{"url_path":"/sec/forty/10-k/2026/item-3","section_key":"item-3","section_title":"Item 3 KEY INFORMATION**","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-05-13","source_url":"https://www.sec.gov/Archives/edgar/data/1045986/0001213900-26-055948-index.html","accession_number":"0001213900-26-055948","cik":"0001045986","ticker":"FORTY","issuer_name":"FORMULA SYSTEMS (1985) LTD","edgar_url":"https://www.sec.gov/Archives/edgar/data/1045986/0001213900-26-055948-index.html","primary_entity_key":"0001045986","primary_entity_name":"FORMULA SYSTEMS (1985) LTD"},"word_count":23386,"has_tables":true,"body_markdown":"**ITEM 3. KEY INFORMATION**\n\n \n\n**A.**\n**[Reserved]**\n\n \n \n\n**B.**\n**Capitalization and Indebtedness**\n\n \n\nNot applicable.\n\n \n\n**C.**\n**Reasons for the Offer and Use of Proceeds**\n\n \n\nNot applicable.\n\n \n\n**D.**\n**Risk Factors**\n\n \n\nInvesting in our ordinary\nshares, including ordinary shares represented by ADSs, involves a high degree of risk and uncertainty. You should carefully consider the\nrisks and uncertainties described below before investing in our ordinary shares or ADSs. Our business prospects, operating results and\nfinancial condition could be seriously harmed due to any of the following risks. Additional risks and uncertainties that we are not aware\nof or that we currently believe are immaterial may also adversely affect our business prospects, financial condition, and results of operations.\nThe trading prices of our ordinary shares and ADSs could decline as a result of the realization of any of these risks, in which case you\nmay lose part or all of your investment.\n\n \n\n**Risks Related to Our Business, Our Industry\nand Our Financial Condition**\n\n \n\n**The implementation of our M&A growth\nstrategy, which requires the integration of our multiple acquired companies and their respective businesses, operations and employees\nwith our own, and their respective businesses, operations and employees with our own, involves significant risks, and the failure to integrate\nsuccessfully may adversely affect our future results.**\n\n \n\nOver the past decade and even\nsince the start of the last fiscal year alone, we have made, and continue to make, a significant number of important acquisitions.\n\n \n\nIn April 2025, our then directly-held\nsubsidiary Magic Software (which as of February 24, 2026 is an indirect subsidiary of ours that is wholly-held by our subsidiary Matrix)\ncompleted a transaction to acquire additional ordinary shares of its subsidiary Comm-IT Technology Solutions Ltd. for approximately NIS\n50.2 million (approximately $13.8 million), increasing its holdings (on a fully diluted basis) from 68.15% to approximately 79.32%.\n\n \n\nIn March 2025, Magic Software\ncompleted the acquisition of all issued and outstanding shares of Expim Ltd, an Israel-based provider of managed cloud services, network\nconnectivity, cybersecurity solutions and IT infrastructure support for total consideration (including a conditional additional payment\nto be paid in 2029, subject to the achievement of certain financial operational goals) of approximately NIS 18.2 million (approximately\n$5.0 million).\n\n \n\n1\n\n \n\n \n\nIn October 2024, Magic Software\ncompleted the acquisition of Executive Life Ltd., a U.S.-based executive recruitment firm specializing in talent acquisition services,\nfor $1.5 million (including a deferred payment).\n\n \n\nIn July 2024, Magic Software\nacquired a nursing care platform operation for $1.6 million.\n\n \n\nIn April 2024, Magic Software\ncompleted the acquisition of all issued and outstanding share capital of Theoris Group Inc. a U.S.-based provider of information technology\nand engineering consulting services, specializing in strategic data management, analytics, application development, cloud solutions, and\nthe recruitment of technical personnel, for $13.1 million (including deferred payments).\n\n \n\nIn December 2025, Comm-IT\nSoftware Ltd and 9540 Y.G. Soft I.T Ltd., both subsidiaries of Magic Software, acquired in the aggregate 75% of the outstanding share\ncapital of Savanna Solutions Ltd., or Savanna. Savanna is an offshore technology services provider specializing in software development,\nIT consulting and engineering services, including application development, cloud-based solutions and support for digital transformation\ninitiatives for a total purchase price consideration amounted to NIS 5.25 million (approximately $1.6 million), consisting of a base purchase\nprice of NIS 3.75 million (approximately $1.1 million) and a contingent consideration estimated as of the acquisition date at of NIS 1.5\nmillion (approximately $0.5 million). The additional consideration was contingent upon Savanna reaching certain operational targets in\n2025, 2026 and 2027.\n\n \n\nIn February 2025, Matrix completed\nthe acquisition of 70% of the outstanding share capital of Gav Systems Ltd. and Gav Expert Ltd., providers of outsourcing services, primarily\nin the form of computing and software personnel, for total consideration of approximately NIS 45.5 million (approximately $12.5 million).\nAdditionally, a dividend was paid to the sellers in respect of accumulated profits up to December 31, 2023, in a total amount of NIS 29\nmillion (approximately $8.1 million).\n\n \n\nIn December 2024, Matrix acquired\nMoshe Ort Holdings Ltd. (Ortec) for approximately NIS 19.5 million (approximately $5.4 million) in cash, together with additional contingent\nconsideration.\n\n \n\nIn November 2024, Matrix completed\nthe purchase of 51% of the outstanding share capital of Alacer Matrix LLC (former: Alacer Group), which specializes in advisory services\nand the provision of experts in the field of governance, regulation and compliance within the U.S. financial market, for approximately\n$1.95 million in cash, and additional contingent consideration.