OPEN TEXT CORP 10-Q

Item 1. Financial Statements OPEN TEXT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars, except share data) September 30, 2022 June 30, 2022 ASSETS (unaudited) Cash and cash equivalents $ 1,704,385 $ 1,693,741 Accounts receivable trade, net of allowance for credit losses of $ 15,410 as of September 30, 2022 and $ 16,473 as of June 30, 2022 (Note 4) 378,143 426,652 Contract assets (Note 3) 27,802 26,167 Income taxes recoverable (Note 15) 8,856 18,255 Prepaid expenses and other current assets (Note 9) 124,868 120,552 Total current assets 2,244,054 2,285,367 Property and equipment (Note 5) 251,151 244,709 Operating lease right of use assets (Note 6) 201,374 198,132 Long-term contract assets (Note 3) 18,544 19,719 Goodwill (Note 7) 5,226,814 5,244,653 Acquired intangible assets (Note 8) 974,589 1,075,208 Deferred tax assets (Note 15) 814,471 810,154 Other assets (Note 9) 299,608 256,987 Long-term income taxes recoverable (Note 15) 46,483 44,044 Total assets $ 10,077,088 $ 10,178,973 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities (Note 10) $ 601,074 $ 448,607 Current portion of long-term debt (Note 11) 10,000 10,000 Operating lease liabilities (Note 6) 58,969 56,380 Deferred revenues (Note 3) 848,789 902,202 Income taxes payable (Note 15) 58,692 51,069 Total current liabilities 1,577,524 1,468,258 Long-term liabilities: Accrued liabilities (Note 10) 20,119 18,208 Pension liability (Note 12) 53,202 60,951 Long-term debt (Note 11) 4,208,547 4,209,567 Long-term operating lease liabilities (Note 6) 197,328 198,695 Long-term deferred revenues (Note 3) 85,514 91,144 Long-term income taxes payable (Note 15) 42,087 34,003 Deferred tax liabilities (Note 15) 42,626 65,887 Total long-term liabilities 4,649,423 4,678,455 Shareholders’ equity: Share capital and additional paid-in capital (Note 13) 269,880,769 and 269,522,639 Common Shares issued and outstanding at September 30, 2022 and June 30, 2022, respectively; authorized Common Shares: unlimited 2,067,881 2,038,674 Accumulated other comprehensive income (loss) (Note 20) ( 42,576 ) ( 7,659 ) Retained earnings 1,978,442 2,160,069 Treasury stock, at cost ( 3,586,014 and 3,706,420 shares at September 30, 2022 and June 30, 2022, respectively) ( 154,792 ) ( 159,966 ) Total OpenText shareholders' equity 3,848,955 4,031,118 Non-controlling interests 1,186 1,142 Total shareholders’ equity 3,850,141 4,032,260 Total liabilities and shareholders’ equity $ 10,077,088 $ 10,178,973 Guarantees and contingencies (Note 14) Related party transactions (Note 24) Subsequent event (Note 25) See accompanying Notes to Condensed Consolidated Financial Statements 3 Table of C ontents OPEN TEXT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands of U.S. dollars, except share and per share data) (unaudited) Three Months Ended September 30, 2022 2021 Revenues (Note 3): Cloud services and subscriptions $ 404,651 $ 356,589 Customer support 317,351 335,237 License 62,548 73,529 Professional service and other 67,486 66,953 Total revenues 852,036 832,308 Cost of revenues: Cloud services and subscriptions 131,799 119,779 Customer support 27,354 29,483 License 2,758 3,969 Professional service and other 53,800 51,725 Amortization of acquired technology-based intangible assets (Note 8) 42,637 53,167 Total cost of revenues 258,348 258,123 Gross profit 593,688 574,185 Operating expenses: Research and development 110,198 100,165 Sales and marketing 167,170 146,240 General and administrative 78,074 71,477 Depreciation 23,174 21,386 Amortization of acquired customer-based intangible assets (Note 8) 54,438 51,884 Special charges (recoveries) (Note 18) 14,281 344 Total operating expenses 447,335 391,496 Income from operations 146,353 182,689 Other income (expense), net (Note 22) ( 189,231 ) 29,782 Interest and other related expense, net ( 40,382 ) ( 37,055 ) Income (loss) before income taxes ( 83,260 ) 175,416 Provision for income taxes (Note 15) 33,625 43,450 Net income (loss) for the period $ ( 116,885 ) $ 131,966 Net (income) loss attributable to non-controlling interests ( 44 ) ( 51 ) Net income (loss) attributable to OpenText $ ( 116,929 ) $ 131,915 Earnings (loss) per share—basic attributable to OpenText (Note 23) $ ( 0.43 ) $ 0.48 Earnings (loss) per share—diluted attributable to OpenText (Note 23) $ ( 0.43 ) $ 0.48 Weighted average number of Common Shares outstanding—basic (in '000's) 269,804 272,044 Weighted average number of Common Shares outstanding—diluted (in '000's) 269,804 273,232 See accompanying Notes to Condensed Consolidated Financial Statements 4 Table of C ontents OPEN TEXT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands of U.S. dollars) (unaudited) Three Months Ended September 30, 2022 2021 Net income (loss) for the period $ ( 116,885 ) $ 131,966 Other comprehensive income (loss)—net of tax: Net foreign currency translation adjustments ( 36,366 ) ( 10,092 ) Unrealized gain (loss) on cash flow hedges: Unrealized gain (loss) - net of tax expense (recovery) effect of ($ 1,206 ) and $( 391 ) for the three months ended September 30, 2022 and 2021, respectively ( 3,340 ) ( 1,086 ) (Gain) loss reclassified into net income - net of tax (expense) recovery effect of $ 212 and $( 103 ) for the three months ended September 30, 2022 and 2021, respectively 588 ( 287 ) Actuarial gain (loss) relating to defined benefit pension plans: Actuarial gain (loss) - net of tax expense (recovery) effect of $ 1,104 and $( 232 ) for the three months ended September 30, 2022 and 2021, respectively 4,164 ( 1,049 ) Amortization of actuarial (gain) loss into net income - net of tax (expense) recovery effect of $ 26 and $ 68 for the three months ended September 30, 2022 and 2021, respectively 37 162 Total other comprehensive income (loss) net, for the period ( 34,917 ) ( 12,352 ) Total comprehensive income (loss) ( 151,802 ) 119,614 Comprehensive (income) loss attributable to non - controlling interests ( 44 ) ( 51 ) Total comprehensive income (loss) attributable to OpenText $ ( 151,846 ) $ 119,563 See accompanying Notes to Condensed Consolidated Financial Statements 5 Table of C ontents OPEN TEXT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands of U.S. dollars and shares) (unaudited) Three Months Ended September 30, 2022 Common Shares and Additional Paid in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Non-Controlling Interests Total Shares Amount Shares Amount Balance as of June 30, 2022 269,523 $ 2,038,674 ( 3,706 ) $ ( 159,966 ) $ 2,160,069 $ ( 7,659 ) $ 1,142 $ 4,032,260 Issuance of Common Shares Under employee stock option plans 72 1,994 — — — — — 1,994 Under employee stock purchase plans 286 9,179 — — — — — 9,179 Share-based compensation — 23,208 — — — — — 23,208 Issuance of treasury stock — ( 5,174 ) 120 5,174 — — — — Dividends declared ($ 0.24299 per Common Share) — — — — ( 64,698 ) — — ( 64,698 ) Other comprehensive income (loss) - net — — — — — ( 34,917 ) — ( 34,917 ) Net income (loss) for the period — — — — ( 116,929 ) — 44 ( 116,885 ) Balance as of September 30, 2022 269,881 $ 2,067,881 ( 3,586 ) $ ( 154,792 ) $ 1,978,442 $ ( 42,576 ) $ 1,186 $ 3,850,141 Three Months Ended September 30, 2021 Common Shares and Additional Paid in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Non-Controlling Interests Total Shares Amount Shares Amount Balance as of June 30, 2021 271,541 $ 1,947,764 ( 1,568 ) $ ( 69,386 ) $ 2,153,326 $ 66,238 $ 1,511 $ 4,099,453 Issuance of Common Shares Under employee stock option plans 796 27,299 — — — — — 27,299 Under employee stock purchase plans 197 8,489 — — — — — 8,489 Share-based compensation — 13,934 — — — — — 13,934 Issuance of treasury stock — ( 5,909 ) 142 5,909 — — — — Dividends declared ($ 0.2209 per Common Share) — — — — ( 59,878 ) — — ( 59,878 ) Other comprehensive income (loss) - net — — — — — ( 12,352 ) — ( 12,352 ) Distribution to non-controlling interest — 142 — — — — ( 538 ) ( 396 ) Net income (loss) for the period — — — — 131,915 — 51 131,966 Balance as of September 30, 2021 272,534 $ 1,991,719 ( 1,426 ) $ ( 63,477 ) $ 2,225,363 $ 53,886 $ 1,024 $ 4,208,515 6 Table of C ontents OPEN TEXT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) (unaudited) Three Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income (loss) for the period $ ( 116,885 ) $ 131,966 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of intangible assets 120,249 126,437 Share-based compensation expense 23,208 13,934 Pension expense 1,387 1,486 Amortization of debt issuance costs 1,480 1,161 Write-off of right of use assets 2,827 — Loss on sale and write down of property and equipment — 27 Deferred taxes ( 20,667 ) 14,682 Share in net (income) loss of equity investees 6,534 ( 29,315 ) Unrealized (gain) loss on financial instruments 181,461 — Changes in operating assets and liabilities: Accounts receivable 59,494 76,526 Contract assets ( 9,054 ) ( 7,248 ) Prepaid expenses and other current assets ( 2,934 ) ( 9,811 ) Income taxes 15,834 16,761 Accounts payable and accrued liabilities ( 27,179 ) ( 114,334 ) Deferred revenue ( 53,779 ) ( 38,516 ) Other assets ( 47,749 ) 7,542 Operating lease assets and liabilities, net ( 2,268 ) ( 1,629 ) Net cash provided by operating activities 131,959 189,669 Cash flows from investing activities: Additions of property and equipment ( 36,324 ) ( 26,712 ) Other investing activities — 296 Net cash used in investing activities ( 36,324 ) ( 26,416 ) Cash flows from financing activities: Proceeds from issuance of Common Shares from exercise of stock options and ESPP 10,037 36,720 Repayment of long-term debt and Revolver ( 2,500 ) ( 2,500 ) Distribution to non-controlling interest — ( 396 ) Payments of dividends to shareholders ( 64,698 ) ( 59,878 ) Net cash used in financing activities ( 57,161 ) ( 26,054 ) Foreign exchange gain (loss) on cash held in foreign currencies ( 28,102 ) ( 9,277 ) Increase in cash, cash equivalents and restricted cash during the period 10,372 127,922 Cash, cash equivalents and restricted cash at beginning of the period 1,695,911 1,609,800 Cash, cash equivalents and restricted cash at end of the period $ 1,706,283 $ 1,737,722 7 Table of C ontents OPEN TEXT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) (unaudited) Reconciliation of cash, cash equivalents and restricted cash: September 30, 2022 September 30, 2021 Cash and cash equivalents $ 1,704,385 $ 1,735,265 Restricted cash (1) 1,898 2,457 Total cash, cash equivalents and restricted cash $ 1,706,283 $ 1,737,722 _________________________________ (1) Restricted cash is classified under the Prepaid expenses and other current assets and Other assets line items on the Condensed Consolidated Balance Sheets (Note 9). Supplemental cash flow disclosures (Note 6 and Note 21) See accompanying Notes to Condensed Consolidated Financial Statements 8 Table of C ontents OPEN TEXT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended September 30, 2022 (Tabular amounts in thousands of U.S. dollars, except share and per share data) (unaudited) NOTE 1— BASIS OF PRESENTATION The accompanying Condensed Consolidated Financial Statements include the accounts of Open Text Corporation and our subsidiaries, collectively referred to as “OpenText” or the “Company.” We wholly own all of our subsidiaries with the exception of Open Text South Africa Proprietary Ltd. (OT South Africa), which as of September 30, 2022, was 70 % owned by OpenText. All intercompany balances and transactions have been eliminated. Previously, our ownership in EC1 Pte. Ltd. (GXS Singapore) was 81 %. During the first quarter of Fiscal 2022 (as defined below), we made a final cash distribution of $ 0.4 million to the non-controlling interest holder in GXS Singapore as part of the process to liquidate the subsidiary. During Fiscal 2022, the liquidation of GXS Singapore was completed. The following Fiscal Year terms are used throughout this Quarterly Report on Form 10-Q: Fiscal Year Beginning Date Ending Date Fiscal 2024 July 1, 2023 June 30, 2024 Fiscal 2023 July 1, 2022 June 30, 2023 Fiscal 2022 July 1, 2021 June 30, 2022 Fiscal 2021 July 1, 2020 June 30, 2021 Fiscal 2020 July 1, 2019 June 30, 2020 Fiscal 2019 July 1, 2018 June 30, 2019 Fiscal 2018 July 1, 2017 June 30, 2018 Fiscal 2017 July 1, 2016 June 30, 2017 Fiscal 2016 July 1, 2015 June 30, 2016 Fiscal 2015 July 1, 2014 June 30, 2015 Fiscal 2014 July 1, 2013 June 30, 2014 Fiscal 2013 July 1, 2012 June 30, 2013 Fiscal 2012 July 1, 2011 June 30, 2012 These Condensed Consolidated Financial Statements are expressed in U.S. dollars and are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The information furnished reflects all adjustments necessary for a fair presentation of the results for the periods presented. Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates, judgments and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements. These estimates, judgments and assumptions are evaluated on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable at that time, 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 those estimates. In particular, key estimates, judgments and assumptions include those related to: (i) revenue recognition, (ii) accounting for income taxes, (iii) testing of goodwill for impairment, (iv) the valuation of acquired intangible assets, (v) the valuation of long-lived assets, (vi) the recognition of contingencies, (vii) restructuring accruals, (viii) acquisition accruals and pre-acquisition contingencies, (ix) the valuation of stock options granted and obligations related to share-based payments, including the valuation of our long-term incentive plans, (x) the valuation of pension obligations, and (xi) the valuation of derivative instruments. 9 Table of C ontents Proposed Acquisition of Micro Focus On August 25, 2022, we announced an agreement on the terms of an all-cash offer (through our wholly-owned subsidiary), to acquire the entire issued and to be issued share capital of Micro Focus International PLC (Micro Focus), for a total purchase price of approximately $ 6.0 billion, inclusive of Micro Focus’ cash and debt. The all-cash consideration for the proposed acquisition of Micro Focus (Micro Focus Acquisition) is expected to be funded by new debt, cash on hand and a draw on our Revolver (defined below). Concurrent with the announcement of the Micro Focus Acquisition, the Company entered into the Acquisition Term Loan and Bridge Loan (each as defined below) as well as certain derivative transactions. These derivative transactions were marked-to-market during the three months ended September 30, 2022, with the resulting unrealized gains (losses) on these derivatives recognized in Other Income (Expense) within our Condensed Consolidated Statements of Income. The Micro Focus Acquisition is expected to close in the first quarter of calendar 2023, subject to the satisfaction (or, where applicable, waiver) of certain conditions. On October 18, 2022 the shareholders of Micro Focus approved the all-cash offer. The following Notes include details related to the Micro Focus Acquisition: Note 9 “Prepaid Expenses and Other Assets,” Note 10 “Accounts Payable and Accrued Liabilities,” Note 11 “Long-Term Debt,” Note 16 “Fair Value Measurement,” Note 17 “Derivative Instruments and Hedging Activities,” Note 19 “Acquisitions” and Note 22 “Other Income (Expense), Net.” NOTE 2— RECENT ACCOUNTING PRONOUNCEMENTS Accounting Pronouncements Adopted in Fiscal 2023 During the three months ended September 30, 2022, there have been no new Accounting Standards Updates (ASU) or changes in accounting pronouncements that have had a material impact to our reported financial position, results of operations or cash flows . 10 Table of C ontents NOTE 3— REVENUES Disaggregation of Revenue We have four revenue streams: cloud services and subscriptions, customer support, license, and professional service and other. The following tables disaggregate our revenue by significant geographic area, based on the location of our direct end customer, by type of performance obligation and timing of revenue recognition for the periods indicated: Three Months Ended September 30, 2022 2021 Total Revenues by Geography: Americas (1) $ 557,788 $ 519,692 EMEA (2) 228,353 244,597 Asia Pacific (3) 65,895 68,019 Total revenues $ 852,036 $ 832,308 Total Revenues by Type of Performance Obligation: Recurring revenues (4) Cloud services and subscriptions revenue $ 404,651 $ 356,589 Customer support revenue 317,351 335,237 Total recurring revenues $ 722,002 $ 691,826 License revenue (perpetual, term and subscriptions) 62,548 73,529 Professional service and other revenue 67,486 66,953 Total revenues $ 852,036 $ 832,308 Total Revenues by Timing of Revenue Recognition: Point in time $ 62,548 $ 73,529 Over time (including professional service and other revenue) 789,488 758,779 Total revenues $ 852,036 $ 832,308 ___________________________ (1) Americas consists of countries in North, Central and South America. (2) EMEA primarily consists of countries in Europe, the Middle East and Africa. (3) Asia Pacific primarily consists of Japan, Australia, China, Korea, Philippines, Singapore, India and New Zealand. (4) Recurring revenue is defined as the sum of Cloud services and subscriptions revenue and Customer support revenue. Contract Balances A contract asset, net of allowance for credit losses, will be recorded if we have recognized revenue but do not have an unconditional right to the related consideration from the customer. For example, this will be the case if implementation services offered in a cloud arrangement are identified as a separate performance obligation and are provided to a customer prior to us being able to bill the customer. In addition, a contract asset may arise in relation to subscription licenses if the license revenue that is recognized upfront exceeds the amount that we are able to invoice the customer at that time. Contract assets are reclassified to accounts receivable when the rights become unconditional. The balance for our contract assets and contract liabilities (i.e. deferred revenues) for the periods indicated below were as follows: As of September 30, 2022 As of June 30, 2022 Short-term contract assets $ 27,802 $ 26,167 Long-term contract assets $ 18,544 $ 19,719 Short-term deferred revenues $ 848,789 $ 902,202 Long-term deferred revenues $ 85,514 $ 91,144 The difference in the opening and closing balances of our contract assets and deferred revenues primarily results from the timing difference between our performance and the customer’s payments. We fulfill our obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. During the three months ended September 30, 2022, we reclassified $ 8.9 million (three months ended September 30, 2021—$ 8.1 million) of contract assets to 11 Table of C ontents receivables as a result of the right to the transaction consideration becoming unconditional. During the three months ended September 30, 2022 and 2021, respectively, there was no significant impairment loss recognized related to contract assets. We recognize deferred revenue when we have received consideration or an amount of consideration is due from the customer for future obligations to transfer products or services. Our deferred revenues primarily relate to cloud services and customer support agreements which have been paid for by customers prior to the performance of those services. The amount of revenue that was recognized during the three months ended September 30, 2022 that was included in the deferred revenue balances at June 30, 2022 was $ 373 million (three months ended September 30, 2021—$ 359 million). Incremental Costs of Obtaining a Contract with a Customer Incremental costs of obtaining a contract include only those costs that we incur to obtain a contract that we would not have incurred if the contract had not been obtained, such as sales commissions. The following table summarizes the changes in total capitalized costs to obtain a contract, since June 30, 2022: Capitalized costs to obtain a contract as of June 30, 2022 $ 82,562 New capitalized costs incurred 6,148 Amortization of capitalized costs ( 7,578 ) Impact of foreign exchange rate changes ( 1,885 ) Capitalized costs to obtain a contract as of September 30, 2022 $ 79,247 During the three months ended September 30, 2022 and 2021, respectively, there was no significant impairment loss recognized related to capitalized costs to obtain a contract. Refer to Note 9 “Prepaid Expenses and Other Assets” for additional information on incremental costs of obtaining a contract. Transaction Price Allocated to the Remaining Performance Obligations As of September 30, 2022, approximately $ 1.5 billion of revenue is expected to be recognized from remaining performance obligations on existing contracts. We expect to recognize approximately 46 % of this amount over the next 12 months and the remaining balance substantially over the next three years thereafter. We apply the practical expedient and do not disclose performance obligations that have original expected durations of one year or less. NOTE 4— ALLOWANCE FOR CREDIT LOSSES The following illustrates the activity in our allowance for credit losses on accounts receivable, since June 30, 2022: Balance as of June 30, 2022 $ 16,473 Credit loss expense (recovery) 847 Write-off / adjustments ( 1,910 ) Balance as of September 30, 2022 $ 15,410 Included in accounts receivable are unbilled receivables in the amount of $ 51.0 million as of September 30, 2022 (June 30, 2022—$ 47.9 million). As of September 30, 2022, we have an allowance for credit losses of $ 0.5 million for contract assets (June 30, 2022—$ 0.7 million). For additional information on contract assets please see Note 3 “Revenues.” 12 Table of C ontents NOTE 5— PROPERTY AND EQUIPMENT As of September 30, 2022 Cost Accumulated Depreciation Net Furniture, equipment and other $ 51,418 $ ( 39,485 ) $ 11,933 Computer hardware 340,407 ( 231,133 ) 109,274 Computer software 150,126 ( 120,043 ) 30,083 Capitalized software development costs 154,785 ( 105,584 ) 49,201 Leasehold improvements 103,442 ( 84,754 ) 18,688 Land and buildings 48,839 ( 16,867 ) 31,972 Total $ 849,017 $ ( 597,866 ) $ 251,151 As of June 30, 2022 Cost Accumulated Depreciation Net Furniture, equipment and other $ 52,381 $ ( 39,643 ) $ 12,738 Computer hardware 332,462 ( 226,341 ) 106,121 Computer software 142,094 ( 117,026 ) 25,068 Capitalized software development costs 149,053 ( 101,874 ) 47,179 Leasehold improvements 107,739 ( 86,514 ) 21,225 Land and buildings 49,011 ( 16,633 ) 32,378 Total $ 832,740 $ ( 588,031 ) $ 244,709 NOTE 6— LEASES We enter into operating leases, both domestically and internationally, for certain facilities, automobiles, data centers and equipment for use in the ordinary course of business. The duration of the majority of these leases generally ranges from 1 to 10 years, some of which include options to extend for an additional 3 to 5 years after the initial term. Additionally, the land upon which our headquarters in Waterloo, Ontario, Canada is located is leased from the University of Waterloo for a period of 49 years beginning in December 2005, with an option to renew for an additional term of 49 years. Leases with an initial term of 12 months or less are not recorded on our Condensed Consolidated Balance Sheets and we do not have any material finance leases. Lease Costs and Other Information The following illustrates the various components of operating lease costs for the period indicated: Three Months Ended September 30, 2022 2021 Operating lease cost $ 14,311 $ 15,391 Short-term lease cost 387 119 Variable lease cost 579 588 Sublease income ( 2,912 ) ( 1,889 ) Total lease cost $ 12,365 $ 14,209 The weighted average remaining lease term and discount rate for the periods indicated below were as follows: As of September 30, 2022 As of June 30, 2022 Weighted-average remaining lease term 5.87 years 6.13 years Weighted-average discount rate 3.29 % 2.95 % 13 Table of C ontents Supplemental Cash Flow Information The following table presents supplemental information relating to cash flows arising from lease transactions. Cash payments made for variable lease costs and short-term leases are not included in the measurement of operating lease liabilities, and, as such, are excluded from the amounts below: Three Months Ended September 