customers has been and remains at very high rates. As a result, we believe that Diligent’s customers will renew numerous times during their tenure with us.  Consequently, Diligent has had a very low annual attrition rate which historically has been less than 5.0%. After considering these factors, we determined that a nine year estimated customer life was appropriate as of September 30, 2014.  The Company evaluates its estimated customer life on an annual basis.

Deferred Revenue

Deferred Revenue — Deferred revenue represents installation and subscription fees for which cash has been received but for which we have not yet delivered services or the criteria for the recognition of revenue have not yet been met.  Deferred revenues presented in the consolidated balance sheet do not include amounts receivable (both billed and unbilled) for executed subscription agreements for which we have not yet received payment.  Accordingly, the deferred revenue balance does not represent the total contract value of annual, non-cancelable subscription agreements.

Long term deferred revenue consists of installation fees that will be recognized over the estimated life of the customer relationship which is generally nine years.  Installation fees expected to be recognized within the next 12 months of the balance sheet date are included in the current portion of deferred revenue.

Accounts receivable

Accounts receivable —The Company generally invoices our customers on an annual or quarterly basis.  Accounts receivable represents amounts due from Diligent’s customers for which revenue has been recognized.  A provision for doubtful accounts is recorded based on management’s assessment of amounts considered uncollectable for specific customers based on age of the receivable, history of payments and other relevant information.  At each of September 30, 2014 and December 31, 2013, the Company recorded a provision for doubtful accounts of $100 thousand.

Research and development

Research and development  — Research and development expenses are incurred as we upgrade and maintain the Diligent Boardbooks software, and develop product enhancements.  Such expenses include compensation and employee benefits of engineering and testing personnel, materials, travel and direct costs associated with the design and required testing of the product line.  Diligent does not allocate indirect overhead to research and development. Direct development costs related to software enhancements that add functionality have been expensed as incurred as we have not historically maintained sufficiently detailed records of development efforts to be able to capitalize such costs.

Share-based compensation

Share-based compensation — Diligent measures the cost of employee services received in exchange for an equity-based award using the fair value of the award on the date of the grant, and recognizes the cost over the period that the award recipient is required to provide services to the Company in exchange for the award. The fair value of restricted stock units and performance stock units are estimated using the market price of Diligent’s common stock at the date of the grant and we recognize compensation expense for the portion of the award that is expected to vest. Diligent measures compensation cost for awards granted to non-employees based on the fair value of the award at the measurement date, which is the date performance is satisfied or services are rendered by the non-employee.

Earnings per share

Earnings per share - Basic earnings per share is computed by dividing the net income attributable to common stockholders, after deducting accrued preferred stock dividends, by the weighted average number of common and preferred shares outstanding for the period. The preferred stockholders are entitled to participate on an “as converted” basis in any dividends paid on Diligent’s common stock, and as such are considered participating securities to which earnings should be allocated using the two-class method.

Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, settled or converted into common stock, unless the effect is anti-dilutive. Stock options and employee share awards are included as potential dilutive securities for the applicable periods, except 1.5 million stock options which have been excluded for the three and nine months ended September 30, 2014, respectively because their effect is anti-dilutive. There were 360,000 anti-dilutive equity instruments for the comparable three and nine month periods in 2013.

The computation of shares used in calculating basic and diluted earnings per common share are as follows:

	Three months ended September 30,		Nine months ended September 30,
	2014	2013	2014	2013
	(in thousands)
Basic weighted average common shares outstanding	87,611	83,776	86,240	83,755
Basic weighted average preferred shares outstanding	30,000	32,667	30,632	32,667
Basic weighted average shares outstanding	117,611	116,443	116,872	116,422
Dilutive effect of stock options	2,577	5,218	2,552	5,404
Dilutive effect of performance stock units	1,171	—	1,105	—
Dilutive effect of restricted stock units	661	83	320	37
Dilutive weighted average shares outstanding	122,020	121,744	120,849	121,863

Recent accounting pronouncements

Recent accounting pronouncements — In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. The new guidance is effective for annual and interim periods beginning after December 15, 2016 with no early adoption permitted. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on Diligent’s financial position, results of operations and cash flows.

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

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Condensed Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues	$ 21,423	$ 17,235	$ 60,893	$ 46,573
Cost of revenues (excluding depreciation and amortization)	4,133	3,244	11,827	9,017
Gross profit	17,290	13,991	49,066	37,556
Operating expenses:
Selling and marketing	2,726	2,473	8,084	7,089
General and administrative	6,437	5,371	21,086	13,664
Research and development	2,486	1,209	5,259	3,088
Depreciation and amortization	765	515	1,953	1,130
Investigation and restatement		939	916	3,282
Total operating expenses	12,414	10,507	37,298	28,253
Operating income	4,876	3,484	11,768	9,303
Other income (expense), net:
Interest expense, net	59	(24)	30	(58)
Foreign exchange transaction (loss) gain	(126)	32	(25)	(149)
Total other income (expense), net	(67)	8	5	(207)
Income before provision for income taxes	4,809	3,492	11,773	9,096
Income tax expense	2,107	1,339	4,622	3,485
Net income (loss)	2,702	2,153	7,151	5,611
Accrued preferred stock dividends	(83)	(89)	(253)	(270)
Net income attributable to common stockholders	$ 2,619	$ 2,064	$ 6,898	$ 5,341
Earnings per share:
Basic (in dollars per share)	$ 0.02	$ 0.02	$ 0.06	$ 0.05
Diluted (in dollars per share)	$ 0.02	$ 0.02	$ 0.06	$ 0.04
Weighted average shares outstanding:
Basic weighted average shares outstanding (in shares)	117,611	116,443	116,872	116,422
Diluted weighted average shares outstanding (in shares)	122,020	121,744	120,849	121,863

