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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     .
Commission file number: 000-50600
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Blackbaud, Inc.
(Exact name of registrant as specified in its charter)
Delaware11-2617163
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
65 Fairchild Street
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on which Registered
Common Stock, $0.001 Par ValueBLKBNasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer   
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes   No      
The number of shares of the registrant’s Common Stock outstanding as of October 28, 2020 was 49,568,364.







TABLE OF CONTENTS
  
Third Quarter 2020 Form 10-Q
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1

Table of Contents

Blackbaud, Inc.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the documents incorporated herein by reference, contains forward-looking statements that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These "forward-looking statements" are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements consist of, among other things, specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations and on the markets and communities in which we and our customers and partners operate, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build and grow our business, our operating results, our ability to successfully integrate acquired businesses and technologies, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the impact of expensing stock-based compensation, the sufficiency of our capital resources, our ability to meet our ongoing debt and obligations as they become due, cybersecurity and data protection risks, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “could,” “would,” “likely,” “will,” “targets,” “plans,” “anticipates,” “aims,” “projects,” “estimates” or any variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Accordingly, they should not be viewed as assurances of future performance, and actual results may differ materially and adversely from those expressed in any forward-looking statements.
Important factors that could cause actual results to differ materially from our expectations expressed in forward-looking statements include, but are not limited to, those summarized under “Part II, Item 1A. Risk factors” and elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our other SEC filings. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statement, whether as a result of new information, future events or otherwise.
2
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Third Quarter 2020 Form 10-Q


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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Blackbaud, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)September 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents$30,563 $31,810 
Restricted cash203,660 545,485 
Accounts receivable, net of allowance of $10,727 and $5,529 at September 30, 2020 and December 31, 2019, respectively
96,830 88,868 
Customer funds receivable4,901 524 
Prepaid expenses and other current assets76,761 67,852 
Total current assets412,715 734,539 
Property and equipment, net109,469 35,546 
Operating lease right-of-use assets30,218 104,400 
Software development costs, net108,891 101,302 
Goodwill632,840 634,088 
Intangible assets, net284,414 317,895 
Other assets72,617 65,193 
Total assets$1,651,164 $1,992,963 
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable$31,775 $47,676 
Accrued expenses and other current liabilities48,380 73,317 
Due to customers207,356 546,009 
Debt, current portion10,305 7,500 
Deferred revenue, current portion322,452 314,335 
Total current liabilities620,268 988,837 
Debt, net of current portion497,953 459,600 
Deferred tax liability46,989 44,594 
Deferred revenue, net of current portion5,803 1,802 
Operating lease liabilities, net of current portion25,706 95,624 
Other liabilities12,610 5,742 
Total liabilities1,209,329 1,596,199 
Commitments and contingencies (see Note 10)
Stockholders’ equity:
Preferred stock; 20,000,000 shares authorized, none outstanding
  
Common stock, $0.001 par value; 180,000,000 shares authorized, 60,903,925 and 60,206,091 shares issued at September 30, 2020 and December 31, 2019, respectively
61 60 
Additional paid-in capital512,269 457,804 
Treasury stock, at cost; 11,337,486 and 11,066,354 shares at September 30, 2020 and December 31, 2019, respectively
(311,951)(290,665)
Accumulated other comprehensive loss(8,872)(5,290)
Retained earnings250,328 234,855 
Total stockholders’ equity441,835 396,764 
Total liabilities and stockholders’ equity$1,651,164 $1,992,963 
The accompanying notes are an integral part of these condensed consolidated financial statements.
Third Quarter 2020 Form 10-Q
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3



