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EXCEL - IDEA: XBRL DOCUMENT - Diligent Corp | Financial_Report.xls |
EX-3.2 - EXHIBIT 3.2 - Diligent Corp | v313145_ex3-2.htm |
EX-32.1 - EXHIBIT 32.1 - Diligent Corp | v313145_ex32-1.htm |
EX-31.2 - EXHIBIT 31.2 - Diligent Corp | v313145_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - Diligent Corp | v313145_ex31-1.htm |
EX-32.2 - EXHIBIT 32.2 - Diligent Corp | v313145_ex32-2.htm |
EX-10.6.2 - EXHIBIT 10.6.2 - Diligent Corp | v313145_ex10-62.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 000-53205
Diligent Board Member Services, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 26-1189601 |
(State or Other Jurisdiction | (I.R.S. Employer |
of Incorporation or Organization) | Identification No.) |
39 West 37 St. 8th Floor, New York, NY, 10018
(Address of Principal Executive Offices)(Zip Code)
(212) 741-8181
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, “large accelerated filer” and smaller company: in Rule 12b-2 of the Exchange Act. (Check One):
¨ | Large accelerated filer | ¨ | Accelerated filer |
¨ | Non-accelerated filer | x | Smaller Reporting Company |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨Yes x No
The number
of shares of the registrant’s common stock outstanding as of
May 7, 2012 was 81,884,524.
(this page intentionally left blank)
CONTENTS
PAGE | |||
Forward Looking Statements | ii | ||
Available Information | ii | ||
PART I – Financial Information | |||
Item 1. | Condensed Consolidated Financial Statements | 1 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | |
Item 4. | Controls and Procedures | 15 | |
PART II – Other Information | |||
Item 1. | Legal Proceedings | 16 | |
Item 1A. | Risk Factors | 16 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 | |
Item 3. | Defaults Upon Senior Securities | 16 | |
Item 4. | [Reserved] | 16 | |
Item 5. | Other Information | 16 | |
Item 6. | Exhibits | 16 | |
SIGNATURES | 17 |
i |
FORWARD LOOKING STATEMENTS
Except for statements of historical fact, certain information described in this document contains "forward-looking statements" that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," "would" or similar words. The statements that contain these or similar words should be read carefully because these statements discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other "forward-looking" information. Diligent Board Member Services, Inc. believes that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able accurately to predict or control. Further, we urge you to be cautious of the forward-looking statements which are contained in this Form 10-Q because they involve risks, uncertainties and other factors affecting our operations, market growth, service, products and licenses. Events in the future may cause our actual results and achievements, whether expressed or implied, to differ materially from the expectations we describe in our forward-looking statements. The occurrence of future events could have a material adverse effect on our business, results of operations and financial position.
AVAILABLE INFORMATION
We file reports, proxy statements, information statements and other information with the Securities and Exchange Commission. You may read and copy this information, for a copying fee, at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on its public reference rooms. Our Securities and Exchange Commission filings are also available to the public from commercial document retrieval services, and at the web site maintained by the Securities and Exchange Commission at http://www.sec.gov. Our internet address is http://www.boardbooks.com. We make available through our web site, electronic copies of our annual reports on Form 10-K and quarterly reports on Form 10-Q. To receive paper copies of our SEC materials, please contact us by mail addressed to Robert E. Norton, Corporate Secretary, Diligent Board Member Services, Inc., 39 West 37 St. 8th Floor, New York, NY 10018, (212) 741-8181.
ii |
PART 1 – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Diligent Board Member Services, Inc.