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Obligations Under Capital Leases

9 Months Ended

Sep. 30, 2014

Obligations Under Capital Leases

Obligations Under Capital Leases

4)Obligations Under Capital Leases

During the first nine months of 2013, we entered into two capital leases for computer equipment which mature in February 2016.  The leases have a total obligation of $1.3 million and bear interest at rates of 5.449% and 3.804%, with monthly payments of $28 thousand and $14 thousand, respectively.  We did not enter into any new capital leases during the first nine months of 2014.

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Significant accounting policies

9 Months Ended

Sep. 30, 2014

Significant accounting policies

Significant accounting policies

3)Significant accounting policies

Basis of presentation — The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2013 Form 10-K.

In the opinion of management, the accompanying unaudited condensed 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, 2014 are not necessarily indicative of results expected for the full year.

The preparation of financial statements in conformity with U.S. 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. Significant estimates and assumptions made by management include the deferral and recognition of revenue, the fair value of share-based compensation, accounting for income taxes, including the realization of deferred tax assets and uncertain tax positions, and the useful lives of tangible and intangible assets. Actual results could differ from those estimates.

Principles of consolidation — The condensed consolidated financial statements include the accounts of Diligent and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated.

Cash and cash equivalents — The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.  The Company invests its excess cash primarily in bank and money market funds of major financial institutions.  Accordingly, its cash equivalents are subject to minimal credit and market risk.

Short-term investments — Short-term investments consist of U.S. treasury bills with original maturities of more than three months at the time of purchase and term deposits with banks, with maturities greater than three months at inception.

Fair value of financial instruments — The fair value of Diligent’s accounts receivable, accounts payable and accrued expenses and other liabilities approximates book value due to their short term settlements.

Revenue Recognition — Diligent derives revenues primarily from subscription fees and installation fees, including training. The Company sells subscriptions to Diligent’s cloud-based application that are generally one year in length. Diligent’s arrangements do not include a general right of return and automatically renew unless the Company is notified 30 days prior to the expiration of the subscription term. Diligent’s subscription agreements do not provide the customer the right to take possession of the software that supports the application. Installation fees consist of the configuration of the Company’s service and training of its customers.

Revenue recognition commences when all of the following conditions are met:

· There is persuasive evidence of the arrangement;

· The service has been made available to the customer;

· The fee is fixed or determinable; and

· The collectability of the fees is reasonably assured.

To qualify as a separate unit of accounting, the delivered item in a multiple element arrangement must have value to the customer on a standalone basis. The Company has determined that the installation fee does not have standalone value, so accordingly it accounts for its arrangements as a single unit of accounting.

Revenue from Diligent’s subscription service is recognized on a daily basis over the subscription term as the services are delivered. The service is considered delivered, and hence revenue recognition commences, when the customer has access to the Diligent Boardbooks product. Revenue is recorded ratably through the end of the subscription term, which is generally twelve months from the date of the contract.

Installation fees paid by customers in connection with the subscription service are deferred and are recognized ratably over the expected life of the customer relationships, generally nine years. In estimating the expected customer relationship period, the Company looked to guidance on the determination of the useful life of an intangible asset for the appropriate factors to be considered in estimating expected customer life and specifically focused on its customer renewal rate. Diligent’s customer contracts contain a standard “autorenew” feature which provides for one-year renewals unless either party provides written notice of termination. In addition, Diligent’s renewal history with its customers has been and remains at very high rates. As a result, we believe that Diligent’s customers will renew numerous times during their tenure with us.  Consequently, Diligent has had a very low annual attrition rate which historically has been less than 5.0%. After considering these factors, we determined that a nine year estimated customer life was appropriate as of September 30, 2014.  The Company evaluates its estimated customer life on an annual basis.

Deferred Revenue — Deferred revenue represents installation and subscription fees for which cash has been received but for which we have not yet delivered services or the criteria for the recognition of revenue have not yet been met.  Deferred revenues presented in the consolidated balance sheet do not include amounts receivable (both billed and unbilled) for executed subscription agreements for which we have not yet received payment.  Accordingly, the deferred revenue balance does not represent the total contract value of annual, non-cancelable subscription agreements.

Long term deferred revenue consists of installation fees that will be recognized over the estimated life of the customer relationship which is generally nine years.  Installation fees expected to be recognized within the next 12 months of the balance sheet date are included in the current portion of deferred revenue.

