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NZX queries Diligent price fall since announcing revenue recognition problems

Tuesday 16th July 2013

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Governance software purveyors Diligent Board Member Services continue to attract the attention of NZX regulators, who issued a 'please explain' notice today after a 17.3 percent drop in the company's share price in the last four days.

The inquiry is only the second this year from NZX Market Services under Section 10.1.1 of the NZX Listing Rules relating to the requirement for timely disclosure of material information, with the only other notice directed at Diligent, which has suffered a string of its own governance glitches.

It issued a similar notice to Diligent on March 11 asking why the company's price had spiked 26 percent.

Both today and in March, Diligent responded with a brief confirmation it remained in compliance with the rules, which are intended to ensure that all market participants are informed simultaneously of information capable of materially affecting a company's share price.

The company announced July 12 it was delaying its second quarter earnings release by up to 30 days as it reassessed how it books revenue.

"The revenue recognition errors identified by the company and the other related items described below do not affect the total revenues ultimately earned or to be earned, the amount or timing of cash received or to be received from individual customer agreements, or the company's liquidity or overall cash flow," Diligent's July 12 statement said.

The issue relates to a US disclosure rule Regulation G requiring the New York-based, NZX-listed company to "disclose or release certain non-GAAP financial measures to include, in that same disclosure or release, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure."

"In order to comply with U.S. disclosure rules the Company cannot present New Sales or Cumulative Sales at this time," the Diligent statement said, while stressing it is not obliged to produce quarterly updates and does so only to inform investors more regularly than required.

"The company is continuing to evaluate the financial impact of issues identified in its revenue recognition review, which include the previously disclosed error relating to the recognition of revenue from the beginning of a month rather than from the date of contract signing, and the company's failure to defer revenue recognition until customers are provided access to the company's hosting environment, as required by US GAAP," the statement said.

"Certain other items", such as deferred revenue, deferred commissions, income tax provisioning and deferred tax balances, needed evaluation "prior to making a conclusion as to whether the errors are material for the purpose of requiring a restatement in the Company's historical financial statements for any fiscal period," Diligent said.

"Additionally, the Company is evaluating the effect of properly capitalising certain costs associated with software developed for internal use. These costs were previously expensed."

Diligent has experienced exponential growth in demand for its tablet-based board paper software, which has caught on in corporate America as an efficient alternative to the distribution of paper-based board papers.

However, it was also forced to recut executive remuneration arrangements earlier this year after mistakenly over-allocating options, and was found to be using a US audit firm, which was not compliant in New Zealand.

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