Consolidated Balance Sheets
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12,113,322 | $ | 8,930,695 | ||||
Term deposit | 102,313 | 97,188 | ||||||
Accounts receivable | 1,767,162 | 1,956,527 | ||||||
Prepaid expenses and other current assets | 862,979 | 764,518 | ||||||
Deferred tax assets, net of valuation allowance | 331,014 | 300,840 | ||||||
Note receivable from affiliate | 3,071,563 | 3,071,563 | ||||||
Total current assets | 18,248,353 | 15,121,331 | ||||||
Property and equipment, net | 2,245,086 | 2,088,495 | ||||||
Deferred tax assets, net of valuation allowance | 853,977 | 882,600 | ||||||
Intangible assets, net | 325,953 | 362,170 | ||||||
Restricted cash - security deposits | 132,631 | 97,885 | ||||||
Total assets | $ | 21,806,000 | $ | 18,552,481 | ||||
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 264,012 | $ | 857,883 | ||||
Accrued expenses and other liabilities | 1,113,944 | 1,436,824 | ||||||
Deferred revenue | 10,824,876 | 8,495,661 | ||||||
Current portion of obligations under capital leases | 81,068 | 99,250 | ||||||
Total current liabilities | 12,283,900 | 10,889,618 | ||||||
Non-current liabilities: | ||||||||
Obligations under capital leases, less current portion | 60,232 | 70,009 | ||||||
Other non-current liabilities | 242,094 | 268,842 | ||||||
Total non-current liabilities | 302,326 | 338,851 | ||||||
Total liabilities | 12,586,226 | 11,228,469 | ||||||
Commitments and contingencies | ||||||||
Redeemable preferred stock: | ||||||||
Series A convertible redeemable preferred stock, $.001 par value, 50,000,000 shares authorized, 32,667,123 shares issued and outstanding (liquidation value $4,989,902 and $5,019,849) | 3,211,940 | 3,204,993 | ||||||
Stockholders' equity: | ||||||||
Common Stock, $.001 par value, 250,000,000 shares authorized, 81,834,191 and 81,861,335 shares issued and outstanding | 81,834 | 81,861 | ||||||
Additional paid-in capital | 23,779,923 | 23,837,196 | ||||||
Accumulated deficit | (17,896,931 | ) | (19,797,321 | ) | ||||
Accumulated other comprehensive income (loss) | 43,008 | (2,717 | ) | |||||
Total stockholders' equity | 6,007,834 | 4,119,019 | ||||||
Total liabilities, redeemable preferred stock and stockholders' equity | $ | 21,806,000 | $ | 18,552,481 |
See accompanying notes to condensed consolidated financial statements
1 |
Diligent Board Member Services, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Revenues | $ | 8,214,486 | $ | 2,976,229 | ||||
Cost of revenues | 2,164,946 | 819,849 | ||||||
Gross profit | 6,049,540 | 2,156,380 | ||||||
Operating expenses: | ||||||||
Selling and marketing expenses | 1,938,571 | 873,036 | ||||||
General and administrative expenses | 1,509,549 | 1,052,356 | ||||||
Research and development expenses | 474,297 | 319,554 | ||||||
Depreciation and amortization | 228,082 | 117,969 | ||||||
Total operating expenses | 4,150,499 | 2,362,915 | ||||||
Operating income (loss) | 1,899,041 | (206,535 | ) | |||||
Other income (expense): | ||||||||
Interest income, net | 48,382 | 44,820 | ||||||
Foreign exchange transaction gain (loss) | 5,586 | (12,189 | ) | |||||
Total other income, net | 53,968 | 32,631 | ||||||
Income (loss) before provision for income taxes | 1,953,009 | (173,904 | ) | |||||
Provision for income taxes | 52,619 | 13,747 | ||||||
Net income (loss) | $ | 1,900,390 | $ | (187,651 | ) | |||
Net income (loss) per share: | ||||||||
Basic | $ | 0.022 | $ | (0.003 | ) | |||
Diluted | $ | 0.016 | $ | (0.003 | ) | |||
Weighted average shares outstanding: | ||||||||
Basic | 81,805,677 | 81,974,668 | ||||||
Diluted | 119,991,625 | 81,974,668 |
See accompanying notes to condensed consolidated financial statements
2 |
Diligent Board Member Services, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net income (loss) | $ | 1,900,390 | $ | (187,651 | ) | |||
Other comprehensive income (loss): | ||||||||
Foreign exchange translation adjustments | 45,725 | (5,886 | ) | |||||
Comprehensive income (loss) | $ | 1,946,115 | $ | (193,537 | ) |
See accompanying notes to condensed consolidated financial statements
3 |
Diligent Board Member Services, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
Three Months Ended March 31, 2012
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Common | Additional | Other | Total | |||||||||||||||||||||
Common | Stock | Paid-in- | Accumulated | Comprehensive | Stockholders' | |||||||||||||||||||
Shares | $.001 Par Value | Capital | Deficit | (Loss) Income | Equity | |||||||||||||||||||
Balance at January 1, 2012 | 81,861,335 | $ | 81,861 | $ | 23,837,196 | $ | (19,797,321 | ) | $ | (2,717 | ) | $ | 4,119,019 | |||||||||||
Net income | - | - | - | 1,900,390 | - | 1,900,390 | ||||||||||||||||||