Blackbaud, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended
September 30,
Nine months ended
September 30,
(dollars in thousands, except per share amounts)2020201920202019
Revenue
Recurring$200,102 $205,227 $621,229 $611,789 
One-time services and other14,899 15,893 49,384 50,795 
Total revenue215,001 221,120 670,613 662,584 
Cost of revenue
Cost of recurring84,251 87,645 265,172 259,013 
Cost of one-time services and other14,434 14,152 43,317 42,874 
Total cost of revenue98,685 101,797 308,489 301,887 
Gross profit116,316 119,323 362,124 360,697 
Operating expenses
Sales, marketing and customer success48,460 55,499 159,149 165,963 
Research and development22,783 25,941 72,655 80,304 
General and administrative34,132 28,897 89,829 84,557 
Amortization749 703 2,219 3,231 
Restructuring105 400 179 3,083 
Total operating expenses106,229 111,440 324,031 337,138 
Income from operations10,087 7,883 38,093 23,559 
Interest expense(3,997)(5,111)(12,049)(16,233)
Other income, net542 2,158 2,242 4,521 
Income before provision for income taxes6,632 4,930 28,286 11,847 
Income tax provision1,756 364 6,948 1,263 
Net income$4,876 $4,566 $21,338 $10,584 
Earnings per share
Basic$0.10 $0.10 $0.44 $0.22 
Diluted$0.10 $0.09 $0.44 $0.22 
Common shares and equivalents outstanding
Basic weighted average shares48,271,139 47,757,769 48,182,799 47,668,235 
Diluted weighted average shares48,859,707 48,464,529 48,582,068 48,223,712 
Other comprehensive income (loss)
Foreign currency translation adjustment4,661 (3,893)(1,954)(5,321)
Unrealized gain (loss) on derivative instruments, net of tax943 (363)(1,628)(3,234)
Total other comprehensive income (loss)5,604 (4,256)(3,582)(8,555)
Comprehensive income$10,480 $310 $17,756 $2,029 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Third Quarter 2020 Form 10-Q


Blackbaud, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine months ended
September 30,
(dollars in thousands)20202019
Cash flows from operating activities
Net income$21,338 $10,584 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization68,755 63,998 
Provision for credit losses and sales returns10,156 6,192 
Stock-based compensation expense54,556 43,621 
Deferred taxes1,879 (75)
Amortization of deferred financing costs and discount569 564 
Other non-cash adjustments2,203 2,047 
Changes in operating assets and liabilities, net of acquisition and disposal of businesses:
Accounts receivable(18,319)(6,375)
Prepaid expenses and other assets4,292 (5,129)
Trade accounts payable(17,203)(74)
Accrued expenses and other liabilities(31,595)(13,592)
Deferred revenue12,534 20,363 
Net cash provided by operating activities109,165 122,124 
Cash flows from investing activities
Purchase of property and equipment(25,836)(9,597)
Capitalized software development costs(32,028)(34,513)
Purchase of net assets of acquired companies, net of cash and restricted cash acquired (109,353)
Other investing activities 500 
Net cash used in investing activities(57,864)(152,963)
Cash flows from financing activities
Proceeds from issuance of debt267,400 371,200 
Payments on debt(290,999)(255,625)
Debt issuance costs(593) 
Employee taxes paid for withheld shares upon equity award settlement(21,286)(20,279)
Proceeds from exercise of stock options4 7 
Change in due to customers(337,821)(215,942)
Change in customer funds receivable(4,495)(6,283)
Dividend payments to stockholders(5,960)(17,705)
Net cash used in financing activities(393,750)(144,627)
Effect of exchange rate on cash, cash equivalents and restricted cash(623)(2,240)
Net decrease in cash, cash equivalents and restricted cash(343,072)(177,706)
Cash, cash equivalents and restricted cash, beginning of period577,295 449,846 
Cash, cash equivalents and restricted cash, end of period$234,223 $272,140 
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown above in the condensed consolidated statements of cash flows:
(dollars in thousands)September 30,
2020
December 31,
2019
Cash and cash equivalents$30,563 $31,810 
Restricted cash203,660 545,485 
Total cash, cash equivalents and restricted cash in the statement of cash flows$234,223 $577,295 
The accompanying notes are an integral part of these condensed consolidated financial statements.

