UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
Amendment No. 1
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
OR
☐ 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: 000-29442
FORMULA SYSTEMS (1985) LTD.
(Exact Name of Registrant as Specified in Its Charter
and translation of Registrant’s name into English)
Israel
(Jurisdiction of Incorporation or Organization)
Yahadut Canada 1 Street, Or Yehuda 6037501, Israel
(Address of Principal Executive Offices)
Asaf Berenstin; Yahadut Canada 1 Street, Or Yehuda 6037501, Israel
Tel: 972 3 5389389, Fax: 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 | ||
| American Depositary Shares, each representing one Ordinary Share, NIS 1 par value | FORTY | 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, 2022, the registrant had 15,317,667 outstanding ordinary shares, NIS 1 par value, of which 141,398 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.
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 ☐ 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.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 ☒
EXPLANATORY NOTE
This Amendment No. 1, or the Amendment, to the Annual Report on Form 20-F for the year ended December 31, 2022, or the Annual Report, filed on May 15, 2023 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 attestation report on internal control over financial reporting of an auditor of a subsidiary of the Company upon which our principal auditor relied, and to which our principal auditor referred, in rendering its attestation report on internal control over financial reporting that was included in the Annual Report. The subject attestation report on internal control over financial reporting 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.
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:
ITEM 19. EXHIBITS
EXHIBIT INDEX
| + | 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 2.2 to the annual report on Form 20-F for the year ended December 31, 2019, filed by the registrant with the Securities and Exchange Commission on June 29, 2020. |
| (4) | Incorporated by reference to Exhibit 99.2 to the report of foreign private issuer on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18, 2012. |
| (5) | 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. |
| (6) | 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. |
| (7) | Incorporated by reference to Appendix A to the registrant’s proxy statement for its special general meeting of shareholders held on January 12, 2023, attached as Exhibit 99.2 to the report of foreign private issuer on Form 6-K furnished by the registrant to the Securities and Exchange Commission on December 8, 2022. |
2
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 | December 11, 2023 | |
| Asaf Berenstin | Date | ||
| Chief Financial Officer |
3
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
U.S. DOLLARS IN THOUSANDS
INDEX
- - - - - - - - - - - - - - - - - - -
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 Shareholders and the Board of Directors 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with International Financial Reporting Standards 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 of constituting 0.2% and 0.2% at December 31, 2022 and 2021, respectively, and total revenues constituting 0.4% in 2022, 0.5% in 2021 and 0.7% in 2020 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, 2022, 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 15, 2023 expressed an unqualified opinion thereon, based on our audit and the report of other auditors.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 matter 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
A Member of Ernst & Young Global
We have served as the Company’s auditor since 2010.
Tel-Aviv, Israel
May 15, 2023
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 internal control over financial reporting as of December 31, 2022, 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, Formula Systems (1985) Ltd. (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, 2022, 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 0.4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022. 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 Shamrad Electronic (1997) Ltd., Bear Staffing Services Corporation, N.C Marketing and Advertising Ltd., Marcomit Ltd., Appush Ltd. (formerly known as Vidstart Ltd.), The Goodkind Group, LLC and Intrabases SAS, which are included in the 2022 consolidated financial statements of the Company and constituted 1.4% and 1.0% of total and net assets, respectively, as of December 31, 2022 and 1.0% and 1.9% 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 the business of Shamrad Electronic (1997) Ltd., Bear Staffing Services Corporation, N.C Marketing and Advertising Ltd., Marcomit Ltd., Appush Ltd. (formerly known as Vidstart Ltd.), The Goodkind Group, LLC and Intrabases SAS.
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, 2022 and 2021, 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, 2022, and the related notes and our report dated May 15, 2023, 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/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
May 15, 2023
F-6
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands
| December 31, | ||||||||||
| Note | 2022 | 2021 | ||||||||
| ASSETS | ||||||||||
| CURRENT ASSETS: | ||||||||||
| Cash and cash equivalents | 4 | $ | 544,342 | $ | 485,391 | |||||
| Short-term deposits | 23,976 | 25,924 | ||||||||
| Short-term investments | 738 | 1,142 | ||||||||
| Trade receivables (net of allowances for credit losses of $12,242 and $12,855 as of December 31, 2022 and 2021, respectively) | 702,727 | 696,321 | ||||||||
| Prepaid expenses and other accounts receivable | 5 | 64,535 | 72,118 | |||||||
| Inventories | 35,181 | 21,221 | ||||||||
| Total current assets | 1,371,499 | 1,302,117 | ||||||||
| NON-CURRENT ASSETS: | ||||||||||
| Long-term investments and receivables | 6 | 38,985 | 23,676 | |||||||
| Investments in companies accounted for at equity | 8 | 20,746 | 28,900 | |||||||
| Property, plant and equipment | 9 | 54,971 | 56,886 | |||||||
| Right-of-use assets | 17 | 116,840 | 115,833 | |||||||
| Deferred taxes | 23f | 42,027 | 46,364 | |||||||
| Intangible assets | 10 | 222,726 | 241,936 | |||||||
| Goodwill | 11 | 926,161 | 932,854 | |||||||
| Total non-current assets | 1,422,456 | 1,446,449 | ||||||||
| Total assets | $ | 2,793,955 | $ | 2,748,566 | ||||||
The accompanying notes are an integral part of the consolidated 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 | 2022 | 2021 | ||||||||
| LIABILITIES AND EQUITY | ||||||||||
| CURRENT LIABILITIES: | ||||||||||
| Credit from banks and others | 12,14 | $ | 157,882 | $ | 175,696 | |||||
| Debentures | 15 | 68,293 | 48,455 | |||||||
| Current maturities of lease liabilities | 17 | 45,497 | 41,655 | |||||||
| Trade payables | 222,482 | 205,835 | ||||||||
| Deferred revenues | 131,639 | 140,660 | ||||||||
| Employees and payroll accrual | 201,225 | 207,553 | ||||||||
| Other accounts payable | 13 | 86,340 | 80,411 | |||||||
| Liabilities in respect of business combinations | 27,129 | 7,773 | ||||||||
| Put options of non-controlling interests | 2(21)(H) | 60,500 | 39,558 | |||||||
| Total current liabilities | 1,000,987 | 947,596 | ||||||||
| LONG-TERM LIABILITIES: | ||||||||||
| Loans from banks and others | 14 | 115,874 | 157,229 | |||||||
| Debentures | 15 | 305,632 | 205,035 | |||||||
| Lease liabilities | 17 | 78,966 | 84,839 | |||||||
| Other long-term liabilities | 14,101 | 12,183 | ||||||||
| Deferred taxes | 23f | 59,465 | 78,135 | |||||||
| Deferred revenues | 8,859 | 17,757 | ||||||||
| Liability in respect of business combinations | 12,345 | 21,644 | ||||||||
| Put options of non-controlling interests | 2(21)(H) | 11,688 | 31,720 | |||||||
| Employee benefit liabilities | 19 | 9,116 | 12,641 | |||||||
| Total long-term liabilities | 616,046 | 621,183 | ||||||||
| COMMITMENTS AND CONTINGENCIES | 20 | |||||||||
| EQUITY | 21 | |||||||||
| Formula Systems (1985) Ltd. Shareholders’ equity: | ||||||||||
| Share capital: | ||||||||||
| Ordinary shares of NIS 1 par value - Authorized: 25,000,000 shares as of December 31, 2022 and 2021; Issued: 15,886,287 and 15,862,887 at December 31, 2022 and 2021, respectively; Outstanding: 15,317,667 and 15,294,267 at December 31, 2022 and 2021, respectively | 4,347 | 4,340 | ||||||||
| Additional paid-in capital | 145,369 | 153,048 | ||||||||
| Retained earnings | 419,448 | 358,315 | ||||||||
| Accumulated other comprehensive income | (17,030 | ) | 25,516 | |||||||
| Treasury shares (568,620 shares as of December 31, 2021 and 2022) | (259 | ) | (259 | ) | ||||||
| Total equity attributable to Formula Systems shareholders | 551,875 | 540,960 | ||||||||
| Non-controlling interests | 23a | 625,047 | 638,827 | |||||||
| Total equity | 1,176,922 | 1,179,787 | ||||||||
| Total liabilities and equity | $ | 2,793,955 | $ | 2,748,566 | ||||||
The accompanying notes are an integral part of the consolidated 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 | 2022 | 2021 | 2020 | |||||||||||
| Revenues: | ||||||||||||||
| Proprietary software products and related services | $ | 659,470 | $ | 632,986 | $ | 509,109 | ||||||||
| Software services and other | 1,912,887 | 1,771,390 | 1,424,809 | |||||||||||
| Total revenues | 2(13),24c | 2,572,357 | 2,404,376 | 1,933,918 | ||||||||||
| Cost of revenues: | ||||||||||||||
| Proprietary software products and related services | 344,374 | 350,788 | 284,325 | |||||||||||
| Software services and other | 1,605,518 | 1,489,729 | 1,202,160 | |||||||||||
| Total cost of revenues | 1,949,892 | 1,840,517 | 1,486,485 | |||||||||||
| Gross profit | 622,465 | 563,859 | 447,433 | |||||||||||
| Research and development expenses, net | 72,129 | 65,858 | 52,604 | |||||||||||
| Selling, marketing, general and administrative expenses | 317,956 | 289,985 | 224,188 | |||||||||||
| Capital gain from realization of a Matrix IT’s subsidiary | 3(iv)a | 44,260 | - | - | ||||||||||
| Operating income | 276,640 | 208,016 | 170,641 | |||||||||||
| Financial expenses | 23b | 27,216 | 29,994 | 29,444 | ||||||||||
| Financial income | 23b | 7,286 | 5,989 | 2,559 | ||||||||||
| Pre-tax income before share of profits of companies accounted for at equity, net | 256,710 | 184,011 | 143,756 | |||||||||||
| Share of profits (loss) of companies accounted for at equity, net | 8 | (1,808 | ) | 505 | 1,535 | |||||||||
| Taxes on income | 22h | 55,235 | 42,614 | 31,269 | ||||||||||
| Net income | $ | 199,667 | $ | 141,902 | $ | 114,022 | ||||||||
| Attributable to: | ||||||||||||||
| Equity holders of the Company | 81,393 | 54,585 | 46,776 | |||||||||||
| Non-controlling interests | 118,274 | 87,317 | 67,246 | |||||||||||
| $ | 199,667 | $ | 141,902 | $ | 114,022 | |||||||||
| Net earnings per share attributable to equity holders of The Company | 23d | |||||||||||||
| Basic earnings per share | $ | 5.31 | $ | 3.57 | $ | 3.05 | ||||||||
| Diluted earnings per share | $ | 5.21 | $ | 3.50 | $ | 3.01 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-9
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Net income | $ | 199,667 | $ | 141,902 | $ | 114,022 | ||||||
| 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 | 2,717 | 3,007 | 840 | |||||||||
| Gain (loss) from investments in equity instruments measured at fair value through other comprehensive income | (5,257 | ) | - | - | ||||||||
| Share of net other comprehensive income (loss) of companies accounted for at equity | (3,053 | ) | 128 | (169 | ) | |||||||
| Adjustments arising from translating financial statements from functional currency to presentation currency | (140,079 | ) | 10,343 | 17,436 | ||||||||
| 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 | - | - | (2 | ) | ||||||||
| Foreign exchange differences on translation of foreign operations | 67,508 | (10,580 | ) | 16,670 | ||||||||
| Total other comprehensive income (loss), net of tax | (78,164 | ) | 2,898 | 34,775 | ||||||||
| Total Comprehensive income | 121,503 | 144,800 | 148,797 | |||||||||
| Total comprehensive income attributable to: | ||||||||||||
| Equity holders of the Company | 40,177 | 56,048 | 61,009 | |||||||||
| Non-controlling interests | 81,326 | 88,752 | 87,788 | |||||||||
| $ | 121,503 | $ | 144,800 | $ | 148,797 | |||||||
The accompanying notes are an integral part of the consolidated 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 | shares | controlling | Total | ||||||||||||||||||||||||||
| Number | Amount | capital | earnings | income (loss) | (cost) | interests | Equity | |||||||||||||||||||||||||
| Balance as of January 1, 2022 | 15,294,267 | $ | 4,340 | $ | 153,048 | $ | 358,315 | $ | 25,516 | $ | (259 | ) | $ | 638,827 | $ | 1,179,787 | ||||||||||||||||
| Net income | - | - | - | 81,393 | - | - | 118,274 | 199,667 | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | (34,236 | ) | - | (38,335 | ) | (72,571 | ) | |||||||||||||||||||||
| Actuarial gain from defined benefit plans | - | - | - | 1,330 | - | - | 1,387 | 2,717 | ||||||||||||||||||||||||
| Share of other comprehensive income (loss) of companies accounted for at equity | - | - | - | - | (3,053 | ) | - | - | (3,053 | ) | ||||||||||||||||||||||
| Loss from investments in equity instruments measured at fair value through other comprehensive income | - | - | - | - | (5,257 | ) | - | - | (5,257 | ) | ||||||||||||||||||||||
| Total other comprehensive income (loss) | - | - | - | 1,330 | (42,546 | ) | - | (36,948 | ) | (78,164 | ) | |||||||||||||||||||||
| Total comprehensive income (loss) | - | - | - | 82,723 | (42,546 | ) | - | 81,326 | 121,503 | |||||||||||||||||||||||
| Issuance of restricted shares to employees | 23,400 | 7 | (7 | ) | - | - | - | - | - | |||||||||||||||||||||||
| Cost of share-based payment (Note 18) | - | - | 8,161 | - | - | - | 6,729 | 14,890 | ||||||||||||||||||||||||
| Dividend to Formula’s shareholders | - | - | - | (21,590 | ) | - | - | - | (21,590 | ) | ||||||||||||||||||||||
| Dividend to non-controlling interests in subsidiaries | - | - | - | - | - | - | (96,630 | ) | (96,630 | ) | ||||||||||||||||||||||
| Transactions with non-controlling interests due to holding changes, including exercise of employees’ stock options | - | - | (766 | ) | - | - | - | 744 | (22 | ) | ||||||||||||||||||||||
| Acquisition of non-controlling interests | - | - | (8,673 | ) | - | - | - | (8,919 | ) | (17,592 | ) | |||||||||||||||||||||
| Settlement of put options over non-controlling interests | - | - | (6,394 | ) | - | - | - | (438 | ) | (6,832 | ) | |||||||||||||||||||||
| Non-controlling interests arising from initially consolidated companies | - | - | - | - | - | - | 4,219 | 4,219 | ||||||||||||||||||||||||
| Deconsolidation of a Matrix IT’s subsidiary | - | - | - | - | - | - | (811 | ) | (811 | ) | ||||||||||||||||||||||
| Balance as of December 31, 2022 | 15,317,667 | $ | 4,347 | $ | 145,369 | $ | 419,448 | $ | (17,030 | ) | $ | (259 | ) | $ | 625,047 | $ | 1,176,922 | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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 | Treasury | Non- | |||||||||||||||||||||||||||||
| Share Capital | paid-in | Retained | comprehensive | shares | controlling | Total | ||||||||||||||||||||||||||
| Number | Amount | capital | earnings | income (loss) | (cost) | interests | Equity | |||||||||||||||||||||||||
| Balance as of January 1, 2021 | 15,294,267 | $ | 4,340 | $ | 149,249 | $ | 324,358 | $ | 25,513 | $ | (259 | ) | $ | 605,342 | $ | 1,108,543 | ||||||||||||||||
| Net income | - | - | - | 54,585 | - | - | 87,317 | 141,902 | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | (125 | ) | - | (112 | ) | (237 | ) | |||||||||||||||||||||
| Actuarial gain from defined benefit plans | - | - | - | 1,460 | - | - | 1,547 | 3,007 | ||||||||||||||||||||||||
| Share of other comprehensive income (loss) of companies accounted for at equity | - | - | - | - | 128 | - | - | 128 | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | - | - | - | 1,460 | 3 | - | 1,435 | 2,898 | ||||||||||||||||||||||||
| Total comprehensive income (loss) | - | - | - | 56,045 | 3 | - | 88,752 | 144,800 | ||||||||||||||||||||||||
| Cost of share-based payment (Note 18) | - | - | 7,434 | - | - | - | 7,405 | 14,839 | ||||||||||||||||||||||||
| Dividend to Formula’s shareholders | - | - | - | (22,088 | ) | - | - | - | (22,088 | ) | ||||||||||||||||||||||
| Dividend to non-controlling interests in subsidiaries | - | - | - | - | - | - | (62,662 | ) | (62,662 | ) | ||||||||||||||||||||||
| Transactions with non-controlling interests due to holding changes, including exercise of employees’ stock options | - | - | (540 | ) | - | - | - | 3,211 | 2,671 | |||||||||||||||||||||||
| Acquisition of non-controlling interests | - | - | 1,005 | - | - | - | (2,705 | ) | (1,700 | ) | ||||||||||||||||||||||
| Settlement of put options over non-controlling interests | - | - | (4,100 | ) | - | - | - | (4,532 | ) | (8,632 | ) | |||||||||||||||||||||
| Non-controlling interests arising from initially consolidated companies | - | - | - | - | - | - | 4,016 | 4,016 | ||||||||||||||||||||||||
| Balance as of December 31, 2021 | 15,294,267 | $ | 4,340 | $ | 153,048 | $ | 358,315 | $ | 25,516 | $ | (259 | ) | $ | 638,827 | $ | 1,179,787 | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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 | shares | controlling | Total | ||||||||||||||||||||||||||
| Number | Amount | capital | earnings | income (loss) | (cost) | interests | Equity | |||||||||||||||||||||||||
| Balance as of January 1, 2020 | 15,294,267 | $ | 4,340 | $ | 120,737 | $ | 285,146 | $ | 11,676 | $ | (259 | ) | $ | 474,694 | $ | 896,334 | ||||||||||||||||
| Net income | - | - | - | 46,776 | - | - | 67,246 | 114,022 | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | 14,007 | - | 20,099 | 34,106 | ||||||||||||||||||||||||
| Actuarial gain from defined benefit plans | - | - | - | 396 | - | - | 444 | 840 | ||||||||||||||||||||||||
| Unrealized loss on debt instruments at fair value through other comprehensive income, net | - | - | - | - | (1 | ) | - | (1 | ) | (2 | ) | |||||||||||||||||||||
| Share of other comprehensive income (loss) of companies accounted for at equity | - | - | - | - | (169 | ) | - | - | (169 | ) | ||||||||||||||||||||||
| Total other comprehensive income (loss) | - | - | - | 396 | 13,837 | - | 20,542 | 34,775 | ||||||||||||||||||||||||
| Total comprehensive income (loss) | - | - | - | 47,172 | 13,837 | - | 87,788 | 148,797 | ||||||||||||||||||||||||
| Cost of share-based payment (Note 18) | - | - | 1,310 | - | - | - | 6,546 | 7,856 | ||||||||||||||||||||||||
| Dividend to Formula’s shareholders | - | - | - | (7,960 | ) | - | - | - | (7,960 | ) | ||||||||||||||||||||||
| Dividend to non-controlling interests in subsidiaries | - | - | - | - | - | - | (39,056 | ) | (39,056 | ) | ||||||||||||||||||||||
| Transactions with non-controlling interests due to holding changes, including exercise of employees’ stock options | - | - | 847 | - | - | - | 4,459 | 5,306 | ||||||||||||||||||||||||
| Acquisition of non-controlling interests | - | - | (6,538 | ) | - | - | - | (13,114 | ) | (19,652 | ) | |||||||||||||||||||||
| Dilution in Formula’s share in Sapiens due to issuance of Sapiens’ ordinary shares | - | - | 34,462 | - | - | - | 74,275 | 108,737 | ||||||||||||||||||||||||
| Settlement of put options over non-controlling interests | - | - | (1,569 | ) | - | - | - | (4,137 | ) | (5,706 | ) | |||||||||||||||||||||
| Non-controlling interests arising from initially consolidated companies | - | - | - | - | - | - | 13,887 | 13,887 | ||||||||||||||||||||||||
| Balance as of December 31, 2020 | 15,294,267 | $ | 4,340 | $ | 149,249 | $ | 324,358 | $ | 25,513 | $ | (259 | ) | $ | 605,342 | $ | 1,108,543 | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-13
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands (except share and per share data)
Accumulated other comprehensive income (loss):
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Foreign currency translation reserve arising from translating financial statements of foreign operations | $ | (84,455 | ) | $ | (18,494 | ) | $ | (12,964 | ) | |||
| Adjustments arising from translating financial statements from functional currency to presentation currency | 77,367 | 45,642 | 40,237 | |||||||||
| Reserve from financial assets measured at fair value through other comprehensive income | (4,853 | ) | 404 | 404 | ||||||||
| Share of other comprehensive income (loss) of companies accounted for at equity | (5,089 | ) | (2,036 | ) | (2,164 | ) | ||||||
| Accumulated other comprehensive income (loss) | $ | (17,030 | ) | $ | 25,516 | $ | 25,513 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
F-14
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 199,667 | $ | 141,902 | $ | 114,022 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Share of profits of companies accounted for at equity, net | 1,808 | (505 | ) | (1,535 | ) | |||||||
| Depreciation and amortization | 115,308 | 122,184 | 95,507 | |||||||||
| Changes in value of debentures, net | 517 | (624 | ) | (42 | ) | |||||||
| Increase (decrease) in employee benefit liabilities | 1,000 | (220 | ) | 1,194 | ||||||||
| Gain from disposition of a subsidiary of Matrix IT | (44,260 | ) | - | - | ||||||||
| Loss (gain) from sale of property, plants and equipment | (37 | ) | (21 | ) | 118 | |||||||
| Loss from early termination of lease | 80 | - | - | |||||||||
| Stock-based compensation expenses | 14,953 | 14,767 | 7,779 | |||||||||
| Changes in value of short-term and long-term loans from banks and others and deposits, net | (4,688 | ) | 2,030 | 5,482 | ||||||||
| Changes in deferred taxes, net | (18,142 | ) | (7,997 | ) | (6,348 | ) | ||||||
| Cash paid in respect of acquisitions of activities | (4,060 | ) | (556 | ) | - | |||||||
| Change in liability in respect of business combinations | (2,971 | ) | 5,296 | (643 | ) | |||||||
| Impairment of right-of-use asset | - | 1,439 | 351 | |||||||||
| Change in fair value of financial assets measured at fair value through profit or loss | 19 | - | - | |||||||||
| Amortization of premium and accrued interest on debt instruments at fair value through other comprehensive income | 76 | 96 | (70 | ) | ||||||||
| Gain from revaluation of dividend preference derivative in TSG | (1,221 | ) | (255 | ) | (48 | ) | ||||||
| Effect of exchange rate on cash and cash equivalents held in currencies other than the functional currency | 2,412 | 614 | 1,200 | |||||||||