Foreign exchange translation adjustment | - | - | - | - | 45,725 | 45,725 | ||||||||||||||||||
Share-based compensation | - | - | 222,066 | - | - | 222,066 | ||||||||||||||||||
Tender of common stock in lieu of interest payment on Note receivable from affiliate | (133,811 | ) | (134 | ) | (199,518 | ) | - | - | (199,652 | ) | ||||||||||||||
Exercise of stock options | 106,667 | 107 | 16,960 | - | - | 17,067 | ||||||||||||||||||
Amortization of preferred stock offering costs | - | - | (6,947 | ) | - | - | (6,947 | ) | ||||||||||||||||
Accrued preferred stock dividend | - | - | (89,834 | ) | - | - | (89,834 | ) | ||||||||||||||||
Balance at March 31, 2012 (Unaudited) | 81,834,191 | $ | 81,834 | $ | 23,779,923 | $ | (17,896,931 | ) | $ | 43,008 | $ | 6,007,834 |
See accompanying notes to condensed consolidated financial statements
4 |
Diligent Board Member Services, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 1,900,390 | $ | (187,651 | ) | |||
Adjustments to reconcile net income (loss) to net | ||||||||
cash provided by operating activities: | ||||||||
Depreciation and amortization | 228,082 | 117,969 | ||||||
Share-based compensation | 222,066 | 143,844 | ||||||
Other non-cash | 9,469 | 786 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 189,365 | (43,391 | ) | |||||
Prepaid expenses and other current assets | (298,113 | ) | 15,232 | |||||
Restricted cash - security deposits | (34,745 | ) | (2,136 | ) | ||||
Accounts payable and accrued expenses, net | (886,805 | ) | (160,517 | ) | ||||
Deferred revenue | 2,329,215 | 739,387 | ||||||
Other | (1,551 | ) | - | |||||
Net cash provided by operating activities | 3,657,373 | 623,523 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (353,762 | ) | (175,837 | ) | ||||
Net cash used in investing activities | (353,762 | ) | (175,837 | ) | ||||
Cash flows from financing activities: | ||||||||
Payment of preferred stock dividend, net of capital contribution in lieu of dividend | (119,781 | ) | (159,338 | ) | ||||
Proceeds from exercise of stock options | 17,067 | 1,600 | ||||||
Proceeds from repayment of principal on Note receivable from affiliate | - | 4,122 | ||||||
Payments of obligations under capital leases | (27,960 | ) | (20,766 | ) | ||||
Payments of obligations under software licensing agreements | (36,217 | ) | - | |||||
Net cash used in financing activities | (166,891 | ) | (174,382 | ) | ||||
Effect of exchange rates on cash and cash equivalents | 45,907 | (4,242 | ) | |||||
Net increase in cash and cash equivalents | 3,182,627 | 269,062 | ||||||
Cash and cash equivalents at beginning of period | 8,930,695 | 3,212,449 | ||||||
Cash and cash equivalents at end of period | $ | 12,113,322 | $ | 3,481,511 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for : | ||||||||
Interest | $ | 4,882 | $ | 7,754 | ||||
Income taxes | $ | 52,688 | $ | 17,910 | ||||
Supplemental disclosure of noncash investing and financing activities: | ||||||||
Capital contribution in lieu of preferred stock dividend | $ | - | $ | 200,000 | ||||
Accrual of preferred stock dividend | $ | 89,834 | $ | 89,834 | ||||
Tender of common stock in lieu of interest payment on Note receivable from affiliate | $ | 199,652 | $ | - |
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. (“Diligent” or the “Company”) is a global leader in web-based portals for Boards of Directors. The Company develops and sells an online software application called Diligent Boardbooks®, a web based portal that board members, management and administrative staff use to compile, update, review and archive board materials during and after board meetings. Diligent provides clients with subscription-based access to the software and also provides associated services including securely hosting the clients’ data and customer service and support for the application.
The Company was incorporated in the State of Delaware on September 27, 2007 and is listed on the New Zealand Stock Exchange (“NZSX”). On December 12, 2007, the Company completed its initial public offering on the NZSX. The Company’s corporate headquarters are located in New York and Christchurch, New Zealand.
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, Diligent Boardbooks Limited (“DBL”), an England and Wales limited liability company which provides European sales and marketing services. The Company has a Singapore-based wholly-owned subsidiary, APAC Board Services PTE. Ltd. (“APAC”), which was formed on December 23, 2010 to provide Asia-Pacific sales and marketing services. At the end of 2011, the Company formed an Australian-based wholly-owned subsidiary, Diligent Board Services Australia PTY Ltd., which commenced operations in 2012. Diligent, together with its subsidiaries, are hereinafter referred to as “the Company”.