Accounts receivable —The Company generally invoices our customers on an annual or quarterly basis.  Accounts receivable represents amounts due from Diligent’s customers for which revenue has been recognized.  A provision for doubtful accounts is recorded based on management’s assessment of amounts considered uncollectable for specific customers based on age of the receivable, history of payments and other relevant information.  At each of September 30, 2014 and December 31, 2013, the Company recorded a provision for doubtful accounts of $100 thousand.

Research and development  — Research and development expenses are incurred as we upgrade and maintain the Diligent Boardbooks software, and develop product enhancements.  Such expenses include compensation and employee benefits of engineering and testing personnel, materials, travel and direct costs associated with the design and required testing of the product line.  Diligent does not allocate indirect overhead to research and development. Direct development costs related to software enhancements that add functionality have been expensed as incurred as we have not historically maintained sufficiently detailed records of development efforts to be able to capitalize such costs.

Share-based compensation — Diligent measures the cost of employee services received in exchange for an equity-based award using the fair value of the award on the date of the grant, and recognizes the cost over the period that the award recipient is required to provide services to the Company in exchange for the award. The fair value of restricted stock units and performance stock units are estimated using the market price of Diligent’s common stock at the date of the grant and we recognize compensation expense for the portion of the award that is expected to vest. Diligent measures compensation cost for awards granted to non-employees based on the fair value of the award at the measurement date, which is the date performance is satisfied or services are rendered by the non-employee.

Earnings per share - Basic earnings per share is computed by dividing the net income attributable to common stockholders, after deducting accrued preferred stock dividends, by the weighted average number of common and preferred shares outstanding for the period. The preferred stockholders are entitled to participate on an “as converted” basis in any dividends paid on Diligent’s common stock, and as such are considered participating securities to which earnings should be allocated using the two-class method.

Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, settled or converted into common stock, unless the effect is anti-dilutive. Stock options and employee share awards are included as potential dilutive securities for the applicable periods, except 1.5 million stock options which have been excluded for the three and nine months ended September 30, 2014, respectively because their effect is anti-dilutive. There were 360,000 anti-dilutive equity instruments for the comparable three and nine month periods in 2013.

The computation of shares used in calculating basic and diluted earnings per common share are as follows:

	Three months ended September 30,		Nine months ended September 30,
	2014	2013	2014	2013
	(in thousands)
Basic weighted average common shares outstanding	87,611	83,776	86,240	83,755
Basic weighted average preferred shares outstanding	30,000	32,667	30,632	32,667
Basic weighted average shares outstanding	117,611	116,443	116,872	116,422
Dilutive effect of stock options	2,577	5,218	2,552	5,404
Dilutive effect of performance stock units	1,171	—	1,105	—
Dilutive effect of restricted stock units	661	83	320	37
Dilutive weighted average shares outstanding	122,020	121,744	120,849	121,863

Recent accounting pronouncements — In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. The new guidance is effective for annual and interim periods beginning after December 15, 2016 with no early adoption permitted. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on Diligent’s financial position, results of operations and cash flows.

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

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Significant accounting policies (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Significant accounting policies
Period in length of subscriptions to cloud-based application			1 year
Notice period for return and automatic renewal of subscription arrangements			30 days
Contract period of subscription services			12 months
Estimated customer attrition rate	5.00%
Provision for doubtful accounts	$ 100		$ 100		$ 100
Stock options excluded from computation of earnings per share (in shares)	1,500,000	360,000	1,500,000	360,000
Minimum
Significant accounting policies
Short-term investment maturity period			90 days
Customer relationships
Significant accounting policies
Estimated useful life			9 years
U.S. treasury bills | Minimum
Significant accounting policies
Short-term investment maturity period			3 months

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Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2014

Significant accounting policies

Computation of shares used in calculating basic and diluted earnings per common share

	Three months ended September 30,		Nine months ended September 30,
	2014	2013	2014	2013
	(in thousands)
Basic weighted average common shares outstanding	87,611	83,776	86,240	83,755
Basic weighted average preferred shares outstanding	30,000	32,667	30,632	32,667
Basic weighted average shares outstanding	117,611	116,443	116,872	116,422
Dilutive effect of stock options	2,577	5,218	2,552	5,404
Dilutive effect of performance stock units	1,171	—	1,105	—
Dilutive effect of restricted stock units	661	83	320	37
Dilutive weighted average shares outstanding	122,020	121,744	120,849	121,863

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Stock option and incentive plan

9 Months Ended

Sep. 30, 2014

Stock option and incentive plan

Stock option and incentive plan

7)Stock option and incentive plan

On May 3, 2013, the Board adopted the Diligent Board Member Services, Inc. 2013 Incentive Plan (the “2013 Plan”), which was approved by the Diligent’s stockholders in June 2013. An aggregate of 8.5 million shares of the Company’s common stock may be issued pursuant to the Plan to employees, directors and consultants of Diligent and its affiliates. Of the shares available under the Plan, 4.1 million were utilized in connection with the replacement incentive awards issued in accordance with the CEO Replacement Grant Agreement as discussed below. Upon approval of the 2013 Plan the Company discontinued the use of the Company’s 2007 Stock Option and Incentive Plan (the “2007 Plan”) and the 2010 Stock Option and Incentive Plan (the “2010 Plan”).

