What changed in this filing

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Item 1A. Risk Factors

2023-05-04 compared with 2022-11-03 · 66 added, 26 removed, 32 unchanged (74% of the section changed)

We are supplementing Item 1A.

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 1, 2022 (the “Annual Report”).

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on February 24, 2023 (the “Annual Report”).

The following risk factors should be read in conjunction with the risk factors set forth in that Annual Report.

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To date, we have received approximately 260 customer reimbursement requests and approximately 400 reservations of the right to seek expense recovery in the future from customers or their attorneys in the U.S., U.K.

and Canada related to the Security Incident (none of which have as yet been filed in court).

In June 2022, we also received notice of a proposed claim on behalf of a number of U.K.

and Canada related to the Security Incident.

We have also received notices of proposed claims on behalf of a number of U.K.

data subjects, which we are reviewing.

In addition, insurance companies representing various customers’ interests through subrogation claims have contacted us, and one insurance company has filed a subrogation claim in court.

In addition, insurance companies representing various customers’ interests through subrogation claims have contacted us, and certain insurance companies have filed subrogation claims in court.

Customer and insurer subrogation claims generally seek reimbursement of their costs and expenses associated with notifying their own customers of the Security Incident and taking steps to assure that personal information has not been compromised as a result of the Security Incident.

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Federal Trade Commission, the U.S.

Department of Health and Human Services, the SEC, the Office of the Australian Information Commissioner and the Office of the Privacy Commissioner of Canada.

(See Note 10 to our unaudited, condensed consolidated financial statements included in this report for a more detailed description of the Security Incident and related matters.)

Third Quarter 2022 Form 10-Q

Department of Health and Human Services, the Office of the Australian Information Commissioner and the Office of the Privacy Commissioner of Canada.

On March 9, 2023, the Company reached a settlement with the SEC in connection with the Security Incident.

This settlement fully resolves the previously disclosed SEC investigation of the Security Incident and is further described in the SEC Order.

Under the terms of the SEC Order, the Company agreed to cease-and-desist from committing or causing any violations or any future violations of Sections 17(a)(2) and (3) of the Securities Act and Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-13 and 13a-15(a) thereunder.

As part of the SEC Order, the Company also agreed to pay, and has paid, a civil penalty in the amount of $3.0 million.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

See Note 8 to our unaudited, condensed consolidated financial statements included in this report for a more detailed description of the Security Incident and related matters.

We may be named as a party in additional lawsuits, other claims may be asserted by or on behalf of our customers or their constituents, and we may be subject to additional governmental inquires, requests or investigations.

Responding to and resolving these current and any future lawsuits, claims and/or investigations could result in material remedial and other expenses that will not be covered by insurance.

For example, we have recorded approximately $5.0 million in aggregate liabilities for loss contingencies related to the Security Incident that we believe we can reasonably estimate as of September 30, 2022.

Governmental authorities are likely to seek to impose undertakings, injunctive relief, consent decrees, or other civil or criminal penalties, which could, among other things, materially increase our data security costs or otherwise require us to alter how we operate our business.

For example, we have recorded approximately $30.2 million in aggregate liabilities for loss contingencies related to the Security Incident that we believe we can reasonably estimate as of March 31, 2023.

It is reasonably possible that our estimated or actual losses may change in the near term for those matters and be materially in excess of the amounts accrued.

Certain governmental authorities are seeking to impose undertakings, injunctive relief, consent decrees, or other civil or criminal penalties, which could, among other things, materially increase our data security costs or otherwise require us to alter how we operate our business.

Although we intend to defend ourselves vigorously against the claims asserted against us, we cannot predict the potential outcomes, cost and expenses associated with current and any future claims, lawsuits, inquiries and investigations.

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Significant management time and Company resources have been, and are expected to continue to be, devoted to the Security Incident.

For example, we currently expect net cash outlays of approximately $15 million to $25 million for ongoing legal fees related to the Security Incident for full year 2022.

For full year 2022, we currently expect net pre-tax expense of approximately $30 million to $35 million for ongoing legal fees related to the Security Incident.

Although we carry insurance against certain losses related to the Security Incident, we have exceeded the limit of that insurance coverage.

For example, for the three months ended March 31, 2023, we incurred net pre-tax expense of $17.8 million related to the Security Incident, which included $7.6 million for ongoing legal fees and an additional accrual for loss contingencies of $10.2 million.

