ITEM 1. BUSINESS
As used herein, unless the context otherwise requires, the terms "Company," "we," "us," "our" and words of similar import refer to the combined business of Diligent Board Member Services, Inc. and its subsidiaries.
GENERAL INFORMATION
History
We are a Delaware corporation that was incorporated on September 27, 2007. On October 1, 2007, our accounting predecessor entity and sole stockholder at that time, Services Share Holding, LLC (previously known as Diligent Board Member Services, LLC and referred to in this document as "SSH LLC"), contributed substantially all of its assets and its Diligent Boardbooks®(1) business to Diligent Board Member Services, Inc. SSH LLC was founded in 1994 and developed complex database-driven software for large and small companies until 2003, when it shifted its focus to corporate governance service delivery software.
Company Overview
We develop and sell a software application called Diligent Boardbooks. We deliver Diligent Boardbooks as a service via all major browsers and on certain major mobile device operating systems, including the iPad and Windows-supported tablets. Our Diligent Boardbooks secure board portal speeds and simplifies how meeting materials are produced, delivered and reviewed. The service provides directors and management with immediate access to time sensitive and confidential information online and offline, along with the tools to review, discuss and vote. Work flow features get board materials out more efficiently and serves to free up internal administration and IT resources, using the Diligent Boardbooks portal, corporate executives can streamline board communications and discussions, helping to improve the quality of leadership decisions. Each of our clients enters into a service agreement whereby we agree to provide and support the Diligent Boardbooks service. Diligent provides clients with subscription-based access to its software and also provides associated services including securely hosting the clients' data, as well as providing customer service and support for the application.
The Diligent Boardbooks product features an on-screen interface that looks and works like a book and displays documents in single pages, from a secure central database. The software can be accessed via either the iPad or Windows apps, the OneClick client or by using a personal computer browser, and lets directors swipe or click to navigate easily throughout the entire virtual book.
Diligent 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, Diligent offers annual renewable subscriptions for customer access to its Diligent Boardbooks product which is hosted on Diligent's secure servers, and offers a complete suite of related services including training, support, data migration and data security/backup.
The SaaS model allows Diligent 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 companies to retain control over access to the application while outsourcing to Diligent the support activities, such as managing the IT infrastructure and maintaining the software.
(1)Diligent Boardbooks is a registered trademark of Diligent Board Member Services, Inc.
The first phase of our business focus was developing and testing the Diligent Boardbooks system, building a loyal core customer base for the product, and promoting product awareness through exposure in print media. During this phase we did not focus on revenue growth or profitability, and sales and marketing had been conducted by two to three staff members, who fit this role alongside their other responsibilities. By 2007 we had a commercially viable product and shifted our focus to commit substantial resources to the sales and marketing of our Diligent Boardbooks product. By 2009 we entered the customer acquisition phase of our business and in 2010 saw the introduction of the Diligent Boardbooks iPad app sharply accelerate demand. By 2013 we saw adoption across a number of new markets, and benefited from continued referrals and growth from our existing client base. In 2014 we began developing a new SaaS collaboration solution called DiligentTeams.
Development Timeline
The discussion below provides a general timeline of the development of the Diligent Boardbooks system:
• Development and Testing (1998-2006). We began developing components of the Diligent Boardbooks system starting in 1998. In 2001, SunAmerica Funds requested a solution to automate the management of its board meeting papers. The development process took more than three years to create the first commercially viable version of Diligent Boardbooks. After developing the product for SunAmerica Funds, we began marketing and selling subscriptions, and developing a customer base. Typically, the sales process took more than a year prior to clients having the comfort to move their board materials to our servers.
• Roll-out (2007-2008). The roll-out of a sales force commenced in 2007 and by the end of the 4th quarter of 2007 our sales force had increased from 3 to 18 full time salespeople.
• Growth (2009-2011). Despite the global economic crisis, the Company's revenues grew from $5.0 million in 2009 to $15.6 million in 2011.
• Scale (2012 and forward). During 2014, Diligent continued to see the start of global scaling of its Diligent Boardbooks product with clients in over 45 countries. Total revenues per year increased from $39.1 million in 2012 to $64.8 million in 2013 to $83.1 million in 2014.
New Zealand Offering
On December 12, 2007, we completed an offshore offering of 24,000,000 common shares to members of the public in conjunction with a listing of our stock on the NZX Main Board. The net proceeds of the offering were approximately $16.4 million, which we used to recruit additional staff to grow our business, including more sales people in North America, Europe and the Pacific Rim; invest in the operational infrastructure required to scale the business; provide working capital to sustain the operations of the business while we further built our revenue streams; and retire certain debt obligations incurred by SSH LLC in connection with the development of the Diligent Boardbooks business.
Our common stock is listed on the NZX Main Board and trades under the symbol "DIL."
Activities of Foreign Subsidiaries
The Company has the following wholly-owned foreign subsidiaries:
DBMS NZ primarily provides research and development services for the Company, as well as customer support and account management. DBL provides European sales, marketing, account management, customer support and IT support. APAC provides Asia-Pacific sales and marketing services. DBA began operations in 2012 and provides sales and marketing in Australia and New Zealand. In December 2012, the Company formed Diligent APAC Limited in Hong Kong, which has had no operations to date. On February 4, 2014, the Company formed Diligent Boardbooks GmbH, which holds the Company's German data hosting operations. The Company has no domestic subsidiaries.
Market Opportunity
The digital board portal industry can be described as a two tier market consisting of both mature and emerging markets. The U.S., Canada, U.K. and Australia markets have higher awareness and adoption rates, with growth now starting to take hold in a number of new board portal markets in all major regions of the world. Financial information regarding our revenue, by geographic location of the customer, and long-lived assets located outside the Americas is included in Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Our client base was initially comprised of blue chip companies predominantly in the financial services sector. These entities were prime prospects because their board materials are crucial to effectively managing the corporate governance process. Public recognition by prominent publications helped us become a leader in the provision of board portal software in this sector, as have referrals from a substantial number of directors using the product. We believe additional opportunities remain in the global financial services sector as well as industries with greater regulatory and compliance requirements, and specific country sectors with "paperless" environmental mandates.
In addition to the financial services sector, Diligent has expanded into numerous other sectors as well, including banking, insurance, utilities, oil and gas, retail, consumer products, manufacturing, construction, telecommunications, health care, universities, not-for-profits and government in the Americas (U.S., Canada, Latin America and the Caribbean), EMEA (Europe, Middle East and Africa) and the Asia Pacific region. While the newer geographic regions are showing strong growth, North America still remains our largest market, with over 30% of Fortune 1000 companies using the Diligent Boardbooks portal.
In 2014, Diligent achieved revenue of $83.1 million, a year-to-year increase of 28.2%. We believe the Company's ability to continue to significantly grow its recurring revenue each quarter confirms that its SaaS business model is strongly positioned for the future.
We further believe the drivers behind Diligent's significant sales growth include:
• Greater brand recognition of the Diligent Boardbooks product;
• A highly-focused and knowledgeable sales force;
• Shorter sales cycle driven by the increasing awareness of board portals and Diligent's category leadership position;
• Ongoing product innovation including the Apple iPad version of Diligent Boardbooks, upgraded to iPad 1.9.5 as of December 2014;
• High customer confidence in, and satisfaction with, the product; supporting a trend where existing clients continue to add new users and provide new client referrals. The Company's client revenue retention rate in 2014 continued to exceed 95%; and
• Untapped and developing opportunities in international markets.
Our Product Strengths
The market for our Diligent Boardbooks system is extremely competitive. Our ability to differentiate our offering from the competition is based on a number of factors, the most significant of which are described below.
Established Brand. We began development in early 1998 ahead of many of our competitors. As a result, we believe our brand is more established in the marketplace. We are also investing to continue to build brand awareness and leadership.
Ease of Use. The Diligent Boardbooks portal looks and works just like a book-making it incredibly intuitive and easy to use. Directors can click or swipe single pages, or navigate off the agenda. This "ease of use" has been one of the many key elements to the Diligent Boardbooks portal popularity among executives who have little time to learn a new system.
Flexible Online and Offline Viewing. Diligent Boardbooks may be viewed online or offline via Internet or Wi-Fi on the user's tablet or computer. The offline version of the Diligent Boardbooks application allows a user to download a secure encrypted database of their own corporation's entire Diligent Boardbooks database. This allows meetings to be run off-site without an Internet connection. The same book-like interface is used to view offline as well as online. This system is secured through high-level security and encryption technology.
Additionally, when paper copies are requested, Diligent Boardbooks has a "Print Book" feature that allows directors to print the entire collated boardbook complete with page numbers, agenda-related footers and more. This feature is controlled by the user, allowing a page, a tab or a whole book to be printed. This is a password-specific functionality controlled by the users.
Offline Synchronization. The main distinction between the Diligent Boardbooks portal and some competing systems is that Diligent Boardbooks maintains a single copy and does not download information that has already been downloaded, making synchronization an efficient and rapid process. Accordingly, there is no risk of having multiple copies or outdated documents remaining on devices or personal computers.
Regular Upgrades. The Diligent Boardbooks software is regularly updated by our software development team. Updates are applied automatically and users receive the benefit of enhanced functionality without the inconvenience of software reinstallation.
Application Security. We designed a powerful and secure network to promote protection and availability of client data. Primaries, secondaries and fail-over servers and systems are located in geographically diverse locations for application and data delivery security. An automated intrusion detection system blocks malicious activity and reverse proxy authentication provides another barrier of protection for sensitive data. Each individual Diligent Boardbooks user has a distinct user name and
password that is required to access the Diligent Boardbooks site. All data is encrypted, both in transit and at rest.
We have been SSAE 16/ ISAE 3402 Type 2 (SOC 1) or SAS 70-Series II Audited (Statement on Auditing Standards-Service Organizations) audited for nine consecutive years. In 2014, we obtained our ISO27001 certification for the security of our product software.
Global Support. We serve the highest level officers and directors of some of the largest companies in the world. To assist with completely meeting the expectations of these individuals and their key employees, we have staff in eleven countries. Our support team is trained to work with its high-level clients to solve any problem a user might encounter.
Full Management and Implementation Team. We provide personalized and high quality account management and implementation to our clients. Each client has a dedicated team including an assigned day-to-day account manager and security engineer and executive resources.
Rapid, Cost Effective Deployment. The Diligent Boardbooks solution can be rapidly deployed for use within an organization. Once a company chooses to use the Diligent Boardbooks system, it can begin to realize the benefits almost immediately. Director training typically takes less than 45 minutes and full product administration training less than 10 hours. We consider this a very important distinguishing factor relative to key competitors whose systems can take considerably longer to implement.
Business Model
We use the SaaS model to distribute our Diligent Boardbooks software to the market and maintain the security and integrity of our clients' data. Under this model, we grant customer access to our Diligent Boardbooks product, which is hosted on our secure servers, and offer a complete suite of related services including training, support, data migration and data security/backup.
The SaaS model is characterized by a company providing on-demand access to its complex software through a web-based interface in return for subscription-based revenue. The SaaS industry has undergone significant growth over the past five years, spurred on by several factors:
• SaaS providers can cost-effectively share one application across hundreds or thousands of companies;
• Clients can accelerate the deployment process and eliminate additional infrastructure costs;
• A continuing decline in the cost of bandwidth has meant web-based solutions have become more viable;
• Clients do not pay large sums for a product with a long development and implementation timeframe with no guarantee of success. Instead, clients that pay a nominal set-up and/or training fee (installation fee), and a recurring subscription fee, can begin to use the fully developed service immediately and retain the ability to cancel the service, if unsatisfied;
• The success of on-demand services in the consumer market (e.g., Google, iTunes and YouTube) has made accessing content and services commonplace in professionals' personal lives. Professionals are now demanding similar features in business software; and
• The success of early leaders such as salesforce.com has demonstrated the viability and value proposition of the SaaS model.
• Central characteristics of implementing the SaaS model include the:
• Ability to obtain rapid growth in market share and revenue over a sustained period of time;
• Highly scalable operations that can support sales growth with much lower increases in operating costs;
• Significant up-front investment in sales and marketing in order to maximize the market penetration; and
• Negative earnings over the expansion period offset by equity capital.
Marketing; Growth Strategy
We believe building a successful sales and marketing team to present to and serve the boards of the world's major corporations is a significant undertaking. Staff must have a deep understanding of corporate governance issues while also being able to interact credibly with the board members and senior executives of major U.S. and international corporations.
We believe the Company has built a team with deep experience in business-to-business, technology and governance marketing and sales. We believe we have taken a prominent position in key channels to build awareness with target audiences. We have built strategic relationships and invested in the preeminent groups and communities serving board members and their administrative teams in a number of regions. We have committed to provide an educational series on the latest developments in technology in the boardroom and best practices in how organizations are using board portals through white papers and at conferences, webinars and invitation-only events, as well as through private one-on-one information sessions provided by our sales force. Lastly, we are working closely with clients to highlight their success in using the Diligent Boardbooks board portal to improve governance and board communications.
Intellectual Property
We have protected our unique graphical user interface by copyright. We have registered our "Diligent Boardbooks" and "Diligent" trademarks and will continue to take steps to protect our intellectual property.
All software developed by us is protected by copyright. Employees and contractors have no rights to the application source code, design, user interface or any other aspect of the application, which is protected by copyright and provisions in our employment contracts.
Clients have no rights, other than the right to access the application in object code form, and generally have no visibility of the source code. We make occasional exceptions to allow clients to perform due diligence security audits, which are protected by non-disclosure/non-use agreements. Client rights to the application are defined and protected by the client service agreement with us.
Customers and Certain Contracts
We serve major corporations and a variety of private firms, non-profits and government agencies globally and across multiple industry sectors. While confidentiality arrangements limit Diligent from disclosing its client base, those who have permitted disclosure include Air New Zealand, Bombardier, Centennial Coal, First Rand Bank, Gwinnett Medical Center, Goodman Property, Heineken, International Personal Finance, Kingfisher, NZ Rugby Union, Sydney Airport, Randstad Holding and Rio Tinto. We have implemented Diligent Boardbooks for over 3,000 clients and 92,000 users, with 33% of the Fortune 1000 companies and 38% of the U.K. FTSE 100 companies using our board portal.
Research and Development
Our research and development efforts are now focused on improving and enhancing our Diligent Boardbooks system as well as developing the DiligentTeams product. Research and development costs were $9.0 million, $4.5 million and $2.3 million for the years 2014, 2013 and 2012, respectively.