30, 2022 2021 Cash paid for amounts included in the measurement of operating lease liabilities $ 17,740 $ 17,452 Right of use assets obtained in exchange for new operating lease liabilities $ 22,467 $ 4,231 Maturity of Lease Liabilities The following table presents the future minimum lease payments under our operating leases liabilities as of September 30, 2022: Fiscal years ending June 30, 2023 (nine months ended) $ 50,268 2024 57,665 2025 45,521 2026 32,557 2027 29,712 Thereafter 65,344 Total lease payments $ 281,067 Less: Imputed interest ( 24,770 ) Total $ 256,297 Reported as: Current operating lease liabilities $ 58,969 Non-current operating lease liabilities 197,328 Total $ 256,297 Operating lease maturity amounts included in the table above do not include sublease income expected to be received under our various sublease agreements with third parties. Under the agreements initiated with third parties, we expect to receive sublease income of $ 9.0 million over the remainder of Fiscal 2023 and $ 47.1 million thereafter. NOTE 7— GOODWILL Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets. The following table summarizes the changes in goodwill since June 30, 2022: Balance as of June 30, 2022 $ 5,244,653 Acquisition of Zix Corporation (Note 19) 640 Impact of foreign exchange rate changes ( 18,479 ) Balance as of September 30, 2022 $ 5,226,814 14 Table of C ontents NOTE 8— ACQUIRED INTANGIBLE ASSETS As of September 30, 2022 Cost Accumulated Amortization Net Technology assets $ 876,153 $ ( 659,743 ) $ 216,410 Customer assets 1,526,612 ( 768,433 ) 758,179 Total $ 2,402,765 $ ( 1,428,176 ) $ 974,589 As of June 30, 2022 Cost Accumulated Amortization Net Technology assets $ 999,032 $ ( 738,710 ) $ 260,322 Customer assets 1,595,219 ( 780,333 ) 814,886 Total $ 2,594,251 $ ( 1,519,043 ) $ 1,075,208 Where applicable, the above balances as of September 30, 2022 have been reduced to reflect the impact of intangible assets where the gross cost has become fully amortized during the three months ended September 30, 2022. The impact of this resulted in a reduction of $ 119 million to technology assets and $ 64 million to customer assets. The weighted average amortization periods for acquired technology and customer intangible assets are approximately six years and eight years , respectively. The following table shows the estimated future amortization expense for the fiscal years indicated. This calculation assumes no future adjustments to acquired intangible assets: Fiscal years ending June 30, 2023 (nine months ended) $ 248,645 2024 265,700 2025 155,966 2026 112,780 2027 43,443 2028 and Thereafter 148,055 Total $ 974,589 15 Table of C ontents NOTE 9— PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other current assets: As of September 30, 2022 As of June 30, 2022 Deposits and restricted cash $ 1,674 $ 6,300 Capitalized costs to obtain a contract 26,906 27,077 Short-term prepaid expenses and other current assets 96,288 87,175 Total $ 124,868 $ 120,552 Other assets: As of September 30, 2022 As of June 30, 2022 Deposits and restricted cash $ 10,590 $ 6,462 Capitalized costs to obtain a contract 52,341 55,484 Deferred debt issuance costs 47,010 — Investments 166,672 173,205 Long-term prepaid expenses and other long-term assets 22,995 21,836 Total $ 299,608 $ 256,987 Deposits and restricted cash primarily relate to security deposits provided to landlords in accordance with facility lease agreements and cash restricted per the terms of certain contractual-based agreements. Capitalized costs to obtain a contract relate to incremental costs of obtaining a contract, such as sales commissions, which are eligible for capitalization on contracts to the extent that such costs are expected to be recovered (see Note 3 “Revenues”). Deferred debt issuance costs represents fees incurred related to the Acquisition Term Loan and Bridge Loan (each as defined below). See Note 11 “Long-Term Debt.” Investments relate to certain investment funds in which we are a limited partner. Our interests in each of these investees range from 4 % to below 20 %. These investments are accounted for using the equity method. Our share of net income or losses based on our interest in these investments, which approximates fair value and is subject to volatility based on market trends and business conditions, is recorded as a component of Other income (expense), net in our Condensed Consolidated Statements of Income (see Note 22 “Other Income (Expense), Net”). During the three months ended September 30, 2022, our share of income (loss) from these investments was $( 6.5 ) million (three months ended September 30, 2021—$ 29.3 million). Prepaid expenses and other assets, both short-term and long-term, include advance payments on licenses that are being amortized over the applicable terms of the licenses and other miscellaneous assets. 16 Table of C ontents NOTE 10— ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities: As of September 30, 2022 As of June 30, 2022 Accounts payable—trade $ 101,544 $ 113,978 Accrued salaries, incentives and commissions 128,102 193,421 Accrued liabilities 93,295 81,564 Accrued sales and other tax liabilities 14,525 20,423 Derivative liability (1) 181,461 — Deferred debt issuance costs (2) 47,010 — Accrued interest on Senior Notes 28,751 31,813 Amounts payable in respect of restructuring and other special charges 4,679 3,589 Asset retirement obligations 1,707 3,819 Total $ 601,074 $ 448,607 ______________________________ (1) Represents the liability related to the unrealized losses on our derivatives not designated as hedges related to the proposed Micro Focus Acquisition (see Note 17 “Derivative Instruments and Hedging Activities”). (2) Represents deferred debt issuance costs related to the Acquisition Term Loan and Bridge Loan related to the proposed Micro Focus Acquisition (see Note 11 “Long-Term Debt”). Long-term accrued liabilities: As of September 30, 2022 As of June 30, 2022 Amounts payable in respect of restructuring and other special charges $ 5,803 $ 5,702 Other accrued liabilities 516 563 Asset retirement obligations 13,800 11,943 Total $ 20,119 $ 18,208 Asset retirement obligations We are required to return certain of our leased facilities to their original state at the conclusion of our lease. As of September 30, 2022, the present value of this obligation was $ 15.5 million (June 30, 2022—$ 15.8 million), with an undiscounted value of $ 16.2 million (June 30, 2022—$ 16.4 million). 17 Table of C ontents NOTE 11— LONG-TERM DEBT As of September 30, 2022 As of June 30, 2022 Total debt Senior Notes 2031 $ 650,000 $ 650,000 Senior Notes 2030 900,000 900,000 Senior Notes 2029 850,000 850,000 Senior Notes 2028 900,000 900,000 Senior Notes 2026 — — Term Loan B 955,000 957,500 Revolver — — Acquisition Term Loan — — Bridge Loan — — Total principal payments due 4,255,000 4,257,500 Debt issuance costs (1) ( 36,453 ) ( 37,933 ) Total amount outstanding 4,218,547 4,219,567 Less: Current portion of long-term debt Term Loan B 10,000 10,000 Total current portion of long-term debt 10,000 10,000 Non-current portion of long-term debt $ 4,208,547 $ 4,209,567 ____________________________ (1) As of September 30, 2022, there was an additional $ 47.0 million of deferred debt issuance costs related to the Acquisition Term Loan and Bridge Loan included in “Other assets” not included above. Senior Unsecured Fixed Rate Notes Senior Notes 2031 On November 24, 2021, OpenText Holdings, Inc. a wholly-owned indirect subsidiary of the Company, issued $ 650 million in aggregate principal amount of 4.125 % Senior Notes due 2031 guaranteed by the Company (Senior Notes 2031) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act), and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2031 bear interest at a rate of 4.125 % per annum, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2031 will mature on December 1, 2031, unless earlier redeemed, in accordance with their terms, or repurchased. For the three months ended September 30, 2022, we recorded interest expense of $ 6.7 million relating to Senior Notes 2031 (three months ended September 30, 2021— nil ). Senior Notes 2030 On February 18, 2020, OpenText Holdings, Inc. a wholly-owned indirect subsidiary of the Company, issued $ 900 million in aggregate principal amount of 4.125 % Senior Notes due 2030 guaranteed by the Company (Senior Notes 2030) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2030 bear interest at a rate of 4.125 % per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2030 will mature on February 15, 2030, unless earlier redeemed, in accordance with their terms, or repurchased. For the three months ended September 30, 2022, we recorded interest expense of $ 9.3 million relating to Senior Notes 2030 (three months ended September 30, 2021—$ 9.3 million). Senior Notes 2029 On November 24, 2021, we issued $ 850 million in aggregate principal amount of 3.875 % Senior Notes due 2029 (Senior Notes 2029) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to 18 Table of C ontents certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2029 bear interest at a rate of 3.875 % per annum, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2029 will mature on December 1, 2029, unless earlier redeemed, in accordance with their terms, or repurchased. For the three months ended September 30, 2022, we recorded interest expense of $ 8.2 million relating to Senior Notes 2029 (three months ended September 30, 2021— nil ). Senior Notes 2028 On February 18, 2020, we issued $ 900 million in aggregate principal amount of 3.875 % Senior Notes due 2028 (Senior Notes 2028 and, together with the Senior Notes 2031, Senior Notes 2030 and Senior Notes 2029, the Senior Notes) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2028 bear interest at a rate of 3.875 % per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2028 will mature on February 15, 2028, unless earlier redeemed, in accordance with their terms, or repurchased. For the three months ended September 30, 2022, we recorded interest expense of $ 8.7 million relating to Senior Notes 2028 (three months ended September 30, 2021—$ 8.7 million). Senior Notes 2026 On May 31, 2016, we issued $ 600 million in aggregate principal amount of 5.875 % Senior Notes due 2026 (Senior Notes 2026) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2026 had interest at a rate of 5.875 % per annum, payable semi-annually in arrears on June 1 and December 1, commencing on December 1, 2016. Senior Notes 2026 would have matured on June 1, 2026. On December 20, 2016, we issued an additional $ 250 million in aggregate principal amount by reopening our Senior Notes 2026 at an issue price of 102.75 %. The additional notes had identical terms, were fungible with and were part of a single series with the previously issued $ 600 million aggregate principal amount of Senior Notes 2026. The outstanding aggregate principal amount of Senior Notes 2026, after taking into consideration the additional issuance, was $ 850 million as of December 9, 2021. On December 9, 2021, we redeemed Senior Notes 2026 in full at a price equal to 102.9375 % of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date. A portion of the net proceeds from the offerings of Senior Notes 2029 and Senior Notes 2031 was used to redeem Senior Notes 2026. Upon redemption, Senior Notes 2026 were cancelled and any obligation thereunder was extinguished. The resulting loss of $ 27.4 million, consisting of $ 25.0 million relating to the early termination call premium, $ 6.2 million relating to unamortized debt issuance costs and $( 3.8 ) million relating to unamortized premium, has been recorded as a component of Other income (expense), net in our Condensed Consolidated Statements of Income. See Note 22 “Other Income (Expense), Net.” For the three months ended September 30, 2022, we did not record any interest expense relating to Senior Notes 2026 (three months ended September 30, 2021—$ 12.5 million). Term Loan B On May 30, 2018, we refinanced our existing term loan facility, by entering into a new $ 1 billion term loan facility (Term Loan B), whereby we borrowed $ 1 billion on that day and repaid in full the loans under our prior $ 800 million term loan facility originally entered into on January 16, 2014. Borrowings under Term Loan B are secured by a first charge over substantially all of our assets on a pari passu basis with the Revolver, Acquisition Term Loan and Bridge Loan (each as defined below). Term Loan B has a seven-year term, maturing in May 2025, and repayments made under Term Loan B are equal to 0.25 % of the principal amount in equal quarterly installments for the life of Term Loan B, with the remainder due at maturity. Borrowings under Term Loan B currently bear a floating rate of interest equal to 1.75 % plus LIBOR. As of September 30, 2022, the outstanding balance on the Term Loan B bears an interest rate of 4.27 %. For more information regarding the impact and discontinuance of LIBOR, see “Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against” included within Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022. Under Term Loan B, we must maintain a “consolidated net leverage” ratio of no more than 4 :1 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of our total debt reduced by unrestricted cash, including guarantees and letters of credit, over our trailing twelve months net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges. As of September 30, 2022, our consolidated net leverage ratio was 2.1 :1. 19 Table of C ontents For the three months ended September 30, 2022, we recorded interest expense of $ 9.7 million relating to Term Loan B (three months ended September 30, 2021—$ 4.6 million). Revolver On October 31, 2019, we amended our committed revolving credit facility (the Revolver) to increase the total commitments under the Revolver from $ 450 million to $ 750 million as well as to extend the maturity from May 5, 2022 to October 31, 2024. Borrowings under the Revolver are secured by a first charge over substantially all of our assets, on a pari passu basis with Term Loan B, the Acquisition Term Loan and Bridge Loan. The Revolver has no fixed repayment date prior to the end of the term. Borrowings under the Revolver bear interest per annum at a floating rate of LIBOR plus a fixed margin dependent on our consolidated net leverage ratio ranging from 1.25 % to 1.75 %. For more information regarding the impact and discontinuance of LIBOR, see “Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against” included within Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022. As of September 30, 2022, we had no outstanding balance under the Revolver (June 30, 2022— nil ). For the three months ended September 30, 2022, we did not record any interest expense relating to the Revolver (three months ended September 30, 2021— nil ). Acquisition Term Loan On August 25, 2022, we entered into a first lien term loan facility (the Acquisition Term Loan) which provides for a senior secured delayed-draw term loan facility in an aggregate principal amount of $ 2.585 billion. The proceeds of the Acquisition Term Loan, if drawn, will be used solely by the Company to finance the Micro Focus Acquisition (see Note 19 — “Acquisitions” for more details). The Acquisition Term Loan has a seven-year term from the date of funding, and repayments under the Acquisition Term Loan are equal to 0.25 % of the principal amount in equal quarterly installments for the life of the Acquisition Term Loan, with the remainder due at maturity. Borrowings under the Acquisition Term Loan will bear interest at rates as specified in the Acquisition Term Loan Agreement. The Acquisition Term Loan has incremental facility capacity of (i) $ 250 million plus (ii) additional amounts, subject to meeting a “consolidated senior secured net leverage” ratio not exceeding 2.75 :1.00, in each case subject to certain conditions. Consolidated senior secured net leverage ratio is defined for this purpose as the proportion of the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, that is secured by the Company’s or any of the Company’s subsidiaries’ assets, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges. Under the Acquisition Term Loan, we must maintain a “consolidated net leverage” ratio of no more than 4.5 :1.00 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges as defined in the Acquisition Term Loan Agreement. As of September 30, 2022, our consolidated net leverage ratio was 2.1 :1. The Acquisition Term Loan is unconditionally guaranteed by certain subsidiary guarantors, as defined in the Acquisition Term Loan Agreement, and is secured by a first charge on substantially all of the assets of the Company and the subsidiary guarantors on a pari passu basis with the Revolver, Term Loan B and the Bridge Loan. Certain adjustments may be made to the applicable margin and other terms of the Acquisition Term Loan in limited circumstances where necessary to achieve successful syndication. As of September 30, 2022, we had no borrowings under the Acquisition Term Loan. For the three months ended September 30, 2022, we did not record any interest expense relating to the Acquisition Term Loan (three months ended September 30, 2021— nil ). Bridge Loan On August 25, 2022, we entered into a bridge loan agreement (Bridge Loan) which provides for commitments of up to $ 2.0 billion to finance a portion of the repayment of Micro Focus’ existing debt. The Bridge Loan has a one-year term from the initial date of funding, with an extension mechanism pursuant to which such borrowings would convert into secured financing maturing five years from the initial funding date. Borrowings under the Bridge Loan would bear interest at rates as specified in the Bridge Loan Agreement, subject to a total cap. The Bridge Loan is unconditionally guaranteed by certain subsidiary guarantors, as defined in the Bridge Loan Agreement, and is secured by a first charge on substantially all of the assets of the Company and the subsidiary guarantors on a pari passu basis with the Revolver, Term Loan B and Acquisition Term Loan. The Company intends to reduce commitments or 20 Table of C ontents the borrowings under the Bridge Loan by accessing the debt capital markets directly or through certain affiliates prior to or following the closing of the Micro Focus Acquisition, but no assurance can be given that the Company will be able to do so. The Company expects that such debt to also be secured. As of September 30, 2022, we had no borrowings under the Bridge Loan. For the three months ended September 30, 2022, we did not record any interest expense relating to the Bridge Loan (three months ended September 30, 2021— nil ). Debt Issuance Costs Debt issuance costs relate primarily to costs incurred for the purpose of obtaining our credit facilities and issuing our Senior Notes and are being amortized through interest expense over the respective terms of the Senior Notes and Term Loan B, Revolver, Acquisition Term Loan and Bridge Loan using the effective interest method. Additionally, as of September 30, 2022, we had $ 47.0 million in deferred debt issuance costs included in “Other Assets” (see Note 9 “Prepaid Expenses and Other Assets” for more details). NOTE 12— PENSION PLANS AND OTHER POST RETIREMENT BENEFITS Defined Benefit Plans CDT Plan CDT sponsors an unfunded defined benefit pension plan covering substantially all CDT employees (CDT plan) which provides for old age, disability and survivors’ benefits. Benefits under the CDT plan are generally based on age at retirement, years of service and the employee’s annual earnings. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. No contributions have been made since the inception of the plan. GXS GER Plan As part of our acquisition of GXS Group, Inc. (GXS) in Fiscal 2014, we assumed an unfunded defined benefit pension plan covering certain German employees which provides for old age, disability and survivors' benefits. The GXS GER plan has been closed to new participants since 2006. Benefits under the GXS GER plan are generally based on a participant’s remuneration, date of hire, years of eligible service and age at retirement. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. No contributions have been made since the inception of the plan. GXS PHP Plan As part of our acquisition of GXS in Fiscal 2014, we assumed a primarily unfunded defined benefit pension plan covering substantially all of the GXS Philippines employees which provides for retirement, disability and survivors' benefits. Benefits under the GXS PHP plan are generally based on a participant’s remuneration, years of eligible service and age at retirement. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. Aside from an initial contribution which has a fair value of $( 0.03 ) million as of September 30, 2022, no additional contributions have been made since the inception of the plan. 21 Table of C ontents The following are details of net pension expense relating to the following pension plans: Three Months Ended September 30, 2022 2021 Pension expense: CDT GXS GER GXS PHP Total CDT GXS GER GXS PHP Total Service cost $ 52 $ 25 $ 351 $ 428 $ 94 $ 43 $ 428 $ 565 Interest cost 195 119 149 463 112 80 133 325 Amortization of actuarial (gains) losses — ( 15 ) 46 31 125 6 ( 23 ) 108 Net pension expense $ 247 $ 129 $ 546 $ 922 $ 331 $ 129 $ 538 $ 998 Service-related net periodic pension costs are recorded within operating expense and all other non-service related net periodic pension costs are classified under “Interest and other related expense, net” on our Condensed Consolidated Statements of Income. Other Plans Other plans include defined benefit pension plans that are offered or statutorily required by certain of our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. These other plans are primarily unfunded, with the aggregate projected benefit obligation included in our pension liability. The net periodic costs of these plans are determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. NOTE 13— SHARE CAPITAL, OPTION PLANS AND SHARE-BASED PAYMENTS Cash Dividends For the three months ended September 30, 2022, pursuant to the Company’s dividend policy, we declared total non-cumulative dividends of $ 0.24299 per Common Share in the aggregate amount of $ 64.7 million which we paid during the same period (three months ended September 30, 2021—$ 0.2209 per Common Share in the aggregate amount of $ 59.9 million). Share Capital Our authorized share capital includes an unlimited number of Common Shares and an unlimited number of Preference Shares. No Preference Shares have been issued. Treasury Stock From time to time we may provide funds to an independent agent to facilitate repurchases of our Common Shares in connection with the settlement of awards under the Long-Term Incentive Plans (LTIP) or other plans. During the three months ended September 30, 2022 and 2021, we did not repurchase any Common Shares on the open market for potential settlement of awards under our LTIP or other plans as described below. During the three months ended September 30, 2022, we delivered to eligible participants 120,406 Common Shares that were purchased in the open market in connection with the settlement of awards and other plans (three months ended September 30, 2021— 141,452 Common Shares). Share Repurchase Plan On November 4, 2021, the Board authorized a share repurchase plan (Fiscal 2022 Repurchase Plan), pursuant to which we may purchase in open market transactions, from time to time over the 12-month period commencing November 12, 2021, up to an aggregate of $ 350 million of our Common Shares. During the three months ended September 30, 2022 and 2021, we did not repurchase and cancel any Common Shares. 22 Table of C ontents Share-Based Payments Share-based compensation expense for the periods indicated below is detailed as follows: Three Months Ended September 30, 2022 2021 Stock Options (issued under Stock Option Plans) $ 3,585 $ 4,267 Performance Share Units (issued under LTIP) 4,235 3,445 Restricted Share Units (issued under LTIP) 2,175 2,166 Restricted Share Units (other) 10,637 1,728 Deferred Share Units (directors) 961 830 Employee Stock Purchase Plan 1,615 1,498 Total share-based compensation expense $ 23,208 $ 13,934 A summary of unrecognized compensation cost for unvested shared-based payment awards is as follows: As of September 30, 2022 Unrecognized Compensation Cost Weighted Average Recognition Period (years) Stock Options (issued under Stock Option Plans) 49,204.7 2.6 Performance Share Units (issued under LTIP) 45,389.4 2.5 Restricted Share Units (issued under LTIP) 23,596.2 1.8 Restricted Share Units (other) 76,748.6 1.9 Total unrecognized share-based compensation cost $ 194,938.9 Stock Option Plans Stock Options A summary of activity under our stock option plans for the three months ended September 30, 2022 is as follows: Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value ($’000's) Outstanding at June 30, 2022 8,820,662 $ 42.74 4.68 $ 7,111 Granted 1,872,400 35.24 Exercised ( 72,080 ) 27.66 Forfeited or expired ( 505,374 ) 44.34 Outstanding at September 30, 2022 10,115,608 $ 41.38 4.87 $ — Exercisable at September 30, 2022 3,651,940 $ 39.07 3.30 $ — As of September 30, 2022, 8,227,818 options to purchase Common Shares were available for issuance under our stock option plans. We estimate the fair value of stock options using the Black-Scholes option-pricing model or, where appropriate, the Monte Carlo pricing model, consistent with the provisions of ASC Topic 718, “Compensation—Stock Compensation” (Topic 718) and SEC Staff Accounting Bulletin No. 107. The option-pricing models require input of subjective assumptions, including the estimated life of the option and the expected volatility of the underlying stock over the estimated life of the option. We use historical volatility as a basis for projecting the expected volatility of the underlying stock and estimate the expected life of our stock options based upon historical data. We believe that the valuation techniques and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of our stock option grants. Estimates of fair value are not intended, however, to predict actual future events or the value ultimately realized by employees who receive equity awards. 23 Table of C ontents For the periods indicated, the weighted-average fair value of options and weighted-average assumptions estimated under the Black-Scholes option-pricing model were as follows: Three Months Ended September 30, 2022 2021 Weighted–average fair value of options granted $ 8.16 $ 9.75 Weighted-average assumptions used: Expected volatility 27.46 % 26.62 % Risk–free interest rate 2.86 % 0.55 % Expected dividend yield 2.32 % 1.56 % Expected life (in years) 4.18 4.16 Forfeiture rate (based on historical rates) 7 % 7 % Average exercise share price $ 39.09 $ 52.62 Performance Options During the three months ended September 30, 2022, we granted 1,000,000 performance options (during the three months ended September 30, 2021— nil ). For the period in which performance options were granted, the weighted-average fair value of performance options and weighted-average assumptions estimated under the Monte Carlo pricing model were as follows: Three Months Ended September 30, 2022 Weighted–average fair value of options granted $ 8.09 Derived service period (in years) 1.7 Weighted-average assumptions used: Expected volatility 26.00 % Risk–free interest rate 3.21 % Expected dividend yield 2.00 % Average exercise share price $ 31.89 Long-Term Incentive Plans We incentivize certain eligible employees, in part, with long-term compensation pursuant to our LTIP. The LTIP is a rolling three-year program that grants eligible employees a certain number of target Performance Share Units (PSUs) and/or Restricted Share Units (RSUs). Target PSUs become vested upon the achievement of certain financial and/or operational performance criteria (the Performance Conditions) that are determined at the time of the grant. RSUs become vested when an eligible employee remains employed throughout the vesting period. PSUs and RSUs granted under the LTIP have been measured at fair value as of the effective date, consistent with Topic 718, and will be charged to share-based compensation expense over the remaining life of the plan. We estimate the fair value of PSUs using the Monte Carlo pricing model and RSUs have been valued based upon their grant date fair value. Stock options granted under the LTIP have been measured using the Black-Scholes option-pricing model, consistent with Topic 718. LTIP 2025 Grants made in Fiscal 2023 under the LTIP (collectively referred to as LTIP 2025), consisting of PSUs and RSUs, took effect in Fiscal 2023 starting on August 8, 2022. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. The RSUs are employee service-based awards and vest over the life of the LTIP 2025. We expect to settle the LTIP 2025 awards in Common Shares. The LTIP 2025 PSU and RSU awards are eligible to receive dividend equivalent units that vest under the same conditions as the underlying grants. 24 Table of C ontents Performance Share Units (Issued Under LTIP) A summary of activity under our performance share units issued under the LTIP for the three months ended September 30, 2022 is as follows: Units Weighted-Average Grant Date Fair Value Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value ($’000's) Outstanding at June 30, 2022 812,937 $ 61.29 1.89 $ 30,762 Granted (1) 526,865 54.70 Vested — — Forfeited or expired ( 58,350 ) 67.10 Outstanding at September 30, 2022 1,281,452 $ 58.37 2.12 $ 33,882 __________________________ (1) PSUs are earned based on market conditions and the actual number of PSUs earned, if any, is dependent upon performance and may range from 0 to 200 percent. For the periods indicated, the weighted-average fair value of PSUs issued under LTIP, and weighted-average assumptions estimated under the Monte Carlo pricing model were as follows: Three Months Ended September 30, 2022 2021 Weighted–average fair value of performance share units granted $ 55.06 $ 75.15 Weighted-average assumptions used: Expected volatility 29.00 % 28.00 % Risk–free interest rate 3.13 % 0.45 % Expected dividend yield — % 1.70 % Expected life (in years) 3.11 3.10 Forfeiture rate (based on historical rates) 7 % 7 % Restricted Share Units (Issued Under LTIP) A summary of activity under our RSUs issued under the LTIP for the three months ended September 30, 2022 is as follows: Units Weighted-Average Grant Date Fair Value Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value ($’000's) Outstanding at June 30, 2022 611,743 $ 44.14 1.62 $ 23,148 Granted 394,584 38.97 Vested — — Forfeited or expired ( 45,030 ) 45.85 Outstanding at September 30, 2022 961,297 $ 41.94 2.07 $ 25,417 Restricted Share Units (Other) In addition to the grants made in connection with the LTIP discussed above, from time to time, we may grant RSUs to certain employees in accordance with employment and other non-LTIP related agreements. RSUs (other) vest over a specified contract date, typically two or three years from the respective date of grants. 25 Table of C ontents A summary of activity under our RSUs (other) issued for the three months ended September 30, 2022 is as follows: Units Weighted-Average Grant Date Fair Value Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value ($’000's) Outstanding at June 30, 2022 2,593,707 $ 44.90 2.86 $ 98,146 Granted — — Vested ( 120,406 ) 37.83 Forfeited or expired ( 88,587 ) 44.84 Outstanding at September 30, 2022 2,384,714 $ 44.86 2.68 $ 63,052 Deferred Share Units (DSUs) The DSUs are granted to certain non-employee directors. DSUs are issued under our Deferred Share Unit Plan. DSUs granted as compensation for director fees vest immediately, whereas all other DSUs granted vest at our next annual general meeting following the granting of the DSUs. No DSUs are payable by us until the director ceases to be a member of the Board. A summary of activity under our deferred share units issued for the three months ended September 30, 2022 is as follows: Units Weighted-Average Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value ($’000's) Outstanding at June 30, 2022 (1) 885,701 $ 31.49 0.36 $ 33,515 Granted 13,747 32.41 Outstanding at September 30, 2022 (1) 899,448 $ 31.50 0.10 $ 21,934 ______________________ (1) Includes 55,520 unvested DSUs. Employee Stock Purchase Plan (ESPP) Our ESPP offers employees the opportunity to purchase our Common Shares at a purchase price discount of 15 %. During the three months ended September 30, 2022, 354,465 Common Shares were eligible for issuance to employees enrolled in the ESPP (three months ended September 30, 2021— 225,731 Common Shares). During the three months ended September 30, 2022, cash in the amount of $ 8.0 million was received from employees relating to the ESPP (three months ended September 30, 2021—$ 9.4 million). NOTE 14— GUARANTEES AND CONTINGENCIES We have entered into the following contractual obligations with minimum payments for the indicated fiscal periods as follows: Payments due between Total October 1, 2022 - June 30, 2023 July 1, 2023 - June 30, 2025 July 1, 2025 - June 30, 2027 July 1, 2027 and beyond Long-term debt obligations (1) $ 5,336,028 $ 134,121 $ 1,289,157 $ 263,500 $ 3,649,250 Purchase obligations for contracts not accounted for as lease obligations (2) 93,168 36,137 44,352 12,679 — $ 5,429,196 $ 170,258 $ 1,333,509 $ 276,179 $ 3,649,250 _________________________ (1) Includes interest up to maturity and principal payments. Please see Note 11 “Long-Term Debt” for more details. (2) For contractual obligations relating to leases and purchase obligations accounted for under ASC Topic 842, please see Note 6 “Leases.” Guarantees and Indemnifications We have entered into customer agreements which may include provisions to indemnify our customers against third-party claims that our software products or services infringe certain third-party intellectual property rights and for liabilities related to 26 Table of C ontents a breach of our confidentiality obligations. We have not made any material payments in relation to such indemnification provisions and have not accrued any liabilities related to these indemnification provisions in our Condensed Consolidated Financial Statements. Occasionally, we enter into financial guarantees with third parties in the ordinary course of our business, including, among others, guarantees relating to taxes and letters of credit on behalf of parties with whom we conduct business. Such agreements have not had a material effect on our results of operations, financial position or cash flows. Litigation We are currently involved in various claims and legal proceedings. Quarterly, we review the status of each significant legal matter and evaluate such matters to determine how they should be treated for accounting and disclosure purposes in accordance with the requirements of ASC Topic 450-20 “Loss Contingencies” (Topic 450-20). Specifically, this evaluation process includes the centralized tracking and itemization of the status of all our disputes and litigation items, discussing the nature of any litigation and claim, including any dispute or claim that is reasonably likely to result in litigation, with relevant internal and external counsel, and assessing the progress of each matter in light of its merits and our experience with similar proceedings under similar circumstances. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss in accordance with Topic 450-20. As of the date of this Quarterly Report on Form 10-Q, the aggregate of such accrued liabilities was not material to our consolidated financial position or results of operations and we do not believe as of the date of this filing that it is reasonably possible that a loss exceeding the amounts already recognized will be incurred that would be material to our consolidated financial position or results of operations. As described more fully below, we are unable at this time to estimate a possible loss or range of losses in respect of certain disclosed matters. Contingencies CRA Matter As part of its ongoing audit of our Canadian tax returns, the Canada Revenue Agency (CRA) has disputed our transfer pricing methodology used for certain intercompany transactions with our international subsidiaries and has issued notices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016. Assuming the utilization of available tax attributes (further described below), we estimate our potential aggregate liability, as of September 30, 2022, in connection with the CRA's reassessments for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016, to be limited to penalties, interest and provincial taxes that may be due of approximately $ 70 million. As of September 30, 2022, we have provisionally paid approximately $ 32 million in order to fully preserve our rights to object to the CRA's audit positions, being the minimum payment required under Canadian legislation while the matter is in dispute. This amount is recorded within “Long-term income taxes recoverable” on the Condensed Consolidated Balance Sheets as of September 30, 2022. The notices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016 would, as drafted, increase our taxable income by approximately $ 90 million to $ 100 million for each of those years, as well as impose a 10 % penalty on the proposed adjustment to income. Audits by the CRA of our tax returns for fiscal years prior to Fiscal 2012 have been completed with no reassessment of our income tax liability. We strongly disagree with the CRA's positions and believe the reassessments of Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016 (including any penalties) are without merit, and we are continuing to contest these reassessments. On June 30, 2022, we filed a notice of appeal with the Tax Court of Canada seeking to reverse all such reassessments (including penalties) in full. Even if we are unsuccessful in challenging the CRA's reassessments to increase our taxable income for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016, we have elective deductions available for those years (including carry-backs from later years) that would offset such increased amounts so that no additional cash tax would be payable, exclusive of any assessed penalties and interest, as described above. The CRA has audited Fiscal 2017 on a basis that we strongly disagree with and are contesting. The focus of the CRA audit has been the valuation of certain intellectual property and goodwill when one of our subsidiaries continued into Canada from Luxembourg in July 2016. In accordance with applicable rules, these assets were recognized for tax purposes at fair market value as of that time, which value was supported by an expert valuation prepared by an independent leading accounting and advisory firm. CRA’s position for Fiscal 2017 relies in significant part on the application of its positions regarding our transfer pricing methodology that are the basis for its reassessment of our fiscal years 2012 to 2016 described above, and that we believe are without merit. Other aspects of CRA’s position for Fiscal 2017 conflict with the expert valuation prepared by the 27 Table of C ontents independent leading accounting and advisory firm that was used to support our original filing position. On January 27, 2022, the CRA issued a notice of reassessment in respect of Fiscal 2017 on a basis consistent with its proposal to reduce the available depreciable basis of assets in Canada. On April 19, 2022, we filed our notice of objection regarding the reassessment in respect of Fiscal 2017. If we are ultimately unsuccessful in defending our position, the estimated impact of the proposed adjustment could result in us recording an income tax expense, with no immediate cash payment, to reduce the stated value of our deferred tax assets of up to approximately $ 470 million. Any such income tax expense could also have a corresponding cash tax impact that would primarily occur over a period of several future years based upon annual income realization in Canada. We strongly disagree with the CRA’s position for Fiscal 2017 and intend to vigorously defend our original filing position. We are not required to provisionally pay any cash amounts to the CRA as a result of the reassessment in respect of Fiscal 2017 due to the utilization of available tax attributes; however, to the extent the CRA reassesses subsequent fiscal years on a similar basis, we expect to make certain minimum payments required under Canadian legislation, which may need to be provisionally made starting in Fiscal 2024 while the matter is in dispute. We will continue to vigorously contest the adjustments to our taxable income and any penalty and interest assessments, as well as any reduction to the basis of our depreciable property. We are confident that our original tax filing positions were appropriate. Accordingly, as of the date of this Quarterly Report on Form 10-Q, we have not recorded any accruals in respect of these reassessments or proposed reassessment in our Condensed Consolidated Financial Statements. The CRA is currently in preliminary stages of auditing Fiscal 2018 and Fiscal 2019. Carbonite Class Action Complaint On August 1, 2019, prior to our acquisition of Carbonite, a purported stockholder of Carbonite filed a putative class action complaint against Carbonite, its former Chief Executive Officer, Mohamad S. Ali, and its former Chief Financial Officer, Anthony Folger, in the United States District Court for the District of Massachusetts captioned Ruben A. Luna, Individually and on Behalf of All Others Similarly Situated v. Carbonite, Inc., Mohamad S. Ali, and Anthony Folger (No. 1:19-cv-11662-LTS). The complaint alleges violations of the federal securities laws under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint generally alleges that the defendants made materially false and misleading statements in connection with Carbonite’s Server Backup VM Edition, and seeks, among other things, the designation of the action as a class action, an award of unspecified compensatory damages, costs and expenses, including counsel fees and expert fees, and other relief as the court deems appropriate. On August 23, 2019, a nearly identical complaint was filed in the same court captioned William Feng, Individually and on Behalf of All Others Similarly Situated v. Carbonite, Inc., Mohamad S. Ali, and Anthony Folger (No. 1:19- cv-11808-LTS) (together with the Luna Complaint, the “Securities Actions”). On November 21, 2019, the district court consolidated the Securities Actions, appointed a lead plaintiff, and designated a lead counsel. On January 15, 2020, the lead plaintiff filed a consolidated amended complaint generally making the same allegations and seeking the same relief as the complaint filed on August 1, 2019. The defendants moved to dismiss the Securities Actions on March 10, 2020. The motion was fully briefed in June 2020 and a hearing on the motion to dismiss the Securities Actions was held on October 15, 2020. Following the hearing, on October 22, 2020, the district court granted with prejudice the defendants’ motion to dismiss the Securities Actions. On November 20, 2020, the lead plaintiff filed a notice of appeal to the Court of Appeals for the First Circuit. On December 21, 2021, the First Circuit issued a decision reversing and remanding the Securities Actions to the district court for further proceedings. The defendants remain confident in their position, believe the Securities Actions are without merit, and will continue to vigorously defend the matter. Carbonite vs Realtime Data On February 27, 2017, before our acquisition of Carbonite, a non-practicing entity named Realtime Data LLC (Realtime Data) filed a lawsuit against Carbonite in the U.S. District Court for the Eastern District of Texas “Realtime Data LLC v. Carbonite, Inc. et al (No 6:17-cv-00121-RWS-JDL).” Therein, it alleged that certain of Carbonite’s cloud storage services infringe upon certain patents held by Realtime Data. Realtime Data’s complaint against Carbonite sought damages in an unspecified amount and injunctive relief. On December 19, 2017, the U.S. District Court for the Eastern District of Texas transferred the case to the U.S. District Court for the District of Massachusetts (No. 1:17-cv-12499). Realtime Data has also filed numerous other patent suits on the same asserted patents against other companies. After a stay pending appeal in one of those suits, on January 21, 2021, the district court held a hearing to construe the claims of the asserted patents. As to the fourth patent asserted against Carbonite, on September 24, 2019, the U.S. Patent & Trademark Office Patent Trial and Appeal Board invalidated certain claims of that patent, including certain claims that had been asserted against Carbonite. The parties then jointly stipulated to dismiss that patent from this action. On August 23, 2021, in one of the suits against other companies, the District of Delaware (No. 1:17-cv-800), held all of the patents asserted against Carbonite to be invalid. Realtime Data has appealed that decision to the U.S. Court of Appeals for the Federal Circuit. We continue to vigorously defend the matter, and the U.S. District Court for the District of Massachusetts has issued a claim construction order. We have not accrued a loss contingency related to this matter because litigation related to a non-practicing entity is inherently unpredictable. Although a 28 Table of C ontents loss is reasonably possible, an unfavorable outcome is not considered by management to be probable at this time and we remain unable to reasonably estimate a possible loss or range of loss associated with this litigation. Please also see Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022. NOTE 15— INCOME TAXES The Company’s effective tax rate for the three months ended September 30, 2022, was ( 40.4 )%, compared to a provision of 24.8 % for the three months ended September 30, 2021. The Company’s effective tax rate for the three months ended September 30, 2022, differs from the Canadian statutory rate of 26.5% primarily due to the pre-tax loss created by the mark-to-market valuation on the derivatives not designated as hedges that the Company entered into in connection with the proposed Micro Focus Acquisition, and the inability to recognize a majority of the mark-to-market losses for tax purposes (see Note 17 “Derivative Instruments and Hedging Activities”). The mark-to-market losses are considered capital losses for tax purposes and require capital income to be recognized. Therefore we recorded a valuation allowance on the portion of the losses that are not supportable by capital gains. Other items impacting the rate include provision to return adjustments, a net increase in uncertain tax positions, and permanent items such as disallowed stock-based compensation and foreign passive income inclusion, partially offset by research and development credits. The Company’s effective tax rate for the three months ended September 30, 2021, differs from the Canadian statutory rate primarily due to research and development credits, partially offset by US Base Erosion and Anti-Abuse Tax (US BEAT). As of September 30, 2022, the gross amount of unrecognized tax benefits accrued is $ 58.9 million, which is inclusive of interest and penalties accrued of $ 8.6 million (June 30, 2022 — $ 54.1 million and $ 8.4 million, respectively). We believe that it is reasonably possible that the gross unrecognized tax benefit could decrease by $ 6.8 million in the next 12 months, relating primarily to the expiration of competent authority relief and tax years becoming statute barred for purposes of future tax examinations by local taxing jurisdictions. We are subject to income tax audits in all major taxing jurisdictions in which we operate, and remain subject to income tax audits by applicable tax authorities for a certain length of time following the tax year to which those tax filings relate. We currently have income tax audits open in Canada, the United States, Germany and other immaterial jurisdictions. The earliest fiscal years open for examination for our major jurisdictions are 2012 for Canada, 2016 for the United States and 2012 for Germany. As of December 31, 2021, the Fiscal 2015 and Fiscal 2016 tax years for Luxembourg became statute barred. On a quarterly basis we assess the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. Statements regarding the Canada audits are included in Note 14 “Guarantees and Contingencies.” The timing of the resolution of income tax audits is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax audits in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes. For more information relating to certain income tax audits, please refer to Note 14 “Guarantees and Contingencies.” As of September 30, 2022, we have recognized a provision of $ 20.7 million (June 30, 2022—$ 19.9 million) in respect of both additional foreign taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of certain non-United States subsidiaries and planned periodic repatriations from certain German subsidiaries, that will be subject to withholding taxes upon distribution. We have not provided for additional foreign withholding taxes or deferred income tax liabilities related to undistributed earnings of all other non-Canadian subsidiaries, since such earnings are considered permanently invested in those subsidiaries or are not subject to withholding taxes. It is not practicable to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future. NOTE 16— FAIR VALUE MEASUREMENT ASC Topic 820 “Fair Value Measurement” (Topic 820) defines fair value, establishes a framework for measuring fair value, and addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including our own credit risk. 29 Table of C ontents In addition to defining fair value and addressing disclosure requirements, Topic 820 establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: • Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. • Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques. Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis: Our financial assets and liabilities that are measured at fair value on a recurring basis consisted of the following types of instruments as of September 30, 2022 and June 30, 2022: Fair Value Fair Value Hierarchy September 30, 2022 June 30, 2022 Financial Assets (Liabilities): Designated as Hedging Instruments Cash flow hedge (Note 17) Level 2 $ ( 4,637 ) $ ( 892 ) Not Designated as Hedging Instruments Deal-contingent forward contracts (Note 17) Level 3 $ ( 125,331 ) $ — Non-contingent forward contract (Note 17) Level 2 $ ( 26,203 ) $ — Cross currency swap contract (Note 17) Level 2 $ ( 29,927 ) $ — Changes in Level 3 Fair Value Measurements The following tables provides a reconciliation of changes in the fair value of our Level 3 deal-contingent foreign currency forward contract between June 30, 2022 and September 30, 2022. Deal-contingent foreign currency forward contract Balance as of June 30, 2022 $ — Gain (loss) recognized in income ( 125,331 ) Balance as of September 30, 2022 $ ( 125,331 ) Our valuation techniques used to measure the fair value of our Level 2 and Level 3 derivative instruments, the counterparties to which have high credit ratings, were derived from pricing models including discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data, as no quoted market prices exist for these instruments. Our discounted cash flow techniques use observable market inputs, such as, where applicable, foreign currency spot and forward rates. The valuation technique for our Level 3 derivative instrument utilizes management estimates related to the probability and timing of our proposed Micro Focus Acquisition that are unobservable, and are not deemed to be significant inputs for the overall valuation. Our cash and cash equivalents, along with our accounts receivable and accounts payable and accrued liabilities balances, are measured and recognized in our Condensed Consolidated Financial Statements at an amount that approximates the fair value (a Level 2 measurement) due to their short maturities. The fair value of our Senior Notes is determined based on observable market prices and categorized as a Level 2 measurement. As of September 30, 2022, the fair value was $ 2.6 billion (June 30, 2022—$ 2.8 billion). The carrying value of our other long-term debt facilities approximates the fair value since the interest rate is at market. Please see Note 11 “Long-Term Debt” for further details. 30 Table of C ontents If applicable, we will recognize transfers between levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three months ended September 30, 2022 and 2021, respectively, we did not have any transfers between Level 1, Level 2 or Level 3. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets and liabilities are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three months ended September 30, 2022 and 2021, respectively, no indications of impairments were identified and therefore no fair value measurements were required. NOTE 17— DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Cash Flow Hedge We are engaged in hedging programs with various banks to limit the potential foreign exchange fluctuations incurred on future cash flows relating to a portion of our Canadian dollar payroll expenses. We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business, in particular to changes in the Canadian dollar on account of large costs that are incurred from our centralized Canadian operations, which are denominated in Canadian dollars. As part of our risk management strategy, we use foreign currency forward contracts to hedge portions of our payroll exposure with typical maturities of between one and twelve months . We do not use foreign currency forward contracts for speculative purposes. We have designated these transactions as cash flow hedges of forecasted transactions under ASC Topic 815 “Derivatives and Hedging” (Topic 815). As the critical terms of the hedging instrument and of the entire hedged forecasted transaction are the same, in accordance with Topic 815, we have been able to conclude that changes in fair value or cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly, quarterly unrealized gains or losses on the effective portion of these forward contracts have been included within “Other Comprehensive Income (Loss) - net.” As of September 30, 2022, the fair value of the contracts is recorded within “Accounts payable and accrued liabilities” and represents the net loss before tax effect that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings with the next twelve months. As of September 30, 2022, the notional amount of forward contracts we held to sell U.S. dollars in exchange for Canadian dollars was $ 79.0 million (June 30, 2022—$ 66.5 million). Non-designated Hedges In connection with the Micro Focus Acquisition, in August 2022, the Company entered into certain derivative transactions to meet certain foreign currency obligations under UK cash confirmation requirements related to the purchase price of the proposed Micro Focus Acquisition, mitigate the risk of foreign currency appreciation in the GBP denominated purchase price and mitigate the risk of foreign currency appreciation in the EUR denominated existing debt held by Micro Focus. The Company entered into the following derivatives: (i) three deal-contingent forward contracts, (ii) a non-contingent forward contract, and (iii) EUR/USD cross currency swaps. The deal-contingent forward contracts have an aggregate notional amount of £ 1.475 billion, and settlement is contingent upon closing the Micro Focus Acquisition. The non-contingent forward contract has a notional amount of £ 350 million. The cross currency swaps are comprised of a 5 year EUR/USD cross currency swap with a notional amount of € 690 million and a 7 year EUR/USD cross currency swap with a notional amount of € 690 million. These instruments were entered into as economic hedges to mitigate foreign currency risks associated with the proposed Micro Focus Acquisition. The instruments do not qualify for hedge accounting at inception. Derivative financial instruments that do not apply hedge accounting are recognized on the Condensed Consolidated Balance Sheets as either assets or liabilities. As of September 30, 2022, the forward contracts and the foreign currency swaps are in a net liability position and are classified within “Accounts payable and accrued liabilities.” The forward contracts and cross currency swaps are measured at fair value with changes to fair value being recognized in the Condensed Consolidated Statements of Income within “Other income (expense), net.” 31 Table of C ontents Fair Value of Derivative Instruments and Effect of Derivative Instruments on Financial Performance The fair values of outstanding derivative instruments are as follows: As of September 30, 2022 As of June 30, 2022 Instrument Balance Sheet Location Asset Liability Asset Liability Derivatives designated as hedges: Cash flow hedge Accounts payable and accrued liabilities $ — $ ( 4,637 ) $ — $ ( 892 ) Total derivatives designated as hedges: $ — $ ( 4,637 ) $ — $ ( 892 ) Derivatives not designated as hedges: Deal-contingent forward contracts Accounts payable and accrued liabilities — ( 125,331 ) — — Non-contingent forward contract Accounts payable and accrued liabilities — ( 26,203 ) — — Cross currency swap contracts Accounts payable and accrued liabilities — ( 29,927 ) — — Total derivatives not designated as hedges: $ — $ ( 181,461 ) $ — $ — Total derivatives $ — $ ( 186,098 ) $ — $ ( 892 ) The effects of gains (losses) from derivative instruments on our Condensed Consolidated Statements of Income is as follows: Three Months Ended September 30, Instrument Income Statement Location 2022 2021 Derivatives designated as hedges: Cash flow hedges Operating expenses $ ( 800 ) $ 390 Derivatives not designated as hedges: Deal-contingent forward contract Other income (expense), net ( 125,331 ) — Non-contingent forward contract Other income (expense), net ( 26,203 ) — Cross currency swap contracts Other income (expense), net ( 29,927 ) — Total $ ( 182,261 ) $ 390 The effects of the cash flow hedges on our Condensed Consolidated Statements of Comprehensive Income: Three Months Ended September 30, Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income Location 2022 2021 Gain (loss) recognized in OCI (loss) on derivatives (effective portion) Unrealized gain (loss) on cash flow hedges $ ( 4,546 ) $ ( 1,477 ) Gain (loss) reclassified from AOCI into income (effective portion) Operating expenses $ ( 800 ) $ 390 32 Table of C ontents NOTE 18— SPECIAL CHARGES (RECOVERIES) Special charges (recoveries) include costs and recoveries that relate to certain restructuring initiatives that we have undertaken from time to time under our various restructuring plans, as well as acquisition-related costs and other charges. Three Months Ended September 30, 2022 2021 Fiscal 2022 Restructuring Plan $ 6,110 $ — Other historical restructuring plans ( 468 ) ( 602 ) Acquisition-related costs 4,585 728 Other charges (recoveries) 4,054 218 Total $ 14,281 $ 344 Fiscal 2022 Restructuring Plan During the third quarter of Fiscal 2022, as part of our return to office planning, we made a strategic decision to implement restructuring activities to streamline our operations and further reduce our real estate footprint around the world (Fiscal 2022 Restructuring Plan). The Fiscal 2022 Restructuring Plan charges will relate to facility costs and workforce reductions. Facility costs will include the accelerated amortization associated with the abandonment of ROU assets, the write-off of fixed assets and other related variable lease and exit costs. These charges require management to make certain judgments and estimates regarding the amount and timing of restructuring charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and revise our assumptions and estimates as appropriate. During the three months ended September 30, 2022, we recognized costs of $ 3.8 million related to abandoned office space that have been early terminated or assigned to a third party, of which $ 2.9 million was related to the write-off of right of use assets. As of September 30, 2022, we expect total costs to be incurred in connection with the Fiscal 2022 Restructuring Plan to be approximately $ 40.0 million to $ 45.0 million, of which $ 31.9 million has been recorded within “Special charges (recoveries)” to date. A reconciliation of the beginning and ending restructuring liability, which is included within “Accounts payable and accrued liabilities” in our Condensed Consolidated Balance Sheets, for the three months ended September 30, 2022 is shown below. Fiscal 2022 Restructuring Plan Workforce reduction Facility charges Total Balance payable as of June 30, 2022 $ 989 $ 5,410 $ 6,399 Accruals and adjustments 2,270 952 3,222 Cash payments ( 1,147 ) ( 431 ) ( 1,578 ) Foreign exchange and other non-cash adjustments ( 120 ) — ( 120 ) Balance payable as of September 30, 2022 $ 1,992 $ 5,931 $ 7,923 Acquisition-related costs Acquisition-related costs, recorded within “Special charges (recoveries)” include direct costs of potential and completed acquisitions. Acquisition-related costs for the three months ended September 30, 2022 were $ 4.6 million (three months ended September 30, 2021—$ 0.7 million). Other charges (recoveries) For the three months ended September 30, 2022, “Other charges” includes $ 3.6 million, related to pre-acquisition equity incentives of Zix Corporation (Zix), which upon acquisition were replaced by equivalent value cash settlements (see Note 19 “Acquisitions”) and $ 0.5 million related to other miscellaneous charges. For the three months ended September 30, 2021, “Other charges” includes $ 0.2 million related to other miscellaneous charges. 