The Company’s consolidated financial statements are presented in U.S. dollars, rounded to the nearest dollar, which is the Company’s functional and presentational currency.
The Company has evaluated all subsequent events through the filing date of this Form 10-Q with the SEC, to ensure that this Form 10-Q includes subsequent events that should be recognized in the financial statements as of March 31, 2012, and appropriate disclosure of subsequent events which were not recognized in the financial statements.
2) | Significant accounting policies |
Basis of presentation – The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions for Form 10-Q pursuant to the rules and regulations of the SEC. Accordingly, they do not include all information and notes required by GAAP and provided in the annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Form 10-K of the Company for the year ended December 31, 2011, as filed with the SEC on March 26, 2012.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
6 |
Diligent Board Member Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Cash and cash equivalents – The Company considers all highly liquid investments with original maturities of three months or less 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. At March 31, 2012, cash equivalents include investments in U.S. treasury bills of $2,999,800 and U.S. treasury money market funds of $5,000,145, which are carried at cost which approximates fair value. At December 31, 2011, cash equivalents include investments in U.S. treasury bills of $1,999,919, U.S. treasury money market funds of $3,000,046 and other money market funds of $2,750.
Fair value of financial instruments –The fair value of our cash and cash equivalents, term deposits, accounts receivable, accounts payable and accrued expenses approximates book value due to their short term settlements. The note receivable from affiliate (the “Note”) is recorded at estimated net realizable value, adjusted for any valuation allowance for amounts considered uncollectable. The Note is reviewed for impairment each reporting period.
Share-based compensation – The Company measures the cost of employee services received in exchange for an equity-based award using the fair value of the award on the date of the grant, and recognizes the cost over the period that the award recipient is required to provide services to the Company in exchange for the award.
The Company measures compensation cost for awards granted to non-employees based on the fair value of the award at the measurement date, which is the date performance is satisfied or services are rendered by the non-employee.
Net income (loss) per share – Basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders, after deducting accrued preferred stock dividends, by the weighted average number of common shares outstanding for the period.
Diluted net income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock, unless the effect is anti-dilutive. Stock options and convertible preferred stock are included as potential dilutive securities for the periods applicable. All potentially dilutive securities have been excluded from the calculation for the three months ended March 31, 2011 as they were anti-dilutive. There were 38,597,458 potentially dilutive securities at March 31, 2011.
The components of the calculation of basic and diluted net income (loss) per common share are as follows:
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Numerator: | ||||||||
Net income (loss) | $ | 1,900,390 | $ | (187,651 | ) | |||
Preferred stock dividends | (89,834 | ) | (89,834 | ) | ||||
Basic net income (loss) available to common shareholders | $ | 1,810,556 | $ | (277,485 | ) | |||
Diluted net income (loss) available to common shareholders | $ | 1,900,390 | $ | (187,651 | ) | |||
Denominator: | ||||||||
Basic weighted average shares outstanding | 81,805,677 | 81,974,668 | ||||||
Dilutive effect of stock options | 5,518,825 | - | ||||||
Dilutive effect of convertible preferred stock | 32,667,123 | - | ||||||
Diluted weighted average shares outstanding | 119,991,625 | 81,974,668 | ||||||
Basic income (loss) per share | $ | 0.022 | $ | (0.003 | ) | |||
Diluted income (loss) per share | $ | 0.016 | $ | (0.003 | ) |
7 |
Diligent Board Member Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recent accounting pronouncements – In June 2011, the FASB issued new guidance regarding the presentation of comprehensive income, which requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income (OCI) in either a single continuous statement of comprehensive income or in two separate consecutive statements. The guidance does not change the components of OCI or when an item of OCI must be reclassified to net income, or the earnings per share calculation. The Company implemented this guidance in the first quarter of 2012.
From time to time, new accounting pronouncements are issued by the FASB and are adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of other recently issued accounting pronouncements will not have a material impact on the consolidated financial position, results of operations, and cash flows, or do not apply to the Company’s operations.
3) | Term deposit |
At March 31, 2012, the Company has a term deposit with a New Zealand bank with an original term of 365 days. The term deposit in the amount of NZD 125,000 (US$102,313 at March 31, 2012) bears interest at 4.4% and matures in March 2013.