Awards under the 2013 Plan may be made in the form of stock options (which may constitute incentive stock options or nonqualified stock options), share appreciation rights, restricted shares, restricted share units, performance awards, bonus shares and other awards.  In addition, certain awards under the 2013 Plan may be denominated or settled in cash, including performance awards.

In 2013, the Board and the Company’s stockholders approved a remuneration package for non-executive directors for the 2013 and subsequent fiscal years (the “New Remuneration Package”). The New Remuneration Package consists of both a cash component, designed to compensate members for their service on the Board and its Committees, and an equity component. The total value of the New Remuneration Package for standard board service is $130 thousand per annum, $50 thousand of which will be payable in cash.

Diligent’s non-executive directors, other than the chairman of the Board, are to receive an annual stock grant with a total value of $80 thousand, which would generally be paid to such non-executive directors in equal installments at the end of each quarter of the calendar year. In connection with the non-executive directors’ 2013 service, on March 14, 2014, the Company issued 86.5 thousand restricted shares to its directors based on the volume weighted average trading price of our common stock on its primary trading market for the 20 trading days immediately prior to such date. In connection with the non-executive directors’ 2014 service, on April 9, 2014, the Company issued 27 thousand restricted shares to its directors and on July 10, 2014, the Company issued 24 thousand restricted shares to its directors, in each case based on the volume weighted average trading price of our common stock on its primary trading market for the 20 trading days immediately prior to such date. The grants for 2013 and 2014 services were pro-rated for any director who served on the Board for less than the full calendar year.

In December of 2012 Diligent’s Board authorized a Special Committee of independent directors to conduct a review of certain of the Company’s past stock issuances and stock option grants to determine whether they were in accordance with the relevant incentive plans.  The Special Committee found that three option awards exceeded the applicable plan caps on the number of shares covered by an award issued to a single recipient in a particular year. Specifically, a 2009 award to the chief executive officer exceeded the cap in the 2007 Plan by 1.6 million shares, a 2011 award to the chief executive officer exceeded the cap in the 2010 Plan by 2.5 million shares, and a 2011 award to another employee exceeded the cap in the 2010 Plan by 250 thousand shares.

In May 2013, we entered into a Replacement Grant Agreement with our CEO providing for the cancellation of certain stock options and the issuance of a replacement award, which was to become effective upon the occurrence of certain future events.

On June 12, 2013, Diligent entered into an agreement providing for the cancellation of options for 250 thousand shares issued to the other employee in excess of the applicable plan cap, under which the vesting schedule for the remaining nonvested options was extended over a four and a half year period and replaced with 150 thousand restricted stock units, with graded vesting over four and a half years.  The modification of this award resulted in additional expense of $66 thousand, which will be recognized on a graded basis through December 2017.

On December 23, 2013, we entered into an Amendment to Replacement Grant Agreement with our CEO which finalized the terms of the incentive compensation package to be provided to our CEO in substitution for certain awards that exceeded the applicable plan caps.

Under the terms of the Amendment to Replacement Grant Agreement, on December 23, 2013 (the “Grant Date”), our CEO’s fully vested option to purchase 2.4 million shares of Diligent’s common stock for an exercise price of U.S. $0.14 per share was cancelled to the extent it was in excess of the applicable plan cap, consisting of 1.6 million of such shares. In exchange for the cancellation of the relevant portion of the award, our CEO received:

· An option to purchase 1.6 million shares of common stock having an exercise price of U.S. $2.79, which was the Company’s closing price per share expressed in U.S. dollars on the last trading day on the NZSX immediately prior to the Grant Date (the “Exercise Price”) of December 23, 2013. The option vested on December 31, 2013, and will have a term of ten years from the Grant Date.

· A performance cash award of U.S. $4.2 million, determined based on 1.6 million multiplied by the excess of the Exercise Price of U.S. $2.79 over U.S. $0.14. The CEO’s right to receive such cash award was contingent on the Company achieving revenue growth of at least 7% during the twelve month period ended June 30, 2014 and his continued employment through such date. This revenue target was achieved and the cash award will be paid in three equal annual installments. The first installment in the amount of $1.4 million was paid in August 2014, the second installment will be paid in the first quarter of 2015 and the final installment will be paid in the first quarter of 2016, or, if earlier, upon a change in control of the Company or the CEO’s separation from service. Any payment due on any installment date will be proportionally reduced if the sum of our stock price plus dividends for a measurement period prior to each payment date falls below 75% of the Exercise Price.

In addition, the CEO held an option to purchase 3 million shares of Diligent’s common stock for an exercise price of U.S. $0.82 per share, which remained subject to vesting. Under the terms of the Amendment to Replacement Grant Agreement, we cancelled the portion of such option in excess of the applicable plan cap, consisting of 2.5 million of such shares. In exchange for the cancellation of the relevant portion of the award, the CEO received:

· Performance share units for 2.25 million shares of common stock contingent on Diligent achieving revenue growth of at least 7% during the twelve month period ended June 30, 2014. For purposes of clarification, performance share units in this context are units of common stock issued to Diligent’s CEO upon satisfaction of the performance criteria outlined herein. Effective June 30, 2014, the Company’s revenues met the performance requirement of at least seven percent (7%) growth over the performance period as compared to the period from July 1, 2012 through June 30, 2013. The performance share units were determined to be earned and the award will vest in four equal installments based on continued employment, commencing June 30, 2015, with full vesting occurring on June 30, 2018. The delivery dates for the vested performance shares will be 50% in 2018 and 50% in 2019 or, if earlier, upon a change in control of the Company or the CEO’s separation from service.