| Working capital adjustments: | ||||||||||||
| Decrease (increase) in inventories | (13,756 | ) | 4,642 | (10,966 | ) | |||||||
| Decrease (increase) in trade receivables | (51,398 | ) | (150,818 | ) | 23,312 | |||||||
| Decrease in other current and long-term accounts receivable | 2,627 | 20,506 | 8,735 | |||||||||
| Increase in trade payables | 25,330 | 40,076 | 10,954 | |||||||||
| Increase in other accounts payable and employees and payroll accrual | 22,292 | 7,255 | 34,859 | |||||||||
| Increase (decrease) in deferred revenues | (6,418 | ) | 9,283 | 4,282 | ||||||||
| Net cash provided by operating activities | $ | 239,138 | $ | 209,094 | $ | 288,143 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-15
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Cash flows from investing activities: | ||||||||||||
| Payments for business acquisitions, net of cash acquired (Appendix C) | (52,262 | ) | (77,155 | ) | (141,364 | ) | ||||||
| Proceeds from sale of a subsidiary of Matrix IT (Appendix D) | 42,928 | - | - | |||||||||
| Taxes paid in conjunction with sale of a subsidiary | (8,424 | ) | - | - | ||||||||
| Cash paid in conjunction with deferred payments and contingent liabilities related to business combinations | (5,181 | ) | (8,630 | ) | (9,111 | ) | ||||||
| Payments to former shareholders of consolidated company | - | (161 | ) | (6,656 | ) | |||||||
| Purchase of intangible assets | (3,142 | ) | (872 | ) | (2,852 | ) | ||||||
| Purchase of other investment | (15,073 | ) | (500 | ) | - | |||||||
| Purchase of property and equipment | (22,063 | ) | (17,352 | ) | (16,651 | ) | ||||||
| Proceeds from maturity and sale net of investment in debt instruments at fair value through other comprehensive income or loss, net | 309 | - | 5,429 | |||||||||
| Proceeds from sale of property and equipment | 633 | 2,283 | 693 | |||||||||
| Receipt (grant) of short-term loans | - | 303 | (283 | ) | ||||||||
| Restricted deposit on account of acquisition | - | - | 22,890 | |||||||||
| Dividend from companies accounted for at equity | 48 | 83 | 3,000 | |||||||||
| Change in short-term and long-term deposits | 2,042 | 4,641 | (22,822 | ) | ||||||||
| Capitalization of software development and other costs | (14,110 | ) | (12,832 | ) | (9,305 | ) | ||||||
| Net cash used in investing activities | $ | (74,295 | ) | $ | (110,192 | ) | $ | (177,032 | ) | |||
| Cash flows from financing activities: | ||||||||||||
| Exercise of employees’ stock options in subsidiaries | - | 2,079 | 5,306 | |||||||||
| Proceeds from issuance of ordinary shares in subsidiaries | - | - | 108,737 | |||||||||
| Dividend paid to non-controlling interests | (96,530 | ) | (62,993 | ) | (40,519 | ) | ||||||
| Dividend to Formula’s shareholders | (21,778 | ) | (22,081 | ) | (14,939 | ) | ||||||
| Short-term bank credit, net | (7,315 | ) | 36,261 | (29,630 | ) | |||||||
| Repayment of long-term loans from banks and others | (87,894 | ) | (84,241 | ) | (79,348 | ) | ||||||
| Receipt of long-term loans from banks and others | 65,678 | 62,707 | 91,024 | |||||||||
| Proceeds from issuance of debentures, net | 199,051 | 50,295 | 60,346 | |||||||||
| Repayment of long-term liabilities to IIA | (642 | ) | (825 | ) | (457 | ) | ||||||
| Repayment of debentures | (53,105 | ) | (46,981 | ) | (29,844 | ) | ||||||
| Purchase of non-controlling interests | (16,795 | ) | (1,700 | ) | (6,330 | ) | ||||||
| Repayment of lease liabilities | (49,702 | ) | (44,086 | ) | (33,583 | ) | ||||||
| Cash paid due to exercise of put option by non-controlling interests | (1,854 | ) | (2,565 | ) | (21,030 | ) | ||||||
| Redemption of capital note of non-controlling interests in subsidiaries | (95 | ) | - | - | ||||||||
| Net cash provided (used) by financing activities | $ | (70,981 | ) | $ | (114,130 | ) | $ | 9,733 | ||||
| Effect of exchange rate changes on cash and cash equivalents | (34,910 | ) | (1,030 | ) | 12,140 | |||||||
| Increase (decrease) in cash and cash equivalents | 58,952 | (16,258 | ) | 132,984 | ||||||||
| Cash and cash equivalents at beginning of year | $ | 485,392 | $ | 501,650 | $ | 368,666 | ||||||
| Cash and cash equivalents at end of year | $ | 544,344 | $ | 485,392 | $ | 501,650 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-16
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
| Year ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||
| A | Supplemental cash flow information: | |||||||||||||||
| Cash paid (received) in respect of: | ||||||||||||||||
| Interest paid | $ | 17,573 | $ | 15,344 | $ | 16,571 | ||||||||||
| Interest received | $ | 2,325 | $ | 459 | $ | 511 | ||||||||||
| Taxes paid (received), net | $ | 51,259 | $ | 38,393 | $ | 44,659 | ||||||||||
| B. | Non-cash activities: | |||||||||||||||
| Purchase of property and equipment | $ | 930 | $ | 1,627 | $ | - | ||||||||||
| Dividend payable to non-controlling interests | $ | 111 | $ | 331 | $ | 216 | ||||||||||
| Right-of-use asset recognized with corresponding lease liability | $ | 52,319 | $ | 39,116 | $ | 20,495 | ||||||||||
| C. | 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) | (5,457 | ) | 1,623 | (604 | ) | |||||||||||
| Inventories | (3,536 | ) | - | - | ||||||||||||
| Short-term investments | (752 | ) | - | - | ||||||||||||
| Short-term deposits | (191 | ) | - | - | ||||||||||||
| Property and equipment | (1,433 | ) | (1,507 | ) | (13,152 | ) | ||||||||||
| Goodwill and intangible assets | (87,905 | ) | (108,048 | ) | (197,258 | ) | ||||||||||
| Right-of-use assets | (2,754 | ) | (2,401 | ) | (2,324 | ) | ||||||||||
| Other long-term assets | (123 | ) | (187 | ) | (8,773 | ) | ||||||||||
| Liabilities to banks and others | 5,142 | 6,431 | 10,598 | |||||||||||||
| Long-term liabilities | 1,240 | 1,306 | 13,739 | |||||||||||||
| Lease liabilities | 2,754 | 2,769 | 2,324 | |||||||||||||
| Deferred tax liability, net | 5,692 | 9,662 | 18,626 | |||||||||||||
| Liability to formerly shareholders | 7,327 | 1,518 | 7,596 | |||||||||||||
| Deferred payments and contingent consideration | 23,515 | 7,663 | 4,536 | |||||||||||||
| Non-controlling interests at acquisition date | 4,219 | 4,016 | 23,328 | |||||||||||||
| Total | $ | (52,262 | ) | $ | (77,155 | ) | $ | (141,364 | ) | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-17
FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
| Year ended December 31, | |||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||
| D. | Proceeds from sale of investment in previously | ||||||||||||||
| consolidated subsidiary: | |||||||||||||||
| Assets and liabilities of the subsidiary at date of sale: | |||||||||||||||
| Working capital (other than cash and cash equivalents) | (6,798 | ) | - | - | |||||||||||
| Short-term investments | 5,004 | - | - | ||||||||||||
| Property and equipment | 782 | - | - | ||||||||||||
| Goodwill and intangible assets | 439 | - | - | ||||||||||||
| Other long-term assets | 67 | - | - | ||||||||||||
| Long-term liabilities | (15 | ) | - | - | |||||||||||
| Non-controlling interests at the sale date | (811 | ) | - | - | |||||||||||
| Gain from realization of a subsidiary | 44,260 | - | - | ||||||||||||
| Total | $ | 42,928 | - | - | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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
| a. | 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 1 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, whose shares are traded on the Warsaw Stock Exchange, that offers comprehensive, proprietary IT solutions for all sectors of the economy.
| b. | 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 eight 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”), Ofek Aerial Photography Ltd. (“Ofek”) and Shamrad Electronic (1997) Ltd (“Shamrad”) and one jointly controlled entity: TSG IT Advanced Systems Ltd. (“TSG”). |
| c. | The following table presents the ownership of the Company’s eight 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, | ||||||||
| 2022 | 2021 | |||||||
| Matrix IT | 48.69 | 48.92 | ||||||
| Sapiens | 44.10 | 43.64 | ||||||
| Magic Software | 46.26 | 45.59 | ||||||
| Insync | 90.09 | 90.09 | ||||||
| Michpal | 100.00 | 100.00 | ||||||
| TSG(1) | 50.00 | 50.00 | ||||||
| Ofek | 80.00 | 80.00 | ||||||
| ZAP Group | 100.00 | 100.00 | ||||||
| Shamrad | 100.00 | - | ||||||
| (1) | TSG’s results of operations are reflected in the Company’s results of operations using the equity method of accounting. |
F-19
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.)
| d. | 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.
| 1) | 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 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; liabilities with respect to business combination; and other financial assets and liabilities (including derivatives) which are presented at fair value through profit or loss.
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 has elected to present the profit or loss items using the function of expense method.
| 2) | 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, liabilities with respect to business combination, 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.
| 3) | 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 unilaterally 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-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.)
The Company’s management has concluded that despite the lack of absolute majority of voting power at the general meetings of shareholders of Matrix IT, 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, 2022, 2021 and 2020 with respect to Matrix, Sapiens and Magic Software, in accordance with IFRS 10, was made in accordance with the following factors:
Matrix IT:
As of December 31, 2022, the Company held 48.69% of the outstanding ordinary shares of Matrix. The conclusion regarding the existence of control in Matrix, in line with IFRS 10, was made considering the following additional factors:
| i) | 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; 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 IT: |
Matrix’s shareholders’ structure may be considered dispersed because, apart from the Company, only two shareholders (both Israeli institutional investors) held more than 5% of Matrix’s voting power during the reporting period (one holding approximately 11% and the second one holding approximately 5%); 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 seven years (i.e., 2016-2022), Matrix’s general meetings were attended by shareholders representing between 76% and 82% of its voting power, including the Company’s voting power. Bearing in mind that the Company presently holds approximately 48.69% 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 97.38% 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-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.)
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 direction of development as well as its current business operations.
Sapiens:
As of December 31, 2022, the Company held 44.1% of the outstanding common shares of Sapiens. The conclusion regarding the existence of control in Sapiens, in line with IFRS 10, was made considering the following factors:
| i) | 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 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 no other shareholder except for the Company’s controlling shareholder, held as of December 31, 2022 more than 5% of the voting rights at the general meeting (Harel Insurance Investments & Financial Services Ltd., which increased its percentage ownership of Sapiens’ common shares from 5.4% to 5.6%, and from 5.6% to 5.7% during the years ended December 31, 2020 and 2021, respectively, decreased its percentage interest to 4.6% over the course of 2022; and Phoenix Holdings Ltd. which increased its percentage ownership of Sapiens’ common shares from 5.1% to 5.7% from December 31, 2020 to December 31, 2021 decreased its percentage interest to 4.3% over the course of 2022); there is no evidence that any shareholder has or had granted to any other shareholder a voting proxy at the general meeting; and, over the last six years from 2017 to 2022, Sapiens’ general meetings were attended by shareholders representing in total between 70% and 82% of the total voting power, including the Company’s voting power. Bearing in mind that the Company presently holds approximately 44.1% of total voting rights, this means that the level of activity of Sapiens’ other shareholders is relatively moderate or low. As of December 31, 2022, the attendance by shareholders would have to be higher than 88.2% 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.
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.)
Therefore it is 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:
As of December 31, 2022, the Company held 46.26% of the outstanding ordinary shares of Magic Software. The conclusion regarding the existence of control in Magic Software, in line with IFRS 10, was made considering the following factors:
| i) | 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 the Company, as of December 31, 2022, there were just two shareholders (Israeli institutional shareholders) holding more than 5% of Magic Software’s voting power (representing 9.4% and 10.1%, and 7.0% and 7.0%, of the votes as of December 31, 2022 and March 31, 2023, respectively); 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 six years from 2017 to 2022, Magic Software’s general meetings were attended by shareholders representing between 65%-87% of the total voting rights. Bearing in mind that the Company presently holds approximately 46.26% 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, 2022, the attendance by shareholders would have to be higher than 92.52% 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’s 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.
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.)
| 4) | 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.
| 5) | 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.
| 6) | 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.
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.)
| i. | 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.
| 7) | 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.
| 8) | 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.
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.)
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.
| 9) | Functional currency, presentation currency and foreign currency: |
| i. | 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. Since January 1, 2019 is the NIS. The functional currencies applied by Formula’s subsidiaries and associates 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.
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.)
| 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.
| iii. | Index-linked monetary items: |
Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index (“Israeli CPI”) are adjusted at the relevant index at the end of each reporting period according to the terms of their agreement.
| 10) | Cash and 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 equivalents include amounts held primarily in New-Israeli Shekel, dollars, Euro, Indian Rupee, British Pound and Japanese Yen.
| 11) | Short-term deposits and restricted deposits: |
Short-term 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.
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.)
| 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 that does not require significant implementation services is considered a distinct performance obligation, as the customer can benefit solely 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 term.
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 an 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.
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.)
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 the 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 is 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 is 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.
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.
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.)
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.
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.
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.)
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.
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.
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.)
Disaggregation of revenue
Service revenue includes 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, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Proprietary software and related services | $ | 659,470 | $ | 632,986 | $ | 509,109 | ||||||
| Other products and third party | 494,344 | 472,045 | 312,315 | |||||||||
| Services | 1,418,543 | 1,299,345 | 1,112,494 | |||||||||
| $ | 2,572,357 | $ | 2,404,376 | $ | 1,933,918 | |||||||
Revenue by timing of revenue recognition was as follows:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Products and services transferred over time | $ | 2,251,416 | $ | 2,072,841 | $ | 1,697,312 | ||||||
| Products transferred at a point in time | 320,941 | 331,535 | 236,606 | |||||||||
| $ | 2,572,357 | $ | 2,404,376 | $ | 1,933,918 | |||||||
| 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”), 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.
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.)
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 a long-term liability, in accordance with IFRS 9, with current maturities classified as a short-term liability. The Group identifies and separates equity components contained 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.
| ● | 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.
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.)
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.
| i) | 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.
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 | 2-23 | 3 | ||||
| Motor vehicles | 2-3 | 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.
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.)
| 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.
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.
| v) | 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.
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.)
| 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 | 2.5 | |
| Computers, software, and peripheral equipment | 20 – 33 | |
| Office furniture and equipment | 6 – 33 (mainly 7) | |
| Motor vehicles | 13 – 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.
| 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.
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.)
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 5-7 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.
During the years ended December 31, 2022, 2021 and 2020, 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 | 3 – 15 | |
| Brand names | 5 | |
| Acquired technology | 2 – 8 | |
| Patents | 10 |
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.)
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.
The following criteria are applied in assessing impairment of these specific assets:
| i. | 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.
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.)
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, 2022, 2021 and 2020, no impairment indicators were identified.
| 21) | Financial instruments: |
| A. | 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.
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. |
| i. | 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.
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.)
| 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-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.)
| B. | 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:
| i. | 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”.
| C. | Derecognition of financial assets: |
The Group derecognizes a financial asset when and only when:
| i. | 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-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.)
| D. | Financial liabilities: |
| i. | 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.
| E. | 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 to 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. | 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.
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.)
| G. | Compound financial instruments: |
| i) | 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. |
| H. | 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-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.)
| 22) | Hedge accounting: |
Derivative financial instruments designated as hedges:
From time to time, the Group enters into contracts for derivative financial instruments such as forward currency contracts and interest rate swaps to hedge risks associated with foreign exchange rate and interest rate fluctuations. Any gains or losses arising from changes in the fair values of derivatives that do not qualify for hedge accounting are recorded immediately in profit or loss.
Hedges qualify for hedge accounting, among others, when at inception of the hedging relationship there is a formal designation and documentation of the hedging relationship and of the Group’s risk management objective and strategy for undertaking the hedge. Hedges are assessed on an ongoing basis to determine whether they are highly effective during the reporting period for which the hedge is designated. Hedges are accounted for as follows:
| i) | Fair value hedges: |
The change in the fair value of the derivative (the hedging item) and the hedged item is recognized in profit or loss. For fair value hedges relating to hedged items carried at amortized cost, the adjustment to the carrying amount is amortized to profit or loss over the remaining term to maturity. Any adjustment of the hedged financial instrument for which the effective interest rate method is used, is recognized in profit or loss. If the hedged item is derecognized, the unamortized changes to fair value are recognized immediately in profit or loss.
| ii) | Cash flow hedges: |
The effective portion of the change in the fair value of the hedging instrument is recognized in other comprehensive income (loss) while any ineffective portion is recognized immediately in profit or loss.
Amounts recognized as other comprehensive income (loss) are reclassified to profit or loss when the hedged transaction affects profit or loss, such as when interest income or expense is recognized or when a forecasted transaction occurs. Where the hedged item is a non-financial asset or liability, their cost also includes the gain (loss) from the hedging instrument.
The Company discontinues hedge accounting prospectively only when the hedge relationship, in whole or in part, ceases to meet the qualifying criteria (after taking into account any rebalancing of hedge relationship, if applicable), including instances when the hedging instrument expires or is sold, terminated or exercised (or if the hedge designation is reversed). When the Company discontinues hedge accounting, amounts accumulated in the cash flow hedge reserve remain in the cash flow hedge reserve until the future cash flows occur or are reclassified to profit or loss if the hedged future cash flows are no longer expected to occur.
| 23) | 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.
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.)
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). |
| 24) | 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.
| 25) | 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.
Following are the types of provisions included in the financial statements:
| i. | 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.
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.)
| 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.
| 26) | 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, New Israeli Shekel (“NIS”), British Pound and Japanese Yen and 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.
| 27) | Employee benefit liabilities: |
The Group maintains several employee benefit plans:
| i. | Short-term employee benefits: |
Short-term employee benefits are benefits that are expected to be settled wholly before twelve (12) 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. The short-term employee benefit liability in the statement of financial position is measured on an undiscounted basis.
| 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.
Formula’s and its Israeli subsidiaries and associates 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.
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.)
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 2022, 2021 and 2020 were $51,897, $48,331 and $35,897, 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-48
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.)
| 28) | 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.
| 29) | 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-49
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.)
| 30) | 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 deposits, restricted cash, trade receivables and foreign currency derivative contracts.
The majority of the Group’s cash and cash equivalents, 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 credit losses based upon management’s experience and estimate of collectability of each outstanding invoice. The allowance for credit losses 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, 2022, 2021 and 2020 was $3,022, $1,333 and $3,188 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 (26) above).
| 31) | 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.
F-50
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 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.
| 32) | Changes in accounting policies – initial adoption of new financial reporting and accounting standards: |
| 1. | Amendment to IAS 16, “Property, Plant and Equipment”: |
In May 2020, the IASB issued an amendment to IAS 16, “Property, Plant and Equipment” (the “Amendment”). The Amendment prohibits a company from deducting from the cost of property, plant and equipment (“PP&E”) consideration received from the sales of items produced while the company is preparing the asset for its intended use. Instead, the company should recognize such consideration and related costs in profit or loss.
The Amendment is effective for annual reporting periods beginning on or after January 1, 2022. The Amendment is applied retrospectively, but only to items of PP&E made available for use on or after the beginning of the earliest period presented in the financial statements in which the company first applies the Amendment.
The cumulative effect of initially applying the Amendment is recognized as an adjustment to the opening balance of retained earnings (or other component of equity, as applicable) at the beginning of the earliest period presented.
The application of the Amendment did not have a material impact on the Company’s financial statements.
| 2. | Amendment to IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”: |
In May 2020, the IASB issued an amendment to IAS 37, regarding which costs a company should include when assessing whether a contract is onerous (“the Amendment”).
According to the Amendment, costs of fulfilling a contract include both the incremental costs (for example, raw materials and direct labor) and an allocation of other costs that relate directly to fulfilling a contract (for example, depreciation of an item of property, plant and equipment used in fulfilling the contract).
The Amendment is effective for annual periods beginning on or after January 1, 2022 and applies to contracts for which all obligations in respect thereof have not yet been fulfilled as of January 1, 2022. The application of the Amendment does not require the restatement of comparative data for property, plant and equipment. Instead, the opening balance of retained earnings on the initial application date is adjusted for the cumulative effect of the Amendment.
F-51
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 application of the Amendment did not have a material impact on the Company’s financial statements.
| 3. | Amendments to IFRS 3, “Business Combinations”: |
In May 2020, the IASB issued Amendments to IFRS 3, “Business Combinations – Reference to the Conceptual Framework”, which are intended to replace a reference to the Framework for the Preparation and Presentation of Financial Statements with a reference to the Conceptual Framework for Financial Reporting, which was issued in March 2018, without significantly changing its requirements.
The IASB added an exception to the recognition principle of IFRS 3 to avoid the issue of potential ‘day 2’ gains or losses arising for liabilities and contingent liabilities that would be within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets or IFRIC 21 Levies, if incurred separately.
The exception requires entities to apply the criteria in IAS 37 or IFRIC 21, respectively, instead of the Conceptual Framework, to determine at the acquisition date whether as a result of a past event, a present obligation exists or whether the event that creates an obligation to pay the levy occurred by the acquisition date.
The Amendments also clarify that contingent assets do not qualify for recognition at the acquisition date.
The Amendments are applied prospectively for annual reporting periods beginning on or after January 1, 2022.
The application of the Amendments did not have a material impact on the Company’s financial statements.
| 4. | Annual improvements to IFRSs 2018-2020: |
In May 2020, the IASB adopted certain amendments in the context of the Annual Improvements to IFRSs 2018-2020 Cycle. The main amendment is to IFRS 9, “Financial Instruments” (the “Amendment”). The Amendment clarifies which fees a company should include in the “10% test” described in paragraph B3.3.6 of IFRS 9 when assessing whether the terms of a debt instrument that has been modified or exchanged are substantially different from the terms of the original debt instrument.
According to the Amendment, fees paid net of any fees received that are included in the cash flows are only those fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf.
The Amendment is effective for annual periods beginning on or after January 1, 2022. The Amendment is applied to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the Amendment, that is from January 1, 2022.
F-52
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.)
| 33) | Disclosure of new standards in the period prior to their adoption: |
| i. | Amendment to IAS 1, “Presentation of Financial Statements”: |
In January 2020, the IASB issued an amendment to IAS 1, “Presentation of Financial Statements” regarding the criteria for determining the classification of liabilities as current or non-current (the “Original Amendment”). In October 2022, the IASB issued a subsequent amendment (the “Subsequent Amendment”).
According to the Subsequent Amendment:
| ● | Only covenants with which an entity must comply on or before the reporting date will affect a liability’s classification as current or non-current. |
| ● | An entity should provide disclosure when a liability arising from a loan agreement is classified as non-current and the entity’s right to defer settlement is contingent on compliance with future covenants within twelve months from the reporting date. This disclosure is required to include information about the covenants and the related liabilities. The disclosures must include information about the nature of the future covenants and when compliance is applicable, as well as the carrying amount of the related liabilities. The purpose of this information is to allow users to understand the nature of the future covenants and to assess the risk that a liability classified as non-current could become repayable within twelve months. Furthermore, if facts and circumstances indicate that an entity may have difficulty in complying with such covenants, those facts and circumstances should be disclosed. |
According to the Original Amendment, the conversion option of a liability affects the classification of the entire liability as current or non-current unless the conversion component is an equity instrument.
The Original Amendment and Subsequent Amendment are both effective for annual periods beginning on or after January 1, 2024 and must be applied retrospectively. Early application is permitted.
The Company estimates that the Amendments are not expected to have a material impact on its financial statements.
| ii. | Amendment to IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors”: |
In February 2021, the IASB adopted an amendment to IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors” (the “Amendment”), which introduces a new definition of “accounting estimates”.
Accounting estimates are defined as “monetary amounts in financial statements that are subject to measurement uncertainty”. The Amendment clarifies the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors.
F-53
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 Amendment is to be applied prospectively for annual reporting periods beginning on or after January 1, 2023 and is applicable to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period. Early application is permitted.
The Company estimates that the Amendment is not expected to have a material impact on its financial statements.
| iii. | Amendment to IAS 12, “Income Taxes”: |
In May 2021, the IASB issued an amendment to IAS 12, “Income Taxes” (“IAS 12”), which narrows the scope of the initial recognition exception under IAS 12.15 and IAS 12.24 (the “Amendment”).
According to the recognition guidelines of deferred tax assets and liabilities, IAS 12 excludes recognition of deferred tax assets and liabilities in respect of certain temporary differences arising from the initial recognition of certain transactions. This exception is referred to as the “initial recognition exception”. The Amendment narrows the scope of the initial recognition exception and clarifies that it does not apply to the recognition of deferred tax assets and liabilities arising from transactions that are not a business combination and that give rise to equal taxable and deductible temporary differences, even if they meet the other criteria of the initial recognition exception.
The Amendment applies for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted. In relation to leases and decommissioning obligations, the Amendment is to be applied commencing from the earliest reporting period presented in the financial statements in which the Amendment is initially applied. The cumulative effect of the initial application of the Amendment should be recognized as an adjustment to the opening balance of retained earnings (or another component of equity, as appropriate) at that date.
The Company estimates that the initial application of the Amendment is not expected to have a material impact on its financial statements.
| iv. | Amendment to IAS 1 - Disclosure of Accounting Policies: |
In February 2021, the IASB issued an amendment to IAS 1, “Presentation of Financial Statements” (the “Amendment”), which replaces the requirement to disclose ’significant’ accounting policies with a requirement to disclose ‘material’ accounting policies. One of the main reasons for the Amendment is the absence of a definition of the term ’significant’ in IFRS whereas the term ‘material’ is defined in several standards and particularly in IAS 1.
The Amendment is applicable for annual periods beginning on or after January 1, 2023. Early application is permitted.
The Company estimates that the Amendment is not expected to have a material impact on its financial statements.
F-54
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.)
| v. | Amendment to IFRS 16, “Leases”: |
In September 2022, the IASB issued an amendment to IFRS 16, “Leases” (the “Amendment”), which provides guidance on how a seller-lessee should measure the lease liability arising in a sale and leaseback transaction with variable lease payments that do not depend on an index or rate. The seller-lessee has to choose between two accounting policies for measuring the lease liability on the inception date of the lease. The accounting policy chosen must be applied consistently.
The Amendment is applicable for annual periods beginning on or after January 1, 2024. Early application is permitted. The Amendment is to be applied retrospectively.
The Company estimates that the Amendment is not expected to have a material impact on its financial statements.
| 34) | Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. |
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
| i. | Formula |
| a. | Acquisition of Shamrad Electronic (1997) Ltd (“Shamrad”) |
On October 2, 2022, the Company directly acquired all of the share capital of Shamrad. Shamrad is an Israeli private company, engaged in the supply, integration and installation of computer communication infrastructures, announcement and alarm systems and electronic security systems. Shamrad represents several companies in the field of security: ATI systems – sirens, Garrett – Metal detectors, Kopp – Ferro Magnetic detectors for MRI rooms. The total consideration to be paid for the acquisition amounted to approximately NIS 9,412 (approximately $2,657), with NIS 7,065 (approximately $1,994) paid in cash, or approximately NIS 8,555 (approximately $2,415) 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. The results of Shamrad’s operations have been included in the consolidated financial statements since October 2022.
The following table summarizes the estimated fair values allocated to Shamrad’s assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | (404 | ) | |
| Other long-term assets | 173 | |||
| Liabilities in respect of business combinations | (662 | ) | ||
| Backlog | 837 | |||
| Deferred tax liabilities, net | (140 | ) | ||
| Goodwill | 1,948 | |||
| Total assets acquired net of acquired cash | $ | 1,752 |
| b. | Acquisition of ZAP Group Ltd. (“ZAP Group”) |
On April 6, 2021 (the “Zap Group acquisition date”), the Company directly acquired 100% of the share capital of Zap Group, Israel’s largest group of consumer websites which manages more than 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 244,169 (approximately $74,350), or approximately NIS 216,172 (approximately $65,825) net of acquired cash. Moreover, the former shareholders of Zap Group are entitled to contingent consideration payments of up to NIS 60,000 (approximately $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 3,577 (or $ 1,089). For the year ended December 31, 2022, the fair value of such contingent consideration amounted to $0. 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.
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 as of the acquisition date the estimated consideration for the acquisition of Zap Group:
| Cash consideration | $ | 74,350 | ||
| Acquisition date fair-value of contingent consideration | 1,089 | |||
| Total consideration | $ | 75,439 |
The following table summarizes the estimated fair values allocated to Zap Group’s assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | (7,171 | ) | |
| Other long-term assets | 8,735 | |||
| Other long-term liabilities | (4,565 | ) | ||
| Customer relationships | 39,152 | |||
| Trade names | 8,642 | |||
| Deferred tax liabilities | (10,984 | ) | ||
| Non-controlling interests in acquiree’s subsidiary | (1,384 | ) | ||
| Goodwill | 33,400 | |||
| Total assets acquired net of acquired cash | $ | 65,825 |
| ii. | Sapiens |
Acquisition of I.T Cognitive Ltd (“Cognitive”):
On May 19, 2022, Sapiens completed the acquisition of 100% of the outstanding shares of Cognitive, an Israeli company which provides digital transformation solutions, for a total cash consideration of $3,466.
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 statements of statement of profit or loss.
The following table summarizes the estimated fair values allocated to Cognitive’ s assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | 116 | ||
| Customer relations | 345 | |||
| Acquired technology | 1,320 | |||
| Deferred tax liabilities | (437 | ) | ||
| Goodwill | 2,122 | |||
| Total assets acquired net of acquired cash | $ | 3,466 |
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.)
| iii. | Magic Software |
| a. | Acquisition of Appush Ltd. (formerly known as Vidstart Ltd.) (“Appush”) |
On January 27, 2022, Magic Software acquired 50.1% of Appush Ltd. (formerly known as Vidstart Ltd.) (“Appush”), 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. According to the share purchase agreement, Magic Software is committed to purchase the remainder of Appush’s shares in two tranches: 30% on April 1, 2022 and 19.9% on April 1, 2023. Magic Software’s commitment to purchase all of the outstanding share capital of Appush as of the closing date was accounted for as a financial liability measured at fair value in the amount of $10,450. As of the closing date the estimated total consideration for the acquisition of all of the outstanding share capital of Appush amounted to $21,492, or approximately $19,944, net of acquired cash (of which $11,043 was paid in cash at closing, or approximately $9,495 net of acquired cash). The fair value of the financial liability referring to the purchase of the remaining 49.9% interest in Appush amounted as of December 31, 2022 to approximately $8,560.
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. Appush’s results of operations have been included in the consolidated financial statements commencing January 27, 2022.
The following table summarizes the estimated fair values allocated to the Appush acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net liabilities excluding cash acquired | $ | (1,047 | ) | |
| Customer relations | 5,168 | |||
| Acquired technology | 2,276 | |||
| Deferred tax liabilities | (1,713 | ) | ||
| Liabilities in respect of business combinations | (10,450 | ) | ||
| Goodwill | 15,261 | |||
| Total assets acquired, net of acquired cash | $ | 9,495 |
| b. | Acquisition of The Goodkind Group, LLC (“TGG”): |
On August 23, 2022 (the “TGG Acquisition Date”), Magic Software acquired 100% of TGG’s outstanding share capital for a total consideration of $11,629 or approximately $11,482 net of acquired cash (of which approximately $7,993 was paid upon closing, or approximately $7,846 net of cash acquired). TGG provides permanent and temporary staffing services in various sectors including: Information Technology, Accounting & Finance, Digital Media, Marketing, Human Resource, Financial Services. With On-Site programs and sourcing models TGG solutions include functions which differ from standard staffing companies. TGG provides assistance in the areas of compensation design and development, employee opinion surveys, employment policies and practices, performance management, regulatory and compliance issues and succession planning.
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 remainder constitutes a deferred payment payable in 2023 (approximately $2,765) and 2024 (approximately $870).
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. TGG’s results of operations have been included in the consolidated financial statements since TGG Acquisition Date.
The following table summarizes the estimated fair values(1) allocated to the TGG acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | 3,177 | ||
| Customer relations | 3,901 | |||
| Liabilities in respect of business combinations | (3,635 | ) | ||
| Goodwill | 4,404 | |||
| Total assets acquired, net of acquired cash | $ | 7,847 |
| (1) | The estimated fair values of the tangible and intangible assets in respect of the acquisition of TGG 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. |
| c. | Acquisition of Intrabases SAS (“Intrabases”): |
On July 1, 2022 (the “Intrabases Acquisition Date”), Magic Software acquired Intrabases SAS, a provider of IT professional services based in Nantes, France. The consideration for the transaction was comprised solely of cash in an amount of approximately $3,428, or approximately $2,981 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. The acquisition was accounted for according to the purchase method. Intrabases’ results of operations have been included in the consolidated financial statements since the Intrabases Acquisition Date.
The following table summarizes the estimated fair values allocated to the Intrabases acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net liabilities excluding cash acquired | $ | 120 | ||
| Acquired technology | 429 | |||
| Customer relations | 1,145 | |||
| Deferred tax liabilities | (520 | ) | ||
| Goodwill | 1,807 | |||
| Total assets acquired, net of acquired cash | $ | 2,981 |
| d. | During 2022 Magic Software concluded two separate asset purchase agreements each meeting the definition of a “business” and as such were deemed as “business combinations” in accordance with IFRS 3. These aforementioned acquisitions were immaterial, both individually and in the aggregate. The total consideration paid for these acquisitions amounted to approximately $1,753. The estimated fair values allocated to customer relations, net of deferred tax liability and goodwill amounted to $1,163 and $898, respectively. |
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.)
| e. | 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 was 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 the EnableIT Acquisition Date
The following table summarizes the estimated fair values allocated to the EnableIT acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net liabilities excluding cash acquired | $ | (35 | ) | |
| Intangible assets | 2,546 | |||
| Other long-term assets | 459 | |||
| Other long-term liabilities | (1,171 | ) | ||
| Goodwill | 4,101 | |||
| Total assets acquired, net of acquired cash | $ | 5,900 |
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.
| f. | 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 $5,595 (or $5,505 net of acquired cash), of which, $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 $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.
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 of the Menarva Acquisition Date.
The following table summarizes the estimated fair values allocated to the Menarva acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net liabilities excluding cash acquired | $ | (129 | ) | |
| Customer relationships | 2,750 | |||
| Other long-term assets | 194 | |||
| Other long-term liabilities | (787 | ) | ||
| Goodwill | 3,477 | |||
| Total assets acquired, net of acquired cash | $ | 5,505 |
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.)
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.
| g. | 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 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 $1,134 (or $843 net of acquired cash), of which $367 was paid upon closing, $256 was paid in July 2021, $257 was paid in April 2022 and with 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 $510. In addition, both Magic Software and Soft IT’s minority shareholder hold 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 on the SoftIT Acquistion Date.
The following table summarizes the estimated fair values allocated to the Soft IT acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net liabilities excluding cash acquired | $ | (402 | ) | |
| Customer relationships | 1,150 | |||
| Deferred taxes | (264 | ) | ||
| Redeemable non-controlling interests | (719 | ) | ||
| Goodwill | 967 | |||
| Total assets acquired, net of acquired cash | $ | 732 |
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.