4) | Note receivable from affiliate |
The Note receivable from affiliate (the “Note”) represents amounts due from Services Share Holding, LLC (“SSH LLC”, the Company’s predecessor entity).
The Note has a principal balance of $3,071,563, and matures on October 1, 2012. It bears interest at 6.5%, payable annually on January 1 of each year. At March 31, 2012, the Note is secured by 4,796,786 shares of Diligent common stock held by SSH LLC and pledged as collateral.
The Company expects the principal balance of $3,071,563 to be fully repaid in cash at maturity on October 1, 2012, and accordingly the Note has been recorded as a current receivable in the balance sheet at March 31, 2012.
5) | Fair value measurements |
The Note is the only financial instrument held by the Company for which a fair value measurement is made using significant unobservable inputs (Level 3). A reconciliation of the beginning and ending balances of the Note is as follows:
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Balance at beginning of period | $ | 3,071,563 | $ | 1,875,685 | ||||
Total gains or losses (unrealized/realized) | ||||||||
Included in earnings (or changes in net assets) | - | - | ||||||
Included in other comprehensive income | - | - | ||||||
Purchases, issuances and settlements | - | (4,122 | ) | |||||
Transfers in and/or out of Level 3 | - | - | ||||||
Ending balance | $ | 3,071,563 | $ | 1,871,563 | ||||
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date | $ | - | $ | - |
8 |
Diligent Board Member Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6) | Line of Credit Facility |
As of March 31, 2012, the Company has not borrowed any amounts under its line of credit facility.
7) | Redeemable Preferred Stock |
On March 11, 2009, the Company issued 30,000,000 shares of newly-created Series A Preferred Stock for $0.10 per share in a private offering, for aggregate proceeds of $3,000,000 in additional capital. Expenses relating to the share issuance were $138,850.
For the year 2009, the Board of Directors of the Company approved the issuance of paid-in-kind (“PIK”) shares in lieu of cash, which dividend was effective January 4, 2010. Accordingly, the holders of the Series A Preferred Stock received an aggregate of 2,667,123 PIK shares in January 2010.
The carrying value of the Preferred Shares at March 31, 2012 and December 31, 2011 is as follows:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Gross proceeds | $ | 3,000,000 | $ | 3,000,000 | ||||
Less: Issuance costs | (138,850 | ) | (138,850 | ) | ||||
2,861,150 | 2,861,150 | |||||||
Issuance of PIK shares | 266,712 | 266,712 | ||||||
Cumulative amortization of issuance costs | 84,078 | 77,131 | ||||||
Balance | $ | 3,211,940 | $ | 3,204,993 |
In 2012, the Company anticipates that cash dividends will be paid on the Series A Preferred Stock. Accordingly, preferred stock dividends of $89,834 for the three months ended March 31, 2012 are included in accrued expenses.
8) | Stockholders’ equity |
On January 4, 2012, the Company received 133,811 shares of its common stock from SSH LLC, in satisfaction of the interest due on the Note on January 1, 2012 of $199,652 (See Note 4). The shares were valued at $1.492 per share, which was the market value on the last trading day prior to the transaction. The shares were subsequently cancelled.
9) | Stock option and incentive plan |
During the first quarter of 2012, the Company issued 400,000 stock options to employees, which were valued at $937,043 and will be recognized as expense over the three year vesting period. Total share-based compensation expense recognized during the three months ended March 31, 2012 was $222,066. At March 31, 2012 there was $2,939,417 of unrecognized share-based compensation expense related to options granted that will be recognized over the next 6.0 years.
In April 2012, the Company issued an additional 500,000 stock options to employees.
9 |
Diligent Board Member Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10) | Income taxes |
Income tax expense is provided on an interim basis based upon management’s estimate of the annual effective tax rates in each tax jurisdiction. The income tax provision for the three months ended March 31, 2012 includes U.S. alternative minimum taxes and foreign tax obligations. No regular tax has been provided on U.S. income due to the Company’s net operating loss carryforwards. The Company has a valuation allowance recorded on a portion of its net operating loss carryforwards. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. At December 31, 2011, the Company released a portion of the valuation allowance, based upon the future taxable income expected to be generated from existing contracts. No additional valuation allowance was released in the first quarter of 2012. The Company will continue to evaluate the expected realizability of its deferred tax assets each quarter, and will recognize the tax benefit of its net operating loss carryforwards only to the extent that the Company has contracts or firm commitments which are expected to produce sufficient taxable income, or until such point as the Company has sustained positive operating results.