· Performance share units for up to 250 thousand shares of common stock contingent on Diligent achieving either at least 15% fully diluted EPS growth (adjusted to exclude stock-based compensation expense and extraordinary items) or 15% total stockholder return (“TSR”) growth in four one-year measurement periods beginning April 1, 2013. As of June 30, 2014, the first TSR performance goal was not achieved. TSR growth is measured based on Diligent’s stock price performance during the 20 trading days prior to the relevant measurement date. Performance share units for 62.5 thousand shares of common stock will be earned in each year for which the applicable target is met, with the additional opportunity to earn such shares at the end of the four year performance period if the cumulative fully diluted EPS growth or TSR growth meet the cumulative performance target. The delivery dates for the vested performance shares will be in 2018 or, if earlier, upon a change in control of the Company or the CEO’s separation from service.

The vesting of the options, performance cash award and performance stock units described above will be subject to certain acceleration provisions in the event of a change in control of the Company, upon death or disability or if the CEO is terminated without cause or resigns for good reason.

$1.4 million of the liability for the performance cash award is recorded in “Accrued expenses and other current liabilities” and $1.4 million is recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheet as of September 30, 2014. At December 31, 2013, $1.6 million of the liability for the performance cash award was recorded in “Accrued expenses and other current liabilities” and $0.6 million was recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheet.

The Company recorded performance stock and cash award compensation expense of $0.2 million and $2.8 million during the three and nine months ended September 30, 2014, respectively, and $2.9 million in 2013 relating to the replacement award. The replacement award is expected to result in compensation cost of $0.2 million for the remainder of 2014, $0.7 million in 2015, $0.4 million in 2016, $0.2 million in 2017 and $0.1 million in 2018.

On July 24, 2014, Diligent entered into an agreement providing for the cancellation of 250 thousand shares issued to an employee and replaced with 217,760 restricted stock units, under the 2013 Plan. The restricted stock units vest in five equal installments, the first vesting on the grant date and the remaining installments vesting on each anniversary of December 9, 2013.

On September 15, 2014, the Company entered into a new employment agreement with an executive, pursuant to which the Company issued options to purchase 250 thousand shares of stock and 125 thousand restricted stock units under the 2013 Plan. The options have an exercise price of $3.79 per share and vest in two equal installments on September 15, 2015 and September 15, 2016. The restricted stock units also vest in two equal installments on September 15, 2015 and September 15, 2016, upon which the vested portion will convert into an equal number of shares of common stock.

Stock Options — On June 20, 2014, the Company agreed to issue 1,120,000 stock options to executives and employees under the 2013 Plan. These options vest 25% per year over the next four years, as long as such executive or employee remains in the employ of the Company on each vesting date. On September 15, 2014, the Company agreed to issue 250,000 options to an executive of the Company under the 2013 Plan. These options vest in two equal installments on September 15, 2015 and September 15, 2016, as long as such executive remains in the employ of the Company on each vesting date. Upon the final vesting date, the vested portion will convert into an equal number of shares of common stock. A summary of stock option activity for the nine months ended September 30, 2014 is as follows:

					Weighted average
			Weighted average		remaining
	Options		exercise price		contractual term
	(in thousands)
Outstanding at January 1, 2014	5,758		$	1.97	7.97 years
Granted	1,370		3.83
Exercised	(95	)	0.15
Cancelled	(250	)	0.46
Forfeited	(260	)	6.12
Outstanding at September 30, 2014	6,523		$	2.28	7.75 years
Exercisable at September 30, 2014	3,633		$	1.44	7.05 years

Performance Stock Units — As noted above, in 2013, the Company issued Performance Stock Units (“PSUs”) to its CEO as part of his substitute compensation package.  A summary of activity in PSUs for the nine months ended September 30, 2014 is as follows:

		Weighted Average Grant
	Performance Stock Units	Date Fair Value Per Share
	(in thousands)
Nonvested January 1, 2014	2,500	$	2.79
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested September 30, 2014	2,500	$	2.79

The Company estimates the fair value of the PSU’s as of the grant date utilizing the closing price of its common stock on that date.

Restricted Stock Units — As noted above, in June 2013, the Company agreed to issue 150,000 Restricted Stock Units (“RSUs”) as replacement compensation for the 250,000 stock options issued to an employee of the Company in excess of the 2010 Plan cap. In June 2013, the shareholders of the Company approved the 2013 Plan, under which the Company had agreed to issue 164,000 RSUs to two officers, which vest 25% per year over the next four years, as long as the officers remain in the employ of the Company on each vesting date. 110,000 of these awards were forfeited as of June 30, 2014.  The fair market value of the stock on the date of grant of the RSUs was $5.38 per share.