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.)
| iv. | Matrix IT |
| a. | Sale of Infinity Labs R. & D. Ltd. (“Infinity”) |
On April 24, 2022, Matrix IT concluded the sale of 45.2% of the issued and share capital of Infinity Labs R. & D. Ltd. (“Infinity”) for a total consideration of NIS 154,469 (approximately $46,165). Following the transaction Matrix IT’s remaining interest in Infinity’s outstanding share capital amounted to 4.9% of Infinity’s outstanding share capital. As a result of the transaction, the Company recognized a capital gain (before tax), in the amount of approximately NIS 148,102 (approximately $44,260), including NIS 16,745 (approximately $5,004) recorded with respect to the revaluation of the Matrix IT remaining share interest in Infinity. In accordance, as of the second quarter of 2022, Infinity’s financial results of operations were not consolidated in the Company’s financial statements and the remaining share interest of 4.9% in Infinity’s outstanding share capital was measured at fair value with subsequent changes in the fair value of the investment recognized in profit or loss.
| b. | Acquisition of RDT Equipment and Systems (1993) Ltd., Asio Vision Ltd. and R.S.A. Test Systems Industry Ltd. (Collectively “RDT”) |
On June 19, 2022, Matrix IT, through Matrix Integration and Infrastructure Ltd., Matrix IT’s wholly owned subsidiary, acquired all of the share capital of RDT for cash consideration of NIS 44,012 (approximately $12,720), or NIS 41,006 (approximately $11,851) net of acquired cash. As part of the purchase agreement, the sellers may be entitled to additional future consideration contingent upon RDT meeting certain future operating profit targets. As of the acquisition date, Matrix IT estimates the future value of the contingent consideration at NIS 14,751 (approximately $4,263). RDT provides services in the field of multimedia systems. RDT markets software solutions and systems for a wide range of technologies, including control and automation solutions, test and measurement equipment, advanced technological solutions for testing data communication, EMC products, radio frequency (RF) and microwaves components, and serves, among other things, as a representative in Israel for dozens of international software and hardware vendors. 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. RDT’s results of operations were included in the consolidated financial statements of the Company commencing July 2022.
The following table summarizes the provisional estimated fair values (1) allocated to the RDT acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | 529 | ||
| Inventories | 2,513 | |||
| Property, plant and equipment | 669 | |||
| Intangible assets | 3,470 | |||
| Deferred taxes | (115 | ) | ||
| Credit from banks | (1,388 | ) | ||
| Other long-term liabilities | (62 | ) | ||
| Liabilities in respect of business combinations | (4,263 | ) | ||
| Goodwill | 10,498 | |||
| Total assets acquired net of acquired cash | $ | 11,851 |
| (1) | The estimated fair values of the tangible and intangible assets in respect of the acquisition of RDT 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-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.)
| c. | Acquisition of AVB Technologies Ltd. (“AVB Technologies”) |
On October 5, 2021, Matrix IT, through Matrix Integration and Infrastructure Ltd., Matrix’s wholly owned subsidiary, acquired 60% of the share capital of AVB Technologies for cash consideration of NIS 4,626 (approximately $1,433), or NIS 4,068 (approximately $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 IT estimated the future value of the contingent consideration at NIS 2,063 (approximately $639). 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.
The following table summarizes the estimated fair values allocated to AVB Technologies’ acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | 234 | ||
| Other long-term assets | 100 | |||
| Intangible assets | 972 | |||
| Deferred taxes | (224 | ) | ||
| Other long-term liabilities | (1,094 | ) | ||
| Non-controlling interests | (320 | ) | ||
| Goodwill | 1,592 | |||
| Total assets acquired net of acquired cash | $ | 1,260 |
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.)
| d. | Acquisition of I.T.D. Group Ltd. (“I.T.D. Group”) |
On April 29, 2021, Matrix IT acquired 75% of the share capital of the I.T.D. Group for cash consideration of NIS 5,750 (approximately $1,771) or NIS 4,141 net of acquired cash (approximately $1,276). 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 IT estimates the future value of the contingent consideration at NIS 223 (approximately $69). Matrix IT 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 estimated fair values 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 | $ | 98 | ||
| Other long-term assets | 179 | |||
| Intangible assets | 901 | |||
| Deferred taxes | (207 | ) | ||
| Liabilities in respect of business combination | (818 | ) | ||
| Other long-term liabilities | (137 | ) | ||
| Redeemable non-controlling interests | (145 | ) | ||
| Goodwill | 1,405 | |||
| Total assets acquired net of acquired cash | $ | 1,276 |
| e. | Acquisition of SQ Service Quality Ltd. (“SQ Service Quality”) |
On April 5, 2021, Babcom Centers Ltd., a subsidiary of Matrix IT, acquired 60% of the share capital of SQ Service Quality for cash consideration of NIS 4,043 (approximately $1,218) or NIS 2,734 net of acquired cash (approximately $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. Matrix IT and SQ Service Quality’s minority shareholder hold mutual call and put options for the remaining 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’s results of operations were included in the consolidated financial statements of the Company commencing April 2021.
The following table summarizes the estimated fair values allocated to the SQ Service Quality acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | 84 | ||
| Other long-term assets | 63 | |||
| Intangible assets | 431 | |||
| Deferred taxes | (99 | ) | ||
| Other long-term liabilities | (3 | ) | ||
| Redeemable non-controlling interests | (555 | ) | ||
| Goodwill | 901 | |||
| Total assets acquired net of acquired cash | $ | 822 |
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.)
| f. | Acquisition of A.A Engineering Ltd. (“A.A Engineering”) |
On April 5, 2021, Dana Engineering Ltd. (a subsidiary of Matrix IT), 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 IT estimates the future value of the contingent consideration at NIS 474 (approximately $143). Matrix IT holds a call option for the remaining 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.
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 estimated fair values 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 | $ | 389 | ||
| Other long-term assets | 104 | |||
| Intangible assets | 1,139 | |||
| Deferred taxes | (262 | ) | ||
| Other long-term liabilities | (260 | ) | ||
| Non-controlling interests | (527 | ) | ||
| Goodwill | 2,214 | |||
| Total assets acquired net of acquired cash | $ | 2,797 |
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.)
| v. | Michpal |
| a. | Acquisition of Formally Smart Form System Ltd. (“Formally”) |
On February 16, 2022, Michpal acquired 70% of the share capital of Formally, for a total consideration of NIS 44,833 (approximately $14,415) or NIS 43,768 (approximately $14,073) net of acquired cash. Michpal and the seller hold mutual call and put options, respectively, for the remaining 30% share interest in Formally. The options can be exercised during every year starting from January 1, 2023 in 3 equal portions of 10% each and for a period of 3 years thereafter (i.e. 10% of Formally’s outstanding share capital as of 1.1.23 and for a period of 3 years thereafter; 10% as of 1.1.24 and for a period of 3 years thereafter and 10% as of 1.1.24 and for a period of 3 years thereafter).The fair value of the put option measured on the acquisition date amounted to NIS 6,104 (approximately $1,936). Formally is an Israeli-based company and the creator of Formally Smart Form platform – a central server platform for managing knowledge and work processes, and for producing digital forms combined with a legally-binding eSignature technology allowing customers to create impressive documents in minutes and get them signed in a snap. Formally offers a variety of proprietary computerized and advanced tools for managing business processes trusted by Israel’s largest financial, banking, and insurance enterprises. Its “no-code” platform, allows to convert outdated forms into a digital process for any company freeing IT teams from ongoing maintenance issues and enables employees across the organization to deliver new digital products quickly and efficiently. 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. Formally’s results of operations were included in the consolidated financial statements of the Company commencing February 16, 2022.
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 liabilites excluding cash acquired | $ | (521 | ) | |
| Other long-term assets | 82 | |||
| Acquired technology | 2,468 | |||
| Customer relations | 6,727 | |||
| Deferred tax liabilities | (2,008 | ) | ||
| Other long-term liabilities | (548 | ) | ||
| Non-controlling interests | (1,963 | ) | ||
| Goodwill | 9,836 | |||
| Total assets acquired net of acquired cash | $ | 14,073 |
| vi. | ZAP Group: |
| a. | Acquisition of N.C Marketing and Advertising Ltd. (“Safra digital marketing”) and Marcomit Ltd. (“Marcomit”) |
During December 2022, Zap Group concluded the acquisition of 51% of the outstanding share capital of N.C Marketing and Advertising Ltd. (also known as “Safra digital marketing”) and 51% of the outstanding share capital of Marcomit Ltd. (“Marcomit”). Safra digital marketing is an Israeli company specializing in social media services including Facebook, Instagram and Tik-tok. Marcomit is an Israeli company specializing in digital branding for large enterprises including advanced branding materials for media and digital advertising.
F-66
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 total consideration paid for these acquisitions amounted to approximately $3,532, or $2,819 net of acquired cash. As part of the purchase agreements, the sellers of Safra digital marketing and Marcomit may be entitled to additional future consideration contingent upon meeting certain future operating profit targets. The fair value of such contingent considerations, as of the acquisition dates, amounted to $708. In addition, Zap and the minority shareholders of Safra digital marketing and Marcomit hold mutual call and put options for the remaining 49% interest. The fair value of the put options measured on the acquisition date amounted to approximately $4,021. 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 of Safra digital marketing and Marcomit have been included in the consolidated financial statements since their respective acquisition dates. The provisional estimated fair values allocated to customer relations, net of deferred tax liability and goodwill, amounted to $2,745 and $1,891, respectively.
| b. | Acquisition of the remaining rights in Winhelp Ofran partnership |
In February 2022, Zap Group acquired 49.9% of the rights in its controlled partnership, Winhelp Ofran, a provider of digital advertising solutions for domestic travel businesses in Israel, for consideration of NIS 11,000 (approximately $3,537), pursuant to which, Zap Group owns the entire rights in Winhelp Ofran partnership.
| vii. | Insync Staffing: |
On December 12, 2022, Insync Staffing acquired all of the outstanding share capital of Bear Staffing Services Corporation (“Bear Staffing”), a corporation duly organized under the laws of the State of Florida, for a total consideration of $7,737 (excluding $8,646 of acquired cash) with $5,276 paid in cash at closing, $589 paid in March 2023 and deferred payments of $957 and $915, respectively due on the first and second anniversaries of the closing date. Bear Staffing Corporation is a staffing agency providing talent for industries such as manufacturing, distribution, and call centers. Since its inception, Bear Staffing Corporation has provided more than 50,000 employees to over 2,000 employers across the United States. Leveraging leading-edge recruiting technology and their recruiting model, Bear Staffing has been able to find, attract, place, and retain talent for their clients nationwide. As a staffing agency that specializes in high-volume industries and skill sets, Bear Staffing’s objective is to provide targeted and efficient staffing solutions to meet the specific needs of its clients.
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. Bear Staffing’s results of operations were included in the consolidated financial statements of the Company commencing December 12, 2022.
F-67
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) of the acquired assets and assumed liabilities, with reference to the acquisition as of the acquisition date:
| Net assets excluding cash acquired | $ | 11 | ||
| Customer relations | 1,969 | |||
| Dividend to former shareholder | (7,327 | ) | ||
| Liabilities due to acquisitions | (2,461 | ) | ||
| Goodwill | 4,438 | |||
| Total assets acquired net of acquired cash | $ | (3,370 | ) |
| (1) | The estimated fair values of the tangible and intangible assets in respect of the acquisition of Bear Staffing 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. |
NOTE 4:- CASH AND CASH EQUIVALENTS
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Balance nominated in USD | $ | 190,457 | $ | 155,045 | ||||
| Balance nominated in NIS | 282,050 | 249,186 | ||||||
| Balance nominated in other currencies | 71,835 | 81,160 | ||||||
| $ | 544,342 | $ | 485,391 | |||||
NOTE 5:- PREPAID EXPESNES AND OTHER ACCOUNTS RECEIVAVABLE
The following table summarizes the composition of the Group’s prepaid expenses and other accounts receivable:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Prepaid expenses and advances to suppliers | $ | 42,190 | $ | 48,871 | ||||
| Government authorities | 17,908 | 20,911 | ||||||
| Employees | 430 | 326 | ||||||
| Related Parties | 281 | 278 | ||||||
| Others | 3,726 | 1,732 | ||||||
| $ | 64,535 | $ | 72,118 | |||||
F-68
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 6:- long-term investments and receivables
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Prepaid expenses and deposits | $ | 15,173 | $ | 17,139 | ||||
| Investments in financial assets designated at fair value through other comprehensive income | 9,870 | 680 | ||||||
| Trade receivables and unbilled receivables | 5,379 | 2,960 | ||||||
| Financial assets designated at fair value through profit or loss | 4,856 | 35 | ||||||
| Dividend preference derivative in TSG (see Note 8) | 3,000 | 2,023 | ||||||
| Others | 707 | 839 | ||||||
| $ | 38,985 | $ | 23,676 | |||||
Note 7:- 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, 2021 and 2022:
| Fair value measurements | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Financial assets at fair value through the other comprehensive income | 9,408 | - | 462 | 9,870 | ||||||||||||
| Financial assets measured at fair value through profit or loss | 738 | - | 4,762 | 5,500 | ||||||||||||
| Dividend preference derivative in TSG (1) | - | - | 3,000 | 3,000 | ||||||||||||
| Foreign currency derivative contracts | - | 109 | - | 109 | ||||||||||||
| $ | 10,146 | $ | 109 | $ | 8,224 | $ | 18,479 | |||||||||
| Fair value measurements | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Put options of non-controlling interests | - | - | 72,188 | 72,188 | ||||||||||||
| Contingent consideration in respect of business combination | - | - | 30,635 | 30,635 | ||||||||||||
| $ | - | $ | - | $ | 102,823 | $ | 102,823 | |||||||||
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:- Fair value measurement (Cont.)
| Fair value measurements | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Dividend preference derivative in TSG (1) | - | - | 2,023 | 2,023 | ||||||||||||
| Convertible bonds at fair value through profit or loss | - | 1,142 | - | 1,142 | ||||||||||||
| Foreign currency derivative contracts | - | 188 | - | 188 | ||||||||||||
| $ | - | $ | 1,330 | $ | 2,023 | $ | 3,353 | |||||||||
| Liabilities: | ||||||||||||||||
Put options of non-controlling interests | - | - | 71,278 | 71,278 | ||||||||||||
| Contingent consideration in respect of business combination | - | - | 24,495 | 24,495 | ||||||||||||
| $ | - | $ | - | $ | 95,773 | $ | 95,773 | |||||||||
| (1) | The fair value of dividend preference derivative in TSG was estimated using the Monte-Carlo simulation technique. |
Note 8:- Investments in companies accounted for at equity
The following table summarizes the Group’s investments in companies accounted for at equity:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| TSG (Joint venture) | 19,459 | 27,633 | ||||||
| Other | 1,287 | 1,267 | ||||||
| $ | 20,746 | $ | 28,900 | |||||
Investment in TSG
The Company holds directly a 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 $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 investments and receivables.
F-70
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 8:- Investments in companies accounted for at equity (Cont.)
| a. | The following table summarizes the balances related to the Company’s investment in TSG in the consolidated statements of financial position: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Investment in companies accounted for at equity method | ||||||||
| Shares | 11,291 | 18,391 | ||||||
| Capital note | 8,168 | 9,242 | ||||||
| $ | 19,459 | $ | 27,633 | |||||
| Long-term investments and receivables | ||||||||
| Dividend preference derivative at fair value through profit or loss | $ | 3,000 | $ | 2,023 | ||||
| b. | The following table summarizes the changes in the fair value of TSG’s dividend preference derivative: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Opening balance | $ | 2,023 | $ | 1,707 | ||||
| Increase in fair value recognized in profit or loss | 1,221 | 255 | ||||||
| Currency exchange rate in other comprehensive income | (244 | ) | 61 | |||||
| Closing balance | $ | 3,000 | $ | 2,023 | ||||
| c. | The following table summarizes the changes in the carrying amount of the Company’s investment in TSG: |
| January 1, 2020 | $ | 26,016 | ||
| Company’s share of profit | 1,318 | |||
| Company’s share of other comprehensive income | (169 | ) | ||
| December 31, 2020 | $ | 27,165 | ||
| Company’s share of profit | 340 | |||
| Company’s share of other comprehensive income | 128 | |||
| December 31, 2021 | $ | 27,633 | ||
| Company’s share of profit | (2,027 | ) | ||
| Company’s share of other comprehensive income | (3,053 | ) | ||
| Adjustments arising from translating financial statements from functional currency to presentation currency | (3,094 | ) | ||
| December 31, 2022 | $ | 19,459 |
F-71
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 8:- Investments in companies accounted for at equity (Cont.)
| d. | Summarized financial data of joint venture: |
| (i) | Summarized statements of financial position of TSG as of December 31, 2021 and 2022: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Current assets | 67,254 | 47,065 | ||||||
| Non-current assets | 65,627 | 27,557 | ||||||
| Current liabilities | (33,527 | ) | (25,167 | ) | ||||
| Non-current liabilities | (69,534 | ) | (6,299 | ) | ||||
| Net assets | 29,820 | 43,156 | ||||||
| Accumulated cost of share-based payment | (1,705 | ) | (1,282 | ) | ||||
| Total equity attributed to shareholders | $ | 28,115 | $ | 41,874 | ||||
| 50 | % | 50 | % | |||||
| Share of equity in TSG | 14,058 | 20,937 | ||||||
| Excess of fair value over carrying amount | 5,401 | 6,696 | ||||||
| Total investment carrying amount | $ | 19,459 | $ | 27,633 | ||||
| (ii) | Summarized operating results of TSG for the years ended December 31, 2022, 2021 and 2020: |
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Revenues | 69,714 | 77,035 | 77,661 | |||||||||
| Net income | (2,780 | ) | 2,104 | 4,059 | ||||||||
| Other comprehensive income | (6,107 | ) | 255 | (338 | ) | |||||||
| Total comprehensive income | (8,887 | ) | 2,359 | 3,721 | ||||||||
| Company’s share in TSG | 50 | % | 50 | % | 50 | % | ||||||
| (4,444 | ) | 1,180 | 1,861 | |||||||||
| Amortization of excess cost of intangible assets net of tax | (637 | ) | (712 | ) | (712 | ) | ||||||
| Company’s share of total comprehensive income | (5,081 | ) | 468 | 1,149 | ||||||||
| Company’s share of other comprehensive income | (3,053 | ) | 128 | (169 | ) | |||||||
| Company’s share of profit | (2,027 | ) | 340 | 1,318 | ||||||||
| (5,081 | ) | 468 | 1,149 | |||||||||
F-72
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- PROPERTY, PLANTS AND EQUIPMENT, NET
| a. | Property, plants and equipment, net, are comprised of the following as of the below dates: |
| Computers, furniture and equipment | Leasehold improvements | Motor vehicles | Software | Total | ||||||||||||||||
| Cost: | ||||||||||||||||||||
| Balance at January 1, 2022 | $ | 145,333 | $ | 41,911 | $ | 8,305 | $ | 2,546 | $ | 198,095 | ||||||||||
| Entrance to consolidation | 4,024 | 453 | 351 | 111 | 4,939 | |||||||||||||||
| Purchases | 17,298 | 4,675 | 368 | 114 | 22,455 | |||||||||||||||
| Disposals | (10,735 | ) | (418 | ) | (560 | ) | (25 | ) | (11,738 | ) | ||||||||||
| Loss of Control | (684 | ) | (1,337 | ) | - | - | (2,021 | ) | ||||||||||||
| Exchange rate differences from translation of foreign operations | (15,259 | ) | (2,468 | ) | (967 | ) | (327 | ) | (19,021 | ) | ||||||||||
| Balance at December 31, 2022 | $ | 139,977 | $ | 42,816 | $ | 7,497 | $ | 2,419 | $ | 192,709 | ||||||||||
| Accumulated depreciation: | ||||||||||||||||||||
| Balance at January 1, 2022 | $ | 108,762 | $ | 25,444 | $ | 4,673 | $ | 2,330 | $ | 141,209 | ||||||||||
| Entrance to consolidation | 2,803 | 388 | 219 | 107 | 3,517 | |||||||||||||||
| Depreciation | 14,709 | 2,834 | 909 | 75 | 18,527 | |||||||||||||||
| Disposals | (10,287 | ) | (242 | ) | (384 | ) | (23 | ) | (10,936 | ) | ||||||||||
| Loss of Control | (308 | ) | (971 | ) | - | - | (1,279 | ) | ||||||||||||
| Exchange rate differences from translation of foreign operations | (9,805 | ) | (2,691 | ) | (573 | ) | (231 | ) | (13,300 | ) | ||||||||||
| Balance at December 31,2022 | $ | 105,874 | $ | 24,762 | $ | 4,844 | $ | 2,258 | $ | 137,738 | ||||||||||
| Depreciated cost at December 31, 2022 | $ | 34,103 | $ | 18,054 | $ | 2,653 | $ | 161 | $ | 54,971 | ||||||||||
F-73
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- PROPERTY, PLANTS AND EQUIPMENT, NET (Cont.)