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. Due to changes in stock ownership some of our net operating loss carryforwards may be limited. At this time, the amount of the limitation has not been determined since the Company has not completed its Section 382 study. However, the Company has determined that none of the tax benefit previously recognized will be limited by Section 382.
The Company and its subsidiaries are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. The Company’s federal, state and foreign income tax returns for the 2007 through 2011 tax years are open for examination by the respective taxing jurisdictions.
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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 consolidated financial statements and related notes that appear elsewhere in this Form 10-Q. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
Overview
The Company develops and makes available an online software application called Diligent Boardbooks, a web-based portal that board members, management and administrative staff use to compile, update, review and archive board materials before, during and after board meetings. The Company provides clients with subscription-based access to its software and also provides associated services including securely hosting the clients’ data and customer service and support for the application.
The Company uses the Software-as-a-Service (“SaaS”) model to distribute its Diligent Boardbooks application to the market and maintain the security and integrity of its clients’ data. Under this model, the Company offers annual renewable subscriptions for customer access to its Boardbooks product which is hosted on the Company’s secure servers, and offers a complete suite of related services including training, support, data migration and data security/backup.
The SaaS model allows the Company to differentiate itself through technological innovation and customer service while the subscription billing approach results in a predictable and recurring revenue stream. This SaaS model also allows clients to retain control over access to the application while outsourcing to the Company the support activities, such as managing the IT infrastructure and maintaining the software.
The Company’s SaaS model addresses several difficulties found in the traditional software model and offers the following critical advantages for our company:
• | Highly scalable operations. Because our client’s boards do not ordinarily meet on a daily or monthly basis, our system has the capability to support many more Boards without absorbing increased costs associated with customer growth. |
• | Better revenue visibility. By offering renewable annual subscriptions instead of one time perpetual licenses, the Company has much better revenue foresight. This high revenue visibility allows the Company to undertake much better planning and budgeting, with significant advantages for corporate strategy and profitability. |
• | Lower cost of development. The Company has developed one application that is cost effectively shared across thousands of end users. This is considerably less expensive than developing all the permutations (data bases, operating systems, etc) needed by customers who want to run the software on their own premises. These economies allow the Company to spend resources on developing increased functionalities for its Boardbooks application instead of on creating multiple versions of the same code. |
• | Longer corporate life. The SaaS model has a long tail of recurring revenue that reduces investment risk, simplifies corporate planning and leads to extended corporate life. |
• | Better expense visibility. Because revenue is more predictable, the Company is able to better plan expenses. |
We began developing components of the Diligent Boardbooks system starting in 1998, culminating in the roll-out of an international sales force in 2007.
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On December 12, 2007 we completed a public share offering of 24,000,000 shares of our common stock in conjunction with a listing of our stock on the New Zealand Stock Exchange under the symbol “DIL.” As a result, the Company is subject to the regulation and reporting requirements imposed by the New Zealand Stock Exchange. There is no United States established public trading market for our common stock. However, because the Company is a U.S. company incorporated in Delaware with over 500 shareholders, it is also subject to the U.S. reporting and regulatory requirements of the Securities and Exchange Commission (“SEC”) and the Securities Exchange Act of 1934. Because of this dual regulation in New Zealand and the U.S., the Company is required to meet both standards, which means the Company sometimes is faced with conflicting requirements and always must comply with the more stringent rule.
We are pleased to report that Diligent has continued its exceptional growth with another record-breaking quarterly revenue result. Diligent recorded quarterly revenue of $8.2 million for the first quarter of 2012, which represents a 176% increase over the first quarter of 2011. Diligent records its revenue from subscription-based sales and installation fees ratably over the contract period. In the first quarter of 2012, Diligent signed new contracts with annual recurring revenue of $6.5 million, which is a 247% increase over the first quarter of 2011. This remarkable growth is evidence of a dramatically heightened demand for the Diligent Boardbooks product.
The Company now serves over 1,230 public and private companies with over 1,800 boards and 33,000 users in the U.S., Canada, EMEA (Europe, Middle East and Africa) and the Asia Pacific region. During the first quarter of 2012, Diligent signed a total of 205 net new client agreements versus 64 in the same quarter last year—an increase of 220%. Included among the new clients are 65 NYSE and 32 NASDAQ companies. Diligent now services 189 Fortune 1000 companies, of which 26 were added in the first quarter.