On June 20, 2014, the Company issued 846,000 RSUs to executives and employees under the 2013 Plan. These RSUs, which vest 25% per year over the next four years, as long as such executive or employee remains in the employ of the Company on each vesting date, have a grant date fair market price of $3.84 per share for an aggregate of $3.3 million to be recognized over the vesting period. On July 24, 2014, the Company agreed to issue 217,760 RSUs to an employee of the Company as replacement compensation for 250,000 stock options which were cancelled. These RSUs have a grant date fair market price of $3.57 per share and did not result in any incremental stock compensation expense. On September 15, 2014, the Company issued 125,000 RSUs to an executive under the 2013 plan. These RSUs vest in two equal installments on September 15, 2015 and September 15, 2016 and have a grant date fair market price of $3.79 per share for an aggregate of $474 thousand to be recognized over the vesting period.

A summary of RSU activity for the nine months ended September 30, 2014 is as follows:

			Weighted Average Grant
	Restricted Stock Units		Date Fair Value Per Share
	(in thousands)
Nonvested January 1, 2014	314		$	5.38
Granted	1,189		3.79
Vested	(87	)	3.58
Forfeited	(110	)	5.38
Nonvested September 30, 2014	1,306		$	4.05

The Company estimates the fair value of the RSUs as of the grant date utilizing the closing price of Diligent’s common stock on the grant date.

For the three months ended September 30, 2014, the Company recognized aggregate share-based compensation expense related to stock options, PSUs and RSUs of $495 thousand, $238 thousand and $459 thousand, respectively, which is included in General and administrative expenses in the Condensed Consolidated Statement of Income. For the nine months ended September 30, 2014, Diligent recognized aggregate share-based compensation expense related to stock options, PSUs and RSUs of $578 thousand, $771 thousand and $419 thousand, respectively, which is included in general and administrative expenses in the Condensed Consolidated Statement of Income. Awards granted to the Company’s former CFO were forfeited upon his resignation during the second quarter of 2014 resulting in expense adjustments in the amount of $570 thousand. Total share-based compensation expense recognized for the three and nine months ended September 30, 2013 was $433 thousand and $1.0 million, respectively, which was entirely related to outstanding stock options. At September 30, 2014, there was $8.0 million of unrecognized share-based compensation expense which includes $3.0 million for stock options, $1.6 million for PSUs and $3.4 million for RSUs. The weighted average period for this cost to be recognized is 1.26 years.  Such amounts do not include any impact of the CEO performance cash award.

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2014

Fair Value of Financial Instruments

Fair Value of Financial Instruments

5)Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants. As of September 30, 2014 and December 31, 2013, the carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses and other liabilities approximated fair value due to the short-term nature of these instruments. ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for input into valuation techniques as follows:

i. Level 1 input - unadjusted quoted prices in active markets for identical instrument;

ii. Level 2 input - observable market data for the same or similar instrument but not Level 1, including quoted prices for identical or similar assets or liabilities in markets that are active or not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

iii. Level 3 input - unobservable inputs developed using management’s assumptions about the inputs used for pricing the asset or liability.

Level 2 inputs were utilized to determine the fair value of the Company’s investments in U.S. treasury bills, U.S treasury money market funds, and term deposits.  Due to the short-term nature of these investments, which mature between 90 days and 365 days, amortized cost is used to estimate the fair value.

At September 30, 2014, cash equivalents include investments in U.S. treasury money market funds and treasury bills totaling $31 million, which are carried at cost, which approximates fair value. The fair value of money market funds was determined by reference to quoted market prices.

At December 31, 2013, cash and cash equivalents include investments in U.S. treasury bills of $4.5 million and U.S. treasury money market funds of $23 million, which are carried at cost, which approximates fair value. The fair value of money market funds was determined by reference to quoted market prices. At December 31, 2013, short-term investments include investments in U.S. treasury bills of $12.5 million, which are carried at cost which approximates fair value.

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Redeemable Preferred Stock

9 Months Ended

Sep. 30, 2014

Redeemable Preferred Stock

Redeemable Preferred Stock

6)Redeemable Preferred Stock

On March 11, 2009, Diligent issued 30 million shares of Series A Preferred Stock at $0.10 per share in a private offering, for aggregate gross proceeds of $3.0 million.  Expenses relating to the preferred stock issuance were $139 thousand.

The carrying value of the Preferred Stock at September 30, 2014 and December 31, 2013 was as follows:

	September 30,			December 31,
	2014			2013
	(in thousands)
Gross proceeds	$	3,000		$	3,000
Less: Issuance costs	(139		)	(139		)
	2,861			2,861
Issuance of PIK shares	267			267
Conversion of PIK shares	(267		)	—
Cumulative amortization of offering costs	139			133
Carrying value	$	3,000		$	3,261

The Preferred Stock is entitled to 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 Stock (paid-in-kind 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 Stock will have preference over the declaration or payment of any dividends on the Company’s common stock.  In addition to the 11% preferred dividend, the holders of the Preferred Stock will also be entitled to participate pro rata in any dividend paid on the Company’s common stock.