| Computers, furniture and equipment | Leasehold improvements | Motor vehicles | Software | Total | ||||||||||||||||
| Cost: | ||||||||||||||||||||
| Balance at January 1, 2021 | $ | 137,947 | $ | 40,458 | $ | 8,571 | $ | 2,489 | $ | 189,465 | ||||||||||
| Entrance to consolidation | 6,913 | 1,687 | 420 | 8 | 9,028 | |||||||||||||||
| Purchases | 14,593 | 2,442 | 645 | 114 | 17,794 | |||||||||||||||
| Disposals | (16,699 | ) | (1,473 | ) | (1,542 | ) | (5 | ) | (19,719 | ) | ||||||||||
| Loss of Control | - | (2,288 | ) | - | - | (2,288 | ) | |||||||||||||
| Exchange rate differences from translation of foreign operations | 2,579 | 1,085 | 211 | (60 | ) | 3,815 | ||||||||||||||
| Balance at December 31, 2021 | $ | 145,333 | $ | 41,911 | $ | 8,305 | $ | 2,546 | $ | 198,095 | ||||||||||
| Accumulated depreciation: | ||||||||||||||||||||
| Balance at January 1, 2021 | 102,197 | 22,024 | 3,855 | 2,213 | 130,289 | |||||||||||||||
| Entrance to consolidation | 5,693 | 1,495 | 331 | - | 7,519 | |||||||||||||||
| Depreciation | 15,805 | 3,532 | 991 | 140 | 20,468 | |||||||||||||||
| Disposals | (15,328 | ) | (2,242 | ) | (954 | ) | (5 | ) | (18,529 | ) | ||||||||||
| Exchange rate differences from translation of foreign operations | 395 | 635 | 450 | (18 | ) | 1,462 | ||||||||||||||
| Balance at December 31, 2021 | $ | 108,762 | $ | 25,444 | $ | 4,673 | $ | 2,330 | $ | 141,209 | ||||||||||
| Depreciated cost at December 31, 2021 | $ | 36,571 | $ | 16,467 | $ | 3,632 | $ | 216 | $ | 56,886 | ||||||||||
| b. | Depreciation expenses totaled $18,527, $20,468 and $16,513 for the years ended December 31, 2022, 2021 and 2020, 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 10:- Intangible Assets, Net
| a. | Intangible assets, net, are comprised of the following as of the below dates: |
| Customer relationship | Capitalized Software costs | Acquired technology | Other | Total | ||||||||||||||||
| Cost: | ||||||||||||||||||||
| Balance at January 1, 2022 | $ | 307,256 | $ | 289,506 | $ | 97,395 | $ | 12,906 | $ | 707,063 | ||||||||||
| Entrance to consolidation | 26,643 | - | 6,152 | 843 | 33,638 | |||||||||||||||
| Purchases | - | 14,732 | 1,181 | - | 15,913 | |||||||||||||||
| Disposals | - | (415 | ) | (1,204 | ) | - | (1,619 | ) | ||||||||||||
| Exchange rate differences from translation of foreign operations | (23,920 | ) | (20,785 | ) | (3,187 | ) | (1,479 | ) | (49,371 | ) | ||||||||||
| Balance at December 31, 2022 | $ | 309,979 | $ | 283,038 | $ | 100,337 | $ | 12,270 | $ | 705,624 | ||||||||||
| Accumulated depreciation: | ||||||||||||||||||||
| Balance at January 1, 2022 | 154,112 | 243,264 | 64,381 | 3,370 | 465,127 | |||||||||||||||
| Depreciation | 26,668 | 11,562 | 9,986 | 1,285 | 49,501 | |||||||||||||||
| Disposals | - | (416 | ) | (1,205 | ) | - | (1,621 | ) | ||||||||||||
| Exchange rate differences from translation of foreign operations | (11,213 | ) | (17,157 | ) | (1,319 | ) | (420 | ) | (30,109 | ) | ||||||||||
| Balance at December 31,2022 | $ | 169,567 | $ | 237,253 | $ | 71,843 | $ | 4,235 | $ | 482,898 | ||||||||||
| Depreciated cost at December 31, 2022 | $ | 140,412 | $ | 45,785 | $ | 28,494 | $ | 8,035 | $ | 222,726 | ||||||||||
| Customer relationship | Capitalized Software costs | Acquired technology | Other | Total | ||||||||||||||||
| Cost: | ||||||||||||||||||||
| Balance at January 1, 2021 | $ | 253,064 | $ | 269,374 | $ | 96,754 | $ | 3,657 | $ | 622,849 | ||||||||||
| Entrance to consolidation | 51,348 | - | - | 9,126 | 60,474 | |||||||||||||||
| Purchases | 249 | 14,272 | 1,070 | - | 15,591 | |||||||||||||||
| Exchange rate differences from translation of foreign operations | 2,595 | 5,860 | (429 | ) | 123 | 8,149 | ||||||||||||||
| Balance at December 31, 2021 | $ | 307,256 | $ | 289,506 | $ | 97,395 | $ | 12,906 | $ | 707,063 | ||||||||||
F-75
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NotE 10:- Intangible Assets, Net (Cont.)
| Customer relationship | Capitalized Software costs | Acquired technology | Other | Total | ||||||||||||||||
| Balance at January 1, 2021 | $ | 125,577 | $ | 218,762 | $ | 52,107 | $ | 2,380 | $ | 398,826 | ||||||||||
| Depreciation | 25,960 | 19,697 | 12,096 | 931 | 58,684 | |||||||||||||||
| Exchange rate differences from translation of foreign operations | 2,575 | 4,805 | 178 | 59 | 7,617 | |||||||||||||||
| Balance at December 31,2021 | $ | 154,112 | $ | 243,264 | $ | 64,381 | $ | 3,370 | $ | 465,127 | ||||||||||
| Depreciated cost at December 31, 2021 | $ | 153,144 | $ | 46,242 | $ | 33,014 | $ | 9,536 | $ | 241,936 | ||||||||||
| b. | Amortization expenses totaled $49,501, $58,611, and $44,586 for the years ended December 31, 2022, 2021 and 2020, respectively. |
Note 11:- Goodwill
The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Opening balance | $ | 932,854 | $ | 872,424 | ||||
| Acquisition of subsidiaries | 52,651 | 49,416 | ||||||
| Classifications | (1,502 | ) | 1,585 | |||||
| Foreign currency translation adjustments | (57,842 | ) | 9,429 | |||||
| Closing balance | $ | 926,161 | $ | 932,854 | ||||
The Group performed annual impairment tests as of December 31, 2022, 2021 and 2020 and did not identify any impairment losses (see Note 2(20)).
Note 12:- short term Liabilities to banks and others
| December 31, | December 31, | |||||||||||||
| 2022 | 2022 | 2021 | ||||||||||||
| Interest rate | ||||||||||||||
| % | Currency | |||||||||||||
| Current maturities of long-term loans from banks and other financial institutions (Note 14) | 1.4 - Prime + 1.5 | NIS | 78,883 | 85,280 | ||||||||||
| Commercial securities not listed | Prime+ 0.5 | NIS | 56,834 | 64,309 | ||||||||||
| Short-term bank loans and credit line | 1.6-4 | NIS and USD | 13,168 | 22,070 | ||||||||||
| Current maturities of long-term loans from banks (Note 14) | 2.1%+LIBOR-SOFR+2.25% | NIS Linked to USD | 8,908 | 3,950 | ||||||||||
| Short-term interest on long-term loans from other financial institutions | 2.6 - Prime + 1.5 | NIS | 89 | 87 | ||||||||||
| $ | 157,882 | $ | 175,696 | |||||||||||
F-76
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 13:- other accounts payable
Other accounts payable are comprised of the following as of the below dates:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Government institutions | $ | 43,955 | $ | 39,480 | ||||
| Accrued expenses and other current liabilities | 42,385 | 40,931 | ||||||
| $ | 86,340 | $ | 80,411 | |||||
Note 14:- Long term Liabilities to Banks and Others
| a. | Long term liabilities to banks and others are comprised of the following as of the below dates: |
| Long-term liabilities | Current maturities | Long-term liabilities net of current maturities | Total long-term liabilities net of current maturities | |||||||||||||||
| Interest rate % | Currency | December 31, 2022 | December 31, 2021 | |||||||||||||||
| 1.4%-5% | NIS (Unlinked) | 167,258 | 78,726 | $ | 88,532 | $ | 145,979 | |||||||||||
| 2.1%+LIBOR-SOFR+2.25% | USD (Unlinked) and NIS Linked to USD | 36,407 | 9,065 | 27,342 | 11,250 | |||||||||||||
| 203,665 | 87,791 | $ | 115,874 | $ | 157,229 | |||||||||||||
| b. | Maturity dates: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| First year (current maturities) | $ | 87,791 | $ | 89,230 | ||||
| Second year | 67,956 | 76,627 | ||||||
| Third year | 32,430 | 51,835 | ||||||
| Fourth year | 9,998 | 22,716 | ||||||
| Fifth year and thereafter | 5,490 | 6,051 | ||||||
| $ | 203,665 | $ | 246,459 | |||||
| c. | Details of liens, guarantees and credit facilities are described in Note 20. |
F-77
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- DEBENTURES
The Group’s liabilities under debentures are attributable to debentures issued by Formula, Sapiens and Matrix. The debentures are all listed for trading on the Tel-Aviv Stock Exchange.
| a. | 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, 2022 | |||||||||||||||||||||||||||||||
| Formula’s Series A Secured Debentures (2.8%) | 2.4 | NIS (Unlinked) | NIS 68,422 | $ | 19,444 | 85 | 9,722 | 9,807 | - | 19,529 | ||||||||||||||||||||||
| Formula’s Series C Secured Debentures (2.3%) | 2.7 | NIS (Unlinked) | NIS 493,244 | $ | 140,166 | (1,477 | ) | 23,012 | 115,677 | 265 | 138,954 | |||||||||||||||||||||
| Sapiens’ Series B Debentures (3.37%) | 3.3 | NIS (Linked to fix rate of USD) | NIS 280,000 | $ | 79,186 | (114 | ) | 19,796 | 59,276 | 1,337 | 80,409 | |||||||||||||||||||||
| Matrix IT’ Series B Debentures (4.1%) | 4.5 | NIS (Unlinked) | NIS 475,615 | $ | 135,156 | (1,343 | ) | 9,650 | 124,163 | 1,220 | 135,033 | |||||||||||||||||||||
| $ | 373,952 | (2,849 | ) | 62,180 | 308,923 | 2,822 | $ | 373,925 | ||||||||||||||||||||||||
| 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%) | 2.4 | NIS (Unlinked) | NIS 102,633 | $ | 33,000 | 217 | 11,000 | 22,217 | 457 | 33,674 | ||||||||||||||||||||||
| Formula’s Series C Secured Debentures (2.3%) | 2.2 | NIS (Unlinked) | NIS 374,225 | $ | 120,330 | 472 | 16,970 | 103,832 | 227 | 121,029 | ||||||||||||||||||||||
| Sapiens’ Series B Debentures (3.37%) | 3.3 | NIS (Linked to fix rate of USD) | NIS 350,000 | $ | 98,980 | (198 | ) | 19,796 | 78,986 | 5 | 98,787 | |||||||||||||||||||||
| $ | 252,310 | 491 | 47,766 | 205,035 | 689 | $ | 253,490 | |||||||||||||||||||||||||
F-78
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- DEBENTURES (Cont.)
During the years ended December 31, 2022 and 2021, the Group recorded $7,533 and $7,056, respectively, of interest expenses, and $158 and ($109), respectively, of amortization of debt premium, discount and issuance costs, net in respect of the Group’s debentures.
| b. | Scheduled aggregate principal annual payments of the debentures: |
| Repayment amount | ||||
| 2023 | 62,180 | |||
| 2024 | 71,830 | |||
| 2025 | 86,168 | |||
| 2026 | 86,168 | |||
| 2027 | 67,606 | |||
| $ | 373,952 | |||
| c. | Formula’s debentures |
| i) | 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 $26,295), at a purchase price equal to 100% of their par value, payable in eight equal annual installments on July 2nd of each of the years 2017 through 2024. 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 2nd and January 2nd 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, 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 IT, Magic Software and Sapiens (see Note 20a).
F-79
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- DEBENTURES (Cont.)
The Formula Systems Series A Secured Debentures are listed for trading on the Tel-Aviv Stock Exchange. As of December 31, 2022 and 2021, the fair value of Formula’s Series A Secured Debentures, based on the quoted market price on the Tel-Aviv Stock Exchange, was approximately $19,202 and $34,057, respectively.
| 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 $82,600), at a purchase price equal to 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 2.29% per annum (subject to adjustments based on the credit rating of the debentures), payable on December 1st and June 1st of each of the years 2019 through 2026. Issuance costs, including an early commitment commission of approximately NIS 3,355 (approximately $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, 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) was allocated to the Formula Systems Series C Secured Debentures and is amortized as financial income over the remaining term of the Formula Systems Series A Secured Debentures due in 2026.
On August 30, 2022, Formula issued additional Formula Systems Series C Secured Debentures in an aggregate principal amount of NIS 200,000 (approximately $60,514) 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 August 2022 were NIS 195,000 (approximately $59,002), out of which NIS 1,126 was attributed to interest payable (approximately $341). Debt deficit of NIS 7,076 (approximately $2,141) including issuance costs of NIS 950 (approximately $287) were allocated to the Formula Systems Series C Secured Debentures and are amortized as financial expenses over the remaining term of the Formula Systems Series C 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 and in August 2022 in private placements, 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 IT, Magic Software and Sapiens (see Note 20a).
F-80
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- DEBENTURES (Cont.)
The Series C Secured Debentures are listed for trading on the Tel-Aviv Stock Exchange. As of December 31, 2022 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 $133,046 and $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.
In accordance with the indenture for the Formula Systems Series A Secured Debentures and the 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 20a and 20c(1)(i)).
| d. | Sapiens’ Series B Debentures |
On September 16, 2017, 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 1st 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 1st and July 1st 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, 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. 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, 2022 and 2021, the fair value of Sapiens’ Series B Debentures, based on the quoted market price on the Tel-Aviv Stock Exchange, was approximately $75,192 and $100,465, respectively.
F-81
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- DEBENTURES (Cont.)
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 20c(3)(iii)).
| e. | Matrix IT Series B Debentures |
On September 18, 2022, Matrix IT issued the Matrix IT Series B Debentures in an aggregate principal amount of NIS 295,249 (approximately $87,872), at a purchase price equal to 100% of their par value. The principal due under the Matrix IT Series B Debentures is payable in thirteen (13) semi-annual installments each equal to approximately 7.14% of the aggregate principal amount (or approximately NIS 21,081) on February 1 and on August 1 of each of the years 2023 through 2029 with the last payment equal to 7.18% of the aggregate principal amount (or approximately NIS 21,196) paid on February 1, 2030. The outstanding principal amount under the Matrix IT Series B Debentures bears interest at a fixed rate of 4.1% per annum (subject to adjustments based on the credit rating of the debentures), payable on February 1st and August 1st of each of the years 2023, through 2030. Issuance costs including an early commitment commission of approximately NIS 2,158 (approximately $642) were allocated to the Matrix IT Series B Debentures and are amortized as financial expenses over the term of the Matrix IT Series B Debentures due in 2030.
On December 4, 2022, Matrix IT issued additional Matrix IT Series B Debentures in an aggregate principal amount of NIS 180,366 (approximately $53,680) through a private placement to qualified investors in Israel. The gross proceeds received by Matrix IT for the issuance of Matrix IT Series B Debentures in December 2022 were NIS 178,385 (approximately $53,107), out of which NIS 1,582 was attributed to interest payable (approximately $471). Debt deficit of NIS 1,981 (approximately $590) including issuance costs of NIS 399 (approximately $119) were allocated to the Matrix IT Series B Debentures and are amortized as financial expenses over the remaining term of the Matrix IT Series B Debentures due in 2030.
The Matrix IT Series B Debentures issued in September 2022, together with the Matrix IT Series B Debentures sold in December 2022 in a private placement, form one single series with identical terms and conditions.
As of December 31, 2022, the fair value of Matrix IT’s Series B Secured Debentures, based on the quoted market price on the Tel-Aviv Stock Exchange, was approximately $135,156.
F-82
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 16:- RELATED PARTies TRANSACTIONS
| a) | 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, 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, 2022, 2021 and 2020, Asseco provided back-office services, professional services and fixed assets to Sapiens’ wholly owned subsidiary, Sapiens Poland, in amounts totaling approximately $181, $197 and $521, respectively.
During the years ended December 31, 2022, 2021 and 2020, Sapiens Poland performed services as a sub-contractor on behalf of Asseco for clients of Asseco in total amounts of approximately $2,900, $3,200 and $3,100, 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, 2022 and 2021 the Group had trade payable balances due from its transactions with Asseco, as detailed above, in amounts of $2,927 and $3,187, respectively. As of December 31, 2022 and 2021, the Group had trade receivables balances due from its transactions with Asseco, as detailed above, in amounts of approximately $1,149 and $852, respectively.
| b) | Fees paid for board services in affiliates |
Sapiens paid Formula director fees for the years ended December 31, 2022, 2021 and 2020, of approximately $28.6, $26.7 and $29.6, respectively, in respect of Mr. Guy Bernstein, Sapiens’ Chairman and Formula’s chief executive officer.