Competition
We are subject to significant competition that could increase the price pressure on our service, and impact our ability to gain market share and win business. We face strong competition from a wide variety of firms, both large and small, including the following:
• Thomson Reuters, headquartered in New York, which provides a board portal service through a product called BoardLink as part of its Accelus governance, risk and compliance solutions
• BoardVantage, Inc., located in California, which provides a product called Director;
• NASDAQ OMX, located in New York and Washington, which provides a product called Directors Desk as part of its Corporate Solutions
• Computershare, based in Australia with a location in Massachusetts, which provides a product called BoardWorks as part of its Governance Services; and
• ICSA Software International, headquartered in the United Kingdom, which provides a product called Blueprint BoardPad 2 as part of its Board Solutions.
We believe the principal factors that generally determine a company's competitive advantage in the market in which Diligent Boardbooks competes are:
• software development capabilities;
• functionality and reliability of products and services;
• competitive sales and marketing capabilities;
• high quality support services;
• proven testing record of software products and services; and
• market share.
We believe that we compete favorably regarding each of these factors.
Regulation
Our business is not subject to any industry-specific regulation that affects our business as currently conducted, although we are subject to general tax, corporate, securities, employment, privacy and other laws and regulations that affect businesses generally. We are subject to the NZX Listing Rules, New Zealand securities laws and United States securities laws, New Zealand financial reporting and audit 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. See Item 1A
ITEM 1A. RISK FACTORS
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below 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 below, 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 following risks and uncertainties, 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.
We have concluded that as of December 31, 2014, our disclosure controls were not effective and we identified material weaknesses in our internal control over financial reporting. Our adoption of remedial measures to improve our internal controls will cause us to incur additional costs in future periods. Any failure in our remediation efforts could have a material adverse effect on our ability to file required reports with the SEC, NZX or the New Zealand Registrar of Companies and report our financial results timely and accurately.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. In our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, filed with the SEC on May 20, 2014, we disclosed multiple material weaknesses in internal control over financial reporting. As described in the "Controls and Procedures" section in Item 9A of this Annual Report, the Company has adopted remedial measures intended to address the material weaknesses described in our prior filings. However, management has determined that material weaknesses relating to our accounting and financial reporting control environment, ineffective control activities relating to the use of spreadsheets, and design and effectiveness of controls related to income and other taxes still existed as of December 31, 2014 because the remedial measures have not been fully implemented and tested as of such date. In addition, management determined that our disclosure controls were ineffective as of December 31, 2014 due to the existence of these material weaknesses.
A material weakness is defined as a control deficiency, or combination of significant control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. An effective internal control environment is necessary for us to produce reliable financial reports.
We plan to continue our implementation of remedial measures designed to address the material weaknesses identified. If we do not successfully improve our internal controls, and remediate the material weaknesses identified in management's evaluations, we may fail to meet our future reporting obligations on a timely basis, our financial statements may contain material misstatements, our operating results may be negatively impacted, and we may be subject to litigation and regulatory actions. In addition, even if we are successful in improving our internal controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements or our periodic reports filed with the SEC, the NZX or the New Zealand Registrar of Companies. While management evaluates the effectiveness of our internal control over financial reporting on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure of human judgment.
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 services involve the storage and transmission of clients' proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our clients' data or our data, including our intellectual property and other confidential business information, or our IT systems. Additionally, third parties may attempt to fraudulently induce employees or clients into disclosing sensitive information such as user names, passwords or other information in order to gain access to our clients' data or our data or IT systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our clients may authorize third-party technology providers to access their data. Because we do not control the transmissions between our clients and third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Any security breach could result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability.
The anticipated launch of our DiligentTeams offering will require significant investment, may not occur in the timeframe we expect, and may not meet with commercial success.
In February 2015 we announced that we plan to introduce a new SaaS collaboration solution called DiligentTeams during the third quarter of 2015. During 2014, research and development costs increased 100% when compared to 2013, primarily due to increased staffing. In 2014, we more than doubled our research and development headcount, partially due to our exploratory work on the design of the DiligentTeams product. In 2015 we plan to increase our investment in research and development but we expect to begin capitalizing labor costs that are directly attributable to the development of the new product. Our DiligentTeams product does not yet have beta users. There can be significant time lags and unexpected development costs incurred between initial beta releases and the commercial availability of new products. Our DiligentTeams product may not be introduced on our expected timetable, or meet with commercial success. The introduction of new products or updated versions of continuing products has inherent risks, including, but not limited to:
• product quality, including the possibility of software defects;
• delays in releasing new products;
• customer confusion and extended evaluation and negotiation time;
• the fit of the new products and features with the customer's needs;
• the successful adaptation of third-party technology into our products;
• educating our sales, marketing and consulting personnel to work with new products and features;
• competition from earlier and more established entrants;
• market acceptance of initial product releases;
• marketing effectiveness, including challenges in distribution;
• higher than expected research and development costs;
• the accuracy of assumptions about the nature of customer demand.
If we are unable to successfully introduce, market, and sell our DiligentTeams product in a timely and cost-effective manner, and properly position and/or price our products, our business, results of operations, or financial position could be materially impacted.
If we do not successfully develop or introduce new product offerings, or enhancements to our existing Diligent Boardbooks offerings, 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 our financial performance and revenue growth may suffer.
In order to remain competitive, we must continually modify and enhance our Diligent Boardbooks product offering to keep pace with changes in hardware and software platforms, database technology and other items. Uncertainties related to the timing and nature of new product announcements or introductions, or modifications by vendors of operating systems, browsers and other internet-related applications, could impact our ability to keep pace with changes and could harm acceptance of our product offering.
We are continually seeking to develop new offerings and remain subject to all of the risks inherent in product development, including unanticipated technical or other development problems. The introduction of new enhancements or new products may require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our existing clients or new customers purchase new or enhanced services depends on a number of factors, including general economic conditions and that our existing clients do not react negatively to any price changes related to additional features and services. If our efforts to up-sell to our clients are not successful and negative reaction occurs, or if we are not successful in attracting new customers to new product offerings, our business may suffer. There can be no assurance that we will be able to develop enhanced or new product offerings successfully, or to introduce and gain market acceptance of new products in a timely manner.
Our sales to clients outside the United States and other English-speaking areas of the world are critical to our continued growth. Our product may not attain widespread acceptance internationally, which could harm our future growth prospects. We are currently exposed to risks inherent in international sales and these risks will increase if we are successful in increasing our international sales.
We anticipate that sales growth in our Diligent Boardbooks product offering will be subject to slower growth in the U.S. as the market for our product matures and sales remain subject to intense competition. Accordingly, our future growth will depend in large part on international acceptance of our Diligent Boardbooks product offering, as well as in our ability to sell additional features and services related to our existing offering, and our ability to develop and successfully introduce new products.
We have encountered challenges selling Diligent Boardbooks internationally, including difficulties due to language barriers, different regulatory regimes, unfamiliarity in jurisdictions where board portals have not yet seen significant adoption, and concerns related to the security of hosted solutions in general.
We currently sell our products and services throughout the world. For example, revenues from clients outside the Americas represented approximately 29% of our total revenues for the year ended December 31, 2014, and we intend to continue to expand our international sales efforts. The risks and challenges associated with sales to clients outside the United States include:
• localization of our service, including translation into foreign languages and associated expenses;
• laws and business practices favoring local competitors;
• compliance with multiple overlapping and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;
• pressure on the creditworthiness of sovereign nations, particularly in Europe, where we have clients and maintain cash balances. Liquidity issues or political actions by sovereign nations could affect exchange rates resulting in decreased values for our cash and cash equivalents and foreign exchange losses on assets and liabilities denominated in a foreign currency;
• regional data privacy laws that apply to the transmission of our clients' data across international borders;
• treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions;
• foreign currency fluctuations and controls;
• different pricing environments;
• difficulties in staffing and managing foreign operations;
• different or lesser protection of our intellectual property;
• longer accounts receivable payment cycles and other collection difficulties;
• natural disasters, acts of war, terrorism, pandemics or security breaches; and
• regional economic and political conditions.
Any of these factors could negatively impact our business and results of operations.
Additionally, our international subscription fees are denominated in either in U.S. dollars or local currency. As a result, fluctuations in the value of the U.S. dollar in relation to foreign currencies may make our services more expensive for international clients, which could harm our business.
Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our application suite and harm our business.
As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments and agencies becomes more likely. For example, we believe increased regulation is occurring in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our clients' ability to use and share data, potentially reducing demand for our solutions and restricting our ability to store, process and share data with our clients.
Our clients can use our services to store contact and other personal or identifying information regarding their customers and contacts. Federal, state and foreign governments, including the European Union, and agencies have adopted or are considering adopting laws and regulations regarding the confidentiality, collection, use and disclosure of personal information obtained from consumers and individuals in addition to laws and regulations that impact the cross-border transfer of personal information. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our clients may limit the use and adoption of our services and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws. Furthermore, privacy concerns may cause our clients' customers to resist providing the personal data necessary to allow our clients to use our services effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our services in certain industries.
In addition, the requirements imposed by data privacy laws and regulations in one jurisdiction can conflict with laws, and the demands of regulators and other governmental authorities, in other jurisdictions. For example, U.S. authorities can demand access to data that is accessible to or controlled or collected by us because we are located in the U.S., pursuant to the Foreign Intelligence Surveillance Act (FISA), Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism, or the Patriot Act, and other similar laws and regulations, including data collected or controlled by affiliates located outside of the U.S. If any of this data includes personal data and/or confidential information, it is possible that any such disclosure could cause us to breach data protection and privacy laws and regulations in one or more member states of the European Union or other jurisdictions.
FISA, the Patriot Act and other similar laws and regulations could adversely affect our ability to expand internationally and attract and retain non-U.S. clients with concerns regarding the extent to which U.S. governmental and law enforcement agencies may obtain data. Such non-U.S. clients may decide that the privacy risks of storing data with a U.S.-based company may outweigh the benefits and opt to seek solutions from a company based outside of the United States. Moreover, certain foreign governments are considering mandating on-shore storage of their citizens' data. If any such requirements are adopted, it may adversely affect our ability to attract, retain or cost-effectively serve non-U.S. clients.
In addition to government activity, privacy advocacy groups and other industry groups are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the gathering of personal information were to be curtailed in this manner, our application suite would be less effective, which may reduce demand for our services and harm our business.
Interruptions or delays in service from any one of our data center hosting facilities could impair the delivery of our services and harm our business.
We currently serve our clients from multiple data center hosting facilities located in the United States, Canada, and in Germany. Any damage to, or failure of, one or more of these facilities or systems generally could impair the delivery of our services. Interruptions or delays in our services may reduce our revenue, cause us to issue credits or pay penalties, cause clients to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new clients. Our business will also be harmed if our clients and potential clients believe our services are unreliable.
As part of our current disaster recovery arrangements, our production environment and all of our clients' data is currently backed up and/or replicated in near real-time in a facility located in the United States and/or Canada. Companies and products added through acquisition may be temporarily served through alternate facilities. We do not control the operation of any of these facilities, and they are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in the need to replace facilities and related expenses. Even with the disaster recovery arrangements, our services could be interrupted. Our data center facility providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with the facility providers or if in the future we add additional data center facility providers, we may experience additional costs in connection with the transfer to, or the addition of, new data center facilities.
As we continue to add data centers and add capacity in our existing data centers, we may move or transfer our data and our clients' data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our services.
We are subject to U.S. securities laws as a SEC registered company and New Zealand securities and financial reporting laws as a listed company in New Zealand, and these dual regimes increase both our costs and the risk of noncompliance. As previously disclosed, we have failed to comply with certain of these requirements in the past, and could face potential regulatory actions and/or contingent liabilities as a result of past or any future violations.
As a public company, we incur significant legal, accounting and other expenses associated with compliance with applicable laws, rules, regulations and listing requirements. From a New Zealand perspective, these include the NZX Listing Rules, the Securities Act of 1978, the Financial Markets Conduct Act 2013 and the Financial Reporting Act of 2013. In addition, the Sarbanes-Oxley Act, the Dodd-Frank Act, and rules subsequently implemented by the SEC and the FMA (NZ), have imposed a variety of compliance requirements on public companies, including requiring changes in corporate governance practices. In addition, the SEC, the U.S. Congress and the New Zealand Parliament may continue to increase the scope of applicable disclosure and corporate governance-related rules. Our management and other personnel may need to devote a substantial amount of time to the compliance requirements associated with being an SEC registered company and a New Zealand-listed company. Moreover, requirements imposed by these laws, rules and regulations have increased and may continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices.
In 2012 and 2013, a Special Committee of the Company's Board of Directors investigated stock issuances and stock option grants under the Company's stock option and incentive plans, and also reviewed the Company's compliance with applicable regulations since listing on the NZX Main Board in 2007, including U.S. and New Zealand securities regulations and the NZX Listing Rules. The Special Committee identified a number of instances where it appears that the Company was not, or may not have been, in compliance with its New Zealand regulatory obligations. In addition, it was noted that the Company had not registered shares authorized for grant under its stock incentive plans pursuant to the Securities Act of 1933. The Special Committee determined that these instances of non-compliance were inadvertent and attributable in part to the constrained resources of the Company in a period of financial difficulty in the years following its listing on the NZX Main Board and the complex regulatory and compliance obligations across multiple jurisdictions with differing regulations and requirements.
On March 12, 2013, the Board unanimously adopted remedial actions in response to the findings and recommendations of the Special Committee. The Special Committee investigation and findings and remedial measures adopted by our Board of Directors are described in the "Controls and Procedures" section of our 2013 Form 10-K. The "Controls and Procedures" section of this Annual Report describes the current status of our remedial activities.
We entered into a settlement agreement, dated August 30, 2013, New Zealand time, with the NZX Limited in respect of past breaches of the NZX Listing Rules. In connection with this settlement, the NZ Markets Disciplinary Tribunal issued a public censure and imposed a fine of NZ $15 thousand plus certain expenses. In September 2014 the NZ Markets Disciplinary Tribunal approved an additional settlement reached by the Company and the New Zealand Stock Exchange regarding breaches of the NZSX listing rules by the Company relating to the delayed delivery of the annual and half year report. The settlement provided for the payment of fines and costs by the Company, consisting of NZ $100 thousand ($79 thousand USD) as a penalty to the NZX Discipline Fund and NZ $4 thousand ($3 thousand USD) towards the cost of NZXR, these amounts have been paid as of December 31, 2014.
The action by the NZX Limited and NZ 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 our management to devote significant attention and to incur significant legal expense and which could require us to pay substantial judgments, settlements or other penalties.
Certain of our past stock issuances and stock option grants may not have complied with applicable securities laws and regulations and may expose us to potential contingent liabilities, including potential rescission rights or regulatory actions.