During the three months ended March 31, 2023, we had net cash outlays of $9.2 million related to the Security Incident, which included ongoing legal fees and the $3.0 million civil penalty paid related to the SEC settlement (as discussed in Note 8).

For full year 2023, we currently expect net pre-tax expense of approximately $20.0 million to $30.0 million and net cash outlays of approximately $25.0 million to $35.0 million for ongoing legal fees related to the Security Incident.

Although we carry insurance against certain losses related to the Security Incident, we exceeded the limit of that insurance coverage in the first quarter of 2022.

As a result, we will be responsible for all expenses or other losses (including penalties, fines or other judgments) or all types of claims that may arise in connection with the Security Incident, which could materially and adversely affect our liquidity and results of operations.

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In addition, publicity or developments related to the Security Incident could in the future have a range of other adverse effects on our business or prospects, including causing or contributing to loss of customer confidence, reduced customer demand, reduced customer retention, strategic growth opportunities, and associated retention and recruiting difficulties, some or all of which could be material.

Financial Risks

Adverse developments affecting the financial services industry, including events or risks involving liquidity, defaults or non-performance by financial institutions, could have a material adverse effect on our business, financial condition or results of operations.

Financial services market conditions and changing circumstances, some of which may be beyond our control, could impair our ability to access our existing cash, cash equivalents and investments and to timely pay key vendors and others.

For example, on March 10, 2023, Silicon Valley Bank (SVB), where we maintain certain accounts and cash deposits, was placed into receivership with the Federal Deposit Insurance Corporation (FDIC), which resulted in all funds held at SVB being temporarily inaccessible by SVB’s customers, including Blackbaud.

As of March 13, 2023, access to our cash and cash equivalents at SVB was fully restored.

Although our cash balances at SVB are insignificant and we do not expect further developments at SVB to have a material impact on our cash and cash equivalents, if other banks and financial institutions with whom we have banking relationships enter receivership or become insolvent in the future, we may be unable to access, and we may lose, some or all of our existing cash, cash equivalents and investments to the extent those funds are not insured or otherwise protected by the FDIC.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Although we seek to minimize our exposure to third-party losses of our cash and cash equivalents, we hold cash balances in several large financial institutions significantly in excess of FDIC insurance limits.

Notwithstanding their large size and historical stability, these financial institutions are subject to risk or failure.

In addition, we also maintain cash deposits in foreign banks, some of which are not insured or are partially insured by government agencies.

Any delay in our ability to access our cash, cash equivalents and investments (or the loss of some or all of such funds) or to timely pay key vendors and others could have a material adverse effect on our business, financial condition or results of operations.

If one of our payment processing partners were to experience a significant disruption or fail, it could temporarily interrupt our ability to provide payment services to our customers, which could negatively impact our business, financial condition or results of operations.

In addition, concerns or rumors regarding the U.S.

or international financial systems in general could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on terms favorable to us, or at all.

Any decline in available funding or access to our cash and liquidity resources could, among other things, adversely impact our ability to meet our operating expenses, financial obligations or other obligations, result in breaches of our contractual obligations or result in violations of federal, state and foreign laws.

Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our our business, financial condition or results of operations.

Legal and Compliance Risks

Anti-takeover provisions in our charter documents, our Stockholder Rights Agreement (as described below, the "Rights Agreement") and Delaware law may delay or prevent an acquisition of our Company.

Provisions of Delaware law, our certificate of incorporation and bylaws and our Rights Agreement may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.

Our certificate of incorporation authorizes “blank check” preferred stock, which could be issued by the board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock.

Stockholder approval is not necessary to issue preferred stock in this manner.

Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device.

Currently there are no shares of our preferred stock issued or outstanding.

Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and limit the persons who may call special meetings of stockholders.

Third Quarter 2022 Form 10-Q

Provisions in our organizational documents, our Stockholder Rights Agreement (as described below, the "Rights Agreement") , certain officer compensation arrangements and Delaware law may delay or prevent an acquisition or change of control of our Company that could be deemed beneficial to our stockholders.

Certain provisions in our organizational documents, the Rights Agreement, compensation arrangements with our officers and Delaware law (as summarized below) may have the effect of delaying, deferring, discouraging or preventing an acquisition or change in control of the Company or a change in our management.

This includes tender offers for our common stock, proxy contests or other takeover attempts.