Matrix IT paid Formula director fees for the years ended December 31, 2022, 2021 and 2020, of approximately $33.2, $36.7 and $31.4, respectively, in respect of Mr. Guy Bernstein, Matrix IT’s Chairman and Formula’s chief executive officer.
| c) | Compensation of key officers of the Company |
The following amounts disclosed in the table are recognized as an expense during the reporting period related to officers and directors of the Company:
| Year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Short-term employee benefits | $ | 4,665 | $ | 3,577 | ||||
| Share-based compensation | 8,104 | 7,440 | ||||||
| $ | 12,769 | $ | 11,017 | |||||
| d) | Back-office services |
During the years ended December 31, 2022, 2021 and 2020, Magic Software provided back-office services to Formula in amounts totaling approximately $240, $160 and $138, respectively.
| e) | 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-83
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 17:- LEASES
The Group leases substantially all of its office space and vehicles under operating leases. 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:
| 2023 | $ | 46,489 | ||
| 2024 | 27,416 | |||
| 2025 | 13,229 | |||
| 2026 | 12,225 | |||
| 2027 | 11,086 | |||
| 2028 and thereafter | 26,763 | |||
| Total undiscounted cash flows | $ | 137,208 | ||
| Less imputed interest | (12,244 | ) | ||
| Present value of lease liabilities | $ | 124,964 |
| a. | Information on leases: |
| Year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Interest expense on lease liabilities | $ | 4,822 | $ | 5,377 | ||||
| Total cash outflow for leases | $ | 49,702 | $ | 44,086 | ||||
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:- LEASES (Cont.)
| b. | Disclosures in respect of right-of-use assets: |
| Land and buildings | Motor vehicles | Total | ||||||||||
| Cost: | ||||||||||||
| Balance as of January 1, 2022 | $ | 173,450 | $ | 54,036 | $ | 227,486 | ||||||
| Additions during the year: | ||||||||||||
| New leases | 30,711 | 22,483 | 53,194 | |||||||||
| Adjustments for indexation | 2,438 | 1,017 | 3,455 | |||||||||
| Adjustments arising from translating financial statements of foreign operations | (15,571 | ) | (5,471 | ) | (21,042 | ) | ||||||
| Modification of leases | 589 | 89 | 678 | |||||||||
| Acquisition of subsidiaries | 2,714 | 40 | 2,754 | |||||||||
| Disposals during the year: | ||||||||||||
| Termination of leases | (14,714 | ) | (21,942 | ) | (36,656 | ) | ||||||
| Balance as of December 31, 2022 | $ | 179,617 | $ | 50,252 | $ | 229,869 | ||||||
| Accumulated depreciation: | ||||||||||||
| Balance as of January 1, 2022 | 77,669 | 33,984 | 111,653 | |||||||||
| Additions during the year: | ||||||||||||
| Depreciation | 31,387 | 15,893 | 47,280 | |||||||||
| Adjustments arising from translating financial statements of foreign operations | (6,902 | ) | (3,416 | ) | (10,318 | ) | ||||||
| Disposals during the year: | ||||||||||||
| Termination of leases | (13,725 | ) | (21,861 | ) | (35,586 | ) | ||||||
| Balance as of December 31, 2022 | 88,429 | 24,600 | 113,029 | |||||||||
| Depreciated cost at December 31, 2022 | $ | 91,188 | $ | 25,652 | $ | 116,840 | ||||||
| Land and buildings | Motor vehicles | Total | ||||||||||
| Cost: | ||||||||||||
| Balance as of January 1, 2021 | $ | 159,764 | $ | 27,977 | $ | 187,741 | ||||||
| Additions during the year: | ||||||||||||
| New leases | 16,868 | 24,694 | 41,562 | |||||||||
| Adjustments for indexation | 989 | 495 | 1,484 | |||||||||
| Adjustments arising from translating financial statements of foreign operations | 2,900 | 1,864 | 4,764 | |||||||||
| Acquisition of subsidiaries | 1,129 | - | 1,129 | |||||||||
| Disposals during the year: | ||||||||||||
| Termination of leases | (8,200 | ) | (994 | ) | (9,194 | ) | ||||||
| Balance as of December 31, 2021 | $ | 173,450 | $ | 54,036 | $ | 227,486 | ||||||
| Accumulated depreciation: | ||||||||||||
| Balance as of January 1, 2021 | 49,187 | 21,003 | 70,190 | |||||||||
| Additions during the year: | ||||||||||||
| Depreciation | 30,398 | 12,634 | 43,032 | |||||||||
| Adjustments arising from translating financial statements of foreign operations | 2,525 | 1,226 | 3,751 | |||||||||
| Disposals during the year: | ||||||||||||
| Termination of leases | (4,441 | ) | (879 | ) | (5,320 | ) | ||||||
| Balance as of December 31, 2021 | 77,669 | 33,984 | 111,653 | |||||||||
| Depreciated cost at December 31, 2021 | $ | 95,781 | $ | 20,052 | $ | 115,833 | ||||||
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 Option Plans
| a) | 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, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| General and administrative expenses | 14,953 | 14,767 | 7,856 | |||||||||
| $ | 14,953 | $ | 14,767 | $ | 7,856 | |||||||
| b) | Formula: |
In March 2011, the Company’s board of directors adopted Formula’s 2011 Share Incentive Plan (the “2011 Plan”). Pursuant to the 2011 Plan, the Company may grant from time to time to its employees, office holders and consultants’ options to purchase, share based awards or restricted shares with respect to, up to an aggregate of 545,000 ordinary shares of the Company. The 2011 Plan is administered by the Company’s board of directors. The 2011 Plan provides that options, restricted shares or other stock-based awards may be granted, from time to time, to such grantees to be determined by the Company’s board of directors, at such exercise prices and with such vesting or other terms as shall be determined by the board at its sole and absolute discretion. In March 2012, the Company’s board of directors increased the amount of ordinary shares reserved for issuance under the 2011 Share Incentive Plan by 1,200,000 shares. Upon the lapse of ten years following the adoption of the 2011 Plan, no further grants could be made under the plan. Consequently, in August 2021, the Company adopted its 2021 Share Incentive Plan (the “2021 Plan”). Pursuant to the 2021 Plan, we may grant from time to time to the Company’s employees, office holders and consultants’ options to purchase, share-based awards or restricted shares with respect to, up to an aggregate of 350,000 Ordinary shares (including 48,378 Ordinary shares that were reserved for issuance under the 2011 Plan and not subject to outstanding grants and transferred to the 2021 Plan). The 2021 Plan is administered by the Company’s board of directors. The 2021 Plan provides that options, restricted shares, or other stock-based awards may be granted, from time to time, to such grantees to be determined by the Company’s board of directors, at such exercise prices and with such vesting or other terms as shall be determined by the Company’s board of directors at its sole and absolute discretion.
Of the awards available for grant under the 2011 Plan, the Company approved the grant, in March 2011, of options to purchase 1,122,782 ordinary shares to the Company’s Chief Executive Officer, each to be exercisable for NIS 0.01 per share. The Company also approved the grant of 10,000 restricted shares to its Chief Financial Officer on each of November 13, 2014 and August 17, 2017 and the grant of 10,000 restricted shares to its Chief Operational Officer on November 19, 2017, in each case under the 2011 Plan.
In August 2017, Formula’s board of directors, following the approval by Formula’s compensation committee, awarded its chief financial officer 10,000 restricted shares under the 2011 Plan (the “new restricted shares”). 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 $371 ($37.1 per share).
F-86
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
In March 2022, Formula’s board of directors, following the approval by Formula’s compensation committee, awarded its chief financial officer 21,000 restricted shares under the 2021 Plan (the “new restricted shares”). These restricted shares vest on a quarterly basis over a six-year period, commencing on March 15, 2022 and concluding on December 31, 2027, 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 $232 ($96.7 per share).
The total compensation expense that the Company recorded in its statement of profit or loss for the years ended December 31, 2022 and 2021 in respect of its chief financial officer was $973 and $0, respectively. As of December 31, 2022, Formula’s chief financial officer holds 31,834 Ordinary shares, of which 16,834 are fully vested.
In March 2022, Formula’s board of directors, following the approval by Formula’s compensation committee, awarded employees of the Company 2,400 restricted shares under the 2021 Plan (the “new restricted shares”). These restricted shares vest at certain points in time over a six-year period, commencing on March 15, 2022 and concluding on December 31, 2027. The total fair value of the grant was calculated based on the Formula share price on the grant date and equaled $232 ($96.7 per share).
In November 2018, Formula’s board of directors, following the approval by Formula’s compensation committee, awarded its chief operational officer 10,000 restricted shares under the 2011 plan (the “restricted shares”). 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, 2022, 2021 and 2020 was $21, $52 and $98, respectively. As of December 31, 2022 Formula’s chief operational officer holds 10,000 restricted shares from this grant.
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, 611,771 restricted stock units (“RSUs”) in respect of ordinary shares of the Company. 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 105% of 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.
F-87
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
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) 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 105% of 75% of the average EBITDA for the three fiscal years that consist of the subject fiscal year and the 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 20%.
The total fair value of the grant was calculated based on the Formula share price on the grant date and equaled NIS 170,684, or $50,054 ($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, 2022, was approximately $7,089.
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.
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.
| 1 | “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 |
F-88
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
Total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Formula equity incentive plan as of December 31, 2022 and 2021 were $34,972 and $45,973, respectively.
In December 2020, a motion to certify a derivative suit, referred to as the Motion, was filed against the Company by a shareholder, who is also referred to as the Plaintiff, in the district court (economic division) of Tel Aviv-Jaffa, Israel, naming each of our then acting five directors, as well as our chief executive officer and chief financial officer as defendants.
The suit challenged the legality, under the Companies Law, of, among other things, compensation approved for the chief executive officer, including the re-approval by our compensation committee and board of the subject eight-year RSU award to our chief executive officer.
On January 12, 2023, the Company held a special general meeting of shareholders for its shareholders to re-affirm the subject grant of RSUs (reflecting the adjusted 66.67%-33.33% ratio of time-based-vesting to performance-based-vesting RSUs) to the Company’s chief executive officer. Although the Company believes that the legal challenge to the original re-approval, in November 2020, by the compensation committee and the board of directors of this RSUs grant were without merit, the Company nevertheless brought the re-affirmation to its shareholders.
The January 12, 2023 special general shareholders meeting did not re-affirm the RSUs grant. On January 15, and 16, 2023, the Company’s compensation committee and board of directors, respectively, acting in accordance with the Companies Law, re-affirmed the RSUs grant once again. Since such additional re-affirmation by the Company’s shareholders, compensation committee and board of directors was not required by law, the Company considered November 2020 as the grant date for accounting purposes, in accordance with IFRS 2.
| c) | Matrix IT: |
In December 2017, Matrix IT extended its agreement with Revava Management Company Ltd. through which its chief executive officer, Mr. Moti Gutman, provides services to Matrix IT, for five years’ term starting on January 1, 2018. As part of the new agreement in January 2018, Matrix IT 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 IT’s financial statements for each respective year, and subject to certain conditions. In 2022, 51,378 restricted share units (RSU) were vested and exercised. As of December 31, 2022 Mr. Gutman holds 51,378 restricted share units (RSUs) from this grant.
F-89
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
In December 2022, Matrix IT entered into a new employment agreement with its chief executive officer, Mr. Moti Gutman, for the provision of management services for a term of five years starting on January 1, 2023. As part of the new employment agreement, Matrix IT awarded Mr. Gutman 375,000 Matrix restricted shares. 40% of the options will be vested on December 31, 2024 with the remaining amount vesting in equal parts on December 31, 2025, 2026 and 2027 but any case not before the publication of Matrix IT’s financial statements for each respective year.
The fair value of the restricted shares amounted on the date of grant to NIS 27,851 (approximately $7,914).
In January 2019, Matrix IT’s board of directors approved, following the approval by Matrix IT’s compensation committee, the grant of 1,440,000 options which are exercisable into up to 1,440,000 ordinary shares of Matrix IT of NIS 1 par value each, to 20 senior officers of Matrix IT. 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 IT not receiving any cash consideration for the issuance of its shares.
In February 2019, the general shareholder meeting of Matrix IT approved, after obtaining the approval of Matrix IT’s compensation committee and Matrix IT’s board of directors the grant of 80,000 options which are exercisable into up to 80,000 ordinary shares of Matrix IT of NIS 1 par value, to the President and Vice Chairman of the Matrix IT 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 IT not receiving any cash consideration for the issuance of its shares. In January 2022, the general shareholder meeting of Matrix IT approved, after obtaining the approval of Matrix IT’s compensation committee and Matrix IT’s board of directors the acceleration of the third tranche so that tranche will vest on January 31, 2022, Matrix IT’s President and Vice Chairman of the Matrix IT 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 0.5% -1.6%, early exercise factor is 70% and expected volatility is 24%. The contractual life of the options is 5 years from the date of grant.
F-90
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
The following table summarizes Matrix IT’s employee stock-based compensation activity during the year ended December 31, 2022:
Number of options | Weighted average exercise price | Weighted average (in years) | Aggregate intrinsic value | |||||||||||||
| Outstanding at January 1, 2022 | 862,756 | 10.07 | 1.93 | 17,513 | ||||||||||||
| Expired and forfeited | (12,500 | ) | 10.08 | |||||||||||||
| Exercised | (451,378 | ) | 10.11 | - | 7,786 | |||||||||||
| Outstanding at December 31, 2022 | 398,878 | 7.66 | 0.9 | 5,144 | ||||||||||||
| Exercisable at December 31, 2022 | 51,378 | - | - | 1,056 | ||||||||||||
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 IT’s 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 IT equity incentive plan as of December 31, 2022 and 2021 were $0 and $428, respectively.
| d) | Sapiens: |
The following table summarizes Sapiens’ stock-based compensation activity during the year ended December 31, 2022:
| Year ended December 31, 2022 | ||||||||||||||||
| Amount of options | Weighted average exercise price | Weighted average remaining contractual life (in years) | Aggregate intrinsic value | |||||||||||||
| Outstanding at January 1, 2022 | 1,835,385 | 22.27 | 3.77 | 22,374 | ||||||||||||
| Granted | 404,500 | 21.19 | ||||||||||||||
| Exercised | (21,253 | ) | 10.65 | 250 | ||||||||||||
| Expired and forfeited | (85,869 | ) | 24.07 | |||||||||||||
| Outstanding at December 31, 2022 | 2,132,763 | 21.51 | 3.30 | 5,531 | ||||||||||||
| Exercisable at December 31, 2022 | 1,010,513 | 16.21 | 1.95 | 4,305 | ||||||||||||
In 2022, 2021 and 2020, Sapiens granted 404,500, 847,000 and 315,000 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, 2022, 2021 and 2020 were $7.22, $10.35 and $7.99, 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, 2022, 2021 and 2020 was $250, $8,505 and $11,658, respectively.
F-91
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
The options outstanding under Sapiens’ stock option plans as of December 31, 2022 have been separated into ranges of exercise price as follows:
| Weighted | |||||||||||||||||||||
| Options | Weighted | Options | Average | ||||||||||||||||||
| outstanding | Average | Weighted | Exercisable | Exercise | |||||||||||||||||
| as of | remaining | average | as of | price of | |||||||||||||||||
| Ranges of | December 31, | contractual | exercise | December 31, | Options | ||||||||||||||||
| exercise price | 2022 | Term | price | 2022 | Exercisable | ||||||||||||||||
| $ | (Years) | $ | $ | ||||||||||||||||||
| 8 | 2,000 | 1.18 | 8 | 2,000 | 8 | ||||||||||||||||
| 8.37-10.02 | 590,097 | 0.82 | 9.96 | 590,097 | 9.96 | ||||||||||||||||
| 10.78-18.77 | 220,416 | 4.30 | 16.49 | 62,916 | 11.99 | ||||||||||||||||
| 22.54-24.33 | 423,250 | 4.42 | 23.10 | 141,250 | 23.69 | ||||||||||||||||
| 27.79-31.57 | 830,000 | 4.03 | 29.27 | 197,500 | 29.46 | ||||||||||||||||
| 33.99 | 67,000 | 4.92 | 33.99 | 16,750 | 33.99 | ||||||||||||||||
| 2,132,763 | 3.30 | 21.51 | 1,010,513 | 16.21 | |||||||||||||||||
The total equity-based compensation expense related to all of Sapiens’ equity-based awards, recognized for the years ended December 31, 2022, 2021 and 2020, after being adjusted to comply with IFRS, was $4,317, $5,421 and $4,318, respectively. As of December 31, 2022, there was $5,550 of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a weighted-average period of 1.84 years.
In connection with Sapiens’ acquisition of sum.cumo on February 6, 2020, Sapiens issued an aggregate of 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 24,222 RSUs to certain employees of sum.cumo in connection with the acquisition.
Sapiens recorded compensation costs related to RSUs of $794 and $1,130 for the years ended December 31, 2022 and 2021, respectively which were included in Selling, marketing, general and administrative expenses in the Company’s consolidated statements of profit or loss.
A summary of the RSU activities in Sapiens in the year ended on December 31, 2022, is as follows:
| Weighted Average | ||||||||
| Amount of | Grant-Date Fair | |||||||
| options | value | |||||||
| Unvested at January 1, 2022 | 203,756 | 26.46 | ||||||
| Granted | 7,500 | 23.24 | ||||||
| Vested | (53,948 | ) | 26.32 | |||||
| Expired and forfeiture | (18,164 | ) | 24.73 | |||||
| Unvested at December 31, 2022 | 139,144 | 26.56 | ||||||
F-92
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
| e) | Magic Software: |
The following table summarizes Magic Software stock-based compensation activity during the year ended December 31, 2022:
Number of options | Weighted average exercise price | Weighted average (in years) | Aggregate intrinsic value | |||||||||||||
| Outstanding at January 1, 2022 | 66,250 | 0.45 | 7.96 | 1,360 | ||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | (20,000 | ) | - | |||||||||||||
| Forfeited | (20,000 | ) | - | |||||||||||||
| Outstanding at December 31, 2022 | 26,250 | 0.91 | 5.99 | 394 | ||||||||||||
| Exercisable at December 31, 2022 | 6,250 | 3.81 | 0.6 | 76 | ||||||||||||
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, 2022, 2021 and 2020, was $344, $628 and $765 respectively. As of December 31, 2022, there was $112 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under Magic Software’s plans, which is expected to be recognized in full during 2023.
The options outstanding as of December 31, 2022, 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) | $ | $ | |||||||||||||||||
| 0 | 20,000 | 7.67 | - | - | - | |||||||||||||||
| 3.81 | 6,250 | 0.6 | 3.81 | 6,250 | 3.81 | |||||||||||||||
| 26,250 | 5.99 | $ | 0.91 | 6,250 | $ | 3.81 | ||||||||||||||
Stock Option Plan of Comm-IT Technology Solutions Ltd (“Comm-IT Solutions”), a subsidiary of Magic Software:
Under the Comm-IT Solutions’ 2022 Stock Option Plan, (“Comm-IT Solutions 2022 Plan”), options may be granted to employees, officers, directors and consultants of Comm-IT Solutions and its subsidiaries. Pursuant to Comm-IT Solutions 2022 Plan, Comm-IT Solutions shall reserve in its registered and reserved capital, such sufficient number of shares (subject to any adjustment in the capital under the Comm-IT Solutions 2022 Plan) required in order to consummate the Comm-IT Solutions 2022 Plan.
In December 2022, Comm-IT Solutions, awarded 12 of its senior officers 4,028 options to purchase 4,028 shares of Comm-IT Solutions. 827 of the options have fully vested upon their grant, whereas the vesting of the remainder of the options are subject to Comm-IT Solutions and its subsidiaries meeting certain EBITDA targets for the years 2023-2024. Subject to the EBITDA targets to be met, as well as the officers continued employment with Comm-IT Solutions throughout 2027, the options will vest at certain points in time throughout the years 2023 to 2027.
F-93
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EMPLOYEE OPTION PLANS (Cont.)
A summary of employee option activity under the Comm-IT Solutions 2022 Plan as of December 31, 2022 and changes during the year ended December 31, 2022 are as follows:
Number of options | Weighted average exercise price | Weighted average (in years) | Aggregate intrinsic value | |||||||||||||
| Outstanding at January 1, 2022 | - | $ | - | - | $ | - | ||||||||||
| Granted | 4,028 | 264.67 | ||||||||||||||
| Outstanding at December 31, 2022 | 4,028 | $ | 264.67 | 7.94 | $ | 7,499 | ||||||||||
| Exercisable at December 31, 2022 | 827 | $ | 0.28 | 7.92 | $ | 1,839 | ||||||||||
As of December 31, 2022, there was $2,885 of total unrecognized compensation cost related to non-vested options of Comm-IT Solutions, which is expected to be recognized in full over a weighted average period of 1.13 years.
The options outstanding as of December 31, 2022, have been separated into 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) | $ | $ | |||||||||||||||||
| 0.28 | 3,238 | 7.92 | - | 827 | 0.28 | |||||||||||||||
| 469.45 | 297 | 7.99 | - | - | ||||||||||||||||
| 1,877.81 | 493 | 7.99 | 3.81 | - | - | |||||||||||||||
| 4,028 | 7.94 | $ | 0.91 | 827 | $ | 0.28 | ||||||||||||||
Note 19:- EMPLOYEE BENEFIT LIABILITIES
Employee benefits consist of post-employment benefits, other long-term benefits and termination benefits.
| a) | 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 of 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.
F-94
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 19:- EMPLOYEE BENEFIT LIABILITIES (Cont.)