Third Quarter 2020 Form 10-Q
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5

Blackbaud, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)

(dollars in thousands)Common stockAdditional
paid-in
capital
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
stockholders'
equity
SharesAmount
Balance at December 31, 201960,206,091 $60 $457,804 $(290,665)$(5,290)$234,855 $396,764 
Net income— — — — — 4,639 4,639 
Payment of dividends ($0.12 per share)— — — — — (5,960)(5,960)
Exercise of stock options and vesting of restricted stock units210,057 — 1 — — — 1 
Employee taxes paid for 245,358 withheld shares upon equity award settlement
— — — (19,782)— — (19,782)
Stock-based compensation— — 13,539 — — 41 13,580 
Restricted stock grants563,947 1 — — — — 1 
Restricted stock cancellations(47,456)— — — — — — 
Other comprehensive loss— — — — (8,850)— (8,850)
Balance at March 31, 202060,932,639 $61 $471,344 $(310,447)$(14,140)$233,575 $380,393 
Net income— — — — — 11,823 11,823 
Exercise of stock options and vesting of restricted stock units7,111 — 3 — — — 3 
Employee taxes paid for 21,200 withheld shares upon equity award settlement
— — — (1,214)— — (1,214)
Stock-based compensation— — 20,103 — — 30 20,133 
Restricted stock grants20,776  — — — —  
Restricted stock cancellations(59,426)— — — — — — 
Other comprehensive loss— — — — (336)— (336)
Balance at June 30, 202060,901,100 $61 $491,450 $(311,661)$(14,476)$245,428 $410,802 
Net income— — — — — 4,876 4,876 
Vesting of restricted stock units906 —  — — —  
Employee taxes paid for 4,574 withheld shares upon equity award settlement
— — — (290)— — (290)
Stock-based compensation— — 20,819 — — 24 20,843 
Restricted stock grants48,783  — — — —  
Restricted stock cancellations(46,864)— — — — — — 
Other comprehensive income— — — — 5,604 — 5,604 
Balance at September 30, 202060,903,925 $61 $512,269 $(311,951)$(8,872)$250,328 $441,835 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Third Quarter 2020 Form 10-Q

Blackbaud, Inc.
Condensed Consolidated statements of stockholders' equity (continued)
(Unaudited)

(dollars in thousands)Common stockAdditional
paid-in
capital
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
stockholders'
equity
SharesAmount
Balance at December 31, 201859,327,633 $59 $399,241 $(266,884)$(5,110)$246,477 $373,783 
Net loss— — — — — (1,122)(1,122)
Payment of dividends ($0.12 per share)— — — — — (5,901)(5,901)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units234,453 — 3 — — — 3 
Employee taxes paid for 239,311 withheld shares upon equity award settlement
— — — (18,400)— — (18,400)
Stock-based compensation— — 13,693 — — 33 13,726 
Restricted stock grants663,906 1 — — — — 1 
Restricted stock cancellations(43,314)— — — — — — 
Other comprehensive income— — — — 3,658 — 3,658 
Balance at March 31, 201960,182,678 $60 $412,937 $(285,284)$(1,452)$239,487 $365,748 
Net income— — — — — 7,140 7,140 
Payment of dividends ($0.12 per share)— — — — — (5,901)(5,901)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units21,726 — 3 — — — 3 
Employee taxes paid for 17,119 withheld shares upon equity award settlement
— — — (1,360)— — (1,360)
Stock-based compensation— — 15,010 — — 19 15,029 
Restricted stock grants12,405  — — — —  
Restricted stock cancellations(29,746)— — — — — — 
Other comprehensive loss— — — — (7,957)— (7,957)
Balance at June 30, 201960,187,063 $60 $427,950 $(286,644)$(9,409)$240,745 $372,702 
Net income— — — — — 4,566 4,566 
Payment of dividends ($0.12 per share)— — — — — (5,903)(5,903)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units5,315 — 1 — — — 1 
Employee taxes paid for 5,795 withheld shares upon equity award settlement
— — — (519)— — (519)
Stock-based compensation— — 14,852 — — 14 14,866 
Restricted stock grants37,920  — — — —  
Restricted stock cancellations(23,207)— — — — — — 
Other comprehensive loss— — — — (4,256)— (4,256)
Balance at September 30, 201960,207,091 $60 $442,803 $(287,163)$(13,665)$239,422 $381,457 
The accompanying notes are an integral part of these condensed consolidated financial statements.

Third Quarter 2020 Form 10-Q
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Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1. Organization
We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, higher education institutions, K–12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies and individual change agents—we connect and empower organizations to increase their impact through cloud software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing and analytics. Serving the industry for more than three decades, we are headquartered in Charleston, South Carolina, and have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom.
2. Basis of Presentation
Unaudited condensed consolidated interim financial statements
The accompanying condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity, for the periods presented in accordance with accounting principles generally accepted in the United States ("U.S.") ("GAAP"). The consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, and other forms filed with the SEC from time to time.
Basis of consolidation
The condensed consolidated financial statements include the accounts of Blackbaud, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reportable segment
We report our operating results and financial information in one operating and reportable segment. Our chief operating decision maker uses consolidated financial information to make operating decisions, assess financial performance and allocate resources. Our chief operating decision maker is our chief executive officer ("CEO").
Risks and uncertainties
Impact of COVID-19
We are subject to risks and uncertainties as a result of the global COVID-19 pandemic. We expect that COVID-19 will impact all of our vertical markets across all of our geographies to some degree, but the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease and other unforeseeable consequences.
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Third Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

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, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets, income taxes, business combinations, stock-based compensation, capitalization of software development costs, our allowances for credit losses and sales returns, costs of obtaining contracts, valuation of derivative instruments and loss contingencies, among others. Changes in the facts or circumstances underlying these estimates due to COVID-19 could result in material changes and actual results could materially differ from these estimates.
Response to COVID-19
To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we have taken several actions. These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. Some of these actions include the following:
Temporarily closed our offices worldwide and transitioned our employees to work remotely;
Rescinded our previously announced policy to pay an annual dividend at a rate of $0.48 per share of common stock and discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020 and thereafter until such time, if any, as our Board of Directors may otherwise determine in its sole discretion;
Temporarily suspended our 401(k)-match program, whereby we have historically matched 50% of qualified U.S. employees' contributions to our 401(k) plan up to 6% of their salaries, effective with the payroll period commencing April 1, 2020;
Temporarily froze our hiring efforts and implemented a modest and targeted headcount reduction, though we have since began backfilling key roles, including engineering positions;
Michael Gianoni, our President and Chief Executive Officer, elected to forego receipt of all but that portion of his base salary necessary to fund, on a pre-tax basis, his contributions to continue to participate in our health benefits plan, between April 1, 2020 and June 16, 2020;
Restricted non-essential employee travel and put in place other operating cost containment actions;
All of our employees with a base salary equal to or less than $75 thousand received financial support in the form of a one-time bonus of $1 thousand on April 30, 2020;
On May 1, 2020, we granted restricted stock units with a total grant date fair value of $8.3 million to our employees that were eligible for base salary merit increases in lieu of such increases, which will vest on May 1, 2021 subject to the recipient's continued employment with us;
On May 1, 2020, we granted performance-based restricted stock units with a total grant date fair value of $34.4 million to our employees that were eligible for a 2020 cash bonus plan in lieu of such cash bonus, which may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us;
During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely when our offices reopen. This change also expands our access to a larger and more diverse talent pool, empowers our leaders to make decisions based on skills and business need rather than location, and it is expected to create efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices.
Recently adopted accounting pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires certain types of financial instruments, including trade receivables, to be presented at the net amount expected to be collected based on historical events, current conditions and forward-looking information. We adopted ASU 2016-13 as of the January 1, 2020 effective date and the adoption did not have a material impact on our consolidated financial statements.