Previously, we have offered and sold our common stock and options over common stock to employees, directors and others in transactions that may not have been in compliance with applicable New Zealand and U.S. requirements. We did not file with the SEC registration statements covering issuances under our stock incentive plans and certain of the sales and issuances may not have qualified for a valid exemption under the Securities Act of 1933. Consequently, regulatory actions and/or private proceedings could be commenced against us seeking to require us to conduct a rescission offer regarding certain prior sales, whereby we would offer to stockholders the right to rescind or unwind such sales. If a stockholder elects to accept a rescission offer, we would be obligated to pay that stockholder the purchase price plus interest and costs for his/her shares (less distributions previously paid on such shares). The costs required to conduct a rescission offer could be significant. The Securities Act generally requires a private action for a violation of Section 5 of the Securities Act to be brought within one year of the violation. Applicable statutes of limitations in state securities law actions vary.
We previously offered our securities to employees and directors in New Zealand for subscription without a registered prospectus and investment statement. The effect of doing so is that the securities so offered may have been invalid under the Securities Act of 1978 (NZ). We submitted an application to the High Court of New Zealand to have the foregoing securities validated and an order validating the securities was granted by the High Court on July 22, 2013, New Zealand time.
Even though it is difficult to estimate the financial impact potential rescission rights or similar rights may have on our business, based on the current trading prices of our common stock and the prices at which such issuances occurred, we do not anticipate that any amounts paid would materially affect our liquidity. However, there can be no assurance that our anticipations would prove accurate. Additionally, even given the grant of the High Court order, we could become subject to enforcement action and fines and penalties imposed by New Zealand authorities, the SEC, or state securities agencies.
Our past practices related to the timing of the inclusion of customer agreements in our financial results in a particular period may expose us to potential regulatory investigations.
On July 2, 2013, the Audit and Compliance Committee of the Board of Directors 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 US 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. While the Audit Committee investigation resulted in no finding of intentional misconduct or fraud, due to this practice, we may be subject to an increased risk of regulatory actions, claims or litigation, the defense of which would require our management to devote significant attention
and to incur significant legal expense and which could require us to pay substantial judgments, settlements or other penalties.
As an "emerging growth company" we are not required to comply with the auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act, which may cause investors to have less confidence in our internal control over financial reporting.
The auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act provides that a public company's independent auditor must attest to and report on management's internal control over financial reporting. Because we qualify as an "emerging growth company" under the JOBS Act, we are not required to comply with the auditor attestation requirement. The lack of an auditor attestation concerning management's assessment of our internal controls over financial reporting may cause investors to have less confidence in our internal control over financial reporting.
We could be an "emerging growth company" for up to five years from the effective date of our Registration Statement on Form S-8 (July 23, 2014), or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
We are subject to New Zealand financial reporting and audit requirements as an entity listed on a New Zealand licensed market. Our accounts must therefore comply with the Financial Reporting Act of 1993 and the Auditor Regulation Act of 2011.
The Directors of the Company are responsible for preparing and arranging for its financial statements to be audited in accordance with the Financial Reporting Act of 1993 and the Auditor Regulation Act of 2011 (NZ). For fiscal years ending December 31, 2015 and beyond, the Company will need to prepare financial statements in compliance with the requirements of the Financial Markets Conduct Act of 2013 which has replaced the Financial Reporting Act of 1993.
These Acts require us to engage a registered audit firm or licensed auditor to audit our financial statements. Further, the NZX Rules require that our financial statements meet these requirements. Given that the Company prepares its accounts in accordance with U.S. GAAP, it is not aware of a New Zealand based and registered audit firm with the requisite expertise to audit its financial statements. Consequently, in order to engage the Company's current US independent registered public accounting firm, Deloitte & Touche LLP, in respect of the audit of the financial statements in connection with this Annual Report, the Company sought and obtained exemptions from the Financial Reporting Act. The exemption notices obtained and being relied upon by the Company are the Financial Reporting Act (Diligent Board Member Services, Inc.) Exemption Notice 2014 and Securities Act (Diligent Board Member Services, Inc.) Exemption Notice 2014. The Exemption Notices are available on the Financial Markets Authority's website:
(http://www.fma.govt.nz/laws-we-enforce/legislation/exemption-notices/current-exemption-notices/)
The markets in which we compete are intensely competitive, and if we do not compete effectively, our operating results may be harmed.
The markets in which we operate are intensely competitive and rapidly changing with relatively low barriers to entry. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margin or the failure of our services to achieve or maintain more widespread market acceptance. Often we compete to sell our product against existing
applications that our potential clients have already made significant expenditures to install. Competition in our market is based principally upon service breadth and functionality; service performance, security and reliability; ease of use of the service; speed and ease of deployment, integration and configuration; total cost of ownership, including price and implementation and support costs; and financial resources of the vendor.
We face competition from both traditional software vendors and SaaS providers. Our principal competitors include Thomson Reuters, BoardVantage, Inc., NASDAQ OMX, Computershare, and ICSA Software International. Many of our actual and potential competitors enjoy substantial competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our competitors have established marketing relationships and access to larger client bases, and have major distribution agreements with consultants, system integrators and resellers. If we are not able to compete effectively, our operating results will be harmed.
We are dependent on our direct sales force to maintain and increase sales of our product offering and any future product offerings in the marketplace. If we lose or fail to attract key personnel upon whom we are dependent, our business will be adversely affected.
In order to continue to develop our product offering and remain competitive in competition with well-established companies such as Thomson Reuters, NASDAQ OMX, Computershare and others, we must rely on highly specialized engineering and sales talent. These key employees represent a significant asset, and the competition for these employees is intense in the software and SaaS markets. We continue to anticipate significant increases in human resources, particularly in engineering and sales resources, through 2015 to support our growth.
We sell our product offering primarily through our direct sales force. Our ability to achieve sales and revenue growth in the future will depend on the success of our direct sales force and our ability to adapt our sales efforts to address the evolving markets for our product offering and any new product offerings. We anticipate the need to continue to increase our direct sales force. There is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. If we were not able to hire or retain competent sales personnel our business would suffer. In addition, by relying primarily on a direct sales model, we may miss sales opportunities that might be available through other sales channels, such as domestic and international resellers and strategic referral arrangements. Any inability to hire and retain salespeople or any other qualified personnel would negatively impact our ability to grow our business and continue to develop our product offerings.
Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.
We generally recognize revenue from clients on a daily basis over the subscription term as the services are delivered. Revenue recognition does not commence until the customer has access to the Diligent Boardbooks product, which is typically 3 to 4 weeks after the subscription agreement is executed. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during previous quarters.
Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services, and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase
our revenue through additional sales in any period, as revenue from new clients must be recognized over the applicable subscription term.
We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.
We have grown our business rapidly over the past few years. Between the fiscal years ended December 31, 2010 and 2014, our revenues increased from $7.5 million to $83.1 million. During such time, we significantly increased our sales force. We plan to expand our sales and marketing capabilities and broaden our customer support capabilities which will significantly increase our operating expenses. Our expansion has placed, and our anticipated growth may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our overall business, client base, headcount and operations. We also intend to continue expanding our operations internationally. Creating a global organization and managing a geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. To manage our expected growth, we will have to:
• retain existing personnel;
• hire, train, manage and retain additional qualified personnel, including sales and marketing personnel;
• implement additional operational controls, financial and reporting systems, controls and procedures; and
• effectively manage and expand our relationships with clients, subcontractors and other third parties responsible for manufacturing and delivering our products.
If we are unable to effectively manage such growth, our business may become inefficient and we may not be able to effectively compete, increase our revenues or control our expenses.
We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of our service.
We rely on computer hardware purchased or leased and software licensed from third parties in order to offer our services. This hardware and software may not continue to be available at reasonable prices or on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could significantly increase our expenses and otherwise result in delays in the provision of our services until equivalent technology is either developed by us, or, if available, is identified, to our clients purchased or licensed and then integrated into our business. Any errors or defects in third-party hardware or software could result in errors or a failure of our services which could harm our business.
The market for cloud-based applications may develop more slowly than we expect.
Our success will depend, to a large extent, on the willingness of organizations to accept cloud-based services for applications that they view as critical to the success of their organization. Many organizations have invested substantial effort and financial resources to integrate traditional enterprise software into their organizations and may be reluctant or unwilling to switch to a different application or to migrate these applications to cloud-based services. Other factors that may affect market acceptance of our application include:
• the security capabilities, reliability and availability of cloud-based services;
• client concerns with entrusting a third party to store and manage their data, especially confidential or sensitive data;
• our ability to minimize the time and resources required to implement our software;
• our ability to maintain high levels of client satisfaction;
• our ability to implement upgrades and other changes to our software without disrupting our service;
• the level of customization or configuration we offer;
• our ability to provide rapid response time during periods of intense activity on client websites; and
• the price, performance and availability of competing products and services.
The market for these services may not develop further, or may develop more slowly than we expect, either of which would harm our business.
Our business may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales. Any successful action by state, foreign or other authorities to collect additional or past sales tax could adversely harm our business.
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 our subscription services in various jurisdictions is unclear. We have recorded sales tax provisions of $736 thousand, $1.5 million, and $2.1 million as of December 31, 2012, 2013 and 2014, respectively, with respect to sales and use tax liabilities in various states and local jurisdictions. It is possible that we could incur additional liabilities that exceed our estimates, as we are currently under audit by New York State. Other state tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to states and international jurisdictions for which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.
We are in the process of filing sales tax returns in certain states within the United States as required by law for our subscription services. We do not collect sales or other similar taxes in other states and many of the states do not apply sales or similar taxes to the services that we provide. However, one or more states or foreign authorities could seek to impose additional sales, use or other tax collection and record-keeping obligations on us or may determine that such taxes should have, but have not been, paid by us. Liability for past taxes may also include substantial interest and penalty charges. Any successful action by state, foreign or other authorities to compel us to collect and remit sales tax, use tax or other taxes, either retroactively, prospectively or both, could adversely affect our results of operations and business.
Assertions by a third party of intellectual property infringement, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses.
The software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent and an increasing amount of litigation based on allegations of infringement or other violations of intellectual property rights. As we continue to grow, the possibility of claim of intellectual property rights against us may increase. Our technologies may not be able to withstand any third-party claims or rights against their use. Additionally, although we have licensed from other parties proprietary technology covered by patents,
we cannot be certain that any such patents will not be challenged, invalidated or circumvented. Furthermore, our service agreements require us to indemnify our clients for certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages if there were an adverse ruling related to any such claims. These types of claims could harm our relationships with our clients, may deter future clients from subscribing to our services or could expose us to litigation for these claims. Even if we are not a party to any litigation between a client and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property in any subsequent litigation in which we are a named party.
Any intellectual property rights claim against us or our clients, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination could prevent us from offering our suite of services to our clients and may require that we procure or develop substitute services.
For any intellectual property rights claim against us or our clients, we may have to pay damages, license fees and/or stop using technology found to be in violation of a third party's rights. We may have to seek a license for the technology. Such license may not be available on reasonable terms, if at all, and may significantly increase our operating expenses or may require us to restrict our business activities and limit our ability to deliver certain products and services. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense and/or cause us to alter our product and service offerings which could negatively affect our business.
Our success depends in large part on our ability to protect and enforce our intellectual property rights.
We rely on a combination of copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We do not have any issued patents and currently have no patent applications pending. Any patents that may be issued in the future may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any future service mark or trademark registrations will be issued for future applications or that any registered service marks or trademarks will be enforceable or provide adequate protection of our proprietary rights.
We enter into agreements with our employees and contractors and agreements with parties with whom we do business to limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. Enforcement of our intellectual property rights also depends on our successful legal actions against infringement by third parties, but these actions may not be successful, even when our rights have been infringed.
Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are available. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.
Material defects or errors in the software we use to deliver our services could harm our reputation, result in significant costs to us and impair our ability to sell our services.
The software applications underlying our services are inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. We have from time to time found defects in our services, and new errors in our existing services may be detected in the future. Any defects that cause interruptions to the availability of our services could result in:
• a reduction in sales or delay in market acceptance of our services;
• sales credits or refunds to our clients;
• loss of existing clients and difficulty in attracting new clients;
• diversion of development resources;
• harm to our reputation; and
• increased warranty and insurance costs.
After the release of our services, defects or errors may also be identified from time to time by our internal team and by our clients. The costs incurred in correcting any material defects or errors in our services may be substantial and could harm our operating results.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt, and the terms of our Series A preferred stock include significant consent rights.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board of Directors. Our corporate governance documents include provisions:
• providing for a classified Board of Directors, meaning that only one-third of our Board of Directors stands for election at each annual meeting (subject to stockholder approval at our 2015 Annual Meeting, we plan to declassify our Board of Directors effective at our 2016 Annual Meeting);
• authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
• limiting the liability of, and providing indemnification to, our directors and officers;
• limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
• requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors;
• controlling the procedures for the conduct and scheduling of board and stockholder meetings;
• providing the Board of Directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings;
• limiting the total number of directors on our board to seven and the filling of vacancies or newly created seats on the board to our Board of Directors then in office (subject to shareholder approval at our 2015 Annual Meeting, we plan to increase the total number of directors on our board to eight); and
• providing that directors may be removed by stockholders only for cause (if our Board of Directors is declassified as noted above, this provision will no longer apply).
These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management. In addition, the holders of our Series A Preferred Stock have the requisite power to significantly affect certain of our significant decisions, including the power to approve an acquisition of the Company.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without a supermajority approval of our outstanding common stock.
Any provision of our amended and restated certificate of incorporation or our amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
As an entity listed on the NZX Main Board, the takeover provisions of the NZX Listing Rules apply except for the compulsory acquisition provisions of listing rules 4.8 and 4.8.5. The takeover provisions are reflected in the Company's amended and restated bylaws. These provisions restrict transfers of quoted equity securities to directors and associated persons of directors and those who hold non-public material information about the Company (each, an "Insider"). In summary, transfers are restricted where they would result in an Insider controlling more than 20% or more of the votes attached to the relevant class of quoted equity securities or if 20% or more votes are controlled, an increase occurring in excess of 5% over the preceding 12 months. In order for a restricted transfer to be affected the notice and pause process described in the NZX takeover provisions of the NZX Rules must be followed. Additionally, the Company may be required to prepare an appraisal report in connection with any potential takeover by an Insider. This process may deter a change in control by an Insider and, therefore, limit the opportunity for stockholders to receive a premium for their shares of our common stock.
Our securities are not currently traded on any United States public markets other than periodic trading on the OTCBB.