In 2014, Diligent anticipates that accumulated unpaid dividends will be paid in cash on the Series A Preferred Stock.  Accordingly, preferred stock dividends of $83 thousand and $253 thousand for the three and nine months ended September 30, 2014 are included in accrued expenses.

Spring Street Partners, L.P., a holder of the Series A Preferred Stock, waived its right to the preferred stock dividend payable on January 3, 2013 of $240 thousand.  This was recorded as a capital contribution in 2013 when waived. The founder and managing partner of Spring Street Partners, L.P. is also the Chairman of the Board and the holder of 5.9 million shares of common stock of the Company.

On March 3 and 5, 2014, Carroll Capital Holdings and Spring Street Partners, L.P. converted 889,219 and 1,777,904 shares of Series A Preferred Stock, respectively, to an equivalent number of shares of common stock.

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Income taxes

9 Months Ended

Sep. 30, 2014

Income taxes

Income taxes

8)Income taxes

Income tax expense is provided on an interim basis based upon management’s estimate of the annual effective tax rate.  The income tax provision for the three and nine months ended September 30, 2014 provides income taxes at an effective rate of 44% and 39%, respectively.  The tax rate increased compared to comparable periods in 2013 primarily due to discrete events that are recorded in the period in which they occur. The Company recorded an income tax provision for the three and nine months ended September 30, 2013, based on an effective tax rate of 38% and 38%, respectively.

Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that can be used to offset taxable income when a corporation has undergone significant changes in stock ownership.  Beginning in 2013, the Company’s annual net operating loss carryforward is subject to a limitation of approximately $350 thousand to offset expected taxable income until expiration of the carryforwards. Based on this limitation, the Company expects that approximately $4.9 million of its total net operating loss carryforwards will expire unutilized in 2029. A full valuation allowance had previously been provided on the related deferred tax asset, and therefore the deferred tax asset and valuation allowance relating to the net operating loss carryforwards expected to expire unutilized were written off.

Diligent 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 U.S. federal and state income tax returns for the tax years 2010 and forward are open for examination by the taxing jurisdictions. The Company’s foreign income tax returns are open for examination by the local taxing jurisdictions for the following years: New Zealand — 2009 and forward; U.K. — 2010 and forward; Australia — 2012.

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Stock option and incentive plan (Tables)

9 Months Ended

Sep. 30, 2014

Stock option and incentive plan

Summary of stock option activity

					Weighted average
			Weighted average		remaining
	Options		exercise price		contractual term
	(in thousands)
Outstanding at January 1, 2014	5,758		$	1.97	7.97 years
Granted	1,370		3.83
Exercised	(95	)	0.15
Cancelled	(250	)	0.46
Forfeited	(260	)	6.12
Outstanding at September 30, 2014	6,523		$	2.28	7.75 years
Exercisable at September 30, 2014	3,633		$	1.44	7.05 years

Summary of activity in PSUs

		Weighted Average Grant
	Performance Stock Units	Date Fair Value Per Share
	(in thousands)
Nonvested January 1, 2014	2,500	$	2.79
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested September 30, 2014	2,500	$	2.79

Summary of RSU activity

			Weighted Average Grant
	Restricted Stock Units		Date Fair Value Per Share
	(in thousands)
Nonvested January 1, 2014	314		$	5.38
Granted	1,189		3.79
Vested	(87	)	3.58
Forfeited	(110	)	5.38
Nonvested September 30, 2014	1,306		$	4.05

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified					9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2014 Minimum	Sep. 30, 2014 Maximum	Sep. 30, 2014 U.S. treasury bills Minimum	Sep. 30, 2014 Level 2	Dec. 31, 2013 Level 2 U.S. treasury money market funds	Dec. 31, 2013 Level 2 U.S. treasury bills
Fair value of financial instruments
Short-term investment maturity period					90 days	365 days	3 months
Cash and cash equivalents	$ 66,837	$ 43,583	$ 36,369	$ 33,311					$ 23,000	$ 4,500
Short-term investments		$ 12,497						$ 31,000		$ 12,500

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Statement Of Other Comprehensive Income [Abstract]
Net income (loss)	$ 2,702	$ 2,153	$ 7,151	$ 5,611
Other comprehensive loss :
Foreign exchange translation adjustment	19	55	(9)	(89)
Total comprehensive income (loss)	$ 2,721	$ 2,208	$ 7,142	$ 5,522

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Investigations and restatement

9 Months Ended

Sep. 30, 2014

Investigations and restatement

Investigations and restatement

2)Investigations and restatement

Special Committee

In December 2012, the Board of Directors (the “Board”) of Diligent appointed a Special Committee of independent directors to examine certain of Diligent’s past stock issuances and stock option grants that may not have been issued in compliance with the relevant stock option and incentive plans. The Special Committee’s members were not on the Board at the time of the issuance of such grants, were not involved in their issue, and are not the recipients of any option grants. The Special Committee was delegated broad powers from the Board to take all such action in respect of the issuances as it deemed necessary and advisable.