Third Quarter 2020 Form 10-Q
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Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. We adopted ASU 2018-15 prospectively as of the January 1, 2020 effective date and the adoption did not have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements
There are no recently issued accounting pronouncements that are expected to have a material impact on our financial position or results of operations when adopted in the future.
Summary of significant accounting policies
Except for the accounting policies for allowance for credit losses and allowance for sales returns below that were updated as a result of adopting ASU 2016-13, there have been no new or material changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 20, 2020.
Allowance for credit losses
Our accounts receivable consist of a single portfolio segment. Accounts receivable are recorded at original invoice amounts less an allowance for credit losses, an amount we estimate to be sufficient to provide adequate protection against lifetime expected losses resulting from extending credit to our customers. In judging the adequacy of the allowance for credit losses, we consider multiple factors including historical bad debt experience, the current aging of our receivables and current economic conditions that may affect our customers' ability to pay. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for credit losses could be required. Accounts are written off after all means of collection are exhausted and recovery is considered remote. Provisions for credit losses are recorded in general and administrative expense.
Below is a summary of the changes in our allowance for credit losses.
(in thousands)
Balance at
beginning of year (1)
Provision/
adjustment
Write-offRecovery
Balance at
September 30, 2020
2020$4,011 $6,303 $(971)$302 $9,645 
(1)Upon adoption of ASU 2016-13 at January 1, 2020, we reclassified certain balances previously disclosed within the allowance for sales returns to the allowance for credit losses, as these amounts reflect the credit risk associated with our accounts receivable.
The increase in our allowance for credit losses during the nine months ended September 30, 2020 was primarily due to an increase in the aging of our receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic, which may continue in the near term. The amount of write-offs during the nine months ended September 30, 2020 was lower than the amount of write-offs during the same period in 2019 as we temporarily suspended sending past due customer accounts to collections during the second and third quarters due to payment delays related to COVID-19.
Allowance for sales returns
We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and the nature of service level commitments. A considerable amount of judgment is required in assessing these factors. Provisions for sales returns and credits are charged against the related revenue items.
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Third Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Below is a summary of the changes in our allowance for sales returns.
(in thousands)
Balance at
beginning of year
(1)
Provision/
adjustment
Deduction
Balance at
September 30, 2020
2020$1,518 $3,853 $(4,289)$1,082 
(1)As discussed above, we reclassified certain balances previously disclosed within the allowance for sales returns to the allowance for credit losses upon adoption of ASU 2016-13 at January 1, 2020.
3. Goodwill and Other Intangible Assets
The change in goodwill during the nine months ended September 30, 2020, consisted of the following:
(dollars in thousands)Total
Balance at December 31, 2019$634,088 
Effect of foreign currency translation(1,248)
Balance at September 30, 2020$632,840 
4. Earnings Per Share
We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted earnings per share reflect the assumed exercise, settlement and vesting of all dilutive securities using the “treasury stock method” except when the effect is anti-dilutive. Potentially dilutive securities consist of shares issuable upon the exercise of stock options, settlement of stock appreciation rights and vesting of restricted stock awards and units.
The following table sets forth the computation of basic and diluted earnings per share:
  
Three months ended
September 30,
Nine months ended
September 30,
(dollars in thousands, except per share amounts)
2020
2019
2020
2019
Numerator:
Net income$4,876 $4,566 $21,338 $10,584 
Denominator:
Weighted average common shares48,271,139 47,757,769 48,182,799 47,668,235 
Add effect of dilutive securities:
Stock-based awards588,568 706,760 399,269 555,477 
Weighted average common shares assuming dilution48,859,707 48,464,529 48,582,068 48,223,712 
Earnings per share:
Basic$0.10 $0.10 $0.44 $0.22 
Diluted$0.10 $0.09 $0.44 $0.22 
Anti-dilutive shares excluded from calculations of diluted earnings per share915,226 227,523 1,036,445 252,282 
Third Quarter 2020 Form 10-Q
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Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