Other than periodic trading on the OTCBB, there is no public market for our shares in the United States or in any other jurisdiction other than New Zealand. The trading price of our shares on the OTCBB may not accurately reflect the price or prices at which purchasers or sellers would be willing to purchase or sell our common stock in a liquid market. We have not determined whether we will seek the quotation of our shares on any national exchange in the United States. We cannot assure that we will seek to be quoted on any national exchange in the United States or that we would meet any applicable listing requirements.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
Our headquarters is located at 1385 Broadway, 19th Floor, New York, NY 10018, where our primary executive, sales and administrative offices are located. We also have an ancillary administrative office located at 155 Willowbrook Boulevard, Suite 100, Wayne, NJ 07470 and an ancillary software development center located at 440 South Church Street, Suite 550, Charlotte, NC 28202. We have sales and general offices in Canada, England, Singapore, Brazil, Germany, and Australia. We also have an office at 49 Carlyle Street, Christchurch, New Zealand, where software development takes place. We lease all of these properties and do not own any real property.
We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations. We intend to open additional sales offices as our geographic sales footprint warrants.
We believe that our facilities are adequately covered by insurance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding required to be disclosed under Item 103 of Regulation S-K.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
On December 12, 2007, we completed an offshore offering of 24,000,000 shares of our common stock to members of the public in conjunction with our listing of our stock on the NZX Main Board. Our common stock currently trades on NZX Main Board under the symbol "DIL."
Our common stock also trades periodically on the Over-the-Counter Bulletin Board (OTCBB) under the symbol "DLBDF." Trading in stocks quoted on the OTCBB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may be unrelated to a company's operations or business prospects. OTCBB securities are not listed or traded on the floor of an organized national or regional stock exchange. Instead, OTCBB securities transactions are conducted through a telephone and computer network connecting dealers in stocks.
The following table shows the high and low sales prices for our common stock on the NZX Main Board in New Zealand dollars.
Holders
As of March 10, 2015, there are 2,862 holders of record of our common stock.
Dividends
We have not paid any dividends on our common stock within the past two fiscal years or during the current fiscal year.
Recent Sales of Unregistered Securities
During the three months ended December 31, 2014, the Company did not issue any unregistered securities.
Issuer Purchases of Equity Securities
During the three months ended December 31, 2014, the Company did not repurchase any shares of its common stock.
Stock Performance Graph
The following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended. The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Standard & Poor's 500 Index and the S&P Information Technology Index for each of the last five fiscal years ended December 31, 2014, assuming an initial investment of $100 in 2007. Data for the Standard & Poor's 500 Index and the S&P Information Technology Index assume reinvestment of dividends.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended December 31, 2014, 2013, and 2012, and the selected consolidated balance sheet data as of December 31, 2014 and 2013 are derived from, and are qualified by reference to, the audited consolidated financial statements included in this Form 10-K. The consolidated balance sheet data as of December 31, 2012 and 2011 and the consolidated statement of operations data for the year ended December 31, 2011 are derived from audited consolidated financial statements which are not included in this Form 10-K. The consolidated statement of operations data for the year ended December 31, 2010 and the consolidated balance sheet data as of December 31, 2010 are derived from unaudited consolidated financial statements which are not included in this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with "Business" under Item 1, and the consolidated financial statements and the related notes thereto which appear elsewhere in this report. 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" under Part I, Item 1A of this Annual Report on Form 10-K.
We develop and commercialize Diligent Boardbooks, a secure software application available online and compatible with IPad and Windows 8-1.3 supported devices. Diligent Boardbooks is one of the world's most widely used board portals, 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 the 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 service which is hosted on our servers held in a secure data centers, and offer 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. 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 NZX Main Board under the symbol "DIL." As a result, we are subject to the regulation and reporting requirements imposed by the NZX. 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 NZX Listing Rules, 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.
In February 2015, we announced that we plan to introduce a new SaaS collaboration solution called DiligentTeams during the third quarter of 2015. During 2014, research and development costs increased 100% when compared to 2013, primarily due to increased staffing. In 2014, we more than doubled our research and development headcount, partially due to our exploratory work on the design of the DiligentTeams product. In 2015 we plan to increase our investment in research and development. Our DiligentTeams product does not yet have beta users. There can be significant time lags and unexpected development costs incurred between initial beta releases and the commercial availability of new products. While we are enthusiastic about the planned launch of DiligentTeams and believe that the product will be welcomed by many of our existing clients and new clients, our DiligentTeams product may not be introduced on our expected timetable, or meet with commercial success.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). This is consistent with the requirements of the Financial Reporting Act of 1993 as applicable under the transitional provisions of the Financial Reporting Act 2013. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to the deferral and recognition of revenue, the fair value of share-based compensation, accounting for income and other taxes, including uncertain tax positions, and the useful lives of tangible and intangible assets. Management bases its estimates and judgments on historical experience, known trends or events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We define our "critical accounting policies" as those that require us to make subjective estimates about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations or that concern the specific manner in which we apply GAAP. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at the time the accounting estimate is made and applied and require us to assess a range of potential outcomes.
We believe the following critical accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment.
Revenue Recognition-The Company derives its revenues primarily from subscription fees and installation fees, including training. The Company sells subscriptions to its cloud-based application that are generally at least one year in length. Its 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. The Company'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.
Pursuant to the authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables, for a deliverable to qualify as a separate unit of accounting, the delivered item 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 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 at least 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. The Company's customer contracts contain a standard "autorenew" feature which provides for one-year renewals unless either party provides written notice of termination. In addition, the Company's renewal history with its customers has been and remains at very high rates. As a result, the Company believes that its customers will renew numerous times during their tenure with the Company and consequently have a very low annual attrition rate. After considering these factors, the Company determined that a nine year estimated customer life was appropriate.
Deferred Revenue-Deferred revenue represents installation and subscription fees for which cash has been received but for which we have not yet delivered our services or the criteria for the recognition of revenue have not yet been met. Deferred revenues presented in our consolidated balance sheet do not include amounts receivable (either billed or 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 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.
The Company also discloses 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 has 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 significant percentage of our total revenues for the next 12 months and therefore we believe it is useful to the users of our consolidated financial statements to disclose gross deferred revenues.
Accounts Receivable-The Company generally invoices its customers on a quarterly or annual 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 the age of the receivable, history of payments and other relevant information. At each of December 31, 2014 and 2013, the Company has recorded a provision for doubtful accounts of $100 thousand. The Company also discloses 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 December 31, 2014, is as follows:
The reconciliation of gross accounts receivable and deferred revenue to net accounts receivable and deferred revenue at December 31, 2013, is as follows:
(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 hosting the Company's cloud-based application, account management, customer support, data communication expenses, employee bonuses, stock based compensation, and salaries and benefits of account management, customer support and network operations personnel, and software license fees. 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 and benefits for sales and marketing employees, marketing program expenses, employee bonuses, stock based compensation, 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, inclusive of employee bonuses and stock based compensation, 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 facilities and related expenses.
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. Other expenses included are employee bonuses and stock based compensation. 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. In December 2012, the Company's Board of Directors authorized and empowered a Special Committee of independent directors to conduct a review of the Company's 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 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 the Company's 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 stock, stock options and other share-based compensation awards issued to employees and contractors for services rendered. The Company measures the cost of employee services received in exchange for an equity-based award using the fair value of the award on the date of the grant, and recognizes the cost over the period that the award recipient is required to provide services to the Company in exchange for the award. The fair value of restricted stock units and performance stock units is estimated using the market price of the Company'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.
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.
Results of Operations for the Years Ended December 31, 2014 and 2013 (in thousands):
The growth in total revenues of $18.3 million or 28% for the year ended December 31, 2014 when compared to 2013 is primarily the result of an increase in new users of Diligent Boardbooks, as well as our retention of existing customers. Our customer retention rate continues to exceed 95% for the twelve months ended December 31, 2014. We have continued to add users each quarter since inception. At December 31, 2014, the total number of users exceeded 92,700 compared with approximately 72,600 at December 31, 2013. North America, EMEA (Europe, Middle East and Africa) and Asia/Pacific accounted for 59%, 20%, and 21%, respectively, of the contract value of new subscriptions added during 2014. Upgrades from existing customers, which represents the increase during the year in value from existing agreements due primarily to additional users being added to the agreement, represented 44% and 46%, respectively, of the contract value of new subscriptions added for the years ended December 31, 2014 and 2013.
We recognize subscription revenue ratably over the contract period, which is generally at least twelve months. Accordingly, we expect that the growth in subscription agreements will be reflected by increases in revenues over the next twelve months
(1)Excluding depreciation and amortization
Cost of revenues is comprised of account management, customer support and network operations personnel. The increase in costs of revenues is predominantly due to the increase in headcount in network operations personnel in support of our larger client base. Worldwide employee salaries and employee related costs increased by $1.4 million, consisting of an increase of $1.2 million in network operations personnel salaries and $0.4 million of employee related costs in account management and network operations personnel; offset by a decrease of $0.2 million in account management incentive compensation. Employee bonus and employee stock based compensation costs increased by $0.9 million and $0.6 million respectively. Costs relating to customer data hosting and maintenance increased by $0.8 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 travel expenses of $0.4 million; network compliance costs and other professional fees of $0.2 million; security costs of $0.1 million and other costs of $0.1 million.
Cost of revenues increased at a slightly higher rate than revenue, resulting in a gross profit margin of 79% for the year ended December 31, 2014 compared with 80% for the year ended December 31, 2013.
Selling and marketing expenses consist of $5.6 million of selling expense and $6.8 million of marketing expense. Selling expenses for the year ended December 31, 2014 remain flat compared to 2013. Marketing expenses increased $2.8 million for the year ended December 31, 2014 when compared to 2013.
The increase in marketing expenses of $2.8 million consists of $2.1 million in the U.S., $0.3 million in EMEA, $0.2 million in Asia and $0.2 million in Australia. The increase in marketing expenses was primarily due to increases to our marketing headcount to address expanded marketing programs, and the recent sales management hire we made in Germany. We expect to further increase our marketing expenditures during 2015.
The increase in general and administrative expenses of $5.2 million in 2014 is comprised of a $3.6 million increase in the U.S., $0.5 million in EMEA, $0.6 million in New Zealand and $0.5 million in Australia. The U.S. increase consists of $1.8 million relating to salaries, bonuses, and other employee costs. Other increases include occupancy costs of $0.4 million; insurance costs of $0.3 million; state and local accrued tax expense of $0.3 million; Directors' fees and expenses of $0.1 million due to the increase in our Board of Directors compensation; $0.6 million for accounting and auditing fees; $0.2 million for software license; $0.2 million for legal fees; $0.3 million for professional services; and $0.1 for other costs. Employee stock based compensation decreased by $0.7 million.
The increase in EMEA of $0.5 million, $0.6 in New Zealand and $0.5 million in Australia relate to the implementation of a 2014 Corporate Bonus Plan and various other miscellaneous costs.
The increase in research and development expenses is primarily due to increased staffing driven by our development work in relation to the DiligentTeams product and upgrades and enhancements to Diligent Boardbooks. In 2014, we had an additional 52 people in research and development when compared to 2013. Of these 52 people, 38 were added in the U.S., of which 32 were additions to our new North Carolina Development Center, which currently focuses 100% on the recently announced DiligentTeams Product, and 6 were additions to our New York team. The remaining 14 people were additions to our New Zealand team. Worldwide salaries and wages in 2014 were $2.7 million higher than in 2013. Employee bonus and employee stock based compensation costs increase by $0.8 million and $0.2 million respectively. The remaining increase relates to $0.5 million for recruiting costs; $0.4 million for employee related costs; $0.1 million for travel costs, offset by a decrease in outside contractor fees of $0.2 million. We expect to further increase our investment in research and development in 2015 as we prepare for the anticipated commercial launch of DiligentTeams in the third quarter of 2015.
The increase in depreciation and amortization is attributable to the net increase in property and equipment, consisting principally of computer equipment and computer software. During 2014 and 2013, the Company made capital expenditures of $7.0 million and $3.3 million, respectively.
During 2014 and 2013, we incurred costs of $916 thousand and $3.3 million, 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 April 2014.
These costs included the re-audit of our financial statements for the years ended 2012, 2011 and 2010. During the years ended December 31, 2014 and 2013, we incurred costs of $0 and $2.3 million, respectively, related to the Special Committee investigation of our historical stock option issuances. Included in investigations and restatement are professional fees incurred for legal, accounting and compensation consultants and compensation paid to Special Committee members.
Interest expense, net, includes interest expense on capital lease obligation, which was more than offset by interest earned on our cash and cash equivalents and short-term investments which are interest-bearing.
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 (NZD), 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 year ended December 31, 2014 when compared to 2013 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 year ended December 31, 2014 and 2013, we did not engage in any foreign currency hedging activities.
Our income tax provision for year ended December 31, 2014 and 2013 was 40% and 37%, respectively. The effective tax rate for 2014 increased as compared to 2013 due to an increase in the Company's uncertain tax positions. The Company's effective tax rate for the year ended December 31, 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 Years Ended December 31, 2013 and 2012 (in thousands):
The growth in total revenues of 66% for the year ended December 31, 2013 when compared with 2012 is primarily the result of an increase in new subscription agreements, as well as our client retention rate of 97%. At December 31, 2013, the total number of client agreements (net of cancellations) was approximately 2,500, compared with approximately 1,800 at December 31, 2012. Over 640 net, new subscription agreements were added during 2013, compared with approximately 780 added in 2012, representing a decrease of 18% in the rate of growth in new subscription agreements. The rate of growth in new sales decreased in both the Americas and Asia/Pacific regions and increased in EMEA (Europe, Middle East and Africa). Additionally, upgrades from existing customers in 2013, which represents the increase during the year in the value of existing agreements due primarily to additional users being added to the agreement, increased 4% over 2012.
The Company recognizes subscription fees ratably over the contract period, which is generally twelve months. Accordingly, we expect that the growth in subscription agreements will be reflected by increases in revenues over the next twelve months.
Cost of revenues is comprised of account management, customer support and network operations personnel services. The increase in costs of revenues is predominantly due to the increase in headcount to service the Company's larger client base. Worldwide, employee salaries and incentive pay increased by $2.7 million, consisting of $1.4 million in account management, $0.4 million in customer support and $0.9 million in network operations personnel. Hosting costs increased by $0.8 million due to the increase in capacity of our existing centers. These increases were offset by a decrease due to the transfer of MIS related costs to general and administrative expenses of $0.3 million. Included within these increases are higher costs in the U.K. of $0.3 million as a result of the increase in European account management, customer support and information technology services staff.
Cost of revenues increased at a lower rate than revenues, resulting in an increase in the gross profit margin to 80% for the year ended 2013, compared with 76% for the year ended 2012.
Selling and marketing expenses consist of $5.6 million of selling expenses and $4.0 million of marketing expense. The net increase is comprised of a decrease in selling expenses of $1.7 million, offset by an increase in marketing expenses of $2.6 million. The decrease in selling expenses is primarily a result of a decrease in U.S. sales commissions, as our new sales in the U.S. have declined. The increase in marketing expenses of $2.6 million consists of $1.7 million in the U.S. and $0.8 million
in the U.K. and $0.1 million in Australia. The Company has significantly increased its marketing initiatives in both the U.S. and the U.K. The Company does not have a sales office in New Zealand.