Critical Accounting Policies and Estimates
There have been no material changes to the critical accounting policies as filed in our 2011 annual report on Form 10-K.
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements at Item 1 of this Form 10-Q.
Results of Operations for the Three Months Ended March 31, 2012 and 2011
Revenues
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Revenues | $ | 8,214,486 | $ | 2,976,229 | $ | 5,238,257 |
The Company achieved another record quarter of revenue growth, posting an increase of 176% in the quarter ended March 31, 2012 when compared with the 2011 first quarter. The Company has continued to add license agreements each quarter since inception, adding 205 new client agreements in the first quarter of 2012, compared with 64 added in the first quarter of 2011. Cumulative license agreements at March 31, 2012 were 1,231, compared with 520 at March 31, 2011, a 137% increase. This increase in revenues is in line with our targets and was achieved at a significantly lower customer acquisition cost.
The Company recognizes revenue ratably over the contract period. All of the deferred revenue of $10.8 million recorded on the balance sheet at March 31, 2012 will be recognized as revenue in the next twelve months.
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Cost of Revenues and Operating Expenses
Cost of Revenues
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Cost of Revenues | $ | 2,164,946 | $ | 819,849 | $ | 1,345,097 |
Cost of revenues is comprised of account management, customer support and IT services, which accounted for $0.7 million, $0.2 million and $0.5 million, respectively, of the increase in cost of revenues. The Company increased headcount in order to service our larger client base, resulting in an increase in employee salaries and commissions of approximately $1.0 million in total for account management, customer support and IT services. Other expenses increased as a direct result of the increase in customers and headcount, including hosting costs ($0.1 million), non-hosting IT costs ($0.1 million) and recruitment fees ($0.1 million). Included within these increases are higher customer service and account management costs in the U.K. and Australia as a result of the increase in European sales and the commencement of operations in Australia.
The gross profit ratio for the three months ended March 31, 2012 was 73.6%, compared with 72.5% for the first quarter of 2011, demonstrating management’s ability to control costs.
Selling and Marketing Expenses
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Selling and Marketing Expenses | $ | 1,938,571 | $ | 873,036 | $ | 1,065,535 |
Selling and marketing expenses increased in the first quarter of 2012 as a result of an increase in salaries and commissions for our U.S. sales force of approximately $0.6 million. Foreign salaries and commissions increased by approximately $0.3 million, primarily due to increased sales in the U.K. and our expansion into the Australian market. The remaining $0.1 million increase in selling and marketing expenses is due to increases in other selling expenses, including travel and support services, as well as a small increase in marketing, primarily due to web advertising.
General and Administrative Expenses
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
General and Administrative Expenses | $ | 1,509,549 | $ | 1,052,356 | $ | 457,193 |
The increase in general and administrative expenses includes an increase in share-based compensation costs of $0.1 million, and increases in officer salaries and benefits of $0.1 million due to salary increases and additional headcount. Office costs in the U.S., the U.K. and New Zealand added an additional $0.1 million, due to the expansion of office space in each of these locations. Professional and outside contractor fees increased $0.1 million, while other modest increases include director fees, travel costs and recruitment costs.
Research and Development Expenses
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Research and Development Expenses | $ | 474,297 | $ | 319,554 | $ | 154,743 |
The increase is primarily due to increased staffing in our New Zealand subsidiary for product development and support, combined with the effect of a higher average US$/NZD exchange rate for the first quarter of 2012, resulting in even higher expenses when measured in U.S. dollars.
Depreciation and Amortization
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Depreciation and Amortization | $ | 228,082 | $ | 117,969 | $ | 110,113 |
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The increase in depreciation and amortization is attributable to the net increase in property and equipment, consisting principally of computer equipment and computer software.
Interest Income, net
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Interest Income, net | $ | 48,382 | $ | 44,820 | $ | 3,562 |
Interest income, net, includes interest income on the Note Receivable from our affiliate and interest on the Company’s cash and cash equivalents and term deposits which are interest-bearing, offset by interest expense on our capital lease obligations. The increase in net interest income is attributable to a decrease in interest expense on our capital lease obligations as some of our older leases with higher interests were completed during the latter part of 2011.
Foreign Exchange Transaction Gain (Loss)
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Foreign Exchange Transaction Gain (Loss) | $ | 5,586 | $ | (12,189 | ) | $ | 17,775 |
The Company’s U.S. and U.K. operations have transactions with customers and suppliers denominated in currencies other than their functional currencies, primarily the Canadian Dollar and the Euro, 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 NZD and GBP. 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 gain recorded in the first quarter of 2012 is primarily a result of the weakening of the U.S. dollar against NZD and GBP.