5. Fair Value Measurements
We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 - Quoted prices for identical assets or liabilities in active markets;
Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Recurring fair value measurements
Assets and liabilities that are measured at fair value on a recurring basis consisted of the following, as of the dates indicated below:
Fair value measurement using
(dollars in thousands)Level 1Level 2Level 3Total
Fair value as of September 30, 2020
Financial liabilities:
Derivative instruments$ $3,957 $ $3,957 
Total financial liabilities$ $3,957 $ $3,957 
Fair value as of December 31, 2019
Financial liabilities:
Derivative instruments$ $1,757 $ $1,757 
Total financial liabilities$ $1,757 $ $1,757 
Our derivative instruments within the scope of Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, are required to be recorded at fair value. Our derivative instruments that are recorded at fair value include interest rate swaps.
The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy. The Financial Conduct Authority in the U.K. has stated that it plans to phase out LIBOR by the end of calendar year 2021. We do not currently anticipate a significant impact to our financial position or results of operations as a result of this action as we expect that our financial contracts currently indexed to LIBOR will either expire or be modified before the phase out occurs.
We believe the carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at September 30, 2020 and December 31, 2019, due to the immediate or short-term maturity of these instruments.
We believe the carrying amount of our debt approximates its fair value at September 30, 2020 and December 31, 2019, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt under the 2017 Credit Facility (as defined below) is classified within Level 2 of the fair value hierarchy. Our fixed rate debt is also classified within Level 2 of the fair value hierarchy.
We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the nine months ended September 30, 2020. Additionally, we did not hold any Level 3 assets or liabilities during the nine months ended September 30, 2020.
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Third Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets, goodwill and operating lease right-of-use ("ROU") assets, which are recognized at fair value during the period in which an acquisition is completed or at lease commencement, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for long-lived assets, intangible assets acquired and operating lease ROU assets, are based on Level 3 unobservable inputs. In the event of an impairment, we determine the fair value of these assets other than goodwill using a discounted cash flow approach, which contains significant unobservable inputs and, therefore, is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate. For goodwill impairment testing, we estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium.
During the three months ended June 30, 2020, we recorded an impairment charge of $4.3 million against certain previously capitalized software development costs that reduced the carrying value of those assets to zero. The impairment charge is reflected in cost of recurring revenue and resulted primarily from our decision to accelerate the end of customer support for certain solutions. During the nine months ended September 30, 2020, we also recorded $2.9 million in impairments of operating lease ROU assets associated with certain leased office space we have ceased using or determined we will cease using. These impairment charges are reflected in general and administrative expense.
There were no other non-recurring fair value adjustments to our long-lived assets, intangible assets, operating lease ROU assets and goodwill during the nine months ended September 30, 2020.
6. Property and Equipment
Purchase of Headquarters Facility
In August 2020, we completed the purchase of the building, fixtures and other improvements and parcels of land of our headquarters facility in Charleston, South Carolina (the "Headquarters Facility"), pursuant to a Purchase and Sale Agreement (the "PSA") with HPBB1, LLC, a Georgia limited liability company (the "Seller") (the "Transaction"). Prior to the completion of the Transaction, we leased the Headquarters facility from the Seller. We paid the Seller a purchase price that included the assumption of the Seller's obligations of $61.1 million, cash of $15.2 million and certain lender fees, closing costs, adjustments and prorations as set forth in the PSA. We funded the cash portion of the purchase price through borrowings under the 2017 Credit Facility (as defined below). We capitalized the insignificant direct transaction costs we incurred as a component of the assets acquired.
As a result of the Transaction, we derecognized the ROU asset and lease liability associated with the former lease and recorded the following long-lived assets on a relative fair value basis in property and equipment, net upon closing:
(dollars in thousands)Assets
acquired
Estimated useful life (years)
Land$9,548 — 
Building61,284 39
Building systems4,393 
7 - 15
Total long-lived assets$75,225 
Depreciation expense
Depreciation expense was $5.1 million and $12.3 million for the three and nine months ended September 30, 2020, respectively, and $3.8 million and $11.3 million for the three and nine months ended September 30, 2019, respectively.
Third Quarter 2020 Form 10-Q
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Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