The increase in general and administrative expenses of $10.5 million is comprised of increases of $10.1 million in the U.S., $0.3 million in the U.K., $0.2 million in New Zealand and a decline of $0.1 million in Australia. The U.S. increase consists of $1.3 million relating to salaries for the Company's executive officers and employees offset by a decrease of $0.6 million in executive bonuses. Other increases include: $2.3 million in professional fees resulting from increased compliance costs as a result of remediation measures taken to correct certain inadvertent regulatory non-compliance; $2.2 million for the performance cash awards for the CEO (see Note 14 to the consolidated financial statements); Management Information Systems (MIS) expenses of $0.2 million; share-based compensation of $1.0 million; Directors fees and expenses of $0.5 million, due to the expansion of the Board of Directors; Occupancy and related costs of $0.9 million; Recruiting fees of $0.3 million; Costs associated with an Enterprise Resource Planning (ERP) implementation of $1.4 million; Insurance costs of $0.1 million and an accrual for sales tax exposure of $0.3 million.
The increase in the U.K. is due to the expansion of the Company's European operations, and consists principally of an increase in employee costs, including salaries and bonuses and additional support staff. The decrease in Australia is due to a reduction in salaries and the New Zealand increase is a result of an increase in salaries and recruiting expenses.
The increase in research and development expenses is primarily due to increased staffing in the Company's New Zealand subsidiary for product upgrades and enhancements. The Company maintains a small research and development department at its New York headquarters, which also had an increase in headcount. Worldwide, research and development labor costs increased $1.6 million, while the remaining increase is due to the employment of outside consultants for $0.4 million, $0.1 million for travel and $0.1 million in recruiting costs.
The increase in depreciation and amortization is attributable to the net increase in property and equipment, consisting principally of computer equipment and computer software. During 2013 and 2012, the Company made capital expenditures of $3.3 million and $3.7 million, respectively.
During 2012, the Company's Board of Directors authorized and empowered a Special Committee of independent directors to conduct a review of the Company's past stock issuances and stock option grants to determine if they were in accordance with the relevant incentive plans. As a result of the review, the Special Committee identified a number of instances of inadvertent non-compliance with applicable regulations, and determined that certain executive's options were inadvertently issued in excess of applicable plan caps. As of December 31, 2013, the Company incurred costs of $2.3 million related to the Special Committee investigation and costs of $3.3 million related to the restatement of our historical financial statements, re-audits of the years ended December 31, 2012, 2011 and 2010 and the related Audit Committee investigation. Included in investigations and restatement are professional fees incurred for legal, accounting and compensation consultants and compensation paid to Special Committee members. Costs incurred during the year ended December 31, 2012 were fees and expenses for legal counsel related to the Special Committee and estimated NZX penalties.
Interest income, net, includes interest income on the note receivable from our predecessor and interest on the Company's cash and cash equivalents and short-term investments which are interest-bearing, offset by interest expense on capital lease obligations. The decrease in net interest income is attributable to a decrease in interest income on the note receivable, which was repaid at the end of August 2012 and increased interest expense related to capital leases. This decrease more than exceeded the increase in interest earned on the Company's cash held in interest-bearing accounts and short-term investments.
The Company's U.S. and foreign operations have transactions with customers 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, the New Zealand dollar, the British Pound and the Australian dollar. 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 large decrease in 2013 is due to the strengthening of the U.S. dollar against the
British Pound (GBP) which caused losses on the settlement of intercompany receivables and on cash held in GBP.
Income tax expense increased significantly as the Company's profits have increased and we are subject to tax in multiple jurisdictions. The Company had a net income tax benefit in 2012 as a result of the release of the valuation allowance against the Company's U.S. net deferred tax assets of $4.9 million in the third quarter of 2012. Due to a history of tax losses, resulting in a cumulative loss position, the Company had recorded a full valuation allowance against all of its U.S. net deferred tax assets at December 31, 2011. In the third quarter of 2012, management determined that the Company was no longer in a cumulative loss position and it was more likely than not that the Company's net deferred tax assets would be realized through future taxable income. Accordingly, the Company released the valuation allowance previously provided. This resulted in a deferred tax benefit for the year which exceeded the current tax provision, resulting in a net tax benefit for the year of $2.9 million.
The Company's U.S. tax rate in 2013 was lower than the statutory rate due to lower tax rates in foreign jurisdictions, the inclusion in the U.S. tax return of the losses of our Singapore subsidiary which is a disregarded entity for tax purposes, and the availability of research and development credits in the U.S. The tax rate in 2012 was lower than the statutory rate primarily due to the utilization in 2012 of $5.3 million of net operating loss carryforwards against which the Company had previously provided a valuation allowance, and due to the inclusion in the U.S. tax return of the losses of our Singapore subsidiary which is a disregarded entity for tax purposes. During the second quarter of 2012, the Company completed its Section 382 study and determined that, due to changes in stock ownership in prior years, some of its net operating loss carryforwards were subject to limitation. Beginning in 2013, the Company has an annual limitation of $350 thousand of the amount of net operating loss carryforwards which may be utilized pursuant to Section 382 of the U.S. Internal Revenue Code, which 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 a significant change in ownership.
Liquidity and Capital Resources
At December 31, 2014, our sources of liquidity consist of cash and cash equivalents of approximately $70.8 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 Series A preferred stock and payments of capital lease and software licensing obligations.
In the early stages of the Company's history, its primary source of liquidity was the cash received from stock issuances. Through the third quarter of 2010, the Company's cash flow from operations was negative and it relied on capital infusions to sustain and grow the business, combined with cost containment activity. 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 generated positive cash flow from operations. The Company has continued to generate positive cash flows each subsequent quarter. Additionally, in August 2012, the Company received $3.1 million in cash from the repayment of the note receivable from its predecessor entity which was due October 1, 2012.
On May 3, 2013 we entered into a definitive Replacement Grant Agreement with our chief executive officer, in order to substitute certain equity awards that had exceeded the applicable limits in the Company's historical equity inventive plans and would be cancelled, subject to shareholder approval of the terms of the substitute incentive compensation package and a new incentive plan. 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 $32.5 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 and the Company's growth initiatives.
As of December 31, 2014, 2013 and 2012, the undistributed earnings in our international subsidiaries were $8.1 million, $2.9 million and $463 thousand, respectively. We intend to indefinitely reinvest the undistributed earnings of the Company's foreign operations. We are not dependent on foreign earnings to fund our domestic operations. We believe that our existing sources of liquidity will be sufficient to support our operating, capital and debt service requirements for the foreseeable future. Accordingly, no provision has been made for U.S. income taxes on undistributed earnings of foreign subsidiaries as of December 31, 2014. It is not practicable for us to determine the amount of additional income and withholding taxes that may be payable in the event the undistributed earnings are repatriated.
Cash flows
Net Cash Flows from Operating Activities
Cash provided by operating activities for the year ended December 31, 2014 decreased by $2.6 million compared with 2013, due to the decrease in the amount of cash provided by the growth in deferred revenue, other non-current liabilities, and accounts payable compared to the prior year, offset by an increase in net income, depreciation and amortization, and income taxes payable.
Net Cash Flows from Investing Activities
Cash provided by investing activities for the year ended December 31, 2014 increased $21.3 million over the comparable period of 2013. This increase primarily consists of proceeds from the maturity of short-term investments of $12.5 million in 2014 versus net purchases of short-term investments of $12.4 million in 2013. Purchases of property and equipment increased $3.7 million from $3.3 million to
$7.0 million in 2014. The increase is due to investments in our Charlotte, North Carolina development facility and German data center.
Net Cash Flows from Financing Activities
Cash used in financing activities consist of payments under capital leases and software licensing obligations of $1.0 million and dividends paid on the Company's preferred stock of $359 thousand.
Contractual Commitments
(1)Does not include our liabilities for uncertain tax positions of $763 thousand. Because the timing of future cash outflows associated with our liabilities for uncertain tax positions is highly uncertain, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities (see Note 11 to our consolidated financial statements).
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
Foreign currency exchange risk
The Company's wholly-owned subsidiaries, DBL, DBMS NZ, DBG, and DBA, utilize the British Pound Sterling (GBP), New Zealand Dollar (NZD), Euro (EUR) 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. Prior to the fourth quarter of 2012, the Company's Singapore subsidiary used the Singapore dollar as its functional currency. Effective October 1, 2012, the Company changed the functional currency to the U.S. dollar. The Company believes that the growth in this subsidiary's U.S. dollar denominated revenues and expenses indicated a change in the economic facts and circumstances that justified the change in the functional currency. The effects of the change in functional currency were not significant to the Company's consolidated financial statements.
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.
Interest Rate Sensitivity
We had cash and cash equivalents totaling $70.8 million at December 31, 2014. This amount was invested primarily in money market funds and government securities. 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Diligent Board Member Services, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Diligent Board Member Services, Inc. and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Diligent Board Member Services, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
March 16, 2015
Diligent Board Member Services, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements
Diligent Board Member Services, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
See accompanying notes to consolidated financial statements
Diligent Board Member Services, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
See accompanying notes to consolidated financial statements
Diligent Board Member Services, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands, except per share amounts)
See accompanying notes to consolidated financial statements
Diligent Board Member Services, Inc.
Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes to consolidated financial statements
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
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 the Diligent Boardbooks system, a secure software application available online, on iPad and Windows 8-1.3 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 NZX Main Board. On December 12, 2007, Diligent completed an offshore public offering in connection with its listing on the NZX Main Board. 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. On February 4, 2014, the Company established a German subsidiary, Diligent Boardbooks GmbH ("DBG"), to offer dedicated, private data hosting solutions and data recovery support, primarily for European customers.
Diligent's 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 of the Company 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 14, 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
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
2) Investigations and restatement (Continued)
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 NZX 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 NZX Main Board, 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 NZX regarding the previously disclosed breaches of the NZX 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 NZXR.
Costs for the Special Committee for the year ended December 31, 2014 and 2013 were $0 and $2.3 million, respectively, with an additional $0.3 million incurred in the fourth quarter of 2012. Included in Special Committee expenses are 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. During 2013 and 2014, the Company implemented the recommendations of the Special Committee to remediate the compliance and internal control weaknesses identified as part of the Special Committee investigation.
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 years ended December 31, 2014 and 2013 were $0 and $0.9 million, respectively, and consisted of legal fees.
Restatement and Re-audit Engagements
In August, 2013, the Company announced that its historical financial statements for the years ended December 31, 2012, 2011 and 2010 and the quarter ended March 31, 2013 would be restated due to revenue recognition errors. The Company completed the restatement process in April of 2014. Costs
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
2) Investigations and restatement (Continued)
for the restatement and re-audits incurred during the years ended December 31, 2014 and 2013 were $0.9 million and $2.3 million, respectively. These costs were comprised of professional fees incurred for accounting, auditing and consulting services.
3) Significant accounting policies
Basis of presentation-The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
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. Significant estimates and assumptions made by management include the deferral and recognition of revenue, the fair value of share-based compensation, accounting for income and other 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 consolidated financial statements include the accounts of the Company 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 a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants. As of December 31, 2014 and 2013, the carrying amounts of cash and cash equivalents, accounts receivable, 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 an 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.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
3) Significant accounting policies (Continued)
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 December 31, 2014, cash equivalents include investments in U.S. treasury money market funds and treasury bills totaling $32.5 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 equivalents include investments in U.S. treasury money market funds and treasury bills totaling $27.5 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, 2014 the Company did not have any short-term investments. 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.
Property and equipment-Property and equipment consists of computer and office equipment, leasehold improvements and purchased internal-use computer software. Property and equipment are carried at cost, less accumulated depreciation and amortization and any impairment losses.
Depreciation and amortization-Depreciation on property and equipment is computed on a straight line basis at rates adequate to recover the cost of the assets over their estimated useful lives, which range from three to five years. Leasehold improvements are depreciated over estimated useful lives of the assets or the term of the underlying lease, whichever is shorter. Amortization of internal-use computer software is computed on the straight-line method over its estimated useful life, which is three years. Expenditures for repair and maintenance costs are expensed as incurred.
Impairment of long-lived assets-The Company periodically reviews the carrying amounts of its tangible and intangible assets to determine whether events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. An impairment loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.
Revenue recognition-The Company derives its revenues primarily from subscription fees and installation fees, including training. The Company sells subscriptions to its cloud-based application that are generally one year in length. Its 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 initial term. The Company'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.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
3) Significant accounting policies (Continued)
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.
Pursuant to the authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables, for a deliverable to qualify as a separate unit of accounting, the delivered item 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 the Company'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 contract period, which is generally twelve months from the contract date.
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 December 31, 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 the Company has not yet delivered its 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 the Company has not yet received payment. Accordingly, the deferred revenue balance does not represent the total contract value of annual 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.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
3) Significant accounting policies (Continued)
Accounts receivable-The Company generally invoices its customers on a quarterly or annual 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 the age of the receivable, history of payments and other relevant information. At each of December 31, 2014 and 2013, the Company has recorded a provision for doubtful accounts of $100 thousand.
Research and development-Research and development expenses are incurred as the Company upgrades and maintains the Diligent Boardbooks software, and develops product enhancements. Such expenses include compensation and employee benefits of engineering and testing personnel, including stock based compensation, materials, travel and direct costs associated with the design and required testing of the product line. The Company 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 the Company has not historically maintained sufficiently detailed records of its development efforts to be able to capitalize such costs.
Operating leases-The Company records rental costs, including costs related to fixed rent escalation clauses and rent holidays, on a straight-line basis over the lease term.
Income taxes-The Company files U.S. federal and state income tax returns. Foreign operations file income tax returns in their respective foreign jurisdictions. The Company accounts for deferred income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A valuation allowance is recorded if it is considered more likely than not that some or all of a deferred tax asset may not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The tax effects of an uncertain tax position taken or expected be taken in income tax returns are recognized only if it is "more likely-than-not" to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes the benefit of an uncertain tax position in the period when it is effectively settled. Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense.
Foreign exchange-The Company's wholly-owned subsidiaries, DBL, DBMS NZ, DBG and DBA, utilize the British Pound Sterling (GBP), New Zealand Dollar (NZD), Euro (EUR), 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 date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
3) Significant accounting policies (Continued)
income or loss. Prior to the fourth quarter of 2012, the Company's Singapore subsidiary used the Singapore dollar as its functional currency. Effective October 1, 2012, the Company changed the functional currency of this subsidiary to the U.S. dollar. The Company believes that the growth in this subsidiary's U.S. dollar denominated revenues and expenses indicated a change in the economic facts and circumstances that justified the change in the functional currency. The effects of the change in functional currency were not significant to the Company's consolidated financial statements.