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.
| 1) | 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.
| 2) | 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.
| 3) | Other long-term benefits: |
Certain of the Company’s U.S. subsidiaries have a 401(k) defined contribution plan covering certain employees in the U.S. All eligible employees may elect to contribute up to 100% of their annual compensation to the plan through salary deferrals, subject to Internal Revenue Service limits. These U.S. Subsidiaries match up to 3% of the employees’ contributions up to the plan with no limitation.
| b) | Composition of defined benefit plans is as follows: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Defined benefit obligation | 91,973 | 123,138 | ||||||
| Fair value of plan assets | (82,857 | ) | (110,497 | ) | ||||
| Net defined benefit liability | $ | 9,116 | $ | 12,641 | ||||
Note 20:- Commitments and Contingencies
| a) | Liens: |
| 1) | Liens have been incurred by Formula over a certain portion of the Matrix IT, Magic Software and Sapiens’ shares which it held. As of December 31, 2022 Formula has collateral in connection with the Series A Secured Debentures and Series C Secured Debentures issued by Formula on the TASE (see Note 15). |
| 2) | Composition of pledged shares of Matrix IT, Magic Software and Sapiens owned by Formula as of December 31, 2022: |
| December 31, 2022 | ||||||||
| Formula’s Series A Secured Debentures | Formula’s Series C Secured Debentures | |||||||
| Matrix IT ordinary shares, par value NIS 1.0 per share | 4,128,865 | 6,169,761 | ||||||
| Magic Software ordinary shares, par value NIS 0.1 per share | 5,825,681 | 3,141,474 | ||||||
| Sapiens common shares, par value €0.01 per share | 1,260,266 | 2,957,590 | ||||||
F-95
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
In August 2022, following the private placement of an additional NIS 200,000 par value Series C Secured Debentures, Formula pledged an additional 138,000 shares of Matrix IT and 730,000 shares of Magic (see Note 15).
| b) | Guarantees: |
As of December 31, 2022, the Group provided performance bank guarantees in an aggregate amount of approximately $43,300 as security for performance of various contracts with customers and suppliers. As of December 31, 2022, the Group provided bank guarantees in an aggregate amount of approximately $8,200 as security for rent to be paid for its leased offices. As of December 31, 2022, the Group had restricted bank deposits in an aggregate amount of $400 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.
Each of Matrix IT, Sapiens, Magic Software and Formula provides cross guarantees to its subsidiaries.
| c) | Covenants: |
In connection with the Group’s debentures and credit facility agreements with banks and other financial institutions, as of December 31, 2022, the Group committed to the following:
| 1) | Formula |
| i) | 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:
| a. | A covenant not to distribute dividends unless (i) Formula shareholders’ equity attributable to Formula Systems shareholders is at least $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. |
| b. | 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, 2022, Formula equity attributable to Formula Systems’ shareholders was approximately $551.9 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, 2022 Formula’s net financial indebtedness was 6.3% 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, 2022 the ratio of Formula’s net financial indebtedness to EBITDA was 0.23); 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, 2022 Formula’s cash balances exceed the semi annual interest payments amount). |
F-96
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
| c. | Standard events of default, including, among others: |
| 1. | Suspension of trading of the debentures on the TASE over a period of 60 days; | |
| 2. | If the rating of the debentures is less than BBB- by Standard and Poors Maalot or equivalent rating of other rating agencies; | |
| 3. | Failure to have the debentures rated over a period of 60 days; | |
| 4. | If there is a change in control without consent of the rating agency; and | |
| 5. | If Formula fails to continue to control any of its subsidiaries; |
| 2) | Matrix IT |
| A. | In the context of Matrix IT’s engagements with banks and financial institutions for its credit facilities, Matrix IT has undertaken to comply with the following financial covenants, as they are expressed in its financial statements: |
| (i) | The total rate of Matrix IT 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 IT and shareholders’ loans that have been and/or will be granted to Matrix IT (collectively, the “debts”) will not exceed 40% of its total balance sheet. As of December 31, 2022 the ratio between Matrix IT’s financial debts and liabilities to banks versus Matrix IT total assets was 9.6%. |
| (ii) | The ratio of Matrix IT net debt to the annual EBITDA will not exceed 3.5. As of December 31, 2022, Matrix IT ratio of net debt to EBITDA was 0.74. |
| (iii) | Matrix IT equity shall not be lower than NIS 275,000 (approximately $78,147) at all times. As of December 31, 2022 Matrix IT’s equity was approximately NIS 916,000 (approximately $260,000 million). |
| (iv) | Matrix IT cash and cash equivalents and short-term bank deposits shall not be less than NIS 50,000 (approximately $14,209). In the context of Matrix IT’s issuance of Commercial Securities which are not listed, Matrix IT committed to maintain at least NIS 300,000 (approximately $85,251) 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 $56,834). As of December 31, 2022, Matrix IT’s cash and cash equivalent and short-term bank deposits amounted to NIS 839,313 (approximately $238,509). |
| (v) | Matrix IT has committed that the rate of ownership and control of Matrix IT-Systems shall never be below 50.1%. |
| (vi) | Matrix IT 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). |
F-97
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
| (vii) | Matrix IT 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. |
| B. | Matrix IT Series B Debentures: |
In accordance with Matrix IT’s indenture for its Series B Debentures, Matrix IT has undertaken to comply with the following financial covenants and obligations:
| (i) | Matrix IT total shareholders’ equity (all based on Matrix IT’s quarterly or annual consolidated financial statements, and as defined on Matrix IT Series B Debentures deed of trust) shall not be less than NIS 275,000 (approximately $78,147). As of December 31, 2022, Matrix IT total shareholders’ equity (all based on Matrix IT’s 2022 annual consolidated financial statements, and as defined on Matrix IT Series B Debentures deed of trust) was approximately NIS 964,874 (approximately $274,190). | |
| (ii) | Matrix IT net financial indebtedness (all based on Matrix IT’s quarterly or annual consolidated financial statements, and as defined on Matrix IT Series B Debentures deed of trust) shall not exceed 45% of Matrix IT total assets (all based on Matrix IT’s quarterly or annual consolidated financial statements, and as defined on Matrix IT Series B Debentures deed of trust). As of December 31, 2022 Matrix’s net financial indebtedness (all based on Matrix IT’s 2022 annual consolidated financial statements, and as defined on Matrix IT Series B Debentures deed of trust) was 9.6% of total assets. | |
| (iii) | The ratio of Matrix IT net financial indebtedness (as defined on Matrix IT Series B Debentures deed of trust) to the last twelve-months period EBITDA (as defined on Matrix IT Series B Debentures deed of trust) will not exceed 5 (all based on Matrix IT’s quarterly and annual consolidated financial statements). As of December 31, 2022 the ratio of Matrix IT’s net financial indebtedness to EBITDA (all based on Matrix IT’s 2022 annual consolidated financial statements, and as defined on Matrix IT Series B Debentures deed of trust) was 0.76. |
| 3) | 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. |
| (ii) | financial covenants, including: (a) the equity attributable to the shareholders of Sapiens, as reported in its annual or quarterly financial statements, will not be less than $120 million. |
F-98
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
(as of December 31, 2022 Sapiens shareholders’ equity was $400,504); (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, 2022 Sapiens’ net financial indebtedness was (32.96%) 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, 2022 the ratio of Sapiens’ net financial indebtedness to EBITDA was (1.14)).
| (iii) | a covenant not to distribute dividends unless (a) Sapiens equity attributable to Sapiens shareholders’ shall not be less than $160 million, (b) 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), (c) 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 (d) no event of default shall have occurred. |
| 4) | 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:
| (i) | Total equity attributable to Magic Software’ shareholders shall not be lower than $100,000 at all times – as of December 31, 2022 Magic Software shareholders’ equity was $276,311. |
| (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, 2022 Magic Software’s cash and marketable securities available for sale were $86,966. |
| (iii) | The ratio of Magic Software’s consolidated total financial debts to consolidated total assets will not exceed 50% - as of December 31, 2022 Magic Software’s financial debts were 9.4% 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, 2022 the ratio of Magic Software’s net financial indebtedness to EBITDA was negative (-0.47) (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, 2022, each of Formula, Matrix IT, Sapiens and Magic Software was in compliance with all of its financial covenants.
F-99
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
| d) | Legal proceedings: |
| 1) | 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 $2.4 million, filed a lawsuit seeking damages of NIS 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 1,650). Our financial results of operations of 2021 included a net impact of $1.6 million resulting from the arbitration expenses. |
| 2) | 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 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. The parties held mediation meetings. The mediation meetings took place on February 16, 2022, May 17, 2022 and May 24, 2022. The mediation ended without the parties reaching an agreement. On June 16, 2022, following the oral argument at the pre-trial hearing, the district court accepted the company’s request and ordered Olir to deposit a guarantee for the Company’s costs. Olir deposited the guarantee and paid the costs to the Company as ordered. in the proceedings in the amount of NIS 173 (approximately $51). On January 24, 2023, the Company submitted a request for dismissal in limine of the motion to certify due to a change in the factual grounds of the motion including, among otherthings, the reapproval of the compensation given to the CEO by a new and independent board of directors made on January 15, 2023. The court asked the other parties to respond to the request for dismissal by March 1,2023. A cross examinations hearing was held on January 31, 2023. On March 1, 2023, the other respondents to the motion to certify submitted their responses to the request for dismissal in which they supported the request. On March 8, 2023, Olir filed its objection to the dismissal in limine. On April 13, the Company submitted its response to Olir’s response. Olir should file its briefs by the beginning of July 2023. The respondents should file their briefs 60 days thereafter and Olir has a right to respond 30 days thereafter. At this stage of the proceedings, the Company believes that the chances for the approval of the motion to certify are low.
F-100
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
| 3) | On December 24, 2019, a motion for the approval of a class action (#60508-02-20), in an amount of NIS 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. Additionally, the 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 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. On December 12, 2022 the parties filed a joint notice with the court stating their agreement to initiate a mediation process. A mediation meeting took place on February 6, 2023. The mediation ended without the parties reaching an agreement. 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. |
| 4) | On December 30, 2021, Ronen Har Even, Galit Har Even and TV Center Ltd. (the “Plaintiffs”) submitted a monetary claim in the sum of NIS 24,490 (approximately $6,959) and a claim for the grant of a mandamus order against Zap Group, in the District Court at Haifa. The Plaintiffs allege that Zap Group constitutes a monopoly in the provision of price comparison services in the online arena in Israel, and excluded the Plaintiffs’ business from the E-commerce arena in Israel. According to the Plaintiffs, Zap Group prevented price comparisons between the prices of the Plaintiffs’ televisions and the prices of the televisions of the official importers, by causing systemic manipulations aimed at excluding the television models sold by the Plaintiffs and blurring the fact that they are cheaper in the search results. As mentioned in the Statement of Claim, concurrent with submission of |
F-101
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
the Claim, on April 19, 2021, the Plaintiffs submitted a complaint against Zap Group to the Israel Competition Authority, and on August 18, 2021 and October 21, 2021, submitted supplements to the aforesaid complaint. On June 1, 2022, Zap Group submitted a statement of defense, denying the Plaintiffs’ allegations and in particular the Plaintiffs’ argument that Zap Group has a monopoly in the provision of price comparison services in the online arena in Israel. On July 19, 2022, a pre-trial hearing took place, at the end of which it was held that the Parties must conclude the discovery proceedings by September 10, 2022, and that should any of the Parties wish to submit a motion following receipt of the answers, they must do so by November 15, 2022. On November 15, 2022 the Plaintiffs submitted a motion for the grant of an order of discovery of documents and answer to interrogatories. On December 20, 2022, Zap Group submitted its response to the motion, in which it rejected all of the Plaintiffs’ demands. The Plaintiffs provided Zap Group with the documents that had been disclosed by them in the case, without a suitable legend. On January 13, 2023, the Plaintiffs submitted a response to the motion. On January 16, 2023, a pre-trial hearing took place, in which Zap Group insisted on the receipt of a suitable legend for the documents that had been disclosed to it by the Plaintiffs. The Court held that the Plaintiffs would deliver a suitable legend within 45 days, after which Zap Group would be entitled to submit a suitable motion in this regard within 30 days, should the need to do so arise. On March 5, 2023, the Plaintiffs submitted a new document file in the context of the discovery proceedings, and an updated legend that was almost identical to the previous one. For that reason, on April 3, 2023, Zap Group submitted a motion to strike out the Statement of Claim due to breach of the Court’s decision to provide the discovery materials in a proper manner or, alternatively, for the for the lack of performing the court’s decision. The Plaintiffs are required to respond to the motion by May 21, 2023. An additional pre-trial proceeding has been scheduled for October 2023. As this claim was filed against Zap Group with respect to the period 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.
| 5) | 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. |
F-102
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- COMMITMENTS AND CONTINGENCIES (Cont.)
| e) | 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 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, 2022, the total remaining unpaid royalties to the IIA amounted to $5,661, out of which, an amount of $1,659 was recorded as a liability in accordance with IAS 20.
| f) | 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, Shamrad 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, 2022.
Note 21:- equity
The composition of the Company’s share capital is as follows:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Authorized | Issued | Outstanding | Authorized | Issued | Outstanding | |||||||||||||||||||
| Ordinary shares, NIS 1 par value each | 25,000,000 | 15,886,287 | 15,317,667 | 25,000,000 | 15,862,887 | 15,294,267 | ||||||||||||||||||
| a. | Formula’s ordinary shares, par value NIS 1 per share, are traded on the TASE, and Formula’s ADSs, each representing one ordinary share, are traded on the NASDAQ. |
| b. | Formula holds 568,620 of its own ordinary shares. |
| c. | In February 2021, Formula declared a cash dividend of approximately NIS 33,036 (approximately $10,155) or NIS 2.16 per share (approximately $0.66 per share) to shareholders of record on February 18, 2021 that was paid on March 4, 2021. |
| d. | In August 2021, Formula declared a cash dividend of approximately NIS 38,694 (approximately $11,932) or NIS 2.53 per share (approximately $0.78 per share) to shareholders of record on September 1, 2021 that was paid on September 19, 2021. |
F-103
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 21:- equity (Cont.)
| e. | In March 2022, Formula declared a cash dividend of approximately NIS 39,213 (approximately $12,018) or NIS 2.56 per share (approximately $0.78 per share) to shareholders of record on April 12, 2022 that was paid on April 25, 2022. |
| f. | In November 2022, Formula declared a cash dividend of approximately NIS 33,086 (approximately $9,571) or NIS 2.16 per share (approximately $0.62 per share) to shareholders of record on December 5, 2022 that was paid on December 19, 2022. |
| g. | For information concerning Formula’s employees and officers share-based plans, see Note 18. |
Note 22:- INCOME TAX
| a. | Israeli taxation: |
| 1) | Corporate tax rate in Israel: |
Taxable income of Israeli companies was generally subject to corporate tax at the rate of 23% in 2020, 2021 and in 2022. Some of our Israeli subsidiaries are eligible for certain tax benefits, as described below.
| 2) | 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. 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. A Preferred Technology Enterprise that acquires Benefited Intangible Assets from a foreign company for more than NIS 200 million after January 1, 2017, will be eligible for 12% reduce tax rate on capital gain upon sale of the Benefited Intangible Assets.
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.
F-104
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
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 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.
According to IAS 12, 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 109,000 (approximately $35,048), and accordingly recognized deferred tax liability of $3,531. In 2022, the Sapiens filed its application for the Temporary Order and paid the required amount to the Israeli tax authority.
F-105
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
In November 2022, Magic Software also elected to benefit from the Temporary Order and filed its application for the Temporary Order and paid the required reduced CIT as per the provisions of the Economic Efficiency Law in respect of its total accumulated tax-exempt earnings amounting to NIS 25,022 (approximately $7,100), and accordingly recognized a tax liability of NIS 2,502 (approximately $711).
As of December 31, 2022 all of Sapiens’ and Magic Software’s trapped earnings were released.
| 3) | 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), 5729-1969 (the “Industrial Encouragement Law”). The Industrial Encouragement Law, provides several tax benefits for an “IndustrialCompany”. Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company which was incorporated in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an “Industrial Enterprise” that it owns and located in Israel or in the “Area,” in accordance with the definition under Section 3A of the Israeli Income Tax Ordinance (NewVersion) 1961, or the Ordinance. An “Industrial Enterprise” is defined as an enterprise which is held by an Industrial Company whose major activity, in any given tax year, is industrial production.
An Industrial Company is entitled to certain corporate tax benefits, including:
| i. | Amortization of the cost of purchased patents, or the right to use a patent or know-how or certain other intangible property rights (other than goodwill) that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over an eight-year period commencing on the year in which such rights were first exercised. |
| ii. | The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it. |
| iii. | Expenses related to a public offering are deductible in equal amounts over three years beginning from the year of the offering. |
Eligibility for the benefits under the Industrial Encouragement Law is not subject to receipt of prior approval from any governmental authority.
The Group believes that certain of its Israeli subsidiaries currently qualify as Industrial Companies within the definition under the Industry Encouragement Law. The Group cannot assure you that those subsidiaries will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.
| 4) | 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.
F-106
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
| 5) | Structural changes in Matrix IT: |
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 IT will transfer all their assets and liabilities subject to the provisions of section 103 of the Income Tax Ordinance.
During the fourth quarter of 2022, Matrix IT made a structural change with respect to its holdings in some of its U.S. based subsidiaries. Prior to the structural change, Matrix IT held, indirectly through subsidiaries, all of the share interest in Matrix IFS and Network Infrastructure Technologies Inc. and 60% of the share interest in Matrix Global Services USA Inc. Post the structural change, which was completed without payment of cash, Matrix IT interest in such U.S. subsidiaries is held through Matrix US Holding LLC.(established for this purpose), with Matrix IT holding 95% of the share interest of Matrix US Holding LLC.
| b. | Non-Israeli subsidiaries: |
Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries 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, 2022 and 2021 was $185,636 and $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, 2022 and 2021 was $81,756 and $56,916, respectively.
F-107
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
| c. | 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. 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 U.S. 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.
Starting from 2022, the TCJA requires taxpayers to capitalize research and development expenses with amortization periods over five years for research activities conducted in the United States and over fifteen years for research activities conducted outside of the United States, which has increased the Group’s tax liability in the U.S. The tax provision expense has increased from prior year to account for the capitalization of research and development costs starting in 2022.
| d. | Net operating loss carried forward: |
As of December 31, 2022, Formula and its subsidiaries have cumulative losses for tax purposes totaling approximately $174,524, of which $136,443 was in respect of Israeli subsidiaries and approximately $38,081 of which was in respect of subsidiaries abroad.
| 1) | Formula |
As of December 31, 2022, Formula stand-alone had cumulative carry forward tax losses in Israel totaling approximately NIS 257,503 (approximately $73,180), which can be carried forward and offset against taxable income in the future for an indefinite period.
| 2) | Matrix IT |
As of December 31, 2022, certain subsidiaries of Matrix IT had operating carry-forward tax losses totaling approximately NIS 110,185 (approximately $31,311), which resulted from Israeli operations and as such can be carried forward and offset against taxable income in the future for an indefinite period.
| 3) | Magic Software |
As of December 31, 2022, certain subsidiaries of Magic Software had operating carry forward tax losses totaling approximately $22,427, which can be carried forward and offset against taxable income in the future for an indefinite period.