The Special Committee, assisted by attorneys in the U.S. and New Zealand, conducted a thorough review and analysis of all stock issuances and stock option grants during the relevant period.  As discussed in Note 7, the Special Committee found that three option awards exceeded the applicable plan caps on the number of shares covered by an award issued to a single recipient in a particular year. The Special Committee was delegated the authority to develop appropriate alternative compensation packages for the affected employees.  These awards were determined by the Board to be reasonable compensation at the time, and were an important incentive component of the employees’ compensation packages.

As part of its work, the Special Committee also reviewed the Company’s compliance with applicable regulations, including U.S. and New Zealand securities regulations and the NZSX Listing Rules. The Special Committee identified a number of instances where it appears that Diligent was not, or may not have been, in compliance with its U.S. and New Zealand regulatory obligations.

The Special Committee determined that these instances of non-compliance were inadvertent and attributable in part to the constrained resources of Diligent in a period of financial difficulty in the years following its listing on the NZSX, and the complex regulatory and compliance obligations across multiple jurisdictions with differing regulations and requirements. It recommended, and the Board fully endorsed, that the Company work with its regulators to resolve these issues. In September 2013 the NZ Markets Disciplinary Tribunal approved a settlement reached by the Company and the New Zealand Stock Exchange regarding the previously disclosed breaches of the NZSX Listing Rules by the Company. The settlement provided for the payment of fines and costs by the Company, consisting of NZ $15 thousand as a penalty to the NZX Discipline Fund and NZ $4 thousand towards the costs of NZSX.

Costs for the Special Committee for the three and nine months ended September 30, 2013 were $0 and $2.3 million, respectively. An additional $0.3 million was incurred in the fourth quarter of 2012.  Included in Special Committee expenses were professional fees incurred for legal, accounting and compensation consultants, NZX penalties and compensation paid to Special Committee members. During the second quarter of 2013, the Special Committee was disbanded and the Company is in the process of implementing the recommendations of the Special Committee to remediate the compliance and internal control weaknesses identified.

Audit Committee Investigation

On July 2, 2013, the Audit Committee of the Board engaged outside company counsel to investigate the accounting errors that gave rise to the need to restate the Company’s financial statements, as well as other historical accounting practices impacting the timing of recognition of revenue. In connection with the investigation, it was determined that the Company included in its financial results certain customer agreements that, while having an effective date within a quarter, had not been signed by all parties within the quarter, as would be required to commence revenue recognition under U.S. GAAP. The early inclusion of such contracts did not have a material impact on previously reported revenue for fiscal quarters including the first quarter of 2010 through the first quarter of 2013. The Audit Committee investigation resulted in no finding of intentional misconduct or fraud. Costs of the investigation for the three months ended September 30, 2014 and 2013 were $0 and $0.2 million, respectively. Costs of the investigation for the nine months ended September 30, 2014 and 2013 were $0 and $2.5 million, respectively.

Restatement and Re-audit Engagements

In August, 2013, we announced that Diligent’s historical financial statements for the years ended December 31, 2012, 2011 and 2010 and the quarter ended March 31, 2013 would be restated due to revenue recognition errors. The Company completed the restatement process in April 2014. Costs for the restatement and re-audits incurred during the three months ended September 30, 2014 and 2013 were $0 and $0.8 million, respectively. Costs for the restatement and re-audits incurred during the nine months ended September 30, 2014 and 2013 were $0.9 and $0.8 million, respectively. These costs are comprised of professional fees incurred for accounting, auditing and consulting services and restatement bonuses.

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Redeemable Preferred Stock (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended	12 Months Ended	0 Months Ended			3 Months Ended	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Mar. 05, 2014 Spring Street Partners, L.P.	Mar. 03, 2014 Carroll Capital Holdings	Mar. 11, 2009 Series A Preferred Stock	Sep. 30, 2014 Series A Preferred Stock	Sep. 30, 2014 Series A Preferred Stock	Sep. 30, 2014 Series A Preferred Stock Spring Street Partners, L.P.	Jan. 03, 2013 Series A Preferred Stock Spring Street Partners, L.P.
Redeemable preferred stock
Shares issued under employee stock purchase plan (in shares)					30,000,000
Share price (in dollars per share)					$ 0.10
Gross proceeds	$ 3,000	$ 3,000
Less: Issuance costs	(139)	(139)
Net proceeds	2,861	2,861
Issuance of PIK shares	267	267
Conversion of PIK shares	(267)
Cumulative amortization of offering costs	139	133
Carrying value	3,000	3,261
Dividend (as a percent)							11.00%
Preferred stock dividend						83	253
Rights waived by holders to the preferred stock dividend payable									$ 240
Common stock, shares outstanding	86,765,836	83,776,155						5,900,000
Conversion of preferred stock to common stock (in shares)			1,777,904	889,219

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Redeemable Preferred Stock (Tables)

9 Months Ended

Sep. 30, 2014

Redeemable Preferred Stock

Schedule of carrying value of the Preferred Stock

	September 30,			December 31,
	2014			2013
	(in thousands)
Gross proceeds	$	3,000		$	3,000
Less: Issuance costs	(139		)	(139		)
	2,861			2,861
Issuance of PIK shares	267			267
Conversion of PIK shares	(267		)	—
Cumulative amortization of offering costs	139			133
Carrying value	$	3,000		$	3,261