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.
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 fair value of restricted stock units and performance stock units is estimated using the market price of the Company'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.
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.
Segment reporting-Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM"), or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. In light of the Company's current product offering and the fact that the Company's CODM, which is the Company's Chief Executive Officer, monitors and reviews financial information at a consolidated level for assessing operating results and allocation of resources, management has concluded that the Company has one reportable operating segment.
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 the Company'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 that 1.8 million and 360 thousand stock options have been excluded in 2014 and 2013, respectively because their effect is antidilutive.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
3) Significant accounting policies (Continued)
The computation of shares used in calculating basic and diluted earnings per common share is as follows:
Recent accounting pronouncements-In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income", which requires disclosure of significant amounts reclassified out of accumulated other comprehensive income by component and their corresponding effect on the respective line items of net income. This guidance was effective for the Company as of January 1, 2013 and did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers." ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of this standard on its ongoing financial reporting.
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 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) Short-term investments
At December 31, 2014, the Company did not have any short-term investments in U.S. treasury bills. At December 31, 2013, short-term investments including investments in U.S. treasury bills of $12.5 million, which are carried at cost which approximates fair value.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
5) Intangible assets
During 2014 the Company acquired certain intangible assets. The Company's intangible assets at December 31, 2014 are comprised of the following:
The related amortization expense of intangibles for 2014 was $15 thousand. The Company's estimate of future amortization expense for acquired intangible assets that exist at December 31, 2014 is as follows:
6) Property and equipment and obligations under capital leases
Property and equipment is comprised of the following:
Depreciation and amortization expense for the years ended December 31, 2014, 2013 and 2012 were $2.8 million, $1.6 million and $1.2 million, respectively.
Obligations under capital leases consist of various financing arrangements entered into by the Company to acquire computer equipment and software. The leases bear interest at rates ranging from 3.8% to 5.6% per annum, with monthly payments ranging from $2 thousand to $28 thousand, and maturities from May 1, 2015 through February 1, 2016. Each lease is secured by the underlying leased
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
6) Property and equipment and obligations under capital leases (Continued)
asset. Amortization of assets recorded under capital leases is included in depreciation expense. The assets relating to capital leases, included in property and equipment on the balance sheet, are as follows:
The following is a schedule of future minimum lease payments due under capital leases and software licensing agreements as of December 31, 2014:
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
7) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities are comprised of the following:
8) Line of credit facility
In March 2010, the Company entered into an agreement with Spring Street Partners, L.P. ("the Lender") pursuant to which the Lender extended a $1.0 million revolving line of credit facility to the Company. The Lender is the holder of approximately 20 million shares of the Company's Series A Preferred Stock and 5.9 million shares of the Company's common stock. The founder and managing partner of the Lender is also the Chairman of the Board of Directors of the Company.
The line of credit initially bore interest at a fixed rate of 9.50% per annum on outstanding borrowings and had a maturity date of September 2011. In September 2011, the credit agreement was amended to extend the maturity date to September 2012 and reduce the interest rate under the facility to 7.0%.
The Company never drew any amounts under this credit facility and the facility expired unused on September 12, 2012.
9) Related party transactions
Marketing expense-During the year ended December 31, 2012, the Company incurred marketing expenses of approximately $61 thousand for services rendered by an entity owned by a stockholder of the Company.
Line of Credit-The line of credit described in Note 8 was with a related party, as Spring Street Partners, L.P. is a significant stockholder in the Company.
Payables to related parties-There were no material payables to related parties at December 31, 2014 and 2013.
Note Receivable from Shareholder-At December 31, 2011 the Company had a note receivable from a shareholder with a principal balance of $3.1 million that was due on October 1, 2012 from Services Share Holding, LLC ("SSH LLC") (the Company's predecessor entity). SSH LLC repaid the Note in full on August 27, 2012, together with all outstanding accrued interest of $127 thousand.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
10) Geographic information
The Company's revenue, by geographic location of the customer, and long-lived assets located outside the Americas are as follows:
11) Income taxes
Income before provision for income taxes is comprised of the following:
Domestic income (loss) includes intercompany charges to foreign affiliates for management fees, cost sharing and royalties. Foreign income (losses) includes the income and losses from all of the Company's foreign subsidiaries, including the Singapore subsidiary, which is a disregarded entity for tax purposes.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
11) Income taxes (Continued)
The components of income tax expense (benefit) from continuing operations for the years ended December 31 were as follows:
The income tax provision differs from the amount of tax determined by applying the U.S. federal statutory rate as follows:
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
11) Income taxes (Continued)
The following is a summary of the Company's deferred tax assets and liabilities:
At December 31, 2014, the Company had federal and state income tax net operating loss carryforwards of $5.3 million and $6.0 million, which expire at various dates from 2028 through 2029 and 2023 through 2035, respectively. At December 31, 2014, the Company also has a foreign tax credit carryforward of $20 thousand available to offset future income tax expense, which expires in 2017.
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.
The amounts recorded as net deferred tax assets represent the amount of tax benefits of existing deductible temporary differences and loss carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward period. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets.
Due to a history of tax losses, resulting in a cumulative loss position, the Company had recorded a full valuation allowance of $5.8 million against all of its U.S. and U.K. net deferred tax assets at December 31, 2011. In the third quarter of 2012, management determined that the Company was no longer in a cumulative loss position, and it was more likely than not that the Company's net deferred tax assets would be realized through future taxable income. Accordingly, the Company released the valuation allowance previously provided.
The total amount of unrecognized tax benefits at December 31, 2014 and 2013 and 2012 was $763 thousand, $439 thousand, and $175 thousand, respectively.
We have established a liability for unrecognized tax benefits that management believes to be adequate. Once established, unrecognized tax benefits are adjusted if more accurate information
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
11) Income taxes (Continued)
becomes available, or a change in circumstance or an event occurs necessitating a change to the liability. Given the inherent complexities of the business and that we are subject to taxation in a substantial number of jurisdictions, we routinely assess the likelihood of additional assessment in each of the taxing jurisdictions.
Reconciliation of Unrecognized Tax Benefits:
The total amount of unrecognized benefits that, if recognized, would affect our effective tax rate was $763 thousand, $439 thousand and $175 thousand at December 31, 2014, 2013 and 2012, respectively. The Company does not anticipate any significant changes in its reserves for uncertain tax benefits within the next 12 months.
The Company classifies interest and penalties on uncertain tax positions in income tax expense. The amount of interest and penalties related to uncertain tax positions was not significant in 2014, 2013 or 2012.
As of December 31, 2014, 2013 and 2012, the undistributed earnings in our international subsidiaries were $8.1 million, $2.9 million, and $463 thousand, respectively. Undistributed earnings of the Company's foreign operations are intended to remain indefinitely invested, and accordingly, no U.S. income taxes have been provided on these earnings. If at some future date these earnings cease to be indefinitely invested, the Company may be subject to U.S. income taxes and foreign withholding and other taxes on such amounts. Because the time and manner of repatriation is uncertain, we cannot reasonably estimate the amount of the deferred income tax liability relating to unrepatriated earnings at this time.
The Company and its subsidiaries are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. The Company's U.S. federal and state income tax returns for the tax years 2011 and forward are open for examination by the taxing jurisdictions. The Company's foreign income tax returns are open for examination by the local taxing jurisdictions for the following years: New Zealand-2009 and forward; U.K.-2011 and forward; Australia-2009.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
12) Redeemable Preferred Stock
In March 2009, the Company issued 30 million shares of Series A Preferred Stock for $0.10 per share in a private offering, providing aggregate gross proceeds of $3 million. Expenses relating to the share issuance were $139 thousand. The principal terms of the Preferred Shares are as follows:
Dividend rights-The Preferred Shares carry a fixed, cumulative, dividend of 11% per annum (adjusted for stock splits, consolidation, and other factors). The dividend, which is due on the first business day of each calendar year for the prior year, may (at the Company's option) be paid either in cash or in kind by the issuance of additional Preferred Shares (PIK Shares), to be issued at the same issue price as the Series A.
Preferred Stock of $0.10 per share-The 11% annual dividend on the Preferred Shares will have preference over the declaration or payment of any dividends on the Company's common stock. In addition to the 11% preferred dividend, the holders of the Preferred Shares are also entitled to participate pro rata in any dividend paid on the Company's common stock.
Conversion rights-The Preferred Shares are convertible at any time at the option of the holders into the Company's common stock on a one-for-one basis. In addition, Preferred Shares will automatically be converted into common stock upon the closing of an underwritten share offering by the Company on a registered stock exchange which realizes at least $40 million of gross proceeds.
Redemption rights-The holders of the Preferred Shares have the option to require the Preferred Shares (including any PIK shares) to be redeemed in cash, at $0.10 per share plus accrued and unpaid dividends, at any time after 60 months from the date of issue of the Preferred Shares. Any redeemed amounts will be paid in four equal quarterly installments commencing 60 days after the redemption request.
Anti-Dilution Provision-In the event of a future offering of the Company's stock at a price per common share which is less than the Preferred Share conversion rate immediately before such offering, the conversion price for the Preferred Shares is adjusted according to a weighted average formula.
Liquidation preference-In the event of any voluntary or involuntary liquidation of the Company, the holders of Preferred Shares are entitled to an amount per Preferred Share equal to 1.5 times the original issue price of $0.10 plus any accrued but unpaid dividends.
Voting rights-Preferred Shares have equal voting rights (one vote per share) to common stock, except that Preferred Shares do not vote in the general election of directors.
Other provisions-For as long as not less than 15 million Preferred Shares are outstanding, the holders of the Preferred Shares have the right between them to appoint one director, and the Company may not take action relating to certain major transactions without obtaining the consent of not less than 60% of the Preferred Shares or without obtaining the approval of the director appointed by the holder of the Preferred Shares (for matters requiring Board of Directors approval).
Accounting for Preferred Shares-If certain criteria are met, companies must bifurcate conversion options from their host instruments and account for them as free standing derivative instruments. The Company has evaluated the redemption, conversion and contingent conversion features of the Preferred Shares and determined that the embedded conversion option is not required to be bifurcated.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
12) Redeemable Preferred Stock (Continued)
Additionally, the Company analyzed the conversion feature and determined that the effective conversion price was higher than the market price at date of issuance; therefore no beneficial conversion feature was recorded. However, if the Company were to pay Preferred Stock dividends by issuing PIK shares, the issuance of such PIK shares would result in a beneficial conversion feature if the fair value of the Company's common stock at the dividend declaration date exceeds the per share conversion price of the Preferred Shares. The Company has classified the Preferred Shares as temporary equity because they are redeemable upon the occurrence of an event that is not solely within the control of the issuer. As noted above, the holders of the Preferred Shares may demand redemption at any time after 60 months from the date of issue. The carrying value of the securities, which were initially recorded at their face value net of issuance costs, is increased to the redemption value over the period from the date of issuance to the earliest potential date of redemption.
The carrying value of the Preferred Shares at December 31, 2014 and December 31, 2013 is as follows:
In March 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.
13) Stockholders' equity
In 2014 and 2013, the aggregate shares of common stock issued to employees upon the exercise of stock options were 125 thousand and 190 thousand, respectively. In 2012, the Company adopted a Stock Purchase Plan, under which employees and directors could purchase shares of common stock of the Company. There were no shares purchased under this plan in 2014 and 2013. During 2012, 9,964 shares were purchased under the plan. The Company has reserved 41.6 million shares to be issued upon conversion of its Series A Preferred Stock, outstanding stock options and shares available for future issuance under its existing Stock Option and Incentive Plans.
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 and January 4, 2012 of $240 thousand and $240 thousand, respectively. These were recorded as capital contributions in 2013 and 2012 when
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
13) Stockholders' equity (Continued)
waived. The founder and managing partner of Spring Street Partners, L.P. is also the Chairman of the Board of Directors of the Company.
14) Stock option and incentive plans
In November 2007, the Company adopted the 2007 Stock Option and Incentive Plan (the "2007 Plan") authorizing the issuance of up to 10 million shares of the Company's common stock as awards to selected employees, directors and consultants of the Company and its affiliates, in the form of incentive stock options, non-qualified stock options, and restricted shares of common stock. In June 2010, the Company adopted the 2010 Stock Option and Incentive Plan (the "2010 Plan") authorizing the issuance of up to 5 million shares of the Company's common stock to employees, directors and consultants of the Company and its affiliates, as incentive stock options and non-qualified stock options. The 2010 Plan was amended in April 2012 to authorize the issuance of an additional 2.5 million shares. The Company's Board of Directors or the Compensation Committee determined the number of shares, the term, the frequency and date, the type, the exercise periods, and any performance criteria pursuant to which stock option awards may be granted and the restrictions and other terms and conditions of each grant of restricted shares in accordance with the terms of the 2007 and 2010 Plans.
On May 3, 2013, the Board adopted the Diligent Board Member Services, Inc. 2013 Incentive Plan (the "Plan"), which was approved by the Company'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 the Company 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 Substitute Remuneration Package as discussed below. As of the date of approval of the 2013 Plan, 46 thousand and 2.6 million shares remained available for issuance under the 2007 and 2010 Plans, respectively. Upon approval of the 2013 Plan, the Company discontinued use of the 2007 and 2010 Plans and no shares remain available for future issuance under these plans.
Awards under the 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 Plan may be denominated or settled in cash, including performance awards.
The Board and the Company's stockholders have 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.
The Company's non-executive directors, other than the Chairman of the Board, each received a stock grant for 2013 service with a total value of $80 thousand, which was to be paid to such non-executive directors in equal installments at the end of each quarter of that calendar year. On March 14, 2014, the Company satisfied such grant through the issuance of 86.5 thousand restricted
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
14) Stock option and incentive plans (Continued)
shares to its directors based on the volume weighted average trading price of the Company's common stock on its primary trading market for the 20 trading days immediately prior to such date. The grant for 2013 service was pro-rated for any director who served on the Board for less than the full calendar year.
In December of 2012 the Company's Board of Directors authorized a Special Committee of independent directors to conduct a review of the Company's past stock issuances and stock option grants to determine that they were in accordance with the relevant incentive plans. The Special Committee found that three option awards-one under the 2007 Plan, and two under the 2010 Plan-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 (CEO) exceeded the cap in the 2007 Plan by 1.6 million shares, a 2011 award to the CEO exceeded the cap in the 2010 Plan by 2.5 million shares, and a 2011 award to another officer exceeded the cap in the 2010 Plan by 250 thousand shares.