7. Consolidated Financial Statement Details
Restricted cash
(dollars in thousands)September 30,
2020
December 31,
2019
Restricted cash due to customers$202,455 $545,485 
Real estate escrow balances1,205  
Total restricted cash203,660 545,485 

Prepaid expenses and other assets
(dollars in thousands)September 30,
2020
December 31,
2019
Costs of obtaining contracts(1)(2)
$86,119 $90,764 
Prepaid software maintenance and subscriptions(3)
28,999 17,384 
Implementation costs for cloud computing arrangements, net(4)(5)
11,372 7,294 
Unbilled accounts receivable9,711 6,233 
Receivables for probable insurance recoveries(6)
2,949  
Prepaid insurance2,079 1,585 
Taxes, prepaid and receivable847 849 
Security deposits808 885 
Other assets6,494 8,051 
Total prepaid expenses and other assets149,378 133,045 
Less: Long-term portion72,617 65,193 
Prepaid expenses and other current assets$76,761 $67,852 
(1)Amortization expense from costs of obtaining contracts was $9.4 million and $28.2 million for the three and nine months ended September 30, 2020, respectively, and $9.2 million and $28.6 million for the three and nine months ended September 30, 2019, respectively.
(2)The current portion of costs of obtaining contracts as of September 30, 2020 and December 31, 2019 was $32.1 million and $33.0 million, respectively.
(3)The current portion of prepaid software maintenance and subscriptions as of September 30, 2020 and December 31, 2019 was $23.5 million and $16.1 million, respectively.
(4)These costs, which were previously included in prepaid software maintenance and subscriptions, primarily relate to the multi-year implementations of our new global enterprise resource planning and customer relationship management systems.
(5)Amortization expense from capitalized cloud computing implementation costs was insignificant for the three and nine months ended September 30, 2020 and 2019, respectively. Accumulated amortization for these costs was $0.7 million as of September 30, 2020 and insignificant as of December 31, 2019.
(6)See discussion of the Security Incident at Note 10.
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Third Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Accrued expenses and other liabilities
(dollars in thousands)September 30,
2020
December 31,
2019
Operating lease liabilities, current portion$16,633 $19,784 
Accrued bonuses(1)
 24,617 
Accrued commissions and salaries2,985 6,980 
Taxes payable13,576 6,835 
Derivative instruments3,957 1,757 
Customer credit balances5,677 4,505 
Unrecognized tax benefit3,833 3,758 
Accrued vacation costs2,300 2,232 
Accrued health care costs2,781 2,399 
Other liabilities9,248 6,192 
Total accrued expenses and other liabilities60,990 79,059 
Less: Long-term portion12,610 5,742 
Accrued expenses and other current liabilities$48,380 $73,317 
(1)In March 2020, we reduced our accrued bonuses due to the payment of bonuses from the prior year and, in response to the global COVID-19 pandemic, determined to replace our 2020 cash bonus plans with performance-based equity awards (see Note 2).
Other income, net
  
Three months ended
September 30,
Nine months ended
September 30,
(dollars in thousands)
2020
2019
2020
2019
Interest income$767 $1,247 $1,399 $2,426 
Other (expense) income, net(225)911 843 2,095 
Other income, net$542 $2,158 $2,242 $4,521 
8. Debt
The following table summarizes our debt balances and the related weighted average effective interest rates, which includes the effect of interest rate swap agreements.
Debt balance atWeighted average
effective interest rate at
(dollars in thousands)September 30,
2020
December 31,
2019
September 30,
2020
December 31,
2019
Credit facility:
    Revolving credit loans$