These anti-takeover effects may discourage transactions that might result in the payment of a premium over the market price for shares of our common stock.

Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

Certificate of Incorporation and Bylaw provisions.

The Board of Directors is divided into three classes of directors, as nearly equal in number as possible, with each class serving a staggered term of three years.

The classification of directors will have the effect of making it more difficult and time-consuming for stockholders to change the composition of the Board of Directors, could discourage a third-party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors.

Our Bylaws contain an advance notice procedure for stockholders proposals to be brought before a meeting of stockholders, including any proposed nominations of persons for election to the Board of Directors.

The Bylaws may have the effect of precluding the conduct of business at a meeting if the proper procedures are not followed and may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the Company.

The Board of Directors has the authority to issue up to an aggregate of 20,000,000 shares of preferred stock in one or more classes or series and to determine, with respect to any such class or series, the designations, powers, preferences and rights of such class or series, and the qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption prices, liquidation preferences, and the number of shares constituting any class or series or the designation of such class or series, without further vote or action by the stockholders.

This preferred stock, including the Series A Preferred Stock described below, could have terms that may discourage a potential acquirer from making, without first negotiating with the Board of Directors, an acquisition attempt through which such acquirer may be able to change the composition of the Board of Directors, including a tender offer or other takeover attempt.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

On October 7, 2022, we declared a dividend of one preferred share purchase right (a “Right”) for each of our issued and outstanding shares of common stock.

Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from us one one-thousandth of a share of our Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Preferred Stock”) at a price of $313.00, subject to certain adjustments (as adjusted from time to time, the “Exercise Price”).

Under the Rights Agreement, the Rights will become exercisable if an entity, person or group acquires beneficial ownership of 20% or more of our outstanding common stock in a transaction not approved by our Board of Directors.

In the event that the Rights become exercisable due to the ownership threshold being crossed, each Right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose rights will become void and will not be exercisable) to purchase additional shares of common stock having a then-current market value of twice the Exercise Price.

The Board of Directors possesses the authority to call and hold emergency special meetings of the Board of Directors with less than forty-eight hours’ notice.

This power to hold an emergency special meeting of the Board of Directors on short notice could discourage a potential acquirer from launching a bid to acquire majority ownership of the Company, a proxy solicitation in order to replace the current Board of Directors, or otherwise attempting to obtain control of the Company.

Stockholder Rights Agreement.

On October 7, 2022, the Company declared a dividend of one preferred share purchase right for each of the Company’s issued and outstanding shares of Common Stock.

The description and terms of these Rights are set forth in the Stockholder Rights Agreement, dated as of October 7, 2022 (the “Rights Agreement”), by and between the Company and American Stock Transfer & Trust Company, LLC (the “Rights Agent”).

Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from us one one-thousandth of a share of the Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) at a price of $313.00, subject to certain adjustments (as adjusted from time to time, the “Exercise Price”).

Under the Rights Agreement, the Rights will become exercisable if an entity, person or group acquires beneficial ownership of 20% or more of the outstanding Common Stock in a transaction not approved by the Board of Directors.

In the event that the Rights become exercisable due to the ownership threshold being crossed, each Right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose rights will become void and will not be exercisable) to purchase additional shares of Common Stock having a then-current market value of twice the Exercise Price, which would likely make any takeover or change of control attempt by such entity, person or group prohibitively expensive.

Subject to the terms of the Rights Agreement, the Rights will expire on October 2, 2023.

Additional information regarding the Rights Agreement is contained in a Form 8-K filed with the SEC on October 11, 2022.

The anti-takeover provisions of Delaware law and provisions in our organizational documents and the Rights Agreement may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context.

Officer Compensation Arrangements.

We have entered into an employment agreement with our Chief Executive Officer and retention agreements with certain of our officers, which provide that, upon the occurrence of a change in control of us and either the termination of their employment without cause (as defined) or their resignation for good reason (as defined), such persons would be entitled to certain termination or severance payments made by us (which may include a lump sum payment equal to defined percentages of compensation and accelerated vesting of certain equity stock awards paid in accordance with the terms and conditions of the respective agreement).

Such provisions could significantly increase the costs to a third-party acquirer and/or deter such third-party from acquiring us.

Delaware anti-takeover law .

We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law.

In general, Section 203 prohibits a publicly held Delaware corporation, such as the Company, from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless certain criteria are met.

Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder.

Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns, or is an affiliate or associate of the corporation, and within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors