SEC Info - Formula Systems (1985) Ltd. - ‘20-F/A’ for 12/31/21

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		Alternative Formats (Word, et al.) Consolidated Statements of Cash Flows Consolidated Statements of Changes in Equity Consolidated Statements of Comprehensive Income Consolidated Statements of Financial Position Consolidated Statements of Profit or Loss Notes to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm (PCAOB ID 1281)
1	1st Page – Filing Submission
"	Reports of Independent Registered Public Accounting Firm (PCAOB ID 1281)
"	Consolidated Statements of Financial Position
"	Consolidated Statements of Profit or Loss
"	Consolidated Statements of Comprehensive Income
"	Consolidated Statements of Changes in Equity
"	Consolidated Statements of Cash Flows
"	Notes to Consolidated Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM i 20-F/A

Amendment No. 1

i ☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

i ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended i i December 31, i 2021 /

i ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

i ☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ______________

Commission File Number: i 000-29442

FORMULA SYSTEMS (1985) LTD.

(Exact Name of Registrant as Specified in Its Charter
and translation of Registrant’s name into English)

i Israel

(Jurisdiction of Incorporation or Organization)

i Yahadut Canada 1 Street, i Or Yehuda i 6037501, i Israel

(Address of Principal Executive Offices)

i Asaf Berenstin; i Yahadut Canada 1 Street, i Or Yehuda i 6037501, i Israel

Tel: i 972 i 3 5389389, Fax: i 972 3 5389300

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol(s)		Name of Each Exchange On Which Registered
i American Depositary Shares, each representing one Ordinary Share, NIS 1 par value		i FORTY		i Nasdaq Global Select Market

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 2021, the registrant had i 15,294,267 outstanding ordinary shares, NIS 1 par value, of which 140,969 were represented by American Depositary Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

i Yes ☒ No ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐ i No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

i Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

i Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

i Large accelerated filer ☒	Accelerated filer i ☐
Non-accelerated filer ☐	Emerging Growth Company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. i ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☐

International Financial Reporting
Standards as issued by the International
Accounting Standards Board ☒

Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No i ☒

EXPLANATORY NOTE

This Amendment No. 1, or the Amendment, to the Annual Report on Form 20-F for the year ended December 31, 2021, or the Annual Report, filed on May 16, 2022 with the Securities and Exchange Commission, or the SEC, is being filed by Formula Systems (1985) Ltd., or the Company, to amend the Annual Report for the sole purpose of:

●

Adding to our financial statements included under Item 18 of this Amendment, in accordance with Rule 2-05 of Regulation S-X, the report of the auditor of a subsidiary of the Company upon which our principal auditor relied, and to which our principal auditor referred, in rendering its audit report on our consolidated financial statements that were included in the Annual Report. The subject audit report for the subsidiary had been inadvertently omitted from the Annual Report.

In keeping with SEC requirements, this Amendment consists solely of (i) the entirety of Item 18 of Form 20-F, along with (ii) Exhibits 12.1 and 12.2, which constitute the required certifications of our principal executive officer and principal financial officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and (iii) Exhibits 13.1 and 13.2, which consist of the certifications of our principal executive officer and principal financial officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Other than as expressly set forth above, this Amendment does not, and does not purport to, amend, update or restate the information in any other item of the Annual Report, or reflect any events that have occurred after the Annual Report was originally filed.

C: 1

ITEM 18. FINANCIAL STATEMENTS

Our consolidated financial statements and the reports of our independent registered public accounting firm in connection therewith are filed as part of this Amendment to the Annual Report, as noted on the pages below:

Reports of Independent Registered Public Accounting Firm (PCAOB ID 1281)		F-2 - F-6

Consolidated Statements of Financial Position		F-7 - F-8

Consolidated Statements of Profit or Loss		F-9

Consolidated Statements of Comprehensive Income		F-10

Consolidated Statements of Changes in Equity		F-11 - F-14

Consolidated Statements of Cash Flows		F-15 - F-17

Notes to Consolidated Financial Statements		F-18 - F-113

ITEM 19. EXHIBITS

Exhibit No.
1.1		Memorandum of Association ⁽¹⁾
1.2		Amended and Restated Articles of Association, as adopted by Formula Systems (1985) Ltd. on January 8, 2012 ⁽²⁾
2.1		Depositary Agreement by and among Formula Systems (1985) Ltd., Bank of New York Mellon and the holders of the American Depositary Shares of Formula Systems (1985) Ltd. ⁽¹⁾
2.2		Description of Ordinary Shares of Formula Systems (1985) Ltd. +
4.1		Form of Letter of Indemnification for officers and directors, adopted by Formula Systems (1985) Ltd. on January 8, 2012 ⁽³⁾
4.2		English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)⁽⁴⁾
4.3		Formula Systems (1985) Ltd. 2011 Share Incentive Plan, as amended⁽⁵⁾
4.4		Formula Systems (1985) Ltd. Compensation Policy⁽⁶⁾
8.1		List of Subsidiaries+
12.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act*
12.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act*
13.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
13.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
15.1		Consent of Kost, Forer, Gabbay & Kaiserer, a member of Ernst & Young Global+
15.2		Consent of KDA Audit Corporation+

+ Filed with the original filing of the Annual Report.

* Filed herewith.

(1)	Incorporated by reference to the Registration Statement on Form F-1 (File No. 333-8858).

(2)	Incorporated by reference to Exhibit 99.1 to the report on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18, 2012.

(3)	Incorporated by reference to Exhibit 99.2 to the report on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18, 2012.

(4)	Incorporated by reference to Exhibit 4.3 to the annual report on Form 20-F for the 2008 fiscal year filed by the registrant with the Securities and Exchange Commission on April 27, 2009.

(5)	Incorporated by reference to Exhibit 4.3 to the annual report on Form 20-F for the 2013 fiscal year filed by the registrant with the Securities and Exchange Commission on April 30, 2014.

(6)	Incorporated by reference to Appendix A to Exhibit 99.2 to the report on Form 6-K furnished by the registrant to the Securities and Exchange Commission on November 16, 2016.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Amendment No. 1 to the annual report on its behalf.

FORMULA SYSTEMS (1985) LTD.

By:	/s/ Asaf Berenstin	May 17, 2022
	Asaf Berenstin	Date
	Chief Financial Officer

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2021

U.S. DOLLARS IN THOUSANDS

INDEX

		Page
Reports of Independent Registered Public Accounting Firm (PCAOB ID i 1281)		F-2 - F-6

Consolidated Statements of Financial Position		F-7 - F-8

Consolidated Statements of Profit or Loss		F-9

Consolidated Statements of Comprehensive Income		F-10

Consolidated Statements of Changes in Equity		F-11 - F-14

Consolidated Statements of Cash Flows		F-15 - F-17

Notes to Consolidated Financial Statements		F-18 - F-113

F-1

Kost Forer Gabbay & Kasierer

144 Menachem Begin St.

Tel-Aviv 6492102, Israel

Tel: +972-3-6232525

Fax: +972-3-5622555

ey.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

FORMULA SYSTEMS (1985) LTD.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial position of Formula Systems (1985) Ltd. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, based on our audits and the report of other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

We did not audit the financial statements of Magic Software Japan K.K., a wholly-owned subsidiary of Magic Software Enterprises Ltd., which reflect total assets constituting 0.2% as of December 31, 2021 and 2020, and total revenues constituting 0.5%, 0.7%, 0.7% for the years ended December 31, 2021, 2020 and 2019, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Magic Software Japan K.K., is based solely on the report of the other auditors.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 16, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

F-2

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

		*Effective control*

Description of the Matter		As described in Notes 2(3) to the consolidated financial statements, the Company consolidates various investees despite the lack of absolute majority of voting power at the general meetings of the investees. In a situation where the Company holds less than a majority of voting power in a given entity, but that power is sufficient to enable the Company to unilaterally direct the relevant activities of such entity, then the control is exercised, and the Company consolidates the entities based on effective control. As disclosed by management, the assessment of whether the Company has effective control over an investee involves management’s judgment and analysis and considers factors such as the responsibility of the various organs, the composition of the board of directors, the shareholders structure and their level of activity, the attendance of the shareholders at the general meetings and the voting patterns. Auditing the Company’s assessment of effective control was complex and highly judgmental due to the significant judgment of management in determining whether the Company is enable to unilaterally direct the relevant activities of the entity and therefor controls the entity. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures relating to management’s application of consolidation accounting, and significant auditor judgment in evaluating the audit evidence obtained relating to the responsibility of the various organs, the composition of the board of directors, the shareholders structure and their level of activity, the attendance of the shareholders at the general meetings and the voting patterns.

How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design and tested the effectiveness of controls over effective control, including controls addressing the completeness of the Company’s investees evaluated for consolidation, as well as controls over the judgments and factors used to reach consolidation conclusions regarding these investees. Our audit procedures to evaluate the significant judgments made by management to assess effective control included, among others, testing the completeness of the investees subject to the analysis, evaluating the responsibility of the various organs, the composition of the board of directors, the shareholders structure and their level of activity, the attendance of the shareholders at the general meetings and the voting patterns, evaluating management’s assessment of the Company’s ability to unilaterally direct the relevant activities of each entity, and the existence of effective control over each investee. We also evaluated the appropriateness of the related disclosures included in Note 2(3) to the consolidated financial statements in relation to Effective control.

F-3

/s/ KOST FORER GABBAY & KASIERER

KOST FORER GABBAY & KASIERER

A Member of Ernst & Young Global

We have served as the Company’s auditor since 2010.

Tel-Aviv, Israel

May 16, 2022

F-4

Kost Forer Gabbay & Kasierer

144 Menachem Begin St.

Tel-Aviv 6492102, Israel

Tel: +972-3-6232525

Fax: +972-3-5622555

ey.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

FORMULA SYSTEMS (1985) LTD.

Opinion on Internal Control over Financial Reporting

We have audited Formula Systems (1985) Ltd.’s (“the Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“the COSO criteria”). In our opinion, the Company, based on our audit and the report of other auditors, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

We did not examine the effectiveness of internal control over financial reporting of Magic Software Japan K.K, a wholly owned subsidiary of Magic Software Enterprises Ltd., whose financial statements reflect total assets and revenues constituting 0.2% and 0.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021. The effectiveness of Magic Software Japan K.K.’s internal control over financial reporting was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Magic Software Japan K.K.’s internal control over financial reporting, is based solely on the report of the other auditors.

As indicated in the accompanying Management's Annual Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the business Menarva Ltd., 9540 Y.G. Soft I.T Ltd. and Enable IT LLC., that were acquired during 2021 and included in the 2021 consolidated financial statements of the Company and constituted 0.7% of total assets and 1.3% of the net assets as of December 31, 2021, and 1.1% and 1.4% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Menarva Ltd., 9540 Y.G. Soft I.T Ltd. and Enable IT LLC.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2021 and 2020, the related consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2021 and the related notes and our report dated May 16, 2022 expressed an unqualified opinion thereon based on our audit and the report of the other auditors.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

F-5

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of other auditors provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ i KOST FORER GABBAY & KASIERER

KOST FORER GABBAY & KASIERER

A Member of Ernst & Young Global

i Tel-Aviv, Israel

May 16, 2022

F-6

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

U.S. dollars in thousands

		December 31,
	Note	2021		2020
ASSETS

CURRENT ASSETS:
Cash and cash equivalents		$	i 485,391	$	i 501,650
Short-term deposits			i 25,924		i 30,289
Marketable securities	4		i 1,142		i 1,238
Trade receivables (net of allowances for doubtful accounts of $ i 9,717 and $ i 12,855 as of December 31, 2020 and 2021, respectively)			i 696,321		i 519,885
Prepaid expenses and other accounts receivable	5		i 72,118		i 83,820
Inventories			i 21,221		i 23,988

Total current assets			i 1,302,117		i 1,160,870

LONG-TERM ASSETS:
Deferred taxes	21f		i 46,364		i 39,750
Prepaid expenses, other accounts receivable and other investments			i 23,676		i 22,872

Total long-term assets			i 70,040		i 62,622

INVESTMENTS IN COMPANIES ACCOUNTED FOR AT EQUITY METHOD	7		i 28,900		i 28,311

RIGHT-OF-USE ASSETS	16		i 115,833		i 114,414

PROPERTY, PLANTS AND EQUIPMENT, NET	8		i 56,886		i 59,176

INTANGIBLE ASSETS, NET	9		i 241,936		i 222,263

GOODWILL	10		i 932,854		i 872,424

Total assets		$	i 2,748,566	$	i 2,520,080

The accompanying notes are an integral part of the financial statements.

F-7

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

U.S. dollars in thousands (except share and per share data)

		December 31,
	Note	2021			2020
LIABILITIES AND EQUITY

CURRENT LIABILITIES:
Credit from banks and others	11,13	$	i 175,696		$	i 120,444
Debentures	14		i 48,455			i 41,454
Current maturities of lease liabilities	16		i 41,655			i 32,065
Trade payables			i 205,835			i 153,322
Deferred revenues			i 140,660			i 128,898
Employees and payroll accrual			i 207,553			i 190,247
Other accounts payable	12		i 80,411			i 68,976
Liabilities in respect of business combinations			i 7,773			i 8,654
Put options of non-controlling interests	2(21)(H)		i 39,558			i 35,843

Total current liabilities			i 947,596			i 779,903

LONG-TERM LIABILITIES:
Loans from banks and others	13		i 157,229			i 180,316
Debentures	14		i 205,035			i 203,070
Lease liabilities	16		i 84,839			i 91,188
Other long-term liabilities			i 12,183			i 12,191
Deferred taxes	21f		i 78,135			i 68,367
Deferred revenues			i 17,757			i 16,626
Liability in respect of business combinations			i 21,644			i 16,582
Put options of non-controlling interests	2(21)(H)		i 31,720			i 28,175
Employee benefit liabilities			i 12,641			i 15,119

Total long-term liabilities			i 621,183			i 631,634

COMMITMENTS AND CONTINGENCIES	19

EQUITY	20
Formula Systems (1985) Ltd. shareholders’ equity:
Share capital:
Ordinary shares of NIS i i 1 / par value - Authorized: i i 25,000,000 / shares as of December 31, 2020 and 2021; Issued: i i 15,862,887 / as of December 31, 2020 and 2021; Outstanding: i i 15,294,267 / as of December 31, 2020 and 2021			i 4,340			i 4,340
Additional paid-in capital			i 153,048			i 149,249
Retained earnings			i 358,315			i 324,358
Accumulated other comprehensive income			i 25,516			i 25,513
Treasury shares ( i i 568,620 / shares as of December 31, 2020 and 2021)			( i 259	)		( i 259	)

Total equity attributable to Formula Systems shareholders			i 540,960			i 503,201
Non-controlling interests	22a		i 638,827			i 605,342

Total equity			i 1,179,787			i 1,108,543

Total liabilities and equity		$	i 2,748,566		$	i 2,520,080

The accompanying notes are an integral part of the financial statements.

F-8

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

U.S. dollars in thousands (except share and per share data)

Year ended December 31,

Note

2021

2020

2019

Revenues:

Proprietary software products and related services

i 632,986

i 509,109

i 438,256

Software services and other

i 1,771,390

i 1,424,809

i 1,262,859

Total revenues

2(13),22c

i 2,404,376

i 1,933,918

i 1,701,115

Cost of revenues:

Proprietary software products and related services

i 350,788

i 284,325

i 248,957

Other software products and related services

i 1,489,729

i 1,202,160

i 1,066,109

Total cost of revenues

i 1,840,517

i 1,486,485

i 1,315,066

Gross profit

i 563,859

i 447,433

i 386,049

Research and development expenses, net

i 65,858

i 52,604

i 46,690

Selling, marketing, general and administrative expenses

i 289,985

i 224,188

i 200,870

Operating income

i 208,016

i 170,641

i 138,489

Financial expenses

22b

i 29,994

i 29,444

i 22,443

Financial income

i 5,989

i 2,559

i 3,791

Pre-tax income before share of profits of companies accounted for at equity, net

i 184,011

i 143,756

i 119,837

Share of profits of companies accounted for at equity, net

i 505

i 1,535

i 1,787

Taxes on income

21h

i 42,614

i 31,269

i 27,201

Net income

i 141,902

i 114,022

i 94,423

Attributable to:

Equity holders of the Company

i 54,585

i 46,776

i 38,820

Non-controlling interests

i 87,317

i 67,246

i 55,603

i 141,902

i 114,022

i 94,423

Net earnings per share attributable to equity holders of The Company

22d

Basic earnings per share

i 3.57

i 3.05

i 2.56

Diluted earnings per share

i 3.50

i 3.01

i 2.44

The accompanying notes are an integral part of the financial statements.

F-9

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

U.S. dollars in thousands

Year ended December 31,

2021

2020

2019

Net income

i 141,902

i 114,022

i 94,423

Other comprehensive income (loss) net of tax effect:

Amounts that will not be reclassified subsequently to profit or loss:

Actuarial gain (loss) from defined benefit plans

i 3,007

i 840

( i 26

)

Share in net other comprehensive income (loss) of companies accounted for at equity

i 128

( i 169

)

i 62

Adjustments arising from translating financial statements from functional currency to presentation currency

i 10,343

i 17,436

i 41,116

Amounts that will be or that have been reclassified to profit or loss when specific conditions are met:

Unrealized gain (loss) on debt instruments at fair value through other comprehensive income, net

( i 2

)

i 95

Foreign exchange differences on translation of foreign operations

( i 10,580

)

i 16,670

( i 18,823

)

Total other comprehensive income (loss), net of tax

i 2,898

i 34,775

i 22,424

Total Comprehensive income

i 144,800

i 148,797

i 116,847

Total comprehensive income attributable to:

Equity holders of the Company

i 56,048

i 61,009

i 47,350

Non-controlling interests

i 88,752

i 87,788

i 69,497

i 144,800

i 148,797

i 116,847

The accompanying notes are an integral part of the financial statements.

F-10

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

U.S. dollars in thousands (except share and per share data)

Accumulated

Additional

other

Treasury

Non-

Share Capital

paid-in

Retained

comprehensive

controlling

Total

Number

Amount

capital

earnings

Loss

(cost)

interests

Equity

Balance as of January 1, 2021

i 15,294,267

i 4,340

i 149,249

i 324,358

i 25,513

( i 259

)

i 605,342

i 1,108,543

Net income

i 54,585

i 87,317

i 141,902

Foreign currency translation

( i 125

)

( i 112

)

( i 237

)

Actuarial gain from defined benefit plans

i 1,460

i 1,547

i 3,007

Share in other comprehensive income of joint venture

i 128

Total other comprehensive income (loss)

i 1,460

i 3

i 1,435

i 2,898

Total comprehensive income (loss)

i 56,045

i 3

i 88,752

i 144,800

Cost of share-based payment (Note 17)

i 7,434

i 7,405

i 14,839

Dividend to Formula’s shareholders

( i 22,088

)

( i 22,088

)

Dividend to non-controlling interests in subsidiaries

( i 62,662

)

( i 62,662

)

Transactions with non-controlling interests due to holding changes, including exercise of employees’ stock options

( i 540

)

i 3,211

i 2,671

Acquisition of non-controlling interests

i 1,005

( i 2,705

)

( i 1,700

)

Settlement of put options over non-controlling interests

( i 4,100

)

( i 4,532

)

( i 8,632

)

Non-controlling interests arising from initially consolidated company

i 4,016

Balance as of December 31, 2021

i 15,294,267

i 4,340

i 153,048

i 358,315

i 25,516

( i 259

)

i 638,827

i 1,179,787

F-11

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

U.S. dollars in thousands (except share and per share data)

Accumulated

Additional

other

Non-

Share Capital

paid-in

Retained

comprehensive

Treasury

controlling

Total

Number

Amount

capital

earnings

Loss

shares (cost)

interests

Equity

Balance as of January 1, 2020

i 15,294,267

i 4,340

i 120,737

i 285,146

i 11,676

( i 259

)

i 474,694

i 896,334

Net income

i 46,776

i 67,246

i 114,022

Foreign currency translation

i 14,007

i 20,099

i 34,106

Actuarial gain from defined benefit plans

i 396

i 444

i 840

Unrealized loss on debt instruments at fair value through other comprehensive income, net

( i 1

)

( i 1

)

( i 2

)

Share in other comprehensive income of joint venture

( i 169

)

( i 169

)

Total other comprehensive income (loss)

i 396

i 13,837

i 20,542

i 34,775

Total comprehensive income (loss)

i 47,172

i 13,837

i 87,788

i 148,797

Cost of share-based payment (Note 17)

i 1,310

i 6,546

i 7,856

Dividend to Formula’s shareholders

( i 7,960

)

( i 7,960

)

Dividend to non-controlling interests in subsidiaries

( i 39,056

)

( i 39,056

)

Transactions with non-controlling interests due to holding changes, including exercise of employees’ stock options

i 847

i 4,459

i 5,306

Acquisition of non-controlling interests

( i 6,538

)

( i 13,114

)

( i 19,652

)

Dilution in Formula’s share in Sapiens due to issuance of Sapiens’ ordinary shares

i 34,462

i 74,275

i 108,737

Settlement of put options over non-controlling interests

( i 1,569

)

( i 4,137

)

( i 5,706

)

Non-controlling interests arising from initially consolidated company

i 13,887

Balance as of December 31, 2020

i 15,294,267

i 4,340

i 149,249

i 324,358

i 25,513

( i 259

)

i 605,342

i 1,108,543

F-12

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

U.S. dollars in thousands (except share and per share data)

Accumulated

Additional

other

Treasury

Non-

Share Capital

paid-in

Retained

comprehensive

controlling

Total

Number

Amount

capital

earnings

Loss

(cost)

interests

Equity

Balance as of January 1, 2019

i 14,750,338

i 4,190

i 98,008

i 262,557

i 3,134

( i 259

)

i 437,767

i 805,397

Impact of the adoption of IFRS 16

( i 1,187

)

( i 1,225

)

( i 2,412

)

Balance as of January 1, 2019 (Including the impact of the adoption of IFRS 16)

i 14,750,338

i 4,190

i 98,008

i 261,370

i 3,134

( i 259

)

i 436,542

i 802,985

Net income

i 38,820

i 55,603

i 94,423

Foreign currency translation

i 8,437

i 13,856

i 22,293

Actuarial gain from defined benefit plans

( i 12

)

( i 14

)

( i 26

)

Unrealized gain on debt instruments at fair value through other comprehensive income, net

i 43

i 52

i 95

Share in other comprehensive income of joint venture

i 62

Total other comprehensive income (loss)

( i 12

)

i 8,542

i 13,894

i 22,424

Total comprehensive income (loss)

i 38,808

i 8,542

i 69,497

i 116,847

Issuance of shares upon conversion of convertible debentures

i 543,929

i 150

i 22,321

i 22,471

Cost of share-based payment (Note 17)

i 257

i 3,617

i 3,874

Dividend to Formula’s shareholders

( i 15,032

)

( i 15,032

)

Dividend to non-controlling interests in subsidiaries

( i 38,233

)

( i 38,233

)

Transactions with non-controlling interests due to holding changes, including exercise of employees’ stock options

( i 100

)

i 1,053

i 953

Acquisition of non-controlling interests

( i 9

)

( i 3,838

)

( i 3,847

)

Settlement of put options over non-controlling interests

i 260

i 5,597

i 5,857

Non-controlling interests arising from initially consolidated company

i 459

Balance as of December 31, 2019

i 15,294,267

i 4,340

i 120,737

i 285,146

i 11,676

( i 259

)

i 474,694

i 896,334

F-13

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

U.S. dollars in thousands (except share and per share data)

Year ended
December 31,

2021

2020

2019

Reserve from debt instruments at fair value through other comprehensive income and derivatives

i 404

i 405

Foreign currency translation reserve arising from translating financial statements of foreign operations

( i 18,494

)

( i 12,964

)

( i 18,897

)

Adjustments arising from translating financial statements from functional currency to presentation currency

i 45,642

i 40,237

i 32,163

Share in other comprehensive loss of companies accounted for at equity, net

( i 2,036

)

( i 2,164

)

( i 1,995

)

Accumulated other comprehensive income (loss)

i 25,516

i 25,513

i 11,676

The accompanying notes are an integral part of the financial statements.

F-14

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

Year ended
December 31,

2021

2020

2019

Cash flows from operating activities:

Net income

i 141,902

i 114,022

i 94,423

Adjustments to reconcile net income to net cash provided by operating activities:

Share of profits of companies accounted for at equity, net

( i 505

)

( i 1,535

)

( i 1,787

)

Depreciation and amortization

i 122,184

i 95,507

i 86,932

Changes in value of debentures, net

( i 624

)

( i 42

)

( i 2,067

)

Increase (decrease) in employee benefit liabilities

( i 220

)

i 1,194

i 114

Loss (gain) from sale of property, plants and equipment

( i 21

)

i 118

( i 23

)

Stock-based compensation expenses

i 14,767

i 7,779

i 3,874

Changes in value of short-term and long-term loans from banks and others and deposits, net

i 2,030

i 5,482

i 5,621

Changes in deferred taxes, net

( i 7,997

)

( i 6,348

)

( i 13,157

)

Change in liability in respect of business combinations

i 4,740

( i 643

)

i 523

Impairment of right-of-use asset

i 1,439

i 351

Loss (gain) from sale and increase in value of marketable securities classified as trading

i 35

Amortization of premium and accrued interest on debt instruments at fair value through other comprehensive income

i 96

( i 70

)

i 82

Change in value of dividend preference derivative in TSG

( i 255

)

( i 48

)

( i 93

)

Working capital adjustments:

Decrease (increase) in inventories

i 4,642

( i 10,966

)

( i 938

)

Decrease (increase) in trade receivables

( i 150,818

)

i 23,312

i 16,265

Decrease (increase) in other current and long-term accounts receivable

i 20,506

i 8,735

i 12,692

Increase (decrease) in trade payables

i 40,076

i 10,954

( i 18,010

)

Increase in other accounts payable and employees and payroll accrual

i 7,255

i 34,859

i 5,937

Increase in deferred revenues

i 9,283

i 4,282

i 5,658

Net cash provided by operating activities

i 208,480

i 286,943

i 196,081

The accompanying notes are an integral part of the financial statements.

F-15

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

Year ended
December 31,

2021

2020

2019

Cash flows from investing activities:

Payments for business acquisitions, net of cash acquired (Appendix C)

( i 77,155

)

( i 141,364

)

( i 52,457

)

Cash paid in conjunction with deferred payments and contingent liabilities related to business combinations

( i 8,630

)

( i 9,111

)

( i 8,321

)

Payments to former shareholders of consolidated company

( i 161

)

( i 6,656

)

( i 996

)

Purchase of intangible assets

( i 872

)

( i 2,852

)

( i 4,399

)

Purchase of other investment

( i 500

)

( i 178

)

Purchase of property and equipment

( i 17,352

)

( i 16,651

)

( i 22,379

)

Proceeds from maturity and sale net of investment in debt instruments at fair value through other comprehensive income or loss, net

i 5,429

i 3,356

Proceeds from sale of property and equipment

i 2,283

i 693

i 1,660

Collection (grant) of short-term loans

i 303

( i 283

)

i 37

Restricted deposit on account of acquisition

i 22,890

( i 22,890

)

Dividend from companies accounted for at equity

i 83

i 3,000

Change in short-term and long-term deposits, net

i 4,641

( i 22,822

)

i 8,160

Capitalization of software development and other costs

( i 12,832

)

( i 9,305

)

( i 9,808

)

Net cash used in investing activities

( i 110,192

)

( i 177,032

)

( i 108,215

)

Cash flows from financing activities:

Exercise of employees’ stock options in subsidiaries

i 2,079

i 5,306

i 953

Proceeds from issuance of ordinary shares in subsidiaries

i 108,737

Dividend paid to non-controlling interests

( i 62,993

)

( i 40,519

)

( i 37,656

)

Dividend to Formula’s shareholders

( i 22,081

)

( i 14,939

)

( i 12,966

)

Short-term bank credit, net

i 36,261

( i 29,630

)

i 49,142

Repayment of long-term loans from banks and others

( i 84,241

)

( i 79,348

)

( i 75,548

)

Receipt of long-term loans from banks and others

i 62,707

i 91,024

i 73,819

Proceeds from issuance of debentures, net

i 50,295

i 60,346

i 81,676

Repayment of long-term liabilities to office of the chief scientist

( i 825

)

( i 457

)

( i 617

)

Repayment of debentures

( i 46,981

)

( i 29,844

)

( i 30,811

)

Purchase of non-controlling interests

( i 1,700

)

( i 6,330

)

( i 947

)

Repayment of lease liabilities

( i 44,086

)

( i 33,583

)

( i 34,500

)

Cash paid due to exercise of put option by non-controlling interests

( i 2,565

)

( i 21,030

)

( i 6,532

)

Net cash provided (used) by financing activities

( i 114,130

)

i 9,733

i 6,013

Effect of exchange rate changes on cash and cash equivalents

( i 416

)

i 13,340

i 6,295

Increase (decrease) in cash and cash equivalents

( i 16,258

)

i 132,984

i 100,174

Cash and cash equivalents at beginning of year

i 501,650

i 368,666

i 268,492

Cash and cash equivalents at end of year

i 485,392

i 501,650

i 368,666

The accompanying notes are an integral part of the financial statements.

F-16

FORMULA SYSTEMS (1985) LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

Year ended
December 31,

2021

2020

2019

Supplemental cash flow information:

Cash paid (received) in respect of:

Interest paid

i 15,344

i 16,571

i 15,733

Interest received

i 459

i 511

i 1,380

Taxes paid (received), net

i 38,393

i 44,659

i 39,063

Non-cash activities:

Dividend payable to Formula’s shareholders

i 7,081

Purchase of property and equipment

i 1,627

i 315

Deferred and contingent payments related to business combinations

i 7,663

i 5,114

i 19,871

Dividend payable to non-controlling interests

i 331

i 216

i 1,668

Right-of-use asset recognized with corresponding lease liability

i 39,116

i 20,495

i 25,074

Issuance of Formula’s ordinary shares as a result of conversion of debentures

i 22,471

Acquisition of newly-consolidated subsidiaries and activities, net of cash acquired:

Assets and liabilities of subsidiaries consolidated as of acquisition date:

Working capital (other than cash and cash equivalents)

i 1,623

( i 604

)

i 1,656

Property and equipment

( i 1,507

)

( i 13,152

)

( i 2,929

)

Goodwill and intangible assets

( i 108,048

)

( i 197,258

)

( i 98,194

)

Right-of-use assets

( i 2,401

)

( i 2,324

)

( i 1,001

)

Other long-term assets

( i 187

)

( i 8,773

)

( i 50

)

Liabilities to banks and others

i 6,431

i 10,598

i 5,551

Long-term liabilities

i 1,306

i 13,739

i 2,180

Lease liabilities

i 2,769

i 2,324

i 1,109

Deferred tax liability, net

i 9,662

i 18,626

i 7,407

Liability to formerly shareholders

i 1,518

i 7,596

i 1,060

Deferred payments and contingent consideration

i 7,663

i 4,536

i 19,965

Non-controlling interests at acquisition date

i 4,016

i 23,328

i 5,906

Total

( i 77,155

)

( i 141,364

)

( i 57,340

)

The accompanying notes form an integral part of the financial statements.

F-17

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 1:-

GENERAL

General:

Formula Systems (1985) Ltd. (“Formula” or the “Company”) was incorporated in Israel and began its business operations in 1985. Since 1991, Formula’s ordinary shares, par value NIS i 1.0 per share, have been traded on the Tel-Aviv Stock Exchange (“TASE”), and, in 1997, began trading through American Depositary Shares (“ADSs”) under the symbol “FORTY” on the Nasdaq Global Market in the United States until January 3, 2011, at which date the listing of Formula’s ADSs was transferred to the Nasdaq Global Select Market (“Nasdaq”). Each ADS represents one ordinary share of Formula. The Company is considered an Israeli resident. The controlling shareholder of the Company is Asseco Poland S.A. (“Asseco”), a Polish public company, traded on the Warsaw Stock Exchange.

Formula is a global information technology group providing software services, proprietary and non-proprietary software solutions, software product marketing and support, computer infrastructure and integration solutions and training, integration and digital advertising solutions (the “Group”). The Group manages and operates its businesses through seven directly held subsidiaries; Matrix IT Ltd. (“Matrix”), Sapiens International Corporation N.V (“Sapiens”), Magic Software Enterprises Ltd. (“Magic Software”), Zap Group Ltd. (“ZAP Group”), Insync Staffing Solutions, Inc. (“Insync”), Michpal Micro Computers (1983) Ltd. (“Michpal”) and Ofek Aerial Photography Ltd. (“Ofek”) and one jointly controlled entity: TSG IT Advanced Systems Ltd. (“TSG”).

As of the date of these financial statements, the direct effects of the Coronavirus (COVID-19) crisis on the results of the Group’s operations and business are still being felt, but these effects are considered insignificant. It is management’s opinion that during the period covered by these financial statements up to the date of approval of these financial statements, the Group’s business and financial results were not materially affected by the spread of the Coronavirus, and there were no significant developments or significant effects on any significant aspect, including liquidity, financial condition, and sources of financing.

The following table presents the ownership of the Company’s seven directly held subsidiaries and one jointly controlled entity directly held as of the dates indicated (the list consists only of active companies):

	Percentage of ownership
	December 31,
	2021		2020
Matrix		i 48.92		i 49.28
Sapiens		i 43.64		i 43.96
Magic Software		i 45.59		i 45.53
Insync		i 90.09		i 90.09
Michpal		i 100.00		i 100.00
TSG⁽¹⁾		i 50.00		i 50.00
Ofek		i 80.00		i 86.02
ZAP Group		i 100.00		-

⁽¹⁾

TSG’s results of operations are reflected in the Company’s results of operations using the equity method of accounting.

F-18

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 1:-

general (Cont.)

Definitions:

In these financial statements:

The Company or Formula	-	Formula Systems (1985) Ltd.

The Group	-	Formula Systems (1985) Ltd. and its investees.

Subsidiaries	-	Companies that are controlled by the Company (as defined in IFRS 10) and whose accounts are consolidated with those of the Company.

Jointly controlled entities	-	Companies owned by various entities that have a contractual arrangement for joint control and are accounted for using the equity method of accounting.

Associates	-	Companies over which the Company has significant influence and that are not subsidiaries. The Company’s investment therein is included in the financial statements using the equity method of accounting.

Investees	-	Subsidiaries, jointly controlled entities, and associates.

Interested parties and controlling shareholder	-	As defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.

Related parties	-	As defined in IAS 24.

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES

The following accounting policies have been applied consistently in the financial statements for all periods presented, unless otherwise stated.

Basis of presentation of the financial statements

These financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).

The financial statements for the year ended December 31, 2016 were the Company’s first consolidated financial statements prepared in accordance with IFRS. The date of transition to IFRS was January 1, 2015. For all periods up to and including the year ended December 31, 2015, the Company prepared its financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Accordingly, the Company’s first consolidated financial statements that comply with IFRS are applicable as of December 31, 2016, together with the comparative period data for the year ended December 31, 2015.

F-19

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company’s financial statements have been prepared on a cost basis, except for certain assets and liabilities such as: financial assets measured at fair value through other comprehensive income; contingent liabilities related to business combination; and other financial assets and liabilities (including derivatives) which are presented at fair value through profit or loss.

The Company has elected to present the profit or loss items using the function of expense method.

Use of estimates, judgments and assumptions:

The preparation of the consolidated financial statements requires management to make estimates, judgments, and assumptions, that have an effect on the application of the accounting policies and on the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Such judgments, estimates and assumptions are related, but not limited to effective control, contingent liabilities related to acquisitions, goodwill and identifiable intangible assets and their subsequent impairment analysis, determination of fair value of put options of non-controlling interests, legal contingencies, research and development capitalization, classification of leases, income tax uncertainties, deferred taxes, share-based compensation, as well as the determination of revenue recognition from contracts accounted for based on the estimate of percentage of completion. The Company’s management believes that the estimates, judgments, and assumptions used, are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Changes in accounting estimates are reported in the period of the change in estimate.

Consolidated financial statements:

The consolidated financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Potential voting rights are considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases.

The financial statements of the Company and of the investees, after being adjusted to comply with IFRS, are prepared for the same reporting period and using consistent accounting treatment of similar transactions and economic activities. Any discrepancies in the applied accounting policies are eliminated by making appropriate adjustments. Significant intragroup balances and transactions and gains or losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements.

Effective control:

In a situation where the Company holds less than a majority of voting power in a given entity, but that power is sufficient to enable the Company to unilaterally direct the relevant activities of such entity, then control is exercised. When assessing whether voting rights held by the Company are sufficient to give it power, the Company considers all facts and circumstances, including: the amount of those voting rights relative to the amount and dispersion of other vote holders; potential voting rights held by the Company and other shareholders or parties; rights arising from other contractual arrangements; significant personal ties; and any additional facts and circumstances that may indicate that the Company has, or does not have the ability to direct the relevant activities when decisions need to be made, inclusive of voting patterns observed at previous meetings of shareholders.

F-20

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company’s management has concluded that despite the lack of absolute majority of voting power at the general meetings of shareholders of Matrix, Sapiens and Magic Software, in accordance with IFRS 10, these investees are controlled by the Company. The conclusion regarding the existence of control during the years ended December 31, 2019, 2020 and 2021 with respect to Matrix, Sapiens and Magic Software, in accordance with IFRS 10, was made in accordance with the following factors:

Matrix:

The conclusion regarding the existence of control in Matrix, in line with IFRS 10, was made considering the following factors:

Governing bodies of Matrix:

Decisions of Matrix’s shareholders general meeting are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general meeting adopts resolutions to elect individual directors, appoint Matrix’s independent auditors for the next year, as well as approve Matrix’s financial statements and management’s report on operations; in accordance with Matrix’s articles of association, the board of directors of Matrix is responsible for managing its current business operations and is authorized to take substantially all decisions which are not specifically reserved to Matrix’s shareholders by its articles of association, including the decision to pay out dividends; i Matrix’s board of directors is composed of 5 members, 2 of whom are external directors as required by the Israeli Companies Law, 5759-1999, another one of whom is an independent director, while the remaining two directors are associated with Formula, including Formula’s chief executive officer who serves as the chairman of Matrix’s board of directors.

ii)

Shareholders structure of Matrix:

Matrix’s shareholders structure may be considered dispersed because, apart from i the Company, only one shareholder (a financial institution) held more than 5% of Matrix’s voting power (approximately 10%) during the reporting period; there is no evidence that any of the shareholders has or had granted to any other shareholder a voting proxy at the general meeting; over the last six years (i.e., 2016-2021), Matrix’s general meetings were attended by shareholders representing not more than between 76% and 82% of its voting power, including the Company’s voting power. Bearing in mind that the Company presently holds approximately 48.92% of the total voting power, this means that the level of activity of Matrix’s other shareholders is relatively moderate or low. The attendance by Matrix’s other shareholders would have to be higher than 97.89% in order to deprive the Company of an absolute majority of votes at the general meeting. In accordance with voting patterns at Matrix’s shareholders’ meetings in recent years, it is the Company’s management’s belief that achieving such a high attendance seems unlikely.

F-21

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Therefore, it is management’s opinion that despite the lack of an absolute majority of shares held by it in Matrix, the Company is still able to influence the appointment of directors at Matrix and therefore may affect Matrix’s directions of development as well as its current business operations.

Sapiens:

The conclusion regarding the existence of control in Sapiens, in line with IFRS 10, was made considering the following factors:

Governing bodies of Sapiens:

Decisions of Sapiens’ shareholders general meeting are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general meeting adopts resolutions to appoint individual directors, choose Sapiens’ independent auditors for the next year, as well as approve the company’s financial statements and the management’s report on operations; in accordance with Sapiens’ articles of association, the board of directors of Sapiens is responsible for managing its current business operations and is authorized to take substantially all decisions which are not specifically reserved to Sapiens’ shareholders by its articles of association, including the decision to pay out dividends. Sapiens’ board of directors is composed of 6 members, 3 of whom are independent directors, and one being Formula’s chief executive officer who serves as the chairman of Sapiens’ board of directors.

ii)

Shareholders structure of Sapiens:

Sapiens’ shareholders structure is dispersed because, apart from i the Company, only two financial institutions held more than 5% of the voting rights at the general meeting (representing 5.6% and 5.1%); there is no evidence that any shareholders have or had granted to any other shareholder a voting proxy at the general meeting; and, over the last five years from 2017 to 2021, Sapiens’ general meetings were attended by shareholders representing in total between 70% and 81.8% of the total voting power, including the Company’s voting power. Bearing in mind that the Company presently holds approximately 43.64% of total voting rights, this means that the level of activity of Sapiens’ other shareholders is relatively moderate or low. As of December 31, 2021, the attendance from shareholders would have to be higher than 88.71% in order to deprive the Company of an absolute majority of votes at the general meeting. In accordance with voting patterns at Sapiens’ shareholders’ meetings in recent years, it is the Company’s management’s belief that achieving such a high attendance seems unlikely.

Therefore it is of management’s opinion that despite the lack of an absolute majority of shares in Sapiens, the Company is still able to influence the appointment of directors at Sapiens and therefore may affect Sapiens’ directions of development as well as its current business operations.

Magic Software:

The conclusion regarding the existence of control in Magic Software, in line with IFRS 10, was made considering the following factors:

F-22

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Governing bodies of Magic Software:

Decisions of Magic Software’s shareholders general meeting are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general meeting adopts resolutions to elect individual directors, appoint Magic Software’s independent auditors for the next year, as well as to approve Magic Software’s financial statements and the management’s report on operations; in accordance with Magic Software’s articles of association, the board of directors of Magic Software is responsible for managing Magic Software’s current business operations and is authorized to take substantially all decisions which are not specifically reserved to Magic Software’s shareholders by its articles of association, including the decision to pay out dividends; and, Magic Software’s board of directors is composed of 5 members, 2 of whom are external directors as required by the Israeli Companies Law, 5759-1999, another one of whom is an independent director and a fourth of whom is Formula’s chief executive officer, who also serves as Magic Software’s chief executive officer.

ii)

Shareholders structure of Magic Software:

Magic Software’s shareholders structure is dispersed because, apart from i the Company, as of December 31, 2021, there were just two shareholders (both Israeli financial institutions) holding more than 5% of Magic Software’s voting power (representing 9.4% and 7.5% of the votes); there is no evidence that any of the shareholders have or had granted to any other shareholder a voting proxy at the general meeting; and, over the last five years from 2017 to 2021, Magic Software’s general meetings were attended by shareholders representing between 65%-87% of total voting rights. Bearing in mind that the Company presently holds approximately 45.59% of total voting right, this means that the level of activity of Magic Software’s other shareholders is relatively moderate or low. As of December 31, 2021, the attendance by shareholders would have to be higher than 91.9% in order to deprive the Company of an absolute majority of votes at the general meeting. In accordance with voting patterns at Magic Software’s shareholders’ meetings in recent years, it is the Company’s management belief that achieving such a high attendance seems unlikely.

Therefore, it is management’s opinion that despite the lack of an absolute majority of shares in Magic Software, the Company is still able to influence the appointment of directors at Magic Software and therefore may affect Magic Software’s directions of development as well as its current business operations.

Non-controlling interests

Non-controlling interests in subsidiaries, represent the equity in subsidiaries not attributable, directly or indirectly, to a parent. Non-controlling interests are presented in equity separately from the equity attributable to the equity holders of the Company. Profit or loss and components of other comprehensive income are attributed to the Company and to non-controlling interests. Losses are attributed to non-controlling interests even if they result in a negative balance of non-controlling interests in the consolidated statement of financial position. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as a change in equity by adjusting the carrying amount of the non-controlling interests with a corresponding adjustment of the equity attributable to equity holders of the Company less / plus the consideration paid or received.

F-23

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Business combinations and goodwill:

Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, the Company determines whether to measure the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their proportionate share in the fair value of the acquiree’s net identifiable assets.

Direct acquisition costs are carried to the statement of profit or loss as incurred.

In a business combination achieved in stages, equity interests in the acquiree that had been held by the acquirer prior to obtaining control are measured at the acquisition date fair value while recognizing a gain or loss resulting from the revaluation of the prior investment on the date of achieving control.

Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IFRS 9, “Financial Instruments”. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. If the contingent consideration is classified as an equity instrument, it is measured at fair value on the acquisition date without subsequent remeasurement.

Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date.

Investment in joint arrangements:

Joint arrangements are arrangements in which the Company has joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Joint ventures:

In joint ventures the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A joint venture is accounted for by using the equity method.

ii.

Joint operations:

In joint operations the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities relating to the arrangement. The Company recognizes in relation to its interest its share of the assets, liabilities, revenues and expenses of the joint operation.

The acquisition of interests in a joint operation which represents a business, as defined in IFRS 3, is accounted for using the acquisition method, including the measurement of the identifiable assets and liabilities at fair value, the recognition of deferred taxes arising from this measurement, the accounting treatment of the related transaction costs and the recognition of goodwill or bargain purchase gains. This applies to the acquisition of the initial interest and additional interests in a joint operation that represents a business.

F-24

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Investments in associates:

Associates are companies in which the Group has significant influence over the financial and operating policies without having control. The investment in an associate is accounted for using the equity method.

Investments accounted for using the equity method:

The Group’s investments in associates and joint ventures are accounted for using the equity method.

Under the equity method, the investment in the associate or in the joint venture is presented at cost with the addition of post-acquisition changes in the Group’s share of net assets, including other comprehensive income of the associate or the joint venture. Gains and losses resulting from transactions between the Group and the associate or the joint venture are eliminated to the extent of the interest in the associate or in the joint venture.

Goodwill relating to the acquisition of an associate or a joint venture is presented as part of the investment in the associate or the joint venture, measured at cost and not systematically amortized. Goodwill is evaluated for impairment as part of the investment in the associate or in the joint venture as a whole.

The financial statements of the Company and of the associate or joint venture are prepared as of the same dates and periods. The accounting policies applied in the financial statements of the associate or the joint venture are uniform and consistent with the policies applied in the financial statements of the Group.

Upon the acquisition of an associate or a joint venture achieved in stages when the former investment in the acquiree was accounted for pursuant to the provisions of IFRS 9, the Group adopts the principles of IFRS 3 regarding business combinations achieved in stages. Consequently, equity interests in the acquiree that had been held by the Group prior to achieving significant influence or joint control are measured at fair value on the acquisition date and are included in the acquisition consideration while recognizing a gain or loss resulting from the fair value measurement.

The equity method is applied until the loss of significant influence in the associate or loss of joint control in the joint venture or classification as investment held for sale.

On the date of loss of significant influence or joint control, the Group measures any remaining investment in the associate or the joint venture at fair value and recognizes in profit or loss the difference between the fair value of any remaining investment plus any proceeds from the sale of the investment in the associate or the joint venture and the carrying amount of the investment on that date.

F-25

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Functional currency, presentation currency and foreign currency:

Functional currency and presentation currency:

The presentation currency of these consolidated financial statements of the Group is the U.S dollar (the “dollar”), since the Company believes that financial statements in U.S dollars provide more relevant information to its investors and users of the financial statements. The functional currency applied by Formula, on a stand-alone basis, until December 31, 2018, was the dollar. Following an examination and reevaluation of the primary economic environment in which it currently operates and expects to continue operating and taking into consideration the recent trends and its forward-looking business strategy, in accordance with the International Accounting Standard 21 (IAS 21), Formula concluded that its functional currency on a stand-alone basis commencing January 1, 2019 is the NIS. The functional currencies applied by Formula’s subsidiaries and companies accounted for at equity are the currencies of the primary economic environment in which each one of them operates.

Assets, including fair value adjustments upon acquisition, and liabilities of an investee which is a foreign operation, are translated at the closing rate at each reporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences are recognized in other comprehensive income (loss).

Intragroup loans for which settlement is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in the foreign operation and, accordingly, the exchange rate differences from these loans (net of the tax effect) are recorded in other comprehensive income (loss).

Upon the full or partial disposal of a foreign operation resulting in loss of control in the foreign operation, the cumulative gain (loss) from the foreign operation which had been recognized in other comprehensive income is transferred to profit or loss. Upon the partial disposal of a foreign operation which results in the retention of control in the subsidiary, the relative portion of the amount recognized in other comprehensive income is reattributed to non-controlling interests.

ii.

Transactions, assets and liabilities in foreign currency:

Transactions denominated in foreign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at the exchange rate at that date. Exchange rate differences are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined.

10)

Cash equivalents:

Cash equivalents are considered highly liquid investments, including unrestricted short-term bank deposits with an original maturity of three months or less from the date of investment or with a maturity of more than three months, but which are redeemable on demand without penalty and which form part of the Group’s cash management. Cash and cash equivalent includes amounts held primarily in New-Israeli Shekel, dollars, Euro, Japanese Yen, Indian Rupee and British Pound.

F-26

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

11)

Short-term and restricted deposits:

Short-term bank deposits are deposits with an original maturity of more than three months from the date of investment and which do not meet the definition of cash equivalents. The deposits are presented according to their terms of deposit. Restricted deposits include deposits used to secure certain subsidiaries’ ongoing projects, as well as security deposits with respect to leases, and are classified under other short-term and long-term receivables.

12)

Inventories:

Inventories are measured at the lower of cost and net realizable value. The cost of inventories comprises costs of purchase and costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale. Inventories are mainly comprised of purchased merchandise and products which consist of educational software kits, computers, peripheral equipment and spare parts. Cost is determined on the “first in - first out” basis.

The Group periodically evaluates the condition and aging of its inventories and makes provisions for slow-moving inventories accordingly. No such impairments have been recognized in any period presented.

13)

Revenue recognition:

Revenue from contracts with customers is recognized when the control over the goods or services is transferred to the customer. The transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties (such as taxes).

In determining the amount of revenue from contracts with customers, the Group evaluates whether it is a principal or an agent in the arrangement. The Group is a principal when the Group controls the promised goods or services before transferring them to the customer. In these circumstances, the Group recognizes revenue for the gross amount of the consideration. When the Group is an agent, it recognizes revenue for the net amount of the consideration, after deducting the amount due to the principal.

Sale of software licensing, maintenance services and post implementation consulting services

A software licensing transaction which does not require significant implementation services is considered a distinct performance obligation as the customer can benefit from the software on its own or together with other readily available resources.

The Group recognizes revenue from software licensing transactions at a point in time when the Group provides the customer a right to use the Group’s intellectual property as it exists at the point in time at which the license is granted to the customer. The Group recognizes revenue from software licensing transactions over time when the Group provides the customer a right to access the Group’s intellectual property throughout the license period.

F-27

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Group may generate revenue from sale of software licensing which includes significant implementation and customization services. In such contracts the Group is normally committed to provide the customer with a functional IT system and the customer can only benefit from such functional system, being the final product that would normally be comprised of proprietary licenses and significant related services. Revenues from these contracts are based on either fixed price or time and material.

Software licensing transactions which involve significant implementation, customization, or integration of the Group’s software license to customer-specific requirements, are considered as one performance obligation satisfied over-time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to the Group. In addition, the Group has enforceable right to payment for performance completed throughout the duration of the contract.

Accordingly, the Group recognizes revenue from such contracts over time, using the percentage of completion accounting method. The Group recognizes revenue and gross profit as the work is performed based on a ratio between actual costs incurred compared to the total estimated costs for the contract. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses are first determined, in the amount of the estimated loss for the entire contract.

When post implementation and consulting services do not involve significant customization, the Group accounts for such services as performance obligations satisfied over time and revenues are recognized as the services are provided.

Revenue from maintenance is recognized over time, during the period the customer simultaneously receives and consumes the benefits provided by the Group’s performance. When payments from customers are made before or after the service is performed, the Group recognizes the resulting contract asset or liability.

Sale of hardware and infrastructure

Revenue from sale of hardware and infrastructure is recognized in profit or loss at the point in time when the control of the goods is transferred to the customer, generally upon delivery of the goods to the customer.

Sale of training and implementation services

Revenues from training and implementation services are recognized when the service is provided. revenue from training services in respect of public courses whose operating range is up to 3 months will be recognized at the end of the course period. Revenues from training services in respect of long-term courses will be recognized over the term of the course. Revenues from implementation projects ordered by organizations will be recognized according to actual inputs (actually worked hours).

Revenue of contracts according to actual inputs

Revenue from framework agreements for the performance of work according to actual inputs is recognized according to the hours invested.

F-28

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Revenue of fixed price contracts

Revenue from fixed price contracts is recognized according to the completion rate method when all the following conditions are met: the revenue is known or can be estimated reliably, the collection of income is expected, the costs involved in performing the work are known or can be estimated, there is no material uncertainty about the Group’s ability to complete the work and, the customer and the completion rate can be reliably estimated.

The Group applies a cost-based input method for measuring the progress of performance obligations that are satisfied over time. In applying this cost-based input method, the Group estimates the costs to complete contract performance in order to determine the amount of the revenue to be recognized. These estimated costs include the direct costs and the indirect costs that are directly attributable to a contract based on a reasonable allocation method.

In certain circumstances, the Group is unable to measure the outcome of a contract, but the Group expects to recover the costs incurred in fulfilling the contract as of the reporting date. In such circumstances, the Group recognizes revenue to the extent of the costs incurred as of the reporting date until such time the outcome of the contract can be reasonably measured. If a loss is anticipated from a contract, the loss is recognized in full regardless of the percentage of completion.

When appropriate, the Group also applies a practical expedient permitted under IFRS 15 whereby if the Group has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Group’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the Group may recognize revenue in the amount it is entitled to invoice. Deferred revenues, which represent a contract liability, include unearned amounts received under maintenance and support (mainly) and amounts received from customers for which revenues have not yet been recognized.

Allocating the transaction price

For contracts that consist of more than one performance obligation, at contract inception the Group allocates the contract transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis. The stand-alone selling price is the price at which the Group would sell the promised goods or services separately to a customer. The Group determines the stand-alone selling price for the purposes of allocating the transaction price to each performance obligation by considering several external and internal factors including, but not limited to, transactions where the specific performance obligation is sold separately, historical actual pricing practices and geographies in which the Group offers its products and services. If a specific performance obligation, such as the software license, is sold for a broad range of amounts (that is, the selling price is highly variable) or if the Group has not yet established a price for that good or service, and the good or service has not previously been sold on a stand-alone basis (that is, the selling price is uncertain), the Group applies the residual approach whereby all other performance obligations within a contract are first allocated a portion of the transaction price based upon their respective stand-alone selling prices, with any residual amount of transaction price allocated to the remaining specific performance obligation.

F-29

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Variable consideration

The Group determines the transaction price separately for each contract with a customer. When exercising this judgment, the Group evaluates the effect of each variable amount in the contract, taking into consideration discounts, penalties, variations, claims, and non-cash consideration. In determining the effect of the variable consideration, the Group normally uses the “most likely amount” method described in the Standard. Pursuant to this method, the amount of the consideration is determined as the single most likely amount in the range of possible consideration amounts in the contract. According to the Standard, variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Costs of obtaining a contract

In order to obtain certain contracts with customers, the Group incurs incremental costs in obtaining the contract (such as sales commissions which are contingent on making binding sales). Costs incurred in obtaining the contract with the customer which would not have been incurred if the contract had not been obtained and which the Group expects to recover are recognized as an asset and amortized on a systematic basis that is consistent with the provision of the services under the specific contract.

An impairment loss in respect of capitalized costs of obtaining a contract is recognized in profit or loss when the carrying amount of the asset exceeds the remaining amount of consideration that the Group expects to receive for the goods or services to which the asset relates less the costs that relate directly to providing those goods or services and that have not been recognized as expenses.

The Group has elected to apply the practical expedient allowed by IFRS 15 according to which incremental costs of obtaining a contract are recognized as an expense when incurred if the amortization period of the asset is one year or less.

A significant benefit of financing

In certain contracts, the Group provides the customer with financing for a period exceeding one year. In such circumstances, the Group recognizes revenue based on the amount that reflects the price that would have been paid by the customer in cash on the date of receipt of the goods or services, and the balance is recognized in finance income.

When long-term advances are received for services which the Group is to provide in the future, the Group accrues interest on the advances and recognizes finance expense over the expected period of the contract, provided that the contract contains a significant financing component. As the advances are recognized in revenue, the Group also recognizes the accrued interest as part of revenue from services.

The Group has elected to apply the practical expedient allowed by IFRS 15 according to which the Group does not separate the financing component in transactions for which the period of financing is one year or less and recognizes revenue in the amount of the consideration stated in the contract even if the customer pays for the goods or services before or subsequent to their receipt.

F-30

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Revenues that include warranty services

In certain cases, the Group also provides a warranty for goods and services sold (i.e., extended warranties when the Group contractually undertakes to repair any errors in the delivered software within a strictly specified time limit and/or when the scope of which is broader than just an assurance to the customer that the product/service complies with agreed-upon specifications). The Group has ascertained that such warranties granted by the Group meet the definition of service. The conclusion regarding the extended nature of a warranty is made whenever the Group contractually undertakes to repair any errors in the delivered software within a strictly specified time limit and/or when such warranty is more extensive than the minimum required by law. Under IFRS 15, the fact of granting an extended warranty indicates that the Group provides an additional service. As such, the Group recognizes an extended warranty as a separate performance obligation and allocates a portion of the transaction price to such service. In all cases where an extended warranty is accompanied by a maintenance service, which is even a broader category than the extended warranty itself, revenues are recognized over time because the customer consumes the benefits of such service as it is performed by the provider. If this is the case, the Group continues to allocate a portion of the transaction price to such maintenance service. Likewise, in cases where a warranty service is provided after the project completion and is not accompanied by any maintenance service, then a portion of the transaction price and analogically recognition of a portion of contract revenues will have to be deferred until the warranty service is actually fulfilled.

Disaggregation of revenue

Service revenue include contracts primarily for the provision of supplies and services other than design, development, customization, implementation, software maintenance and support and software updates associated with delivery of products or proprietary software. It may be a stand-alone service contract or a service performance obligation which is distinct from a contract or performance obligation for design, development, customization, support and upgrade or delivery of product. The Group’s service contracts include contracts in which the customer simultaneously receives and consumes the benefits provided as the performance obligations are satisfied. The Group’s service contracts primarily include operation-type contracts, outsourcing, consulting, remote development services, digital advertising management, training and similar activities.

Revenue by products and services was as follows:

Year ended December 31,

2021

2020

2019

Proprietary software and related services

i 632,986

i 509,109

i 438,256

Other products and third party

i 472,045

i 312,315

i 229,104

Services

i 1,299,345

i 1,112,494

i 1,033,755

i 2,404,376

i 1,933,918

i 1,701,115

F-31

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Revenue by timing of revenue recognition was as follows:

	Year ended December 31,
	2021		2020		2019
Products and services transferred over time	$	i 2,072,841	$	i 1,697,312	$	i 1,518,221
Products transferred at a point in time		i 331,535		i 236,606		i 182,894
	$	i 2,404,376	$	i 1,933,918	$	i 1,701,115

14)

Government grants:

Government grants are recognized when there is reasonable assurance that the grants will be received, and the Group will comply with the attached conditions. Government grants received from the Office of the Israel Innovation Authority (“IIA”), formerly the Office of the Chief Scientist (“OCS”), are recognized upon receipt as a liability if future economic benefits are expected from the research project that will result in royalty-bearing sales.

A liability for the loan is first measured at fair value using a discount rate that reflects a market participant rate of interest. The difference between the amount of the grant received and the fair value of the liability is accounted for as a government grant and recognized as a reduction of research and development expenses. After initial recognition, the liability is measured at amortized cost using the effective interest method. Royalty payments are treated as a reduction of the liability. If no economic benefits are expected from the research activity, the grant receipts are recognized as a reduction of the related research and development expenses. In that event, the royalty obligation is treated as a contingent liability in accordance with IAS 37.

At each reporting date, the Group evaluates whether there is reasonable assurance that the liability recognized, in whole or in part, will not be repaid (since the Group will not be required to pay royalties) based on the best estimate of future sales and using the original effective interest method, and if so, the appropriate amount of the liability is derecognized against a corresponding reduction in research and development expenses. Amounts paid as royalties are recognized as settlement of the liability.

15)

Debentures:

The Group accounts for outstanding principal amount of debentures as long-term liability, in accordance with IFRS 9, with current maturities classified as a short-term liability. The Group identifies and separates equity components contains in convertible debentures by first determining the liability component, in accordance with IAS 32, based on the fair value of an equivalent non-convertible liability. The conversion component valued is being determined to be the residual amount. Debt issuance costs are capitalized and reported as deferred financing costs, which are amortized over the life of the debentures using the effective interest rate method.

16)

Income tax:

Current or deferred taxes are recognized in profit or loss, except to the extent that they relate to items which are recognized in other comprehensive income or equity.

F-32

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

●

Current taxes:

The current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date as well as adjustments required in connection with the tax liability in respect of previous years.

●

Deferred taxes:

Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts attributed for tax purposes. Deferred taxes are measured at the tax rate that is expected to apply when the asset is realized or the liability is settled, based on tax laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is not probable that they will be utilized. Deductible carryforward losses and temporary differences for which deferred tax assets had not been recognized are reviewed at each reporting date and a respective deferred tax asset is recognized to the extent that their utilization is probable.

Taxes that would apply in the event of the disposal of investments in investees have not been considered in computing deferred taxes, as long as the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would apply in the event of distribution of earnings by investees as dividends have not been considered in computing deferred taxes, since the distribution of dividends does not involve an additional tax liability or since it is the Group’s policy not to initiate distribution of dividends from a subsidiary that would trigger an additional tax liability.

Taxes on income that relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted for pursuant to IAS 12.

Deferred taxes are offset if there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred taxes relate to the same taxpayer and the same taxation authority.

17)

Leases:

The Group accounts for a contract as a lease when the contract terms convey the right to control the use of an identified asset for a period of time in exchange for consideration.

The Group as lessee:

For leases in which the Group is the lessee, the Group recognizes on the commencement date of the lease a right-of-use asset and a lease liability, excluding leases whose term is up to twelve months and leases for which the underlying asset is of low value. For these excluded leases, the Group has elected to recognize the lease payments as an expense in profit or loss on a straight-line basis over the lease term. In measuring the lease liability, the Group has elected to apply the practical expedient in the Standard and does not separate the lease components from the non-lease components (such as management and maintenance services, etc.) included in a single contract.

F-33

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Leases which entitle employees to a company car as part of their employment terms are accounted for as employee benefits in accordance with the provisions of IAS 19 and not as subleases.

On the commencement date, the lease liability includes all unpaid lease payments discounted at the interest rate implicit in the lease, if that rate can be readily determined, or otherwise using the Group’s incremental borrowing rate. After the commencement date, the Group measures the lease liability using the effective interest rate method.

On the commencement date, the right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already made on or before the commencement date and initial direct costs incurred. The right-of-use asset is measured applying the cost model and depreciated over the shorter of its useful life and the lease term.

Following are the amortization periods of the right-of-use assets by class of underlying asset:

	Years	Mainly
Land and Buildings	i 2- i 23	i 3
Motor vehicles	i 2- i 3	i 3

The Group tests for impairment of the right-of-use asset whenever there are indications of impairment pursuant to the provisions of IAS 36.

ii)

Variable lease payments that depend on an index:

On the commencement date, the Group uses the index rate prevailing on the commencement date to calculate the future lease payments.

For leases in which the Group is the lessee, the aggregate changes in future lease payments resulting from a change in the index are discounted (without a change in the discount rate applicable to the lease liability) and recorded as an adjustment of the lease liability and the right-of-use asset, only when there is a change in the cash flows resulting from the change in the index (that is, when the adjustment to the lease payments takes effect).

iii)

Variable lease payments:

Variable lease payments that do not depend on an index or interest rate but are based on performance or usage are recognized as an expense as incurred when the Group is the lessee.

iv)

Lease extension and termination options:

A non-cancelable lease term includes both the periods covered by an option to extend the lease when it is reasonably certain that the extension option will be exercised and the periods covered by a lease termination option when it is reasonably certain that the termination option will not be exercised.

F-34

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In the event of any change in the expected exercise of the lease extension option or in the expected non-exercise of the lease termination option, the Group remeasures the lease liability based on the revised lease term using a revised discount rate as of the date of the change in expectations. The total change is recognized in the carrying amount of the right-of-use asset until it is reduced to zero, and any further reductions are recognized in profit or loss.

Lease modifications:

If a lease modification does not reduce the scope of the lease and does not result in a separate lease, the Group remeasures the lease liability based on the modified lease terms using a revised discount rate as of the modification date and records the change in the lease liability as an adjustment to the right-of-use asset.

If a lease modification reduces the scope of the lease, the Group recognizes a gain or loss arising from the partial or full reduction of the carrying amount of the right-of-use asset and the lease liability. The Group subsequently remeasures the carrying amount of the lease liability according to the revised lease terms, at the revised discount rate as of the modification date and records the change in the lease liability as an adjustment to the right-of-use asset.

18)

Property, plant and equipment, net:

Property, plant and equipment are measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment losses and any related investment grants and excluding day-to-day servicing expenses. Cost includes spare parts and auxiliary equipment that are
used in connection with plant and equipment. The cost of an item of property, plant and equipment comprises the initial estimate of the costs of dismantling and removing the item and restoring the site on which the item is located.

Depreciation is calculated on a straight-line basis over the useful life of the assets at annual rates as follows:

			%
Land and Buildings			i 2 - i 4
Computers, software, and peripheral equipment			i 20 - i 33
Office furniture and equipment			i 6 - i 33 (mainly 7)
Motor vehicles			i 14 - i 15 (mainly 15)

Leasehold improvements are amortized using the straight-line method over the term of the lease (including option terms that are deemed to be reasonably assured) or the estimated useful life of the improvements, whichever is shorter.

The useful life, the depreciation method and the residual value of an asset are reviewed at least each year-end (at the end of the year) and any changes are accounted for prospectively as a change in accounting estimate. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. For impairment testing of property, plant and equipment, see Note 2(20) below.

F-35

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

19)

Intangible assets:

Separately acquired intangible assets are measured on initial recognition at cost, including directly attributable costs. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Expenditures relating to internally generated intangible assets, excluding capitalized development costs, are recognized in profit or loss when incurred.

Intangible assets with a finite useful life are amortized over their useful life and reviewed for impairment whenever there is an indication that the asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least at each year end.

Research and development expenditures

Research expenditures incurred in the process of software development are recognized in profit or loss when incurred. An intangible asset arising from a software development project or from the development phase of an internal project is recognized if the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale; the Group’s intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits; the availability of adequate technical, financial and other resources to complete the intangible asset; and the ability to measure reliably the respective expenditure asset during its development. The Group establishes technological feasibility upon completion of a detailed program design or a working model.

Capitalized software costs are measured at cost less any accumulated amortization and any accumulated impairment losses on a product-by-product basis. Amortization of capitalized software costs begin when development is complete, and the product is available for use or for sale. The Group considers a product to be available for use when the Group completes its internal validation of the product that is necessary to establish that the product meets its design specifications including functions, features, and technical performance requirements. Internal validation includes the completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The internal validation of the product takes place a few weeks before the product is made available to the market. In certain instances, the Group enters into a short pre-release stage, during which the product is made available to a selected number of customers as a beta program for their own review and familiarization. Subsequently, the release is made generally available to customers. Once a product is considered available for use, the capitalization of costs ceases and amortization of such costs to “cost of sales” begins.

Capitalized software costs are amortized on a product-by-product basis by the straight-line method over the estimated useful life of the software product (between i 5- i 7 years).

Research and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.

The Group assesses the recoverability of its capitalized software costs on a regular basis by assessing the net realizable value of these intangible assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing and disposing of it, including the estimated costs of performing maintenance and customer support over its remaining economical useful life using internally generated projections of future revenues generated by the products, cost of completion of products and cost of delivery to customers over its remaining economical useful life.

F-36

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

During the years ended December 31, 2019, 2020 and 2021, no such unrecoverable amounts were identified.

Other intangible assets

Intangible assets excluding capitalized development costs are comprised mainly of customer-related intangible assets, backlogs, distribution rights, brand names, acquired technology and patent, and are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. The useful life of intangible assets is as follows:

		Years
Customer relationship, backlog and distribution rights		i 3 – i 15
Brand names		i 9 – i 15
Acquired technology		i 2 – i 8
Patents		i 10

Gains or losses arising from the derecognition of an intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss.

The useful life of these assets is reviewed annually to determine whether their indefinite life assessment continues to be supportable. If the events and circumstances do not continue to support the assessment, the change in the useful life assessment from indefinite to finite is accounted for prospectively as a change in accounting estimate, and on that date the asset is tested for impairment. Commencing from that date, the asset is amortized systematically over its useful life.

20)

Impairment of non-financial assets:

The Group evaluates the need to record an impairment of non-financial assets (property, plant and equipment, capitalized software costs and other intangible assets, goodwill, investments in joint venture) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.

An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss.

F-37

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The following criteria are applied in assessing impairment of these specific assets:

Goodwill in respect of subsidiaries:

For the purpose of impairment testing, goodwill acquired in a business combination is allocated, at the acquisition date, to each of our cash-generating units that are expected to benefit from the synergies of the combination. The Group reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment.

Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent periods.

ii.

Investment in associate or joint venture using the equity method:

After application of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to the investment in associates or joint ventures. The Group determines at each reporting date whether there is objective evidence that the carrying amount of the investment in the associate or the joint venture is impaired. The test of impairment is carried out with reference to the entire investment, including the goodwill attributed to the associate or the joint venture.

iii.

Intangible assets with an indefinite useful life / capitalized development costs that have not yet been systematically amortized:

The impairment test is performed annually, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment.

During the years ended December 31, 2019, 2020 and 2021, no impairment indicators were identified.

21)

Financial instruments:

Financial assets:

Financial assets are measured upon initial recognition at fair value plus transaction costs that are directly attributable to the acquisition of the financial assets, except for financial assets measured at fair value through profit or loss in respect of which transaction costs are recorded in profit or loss.

F-38

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Group classifies and measures the debt instruments in its financial statements on the basis of the following criteria:

●

the Group’s business model for the management of financial assets; and

●

the contractual cash flow characteristics of the financial asset.

The Group measures debt instruments at amortized cost when:

The Group’s business model is to hold the financial assets in order to collect their contractual cash flows, and the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. After initial recognition, the instruments in this category are measured according to their terms at amortized cost using the effective interest rate method, less any provision for impairment. On the date of initial recognition, the Group may irrevocably designate a debt instrument as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency, such as when a related financial liability is also measured at fair value through profit or loss.

ii.

The Group measures debt instruments at fair value through other comprehensive income when:

The Group’s business model is to hold the financial assets in order to both collect their contractual cash flows and to sell the financial assets, and the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Subsequent to the initial recognition, the instruments in this category are measured at fair value. Gains or losses from fair value adjustments, excluding interest and exchange rate differences, are recognized in other comprehensive income.

iii.

The Group measures debt instruments at fair value through profit or loss when:

A financial asset which is a debt instrument does not meet the criteria for measurement at amortized cost or at fair value through other comprehensive income. After initial recognition, the financial asset is measured at fair value and gains or losses from fair value adjustments are recognized in profit or loss.

iv.

Equity instruments and other financial assets held for trading:

Investments in equity instruments do not meet the above criteria and accordingly are measured at fair value through profit or loss. Other financial assets held for trading such as derivatives, including embedded derivatives separated from the host contract, are measured at fair value through profit or loss unless they are designated as effective hedging instruments. In respect of certain equity instruments that are not held for trading, on the date of initial recognition, the Company made an irrevocable election to present subsequent changes in fair value in other comprehensive income which changes would have otherwise been recorded in profit or loss. These changes will not be reclassified to profit or loss in the future, even when the investment is disposed of. Dividends from investments in equity instruments are recognized in profit or loss when the right to receive the dividends is established.

F-39

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Impairment of financial assets:

The Group evaluates at the end of each reporting period the loss allowance for financial debt instruments which are not measured at fair value through profit or loss. The Company distinguishes between two types of loss allowances:

Debt instruments whose credit risk has not increased significantly since initial recognition, or whose credit risk is low - the loss allowance recognized in respect of this debt instrument is measured at an amount equal to the expected credit losses within 12 months from the reporting date; or

ii.

Debt instruments whose credit risk has increased significantly since initial recognition, and whose credit risk is not low - the loss allowance recognized is measured at an amount equal to the expected credit losses over the instrument’s remaining term.

The Group has short-term financial assets such as trade receivables in respect of which the Group applies a simplified approach in IFRS 9 and measures the loss allowance in an amount equal to the lifetime expected credit losses.

An impairment loss on debt instruments measured at amortized cost is recognized in profit or loss with a corresponding loss allowance that is offset from the carrying amount of the financial asset, whereas the impairment loss on debt instruments measured at fair value through other comprehensive income is recognized in profit or loss with a corresponding loss allowance that is recorded in other comprehensive income and not as a reduction of the carrying amount of the financial asset in the statement of financial position.

The Group applies the low credit risk simplification in IFRS 9, according to which the Group assumes the debt instrument’s credit risk has not increased significantly since initial recognition if on the reporting date it is determined that the instrument has a low credit risk, for example when the instrument has an external rating of “investment grade”.

Derecognition of financial assets:

The Group derecognizes a financial asset when and only when:

The contractual rights to the cash flows from the financial asset expire; or

ii.

The Group has transferred substantially all the risks and rewards deriving from the contractual rights to receive cash flows from the financial asset or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset; or

iii.

The Group has retained its contractual rights to receive cash flows from the financial asset but has assumed a contractual obligation to pay the cash flows in full without material delay to a third party.

F-40

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Financial liabilities:

Financial liabilities measured at amortized cost:

Financial liabilities are initially recognized at fair value less transaction costs that are directly attributable to the issue of the financial liability. After initial recognition, the Group measures all financial liabilities at amortized cost using the effective interest rate method, except for:

●

Financial liabilities at fair value through profit or loss, such as derivatives;

●

Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies;

●

Financial guarantee contracts; and

●

Contingent consideration recognized by an acquirer in a business combination as to which IFRS 3 applies.

ii.

Financial liabilities measured at fair value through profit or loss:

At initial recognition, the Group measures financial liabilities that are not measured at amortized cost at fair value. Transaction costs are recognized in profit or loss. After initial recognition, changes in fair value are recognized in profit or loss.

Derecognition of financial liabilities:

A financial liability is derecognized when it is extinguished, that is, when the obligation is discharged or cancelled or expires. A financial liability is extinguished when the debtor discharges the liability by paying in cash, other financial assets, goods or services or is legally released from the liability.

When there is a modification in the terms of an existing financial liability, the Group evaluates whether the modification is substantial.

If the terms of an existing financial liability are substantially modified, such modification is accounted for as an extinguishment of the original liability and the recognition of a new liability. The difference between the carrying amounts of the above liabilities is recognized in profit or loss.

If the modification is not substantial, the Group recalculates the carrying amount of the liability by discounting the revised cash flows at the original effective interest rate and any resulting difference is recognized in profit or loss.

F-41

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Offsetting financial instruments:

Financial assets and financial liabilities are offset and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously. The right of set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties. In order for the right of set-off to be currently available, it must not be contingent on a future event, there may not be periods during which the right is not available, or there may not be any events that will cause the right to expire.

Compound financial instruments:

Convertible debentures which contain both an equity component and a liability component are separated into two components. This separation is performed by first determining the liability component based on the fair value of an equivalent non-convertible liability. The value of the conversion component is determined to be the residual amount. Directly attributable transaction costs are apportioned between the equity component and the liability component based on the allocation of proceeds to the equity and liability components.

ii)

Convertible debentures that are denominated in foreign currency contain two components: the conversion component and the debt component. The liability conversion component is initially recognized as a financial derivative at fair value. The balance is attributed to the debt component. Directly attributable transaction costs are allocated between the liability conversion component and the liability debt component based on the allocation of the proceeds to each component.

Put option granted to non-controlling interests:

When the Group grants to non-controlling interests a put option to sell part or all of their interests in a subsidiary, during a certain period, even if such purchase obligation is conditional on the counterparty’s exercise of its contractual right to cause such redemption, if the put option agreement does not transfer to the Group any benefits incidental to ownership of the equity instrument (i.e. the Group does not have a present ownership in the shares concerned) then at the end of each reporting period the non-controlling interests (to which a portion of net profit attributable to non-controlling interests is allocated) are classified as a financial liability, as if such put-able equity instrument was redeemed on that date. The difference between the non-controlling interests carrying amount at the end of the reporting period and the present value of the liability is recognized directly in equity of the Group, under “Additional paid-in capital”.

The Group remeasures the financial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred upon the exercise of the put option.

If the option is exercised in subsequent periods, the consideration paid upon exercise is treated as settlement of the liability. If the put option expires, the liability is settled and a portion of the investment in the subsidiary disposed of, without loss of control therein.

If the Group has present ownership of the non-controlling interests, these non-controlling interests are accounted for as if they are held by the Group, and changes in the amount of the liability are carried to profit or loss.

F-42

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

22)

Fair value measurement:

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s principal market, or in the absence of a principal market, in the most advantageous market.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest level input that is significant to the entire fair value measurement:

Level 1	-	quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2	-	inputs other than quoted prices included within Level 1 that are observable directly or indirectly.

Level 3	-	inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data).

23)

Treasury shares:

Company shares held by the Company and/or by investees are recognized at cost of purchase and presented as a deduction from equity. Any gain or loss arising from a purchase, sale, issue or cancellation of treasury shares is recognized directly in equity.

24)

Provisions:

A provision in accordance with IAS 37 is recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are measured according to the estimated future cash flows discounted using a pre-tax interest rate that reflects the market assessments of the time value of money and, where appropriate, those risks specific to the liability. When the Group expects part or all of the expense to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense is recognized in the statement of profit or loss net of any reimbursement.

F-43

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Following are the types of provisions included in the financial statements:

Legal claims:

A provision for claims is recognized when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of resources embodying economic benefits will be required by the Group to settle the obligation and a reliable estimate can be made of the amount of the obligation.

ii.

Contingent liability recognized in a business combination:

A contingent liability in a business combination is measured at fair value upon initial recognition. In subsequent periods, it is measured at the higher of the amount initially recognized less, when appropriate, cumulative amortization, and the amount that would be recognized at the end of the reporting period in accordance with IAS 37.

25)

Derivative financial instruments and hedging:

From time to time, the Group enters into contracts for derivative financial instruments such as forward currency contracts and options contracts to hedge risks associated with foreign exchange rates resulting from international activities and interest rate fluctuations. The derivative instruments primarily hedge or offset exposures to Euro, British Pound, Japanese Yen and New Israeli Shekel (“NIS”) exchange rate fluctuations.

The Group’s options and forward contracts do not qualify for hedging accounting. Any gains or losses arising from changes in the fair values of the derivatives are recorded immediately in profit or loss as financial income or expense.

26)

Employee benefit liabilities:

The Group maintains several employee benefit plans:

Short-term employee benefits:

Short-term employee benefits are benefits that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services. These benefits include salaries, paid annual leave, paid sick leave, recreation and social security contributions and are recognized as expenses as the services are rendered. A liability in respect of a cash bonus or a profit-sharing plan is recognized when the Group has a legal or constructive obligation to make such payment as a result of past service rendered by an employee and a reliable estimate of the amount can be made.

ii.

Post-employment benefits:

The plans are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined benefit plans.

F-44

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Formula’s and its Israeli subsidiaries and companies accounted for at equity (as defined with respect to their Israeli employee contribution plans pursuant to section 14 of Israel’s Severance Pay Law, 1963 (the “Severance Pay Law”)) pay fixed contributions to those plans and will have no legal or constructive obligation to pay further contributions if the fund into which those contributions are paid does not hold sufficient amounts to pay all employee benefits relating to employee service in the current and prior periods. Contributions to the defined contribution plan in respect of severance or retirement pay are recognized as an expense when contributed concurrently with performance of the employee’s services.

Formula and its Israeli subsidiaries and companies accounted for at equity also operate a defined benefit plan in respect of severance or retirement pay to their Israeli employees pursuant to the Severance Pay Law. According to the Severance Pay Law, employees are entitled to severance pay upon dismissal or retirement. The liability for termination of employment is measured using the projected unit credit method. The actuarial assumptions include rates of employee turnover and future salary increases based on the estimated timing of payment. The amounts are presented based on discounted expected future cash flows using a discount rate determined by reference to market yields at the reporting date on high quality corporate bonds that are linked to Israel’s Consumer Price Index with a term that is consistent with the estimated term of the severance pay obligation.

In respect of its severance pay obligation to certain of its employees, the Group makes current deposits in pension funds and insurance companies (the “plan assets”). Plan assets comprise assets held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the Group’s own creditors and cannot be returned directly to the Group.

The liability for employee benefits shown in the statement of financial position reflects the present value of the defined benefit obligation, less the fair value of the plan assets. Remeasurements of the net liability are recognized in other comprehensive income in the period in which they occur.

Severance expenses for the years 2019, 2020 and 2021 were $ i 37,218, $ i 35,897 and $ i 48,331, respectively.

iii.

Other long-term employee benefits:

Certain employees of the Group are entitled to benefits in respect of adaptation grants. These benefits are accounted for as other long-term benefits since the Group estimates that these benefits will be utilized and the Group’s respective obligation will be settled during the employment period and more than twelve months after the end of the annual reporting period in which the employees rendered the related service.

The Group’s net obligation for other long-term employee benefits, which is computed based on actuarial assumptions, is for the future benefit due to employees for services rendered in the current period and in prior periods and considering expected salary increases. The amount of these benefits is discounted to its present value. The discount rate is determined by reference at the reporting date to market yields on high quality corporate bonds that are linked to the Consumer Price Index and whose term is consistent with the term of the Group’s obligation.

Remeasurement of the net obligation is recognized in the statement of comprehensive income in the incurred period.

F-45

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

27)

Share-based payment transactions:

The Group’s employees and certain service providers are entitled to remuneration in the form of equity-settled share-based payment transactions. The cost of equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date. The fair value is determined using an acceptable option pricing model. As for other service providers, the cost of the transactions is measured at the fair value of the goods or services received as consideration for equity instruments granted.

The cost of equity-settled transactions is recognized in profit or loss together with a corresponding increase in equity during the period which the performance and/or service conditions are to be satisfied ending on the date on which the relevant employees become entitled to the award (the “vesting period”). The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions (service and/or performance) are satisfied.

If the Group modifies the conditions on which equity-instruments were granted, an additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the employee/other service provider at the modification date.

If a grant of an equity instrument is canceled, it is accounted for as if it had vested on the cancelation date and any expense not yet recognized for the grant is recognized immediately. However, if a new grant replaces the canceled grant and is identified as a replacement grant on the grant date, the canceled and new grants are accounted for as a modification of the original grant, as described above.

28)

Earnings per share:

Earnings per share are calculated by dividing the net income attributable to equity holders of the Company by the weighted number of ordinary shares outstanding during the period. Potential ordinary shares are included in the computation of diluted earnings per share if their conversion decreases earnings per share from continuing operations. Potential ordinary shares that are converted during the period are included in diluted earnings per share only until the conversion date and from that date in basic earnings per share. The Company’s share of earnings of subsidiaries is included based on its share of earnings per share of the subsidiaries multiplied by the number of shares held by the Company.

F-46

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

29)

Concentration of credit risk:

Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, restricted cash, trade receivables, marketable securities and foreign currency derivative contracts.

The majority of the Group’s cash and cash equivalents, bank deposits, marketable securities and other financial instruments are invested with major banks in Israel, the United States and across Europe. Management believes that these financial instruments are held in financial institutions with high credit standing, and accordingly, minimal credit risk exists with respect to these investments. Cash and cash equivalents and short-term deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Generally, these banks deposits may be redeemed upon demand and therefore bear minimal risk.

The Group’s trade receivables are generally derived from sales to large organizations located mainly in Israel, North America, Europe and Asia Pacific. The Group performs ongoing credit evaluations of its customers using a reliable outside source to determine payment terms and credit limits which are approved based on the size of the customer and to date has not experienced any material losses. In certain circumstances, Formula and its subsidiaries and companies accounted for at equity may require letters of credit, other collateral or additional guarantees. From time to time, the Group’s subsidiaries sell certain of their accounts receivable to financial institutions, within the normal course of business.

The Group maintains an allowance for doubtful accounts receivable based upon management’s experience and estimate of collectability of each outstanding invoice. The allowance for doubtful accounts is determined with respect to specific debts or which collection is doubtful. The risk of collection associated with accounts receivable is mitigated by the diversity and number of customers.

Bad debt expense, net for the years ended December 31, 2019, 2020 and 2021 was $ i 1,176, $ i 3,188 and $ i 1,333 respectively.

From time to time, the Group enters into foreign exchange forward and option contracts intended to protect against the changes in value of forecasted non-dollar currency cash flows. These derivative instruments are designed to offset a portion of the Group’s non-dollar currency exposure (see Note 2 (25) above).

30)

Liquidity risk:

Liquidity risk arises from managing the Group’s working capital as well as from financial expenses and principal payments of the Group’s debt instruments. Liquidity risk consists of the risk that the Group will have difficulty in fulfilling obligations relating to financial liabilities. The Group’s policy is to ascertain constant cash adequacy needed for settling its liabilities when due. For this purpose, the Group aims to hold cash balances (or adequate credit lines) that will meet anticipated demands.

Formula and its subsidiaries and companies accounted for at equity examine cash flow forecasts on a monthly basis as well as information regarding cash balances. As of the reporting date, these forecasts indicate that the Group can expect sufficient liquid sources for covering its entire liabilities under reasonable assumptions.

F-47

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

31)

Changes in accounting policies - initial adoption of new financial reporting and accounting standards:

Amendments to IFRS 9, IFRS 7, IFRS 16, IFRS 4 and IAS 39 regarding the IBOR reform:

In August 2020, the IASB issued amendments to IFRS 9, “Financial Instruments”, IFRS 7, “Financial Instruments: Disclosures”, IAS 39, “Financial Instruments: Recognition and Measurement”, IFRS 4, “Insurance Contracts”, and IFRS 16, “Leases” (the “Amendments”).

The Amendments provide practical expedients when accounting for the effects of the replacement of benchmark InterBank Offered Rates (IBORs) by alternative Risk Free Interest Rates (RFRs). The Amendments are effective for annual periods beginning on or after January 1, 2021. The Amendments are to be applied retrospectively. However, restatement of comparative periods is not required.

The adoption of the Amendments did not have an effect on the Group’s financial statements as of January 1, 2021, since the Group does not have any IBOR-based hedge transactions which could be affected by the IBOR reform.

Additional amendment in April 2021 to IFRS 16, “Leases”:

In view of the global Covid-19 crisis, in May 2020, the IASB issued “Covid-19-Related Rent Concessions - Amendment to IFRS 16, Leases” (the “2020 Amendment”). The objective of the 2020 Amendment is to allow a lessee to apply a practical expedient according to which Covid-19 related rent concessions will not be accounted for as lease modifications but as variable lease payments. The 2020 Amendment applies solely to lessees.

Originally the 2020 Amendment was applicable only to a reduction in lease payments due on or before June 30, 2021. However, since the Covid-19 pandemic has continued beyond the period envisaged, the IASB updated the condition for lessees to apply the relief to a reduction in lease payments due on or before June 30, 2022 (the “2021 Amendment”). The other criteria for application of the 2020 Amendment remain unchanged.

The 2021 Amendment applies to annual reporting periods beginning on or after April 1, 2021. Early application is permitted.

The 2021 Amendment is to be applied retrospectively, recognizing the cumulative effect of initially applying the 2021 Amendment as an adjustment to the opening balance of retained earnings at the beginning of the annual reporting period in which the lessee first applies the 2021 Amendment.

The application of the Amendments will not have a material impact on the Group’s consolidated financial statements.

i 32)

Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation.

F-48

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS

Formula

Acquisition of ZAP Group Ltd. (“ZAP Group”)

On April 6, 2021 (the “Zap Group acquisition date”), the Company directly acquired i 100% of the share capital of Zap Group, Israel’s largest group of consumer websites which manages more than i 20 leading consumer websites from diverse content worlds. The websites managed and offered by Zap provide small and medium-sized businesses in Israel with a broad and rich advertising platform and offer consumers a user-friendly search experience with a variety of advanced tools, which enable them to make educated purchase decisions in the best and most informed way. The cash consideration paid at the closing amounted to approximately NIS i 244,169 (approximately $ i 74,350), or approximately NIS i 216,172 (approximately $ i 65,825) net of acquired cash. Moreover, the former shareholders of Zap are entitled to contingent consideration payments of up to NIS i 60,000 (approximately $ i 18,270) depending on the future results of operations of Zap Group during the first two years following the acquisition. The fair value of such contingent consideration, as of the acquisition date amounted to NIS i 3,577 (or $ i 1,089). Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The results of Zap Group’s operations have been included in the consolidated financial statements since April 2021. Zap Group’s results of operations have been included in the consolidated financial statements from the Zap Group Acquisition Date.

The following table summarizes the provisional estimated consideration for the acquisition of Zap:

Cash consideration	$	i 74,350
Acquisition date fair-value of contingent consideration		i 1,089
Total consideration	$	i 75,439

The following table summarizes the provisional estimated fair values ⁽¹⁾ allocated to Zap’s assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	( i 7,171	)
Other long-term assets		i 8,735
Other long-term liabilities		( i 4,565	)
Customer relationships		i 39,152
Trade names		i 8,642
Deferred tax liabilities		( i 10,984	)
Non-controlling interests in acquiree’s subsidiary		( i 1,384	)
Goodwill		i 33,400
Total assets acquired net of acquired cash	$	i 65,825

(1)

The estimated fair values of the tangible and intangible assets in respect of the acquisition of ZAP are provisional and are based on information that was available as of the acquisition date to estimate the fair value of these amounts. The Group’s management believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value that appear are subject to change. The Group expects to finalize the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.

F-49

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

Acquisition of Ofek Aerial Photography Ltd. (“Ofek”)

On March 13, 2020 (the “Ofek Acquisition Date”), the Company directly acquired i 86.02% of the share capital of Ofek, Israel’s market leader in the fields of aerial and satellite mapping, geographic data collection and processing, and provider of services in numerous geographic applications, for a total cash consideration of NIS 27,671 (approximately $ i 7,888), or NIS 14,303 (approximately $ i 3,931) net of acquired cash. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Ofek’s results of operations have been included in the consolidated financial statements since the Ofek Acquisition Date.

The following table summarizes the estimated fair values allocated to Ofek’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 4,857
Other long-term assets		i 4,817
Intangible assets		i 874
Dividend payable to former shareholder		( i 7,069	)
Deferred tax, net		( i 34	)
Non-controlling interests		( i 995	)
Goodwill		i 1,481
Total assets acquired net of acquired cash	$	i 3,931

ii.

Sapiens

Acquisition of Thor Denmark Holding ApS and its subsidiaries (“TIA”)

On November 30, 2020 (the “TIA Acquisition Date”), Sapiens completed the acquisition of all of the outstanding shares of TIA, a leading vendor of digital software solutions. TIA offers comprehensive software solutions primarily for Property & Casualty insurers, as well as several innovative extension modules. Additionally, TIA offers a full scope of expert implementation, application management and hosting services, enabling insurers to execute their digital and business strategies. The purchase price amounted to $ i 75,276 in cash (or $ i 72,984 net of acquired cash), subject to net working capital adjustments. Acquisition related costs amounted to $ i 719. TIA’s results of operations have been included in the consolidated financial statements from the TIA Acquisition Date.

During 2021, Sapiens and TIA’s former shareholders (the “Sellers”) agreed on the final working capital adjustments which resulted in payment of $ i 0.8 million from the Sellers to Sapiens.

F-50

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The following table summarizes the estimated fair values allocated to TIA’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 4,045
Other long-term assets		i 4,254
Developed technology		i 10,517
Customer relationships		i 19,266
Backlog		i 163
Goodwill		i 58,120
Current liabilities		( i 4,800	)
Deferred revenues		( i 5,742	)
Deferred tax liabilities		( i 6,962	)
Other long-term liabilities		( i 5,877	)
Total assets acquired, net of acquired cash	$	i 72,984

The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill. The goodwill from the acquisition of TIA is primarily attributable to potential synergies with Sapiens, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss.

Acquisition of sum.cumo GmbH (“sum.cumo”)

On February 6, 2020 (the “sum.cumo Acquisition Date”), Sapiens completed the acquisition of all the outstanding shares of sum.cumo, a German company, which services insurers in the DACH region, helping them to achieve digital transformation of set up their existing business models or to design entirely new business models based on pure digital processes. sum.cumo’s experts in consulting, user experience, marketing and technology enable the region’s insurers to launch highly automated platforms well suited for e-commerce and real-time processing of transactions.

The purchase price totaled $ i 22,487 in cash (or $ i 21,506 net of acquired cash). i At the acquisition date, Sapiens issued an aggregate of 173,005 RSUs to certain senior executives of sum.cumo, valued at a total of $4,400. The value of these grants was not included in the purchase price of sum.cumo, since their vesting is subject to both continued employment and other performance criteria. In addition, sum.cumo’s senior executives have retention-based payments over three years (2020-2023) of up to approximately $2,800. These payments are subject to continued employment, and therefore were not included in the purchase price. Acquisition related costs amounted to $561. Sum.cumo’s results of operations have been included in the consolidated financial statements from the sum.cumo Acquisition Date.

F-51

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The table below presents the estimated fair value allocated to sum.cumo’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 466
Intangible assets		i 9,730
Deferred tax liabilities		( i 3,211	)
Goodwill		i 14,521
Total assets acquired, net of acquired cash	$	i 21,506

The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill. The goodwill from the acquisition of sum.cumo is primarily attributable to sales growth from future products, new customers and potential synergy with Sapiens, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss.

Acquisition of Delphi Technology Inc. and its subsidiary (“Delphi”)

On July 27, 2020 (the “Delphi Acquisition Date”), Sapiens completed the acquisition of Delphi, a leading vendor of software solutions for property & casualty (P&C) carriers, with a focus on the Medical Professional Liability (or “MPL”) and Healthcare Professional Liability (or “HCPL”) markets (sometimes referred to as “medical malpractice”). The total purchase price was $ i 19,600 in cash (or $ i 13,335 net of acquired cash). Acquisition related costs amounted to $ i 299. Delphi’s results of operations have been included in the consolidated financial statements from the Delphi Acquisition Date.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. On April 22, 2020, Delphi applied for such aid in the form of U.S. Small Business Administration’s Paycheck Protection Program (“PPP Loan”) in the amount of $ i 1,546. The PPP Loan is scheduled to mature on i April 22, 2022, has a i 1% interest rate, and is subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the U.S. Small Business Administration under the CARES Act. The PPP Loan was applied for by Delphi prior to the acquisition by Sapiens.

The table below presents the estimated fair value allocated to Delphi’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net liabilities excluding cash acquired	$	( i 6,789	)
Intangible assets		i 7,562
Deferred tax liabilities		( i 2,313	)
Goodwill		i 14,875
Total assets acquired, net of acquired cash	$	i 13,335

F-52

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill. The goodwill from the acquisition of Delphi is primarily attributable to potential synergy with Sapiens, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss.

Acquisition of Tiful Gemel Ltd. (“Tiful Gemel”)

On June 1, 2020 (the “Tiful Gemel Acquisition Date”), Sapiens completed the acquisition of i 75% of the outstanding shares of Tiful Gemel, an Israeli company which provides software solutions and managed services related to pension and provident funds in the Israeli market, for a total cash consideration of $ i 1,281. In addition, under the share purchase agreement, Sapiens is committed to acquire the remainder of Tiful Gemel’s outstanding shares on June 1, 2023. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss.

On July 8, 2021, Sapiens concluded the acquisition of additional i 20% of the outstanding shares of Tiful Gemel for a total consideration of $ i 390.

Acquisition of Cálculo S.A.U. (“Cálculo”)

On September 27, 2019 (the “Acquisition Date”), Sapiens completed the acquisition of all of the share capital of Cálculo, a Spanish-based company engaged in insurance consulting and managed services, and develops, sells and supports a proprietary core solution to the insurance Spanish market, for a total cash consideration of $ i 5,760 (of which $ i 5,608 were paid in September 2019, and $ i 152 in the first quarter of 2020). i In addition, the sellers and senior executives are entitled to performance-based payments relating to achievements of various targets over three years (2019-2021) of up to $1,700. Some of these payments are subject to continued employment, and therefore were not included in the purchase price. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The results of Cálculo’s operations have been included in the consolidated financial statements since September 2019.

The following table summarizes the estimated fair values allocated to Cálculo’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 47
Intangible assets		i 1,037
Goodwill		i 622
Total assets acquired, net of acquired cash	$	i 1,706

F-53

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill. The goodwill from the acquisition of EnableIT is primarily attributable to potential synergies with Magic Software, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

iii.

Magic Software

Acquisition of EnableIT, LLC (“EnableIT”)

On April 1, 2021 (the “EnableIT Acquisition Date”), Magic Software completed the acquisition of all of the share capital of EnableIT, a U.S.-based services company, specializes in IT staffing and recruiting, for a total consideration of $ 6,000 (or 5,900 net of acquired cash) of which $ 4,000 was paid upon closing and the remaining $ 2,000 to be paid in two equal installments: one in April 1, 2022 and the second and final one in April 1, 2023. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The acquisition was accounted for according to the purchase method. EnableIT’s results of operations have been included in the consolidated financial statements since EnableIT Acquisition Date

The following table summarizes the estimated fair values allocated to EnableIT acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net liabilities excluding cash acquired	$	( i 35	)
Intangible assets		i 2,546
Other long-term assets		i 459
Other long-term liabilities		( i 1,171	)
Goodwill		i 4,101
Total assets acquired, net of acquired cash	$	i 5,900

Acquisition of Menarva Ltd. (“Menrava”)

On April 1, 2021 (the “Menrava Acquisition Date”), Magic Software completed the acquisition of all of the share capital of Menarva, an Israeli-based services company which specializes in software solutions for non-profit organizations and the developer of Nativ, a proprietary comprehensive core system, based on Magic xpa, for management of rehabilitation centers for a total consideration of $ i 5,595 (or $ i 5,505 net of acquired cash), of which, $ i 3,000 was paid upon closing). The remaining amount constitutes a contingent payment depending on the future operating results achieved by Menarva during 2021-2022. The fair value of the contingent consideration on the acquisition date amounted to $ i 2,595. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss.

F-54

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The acquisition was accounted for according to the purchase method. Menrava’s results of operations were included in the consolidated financial statements of the Company commencing Menarva Acquisition Date.

The following table summarizes the estimated fair values allocated to Menarva’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net liabilities excluding cash acquired	$	( i 129	)
Customer relationships		i 2,750
Other long-term assets		i 194
Other long-term liabilities		( i 787	)
Goodwill		i 3,477
Total assets acquired, net of acquired cash	$	i 5,505

The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill. The goodwill from the acquisition of Menarva is primarily attributable to potential synergies with Magic Software, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

Acquisition of 9540 Y.G. Soft IT Ltd. (“Soft IT”)

On January 1, 2021 (the “SoftIT Acquistion Date”), Magic Software, through one of its Israeli subsidiaries, acquired i 60% of the shares of Soft IT, an Israel-based services company which specializes in outsourcing of software development services for a total consideration of up to $ i 1,134 (or $ i 834 net of acquired cash), of which $ i 367 were paid upon closing, $ i 256 were paid on July 4, 2021, and the remaining amount constitutes a contingent payment depending on the future operating results achieved by Soft IT. The fair value of the contingent consideration as of the acquisition date amounted to $ i 510. i In addition, both Magic Software and Soft IT’s minority shareholder hold a mutual call and put options, respectively, for the remaining 40% interest. Thus, the noncontrolling interests were classified as redeemable noncontrolling interests. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The acquisition was accounted for according to the purchase method. Soft IT’s results of operations were included in the consolidated financial statements of the Company commencing SoftIT Acquistion Date.

The following table summarizes the estimated fair values allocated to Soft IT’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net liabilities excluding cash acquired	$	( i 351	)
Customer relationships		i 1,150
Other long-term assets		i 613
Other long-term liabilities		( i 826	)
Redeemable non-controlling interests		( i 719	)
Goodwill		i 967
Total assets acquired, net of acquired cash	$	i 834

F-55

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill. The goodwill from the acquisition of Soft IT is primarily attributable to potential synergies with Magic Software, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

Acquisition of Aptonet Inc (“Aptonet”)

On May 7, 2020 (the “Aptonet Acquisition Date”), Magic Software acquired all of the share capital of Aptonet, a U.S.-based services company, specializes in IT staffing and recruiting, for a total consideration of $ i 4,663 (or $ i 3,870 net of acquired cash), of which $ i 3,663 was paid upon closing and the remaining $ i 1,000 paid in two equal installments, at the end of the 6- and 12-months periods following the closing date. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Aptonet’s results of operations have been included in the consolidated financial statements since Aptonet Acquisition Date.

The goodwill from the acquisition of Aptonet is primarily attributable to potential synergies with Magic Software U.S. IT staffing operations, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

The following table summarizes the estimated fair values allocated to Apronet’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets, excluding cash acquired	$	i 529
Intangible assets, net		i 1,556
Goodwill		i 1,785
Total assets acquired, net of acquired cash	$	i 3,870

Acquisition of Stockell Information Systems, Inc (“Stockell”)

On September 2, 2020 (the “Stockell Acquisition Date”), Magic Software acquired all of the share capital of Stockell, a U.S.-based services company, specializing in IT staffing and recruiting, for a total consideration of $ i 7,714, of which $ i 6,265 was paid upon closing with the remaining $ i 1,449 due 12 months following the closing date. In December 2021 and following a few discrepancies in the sellers’ disclosures, Magic Software paid as a final consideration additional $ i 760 to settle the remainder of the consideration. Acquisition-related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Stockell’s results of operations have been included in the consolidated financial statements since the Stockell Acquisition Date.

The goodwill from the acquisition of Stockell is primarily attributable to potential synergy with Magic Software U.S. IT staffing operations, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

F-56

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The following table summarizes the estimated fair values allocated to Stockell’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets	$	i 1,051
Intangible assets, net		i 2,616
Goodwill		i 4,047
Total assets acquired	$	i 7,714

Acquisition of Mobisoft Ltd (“Mobisoft”) and Magic Hands B.V (“Magic Hands”)

In July 2020 and June 2020, Magic Software acquired i 70% of the outstanding share capital of Mobisoft and all of the outstanding share capital of Magic Hands., respectively. The cash consideration paid for both Mobisoft and Magic Hands individually and in the aggregate, was not material and amounted to $ i 11,340. Magic Software and the seller of Mobisoft both hold mutual options to purchase and sell (respectively) the remaining i 30% interest in Mobisoft which may be exercised during the three-year period beginning following the third-year anniversary of the acquisition. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Acquisition related costs were immaterial. Mobisoft’s and Magic Hands’ results of operations were included in the consolidated financial statements of the Company since their respective acquisition dates.

The following table summarizes the aggregated estimated fair values allocated to Mobisfot’s and Magic Hands’ acquired assets and assumed liabilities, with reference to the acquisition as of their respective acquisition dates:

Net assets, excluding cash acquired	$	i 1,069
Intangible assets, net		i 4,553
Goodwill		i 5,718
Total assets acquired, net of acquired cash	$	i 11,340

Acquisition of NetEffects Inc. (“NetEffects”)

On July 1, 2019, Magic Software acquired a all of the share capital of NetEffects, a U.S based services company, engaged in IT staffing and recruiting services, for a total consideration of $ i 12,500 (or $ i 12,333 net of acquired cash), of which $ i 9,400 was paid upon closing, $ i 1,550 was paid during 2020 and the remaining $ i 1,550 was paid during 2021. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The results of operations were included in the consolidated financial statements of the Group commencing July 1, 2019.

The goodwill from the acquisition of NetEffects is primarily attributable to potential synergy with Magic Software’s U.S. IT staffing operations, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

F-57

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The following table summarizes the estimated fair values allocated to Neteffect’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 91
Intangible assets		i 8,716
Goodwill		i 3,526
Total assets acquired net of acquired cash	$	i 12,333

Acquisition of PowWow Inc. (“PowWow”)

On April 1, 2019, Magic Software acquired all of the share capital of PowWow, creator of SmartUX™, a leading Low-Code development platform for mobilizing and modernizing enterprise applications, for a total consideration of $ i 8,443 (net of acquired cash). Total consideration included an estimated deferred consideration of $ i 2,040 contingent upon PowWow meeting various revenue targets over three years (2020-2022). During 2020, Magic Software reversed the entire contingent amount as its management estimated that PowWow will not meet its revenue targets. Acquisition related costs amounted to $ i 980. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The results of operations were included in the consolidated financial statements of the Group commencing April 1, 2019.

The following table summarizes the estimated fair values allocated to PowWow’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net liabilities excluding cash acquired	$	( i 1,557	)
Intangible assets		i 2,855
Goodwill		i 7,145
Total assets acquired net of acquired cash	$	i 8,443

Acquisition of OnTarget Group Inc (“OnTarget”).

On February 28, 2019, i Magic Software acquired all of the share capital of OnTarget, a U.S.-based services company, specializes in outsourcing of software development services, for a total consideration of $12,456. Total consideration consists of $7,000 of which $6,000 was paid in cash upon closing with $1,000 deferred and paid in two equal installments on the six-month and 15-month anniversary of the closing. The remaining amount constitutes a deferred payment contingent upon OnTarget meeting future operating results over four years (2019-2022). Based on OnTarget’s operating results between 2019 and 2021, Magic Software estimates the total purchase price is expected to amount to approximately $19,617. Beyond the $6,500 paid in 2019, Magic Software paid $1,000 in 2020, $1,000 in 2021 and $2,000 in 2022. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Acquisition related costs were immaterial. OnTarget results of operations were included in the consolidated financial statements of the Company commencing March 1, 2019.

The goodwill from the acquisition of OnTaret is primarily attributable to potential synergy with Magic Software’s operations, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

F-58

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The following table summarizes the estimated fair values allocate to OnTarget’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 444
Intangible assets		i 4,908
Deferred taxes		( i 1,276	)
Goodwill		i 8,380
Total assets acquired net of acquired cash	$	i 12,456

On October 1, 2019 Magic Software acquired i 30% of the share capital of Infinigy Solutions LLC (“Infinigy”), increasing its share capital interest from i 70% to i 100%, for a total cash consideration of $ i 4,393, which was paid upon closing. Infinigy is U.S.-based services company focused on expanding the development and implementation of technical solutions which deliver design-driven turnkey solutions, combining Architecture and Engineering, or A&E design, project management and general contracting competencies, across the wireless communications industry.

iv.

Matrix

Acquisition of AVB Technologies Ltd. (“AVB Technologies”)

On October 5, 2021, Matrix, through Matrix Integration and Infrastructure Ltd., Matrix’s wholly owned subsidiary, acquired i 60% of the share capital of AVB Technologies for cash consideration of NIS i 4,626 (approximately $ i 1,433), or NIS i 4,068 (approximately $ i 1,260) net of acquired cash. As part of the purchase agreement, the sellers may be entitled to additional future consideration contingent upon AVB Technologies meeting certain future operating profit targets. As of the acquisition date, Matrix estimates the future value of the contingent consideration at NIS i 2,127 (approximately $ i 659). AVB Technologies provides services in the field of multimedia systems. AVB Technologies’ services vary from constructing multimedia systems for meeting rooms to video conference rooms, state of the art digital display solutions, video walls, command and control management rooms, advanced audio solutions and advanced display solutions. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. AVB Technologies results of operations were included in the consolidated financial statements of the Company commencing October 2021.

F-59

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The following table summarizes the provisional estimated fair values ⁽¹⁾ allocated to AVB Technologies’ acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 234
Other long-term assets		i 101
Intangible assets		i 1,030
Deferred taxes		( i 237	)
Other long-term liabilities		( i 1,114	)
Non-controlling interests		( i 338	)
Goodwill		i 1,584
Total assets acquired net of acquired cash	$	i 1,260

(1)

The estimated fair values of the tangible and intangible assets in respect of the acquisition of AVB Technologies are provisional and are based on information that was available as of the acquisition date to estimate the fair value of these amounts. The Group’s management believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value that appear are subject to change. The Group expects to finalize the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.

Acquisition of I.T.D. Group Ltd. (“I.T.D. Group”)

On April 29, 2021, i Matrix acquired 75% of the share capital of the I.T.D. Group for a cash consideration of NIS 5,750 (approximately $1,771) or NIS 3,669 net of acquired cash (approximately $1,132). As part of the purchase agreement, the sellers may still be entitled to future additional consideration contingent upon I.T.D. Group achieving certain future operating profit targets. As of the acquisition date, Matrix estimates the future value of the contingent consideration at NIS 693 (approximately $213). Matrix also holds a future call option to purchase the remaining 25% of I.T.D. Group’s share capital. I.T.D. Group is a leading provider of software development, regulation and cybersecurity services for the healthcare industry in Israel, assisting companies to: design and develop innovative solutions, services, and desktop, mobile, and cloud-based apps; ensure rock-solid cybersecurity and privacy in compliance with HIPAA/GDPR standards; and manage FDA/CE submissions. Acquisition-related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. I.T.D Group’s results of operations were included in the consolidated financial statements of the Company commencing May 2021.

The following table summarizes the provisional estimated fair values ⁽¹⁾ allocated to I.T.D Group’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 86
Other long-term assets		i 179
Intangible assets		i 781
Deferred taxes		( i 321	)
Other long-term liabilities		( i 1,574	)
Redeemable non-controlling interests		( i 155	)
Goodwill		i 2,136
Total assets acquired net of acquired cash	$	i 1,132

(1)

The estimated fair values of the tangible and intangible assets in respect of the acquisition of I.T.D. Group are provisional and are based on information that was available as of the acquisition date to estimate the fair value of these amounts. The Group’s management believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value that appear are subject to change. The Group expects to finalize the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.

F-60

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

Acquisition of SQ Service Quality Ltd. (“SQ Service Quality”)

On April 5, 2021, Babcom Centers Ltd., a subsidiary of Matrix, acquired i 60% of the share capital of SQ Service Quality for cash consideration of NIS i 4,043 (approximately $ i 1,218) or NIS i 2,734 net of acquired cash (approximately $ i 822). As part of the purchase agreement, the sellers may still be entitled to future additional consideration contingent upon SQ Service Quality achieving certain future operating profit targets. As of the acquisition date, Matrix estimates the future value of the contingent consideration at NIS i 344 (approximately $ i 104). Matrix and SQ Service Quality’s minority shareholder hold mutual call and put options for the remaining i 40% interest in SQ Service Quality. SQ Service Quality has been active for more than a decade and it accompanies organizations and companies in service quality improvement processes. Acquisition-related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. SQ Service Quality results of operations were included in the consolidated financial statements of the Company commencing April 2021.

The following table summarizes the provisional estimated fair values ⁽¹⁾ allocated to SQ Service Quality’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 84
Other long-term assets		i 64
Intangible assets		i 431
Deferred taxes		( i 99	)
Other long-term liabilities		( i 107	)
Redeemable non-controlling interests		( i 797	)
Goodwill		i 1,246
Total assets acquired net of acquired cash	$	i 822

(1)

The estimated fair values of the tangible and intangible assets in respect of the acquisition of SQ Service Quality are provisional and are based on information that was available as of the acquisition date to estimate the fair value of these amounts. The Group’s management believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value that appear are subject to change. The Group expects to finalize the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.

Acquisition of A.A Engineering Ltd. (“A.A Engineering”)

On April 5, 2021, Dana Engineering Ltd. i (a subsidiary of Matrix), acquired 75% of the share capital of A.A Engineering for NIS 10,490 (approximately $3,160) or NIS 9,289 net of acquired cash (approximately $2,797). As part of the purchase agreement, the sellers may be entitled to future additional consideration contingent upon A.A Engineering achieving certain future operating profit targets. As of the acquisition date, Matrix estimates the future value of the contingent consideration at NIS i 474 (approximately $ i 143). Matrix holds a call option for the remaining i 25% share interest in A.A Engineering. Since 1973, A.A Engineering specializes in planning, management, coordination and supervision work in civil engineering projects serving a wide range of customers, both from institutions and public bodies and from leading companies in the Israeli economy.

F-61

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

Acquisition-related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. A.A Engineering’s results of operations were included in the consolidated financial statements of the Company commencing April 2021.

The following table summarizes the provisional estimated fair values ⁽¹⁾ allocated to A.A Engineering’s acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 389
Other long-term assets		i 104
Intangible assets		i 1,139
Deferred taxes		( i 262	)
Other long-term liabilities		( i 260	)
Non-controlling interests		( i 527	)
Goodwill		i 2,214
Total assets acquired net of acquired cash	$	i 2,797

(1)

The estimated fair values of the tangible and intangible assets in respect of the acquisition of A.A Engineering are provisional and are based on information that was available as of the acquisition date to estimate the fair value of these amounts. The Group’s management believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value that appear are subject to change. The Group expects to finalize the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.

Acquisition of Gestetnertec Ltd. (“Gestetnertec”)

On July 9, 2020, Matrix acquired i 51% of the share capital of Gestetnertec, an Israeli-based company and a provider of comprehensive solutions in the area of printing, document production services including, among other things, three-dimensional model printing solutions, for a total consideration of approximately NIS i 49,853 million (or $ i 14,475), or NIS i 31,576 (approximately $ i 9,169) net of acquired cash. In addition, Matrix and the sellers hold mutual call and put options, respectively, for the remaining i 49% interest in Gestetnertec. The fair value of the put option measured on the acquisition date amounted to NIS i 61,238 (approximately $ i 17,781). Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The results of Gestetnertec’s operations have been included in the consolidated financial statements since July 1, 2020.

The goodwill from the acquisition of Gestetnertec is primarily attributable to potential synergy with Matrix operations, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

F-62

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

The following table summarizes the provisional estimated⁽¹⁾ fair values of the assets acquired and liabilities at the date of acquisition:

Net assets excluding cash acquired	$	i 12,746
Short-term bank credit		( i 10,598	)
Non-controlling interest		( i 135	)
Liability to acquire non-controlling interests (put option)		( i 17,781	)
Intangible assets, net		i 16,337
Deferred taxes		( i 4,021	)
Goodwill		i 12,621
Total assets acquired net of acquired cash	$	i 9,169

(1)

The estimated fair values of the tangible and intangible assets in respect of the acquisition of Gestetnertec are provisional and are based on information that was available as of the acquisition date to estimate the fair value of these amounts. The Group’s management believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value reflected are subject to change. The Group expects to finalize the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.

Acquisition of RightStar Inc. (“RightStar”)

On November 16, 2020, Matrix acquired all of the share capital of RightStar, a U.S. based company and a seller and an integrator of BMC and Atlassian Jira solutions, for total consideration of approximately $ i 3,566 (or $ i 100), net of acquired cash, of which $ i 3,040 was paid in cash and $ i 526 thousands was paid on January 15, 2021. Sellers may also be entitled to a contingent consideration, estimated as of the acquisition date at $ i 1,032, upon RightStar meeting various operating profit targets. Based on RightStar’s operating results Matrix estimates the contingent consideration as of December 31, 2021 at approximately $ i 2,300. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. The results of RightStar’s operations have been included in the consolidated financial statements since November 2020. The goodwill from the acquisition of RightStar is primarily attributable to potential synergy with Matrix U.S. operations, as well as certain intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.

The following table summarizes the provisional estimated ⁽¹⁾ fair values of the assets acquired and liabilities at the date of acquisition:

Net liabilities excluding cash acquired	$	( i 763	)
Contingent liability in respect of business combinations		( i 1,077	)
Intangible assets, net		i 354
Deferred taxes		( i 95	)
Goodwill		i 922
Total liabilities acquired net of acquired cash	$	( i 659	)

(1)

The estimated fair values of the tangible and intangible assets in respect of the acquisition of RightStar are provisional and are based on information that was available as of the acquisition date to estimate the fair value of these amounts. The Group’s management believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value that appear are subject to change. The Group expects to finalize the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.

F-63

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

In January 2020, i Matrix acquired 40% of the share capital of Network Infrastructure Technologies (NIT), increasing its share capital interest from 60% to 100%, for a total cash consideration of $4,500, which was paid upon closing.

Acquisition of Techtop Ltd. (“TechTop”)

On May 7, 2019, Matrix purchased the net assets of Techtop, (meeting the definition of a business) for a cash consideration of NIS i 17,087 (approximately $ i 4,764). TechTop is a leasing Israeli supplier of professional sound and systems. As part of the purchase price allocation, the excess of the purchase price paid over the value of net assets acquired in the amount of NIS i 8,602 (approximately $ i 2,398) was allocated to goodwill. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Techtop results of operations were included in the consolidated financial statements of the Company commencing April 1, 2019.

Acquisition of Medatech Information Technologies Ltd. (“Medatech Technologies”)

On February 20, 2019, i Matrix acquired all the share capital of Medatech Technologies, an Israeli-based company and a leading system integrator with many years of experience in distributing and

implementing Priority ERP software, for NIS 85,000 (approximately $23,500) or NIS 77,753 (approximately $21,496) net of acquired cash. On April 7, 2019, Matrix acquired additional 25% of the issued and outstanding share capital of Medatech Systems Inc., (“Medatech Systems”) a subsidiary of Medatech Technologies, for NIS 5,175 (approximately $1,443) or NIS 2,007 (approximately $560) net of acquired cash. Resulting from the acquisition, Medatech Technologies interest in the issued and outstanding share capital of Medatech Systems increased to 75%. Matrix and the seller both hold mutual options to purchase and sell (respectively) 5% of the remaining share capital of Medatech Systems at the end of the second-year anniversary following the acquisition. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Medatech results of operations were included in the consolidated financial statements of the Company commencing March 1, 2019.

The following table summarizes the estimated fair values of the acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	i 2,340
Intangible assets		i 7,553
Deferred taxes		( i 2,276	)
Credit from banks and others		( i 5,550	)
Non-controlling interests		( i 434	)
Goodwill		i 20,423
Total assets acquired net of acquired cash	$	i 22,056

F-64

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

Acquisition of Dana Engineering Ltd. (“Dana Engineering”)

On February 6, 2019, Matrix acquired i 80% of the issued and outstanding share capital of Dana Engineering, an Israeli-based company providing project management services in the field of national infrastructure in Israel, for total cash consideration of NIS i 52,000 (approximately $ i 14,370). Matrix and the seller hold mutual options to purchase and sell (respectively) the remaining i 20% interest in Dana Engineering which may be exercised following the second-year anniversary of the acquisition. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Dana Engineering results of operations were included in the consolidated financial statements of the Company commencing February 1, 2019.

The following table summarizes the estimated fair values of the acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	( i 9,270	)
Intangible assets		i 5,311
Deferred taxes		( i 1,138	)
Non-controlling interests		( i 5,235	)
Goodwill		i 9,746
Total assets acquired net of acquired cash	$	( i 586	)

Michpal

Acquisition of Liram Financial Software Ltd. (“Liram”)

On May 17, 2020, Michpal acquired i 70% of the share capital of Liram, an Israeli-based company and a provider of proprietary integrated specialized solutions in the field of financial accounting, taxation and compliance, for a total cash consideration of NIS i 15,260 (approximately $ i 4,319). In addition, Michpal and the seller hold mutual call and put options, respectively, for the remaining i 30% interest in Liram. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Liram results of operations were included in the consolidated financial statements of the Company commencing May 1, 2020.

The following table summarizes the estimated fair values of the acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net liabilities	$	( i 751	)
Non-controlling interest		( i 821	)
Intangible assets		i 4,529
Deferred tax liability		( i 1,042	)
Goodwill		i 2,404
Total assets acquired	$	i 4,319

F-65

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:-

BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)

Acquisition of Unique Software Industries Ltd.

In November 2019, i Michpal acquired all of the share capital of Unique Software Industries Ltd. (“Unique”), an Israeli-based company and a provider of integrated solutions in the field of payroll, including pay-stubs, pension services management, education funds management, and software solutions for managing employee attendance, for total cash consideration of NIS 48,650 (approximately $14,049), or NIS 44,945 (approximately $12,979) net of acquired cash. In accordance with the purchase agreement, the seller may also be entitled to receive a performance-based payment capped at NIS 12,218 (approximately $3,528), estimated on the date of the acquisition at NIS 9,736 (approximately $2,811), subject to certain milestones to be met by Unique over the four years following the acquisition date. Acquisition-related costs were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated statement of profit or loss. Unique’s results of operations were included in the consolidated financial statements of the Company commencing November 1, 2019.

The following table summarizes the estimated fair values of the acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:

Net assets excluding cash acquired	$	( i 244	)
Intangible assets		i 8,425
Deferred tax liability		( i 1,938	)
Goodwill		i 9,547
Total assets acquired net of acquired cash	$	i 15,790

NOTE 4:-

MARKETABLE SECURITIES

The following table summarizes the composition of the Group’s investment in marketable securities:

	December 31,
	2021		2020
Convertible bonds designated at fair value through profit or loss ⁽¹⁾		i 1,142		i 1,238
	$	i 1,142	$	i 1,238

⁽¹⁾

The consolidated statements of profit or loss for the years ended 2019, 2020 and 2021 include gains (losses) from marketable securities designated at fair value through profit or loss in amounts of ($ i 35), $ i 126 and ($ i 96), respectively.

F-66

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 5:-

PREPAID EXPESNES AND OTHER ACCOUNTS RECEIVAVABLE

The following table summarizes the composition of the Group’s prepaid expenses, other accounts receivable and other investments:

	December 31,
	2021		2020
Prepaid expenses and advances to suppliers	$	i 48,871	$	i 47,155
Government departments		i 20,911		i 29,973
Employees		i 326		i 301
Related Parties		i 278		i 404
Other		i 1,732		i 5,987
	$	i 72,118	$	i 83,820

Note 6:-

Fair value measurement

In determining fair value, the Group utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

The Group’s financial assets and liabilities measured at fair value on a recurring basis, including accrued interest components, consisted of the following types of instruments as of December 31, 2020 and 2021:

Fair value measurements

December 31, 2021

Level 2

Level 3

Total

Assets:

Convertible bonds at fair value through profit or loss (Note 4)

i 1,142

Foreign currency derivative contracts

i 188

Dividend preference derivative in TSG ⁽¹⁾

i 2,023

i 1,330

i 2,023

i 3,353

Liabilities:

Contingent consideration in respect of business combination

i 24,495

Liabilities from acquisition of non-controlling interests (put options)

i 71,278

i 95,773

Fair value measurements

December 31, 2020

Level 2

Level 3

Total

Assets:

Convertible bonds at fair value through profit or loss (Note 4)

i 1,238

Dividend preference derivative in TSG ⁽¹⁾

i 1,707

i 1,238

i 1,707

i 2,945

Liabilities:

Foreign currency derivative contracts

i 707

Contingent consideration in respect of business combination

i 18,456

Liabilities from acquisition of non-controlling interests (put options)

i 64,018

i 707

i 82,474

i 83,181

⁽¹⁾

The fair value of dividend preference derivative in TSG was estimated using the Monte-Carlo simulation technique.

F-67

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 7:-

Investments in companies accounted for at equity METHOD

The following table summarizes the Group’s investments in companies accounted for at equity:

	December 31,
	2021		2020
TSG (Joint venture)		i 27,633		i 27,165
Other investments		i 1,267		i 1,146
		i 28,900		i 28,311

Investment in TSG

The Company holds directly a i 50% share interest in the issued and outstanding share capital of TSG, a joint venture engaged in the fields of command-and-control systems, intelligence, homeland security and cyber security. The Company’s investment in TSG is reflected in the consolidated financial statements using the equity method of accounting. At the acquisition date the Company attributed an amount of $ i 2,140 to a separate component of dividend preference derivative. The dividend preference derivative is measured at fair value through profit or loss and is presented in the consolidated statements of financial position under long-term prepaid expenses, other accounts and other investments.

The following table summarizes the balances related to the Company’s investment in TSG in the consolidated statements of financial position:

	December 31,
	2021		2020
Investment in companies accounted for at equity method
Shares		i 18,391		i 18,225
Capital note		i 9,242		i 8,940
		i 27,633		i 27,165
Long-term prepaid expenses, other accounts, and other investments
Dividend preference derivative at fair value through profit or loss		i 2,023		i 1,707

F-68

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 7:-

Investments in companies accounted for at equity (Cont.)

The following table summarizes the changes in the fair value of TSG’s dividend preference derivative:

	December 31,
	2021		2020
Opening balance		i 1,707		i 1,539
Increase in fair value recognized in profit or loss		i 255		i 48
Currency exchange rate in other comprehensive income		i 61		i 120
Closing balance		i 2,023		i 1,707

The following table summarizes the changes in the carrying amount of the Company’s investment in TSG:

January 1, 2019	$	i 25,683
Company’s share of profit		i 1,771
Company’s share of other comprehensive income		i 62
Company’s Share in dividend declared by TSG		( i 1,500	)
December 31, 2019	$	i 26,016

Company’s share of profit		i 1,318
Company’s share of other comprehensive income		( i 169	)
December 31, 2020	$	i 27,165

Company’s share of profit		i 340
Company’s share of other comprehensive income		i 128
December 31, 2021	$	i 27,633

The following table summarizes financial information of TSG:

(i)

Summarized statement of financial position in accordance with IFRS as of December 31, 2020 and 2021 (as presented in TSG’s financial statements):


	December 31,
	2021			2020
Current assets		i 47,065			i 51,056
Noncurrent assets excluding goodwill		i 8,551			i 4,810
Current liabilities		( i 25,167	)		( i 26,201	)
Noncurrent liabilities		( i 6,299	)		( i 8,414	)
Total equity		i 24,150			i 21,251
Accumulated cost of share-based payment		( i 1,282	)		( i 743	)
	$	i 22,868		$	i 20,508
Company’s share in TSG		i 50	%		i 50	%
		i 11,434			i 10,254
Excess cost of intangible assets net of deferred tax		i 6,363			i 7,075
Goodwill		i 9,836			i 9,836
Company’s carrying amount of the investment in TSG	$	i 27,633		$	i 27,165

F-69

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 7:-

Investments in companies accounted for at equity (Cont.)

(ii)

The following table presents key highlights of TSG’s profit or loss in accordance with IFRS for the years ended December 31, 2019, 2020 and 2021 (as presented in TSG’s financial statements):

Year ended December 31,

2021

2020

2019

Revenues

i 77,035

i 77,661

i 84,350

Net income

i 2,104

i 4,059

i 4,966

Other comprehensive income

i 255

( i 338

)

i 124

Total comprehensive income

i 2,359

i 3,721

i 5,090

Company’s share in TSG

i 50

i 1,180

i 1,861

i 2,545

Amortization of excess cost of intangible assets net of tax

( i 712

)

( i 712

)

( i 712

)

Company’s share of total comprehensive income

i 468

i 1,149

i 1,833

Company’s share of other comprehensive income

i 128

( i 169

)

i 62

Company’s share of profit

i 340

i 1,318

i 1,771

i 468

i 1,149

i 1,833

NOTE 8:-

PROPERTY, PLANTS AND EQUIPMENT, NET

Property, plants and equipment, net, are comprised of the following as of the below dates:

	December 31,
	2021		2020
Cost:
Computers, software, furniture, and equipment	$	i 148,033	$	i 140,583
Motor vehicles		i 8,362		i 8,623
Buildings		-		i 975
Leasehold improvements		i 41,700		i 39,284
		i 198,095		i 189,465
Accumulated depreciation:
Computers, software, furniture, and equipment	$	i 111,258	$	i 104,576
Motor vehicles		i 4,697		i 3,875
Buildings		-		i 112
Leasehold improvements		i 25,254		i 21,726
		i 141,209		i 130,289

Depreciated cost	$	i 56,886	$	i 59,176

Depreciation expenses totaled $ i 12,071, $ i 16,513 and $ i 20,468 for the years ended December 31, 2019, 2020 and 2021, respectively.

F-70

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NotE 9:-

Intangible Assets, Net

Intangible assets, net, are comprised of the following as of the below dates:

	December 31,
	2021		2020
Original amounts:
Capitalized Software costs	$	i 271,357	$	i 221,220
Customer relationship		i 304,816		i 247,445
Acquired technology		i 100,029		i 100,159
Backlog		i 6,938		i 6,909
Patent		i 1,544		i 1,493
Other intangibles		i 23,531		i 3,549
		i 708,215		i 580,775
Accumulated amortization:
Capitalized Software costs	$	i 232,779		i 179,587
Customer relationship		i 151,673		i 120,165
Acquired technology		i 61,163		i 48,087
Backlog		i 6,938		i 6,909
Patent		i 1,145		i 958
Other intangibles		i 12,581		i 2,806
		i 466,279		i 358,512
Total	$	i 241,936	$	i 222,263

Amortization expenses totaled $ i 41,330, $ i 44,586, and $ i 58,684 for the years ended December 31, 2019, 2020 and 2021, respectively.

Note 10:-

Goodwill

The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2021:

	December 31,
	2021		2020
Opening balance	$	i 872,424	$	i 724,193
Acquisition of subsidiaries		i 49,416		i 116,416
Classifications		i 1,585		i 3,066
Foreign currency translation adjustments		i 9,429		i 28,749
Closing balance	$	i 932,854	$	i 872,424

The Group performed annual impairment tests as of December 31, 2019, 2020 and 2021 and did not identify any impairment losses (see Note 2).

F-71

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 11:-

short term Liabilities to banks and others

December 31,

2021

2020

Interest rate

Currency

Short-term bank loans

i 1.8-2.3

i NIS

i 4,641

i 1,259

Short-term bank loans

i 1.6-4

i NIS

i 17,429

i 11,357

Commercial securities not listed

i 0.6

i NIS

i 64,309

i 31,104

Current maturities of long-term loans from banks and

other financial institutions (Note 13)

i 1.8-3.1

i NIS

i 85,280

i 75,856

Current maturities of long-term loans from banks (Note 13)

i Libor +2.1

i NIS Linked to USD

i 3,950

i 800

Short-term interest on long-term loans from other

financial institutions

i 2.6- Prime + 1.5

i NIS

i 87

i 68

i 175,696

i 120,444

Note 12:-

other accounts payable

Other accounts payable are comprised of the following as of the below dates:

	December 31,
	2021		2020
Government institutions	$	i 39,480	$	i 35,648
Accrued expenses and other current liabilities		i 40,931		i 33,328
Total	$	i 80,411	$	i 68,976

Note 13:-

Long term Liabilities to Banks and Others

Long term liabilities to banks and others are comprised of the following as of the below dates:

Interest rate

Currency

Long-term
liabilities

Current
maturities

Long-term
liabilities net of
current maturities

Total long-term
liabilities net of
current maturities

December 31, 2021

December 31,
2020

i 1.4- i 5

i NIS (Unlinked)

i 231,259

i 85,280

i 145,979

i 180,116

Libor +2.1

i NIS Linked to USD

i 15,200

i 3,950

i 11,250

i 200

i 246,459

i 89,230

i 157,229

i 180,316

Maturity dates:

	December 31,
	2021		2020
First year (current maturities)	$	i 89,230	$	i 76,656
Second year		i 76,627		i 69,500
Third year		i 51,835		i 60,310
Fourth year		i 22,716		i 38,162
Fifth year and thereafter		i 6,051		i 12,344
	$	i 246,459	$	i 256,972

Details of liens, guarantees and credit facilities are described in Note 19.

F-72

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 14:-

DEBENTURES

The Group’s liabilities under debentures are attributable to debentures issued by Formula and Sapiens. The debentures are all listed for trading on the Tel-Aviv Stock Exchange.

Debentures are comprised of the following as of the below dates:

Effective Interest rate

Currency

Par value in issuance currency

Par Value

Unamortized debt premium (discount) and issuance costs, net

Current maturities

Total long-term debentures, net of current maturities

Short-term accrued interest

Total short-term and long-term debentures

December 31, 2021

Formula’s Series A
Secured Debentures (2.8%)

i 2.4

i NIS (Unlinked)

i NIS 102,633

i 33,000

i 217

i 11,000

i 22,217

i 457

i 33,674

Formula’s Series C
Secured Debentures (2.3%)

i 2.2

i NIS (Unlinked)

i NIS 374,225

i 120,330

i 472

i 16,970

i 103,832

i 227

i 121,029

Sapiens’ Series B Debentures (3.37%)

i 3.3

i NIS (Linked to fix rate of USD)

i NIS 350,000

i 98,980

( i 198

)

i 19,796

i 78,986

i 5

i 98,787

i 252,310

i 491

i 47,766

i 205,035

i 689

i 253,490

Effective Interest rate

Currency

Par value in issuance currency

Par Value

Unamortized debt premium (discount) and issuance costs, net

Current maturities

Total long-term debentures, net of current maturities

Short-term accrued interest

Total short-term and long-term debentures

December 31, 2020

Formula’s Series A
Secured Debentures (2.8%)

i 2.4

i NIS (Unlinked)

i NIS 136,844

i 42,564

i 365

i 10,641

i 32,288

i 589

i 43,518

Formula’s Series C
Secured Debentures (2.3%)

i 2.5

i NIS (Unlinked)

i NIS 267,000

i 83,048

( i 678

)

i 10,264

i 72,106

i 158

i 82,528

Sapiens’ Series B Debentures (3.37%)

i 3.3

i NIS (Linked to fix rate of USD)

i NIS 420,000

i 118,778

( i 306

)

i 19,796

i 98,676

i 6

i 118,478

i 244,390

( i 619

)

i 40,701

i 203,070

i 753

i 244,524

During the years ended December 31, 2020 and 2021, the Group recorded $ i 6,411 and $ i 7,056, respectively, of interest expenses, and $ i 135 and ($ i 109), respectively, as amortization of debt premium, discount and issuance costs, net in respect of the Group’s debentures.

F-73

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 14:-

DEBENTURES (Cont.)

Scheduled aggregate principal annual payments of the debentures:

	Repayment amount
2022		i 47,766
2023		i 47,766
2024		i 47,766
2025		i 54,506
2026		i 54,506
		i 252,310

Formula’s debentures

Formula Systems Series A Secured Debentures

On September 16, 2015, Formula issued Formula Systems Series A Secured Debentures in an aggregate principal amount of NIS 102,260 (approximately $ i 26,295), at a purchase price equal to i 100% of their par value, payable in eight equal annual installments on July 2^ndof each of the years 2017 through 2024. i The principal amount outstanding under the Formula Systems Series A Secured Debentures bears interest at a fixed rate of 2.8% per annum (subject to adjustments based on the credit rating of the debentures), payable on July 2^nd and January 2^nd of each of the years 2016 through 2024. Issuance costs, including early commitment commission of approximately NIS 1,246 (approximately $320), were allocated to the Formula Systems Series A Secured Debentures and are amortized as financial expenses over the term of the Series A Secured Debentures due in 2024.

On January 31, 2018, i Formula issued additional Formula Systems Series A Secured Debentures in an aggregate principal amount of NIS 150,000 (approximately $44,053) through a private placement to qualified investors in Israel. The gross proceeds received by Formula from the issuance of Formula Systems Series A Secured Debentures in January 2018 were NIS 155,205 (approximately $45,581), out of which NIS 336 was attributed to interest payable (approximately $99). Debt premium of NIS 4,869 (approximately $1,430) net of issuance costs of NIS 782 (approximately $225) was allocated to the Formula Systems Series A Secured Debentures and is amortized as financial income over the remaining term of the Formula Systems Series A Secured Debentures due in 2024.

The Formula Systems Series A Secured Debentures issued in September 2015, together with the Formula Systems Series A Secured Debentures sold in the private placement, form one single series with identical terms and conditions.

The Series A Secured Debentures are denominated in New Israeli Shekels not linked to any currency or index, and are non-convertible. The Formula Systems Series A Secured Debentures are secured with collateral consisting of shares of Matrix, Magic Software and Sapiens (see Note 19a).

The Formula Systems Series A Secured Debentures are listed for trading on the Tel-Aviv Stock Exchange. As of December 31, 2020 and 2021, the fair value of Formula’s Series A Secured Debentures, based on the quoted market price on the Tel-Aviv Stock Exchange, were approximately $ i 44,229 and $ i 34,057, respectively.

F-74

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 14:-

DEBENTURES (Cont.)

ii)

Formula Systems Series C Secured Debentures

On March 31, 2019, Formula issued Formula Systems Series C Secured Debentures in an aggregate principal amount of NIS 300,000 (approximately $ i 82,600), at a purchase price equal to i 100% of their par value. The principal due under the Series C Secured Debentures is payable in five annual installments of NIS 33,000 on December 1 of each of the years 2020 through 2024 and two annual installments of NIS 67,500 on December 1 of each of the years 2025 and 2026. The outstanding principal amount under the Formula Systems Series C Secured Debentures bears interest at a fixed rate of i 2.29% per annum (subject to adjustments based on the credit rating of the debentures), payable on December 1^st and June 1^st of each of the years 2019 through 2026. Issuance costs including an early commitment commission of approximately NIS i 3,355 (approximately $ i 924) were allocated to Formula Systems Series C Secured Debentures and are amortized as financial expenses over the term of Formula Systems Series C Secured Debentures due in 2026.

On April 12, 2021, i Formula issued additional Formula Systems Series C Secured Debentures in an aggregate principal amount of NIS 160,000 (approximately $48,617) through a private placement to qualified investors in Israel. The gross proceeds received by Formula for the issuance of Formula Systems Series C Secured Debentures in April 2021 were NIS 165,920 (approximately $50,524), out of which NIS 1,329 was attributed to interest payable (approximately $405). Debt premium of NIS 4,591 (approximately $1,398) net of issuance costs of NIS 752 (approximately $229) were allocated to the Formula Systems Series C Secured Debentures and are amortized as financial income over the remaining term of the Formula Systems Series A Secured Debentures due in 2026.

The Formula Systems Series C Secured Debentures issued in March 2019, together with the Formula Systems Series C Secured Debentures sold in April 2021 in a private placement, form one single series with identical terms and conditions.

The Formula Systems Series C Secured Debentures are denominated in New Israeli Shekels and are not linked to any currency or index and are non-convertible. The Formula Systems Series C Secured Debentures are secured with collateral consisting of shares of Matrix, Magic Software and Sapiens (see Note 19a).

The Series C Secured Debentures are listed for trading on the Tel-Aviv Stock Exchange. As of December 31, 2020 and 2021, the fair value of Formula’s Series C Secured Debentures, based on the quoted market price on the Tel-Aviv Stock Exchange, was approximately $ i 86,993 and $ i 125,672, respectively.

The offerings of Formula’s debentures were made only in Israel and not to U.S. persons (as defined in Rule 902(k) under the Securities Act of 1933, as amended (the “Securities Act”)), in an overseas directed offering (as defined in Rule 903(b)(i)(ii) under the Securities Act), and were exempt from registration under the Securities Act pursuant to the exemption provided by Regulation S thereunder.

The sale of Formula debentures was not registered under the Securities Act, and Formula debentures may not be offered or sold in the United States and/or to U.S. persons without registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act.

F-75

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 14:-

DEBENTURES (Cont.)

In accordance with the indenture for Formula Systems Series A Secured Debentures and Formula Systems Series C Secured Debentures, Formula has undertaken to maintain a number of conditions and limitations on the manner in which it operates its business, including limitations on its ability to undergo a change of control, distribute dividends, incur a floating charge on its assets, or undergo an asset sale or other change that results in a fundamental change in its operations, and to meet certain financial covenants (see Notes 19a and 19c(1)(i)).

Sapiens’ Series B Debentures

On September 16, 2017, i Sapiens issued its unsecured Series B Debentures in an aggregate principal amount of NIS 280,000 (approximately $79,186), linked to the US dollar and payable in eight equal annual payments of $9,898 on January 1^st of each of the years 2019 through 2026. The outstanding principal amount of Sapiens’ Series B Debentures bears a fixed interest rate of 3.37% per annum (which may be adjusted based on changes to the credit rating of the debentures), payable on January 1^stand July 1^st of each of the years 2018 through 2025, with one final interest payment due on January 1, 2026. Debt discount and issuance costs were approximately $956, allocated to Sapiens’ Series B Debentures discount and are amortized as financial expenses over the term of the Series B Debentures due in 2026.

On June 8, 2020, i Sapiens issued additional Sapiens’ Series B Debentures in an aggregate principal amount of NIS 210,000 (approximately $60,362) through a public offering in Israel. The gross proceeds received from the issuance of Sapiens’ Series B Debentures in June 2020 were NIS 210,840 (approximately $60,603), out of which approximately NIS 3,006 was attributed to interest payable (approximately $864). Debt discount of NIS 2,166 (approximately $623) and issuance costs of NIS 2,326 (approximately $669) were allocated to Sapiens’ Series B Debentures and are amortized as financial expenses over the remaining term of the Sapiens Series B Debentures due in 2026. Following the raise of the additional NIS 210,000 in Series B Debentures, a $20,000 short-term bank loan taken by Sapiens on March 18, 2020, from a commercial bank was fully repaid on June 9, 2020. Sapiens’ Series B Debentures issued in September 2017 together with the Sapiens’ Series B Debentures issued in June 2020, form one single series with identical terms and conditions. Sapiens’ Series B Debentures are linked to the US Dollar, unsecured and non-convertible. Sapiens’ Series B Debentures are listed for trading on the TASE. As of December 31, 2020 and 2021, the fair value of Sapiens’ Series B Debentures, based on the quoted market price on the Tel-Aviv Stock Exchange, were approximately $ i 122,760 and $ i 100,464, respectively.

The offerings of Sapiens’ debentures were made only in Israel and not to U.S. persons (as defined in Rule 902(k) under the Securities Act of 1933, as amended (the “Securities Act”)), in an overseas directed offering (as defined in Rule 903(b)(i)(ii) under the Securities Act), and was exempt from registration under the Securities Act pursuant to the exemption provided by Regulation S thereunder.

The sale of Sapiens debentures was not registered under the Securities Act, and the Sapiens debentures may not be offered or sold in the United States and/or to U.S. persons without registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act.

In accordance with the indenture for the Sapiens Series B Debentures, Sapiens has undertaken to comply with a number of conditions and limitations on the manner in which it operates its business, including limitations on its ability to undergo a change of control, distribute dividends, incur a floating charge on Sapiens’ assets, or undergo an asset sale or other change that results in a fundamental change in Sapiens’ operations and to meet certain financial covenants (see Note 19c(3)(iii)).

F-76

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 15:-

RELATED PARTies TRANSACTIONS

Acquisition of Sapiens Software Solutions (Poland) Sp. Z o.o (formerly “Insseco Sp. Z o.o.”) (“Sapiens Poland”)

On August 18, 2015, Sapiens completed the acquisition from Asseco, the parent company of Formula, of all issued and outstanding share capital of Sapiens Poland. Under the share purchase agreement for that acquisition, Under the share purchase agreement for that acquisition, Asseco committed to assign to Sapiens Poland all customer contracts that relate to the intellectual property that Sapiens acquired as part of the acquisition. In the event that Asseco cannot obtain the consent of any customer to the assignment of its contract to Sapiens Poland, Asseco will hold that customer’s contract in trust for the benefit of Sapiens Poland.

During the years ended December 31, 2019, 2020 and 2021, Asseco provided back-office services, professional services and fixed assets to Sapiens’ wholly owned subsidiary, Sapiens Poland, in amounts totaling approximately $ i 676, $ i 521 and $ i 197, respectively.

During the years ended December 31, 2019, 2020 and 2021, Sapiens Poland performed services as a sub-contractor on behalf of Asseco for clients of Asseco in total amounts of approximately $ i 3,400, $ i 3,100 and $ i 3,200, respectively. For historic reasons, Asseco issues invoices to those clients and then Sapiens in turn invoices Asseco on a back-to-back basis (with no margin to Asseco).

As of December 31, 2019 the Group had no trade payable balances due from its transactions with Asseco, as detailed above. As of December 31, 2020 and 2021 the Group had trade payable balances due from its transactions with Asseco, as detailed above, in an amount of $ i 1,898 and $ i 17, respectively. As of December 31, 2020 and 2021, the Group had trade receivables balances due from its transactions with Asseco, as detailed above, in amounts of approximately $ i 1,228 and $ i 852, respectively.

Fees paid for board services in affiliates

Sapiens paid Formula, director fees for the years ended December 31, 2019, 2020 and 2021, of approximately $ i 25.3, $ i 29.6 and $ i 26.7, respectively, in respect of Mr. Guy Bernstein, Sapiens’ Chairman and Formula’s chief executive officer.

Matrix paid Formula director fees for the years ended December 31, 2019, 2020 and 2021, of approximately $ i 29.9, $ i 31.4 and $ i 36.7, respectively, in respect of Mr. Guy Bernstein, Matrix’ Chairman and Formula’s chief executive officer.

Back-office services

During the years ended December 31, 2019, 2020 and 2021, Magic Software provided back-office services to Formula in amounts totaling approximately $ i 177, $ i 138 and $ i 160, respectively.

Other Transactions

The Group’s subsidiaries and affiliates engage from time to time with each other in non-material transactions, in the ordinary course of business, where the amounts involved, and the nature of the transactions, are not material for either of the parties. The Group believes that these transactions are made on an arms’ length basis upon terms and conditions no less favorable to the Group, its subsidiaries and affiliates, as it could obtain from unaffiliated third parties. If Group engages with its subsidiaries and affiliates in transactions which are not in the ordinary course of business, the Group receives the approvals required under the Companies Law. These approvals include audit committee approval, board approval and, in certain circumstances, shareholder approval.

F-77

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 16:-

LEASES

The Group leases substantially all of its office space and vehicles under operating leases. i The Group’s leases have original lease periods expiring between 2021 and 2033. Some leases include one or more options to renew. The Group does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably certain at lease commencement. Lease payments included in the measurement of the lease liability comprise the following: the fixed non-cancellable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

Under IFRS 16, all leases with durations greater than 12 months, including non-cancellable operating leases, are now recognized on the statement of financial position. The aggregated present value of lease agreements is recorded as a long-term asset titled operating lease right-of-use assets.

The corresponding lease liabilities are classified between operating lease liabilities which are current and long-term.

Maturity analysis of undiscounted future lease payments receivable for operating leases:

2022	i 43,702
2023	i 34,125
2024	i 13,068
2025	i 10,784
2026	i 8,724
2027 and thereafter	i 31,428
Total undiscounted cash flows	i 141,831
Less imputed interest	( i 15,337	)
Present value of lease liabilities	i 126,494

Depreciation expenses of operating lease right-of-use assets totaled $ i 33,531, $ i 34,408 and $ i 43,032 for the years ended December 31, 2019, 2020 and 2021, respectively.

F-78

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 17:-

Employee Option Plans

Formula and its subsidiaries grant, from time to time, options, restricted share units or restricted shares to their officers and employees to purchase shares in the respective companies. In general, the options expire ten years after grant. The following table sets forth the breakdown of share-based compensation expense resulting from such grants, as included in the consolidated statements of profit or loss:

	Year ended December 31,
	2021		2020		2019
Selling and marketing expenses		-		-		i 74
General and administrative expenses		i 14,767		i 7,856		i 3,800
	$	i 14,767	$	i 7,856	$	i 3,874

Formula:

In August 2017, Formula’s board of directors, following the approval by Formula’s compensation committee, awarded its chief financial officer i 10,000 restricted shares under the 2011 plan (the “new restricted shares”). i These restricted shares vest on a quarterly basis over a three-year period, commencing on August 17, 2017 and concluding on August 17, 2020, provided that during such time the chief financial officer will continue to serve as (i) an officer of the Company and/or (ii) an officer in one of the directly held affiliates, except that if he fails to meet the service condition due to the request of the board of directors of either Formula or any of its directly held affiliates (other than a termination of his provision of services which is based on actions or omissions by him that will constitute “cause” under his grant agreement with Formula), then, the chief financial officer will be deemed to have complied with clauses (i) or (ii) above. Notwithstanding the foregoing, if a change of control of the Company occurs, then all unvested new restricted shares will immediately become vested. Total fair value of the grant was calculated based on the Formula share price on the grant date and equaled to $ i 371 ($ i 37.1 per share).

The total compensation expense that the Company recorded in its statement of profit or loss for the years ended December 31, 2019 and 2020 in respect of its chief financial officer were $ i 66 and $ i 21, respectively. i As of December 31, 2021, Formula’s chief financial officer holds 10,834 shares.

In November 2018, Formula’s board of directors, following the approval by Formula’s compensation committee, awarded its chief operational officer i 10,000 restricted shares under the 2011 plan (the “restricted shares”). i These restricted shares vest on an annual basis over a four-year period, commencing on November 19, 2018 and concluding on November 19, 2022, provided that during such time the chief operational officer will continue to serve as (i) an officer of the Company and/or (ii) an officer in one of the directly held affiliates. The total fair value of the grant was calculated based on the Formula share price on the grant date and equaled $382 ($38.2 per share). The total compensation expense the Company recorded in its statement of profit or loss for the years ended December 31, 2019, 2020 and 2021 were $191, $98 and $60, respectively. As of December 31, 2021 Formula’s chief operational officer holds 10,000 restricted shares from this grant, of which 7,500 are fully vested.

F-79

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 17:- Employee Option Plans (Cont.)

In November 2020, Formula’s board of directors, following the approval by Formula’s compensation committee, awarded Emil Sharvit (2001) Consulting and Project Management Ltd., through which its chief executive officer provides services to Formula, i 611,771 restricted stock units (“RSUs”) in respect of ordinary shares of the Company. i 66.67% of the RSUs (i.e., 407,847 RSUs) are subject to time-based vesting that shall start as of the grant date and shall end at December 31, 2027, subject to the continued engagement of Formula’s chief executive officer with the Company as of that date (the “Vesting Period”); and up to 33.33% of the RSUs (i.e., 203,924 RSUs as of the date hereof) are subject to performance-based vesting, and shall vest at December 31, 2027 on a pro-rata basis with respect to each fiscal year (starting as of January 1, 2020) during the Vesting Period in which the Target EBITDA (as defined below) is achieved, subject to the continued engagement of Formula’s chief executive officer with the Company. At the end of the vesting period, the number of performances-based RSUs that vests shall be equal to (i) the number of fiscal years in which the Target EBITDA was achieved multiplied by (ii) 25,490.50 RSUs (rounded to the nearest whole number, up to a cap of 203,924 RSUs in total). The “Target EBITDA” in a given fiscal year during the Vesting Period means the Company’s EBITDA in that certain fiscal year (as reflected in the Company’s annual audited consolidated financial statements), excluding the cost attributed to the applicable portion of the RSUs in the Company’s annual audited consolidated financial statements for the applicable fiscal year (as to which the review of performance is made to determine whether one-eighth of the Performance Based RSUs (i.e., 25,490.50 RSUs) shall become vested at the end of the Vesting Period). The Target EBITDA shall be not less than i 105% of i 75% of the Company’s EBITDA in the previous fiscal year, excluding the cost attributed to the applicable portion of the RSUs in the Company’s annual audited consolidated financial statements for such previous fiscal year (the “Previous Year”). Such examination of EBITDA shall be made on the basis of the Company’s annual audited consolidated financial statements as reflected in the Company’s annual report on Form 20-F, and in the event that the Company sells any of its operations, the Target EBITDA shall be adjusted as applicable for future reference by removing the results of the operations that were sold.

In the event that with respect to any specific fiscal year (the “Specific Year”), the Target EBITDA is not achieved, the Target EBITDA with respect to such Specific Year will still be deemed to have been met for the purpose of vesting of RSUs in the event that either: i (i) the EBITDA in the fiscal year immediately following the Specific Year was at least 110.25% of 75% of the Company’s EBITDA in the year preceding the Specific Year, or (ii) in case that the condition in the foregoing clause (i) was not met, then the EBITDA in the second fiscal year following the Specific Year was at least 115.7625% of 75% of the Company’s EBITDA in the year preceding the Specific Year. Accordingly, in case that either clause (i) or (ii) was met for a certain Specific Year, then the vesting with respect to such Specific Year shall be deemed to have been achieved, and those RSUs shall become vested as of the end of the Vesting Period. In the event that neither of the conditions described in clauses (i) or (ii) was met, the portion of RSUs for the applicable Specific Year shall automatically expire and terminate.

Notwithstanding the foregoing, in case the Target EBITDA is met (in accordance with the above terms) in a certain fiscal year, yet the Target EBITDA is less than i 105% of i 75% of the average EBITDA for the three fiscal years that consist of the subject fiscal year and the i two preceding years (excluding the cost attributed to the applicable portion of the RSUs in Company’s annual audited consolidated financial statements for such applicable fiscal years), then regardless of meeting the Target EBITDA, the number of performance-based RSUs that vests shall be reduced by i 20%.

F-80

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 17:- Employee Option Plans (Cont.)

The total fair value of the grant was calculated based on the Formula share price on the grant date and equaled to NIS 170,864, or $ i 50,054 ($ i 81.8 per share). The total compensation expense the Company recorded in its statement of profit or loss in respect of this grant, in accordance with accounting principles, for the year ended December 31, 2021, was $ i 7,373.

In addition to the RSU grant terms described above, Formula’s board of directors has approved, following the approval by Formula’s compensation committee, an adjustment to the above-described RSU grant based on dividends that the Company distributes to its shareholders. During the vesting period of the RSUs, in the event that any dividend, in cash or in kind, is distributed to the shareholders of the Company, then in addition to the distribution to all shareholders, there will be an equivalent payment to Formula’s chief executive officer with respect to all RSUs that were not converted into shares (whether or not vested) in an amount equal to the pro-rata portion of the overall dividend amount that the RSUs constitute out of the issued and outstanding share capital of the Company as of the date of the distribution. For those purposes, the RSUs will be counted as if they are already vested and converted into shares. These special RSU dividend amounts shall be paid and/or set aside by the Company for the benefit of its chief executive officer, all as described below.

For the purpose of payment of the dividend amounts to Formula’s chief executive officer, the vesting period shall be regarded as if it has commenced on January 1, 2020 (other than with respect to distributions and any related dividend amount which were made prior to the grant of the RSUs and which are explicitly excluded), and will be divided into 32 fiscal quarters (each, referred to as a Fiscal Quarter). The dividend amount within each dividend distributed by the Company to its shareholders will be released to, or set aside for, Formula’s chief executive officer together with the distribution of the dividend. The portion of the Dividend Amount to be released to Formula’s chief executive officer will in each case be based on the number of Fiscal Quarters that have lapsed at the time of distribution of the dividend. The remainder of the Dividend Amount will be set aside and paid to Formula’s chief executive officer on a pro-rata basis upon the expiration of each Fiscal Quarter until the Dividend Amount is released in full at the end of the Vesting Period for the RSUs.

In the event of termination of Formula’s chief executive officer services agreement with the Company, by the Company for Cause (as defined in the services agreement), the RSUs will immediately terminate and become null and void, and all interests and rights of Formula’s chief executive officer in and to the same will expire. In case of termination of Formula’s chief executive officer services agreement by the Company not for Cause, or due to the resignation of Formula’s chief executive officer for Good Reason¹, all unvested RSUs that could have vested from the grant date until December 31, 2027, assuming all performance and time conditions and future targets would have been fulfilled (including all targets that would have resulted in vesting with respect to any Previous Year which could have still been met in future years), will accelerate and become immediately vested and exercisable, regardless of the actual occurrence or failure to occur of any of the future performance targets relating to those RSUs.

“Good Reason” is a termination due to: (i) a material reduction in Formula chief executive representative’s scope of authorities and responsibilities (excluding, for the avoidance of doubt, as a result of changes in legislation or other legal restrictions which affect the scope of Services under its service agreement), (ii) a material breach by the Company of any provision of the service agreement or its exhibits, or (iii) any acceleration event, in each of (i) to (iii) which is not cured (if curable) by the Company within thirty (30) days of receipt of a written notice about such breach from Formula chief executive officer, provided that during the three (3) months prior notice period with respect to resignation for Good Reason the Company shall be entitled to retract its decision in a manner that removes the basis for a Good Reason.

F-81

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 17:- Employee Option Plans (Cont.)

In the event of resignation by Formula’s chief executive officer not for Good Reason, Formula’s chief executive officer RSUs will vest, in an accelerated manner, in such portion equal to the pro-rata portion of the Vesting Period that has already lapsed (based on the full number of Fiscal Quarters that have lapsed form January 1, 2020 until the actual resignation date, including notice period). However, any Performance Based RSUs for which the applicable target was not achieved up until the resignation date (including the notice period) will expire and terminate.

Total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Formula equity incentive plan as of December 31, 2020 and 2021 were $ i 51,940 and $ i 45,973, respectively.

Matrix:

In December 2017, i Matrix extended its agreement with Revava Management Company Ltd. through which its chief executive officer, Mr. Moti Gutman, provides services to Matrix, for five years’ term starting on January 1, 2018. As part of the new agreement in January 2018, Matrix awarded Mr. Gutman 256,890 (RSUs), which vest on an annual basis over a five-year period, commencing on January 16, 2018 and concludes on December 31, 2022, but not before the publication of Matrix’s financial statements for each respective year, and subject to certain conditions. In 2021, 51,378 restricted share units (RSU) were vested and exercised. As of December 31, 2021 Mr. Gutman holds 102,756 restricted share units (RSU) from this grant.

In January 2019, the board of directors of i Matrix approved, following the approval by Matrix’s compensation committee, the grant of 1,440,000 options which are exercisable into up to 1,440,000 ordinary shares of Matrix of NIS 1 par value each, to 20 senior officers of Matrix. The exercise price of the options was NIS 41.7 at the date of their grant, subject to adjustments, including upon the distribution of dividends. 50% of the options will be vested on January 1, 2021 with the remaining amount vesting in equal parts on January 1, 2022 and 2023. When the actual exercise will take place, shares will be allotted, according to a net exercise mechanism resulting with Matrix not receiving any cash consideration for the issuance of its shares.

In February 2019, the general shareholder meeting of i Matrix approved, after obtaining the approval of Matrix’s compensation committee and Matrix board of directors the grant of 80,000 options which are exercisable into up to 80,000 ordinary shares of Matrix of NIS 1 par value, to the President and Vice Chairman of the Matrix board. The exercise price of the options was NIS 43.16 at the date of their grant, subject to adjustments, including upon the distribution of dividends. 50% of the options will vest on January 1, 2021, with the remaining amount vesting in equal parts on January 1, 2022 and 2023. When the actual exercise will take place, shares will be allotted, according to a net exercise mechanism resulting with Matrix not receiving any cash consideration for the issuance of its shares. In January 2022, the general shareholder meeting of Matrix approved, after obtaining the approval of Matrix’s compensation committee and Matrix board of directors the acceleration of the third tranche so that tranche will vest on January 31, 2022, Matrix’s President and Vice Chairman of the Matrix expected retirement date, instead of January 1, 2023.

The fair value of the options was estimated on the date of grant using the Binomial model based on the terms which are: risk-free interest rate is i 0.5% - i 1.6%, early exercise factor is i 70% and expected volatility is i 24%. The contractual life of the options is i 5 years from the date of grant.

F-82

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 17:- Employee Option Plans (Cont.)

The following table summarizes Matrix employee stock-based compensation activity during the year ended December 31, 2021:

Number

of options

Weighted
average
exercise
price

Weighted
average
remaining
contractual
term

(in years)

Aggregate
intrinsic
value

Outstanding at January 1, 2021

i 1,674,134

i 10.70

i 2.88

i 19,935

Exercised

( i 811,378

)

i 10.70

( i 11,159

)

Outstanding at December 31, 2021

i 862,756

i 11.41

i 1.93

i 17,513

Exercisable at December 31, 2021

i 51,378

i 1,560

The aggregate intrinsic value provided in the table above represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on the respective dates. This value would change based on the change in the market value of Matrix’ ordinary shares and the change in the exchange rate between the New Israeli Shekel and dollar. Total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Matrix equity incentive plan as of December 31, 2020 and 2021 were $ i 1,368 and $ i 428, respectively.

Sapiens:

The following table summarizes Sapiens stock-based compensation activity during the year ended December 31, 2021:

Year ended December 31, 2021

Amount of
options

Weighted

average

exercise

price

Weighted average remaining
contractual
life
(in years)

Aggregate
intrinsic value

Outstanding at January 1, 2021

i 1,462,482

i 14.26

i 3.17

i 24,019

Granted

i 847,000

i 30.36

Exercised

( i 359,859

)

i 10.32

Expired and forfeited

( i 114,238

)

i 12.69

Outstanding at December 31, 2021

1835,385

i 22.27

i 3.77

i 22,374

Exercisable at December 31, 2021

i 734,969

i 12.95

i 2.1

i 15,064

i In 2019, 2020 and 2021, Sapiens granted 155,000, 315,000 and 847,000 stock options, respectively, to its employees and directors to purchase its shares. The weighted average grant date fair values of the options granted during the years ended December 31, 2019, 2020 and 2021 were $ i 4.24, $ i 7.99 and $ i 10.35, respectively. The aggregate intrinsic value provided on the table above represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on the respective dates. This value would change based on the change in the market value of Sapiens’ common shares. The total intrinsic value of options exercised during the years ended December 31, 2019, 2020 and 2021 was $ i 2,301, $ i 11,658 and $ i 8,505, respectively.

F-83

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 17:- Employee Option Plans (Cont.)

The options outstanding under Sapiens’ stock option plans as of December 31, 2021 have been separated into ranges of exercise price as follows:

Weighted

Average

Options

Average

Weighted

Options

Exercise

outstanding

remaining

average

Exercisable

price of

Ranges of

as of

contractual

exercise

as of

Options

exercise price

December 31,

Term

price

December 31,

Exercisable

2021

(Years)

2021

i 7.94

i 3,750

i 2.35

i 7.94

i 8.7- i 10.72

i 597,969

i 1.82

i 10.64

i 564,969

i 10.66

i 11.48- i 15.09

i 109,166

i 2.28

i 12.51

i 67,500

i 12.17

i 23.92- i 28.49

i 297,500

i 4.56

i 25.97

i 82,500

i 24.77

i 29.81- i 32.27

i 730,000

i 4.98

i 30.17

i 20,000

i 31.59

i 34.96

i 97,000

i 5.92

i 34.69

i 1,835,385

i 3.77

i 22.27

i 734,696

i 12.95

The total equity-based compensation expense related to all of Sapiens’ equity-based awards, recognized for the years ended December 31, 2019, 2020 and 2021, after being adjusted to comply with IFRS, was $ i 1,125, $ i 4,318 and $ i 5,421, respectively. As of December 31, 2021, there was $ i 8,072 of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a period of up to i four years.

In connection with Sapiens’ acquisition of sum.cumo on February 6, 2020 (see Note 3(ii)(b)), Sapiens issued an aggregate of i 173,005 RSUs to certain employees of sum.cumo in connection with the acquisition. The value of these grants was not included in the purchase price of sum.cumo, since their vesting is subject to both continued employment and other performance criteria. On August 3, 2021, Sapiens issued another i 24,222 RSUs to certain employees of sum.cumo in connection with the acquisition.

Sapiens recorded compensation costs related to RSUs of $ i 1,130 for the year ended December 31, 2021, which were included in Selling, marketing, general and administrative expenses in the Company’s consolidated statements of income.

A summary of the RSU activities in Sapiens in the year ended on December 31, 2021, is as follows

				Weighted Average
	Amount of			Grant-Date Fair
	options			value
Unvested at January 1, 2021		i 238,005			i 24.45
Granted		i 74,222			i 29.96
Vested		( i 43,451	)		i 24.45
Expired and forfeiture		( i 65,020	)		i 24.47
Unvested at December 31, 2021		i 203,756			i 26.46

F-84

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 17:- Employee Option Plans (Cont.)

Magic Software:

The following table summarizes Magic Software stock-based compensation activity during the year ended December 31, 2021:

Number

of options

Weighted
average
exercise
price

Weighted average remaining
contractual
term

(in years)

Aggregate
intrinsic
value

Outstanding at January 1, 2021

i 24,250

i 3.45

i 1.24

i 380

Granted

i 80,000

Exercised

( i 38,000

)

i 1.12

Forfeited

Outstanding at December 31, 2021

i 66,250

i 0.45

i 1,360

Exercisable at December 31, 2021

i 26,250

i 1.03

i 7.96

i 522

The aggregate intrinsic value provided on the table above represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on the respective dates. This value would change based on the change in the market value of Magic Software’s ordinary shares. Total intrinsic value of options exercised during the years ended December 31, 2019, 2020 and 2021, was $ i 537, $ i 765 and $ i 628 respectively. As of December 31, 2021, there was $ i 393 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under Magic Software’s plans, which is expected to be recognized over a weighted-average period of i 1.29 years.

The options outstanding as of December 31, 2021, have been separated into ranges of exercise price categories, as follows:

Ranges of

Exercise price

Options
outstanding

Weighted
average
remaining
contractual life

Weighted
average
exercise price

Options
exercisable

Weighted average
exercise price

of exercisable

options

(Years)

i 0

i 60,000

i 1.60

i 20,000

i 4.32

i 6,250

i 8.62

i 4.32

i 6,250

i 4.32

i 66,250

i 7.96

i 0.45

i 26,250

i 1.03

F-85

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 18:-

EMPLOYEE BENEFIT LIABILITIES

Employee benefits consist of post-employment benefits, other long-term benefits and termination benefits.

Post-employment benefits:

According to the labor laws and Severance Pay Law in Israel, the Israeli companies in the Group are required to pay compensation to an employee upon dismissal or retirement or to make current contributions in defined contribution plans pursuant to section 14 to the Severance Pay Law, as specified below. These liabilities are accounted for as a post-employment benefit. The computation of the Group’s employee benefit liability is made according to the current employment contract based on an employee’s salary and employment term which establish the entitlement to receive the compensation.

The post-employment employee benefits are normally financed by contributions classified as a defined benefit plan or as a defined contribution plan, as detailed below.

Defined contribution plans:

Section 14 of the Severance Pay Law, 1963 applies to part of the compensation payments, pursuant to which the fixed contributions paid by the Group into pension funds and/or policies of insurance companies release the Group from any additional liability to employees for whom said contributions were made. These contributions and contributions for benefits represent defined contribution plans.

Defined benefit plans:

The Group accounts for that part of the payment of compensation that is not covered by contributions in defined contribution plans, as above, as a defined benefit plan for which an employee benefit liability is recognized and for which the Group deposits amounts in central severance pay funds and in qualifying insurance policies.

Other long-term benefits:

According to Matrix’s agreements with one of its senior officers, he is entitled to an adaptation bonus in an amount of 12 salaries. This liability has been recognized as a defined benefit.

Composition of defined benefit plans is as follows:

	December 31,
	2021			2020
Defined benefit obligation		i 123,138			i 113,540
Fair value of plan assets		( i 110,497	)		( i 98,421	)
Net defined benefit liability		i 12,641			i 15,119

Note 19:- Commitments and Contingencies

Liens:

Liens have been incurred by Formula over a certain portion of the Matrix, Magic Software and Sapiens’ shares which it held. As of December 31, 2021 Formula has collaterals in connection with Series A Secured Debentures and Series C Secured Debentures issued by Formula on the TASE (see Note 14).

F-86

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 19:- Commitments and Contingencies (Cont.)

Composition of pledged shares of Matrix, Magic Software and Sapiens owned by Formula as of December 31, 2021:

	December 31, 2021
	Formula’s Series A Secured Debentures		Formula’s Series C Secured Debentures
Matrix ordinary shares, par value NIS 1.0 per share		i 4,128,865		i 6,031,761
Magic Software ordinary shares, par value NIS 0.1 per share		i 5,825,681		i 2,411,474
Sapiens common shares, par value €0.01 per share		i 1,260,266		i 2,957,590

In accordance with the terms of the deed of trust for Formula’s Series C Secured Debentures, Formula did not incur any additional liens in connection with its additional Series C Secured Debentures issued in April 2021 (see Note 14(c)(ii)).

Guarantees:

As of December 31, 2021, the Group provided performance bank guarantees in an aggregate amount of approximately $ i 49,300 as security for performance of various contracts with customers and suppliers. As of December 31, 2021, the Group provided bank guarantees in an aggregate amount of approximately $ i 8,600 as security for rent to be paid for its leased offices. As of December 31, 2021, the Group had restricted bank deposits in an aggregate amount of $ i 300 in favor of the above-mentioned bank guarantees.

In addition, The Company and its subsidiaries provided certain cross guaranties in favor of certain subsidiaries in the Group.

Matrix, Sapiens, Magic Software and Michpal each provides cross guarantees to its subsidiaries.

Covenants:

In connection with the Group’s debentures and credit facility agreements with banks and other financial institutions, as of December 31, 2021, the Group committed to the following:

Formula

Formula’s Debentures

In accordance with Formula’s indenture for its Series A and Series C Secured Debentures, Formula has undertaken to comply with the following financial covenants and obligations:

i a.

A covenant not to distribute dividends unless (i) Formula shareholders’ equity attributable to Formula Systems shareholders shall not be less than $290 million, (ii) Formula’s net financial indebtedness (financial indebtedness offset by cash, marketable securities, deposits and other liquid financial instruments) shall not exceed 50% of net CAP (defined as financial indebtedness, net, plus shareholders’ equity), and (iii) the aggregate amount of distributions from January 1, 2016 shall not exceed the aggregate amount of net oncome for the year ended December 31, 2015 together with 75% of accumulated profits from January 1, 2016 until the respective distribution date and (iv) no event of default shall have occurred.

F-87

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 19:- Commitments and Contingencies (Cont.)

Financial covenants, including: (i) the equity attributable to Formula Systems shareholders, as reported in Formula’s annual or quarterly financial statements, shall not be less than $215 million (as of December 31, 2021, Formula equity attributable to Formula Systems’ shareholders was approximately $541.0 million); (ii) Formula’s net financial indebtedness (financial indebtedness offset by cash, marketable securities, deposits and other liquid financial instruments) shall not exceed 65% of net CAP (defined as financial indebtedness, net, plus total equity) (as of December 31, 2021 Formula’s net financial indebtedness was 5.9% of net CAP); (iii) the ratio of Formula’s net financial indebtedness to the last twelve-months period EBITDA will not exceed 5 (all based on the Company’s quarterly and annual consolidated financial statements) (as of December 31, 2021 the ratio of Formula’s net financial indebtedness to EBITDA was 0.22); and (iv) at all times, Formula’s cash balance on a stand-alone basis will not be less than the semi annual interest payments for the unpaid principal amount of Series A and Series C Secured Debentures (as of December 31, 2021 Formula’s cash balances exceed the semi annual interest payments amount).

Standard events of default, including, among others:

Suspension of trading of the debentures on the TASE over a period of 60 days;

If the rating of the debentures is less than BBB- by Standard and Poors Maalot or equivalent rating of other rating agencies;

Failure to have the debentures rated over a period of 60 days;

If there is a change in control without consent of the rating agency; and

If Formula fails to continue to control any of its subsidiaries;

Matrix

In the context of Matrix’s engagements with banks and financial institutions for its credit facilities, Matrix has undertaken to comply with the following financial covenants, as they are expressed in its financial statements:

i (i)

The total rate of Matrix financial debts and liabilities to banks with the addition of debts in respect of debentures that have been and/or will be issued by Matrix and shareholders’ loans that have been and/or will be granted to Matrix (collectively, the “debts”) will not exceed 40% of its total balance sheet. As of December 31, 2021 the ratio between Matrix’s financial debts and liabilities to banks versus Matrix total assets was 10.9%

(ii)

The ratio of Matrix net debt to the annual EBITDA will not exceed 3.5. As of December 31, 2021, Matrix ratio of net debt to EBITDA was 0.79.

(iii)

Matrix equity shall not be lower than NIS 275,000 (approximately $88,424) at all times. As of December 31, 2021 Matrix’s equity was approximately NIS 878,054 (approximately $282,332 million).

(iv)

Matrix cash and cash equivalents and short-term bank deposits shall not be less than NIS 50,000 (approximately $16,077). In the context of Matrix’ issuance of Commercial Securities which are not listed, Matrix committed to maintain at least NIS 300,000 (approximately $96,463) of liquid assets including unused approved bank credits. Such liquid assets should account for not less than NIS 200,000 of cash and cash equivalent and short-term bank deposit (approximately $64,309).

As of December 31, 2021, Matrix’s cash and cash equivalent and short-term bank deposits amounted to NIS 534,132 (approximately $171,747).

F-88

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 19:- Commitments and Contingencies (Cont.)

(v)

Matrix has committed that the rate of ownership and control of Matrix IT-Systems shall never be below 50.1%.

(vi)

Matrix will not create any pledge on all or part of its property and assets in favor of any third party and will not provide any guarantee to secure any third party’s debts as they are today and as they will be without the banks’ consent (except for a first-rate fixed pledge on an asset which acquisition will be financed by a third party and which the pledge will be in his favor).

(vii)

Matrix will not sell and/or transfer all or part of its assets to others in any manner whatsoever without the banks’ advance written consent unless it is done in the ordinary course of business.

Sapiens

In accordance with the indenture for Sapiens’ Series B Debentures, Sapiens has undertaken to maintain a number of conditions and limitations on the manner in which it can operate its business, including limitations on its ability to undergo a change of control, distribute dividends, incur a floating charge on its assets, or undergo an asset sale or other change that results in fundamental change in its operations. Sapiens Series B Debentures deed of trust also requires it to comply with certain financial covenants, as described below. A breach of the financial covenants for more than two successive quarters or a substantial downgrade in the rating of the debentures (below BBB-) could result in the acceleration of Sapiens’ obligation to repay the debentures. The deed of trust includes the following provisions:

(i)

a negative pledge, subject to certain exceptions;

i (ii)

a covenant not to distribute dividends unless (i) Sapiens equity attributable to Sapiens shareholders’ shall not be less than $160 million - as of December 31, 2021, Sapiens total shareholders’ equity was approximately $408,702, (ii) Sapiens net financial indebtedness (financial indebtedness offset by cash, marketable securities, deposits and other liquid financial instruments) does not exceed 65% of net CAP (defined as financial indebtedness, net, plus total equity) - as of December 31, 2021 the ratio of net financial indebtedness to net capitalization was (36.78)%, (iii) the amount of accumulated dividends from the issuance date and going forward shall not exceed Sapiens net income for the year ended December 31, 2016 and the first three quarters of the year ended December 31, 2017, plus 75% of Sapiens accumulated profits from September 1, 2017 and up to the date of distribution, and (iv) no event of default shall have occurred.

i (iii)

financial covenants, including: (i) the equity attributable to the shareholders of Sapiens, as reported in its annual or quarterly financial statements, will not be less than $120 million (as of December 31, 2021 Sapiens’ shareholders equity was $408,702); (ii) Sapiens’ net financial indebtedness (financial indebtedness offset by cash, marketable securities deposits and other liquid financial instruments) shall not exceed 65% of net CAP (defined as financial indebtedness, net, plus shareholders equity, including deposits and other liquid financial instruments) (as of December 31, 2021 Sapiens’ net financial indebtedness was (36.78%) of net CAP (36.78%) of net CAP); and (iii) the ratio of Sapiens’ net financial indebtedness to EBITDA (based on accumulated calculation for the four last quarters) shall not exceed 5.5 (as of December 31, 2021 the ratio of Sapiens’ net financial indebtedness to EBITDA was (1.27)).

F-89

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 19:- Commitments and Contingencies (Cont.)

Magic Software

Under the terms of the loan with an Israeli financial institution, Magic Software has undertaken to comply with the following financial covenants, as they will be expressed in its consolidated financial statements (in accordance with US GAAP):

i (i)

Total equity attributable to Magic Software’ shareholders shall not be lower than $100,000 at all times – as of December 31, 2021 Magic Software shareholders’ equity was $275,668.

(ii)

Magic Software’s consolidated cash and cash equivalents and marketable securities available for sale shall not be less than $10,000 – as of December 31, 2021 Magic Software’s cash and marketable securities available for sale were $94,818.

(iii)

The ratio of Magic Software’s consolidated total financial debts to consolidated total assets will not exceed 50% - as of December 31, 2021 Magic Software’s financial debts were 7.6% of its total assets;

(iv)

The ratio of Magic Software’s total financial debts less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not exceed 3.25 – as of December 31, 2021 the ratio of Magic Software’s net financial indebtedness to EBITDA was negative (-0.9) (cash exceeds indebtedness); and

(v)

Magic Software shall not create any pledge on all of its property and assets in favor of any third party without the financial institution’s consent.

As of December 31, 2021, each of Formula, Matrix, Sapiens and Magic Software was in compliance with all of its financial covenants.

Legal proceedings:

In September 2016, an Israeli software company, which was previously involved in an arbitration proceeding with Magic Software in 2015 and won damages from it for $ i 2.4 million, filed a lawsuit seeking damages of NIS i 34,106 against Magic Software and one of its subsidiaries. This lawsuit was filed as part of an arbitration proceeding. In the lawsuit, the software company claimed that warning letters that Magic Software sent to its clients in Israel and abroad, warning those clients against the possibility that the conversion procedure offered by the software company may amount to an infringement of Magic Software’s copyrights (the “Warning Letters”), as well as other alleged actions, have caused the software company damages resulting from loss of potential business. The lawsuit is based on rulings given in the 2015 arbitration proceeding in which it was allegedly ruled that the Warning Letters constituted a breach of a non-disclosure agreement (NDA) signed between the parties. Magic Software rejected the claims by the Israeli software company and moved to dismiss the lawsuit entirely. In July 2021 the arbitrator of this proceeding rendered his decision and determined that Magic Software should pay final damages in an amount of NIS5,316 (approximately NIS i 1,650). Our financial results of operations of 2021 included a net impact of $ i 1.6 million resulting from the arbitration expenses.

F-90

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 19:- Commitments and Contingencies (Cont.)

On November 23, 2020, Olir Trade and Industries Ltd. (“Olir”) filed a derivative action and a motion to certify a derivative action, with the District Court (Economic Division) of Tel Aviv-Jaffa, Israel (Derivative Action No. 58348-11-20) (the “Claim” and the “Motion to Certify”, respectively) (as reported in the Company’s Report of Foreign Private Issuer on Form 6-K furnished to the Securities and Exchange Commission on December 9, 2020). In the framework of the Motion to Certify, Olir requested permission to file the Claim, on the Company’s behalf, against each of the Company’s five directors, as well as the Company’s chief executive officer (the “CEO”), Mr. Guy Bernstein, and chief financial officer, Mr. Asaf Berenstin (the “CFO”), as defendants. The Company and the named defendants are all listed as respondents to the Motion to Certify. The Claim challenges the legality, under the Israeli Companies Law, 5759-1999 (the “Companies Law”), of compensation awarded to the Company’s CEO and CFO, including past engagements with the CEO and the recent re-approval by the Company’s compensation committee and board of directors (as reported in the Company’s Report of Foreign Private Issuer on Form 6-K furnished to the Securities and Exchange Commission on November 4, 2020), of the eight-year equity-based award of compensation—in the form of i 611,771 restricted share units— to the Company’s CEO. The Claim includes allegations of breaches of fiduciary duties (duty of care and duty of loyalty) and the oppression of minority shareholders and unjust enrichment. The Claim seeks an accounting from the defendants as to the alleged harm caused to the Company, as well as compensation to the Company for such harm. The Claim also seeks a declaratory order preventing the board of directors from using voting powers allegedly granted to it under agreements related to the Company’s ADSs. The Company rejects all claims made by Olir and believe that all actions taken by its board of directors and its committees were taken in accordance with the Companies Law and based upon advice of legal counsel. All respondents intend to vigorously defend against the Motion to Certify and on May 13, 2021 all respondents filed their responses to the Motion to Certify.

On May 19, 2021 the Company filed a motion asking the court to order Olir to deposit a guarantee for our costs in the proceedings. On June 23, 2021 Olir filed its response to the motion. A pre-trial hearing is scheduled for June 2, 2022. The Company and Olir started mediation proceedings with the first mediation meeting taken place on February 16, 2022. At this early stage of the proceedings, the Company cannot predict the outcome of the proceedings.

On December 24, 2019, a motion for the approval of a class action (#60508-02-20), in an amount of NIS i 793,800, was filed against Zap Group with the Israeli District Court (central district), claiming that Zap Group allegedly generated income illegally from paying customers through the ‘ZAP Group’s price comparison’ website. At the pre-trial hearing, it was decided that the plaintiffs would file an explanation to the court as to why they believe they were fit to serve as class action plaintiffs and give an explanation as to why they have performed prohibited clicks on their competitor’s websites through ZAP Group’s website. In addition plaintiffs were requested to update whether they are willing to reduce the amount of the claim. On July 15, 2021, the plaintiffs filed a motion to reduce the amount of the claim to NIS i 63,000. On December 15, 2021, a pre-trial hearing took place, in which the court clarified that it does not intend to interfere with Zap Group’s business considerations regarding the click filtering mechanisms that it operates. The court recommended that the plaintiffs reach an agreed solution with Zap Group on the issue of the necessary disclosure that Zap Group should include in its contracts with customers (as available on its website). The parties were requested to file a joint notice in accordance with the court’s recommendation by January 15, 2022. The plaintiffs submitted a request for an extension to file the notice. On April 5, 2022, the plaintiffs filed a notice with the court stating that they had not reached agreement with Zap Group and therefore seek to set the case for evidentiary hearing. A date for a hearing has not yet been set. As this claim was filed against Zap Group prior to its acquisition by Formula, any liability resulting from it is covered by the indemnification provided to Formula by the former shareholders of Zap Group.

F-91

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 19:- Commitments and Contingencies (Cont.)

In addition to the above-described legal proceedings, from time to time, Formula and/or its subsidiaries and affiliates are subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business, including claims with respect to intellectual property, contracts, employment and other matters. The Group accrues a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in the determination of both the probability and as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. The Group intends to defend itself vigorously against the above claims, and it generally intends to vigorously defend any other legal claims to which it is subject. While for most litigations, the outcome is difficult to determine, to the extent that there is a reasonable possibility that the losses to which the Group may be subject could exceed the amounts (if any) that it has already accrued, the Group attempts to estimate such additional loss, if reasonably possible, and disclose it (or, if it is an immaterial amount, indicate accordingly). The aggregate provision that the Group has recorded for all other legal proceedings (other than the particular material proceedings described above) is not material.

Royalty commitments:

Sapiens Technologies (1982) Ltd. (“Sapiens Technologies”), a wholly owned subsidiary of Sapiens incorporated in Israel, was partially financed under programs sponsored by the Israel Innovation Authority (“IIA”), formerly the Office of the Chief Scientist (“OCS”) for the support of certain research and development activities conducted in Israel. In exchange for participation in the programs by the IIA, Sapiens Technologies agreed to pay 3.5% of total net consolidated license and maintenance revenue and 0.35% of the net consolidated consulting services revenue related to the software developed within the framework of these programs based on an understanding with IIA reached in January 2012. The royalties will be paid up to a maximum amount equaling 100%-150% of the grants provided by the IIA, linked to the dollar, and for grants received after January 1, 1999, bear annual interest at a rate based on LIBOR.

As of December 31, 2020 and 2021, the Group had contingent liabilities to pay royalties of $ i 6,014 and $ i 5,454, respectively.

Insurance:

The Company and its subsidiaries and affiliates insure themselves in bodily injury and property damage insurance policies, including third party, professional liability and employer’s liability insurance policies. Formula, Sapiens, Magic Software, Zap Group, Insync, Michpal and Ofek directors and officers (D&O) are insured under an “umbrella” policy for insurance of directors and officers including D&O side A DIC policy (another layer of protection for officers) acquired by the Company for itself and its subsidiaries, for a period of 12 months from February 14, 2021.

F-92

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 20:- equity

The composition of the Company’s share capital is as follows:

December 31, 2021

December 31, 2020

Authorized

Issued

Outstanding

Authorized

Issued

Outstanding

Ordinary shares, NIS 1 par value each

i 25,000,000

i 15,862,887

i 15,294,267

i 25,000,000

i 15,862,887

i 15,294,267

Formula’s ordinary shares, par value NIS i 1 per share, are traded on the TASE, and Formula’s ADSs, each representing one ordinary share, are traded on the NASDAQ.

Formula holds i 568,620 of its own ordinary shares.

In August 2019, Formula declared a cash dividend of approximately $ i 7,953 (or $ i 0.52 per share) to shareholders of record on September 12, 2019 that was paid on September 25, 2019.

In November 2019, Formula declared a cash dividend of approximately NIS i 24,471 (approximately $ i 7,079) or NIS i 1.6 per share (approximately $ i 0.46 per share) to shareholders of record on December 24, 2019 that was paid on January 8, 2020.

In August 2020, Formula declared a cash dividend of approximately NIS i 27,071 (approximately $ i 7,960) or NIS i 1.77 per share (approximately $ i 0.52 per share) to shareholders of record on September 3, 2020 that was paid on September 16, 2020.

In February 2021, Formula declared a cash dividend of approximately NIS i 33,036 (approximately $ i 10,155) or NIS i 2.16 per share (approximately $ i 0.66 per share) to shareholders of record on February 18, 2021 that was paid on March 4, 2021.

In August 2021, Formula declared a cash dividend of approximately NIS i 38,694 (approximately $ i 11,932) or NIS i 2.53 per share (approximately $ i 0.78 per share) to shareholders of record on September 1, 2021 that was paid on September 22, 2021.

For information concerning Formula’s employees and officers share-based plans, see Note 17.

Note 21:- INCOME TAX

Israeli taxation:

Corporate tax rate in Israel:

Taxable income of Israeli companies was generally subject to corporate tax at the rate of i i i 23 / / % in 2019, 2020 and in 2021. Some of our Israeli subsidiaries are eligible for certain tax benefits, as described below.

Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Law”):

Amendment 73 to the law:

In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years) 2016, which includes Amendment 73 to the Law for the Encouragement of Capital Investments (the “2017 Amendment”) was published and was pending the publication of regulations, in May 2017 regulations were promulgated by the Finance Ministry to implement the “Nexus Principles” based on OECD guidelines published as part of the Base Erosion and Profit Shifting (BEPS) project. Following the publication of the regulations the 2017 Amendment became fully effective. i According to the 2017 Amendment, a Preferred Technological Enterprise, as defined in the 2017 Amendment, with total consolidated revenues of the group companies is less than NIS 10 billion, shall be subject to 12% tax rate on income derived from intellectual property (in development area A—a tax rate of 7.5%). In order to qualify as a Preferred technological enterprise certain criterion must be met, such as a minimum ratio of annual R&D expenditure and R&D employees, as well as having at least 25% of annual revenues derived from exports.

F-93

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 21:- INCOME TAX (Cont.)

The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a Special Preferred Technology Enterprise (“SPTE”) (an enterprise for which, among others, total consolidated revenues of its parent company and all subsidiaries is at least NIS 10 billion) and will thereby enjoy a reduced corporate tax rate of 6% on PTI regardless of the company’s geographic location within Israel. In addition, a SPTE will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017.

Starting from 2017 under Amendment 73 to the Investment Law, part of the Group’s taxable income in Israel is entitled to a preferred 12% tax rate. Since 2019, under SPTE the tax rate for part of the Group’s taxable income in Israel has been reduced to a 6% corporate tax rate.

Amendment 74 to the Encouragement Law:

On November 15, 2021, the Economic Efficiency Law (Legislative Amendments for Achieving Budget Targets for the 2021 and 2022 Budget Years), 2021 (the “Economic Efficiency Law”), was enacted. This Law establishes a temporary order allowing Israeli companies to release tax-exempt earnings (“trapped earnings” or “accumulated earnings”) accumulated until December 31, 2020, through a mechanism established for a reduced corporate income tax rate applicable to those earnings (the “Temporary Order”).

In addition to the reduced corporate income tax (CIT) rate, Article 74 to the Encouragement Law was amended whereby effective from August 15, 2021, for any dividend distribution (including a dividend as per Article 51B to the Encouragement Law) by a company which has trapped earnings, there will be a requirement to allocate a portion of that distribution to the trapped earnings.

The tax-exempt income is attributable to certain Group members’ previous status as “Approved Enterprise” and “Benefited Enterprise”. Such tax-exempt income cannot be distributed to shareholders without subjecting the Company to payable income taxes. If dividends are distributed from previous tax-exempt profits, the Company will be liable for income tax at the rate applicable to its profits from the Approved Enterprise in at the tax rate enacted in the year in which the income was earned.

According to the Temporary Order, the reduction of CIT will apply to earnings that are released (with no requirement for an actual distribution) within a period of one year from the date of enactment of the Temporary Order. The reduction in the CIT is dependent on the proportion of the trapped earnings that are released in relation to the total trapped earnings, and on the applicable CIT rate in the years the earnings were generated. Consequently, the larger the proportion of the trapped earnings that are released, the lower the tax in respect of the distribution. The minimum tax rate is i 6%. Further, a company that elects to pay a reduced CIT is required to invest in its industrial enterprise a designated amount in accordance with the Economic Efficiency Law within a period of five years commencing from the tax year in which the election is made. The designated investment should be utilized for the acquisition of production assets, and/or investments in research and development and/or compensation to additional new employees.

F-94

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 21:- INCOME TAX (Cont.)

According to ASC 740, a deferred tax liability would generally be recorded relating to corporate taxes that would be owed on the distribution of profits if management has currently the intention to declare dividends of its tax-exempt earnings.

In 2021, Sapiens elected to benefit from the Temporary Order and pay the reduced CIT as per the provisions of the Economic Efficiency Law in respect of its total accumulated tax-exempt earnings amounting to NIS i 109,000 (approximately $ i 35,048), and accordingly recognized deferred tax liability of $ i 3,531.

Tax benefits under the Israeli Law for the Encouragement of Industry (Taxes), 1969:

It is Formula’s management’s belief that certain of its Israeli operations currently qualify as Industrial Companies within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident in Israel and that derives at least i 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major activity in a given tax year is industrial production. Under the Industrial Encouragement Law, the Company is entitled to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes as well as accelerated depreciation rates on equipment and buildings.

Eligibility for the benefits under the Industrial Encouragement Law is not subject to receipt of prior approval from any governmental authority.

Foreign Exchange Regulations:

Under the Foreign Exchange Regulations, certain Israeli subsidiaries of the Group calculate their tax liability in dollars according to certain orders. The tax liability, as calculated in dollars is translated into NIS according to the exchange rate as of December 31 of each year for tax purposes only.

Structural changes in Matrix:

On June 11, 2020, a tax ruling was signed determining that effective December 31, 2019 as part of a merger process, three subsidiaries of Matrix will transfer all their assets and liabilities subject to the provisions of section 103 of the Income Tax Ordinance.

F-95

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 21:- INCOME TAX (Cont.)

Non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of residence. Deferred income taxes were provided in relation to undistributed earnings of non-Israeli subsidiaries, which the Group intends to distribute in the near future.

The Group intends to permanently reinvest undistributed earnings in the foreign subsidiaries in which earnings arose, in the vast majority of its subsidiaries. If the earnings, for which deferred taxes were not provided, were distributed in the form of dividends or otherwise, the Group would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding taxes.

The amount of undistributed earnings of foreign subsidiaries that are considered to be reinvested as of December 31, 2020 and 2021 was $ i 114,569 and $ i 157,464, respectively. However, a determination of the amount of the unrecognized deferred tax liability for temporary difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our group of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.

The amount of cash and cash equivalents that were held by the Group’s subsidiaries outside of Israel and would have been subject to income taxes if distributed as dividend as of December 31, 2020 and 2021 was $ i 87,331 and $ i 61,812, respectively.

Tax Reform - United States of America

The U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) was approved on December 22, 2017. This legislation makes significant changes to the U.S. Internal Revenue Code. Such changes include a reduction in the corporate tax rate and limitations on certain corporate deductions and credits, among other changes. i The TCJA reduces the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.

In addition, the TCJA makes certain changes to the depreciation rules and implements new limits on the deductibility of certain expenses and deduction.

The TCJA introduced the rules for tax on the global intangible low-taxed income (“GILTI”) on foreign income in excess of a deemed return on tangible assets of foreign corporations. One of our subsidiaries is subject to GILTI.

Except for one US subsidiary which has a share interest in a subsidiary in India, all of the Group’s other subsidiaries in the United States do not have any foreign subsidiaries and, therefore, the remaining provisions of the TCJA have no material impact on the Group’s results of operations.

Net operating loss carried forward:

As of December 31, 2021, Formula and its subsidiaries have cumulative losses for tax purposes totaling approximately $ i 184,523, of which $ i 143,355 was in respect of Israeli subsidiaries and approximately $ i 41,168 of which was in respect of subsidiaries abroad.

F-96

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 21:- INCOME TAX (Cont.)

Formula

As of December 31, 2021, Formula stand-alone had cumulative carry forward tax losses in Israel totaling approximately NIS i 257,503 (approximately $ i 82,798), which can be carried forward and offset against taxable income in the future for an indefinite period.

Matrix

As of December 31, 2021, certain subsidiaries of Matrix had operating carry-forward tax losses totaling approximately NIS i 85,483 (approximately $ i 27,486), which resulted from Israeli operations and as such can be carried forward and offset against taxable income in the future for an indefinite period.

Magic Software

As of December 31, 2021, certain subsidiaries of Magic Software had operating carry forward tax losses totaling approximately $ i 23,243, which can be carried forward and offset against taxable income in the future for an indefinite period.

Sapiens

As of December 31, 2021, certain subsidiaries of Sapiens had carry-forward tax losses totaling approximately $ i 34,515. Most of these carry-forward tax losses have no expiration date.

Insync

As of December 31, 2021 Insync did not have any carry forward tax losses.

Michpal

As of December 31, 2021 Michpal did not have any carry forward tax losses.

Ofek

As of December 31, 2021 Ofek did not have any carry forward tax losses.

Zap

As of December 31, 2021, Zap and certain of its subsidiaries had carry-forward tax losses totaling approximately NIS i 22,008 (approximately $ i 7,077). These carry-forward tax losses have no expiration date.

Income tax assessments:

Formula and its subsidiaries are routinely examined by various tax authorities. Below is a summary of the income tax assessments of Formula and its subsidiaries:

Formula

Formula has received final tax assessments (or assessments that are deemed final) through the tax year 2017.

Matrix

Matrix has received final tax assessments through the tax year 2018. i Matrix subsidiaries have received final tax assessments (or assessments that are deemed final) through the tax year 2017.

F-97

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 21:- INCOME TAX (Cont.)

Magic Software

Magic Software has received final tax assessments through the year 2016. Magic Software subsidiaries have received final tax assessments (or assessments that are deemed final) through the tax year 2017.

Sapiens

i Tax assessments filed by some of Sapiens’ Israeli subsidiaries through the year 2016 are considered to be final. Sapiens is currently under audit in several jurisdictions for the tax years 2017 and onwards. Timing of the resolution of audits is highly uncertain and therefore, as of December 31, 2021, the Company cannot estimate the change in unrecognized tax benefits resulting from these audits.

Zap Group

Zap Group has received final tax assessments (or assessments that are deemed final) through the tax year 2018. Zap Group’s subsidiaries have received final tax assessments (or assessments that are deemed final) through the tax year 2016.

Deferred tax liabilities, net:

Presentation in consolidated statements of financial position:

	December 31,
	2021			2020
Deferred taxes assets	$	i 46,364		$	i 39,750
Deferred tax liabilities		( i 78,135	)		( i 68,367	)
	$	( i 31,771	)	$	( i 28,617	)

Composition:

	December 31,
	2021			2020
Net operating losses carried forward	$	i 8,775		$	i 5,377
Intangibles, fixed asset and right-of-use assets		( i 82,313	)		( i 78,885	)
Lease liability		i 30,362			i 31,358
Differences in measurement basis (cash basis for tax purposes)		i 3,084			( i 683	)
Other		i 8,321			i 14,216
	$	( i 31,771	)	$	( i 28,617	)

Pre-tax income:

	Year ended December 31,
	2021		2020		2019
Domestic (Israel)	$	i 137,213	$	i 106,974	$	i 88,942
Foreign		i 46,798		i 36,782		i 30,895
Total	$	i 184,011	$	i 143,756	$	i 119,837

F-98

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 21:- INCOME TAX (Cont.)

Income tax (tax benefit) consist of the following:

	Year ended December 31,
	2021			2020		2019
Current taxes	$	i 52,956		$	i 23,015	$	i 40,181
Deferred taxes		( i 10,342	)		i 8,254		( i 12,980	)
Total	$	i 42,614		$	i 31,269	$	i 27,201

Theoretical tax:

The following table presents reconciliation between the theoretical tax expense, assuming that all income was taxed at statutory tax rates, and the actual income tax expense, as recorded in the Group’s consolidated statements of profit or loss:

Year ended December 31,

2021

2020

2019

Income before income taxes, as per the statement of operations

i 184,011

i 143,756

i 119,837

Statutory tax rate in Israel

i 23

Tax computed at the statutory tax rate

i 42,323

i 33,064

i 27,563

Non-deductible expenses (non-taxable income) net and tax-deductible costs not included in the accounting costs

i 3,667

i 2,544

i 792

Effect of different tax rates

i 852

( i 774

)

i 1,114

Release of trapped earnings (see note 21(a)(2)

i 3,531

Effect of “Approved, Beneficiary or Preferred Enterprise” status

( i 7,338

)

( i 5,426

)

( i 2,557

)

Deferred taxes on current losses (utilization of carry forward losses) and temporary differences for which a valuation allowance was provided, net

( i 84

)

i 1,877

i 1,087

Taxes in respect of prior years

i 891

i 280

( i 569

)

Uncertain tax positions

i 401

i 285

i 1,889

Other

( i 1,629

)

( i 581

)

( i 2,118

)

Taxes on income

i 42,614

i 31,269

i 27,201

F-99

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 21:-

INCOME TAX (Cont.)

Uncertain tax positions:

A reconciliation of the beginning and ending amount of total unrecognized tax benefits in Formula’s subsidiaries is as follows:

Balance as of January 1, 2019	i 6,601

Decrease related to prior years’ tax positions	( i 243	)
Increase related to current year tax positions	i 1,999

Balance as of December 31, 2019	i 8,357

Acquisition of subsidiaries	i 1,057
Decrease related to prior years’ tax positions	( i 1,733	)
Increase related to current year tax positions	i 1,410

Balance as of December 31, 2020	i 9,091

Decrease related to prior years’ tax positions	( i 1,457	)
Increase related to current year tax positions	i 2,906
Balance as of December 31, 2021	i 10,540

Although the Group believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement, there is no assurance that the final tax outcome of its tax audits will not be different from that which is reflected in the Group’s income tax provisions. Such differences could have a material effect on the Group’s income tax provision, cash flow from operating activities and net income in the period in which such determination is made.

The entire balance of unrecognized tax benefits, if recognized, would reduce the Group’s annual effective tax rate.

F-100

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 22:-

Supplementary Financial Statement Information

Composition of non-controlling interest in material partially-owned subsidiaries:

	December 31,
	2021		2020
Matrix and its subsidiaries	$	i 161,947	$	i 147,662
Sapiens and its subsidiaries		i 320,448		i 306,684
Magic Software and its subsidiaries		i 153,706		i 150,808
Other		i 2,726		i 188
	$	i 638,827	$	i 605,342

The following table provides detailed breakdown of the Group’s financial income and expenses:

Year ended December 31,

2021

2020

2019

Financial expenses:

Financial expenses related to liabilities in respect of business combinations

i 3,539

i 3,738

i 1,061

Interest expenses on loans and borrowings

i 6,249

i 6,863

i 6,376

Financial costs related to Debentures

i 6,948

i 6,546

i 5,632

Interest expenses attributed to IFRS 16

i 4,873

i 5,367

i 4,195

Bank charges, negative foreign exchange differences and other financial expenses

i 8,385

i 6,930

i 5,179

i 29,994

i 29,444

i 22,443

Financial income:

Income from marketable securities and embedded derivative

i 3,338

i 204

i 747

Interest income from deposits, positive foreign exchange differences and other financial income

i 2,651

i 2,355

i 3,044

i 5,989

i 2,559

i 3,791

Financial expenses, net

i 24,005

i 26,885

i 18,652

Geographical information:

The Group’s property and equipment is located as follows:

	December 31,
	2021		2020
Israel	$	i 44,221	$	i 44,105
United States		i 3,144		i 4,517
Europe		i 2,820		i 3,303
Japan		i 211		i 283
Other		i 6,490		i 6,968
Total	$	i 56,886	$	i 59,176

F-101

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 22:-

Supplementary Financial Statement Information (Cont.)

Revenues:

The Group’s revenues classified by geographic area (based on the location of customers) are as follows:

Year ended December 31,

2021

2020

2019

Israel

i 1,506,566

i 1,203,109

i 1,047,265

International:

United States

i 591,794

i 501,785

i 462,803

Europe

i 255,680

i 189,152

i 145,564

Africa

i 18,012

i 11,702

i 15,336

Japan

i 12,890

i 14,282

i 14,925

Other (mainly Asia pacific)

i 19,434

i 13,888

i 15,222

Total

i 2,404,376

i 1,933,918

i 1,701,115

Earnings per share:

The following table presents the computation of basic and diluted net earnings per share for the Group:

Year ended December 31,

2021

2020

2019

Numerator:

Basic earnings per share – net income attributable to equity holders of the Company

i 54,585

i 46,776

i 38,820

Diluted earnings per share – net income attributable to equity holders of the Company

i 53,974

i 45,969

i 37,457

Denominator:

Basic earnings per share – weighted average shares outstanding

i 15,290

i 15,286

i 15,190

Effect of dilutive securities

i 114

i 6

i 151

Diluted earnings per share – adjusted weighted average shares outstanding

i 15,404

i 15,292

i 15,341

Basic net earnings per share

i 3.57

i 3.05

i 2.56

Diluted net earnings per share

i 3.50

i 3.01

i 2.44

Note 23:-

operating segments

General:

The Group is engaged through seven directly held subsidiaries; Matrix; Sapiens; Magic Software; Michpal, Zap, Insync and Ofek; and one jointly controlled entity: TSG, in providing software services, proprietary and non-proprietary software solutions, software product marketing and support, computer infrastructure and integration solutions and training and integration.

F-102

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23:-

operating segments (Cont.)

Matrix

Matrix IT Ltd. is Israel’s leading IT services company. Matrix provides software solutions and services, software development projects, outsourcing, integration of software systems and services, project management services and comprehensive consulting and management services in complex infrastructure projects, urban and environment planning – all in accordance with its customers’ specific needs. Matrix also provides upgrading and expansion of existing software systems.

Matrix operates through its directly and indirectly held subsidiaries in the following segments: (1) Information Technology (IT) Software solutions and services, Consulting & Management in Israel; (2) Information Technologies (IT) Software solutions and services in the U.S; (3) Training and integration; (4) Computer and cloud infrastructure and integration solutions; and (5) Software product marketing and support.

Information Technologies (IT) Software solutions and services, Consulting & Management in Israel:

The software solutions and services in Israel provided by Matrix consist mainly of providing tailored software solutions and upgrading and expanding mainly existing large-scale software systems. These services include, among others, developing customized software, adapting software to the customer’s specific needs, implementing software and modifying it based on the customer’s needs, outsourcing, software project management, software testing and QA and integrating all or part of the above elements.

Furthermore, the activity in this segment includes project management consulting services and multi-disciplinary operational and engineering consulting services, including supervision of complex engineering projects, all according to client specific needs as the scope of work invested in each element varies from one customer to the other. i In 2021, activity in software solutions and value-added services in Israel accounted for approximately 54% of Matrix’s revenues and approximately 57% of its operating income.

Information Technologies (IT) Software solutions and services in the United States:

Matrix’s activities in this segment are primarily providing software solutions and services of Governance Risk and Compliance (“GRC”) experts, including activities on the following topics: risk management, management and prevention of fraud, anti-money laundering, trade surveillance as well as, specialized advisory services in the area of compliance with financial regulation and operational services, through Matrix-IFS (formerly Exzac Inc.), a wholly owned subsidiary of Matrix, as well as providing solutions and specialized technological services in areas such as: portals, BI (Business Intelligence) DBA (Data Base Administration), CRM (Customer Relation Management) and EIM (Enterprise Information Management). Furthermore, the activity in this segment includes dedicated solutions for the GovCon Government contracting market, IT help desk services specializing in healthcare and software product distribution services particularly IBM, BMC and Atlassian products to customers in the public-government sector in the U.S (mainly through RightStar Inc.). i In 2021, activity in the U.S accounted for approximately 8% of Matrix’s revenues and approximately 11% of its operating income.

F-103

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23:-

operating segments (Cont.)

Training and integration:

Matrix’s activities in this segment consist of operating a network of high-tech training and instruction centers which provide application courses, professional training courses and advanced professional studies in the high-tech industry, courses of soft skills and management training and provision of training and implementation of computer systems. Matrix also outsources IT services based on graduates of its courses. i In 2021, activity in training and integration accounted for approximately 4% of Matrix’s revenues and for approximately 5% of its operating income.

Computer and cloud infrastructure and integration solutions:

Matrix’s activities in this segment, is primarily providing computer solutions to computer and communications infrastructures, marketing and sale of computers and peripheral equipment to business customers, providing related services, and cloud computing solutions (through the business specializing unit of the Company - Cloud Zone) and a myriad of services regarding Database services and Big data services (through the specialized business unit Data zone). i In 2021, activity in computer and cloud infrastructure and integration solutions accounted for approximately 28% of Matrix’s revenues and for approximately 19% of its operating income.

Software product marketing and support:

Matrix’s activities in this segment include marketing, distributing and support for various software products, the principal of which are CRM, computer systems management infrastructures, web world content management, database and data warehouse mining, application integration, database and systems, data management and software development tools. i In 2021, activity in software product marketing and support accounted for approximately 6% of Matrix’s revenues and approximately 8% of its operating income.

Sapiens

Sapiens is a leading global provider of software solutions for the insurance industry. Sapiens’ extensive expertise is reflected in its innovative software platforms, suites, solutions and services for property & casualty (P&C); life, pension & annuity (L&A); reinsurance; financial and compliance (F&C); workers’ compensation (WC); and financial markets. Sapiens offers a full digital suite that provides an end-to-end, holistic and seamless digital experience for carriers, agents, customers and assorted insurance personnel, across multiple devices and technologies. Sapiens’ offerings enable its customers to effectively manage their core business functions – including policy administration, claims and billing –supporting insurers during their digital transformation journeys. Sapiens portfolio also covers underwriting, illustration and electronic application. Furthermore, Sapiens supplies decision management solutions tailored to a variety of financial services providers, so business users across verticals can quickly deploy business logic and comply with policies and regulations throughout their organizations. Its platforms possess modern, modular architecture and are digital-driven empowering customers to respond to the rapidly changing insurance market and frequent regulatory changes, while improving the efficiency of their core operations.

F-104

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23:-

operating segments (Cont.)

Magic Software

Magic Software is a global provider of: (i) software services and Information Technologies (“IT”) outsourcing software services; (ii) proprietary application development and business process integration platforms; (iii) selected packaged vertical software solutions; as well as (iv) cloud based services for end to end digital transformation. Magic Software’s technology is used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and cost effectively. In addition, Magic Software’s technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and allow customers to dramatically improve their business performance and return on investment.

With respect to software services and IT outsourcing services, Magic Software offers a vast portfolio of professional services in the areas of infrastructure design and delivery, application development, technology consulting planning and implementation services, integration projects, project management, software testing and quality assurance, engineering consulting (including supervision of engineering projects), support services, cloud computing for deployment of highly available and massively-scalable applications and API’s and supplemental outsourcing services, all according to the specific needs of the customer, and in accordance with the professional expertise required in each case.

In addition, Magic Software offers a variety of proprietary comprehensive packaged software solutions through certain of its subsidiaries for (i) enterprise-wide and fully integrated medical platform (“Clicks”), specializing in the design and management of patient-file oriented software solutions for managed care and large-scale health care providers. This platform aims to allow providers to securely access an individual’s electronic health record at the point of care, and it organizes and proactively delivers information with potentially real time feedback to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers; (ii) enterprise management systems for both hubs and traditional air cargo ground handling operations from physical handling and cargo documentation through customs, seamless electronic data interchange, or EDI communications, dangerous goods, special handling, track and trace, security to billing (“Hermes”); (iii) enterprise human capital management, or HCM, solutions, to facilitate the collection, analysis and interpretation of quality data about people, their jobs and their performance, to enhance HCM decision making (“HR Pulse”); (iv) revenue management and monetization solutions in mobile, wireline, broadband and mobile virtual network operator/enabler, or MVNO/E (“Leap”); (v) comprehensive systems for managing broadcast channels in the area of TV broadcast management through cloud-based on-demand service or on-premise solutions; (vi) comprehensive solution for sales and distribution field activities, such as order taking, route accounting, trade marketing, retail execution, proof of deliveries and B2B E-commerce (“Mobisale”); and (vii) comprehensive solution for efficient management of all types of rehabilitation centers (“Nativ”).

Magic Software solutions are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and cost effectively. In addition, its technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and allow customers to dramatically improve their business performance and return on investment. Its software solutions include application platforms for developing and deploying specialized and high-end large-scale business applications (Magic xpa application platform, formerly branded uniPaaS, Appbuilder and Magic SmartUX), an integration platform that allows the integration and interoperability of diverse solutions, applications and systems in a quick and efficient manner (Magic xpi business and process integration platform, formerly branded iBOLT), Magic BusinessEye – a cloud-based platform for all verticals enabling smooth end-to-end digital transformation and full organizational business intelligence and FactoryEye - a proprietary high performance, low-code, flexible, hybrid platform for manufacturers based on existing infrastructure enabling real-time virtualizations of all production data and advanced analytics (based on machine learning) for improved productivity and competitive advantage. These solutions enable Magic Software customers to improve their business performance and return on investment by supporting the affordable and rapid delivery and integration of business applications, systems and databases.

F-105

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23: -

operating segments (Cont.)

Magic Software products and services are available through a global network of regional offices, independent software vendors, system integrators, distributors and value-added resellers as well as original equipment manufacturers and consulting partners in approximately 50 countries.

Insync

InSync is a U.S based national supplier of employees to Vendor Management Systems (VMS) Workforce Management Program accounts. Insync specializes in providing professionals in the following areas; Accounting and Finance, Administrative, Customer Service, Clinical, Scientific and Healthcare, Engineering, Manufacturing and Operations, Human Resources, IT Technology, LI/MFG, and Marketing and Sales. InSync currently supports more than 30 VMS program customers with employees in over 40 states.

Michpal

Michpal, an Israeli registered company, is a developer of proprietary, on-premise payroll software solution for processing traditional payroll stubs to Israeli enterprises and payroll service providers. Michpal also developed several complementary modules such as attendance reporting, which are sold to its customers for additional fees. Together with its subsidiaries Unique Software Industries Ltd, a software development and services company, providing integrated solutions in the field of payroll for more than 30 years, including pay-stubs, pension services management, education funds management, and software solutions for managing employee attendance, and Effective Solutions Ltd Michapl also provides consulting services in the fields of operational cost savings and procurement, as well as salary control and monitoring a payroll, labor, pensions, social security and employee income tax matters. i As of December 31, 2021, Michpal serves approximately 8,000 customers, most of which are long-term customers.

Zap Group

Zap Group, is Israel’s largest group of consumer websites which manages more than twenty leading consumer websites from diverse content worlds with a total of more than 17 million visits per month, including Zap Price Comparison website, Zap Yellow Pages (the largest business index in Israel) and Zap Rest (Israel’s restaurants index). Zap Group, an Israeli private company, provides a variety of digital advertising solutions for its customers (small and medium businesses in Israel) and an access to an E-commerce platform to allow them engage with their consumers. Zap Group serves over 400,000 listed businesses on its platforms; approximately 16,000 of them are paying customers. The websites managed and offered by Zap Group offer consumers a user-friendly search experience with a variety of advanced tools, which enable them to make educated purchase decisions in the best and most informed way.

F-106

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23: -

operating segments (Cont.)

Digital Solutions

Zap Group provides a variety of digital advertising solutions for its customers (small and medium businesses in Israel) and an access to an E-commerce platform that allows them to engage with their consumers. Zap Group regularly seeks to develop attractive digital solutions, which it believes to have market potential for small and medium businesses and their end user. All of Zap Group’s investments in this area have been proven, where we believe we can leverage our experience to enhance product positioning and increase market penetration. We provide our management and technical and financial expertise, marketing experience to help bring these products to market.

E-commerce Solutions

Zap Group provides an e-commerce platform for approximately 1,500 large, medium and small businesses, which operate stores in Israel. The platform, both website and application, allow end users to compare prices of the various stores for over 1.2 million products in 650 categories. The platform provides to more than 120 million visiting end users annually, 300,000 reviews of stores and products and 5,000 quality guides (videos and articles), which allow them to engage through the platform directly with the stores for a purchase of a certain product they looked at through the platform. Total online purchases through the platform is estimated at approximately NIS 2 billion annually, which is estimated at i 14% out of total online purchase volume in Israel (not including food and beverage).

In 2021, Zap Group launched a new website for car sellers and buyers, which provides a marketplace where buyers can explore on one website various options for buying a second-hand car (B2C). The platform allows the buyer to compare prices, specs, financing, peripheral services, accessories and overall packages. The Online, real-time supply availability enables transparency, and also provides the buyer an aggregated view of specific sellers and agencies and a direct contact with a large pool of sellers

Digital platforms

Zap Group provides digital advertising platforms and services through 18 websites for medium and small businesses in 1,600 business categories in Israel, including doctors, lawyers, and other service and product providers. The platform, both website and application allow end users to contact directly with the service provider. The platform provides to more than 50 million visiting end users annually, 200,000 reviews, 2,000 quality guides (videos and articles), 300 price lists, and 700 forums with more than 1.5 million expert explanations.

Zap Group also provides its customers other digital services as Search Engine Marketing (Pay Per Click Google and Facebook campaigns) and Search Engine Optimization for their websites. Zap Group also provides website design services, creation of new websites on various tools (ZAP-X), management of social media, online business cards (GMB), and big data services.

Restaurants and events

Zap Group provides digital advertising platforms and services for more than 17,000 restaurants listed and provides services for social events. Approximately 2,500 of them are paying customers. The platform, both website and application allow end users to directly contact the restaurant for table ordering, ordering of delivery or take away, to post visit reviews or explore the restaurant menu, photo gallery and other content such as articles, etc. The platform provides to more than 30 million visiting end users annually, approximately two million food deliveries, 200,000 reviews, 5,000 food and culinary articles (videos and articles), and more than 0.5 million push updates annually.

F-107

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23: -

operating segments (Cont.)

Other

ZAP Group provides digital advertising platform for domestic travel and hospitality businesses in Israel (the “Platform”). The platform, both website and application, allows end users to order directly from the provider (hotel, guesthouse or attraction service provider). The platform provides access to millions of visiting end users annually, to approximately 1,200 vacation and leisure locations.

Ofek

Founded in 1987, Ofek is one of the leading companies in Israel in the fields of aerial and satellite mapping, geographic data collection and processing, and provider of services in numerous geographic applications. Among Ofek’s customers are many government authorities and foreign government. Ofek employs approximately 100 employees, all situated at Ofek’s headquarter in Natanya, Israel, in multiple areas of expertise: geodetic engineers, software experts, geographers and aerial photo interpreters, GIS and surveying engineers, 3D mapping and data processing experts. The company owns three aerial photography aircrafts equipped with state-of-the-art mapping sensors. Ofek operates worldwide. It has successfully completed projects for various clients (government and private) in Asia, America, Europe, Middle East and Africa, and it constantly involved in ongoing international geographic projects. Ofek aerial photography has accumulated experience in managing and executing NSDI and GIS projects and surveys for detecting, collecting and analyzing diverse geographic cadastral and environmental information.

TSG

TSG is a global high-technology company engaged in high-end technical solutions for protecting the safety of national borders, improving data gathering mechanisms, and enhancing communications channels for military, homeland security and civilian organizations.

TSG operates primarily in the defense and homeland security arenas. The nature of military and homeland security actions in recent years, including low intensity conflicts and ongoing terrorist activities, as well as budgetary pressures to focus on leaner but more technically advanced forces, have caused a shift in the defense and homeland security priorities for many of TSG’s major customers. As a result, TSG believes there is a continued demand in the areas of command, control, communications, computer and intelligence (C4I) systems, intelligence, surveillance and reconnaissance (ISR) systems, intelligence gathering systems, border and perimeter security systems, cyber-defense systems. There is also a continuing demand for cost-effective logistic support and training and simulation services. TSG believes that its synergistic approach of finding solutions that combine elements of its various activities positions it to meet evolving customer requirements in many of these areas. TSG tailors and adapts its technologies, integration skills, market knowledge and operationally-proven systems to each customer’s individual requirements in both existing and new platforms. By upgrading existing platforms with advanced technologies, TSG provides customers with cost-effective solutions, and its customers are able to improve their technological and operational capabilities within limited budgets.

F-108

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23: -

operating segments (Cont.)

TSG markets its systems and products either as a prime contractor or as a subcontractor to various governments and defense and homeland security contractors worldwide. In Israel, TSG sells its defense, intelligence and homeland security systems and products mainly to the IMOD, which procures all equipment for the Israeli Defense Force (IDF).

Consolidated Goodwill in material partially owned subsidiaries:

	December 31,
	2021		2020
Matrix and its subsidiaries	$	i 306,421	$	i 290,662
Sapiens and its subsidiaries		i 406,498		i 409,646
Magic Software and its subsidiaries		i 146,803		i 135,682
Michpal and its subsidiaries		i 36,108		i 34,758
ZAP and its subsidiaries		i 35,292		-
Other consolidated subsidiaries		i 1,732		i 1,676
	$	i 932,854	$	i 872,424

Reporting on operating segments:

The operating segments are identified on the basis of information that is reviewed by the chief operating decision maker (“CODM”) to make decisions about resources to be allocated and assesses its performance. The CODM has been identified as Formula’s CEO. The CODM assess the performance of the Group based on each of the Group’s directly held subsidiaries and company accounted for at equity operating income (or loss). Headquarters and finance expenses of Formula are allocated proportionally among the investees.

F-109

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23: -

operating segments (Cont.)

Matrix

Sapiens

Magic
Software

Michpal

ZAP
Group

Other

Adjustments

Total

Year ended December 31, 2021:

Revenues from external customers

i 1,344,088

i 461,035

i 477,643

i 32,087

i 51,640

i 127,641

( i 89,758

)

i 2,404,376

Inter-segment revenues

i 6,529

i 2,682

( i 9,211

)

Total revenues

i 1,350,617

i 461,035

i 480,325

i 32,087

i 51,640

i 127,641

( i 98,969

)

i 2,404,376

Depreciation and amortization

i 45,736

i 45,732

i 19,837

i 4,023

i 7,486

i 3,776

( i 4,406

)

i 122,184

Segment operating income

i 102,054

i 44,210

i 59,785

i 6,838

i 5,962

i 3,841

( i 3,519

)

i 219,171

Unallocated corporate expenses

( i 11,155

)

Total operating income

i 208,016

Financial expenses, net

( i 24,005

)

Group’s share of profits of companies accounted for at equity, net

i 505

Taxes on income

( i 42,614

)

Net income

i 141,902

Matrix

Sapiens

Magic
Software

Michpal

ZAP
Group

Other

Adjustments

Total

Year ended December 31, 2020:

Revenues from external customers

i 1,116,178

i 382,903

i 368,357

i 26,244

i 120,330

( i 80,094

)

i 1,933,918

Inter-segment revenues

i 5,316

i 2,837

( i 8,153

)

Total revenues

i 1,121,494

i 382,903

i 371,194

i 26,244

i 120,330

( i 88,247

)

i 1,933,918

Depreciation and amortization

i 36,244

i 35,965

i 18,861

i 3,506

i 3,377

( i 2,446

)

i 95,507

Segment operating income

i 84,181

i 35,337

i 47,757

i 6,333

i 4,753

( i 3,455

)

i 174,906

Unallocated corporate expenses

( i 4,265

)

Total operating income

i 170,641

Financial expenses, net

( i 26,885

)

Group’s share of profits of companies accounted for at equity, net

i 1,535

Taxes on income

( i 31,269

)

Net income

i 114,022

F-110

FORMULA SYSTEMS (1985) LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

Note 23: -

operating segments (Cont.)

Matrix

Sapiens

Magic
Software

Michpal

ZAP
Group

Other

Adjustments

Total

Year ended December 31, 2019:

Revenues from external customers

i 1,005,721

i 325,674

i 322,401

i 21,271

i 117,245

( i 91,197

)

i 1,701,115

Inter-segment revenues

i 3,986

i 3,229

( i 7,215

)

Total revenues

i 1,009,707

i 325,674

i 325,630

i 21,271

i 117,245

( i 98,412

)

i 1,701,115

Depreciation and amortization

i 34,780

i 32,196

i 17,584

i 2,500

i 2,158

( i 2,286

)

i 86,932

Segment operating income

i 71,552

i 32,336

i 33,817

i 5,279

i 5,785

( i 7,553

)

i 141,216

Unallocated corporate expenses

( i 2,727

)

Total operating income

i 138,489

Financial expenses, net

( i 18,652

)

Group’s share of profits of companies accounted for at equity, net

i 1,787

Taxes on income

( i 27,201

)

Net income

i 94,423

NOTE 24:-

SUBSEQUENT EVENTS

In March 2022, Formula declared a cash dividend of approximately NIS i 39,213 (approximately $ i 11,930) or NIS i 2.56 per share (approximately $ i 0.78 per share) to shareholders of record on April 12, 2022 that was paid on April 26, 2022.

On December 2, 2021, i Magic Software entered into a Share Purchase Agreement (“the Agreement”) to acquire 50.1% of the outstanding share capital of Vidstart Ltd. (“Vidstart”). Vidstart is a provider of a video advertising platform that offers personalized automated methods and real-time smart optimization, helping its clients achieve high yields in the competitive digital ecosystem. The final closing and execution of the Agreement occurred on January 27, 2022. The total purchase price was approximately $11,292 in cash. Furthermore, according to the Agreement, Magic Software is obliged to purchase the remainder of Vidstart’s shares (30% on December 31, 2022 and 19.9% on December 31, 2023) for a price to be determined based on Vidstart’s future operating results during 2022 and 2023.

On March 31, 2022, i Magic Software entered into a secured credit agreement with an Israeli bank pursuant to which Magic Software borrowed $25,000 for a five-year term (the “Bank Loan”). The Bank Loan will mature on March 31, 2027, and will be repaid in 5 equal annual installments, whereas the interest will be paid and calculated on a quarterly basis. The Bank Loan bears interest at the rate SOFR + 2.25%.

- - - - - - - - - - - - - - - - - - -

F-111

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Magic Software Japan K. K.

Opinion on the Financial Statements

We have audited the accompanying statements of financial position of Magic Software Japan K.K. (the “Company”) as of December 31, 2020 and 2021, and the related statements of comprehensive income and cash flows for each of the three years in the period ended December 31, 2021. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2021, and the related statements of comprehensive income and cash flows for each of the three years in the period ended December 31, 2021 in conformity with International Financial Reporting Standards.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on Section 404 of the Sarbanes-Oxley Act (“SOA”) and our report dated February 15, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Tokyo, Japan

February 15, 2022	/s/ KDA Audit Corporation
	KDA Audit Corporation

F-112

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Magic Software Japan K. K.

Opinion on Internal Control over Financial Reporting

We have audited Magic Software Japan K.K.’s (the “Company”) internal control over financial reporting as of December 31, 2021, based on Section 404 of the Sarbanes-Oxley Act (“SOA”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on Section 404 of the Sarbanes-Oxley Act (“SOA”).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statements of financial position of the Company as of December 31, 2020 and 2021, and the related statements of comprehensive income and cash flows for each of the three years in the period ended December 31, 2021 and our report dated February 15, 2022 expressed unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the entity’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

Tokyo, Japan

February 15, 2022	/s/ KDA Audit Corporation
	KDA Audit Corporation

F-113

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Formula Systems (1985) Ltd. – ‘20-F/A’ for 12/31/21

On: Tuesday, 5/17/22, at 4:37pm ET · For: 12/31/21 · Accession #: 1213900-22-27668 · File #: 0-29442

Previous ‘20-F’: ‘20-F’ on 5/16/22 for 12/31/21 · Next: ‘20-F’ on 5/15/23 for 12/31/22 · Latest: ‘20-F/A’ on 12/11/23 for 12/31/22 · 5 References:

Amendment to Annual or Annual-Transition Report by a Foreign Non-Canadian Issuer — Form 20-F — SEA’34

Filing Table of Contents

‘20-F/A’ — Amendment No. 1 to Form 20-F

Document Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

5 Previous Filings that this Filing References

This ‘20-F/A’ Filing	Date	Other Filings

	12/31/27
	3/31/27
	1/1/26
	12/31/23
	6/1/23
	4/1/23
	1/1/23
	12/31/22
	11/19/22
	6/30/22
	6/2/22
Filed on:	5/17/22
	5/16/22	20-F, 6-K
	4/26/22
	4/22/22
	4/12/22
	4/5/22	6-K
	4/1/22
	3/31/22
	2/16/22
	2/15/22
	1/31/22	SC 13G/A
	1/27/22
	1/15/22
	1/1/22
For Period end:	12/31/21	20-F
	12/15/21
	12/2/21
	11/15/21
	10/5/21
	9/22/21
	9/1/21
	8/15/21
	8/3/21
	7/15/21
	7/8/21
	7/4/21
	6/30/21
	6/23/21
	5/19/21
	5/13/21
	4/29/21	6-K
	4/12/21
	4/6/21	6-K
	4/5/21
	4/1/21
	3/4/21
	2/18/21
	2/14/21
	1/15/21
	1/1/21
	12/31/20	20-F
	12/9/20	6-K, CORRESP
	11/30/20
	11/23/20
	11/16/20
	11/4/20	6-K
	9/16/20
	9/3/20
	9/2/20
	8/17/20
	7/27/20
	7/9/20
	7/1/20
	6/11/20
	6/9/20
	6/8/20	6-K
	6/1/20
	5/17/20
	5/7/20
	5/1/20
	4/22/20
	3/27/20
	3/18/20
	3/13/20
	2/6/20
	1/8/20
	1/1/20
	12/31/19	20-F, 20-F/A
	12/24/19
	11/1/19
	10/1/19
	9/27/19
	9/25/19
	9/12/19
	7/1/19
	5/7/19
	4/7/19
	4/1/19	6-K
	3/31/19
	3/1/19
	2/28/19
	2/20/19
	2/6/19
	2/1/19
	1/1/19
	12/31/18	20-F
	11/19/18
	1/31/18	SC 13G/A
	1/16/18
	1/1/18
	12/31/17	20-F
	12/22/17
	9/16/17
	9/1/17
	8/17/17	6-K
	1/1/17
	12/31/16	20-F, 20-F/A
	11/16/16	6-K
	1/1/16
	12/31/15	20-F, NT 20-F
	9/16/15	6-K
	8/18/15
	1/1/15
	4/30/14	20-F
	1/18/12	6-K
	1/3/11
	4/27/09	20-F
	1/1/99
		List all Filings

Formula Systems (1985) Ltd. – ‘20-F/A’ for 12/31/21

On: Tuesday, 5/17/22, at 4:37pm ET · For: 12/31/21 · Accession #: 1213900-22-27668 · File #: 0-29442

Amendment to Annual or Annual-Transition Report by a Foreign Non-Canadian Issuer — Form 20-F — SEA’34Filing Table of Contents

‘20-F/A’ — Amendment No. 1 to Form 20-FDocument Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

5 Previous Filings that this Filing References

Amendment to Annual or Annual-Transition Report by a Foreign Non-Canadian Issuer — Form 20-F — SEA’34

Filing Table of Contents

‘20-F/A’ — Amendment No. 1 to Form 20-F

Document Table of Contents