F-108
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
| 4) | Sapiens |
As of December 31, 2022, certain subsidiaries of Sapiens had carry-forward tax losses totaling approximately $32,592. Most of these carry-forward tax losses have no expiration date.
| 5) | Zap |
As of December 31, 2022, Zap and certain of its subsidiaries had carry-forward tax losses totaling approximately NIS 21,761 (approximately $6,184). These carry-forward tax losses have no expiration date.
| 6) | As of December 31, 2022 Insync, Michpal, Ofek and Shamrad did not have any carry forward tax losses. |
| e. | 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:
| 1) | Formula |
Formula has received final tax assessments (or assessments that are deemed final) through the tax year 2017.
| 2) | Matrix IT |
Matrix IT has received final tax assessments through the tax year 2018. Matrix IT subsidiaries have received final tax assessments (or assessments that are deemed final) through the tax year 2018.
| 3) | 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.
| 4) | Sapiens |
Tax assessments filed by some of Sapiens’ Israeli subsidiaries through the year 2017 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, 2022, the Company cannot estimate the change in unrecognized tax benefits resulting from these audits.
| 5) | 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 2018.
| 6) | Other than those aforementioned subsidiaries, all other Formula’s subsidiaries have received final tax assessments (or assessments that are deemed final) through the tax year 2017. |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
| f. | Deferred tax liabilities, net: |
| 1) | Presentation in consolidated statements of financial position: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Deferred taxes assets | $ | 42,027 | $ | 46,364 | ||||
| Deferred tax liabilities | (59,465 | ) | (78,135 | ) | ||||
| $ | (17,438 | ) | $ | (31,771 | ) | |||
| 2) | Composition: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net operating losses carried forward | $ | 10,296 | $ | 8,775 | ||||
| Intangibles, fixed asset and right-of-use assets | (39,307 | ) | (52,436 | ) | ||||
| Lease liability | (166 | ) | 484 | |||||
| Differences in measurement basis (cash basis for tax purposes) | 2,213 | 3,084 | ||||||
| Other | 9,526 | 8,322 | ||||||
| $ | (17,438 | ) | $ | (31,771 | ) | |||
| g. | Pre-tax income: |
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Domestic (Israel) | $ | 181,953 | $ | 137,213 | $ | 106,974 | ||||||
| Foreign | 47,757 | 46,798 | 36,782 | |||||||||
| Total | $ | 256,710 | $ | 184,011 | $ | 143,756 | ||||||
| h. | Income tax (tax benefit) consist of the following: |
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Current taxes | $ | 75,407 | $ | 52,956 | $ | 23,015 | ||||||
| Deferred taxes | (20,172 | ) | (10,342 | ) | 8,254 | |||||||
| Total | $ | 55,235 | $ | 42,614 | $ | 31,269 | ||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
| i. | 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, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Income before income taxes, as per the statement of operations | $ | 256,710 | $ | 184,011 | $ | 143,756 | ||||||
| Statutory tax rate in Israel | 23 | % | 23 | % | 23 | % | ||||||
| Tax computed at the statutory tax rate | 59,043 | 42,323 | 33,064 | |||||||||
| Non-deductible expenses (non-taxable income) net and tax-deductible costs not included in the accounting costs | 720 | 3,667 | 2,544 | |||||||||
| Effect of different tax rates | (1,273 | ) | 852 | (774 | ) | |||||||
| Release of trapped earnings (see note 22(a)(2) | 711 | 3,531 | ||||||||||
| Effect of “Approved, Beneficiary or Preferred Enterprise” status | (5,579 | ) | (7,338 | ) | (5,426 | ) | ||||||
| Deferred taxes on current losses (utilization of carry forward losses) and temporary differences for which a valuation allowance was provided, net | 448 | (84 | ) | 1,877 | ||||||||
| Undistributed earnings | (461 | ) | - | - | ||||||||
| Taxes in respect of prior years | 890 | 891 | 280 | |||||||||
| Uncertain tax positions | 3,065 | 401 | 285 | |||||||||
| Other | (2,329 | ) | (1,629 | ) | (581 | ) | ||||||
| Taxes on income | $ | 55,235 | $ | 42,614 | $ | 31,269 | ||||||
| j. | 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, 2021 | $ | 9,091 | ||
| Decrease in tax positions | (1,457 | ) | ||
| Increase in tax positions | 2,906 | |||
| Balance as of December 31, 2021 | $ | 10,540 | ||
| Decrease in tax positions | (1,042 | ) | ||
| Increase in tax positions | 4,455 | |||
| Statue limitation | (1,012 | ) | ||
| Balance as of December 31, 2022 | $ | 12,941 |
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- INCOME TAX (Cont.)
The entire balance of unrecognized tax benefits, if recognized, would reduce the Group’s annual effective tax rate.
Note 23:- Supplementary Financial Statement Information
| a. | Composition of non-controlling interest in material partially-owned subsidiaries: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Matrix IT and its subsidiaries | $ | 155,886 | $ | 161,947 | ||||
| Sapiens and its subsidiaries | 316,319 | 320,448 | ||||||
| Magic Software and its subsidiaries | 151,253 | 153,706 | ||||||
| Other | 1,291 | 2,726 | ||||||
| $ | 625,049 | $ | 638,827 | |||||
| b. | The following table provides detailed breakdown of the Group’s financial income and expenses: |
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Financial expenses: | ||||||||||||
| Financial expenses related to liabilities in respect of business combinations | $ | 1,081 | $ | 3,539 | $ | 3,738 | ||||||
| Interest expenses on loans and borrowings | 9,837 | 6,249 | 6,863 | |||||||||
| Financial costs related to Debentures | 3,775 | 6,948 | 6,546 | |||||||||
| Interest expenses attributed to IFRS 16 | 4,822 | 4,873 | 5,367 | |||||||||
| Derivatives loss | 1,193 | - | - | |||||||||
| Bank charges, negative foreign exchange differences and other financial expenses | 6,508 | 8,385 | 6,930 | |||||||||
| 27,216 | 29,994 | 29,444 | ||||||||||
| Financial income: | ||||||||||||
| Income from marketable securities and embedded derivative | - | 3,338 | 204 | |||||||||
| PPP loan forgiveness | 1,465 | - | - | |||||||||
| Interest income from deposits, positive foreign exchange differences and other financial income | 5,821 | 2,651 | 2,355 | |||||||||
| 7,286 | 5,989 | 2,559 | ||||||||||
| Financial expenses, net | $ | 19,930 | $ | 24,005 | $ | 26,885 | ||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 23:- SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
| c. | Geographical information: |
| 1) | The Group’s property and equipment is located as follows: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Israel | $ | 45,994 | $ | 44,221 | ||||
| United States | 3,563 | 3,144 | ||||||
| Europe | 1,834 | 2,820 | ||||||
| Japan | 153 | 211 | ||||||
| Other | 3,427 | 6,490 | ||||||
| Total | $ | 54,971 | $ | 56,886 | ||||
��
| 2) | Revenues: |
The Group’s revenues classified by geographic area (based on the location of customers) are as follows:
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Israel | $ | 1,571,035 | $ | 1,506,566 | $ | 1,203,109 | ||||||
| International: | ||||||||||||
| United States | 680,325 | 591,794 | 501,785 | |||||||||
| Europe | 262,303 | 255,680 | 189,152 | |||||||||
| Africa | 26,692 | 18,012 | 11,702 | |||||||||
| Japan | 11,333 | 12,890 | 14,282 | |||||||||
| Other (mainly Asia pacific) | 20,669 | 19,434 | 13,888 | |||||||||
| Total | $ | 2,572,357 | $ | 2,404,376 | $ | 1,933,918 | ||||||
| d. | Earnings per share: |
The following table presents the computation of basic and diluted net earnings per share for the Group:
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Numerator: | ||||||||||||
| Basic earnings per share – net income attributable to equity holders of the Company | $ | 81,393 | $ | 54,585 | $ | 46,776 | ||||||
| Diluted earnings per share – net income attributable to equity holders of the Company | $ | 80,794 | $ | 53,974 | $ | 45,969 | ||||||
| Denominator: | ||||||||||||
| Basic earnings per share – weighted average shares outstanding | 15,296 | 15,290 | 15,286 | |||||||||
| Effect of dilutive securities | 207 | 114 | 6 | |||||||||
| Diluted earnings per share – adjusted weighted average shares outstanding | 15,503 | 15,404 | 15,292 | |||||||||
| Basic net earnings per share | 5.31 | 3.57 | 3.05 | |||||||||
| Diluted net earnings per share | 5.21 | 3.50 | 3.01 | |||||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 24:- operating segments
| a. | General: |
The Group is engaged through seven directly held subsidiaries— Matrix IT; Sapiens; Magic Software; Michpal, Zap, Insync, Ofek and Shamrad; 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.
Matrix IT
Matrix IT Ltd. is Israel’s leading IT services company. Matrix IT 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 IT also provides upgrading and expansion of existing software systems.
Matrix IT 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 IT 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. In 2022, activity in software solutions and value-added services in Israel accounted for approximately 52% of Matrix IT’s revenues and approximately 51% of its operating income.
Information Technologies (IT) Software solutions and services in the United States:
Matrix IT’s activities in this segment are performed by two lines of business – Matrix US Holdings and Xtivia. The two line of business primarily provide software solutions and services of Governance Risk and Compliance (“GRC”) experts, including activities on the following topics: risk management, management and fraud prevention, anti-money laundering, trade surveillance as well as, specialized advisory services in the area of compliance with financial regulation and operational services, as well as 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,. In 2022, the activity in the U.S. accounted for approximately 9% of Matrix IT’s revenues and approximately 17% of its operating income.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Note 24: - operating segments (Cont.)
Training and integration:
Matrix IT’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 IT also outsources IT services based on graduates of its courses. In 2022, activity in training and integration accounted for approximately 5% of Matrix IT’s revenues and for approximately 5% of its operating income.
Computer and cloud infrastructure and integration solutions:
Matrix IT’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 and products regarding office automation and printing solutions, representation of global leading manufacturers of test and measurement equipment, communication and cyber and RF solutions, projects and integration in the field of automation, calibration services in advanced technologies, provision of industrial video and image processing solutions as well as Database services and Big data services (through the specialized business unit Data zone). In 2022, activity in computer and cloud infrastructure and integration solutions accounted for approximately 29% of Matrix IT’s revenues and for approximately 22% of its operating income.
Software product marketing and support:
Matrix IT’s activities in this segment include marketing, distributing and support for various software products, web world content management, database and data warehouse mining, application integration, database and systems, data management and software development tools. In 2022, activity in software product marketing and support accounted for approximately 5% of Matrix IT’s revenues and approximately 5% 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, solutions and professional services for property & casualty (P&C); reinsurance; life, pension & annuity (L&A); workers’ compensation (WC); medical professional liability (MPL); financial & compliance (F&C); and decision modelling for both insurance and financial markets. Sapiens offers an end-to-end solutions for insurers core systems, as well as complementary data & analytics and digital. Importantly its wide array of professional services ensures that Sapiens not only makes a sale but accompanies and guides its customers on their path to digital transformation and bring important insights from the field into its products roadmap. Sapiens’ offerings not only enable its customers to effectively manage their core business functions – including policy administration, claims and billing – they support insurers on their path to digital transformation. Its portfolio also provides a variety of complimentary solutions for critical requirements such as reinsurance management, underwriting management, illustration software, electronic applications and financial compliance tools. The latest versions of its platforms possess modern, modular cloud-first architecture and are digital-driven, providing full coverage for all business aspects of policy management, digital engagement and data analysis. They empower customers to respond to the rapidly changing insurance market and frequent regulatory changes, while improving the efficiency of their core operations.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 24: - 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”).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 24: - OPERATING SEGMENTS (Cont.)
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.
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. As of December 31, 2022, 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 24: - 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 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 24: - OPERATING SEGMENTS (Cont.)
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.
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 24: - 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).
Shamrad
Shamrad is an Israeli private company, engaged in the supply, integration and installation of computer communication infrastructures, announcement and alarm systems and electronic security systems. Shamrad represents several companies in the field of security: ATI systems – sirens, Garrett – Metal detectors, Kopp – Ferro Magnetic detectors for MRI rooms. Shamrad holds vast experience in design, supply and installation of security systems, integrated with command and control solutions, CCTV, access control and intruder detection. Shamrad provides video solutions together with high speed networks and wireless links, allowing hundreds of camera channels to be viewed in one or many control centers. Shamrad installs IP and analog cameras in various configurations such as, Bullet, Dome, PTZ, Box, and Thermal. Shamrad offers customers complete solutions for communications and telephony infrastructure, both in the fields of passive and active equipment. Amongst the services offered are installation and maintenance of networks (local and wireless) and specific dedicated communications rooms. Shamrad has, since it’s inception, a dedicated department offering a complete and professional solution, with a system wide view tailored to exactly meet our customers’ requirements.
| b) | Consolidated Goodwill in material partially owned subsidiaries: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Matrix IT and its subsidiaries | $ | 288,235 | $ | 306,421 | ||||
| Sapiens and its subsidiaries | 397,613 | 406,498 | ||||||
| Magic Software and its subsidiaries | 158,699 | 146,803 | ||||||
| Michpal and its subsidiaries | 40,603 | 36,108 | ||||||
| ZAP and its subsidiaries | 33,081 | 35,292 | ||||||
| Other consolidated subsidiaries | 7,930 | 1,732 | ||||||
| $ | 926,161 | $ | 932,854 | |||||
| c) | 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.
| Matrix IT | Sapiens | Magic Software | Michpal | ZAP Group | Other | Adjustments | Total | |||||||||||||||||||||||||
| Year ended December 31, 2022: | ||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 1,388,508 | $ | 474,736 | $ | 561,682 | $ | 37,714 | $ | 49,893 | $ | 133,526 | $ | (73,702 | ) | $ | 2,572,357 | |||||||||||||||
| Inter-segment revenues | 4,310 | - | 5,110 | 309 | - | 360 | (10,089 | ) | - | |||||||||||||||||||||||
| Total revenues | $ | 1,392,818 | $ | 474,736 | $ | 566,792 | $ | 38,023 | $ | 49,893 | $ | 133,886 | $ | (83,791 | ) | $ | 2,572,357 | |||||||||||||||
| Depreciation and amortization | $ | 48,288 | $ | 33,050 | $ | 19,804 | $ | 4,770 | $ | 7,976 | $ | 6,214 | $ | (4,794 | ) | $ | 115,308 | |||||||||||||||
| Segment operating income | $ | 149,298 | $ | 66,164 | $ | 61,762 | $ | 8,117 | $ | (1,042 | ) | $ | 8,311 | $ | (5,345 | ) | $ | 287,265 | ||||||||||||||
| Unallocated corporate expenses | (10,625 | ) | ||||||||||||||||||||||||||||||
| Total operating income | $ | 276,640 | ||||||||||||||||||||||||||||||
| Financial expenses, net | (19,930 | ) | ||||||||||||||||||||||||||||||
| Group’s share of profits of companies accounted for at equity, net | (1,808 | ) | ||||||||||||||||||||||||||||||
| Taxes on income | (55,235 | ) | ||||||||||||||||||||||||||||||
| Net income | $ | 199,667 | ||||||||||||||||||||||||||||||
F-120
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 24: - OPERATING SEGMENTS (Cont.)
| Matrix IT | Sapiens | Magic Software | Michpal | ZAP Group | Other | Adjustments | Total | |||||||||||||||||||||||||
| Year ended December 31, 2021: | ||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 1,344,088 | $ | 461,035 | $ | 477,643 | $ | 32,087 | $ | 51,640 | $ | 127,641 | $ | (89,758 | ) | $ | 2,404,376 | |||||||||||||||
| Inter-segment revenues | 6,529 | - | 2,682 | - | - | - | (9,211 | ) | - | |||||||||||||||||||||||
| Total revenues | $ | 1,350,617 | $ | 461,035 | $ | 480,325 | $ | 32,087 | $ | 51,640 | $ | 127,641 | $ | (98,969 | ) | $ | 2,404,376 | |||||||||||||||
| Depreciation and amortization | $ | 45,736 | $ | 45,732 | $ | 19,837 | $ | 4,023 | $ | 7,486 | $ | 3,776 | $ | (4,406 | ) | $ | 122,184 | |||||||||||||||
| Segment operating income | $ | 102,054 | $ | 44,210 | $ | 59,785 | $ | 6,838 | $ | 5,962 | $ | 3,841 | $ | (3,519 | ) | $ | 219,171 | |||||||||||||||
| Unallocated corporate expenses | (11,155 | ) | ||||||||||||||||||||||||||||||
| Total operating income | $ | 208,016 | ||||||||||||||||||||||||||||||
| Financial expenses, net | (24,005 | ) | ||||||||||||||||||||||||||||||
| Group’s share of profits of companies accounted for at equity, net | 505 | |||||||||||||||||||||||||||||||
| Taxes on income | (42,614 | ) | ||||||||||||||||||||||||||||||
| Net income | $ | 141,902 | ||||||||||||||||||||||||||||||
| Matrix IT | Sapiens | Magic Software | Michpal | ZAP Group | Other | Adjustments | Total | |||||||||||||||||||||||||
| Year ended December 31, 2020: | ||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 1,116,178 | $ | 382,903 | $ | 368,357 | $ | 26,244 | $ | - | $ | 120,330 | $ | (80,094 | ) | $ | 1,933,918 | |||||||||||||||
| Inter-segment revenues | 5,316 | - | 2,837 | - | - | - | (8,153 | ) | - | |||||||||||||||||||||||
| Total revenues | $ | 1,121,494 | $ | 382,903 | $ | 371,194 | $ | 26,244 | $ | - | $ | 120,330 | $ | (88,247 | ) | $ | 1,933,918 | |||||||||||||||
| Depreciation and amortization | $ | 36,244 | $ | 35,965 | $ | 18,861 | $ | 3,506 | $ | - | $ | 3,377 | $ | (2,446 | ) | $ | 95,507 | |||||||||||||||
| Segment operating income | $ | 84,181 | $ | 35,337 | $ | 47,757 | $ | 6,333 | $ | - | $ | 4,753 | $ | (3,455 | ) | $ | 174,906 | |||||||||||||||
| Unallocated corporate expenses | (4,265 | ) | ||||||||||||||||||||||||||||||
| Total operating income | 170,641 | |||||||||||||||||||||||||||||||
| Financial expenses, net | $ | (26,885 | ) | |||||||||||||||||||||||||||||
| Group’s share of profits of companies accounted for at equity, net | 1,535 | |||||||||||||||||||||||||||||||
| Taxes on income | (31,269 | ) | ||||||||||||||||||||||||||||||
| Net income | $ | 114,022 |
F-121
FORMULA SYSTEMS (1985) LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 25:- SUBSEQUENT EVENTS
| a) | On January 1, 2023, Matrix IT purchased 70% of the share capital of Zebra Technologies Ltd. for NIS 53,000 (including equity). Zebra Technologies Ltd. is engaged in the distribution and marketing of solutions in the fields of data communication, cyber protection, hardware, software and services. As part of the transaction, Matrix IT entered into a mutual option agreement with the seller for the sale and purchase of the remaining shares. |
| b) | On March 27, 2023, Magic Software entered into a loan agreement with an Israeli bank, pursuant to which, Magic Software borrowed $20,000 for a four-year term (the “Bank Loan”). The Bank Loan will mature on March 27, 2027, and will be repaid in four (4) equal annual installments of $6,052 (including interest) as of March 27, 2024. The Bank Loan bears interest at the rate of SOFR + 3.38% and can be redeemed with no additional cost after one (1) year. |
- - - - - - - - - - - - - - - - - - -
F-122
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 January 1, 2021, December 31, 2021 and December 31, 2022, and the related statements of profit or loss, comprehensive income and cash flows and for each of the two years in the period ended December 31, 2022, and the related notes. In our opinion, based on our audits the financial statements present fairly, in all material respects, the financial position of the Company at January 1, 2021, December 31, 2021 and December 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
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, 2022, based on Section 404 of the Sarbanes-Oxley Act (“SOA’’) and our report dated February 20, 2023 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 20, 2023 | /s/ KDA Audit Corporation |
| KDA Audit Corporation |
F-123
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, 2022, 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, 2022, 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, 2021 and 2022, and the related statements of comprehensive income and cash flows for each of the three years in the period ended December 31, 2022 and our report dated February 20, 2023 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.
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.
| Tokyo, Japan |  |
| February 20, 2023 | /s/ KDA Audit Corporation |
| KDA Audit Corporation |
F-124
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