In May 2013, the Company and the Company's CEO entered into a Replacement Grant Agreement 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, the Company entered into an agreement with respect to the options for 250 thousand shares issued to the other officer in excess of the applicable plan cap, under which the 250 thousand options were cancelled, the vesting schedule for the remaining nonvested options were 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 was to be recognized on a graded basis through December 2017.
On December 23, 2013, the Company and the CEO entered into an Amendment to Replacement Grant Agreement which finalized the terms of the incentive compensation package to be provided to the Company's 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"), the CEO's fully vested option to purchase 2.4 million shares of the Company'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, the 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 NZX Main Board 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. $0.14. The CEO's right to receive such cash award was contingent on the Company achieving revenue growth of at least 7% during the twelve month period ended June 30, 2014 and his continued employment through such date.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
14) Stock option and incentive plans (Continued)
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 the Company's 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 the Company'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, the Company 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 March 31, 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.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
14) Stock option and incentive plans (Continued)
The liability for the performance cash award of $1.4 million is recorded in accrued expenses and other current liabilities and $1.4 million is recorded in other non-current liabilities on the Consolidated Balance Sheet as of December 31, 2014. The Company recorded compensation expense of $3.1 and $2.9 million during the years ended December 31, 2014 and 2013 relating to the replacement awards. The performance stock units are expected to result in compensation cost of $0.7 million in 2015, $0.4 million in 2016, $0.2 million in 2017 and $0.1 million in 2018.
Stock Option Awards-In January 2011, the Company granted 750 thousand stock options to one of its executive officers at an exercise price of $0.46 per share, with graded vesting over three years, and in June 2011, the Company granted 3 million stock options to its Chief Executive Officer, with graded vesting over seven years. In 2012, the Company granted 1.4 million stock options to five of its executive officers, with cliff vesting after three years. In 2013, in addition to the 1.6 million stock options issued to the CEO as part of the replacement compensation package, the Company issued 380 thousand options to various officers at exercise prices ranging from $3.92-$6.44 per share, with graded vesting over four years.
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.
The exercise price of each option is the market price of the Company's stock for the last sale prior to the grant date, converted to U.S. dollars using the exchange rate in effect on the grant date. The options generally expire after a period not to exceed ten years, except in the event of termination, whereupon vested options must be exercised generally within three months, or upon death or disability, in which cases the vested options must be exercised within twelve months, but in all cases the exercise date may not exceed the expiration date.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The resulting fair value is recognized as share-based compensation expense on either a straight line basis for options that are subject to cliff vesting or a graded basis for options that vest in annual installments, over the option vesting period. Stock options generally vest over four years but vesting periods range from two to six years. The fair value of options granted to nonemployees is initially measured at grant date and remeasured each quarter until the vesting date, which is the measurement date for share-based compensation issued to nonemployees.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
14) Stock option and incentive plans (Continued)
The weighted average fair value per share for options granted during 2014, 2013, and 2012 was $3.83, $1.69, and $1.51, respectively. The fair values were estimated using the following range of assumptions:
(1)The expected volatility was determined using historical volatility data for comparable companies.
(2)The expected term of the options has been estimated using the simplified method which calculates the average of the vesting period and the contractual term of the options, because the Company's limited historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term.
(3)The risk free interest rate is based on the U.S. Treasury constant maturity nominal yield with a term approximately equal to the expected terms of the options.
In determining expected volatility, the Company uses historical volatility data for comparable companies because the period of active trading history of its own stock is less than the expected term of the options. In 2012, the Company refined its estimate of expected volatility, by adjusting the entities previously identified as comparable based on the growth and stage of the Company. This resulted in a lower volatility, which is consistent with the Company's own stock price history. The Company made this determination in the fourth quarter for all grants issued in 2012. The effect on each of the previous three quarters in 2012 was not material to the quarterly or annual financial statements.
A summary of stock option activity for the year ended December 31, 2014 is as follows:
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
14) Stock option and incentive plans (Continued)
The aggregate intrinsic value of the stock options exercisable at December 31, 2014, 2013 and 2012 was $9.8 million, $6.5 million and $15.0 million, respectively. The aggregate intrinsic value of options exercised during 2014, 2013 and 2012 was $0.4 million, $0.8 million and $5.7 million, respectively. The aggregate intrinsic value of options expected to vest at December 31, 2014 was $2.2 million.
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 is as follows:
The Company estimates the fair value of the PSUs as of the grant date utilizing the closing price of its common stock on that date.
Restricted Stock Units-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 $3.2 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 $3.57 per share and did not result in any incremental stock compensation expense.
The Company estimates the fair value of the RSUs as of the grant date utilizing the closing price of its common stock on that date.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
14) Stock option and incentive plans (Continued)
During the year ended December 31, 2014, the Company recognized aggregate share-based compensation expense related to stock options, RSUs and PSUs of $1.1 million, $0.9 million and $1.0 million, respectively. In 2013, total stock compensation expense of $2.6 million included $2.3 million for stock options, $0.3 million for RSUs and $22 thousand for PSUs. In 2012 stock compensation expense included only stock options. The total income tax benefit recognized in the income statement for share-based compensation costs was $0.2 million, $0.8 million and $0.4 million for 2014, 2013 and 2012, respectively. At December 31, 2014 there was $6.9 million of unrecognized share-based compensation expense, which includes $2.5 million for stock options, $3.0 million for RSUs and $1.4 million for PSUs. The weighted average period for this cost to be recognized is 1.6 years.
For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation is recognized. Any corporate income tax benefit realized upon exercise of a stock option award in excess of that previously recognized in earnings (referred to as an excess tax benefit) is presented in the consolidated statements of cash flows as a financing cash flow. Realized excess tax benefits are credited to additional paid-in-capital in the consolidated balance sheet and statement of changes in stockholders' equity. Realized shortfall tax benefits (amounts which are less than that previously recognized in earnings) are first offset against the cumulative balance of excess tax benefits, if any, and then charged directly to income tax expense.
In 2012, the Company adopted a non-compensatory stock purchase plan to facilitate the purchase of the Company's common stock by employees and directors, at a purchase price equal to the average market value over the five trading days preceding the purchase date. The maximum aggregate dollar amount of shares which can be purchased under the plan in any quarter may not exceed $0.5 million. No shares were purchased under this plan in 2013 and 2014 and the Company has discontinued this plan.
The Company sponsors a defined contribution 401(k) plan, which covers all U.S. employees. The Company's matching contribution to the plan was $455 thousand, $362 thousand, and $219 thousand in 2014, 2013 and 2012, respectively.
15) Commitments
Operating leases-The Company has non-cancelable operating lease agreements for office space in New York City, North Carolina, and New Jersey in the United States, Christchurch, New Zealand; London, England; and Sydney, Australia; which expire at various dates through 2024. Rent expense for leases with rent escalations is recognized on a straight-line basis over the term of the lease. Rent expense under operating leases for the years ended December 31, 2014, 2013, and 2012 was $1.8 million, $1.3 million, and $0.7 million respectively.
The lease agreements require security deposits in the amount of $801 thousand at December 31, 2014, which is recorded in the balance sheet.
The Company entered into a sub-lease that commenced on May 1, 2014 and will terminate on February 2018. The Company will receive rental income of $408 thousand and have operating rent expense of $353 thousand from the commencement date through the end of the lease.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
15) Commitments (Continued)
The Company entered into a sub-lease that commenced on December 1, 2013 and will terminate on February 2018. The Company will receive rental income of $842 thousand and have operating rent expense of $920 thousand from the commencement date through the end of the lease. As of December 31, 2013, the Company has recorded a loss of $96 thousand related to the sublease that has been charged to rent expense.
Future minimum lease payments and sublease income for leases that have initial or non-cancelable lease terms in excess of one year at December 31, 2014 are as follows:
Warranties and indemnification-The Company's service is warranted to perform in a manner materially consistent with its marketing and training materials, specifications and technical information provided to users. The Company's arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party's intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations.
The Company has also agreed to indemnify its directors and officers to the fullest extent allowed under applicable law for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person's services as a director or officer of the Company, or arising as a result of that person serving at the request of the Company as a director, officer, employee or agent of another enterprise. The Company maintains director and officer insurance coverage that should enable the Company to recover a portion of any future amounts paid.
16) Contingencies
Sales tax-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 our subscription services in various jurisdictions is unclear. We have recorded sales tax provisions of $2.1 million and $1.5 million as of December 31, 2014 and 2013, respectively, with respect to sales and use tax liabilities in various states and local jurisdictions. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax authorities could assert that we are obligated to collect
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
16) Contingencies (Continued)
additional amounts as taxes from our customers and remit such taxes to those authorities. We could also be subject to audits with respect to states and international jurisdictions for which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.
Litigation and claims-In the ordinary course of business, Diligent is a party to pending legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, Diligent's General Counsel and management are of the opinion that the final outcome will not have a material effect on the Company's financial position, results of operations or cash flows.
NZX 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 NZX Listing Rules for the delayed release of the 2013 annual report, the 2013 full 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 NZ 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, the Company 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 NZX regarding the breaches of the NZX 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 ($79 thousand USD) as a penalty to the NZX Discipline Fund and NZ $4 thousand ($3 thousand USD) towards the cost of NZXR, these amounts have been paid as of December 31, 2014.
17) Risks and uncertainties
Interest rate risk-Interest rate risk is the risk that market interest rates will change and impact the Company's financial results by affecting the rate of interest charged or received by the Company. It is not expected that changes in interest rates will materially affect the Company's results of operations.
Currency rate risk-The Company is subject to currency rate risk primarily from sales and operations in foreign countries including Canada, Europe, Australia, Singapore and New Zealand, and from cash balances maintained in foreign currencies. Transactions in foreign currencies are reported at the rates of exchange at the transaction date. Assets and liabilities are translated at the rates of exchange in effect at the balance sheet date. All differences are recorded in results of operations.
Concentrations of credit and other risks-Financial instruments which potentially subject the Company to concentrations of credit risk consist of trade accounts receivable, money market funds, time deposits and a term deposit.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
17) Risks and uncertainties (Continued)
The Company sells its service to a diverse number of customers and performs ongoing credit evaluations of its customers' financial condition as part of its accounts receivable monitoring procedures. No single customer accounted for more than 10% of the accounts receivable balance at December 31, 2014 and 2013. No single customer generated more than 10% of revenue in 2014, 2013 or 2012.
Our money market funds and time deposits which are classified as cash and cash equivalents and are maintained with high credit quality banking institutions in the United States, New Zealand and Great Britain. At times the cash balances may be in excess of the insurance limits at a particular bank.
18) Selected quarterly financial data (unaudited)
Immaterial Correction of 2014 Quarterly Financial Data-Prior to the filing of our 2014 annual report on Form 10-K, we determined we had inappropriately classified all stock based compensation and employee incentive compensation within the general and administrative expenses financial statement line item instead of presenting the expenses in the same line or lines as the cash compensation paid to the employees. We determined the error to be immaterial to the condensed consolidated interim financial information for each respective previously reported quarterly period of 2014. The errors had no impact on consolidated operating income or net income. The impact of these corrections to the March 31, June 30, and September 30, 2014 condensed consolidated interim financial information is summarized below.
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
18) Selected quarterly financial data (unaudited) (Continued)
The following changes have been made to our condensed consolidated interim financial information for the quarters ended March 31, June 30, and September 30, 2014:
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
18) Selected quarterly financial data (unaudited) (Continued)
DILIGENT BOARD MEMBER SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 2014, 2013 & 2012 (Continued)
ALL AMOUNTS IN US$ UNLESS OTHERWISE NOTED
18) Selected quarterly financial data (unaudited) (Continued)
Selected Quarterly Financial data for Fiscal 2013
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
BACKGROUND
As disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 ("the 2013 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. Further information relating to the identified material weaknesses in internal control over financial reporting, and related remedial measures, is contained in the 2013 10-K.
As a result of these material weaknesses, revenue recognition and other accounting errors occurred, which led to our determination that our financial statements for the fiscal quarter ended March 31, 2013 and the fiscal years ended December 31, 2012, 2011 and 2010 would be restated and that financial statements for such fiscal years, as well as the fiscal years ended December 31, 2009, 2008 and 2007, should no longer be relied upon. On April 7, 2014, we completed the restatement by filing with the SEC Amendment No. 2 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2012 (the "2012 10-K Amendment") and Amendment No. 1 to the Company's Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2013 (the "10-Q Amendment"). The 2012 10-K Amendment and the 10-Q Amendment contain restated financial information for the fiscal years ended December 31, 2012 and 2011, the quarterly periods within such fiscal years and the quarterly period ended March 31, 2013. Other than the 2012 10-K Amendment and the 10-Q Amendment, we have not filed amendments to (i) our Quarterly Reports on Form 10-Q previously filed with the SEC for the interim periods in the affected periods, or (ii) our Annual Reports on Form 10-K previously filed with the SEC for the fiscal years included in the affected periods (collectively, the "Affected Reports"). Accordingly, investors should rely only on the financial information and other disclosures regarding the affected periods in the 2012 10-K Amendment and the 10-Q Amendment, and not on the Affected Reports or any reports, sales update press releases, or similar communications relating to the affected periods provided prior to February 28, 2014.
As described herein, the Company has adopted or is in the process of adopting remedial measures intended to address the material weaknesses described in our prior filings with the SEC. However, management has determined that certain of these material weaknesses still existed as of December 31, 2014 because the remedial measures had not been fully implemented and tested as of such date. In addition, management determined that our disclosure controls were ineffective as of December 31, 2014 due to the continued existence of such material weaknesses.
In connection with the preparation of this Annual Report, the Company evaluated under the supervision of and with participation from the Company's management, including our Chief Executive
Officer and Interim Chief Financial Officer, as to the effectiveness of the Company's disclosure controls and procedures. Based upon such evaluation, the Company's Chief Executive Officer and Interim Chief Financial Officer have concluded that, because of the material weaknesses in its internal control over financial reporting previously identified and not fully remediated, the Company's disclosure controls and procedures were not effective as of December 31, 2014.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate "internal control over financial reporting" for the Company, as that term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement. Any evaluation of effectiveness is subject to the risk that the controls may subsequently become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may decrease over time.
The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized use, acquisition, or disposition of the Company's assets that could have a material effect on the financial statements.
A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the preparation of this Annual Report, management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2014. Management completed its assessment using the criteria set forth in "Internal Control-Integrated Framework (1992)" by COSO, an integrated framework for evaluation of internal controls issued to identify the risks and control objectives related to the evaluation of the control environment. The COSO framework summarizes each of the components of a company's internal control system, including (1) the control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. Management concluded that our internal controls over financial reporting were not effective as of December 31, 2014 due to the following material weaknesses identified in our 2013 10-K that were not remediated as of December 31, 2014:
• Accounting and Financial Reporting Control Environment. The Company did not maintain sufficient levels of qualified personnel in its executive, accounting, finance and tax functions and did not establish adequate accounting and financial reporting policies and procedures as a general matter. In addition, the Company did not provide adequate oversight of accounting and financial reporting activities. Additionally, the Company did not maintain sufficient documentation surrounding the Company's adherence to its accounting policies and procedures, maintain records that would be sufficient to support the manner in which the Company recorded transactions, or communicate and apply proper accounting policies and procedures.