Provision for Income Taxes
Three months ended March 31, | ||||||||||||
2012 | 2011 | Increase/(Decrease) | ||||||||||
Provision for Income Taxes | $ | 52,619 | $ | 13,747 | $ | 38,872 |
The income tax provision for the three months ended March 31, 2012 includes U.S. alternative minimum taxes and foreign tax obligations. No regular tax has been provided on U.S. income due to the Company’s net operating loss carryforwards. The income tax provision for the first quarter of 2011 consists entirely of the New Zealand tax provision.
Liquidity and Capital Resources
At March 31, 2012, the Company’s sources of liquidity consist of cash and term deposits of approximately $12.2 million. The Company also has a $1.0 million revolving line of credit facility with Spring Street Partners, L.P. This line of credit offers the Company additional cash flow support, if needed. Through March 31, 2012, the Company has had no borrowings under this credit facility.
Historically, the Company’s primary sources of liquidity had been the cash received from stock issuances. Through the second quarter of 2010, our cash flow from operations was negative and we relied on capital raises to sustain and grow our business. By the third quarter of 2010, the Company began generating positive cash flows from operations and 2010 marked the first year since inception of the Company that Diligent achieved positive cash flow from operations. The Company has continued to generate positive cash flows each subsequent quarter. We have no debt, except for obligations under capital leases and software licensing agreements, and thus far our financing costs have consisted principally of the dividend on our preferred stock and repayments of our capital lease obligations. We anticipate that this trend will continue through the foreseeable future, with increased cash growth expected from operations in 2012. Additionally, in October 2012, the Note receivable from our predecessor entity will mature, resulting in additional cash inflow of approximately $3.1 million.
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The Company is evaluating strategic growth opportunities that could change our current expense and capital forecasts, particularly in light of our expansion into the Asia-Pacific region.
In order to minimize credit and market risk, the Company has invested $8.0 million of its 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
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | 3,657,373 | $ | 623,523 | ||||
Investing activities | $ | (353,762 | ) | $ | (175,837 | ) | ||
Financing activities | $ | (166,891 | ) | $ | (174,382 | ) |
Net Cash Flows from Operating Activities
Cash provided by operating activities for the quarter ended March 31, 2012 increased significantly compared with the first quarter of 2011. This was achieved through the significantly greater number of customer contracts, while expenses have increased at a slower rate. Note that $2.3 million of the cash generated by operating activities for the quarter came from the increase in deferred revenue, as subscription fees are paid in advance and recorded as deferred revenue until recognized.
Net Cash Flows from Investing Activities
Cash used in investing activities in the first quarters of 2012 and 2011 consist entirely of purchases of property and equipment.
Net Cash Flows from Financing Activities
In the first quarter of 2012, financing activities consist principally of the $119,781 dividend paid on the Company’s preferred stock, as well as repayments of capital leases and software licensing agreements offset by proceeds of stock option exercises. In the first quarter of 2011, cash used in financing activities included $159,338 of cash dividends paid on preferred stock as well as repayments of capital leases offset by proceeds of stock option exercises.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Because the Company qualifies as a smaller reporting company, as defined by §229.10(f)(1) it is not required to provide the information required by this Item.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. As of the end of the quarter ended March 31, 2012, our Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that our current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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(b) Changes in Internal Controls. There has been no change in the Company’s internal control over financial reporting required by Exchange Act Rule 13a-15 or 15d-15 that occurred during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect Diligent Board Member Services, Inc.’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. [Reserved]
Item 5. Other Information.
Not applicable
Item 6. Exhibits.
Exhibit | ||
Numbers | Exhibits | |
3.2 | Amended and Restated Bylaws | |
10.6.2 | Amendment to 2010 Stock Option and Incentive Plan of Diligent Board Member Services, Inc. | |
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 |
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SIGNATURES
Pursuant to the requirements on the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DILIGENT BOARD MEMBER SERVICES, INC. | ||
Dated: May 14, 2012 | By: | /s/ Alessandro Sodi |
Alessandro Sodi, Chief Executive Officer (Principal Executive Officer) | ||
Dated: May 14, 2012 | By: | /s/ Steven P. Ruse |
Steven P. Ruse, Chief Financial Officer (Principal Financial Officer) |
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