33 Table of C ontents NOTE 19— ACQUISITIONS Fiscal 2023 Acquisitions Proposed Acquisition of Micro Focus On August 25, 2022, we announced an agreement on the terms of an all-cash offer (through our wholly-owned subsidiary), to acquire the entire issued and to be issued share capital of Micro Focus, at a price of 532 pence per share, for a total purchase price of approximately $ 6.0 billion, inclusive of Micro Focus’ cash and debt. The all-cash consideration for the Micro Focus Acquisition is expected to be funded by new debt, cash on hand and a draw on our Revolver. Concurrent with the announcement of the Micro Focus Acquisition, the Company entered into the Acquisition Term Loan and Bridge Loan (see Note 11 “Long-Term Debt”) as well as certain derivative transactions (see Note 17 “Derivative Instruments and Hedging Activities”). These derivative transactions were marked-to-market during the three months ended September 30, 2022, with the resulting unrealized gains (losses) on these derivatives recognized in other income (expense) within our Condensed Consolidated Statements of Income (see Note 22 “Other Income (Expense), Net”). On October 18, 2022 the shareholders of Micro Focus approved the all-cash offer. The Micro Focus Acquisition is expected to close in the first quarter of calendar 2023, subject to the satisfaction (or, where applicable, waiver) of certain conditions. See Part II, Item 1A, “Risk Factors” included within this Quarterly Report on Form 10-Q. Acquisition-related costs for Micro Focus included in “Special Charges (Recoveries)” in the Condensed Consolidated Financial Statements for the three months ended September 30, 2022 were $ 4.4 million. Fiscal 2022 Acquisitions Acquisition of Zix Corporation On December 23, 2021, we acquired all of the equity interest in Zix, a leader in software as a service (SaaS) based email encryption, threat protection and compliance cloud solutions for small and medium-sized businesses (SMB). Total consideration for Zix was $ 894.5 million paid in cash, inclusive of cash acquired and $ 18.6 million relating to the cash settlement of pre-acquisition vested share-based compensation that was previously accrued but since paid as of March 31, 2022. In accordance with Accounting Standards Codification (ASC) Topic 805 “Business Combinations” (Topic 805), this acquisition was accounted for as a business combination. We believe the acquisition increases our position in the data protection, threat management, email security and compliance solutions spaces. The results of operations of Zix have been consolidated with those of OpenText beginning December 23, 2021. Preliminary Purchase Price Allocation The recognized amounts of identifiable assets acquired and liabilities assumed, based on their preliminary fair values as of December 23, 2021, are set forth below: Current assets (inclusive of cash acquired of $ 38.3 million) $ 74,230 Non-current tangible assets 13,450 Intangible customer assets 212,400 Intangible technology assets 92,650 Liabilities assumed ( 79,941 ) Total identifiable net assets 312,789 Goodwill 581,672 Net assets acquired $ 894,461 The goodwill of $ 581.7 million is primarily attributable to the synergies expected to arise after the acquisition. There is $ 103.7 million of goodwill that is deductible for tax purposes. The fair value of current assets acquired includes accounts receivable with a fair value of $ 28.4 million. The gross amount receivable was $ 32.7 million, of which $ 4.3 million is expected to be uncollectible. Acquisition-related costs for Zix included in “Special Charges (Recoveries)” in the Condensed Consolidated Financial Statements for the three months ended September 30, 2022 were $ 0.2 million. 34 Table of C ontents Pre-acquisition equity incentives of $ 26.4 million were replaced upon acquisition by equivalent value cash settlements to be settled in accordance with the original vesting dates, primarily over the next two years . Of these equity incentives, $ 3.6 million for the three months ended September 30, 2022 were included in “Special Charges (Recoveries).” The finalization of the above purchase price allocation is pending the finalization of the valuation of fair value for the assets acquired and liabilities assumed, including intangible assets and taxation-related balances as well as for potential unrecorded liabilities. We expect to finalize this determination during our quarter ending December 31, 2022. Acquisition of Bricata Inc. On November 24, 2021, we acquired all of the equity interest in Bricata Inc. (Bricata) for $ 17.8 million. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe the acquisition strengthens our OpenText Security and Protection Cloud with Network Detection and Response technologies. The results of operations of Bricata have been consolidated with those of OpenText beginning November 24, 2021. NOTE 20— ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Pension Plans Accumulated Other Comprehensive Income (Loss) Balance as of June 30, 2022 $ ( 3,316 ) $ ( 656 ) $ ( 3,687 ) $ ( 7,659 ) Other comprehensive income (loss) before reclassifications, net of tax ( 36,366 ) ( 3,340 ) 4,164 ( 35,542 ) Amounts reclassified into net income, net of tax — 588 37 625 Total other comprehensive income (loss) net, for the period ( 36,366 ) ( 2,752 ) 4,201 ( 34,917 ) Balance as of September 30, 2022 $ ( 39,682 ) $ ( 3,408 ) $ 514 $ ( 42,576 ) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Pension Plans Accumulated Other Comprehensive Income (Loss) Balance as of June 30, 2021 $ 75,408 $ 830 $ ( 10,000 ) $ 66,238 Other comprehensive income (loss) before reclassifications, net of tax ( 10,092 ) ( 1,086 ) ( 1,049 ) ( 12,227 ) Amounts reclassified into net income, net of tax — ( 287 ) 162 ( 125 ) Total other comprehensive income (loss) net, for the period ( 10,092 ) ( 1,373 ) ( 887 ) ( 12,352 ) Balance as of September 30, 2021 $ 65,316 $ ( 543 ) $ ( 10,887 ) $ 53,886 NOTE 21— SUPPLEMENTAL CASH FLOW DISCLOSURES Three Months Ended September 30, 2022 2021 Cash paid during the period for interest $ 46,423 $ 41,659 Cash received during the period for interest $ 5,431 $ 838 Cash paid during the period for income taxes $ 38,459 $ 12,780 35 Table of C ontents NOTE 22— OTHER INCOME (EXPENSE), NET Three Months Ended September 30, 2022 2021 Foreign exchange gains (losses) $ ( 1,361 ) $ 351 Unrealized losses on derivatives not designated as hedges (1) ( 181,461 ) — OpenText share in net income (losses) of equity investees (2) ( 6,534 ) 29,315 Other miscellaneous income (expense) 125 116 Total other income (expense), net $ ( 189,231 ) $ 29,782 ____________________________________ (1) Represents the unrealized losses on our derivatives not designated as hedges related to the proposed Micro Focus Acquisition (see Note 17 “Derivative Instruments and Hedging Activities” for more details). (2) Represents our share in net income (losses) of equity investees, which approximates fair value and subject to volatility based on market trends and business conditions, based on our interest in certain investment funds in which we are a limited partner. Our interests in each of these investees range from 4 % to below 20 % and these investments are accounted for using the equity method (see Note 9 “Prepaid Expenses and Other Assets” for more details). NOTE 23— EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share are computed by dividing net income (loss) attributable to OpenText, by the weighted average number of Common Shares outstanding during the period. Diluted earnings (loss) per share are computed by dividing net income (loss) attributable to OpenText, by the shares used in the calculation of basic earnings (loss) per share plus the dilutive effect of Common Share equivalents, such as stock options, using the treasury stock method. Common Share equivalents are excluded from the computation of diluted earnings (loss) per share if their effect is anti-dilutive. For periods in which we incur a net loss, our outstanding Common Share equivalents are not included in the calculation of diluted loss per share as their effect is anti-dilutive. Three Months Ended September 30, 2022 2021 Basic earnings (loss) per share Net income (loss) attributable to OpenText $ ( 116,929 ) $ 131,915 Basic earnings (loss) per share attributable to OpenText $ ( 0.43 ) $ 0.48 Diluted earnings (loss) per share Net income (loss) attributable to OpenText $ ( 116,929 ) $ 131,915 Diluted earnings (loss) per share attributable to OpenText $ ( 0.43 ) $ 0.48 Weighted-average number of shares outstanding (in '000's) Basic 269,804 272,044 Effect of dilutive securities — 1,188 Diluted 269,804 273,232 Excluded as anti-dilutive (1) 9,452 1,973 ____________________________________ (1) Represents options to purchase Common Shares excluded from the calculation of diluted earnings (loss) per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares during the period or the inclusion of the potential dilutive options to purchase Common Shares results in anti-dilution due to the net loss for the period . 36 Table of C ontents NOTE 24— RELATED PARTY TRANSACTIONS Our procedure regarding the approval of any related party transaction requires that the material facts of such transaction be reviewed by the independent members of the Audit Committee and the transaction be approved by a majority of the independent members of the Audit Committee. The Audit Committee reviews all transactions in which we are, or will be, a participant and any related party has or will have a direct or indirect interest in the transaction. In determining whether to approve a related party transaction, the Audit Committee generally takes into account, among other facts it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances; the extent and nature of the related person’s interest in the transaction; the benefits to the Company of the proposed transaction; if applicable, the effects on a director’s independence; and if applicable, the availability of other sources of comparable services or products. During the three months ended September 30, 2022, Mr. Stephen Sadler, a member of the Board of Directors, earned $ 7 thousand (three months ended September 30, 2021 — $ 4 thousand) in consulting fees from OpenText for assistance with acquisition-related business activities. Mr. Sadler abstained from voting on all transactions from which he would potentially derive consulting fees. NOTE 25— SUBSEQUENT EVENTS Cash Dividends As part of our quarterly, non-cumulative cash dividend program, we declared, on November 2, 2022, a dividend of $ 0.24299 per Common Share. The record date for this dividend is December 2, 2022 and the payment date is December 22, 2022. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination and discretion of our Board. 37 Table of C ontents