• Ineffective Control Activities Relating to Use of Spreadsheets. Our accounting and financial reporting processes are dependent on the maintenance of spreadsheets that have become inadequate to
ensure accurate and timely financial reporting given the growth of the Company and the volume of transactions. Among other areas, spreadsheets are utilized in determining the Company's revenue recognition from customer agreements and consolidated income tax provision. We have determined that there are insufficient change management or access controls in place, or such processes lack formal documentation, to prevent unauthorized modification of the data or formulas within these spreadsheets, and there is no review or approval process to detect unauthorized changes or errors.
• Design and Maintenance of Controls Surrounding Taxes. The Company did not design, establish and maintain effective controls over accounting for income taxes. The inadequate levels of knowledge among Company personnel resulted in a failure to correctly apply accounting guidance relating to the tax provision and deferred and current taxes. Additionally, the Company failed to collect and remit state sales tax in certain states where such taxes applied.
REMEDIATION OF MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Throughout 2014 and continuing in 2015, the Company has been actively engaged in the implementation of remediation efforts to address the material weaknesses in existence as of December 31, 2013. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2014, management determined that four of the previously identified material weaknesses, relating to the control environment surrounding stock grants, ineffective control activities relating to equity grants, design and maintenance of controls relating to revenue recognition, and inadequate information and communication relating to revenue recognition and stock grants, had been remediated. Three previously identified material weaknesses, relating to the Company's accounting and financial reporting control environment, ineffective control activities relating to the use of spreadsheets, and design and maintenance of controls relating to taxes, had not been remediated.
The Company is committed to improving its overall control environment and financial reporting processes. As part of this commitment, the Company is implementing or has implemented during the year ended December 31, 2014 the following remedial and other actions relating to the improvement of our internal controls:
Control Environment Surrounding Stock Grants. At December 31, 2013, management identified a material weakness in internal control over financial reporting in that senior personnel at the Company in charge of compliance issues did not have adequate expertise in relevant requirements and did not regularly consult with advisors in a manner that ensured compliance with applicable requirements relating to stock option grants and stock issuances. The Company did not reinforce that compliance was an important activity through personnel review, compensation activities or investment in compliance. During 2013 and 2014, the Company implemented the following remedial measures, which allowed management to determine that as of December 31, 2014, this material weakness had been remediated based on evaluation and testing of the controls in connection with equity grants made during 2014:
• The Company hired a new General Counsel in June 2013, with sufficient experience in public company compliance and the technology, software and SaaS industries, and his role includes an appropriate responsibility for and focus on compliance. The General Counsel regularly reports to the Company's lead director for compliance on the design, maintenance and performance of the Company's compliance policies and activities.
• The Company has registered shares for issuance under its stock option and incentive plans with all applicable regulatory authorities and has taken steps to ensure that such issuances are in compliance with all applicable laws. The Company filed with the SEC a Form S-8 Registration
Statement to register shares underlying unexercised options under the Company's 2007 Plan and 2010 Plan, and awards under the Company's 2013 Plan.
• The Company obtained a validation order from the High Court of New Zealand in connection with the shares issued to New Zealand residents under the 2007 Plan and the 2010 Plan.
• The Company has assisted its officers and directors in completing all outstanding filings in respect of past issuances of stock and options with the appropriate U.S. and New Zealand regulatory agencies, and has provided written information and assistance as to filing requirements applicable to officers and directors in order to assist them in staying current with all filing obligations on a going-forward basis.
• Management has drafted, and the Compensation Committee has adopted, an equity grant policy to ensure compliance with applicable laws and NZX Listing Rules. Management, with the assistance of outside legal advisors in relevant jurisdictions, monitors compliance with this policy in connection with each grant of stock options and other awards.
Ineffective Control Activities Relating to Equity Grants. At December 31, 2013, management found a material weakness in internal control over financial reporting in that there were inadequate procedures for ensuring that stock option grants and stock issuances complied with applicable plan terms as well as applicable laws and listing rules. During 2013 and 2014, the Company implemented the following remedial measures, which allowed management to determine that as of December 31, 2014, this material weakness had been remediated based on evaluation and testing of the controls in connection with equity grants made during 2014:
• Under the supervision of the Compensation Committee, the Company has adopted and is monitoring compliance with the equity grant policy described above.
• The Company has adopted standard forms of equity grant documentation in compliance with the 2013 Plan and regulatory requirements
• Management verifies plan availability and terms and New Zealand regulatory requirements when making new grants.
• The Company's legal, human resources and finance functions communicate with each other on a regular basis in connection with each grant to ensure that grant terms are timely communicated and the proper expense amounts are calculated and reflected in the Company's financial statements.
• Management has retained an outsourced stock option plan management system in order to assist in managing the Company's equity grant program on a standardized basis.
Design and Maintenance of Controls Relating to Revenue Recognition. At December 31, 2013, management found a material weakness in internal control over financial reporting in that the Company did not design, establish and maintain effective controls over revenue recognition. The inadequate levels of knowledge among Company personnel resulted in a failure to correctly apply accounting guidance relating to revenue recognition, including SAB Topic 13.A.3.F. relating to installation fees. The Company's procedures and controls were not adequately designed to ensure that all elements required for the recognition of revenue in accordance with SAB Topic 13 were timely identified and measured to ensure that revenue was recorded correctly within the appropriate period. During 2013 and 2014, the Company implemented the following remedial measures, which allowed management to determine that as of December 31, 2014, this material weakness had been remediated based on evaluation and testing of the related controls during 2014:
• The Company has hired a contracts/accounts receivable manager with responsibility for overseeing proper accounting and billing of contracts.
• The Company has implemented, maintained and monitored its compliance with written revenue recognition policies in accordance with GAAP, and has regularly communicated these policies to all accounting, sales and legal personnel.
• The Company has implemented, maintained and monitored its compliance with written policies governing the contracting process, including the signing and dating of contracts and the retention of all necessary contract documents to support the recognition of revenue in the appropriate fiscal periods.
• The Company has implemented regular training on its new contract and revenue recognition procedures in accordance with GAAP for its accounting, sales and legal personnel.
Information and Communication Relating to Revenue Recognition and Stock Grants. At December 31, 2013, management found a material weakness in internal control over financial reporting in that the Company did not maintain sufficient written revenue recognition policies in accordance with GAAP, proper policies were not clearly communicated to or understood by all sales and legal personnel responsible for the contracting process, and contract procedures were not well-documented in order to ensure that contracts were recorded in the appropriate fiscal quarter. There was not an open flow of information and communication between legal and finance personnel prior to the issuance of stock option grants. During 2013 and 2014, based on the remedial measures described above, including the adoption of written revenue recognition policies, written policies governing the contracting process, and a written equity grant policy, and the communication of those policies to relevant personnel, and the evaluation and testing of these measures during 2014, management determined that as of December 31, 2014, this material weakness had been remediated.
CONTINUING REMEDIATION
Accounting and Financial Reporting Control Environment. As of December 31, 2013, management found that the Company did not maintain sufficient levels of qualified personnel in its executive, accounting, finance and tax functions and did not establish adequate accounting and financial reporting policies and procedures as a general matter. In addition, the Company did not provide adequate oversight of accounting and financial reporting activities. Additionally, the Company did not maintain sufficient documentation surrounding the Company's adherence to its accounting policies and procedures, maintain records that would be sufficient to support the manner in which the Company recorded transactions, or communicate and apply proper accounting policies and procedures. During 2013 and 2014, management took the following actions to remediate this material weakness:
• The Company hired two new accounting managers with experience in revenue recognition and public company accounting.
• The Company documented its processes governing financial reporting, revenue recognition, equity, procure to pay, fixed assets, taxes and payroll.
• The Company retained PricewaterhouseCoopers LLP in the first quarter of 2014 to assist management in applying proper accounting for incomes taxes and income tax provisions.
• The Company continues to refine and adopt baseline controls to ensure that fiscal periods are properly and timely closed.
• The Company retained PricewaterhouseCoopers LLP in November 2014 to assist it in documenting and identifying controls around the accounting and financial reporting environment.
Notwithstanding these efforts towards remediation of the material weakness in the accounting and financial reporting control environment, the Company's efforts are not completed. In particular, in connection with the preparation of this Annual Report, management determined that it had not
allocated stock based compensation expense and bonus expense by function, as is required by GAAP, but had presented such expenses as general and administrative expenses. The Company has corrected its financial information for the first three quarters of 2014 to re-allocate such expenses (see footnote 18 to the consolidated financial statements included herein), and determined that such correction was not material. On a going-forward basis, the Company will classify such expense to the proper functional department to which the relevant employees are allocated.
Due to the error described above, errors related to the accounting for cumulative translation adjustments related to its foreign subsidiaries, and the Company's need to finalize its documentation and adoption of controls and to hire additional experienced accounting personnel, management found that the material weakness relating to the Company's accounting and financial reporting control environment persisted as of December 31, 2014. During 2015, the Company plans to complete its documentation of controls around the accounting and financial reporting environment, and to monitor and test these controls. The Company also plans to hire a Controller and to commence a search for its Chief Financial Officer position. Completion of remediation will require the implementation of these additional controls and actions, and testing them after they are in place to validate their design, implementation and operating effectiveness and sustainability.
Ineffective Control Activities Relating to Use of Spreadsheets. As of December 31, 2013, management found that 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. Among other areas, spreadsheets are utilized in determining the Company's revenue recognition from customer agreements, consolidated income tax provision, and preparing the Company's period-end consolidation. We have determined that there were insufficient change management or access controls in place, or such processes lacked formal documentation, to prevent unauthorized modification of the data or formulas within these spreadsheets, and there was no review or approval process to detect unauthorized changes or errors. During 2013 and 2014, management took the following actions to remediate this material weakness:
• The Company commenced implementation of a financial reporting and accounting application, which will automate important bookkeeping functions, including those involved in the calculation of revenue, deferred revenue and applicable sales tax when fully implemented.
• The Company performed the year-end consolidation of its financial statements within its financial reporting and accounting application as of December 31, 2014.
• The Company retained PricewaterhouseCoopers LLP in the first quarter of 2014 to assist management in verifying calculations in its revenue spreadsheets, pending full implementation of its financial reporting and accounting application.
Notwithstanding these efforts towards remediation of the material weakness relating to the use of spreadsheets, the Company's efforts are not completed. Accordingly, management found that this material weakness persisted as of December 31, 2014. The Company is working to complete implementation of its financial reporting and accounting application, which is expected in the 1st quarter of 2015 and plans to implement change management and access control measures in 2015. In addition, the Company plans to retain a new stock plan administrator to automate stock based compensation expense calculations when provided with the terms of new stock grants. Completion of remediation will require the implementation of these additional controls and actions, and testing them after they are in place to validate their effectiveness and sustainability.
Design and Maintenance of Controls Surrounding Taxes. As of December 31, 2013, management found that the Company did not design, establish and maintain effective controls over accounting for income taxes. The inadequate levels of knowledge among Company personnel resulted in a failure to correctly apply accounting guidance relating to the income tax provision and deferred and current
taxes. Additionally, the Company failed to collect and remit state sales tax in certain states where such taxes applied. During 2013 and 2014, management took the following actions to remediate this material weakness:
• The Company retained PricewaterhouseCoopers LLP during the first quarter of 2014 to prepare its income tax provision and deferred and current tax calculations. The Company also consults with PricewaterhouseCoopers LLP on certain tax matters.
• Company has worked with outside legal and accounting advisors to determine where sales tax may be due based on the jurisdictions in which the Company currently sells its product.
• The Company has filed voluntary disclosure agreements with the identified states, and has accrued for potential tax and interest exposure as of December 31, 2014.
• Upon full implementation of its financial reporting and accounting application, expected in the first quarter of 2015, functions relating to the calculation of sales taxes will be automated with proper inputs as to the applicability of various taxes.
Notwithstanding these efforts towards remediation of the material weakness relating to the design and maintenance of controls surrounding taxes, the Company's efforts are not completed. Accordingly, management found that this material weakness persisted as of December 31, 2014. During 2015, the Company will continue to work with its advisors to verify where sales tax may be payable and to make appropriate remittances. In addition, the Company will work to improve its controls surrounding accounting for income taxes in connection with its remediation of the accounting and financial reporting control environment, by documenting controls and supplementing key accounting personnel, as indicated above. Completion of remediation will require the implementation of these additional key controls and actions, and testing them after they are in place to validate their effectiveness and sustainability.
Due to the aforementioned material weaknesses in internal control over financial reporting, management performed additional analyses and implemented mitigating controls and procedures in connection with preparing the financial statements for the periods covered by this Annual Report. Notwithstanding the material weaknesses described above, the Company and its management have concluded that the Company's consolidated financial statements for the periods covered by and included in this Annual Report are fairly stated, in all material respects, in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.
We are committed to maintaining a strong internal control environment, and believe that these remediation actions will represent significant improvements in our controls when they are fully implemented. Our remediation efforts are ongoing and have not been completed. 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING THE QUARTER ENDED DECEMBER 31,
As described above, the Company continued to implement its remedial plan during the quarter ended December 31, 2014. Measures taken during the fourth quarter include the continued implementation of a financial reporting and accounting application, the retention of Pricewaterhouse Coopers LLP to assist in identifying and documenting internal controls related to the accounting and financial reporting environment, and the documentation of the processes governing financial reporting, revenue recognition, equity, procure to pay, fixed assets, taxes and payroll.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable
PART III
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report:
1)Financial Statements: The information concerning our financial statements, and Report of Independent Registered Public Accounting Firm required by this Item is incorporated by reference herein to the section of this Report in Item 8, entitled "Financial Statements and Supplementary Data."
2)Exhibits: The exhibits listed in the exhibit index of this Form 10-K are filed with, or incorporated by reference in, this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 16, 2015
DILIGENT BOARD MEMBER SERVICES, INC.
By:
/s/ ALEXANDER SANCHEZ
Alexander Sanchez,
Interim Chief Financial Officer
(Principal Financial Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alessandro Sodi, Alex Sanchez and Thomas N. Tartaro, and each of them, as his true and lawful attorney-in-fact and agent, each with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all Annual Reports of the Registrant on Form 10-K and to sign any and all amendments to such reports and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities & Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or any of them or their, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the dates indicated.
INDEX TO EXHIBITS
*Filed herewith