\n\n \n\nIn November 2025, our subsidiary\nMichpal completed the acquisition of 60% of the shares of Linkach Ltd., which develops and markets a secure cloud platform for recruiting\ncandidates through online communities and diverse digital channels, in exchange for approximately NIS 1.125 million (approximately $0.3\nmillion) in cash, with a conditional additional payment to be paid in 2029, subject to the achievement of certain goals. Also in November\n2025, Michpal entered into an agreement to acquire 60% of the share capital of JTG Human Resources Consulting Ltd., which together with\nits subsidiaries constitutes the Zviran Group, which is engaged in providing compensation consulting and salary data services, pension\nconsulting and employee benefits advisory services, as well as human resources processes, and provides services to a wide range of clients\nin both the public and private sectors, including government ministries, local authorities, and public and private companies, for cash\nconsideration of NIS 48 million (approximately $14.9 million), of which NIS 9.0 million (approximately $2.7 million), as well as additional\nNIS 8.4 million (approximately $2.6 million), are contingent on the results of the Zviran Group’s operations in the years 2026-2028.\nThe acquisition was concluded on April 1, 2026, upon the fulfillment of all closing conditions including the receipt of regulatory approvals.\n\n \n\nDuring the third quarter of\n2025, Michpal completed a share exchange transaction, whereby all of its interests in Effective Solutions Ltd., which specializes in consulting\nservices, were transferred to a minority shareholder of that company, and all shares of Kol Tax Ltd. (which is engaged in the training\nof payroll accountants and bookkeepers, and offers professional courses, seminars and continuing education programs in the fields of accounting,\npayroll and tax consulting, as well as provides outsourced pension administration and payroll services to companies and organizations)\nthat were owned by Effective Solutions and that constituted 65% of the issued and outstanding capital of Kol Tax Ltd., were transferred\nto Michpal, in a transaction in which Michpal was deemed to pay approximately NIS 4.4 million (or approximately $1.3 million).\n\n \n\n2\n\n \n\n \n\nIn July 2025, Michpal completed the acquisition of 70% of the shares\nof Mishmarot Technologies Ltd., or Mishmarot, which develops and markets an advanced technological solution for automated work schedules\nbased on artificial intelligence, for a purchase price of approximately NIS 19.5 million in cash (approximately $5.8 million), subject\nto working capital adjustments, and also undertook an additional conditional payment (amounting to approximately NIS 2.1 million (or $0.6\nmillion) as of December 31, 2025) to be paid to sellers in 2027, subject to the achievement of the goals set in relation to the results\nof Mishmarot’s activity in 2026.\n\n \n\nIn March 2025, Michpal acquired\nall remaining outstanding shares of Formally Smart Form System Ltd for total consideration of NIS 28.2 million (approximately $7.7 million).\n\n \n\nIn December 2024, Michpal\nacquired 70% of the outstanding share capital of Paperless Ltd., the developer of the cloud-based Paperless platform for digital and online\npaperless accounting management for finance professionals, accountants, and tax advisors, for total consideration of approximately NIS\n8.5 million (approximately $2.3 million) and also undertook an additional conditional payment (amounting to approximately NIS 24.0 million\n(or $7.5 million, of which approximately $0.3 million was paid to the seller during 2025) to be paid to the seller in 2027, subject to\nthe achievement of the goals set in relation to the results of Paperless in 2026.\n\n \n\nIn October 2024, Michpal acquired\n60% of the outstanding share capital of Y-IT Ltd., an Israeli based company that develops and markets a software platform for managing\nand optimizing transportation operations and vehicle fleets in the Israeli transportation industry, for total consideration of approximately\nNIS 88.9 million (approximately $23.6 million) including additional contingent consideration.\n\n \n\nIn July 2024, Michpal acquired\n60% of the outstanding share capital of Meida Computers Software Solutions (G.D) Ltd., the developer and marketer of advanced solutions\nfor recruitment and human resources management processes, for total consideration of approximately NIS 47 million (approximately $12.49\nmillion) and additional contingent consideration.\n\n \n\nIn February 2024, Michpal\nacquired the remaining outstanding shares of Liram Finance Software Ltd from its minority shareholder for approximately NIS 5.25 million\n(approximately $1.45 million). In January 2024, Michpal acquired 70% of the outstanding share capital of Heshev Information Systems (2012)\nLtd., which develops and markets a cloud-native technology platform for managing financial and business operations, for accountants, tax\nconsultants, payroll managers, bookkeepers, and financial controllers, for total consideration of approximately $1.3 million in cash.\n\n \n\nIn November 2025, our affiliate\nTSG Systems acquired all of the shares of A.S.D. Property Management (1993) Ltd., which is engaged in the provision of municipal surveys\nand surveying services for municipal taxation and property management purposes, for approximately NIS 42.7 million (approximately $12.9\nmillion).\n\n \n\nIn July 2025, TSG Systems\nacquired 70% of the issued and outstanding share capital of PSI Instrumentation and Process Control Ltd., a company engaged in the field\nof instrumentation and control, characterization of process systems, planning and execution of various systems, for total consideration\nof NIS 5.2 million (approximately $1.5 million).\n\n \n\nIn December 2024, TSG Systems\nacquired all of the share capital of Elite Project Management Ltd., the parent company of a subsidiary that manages complex technological\nprojects and the engineering of operational systems for companies and security entities in Israel, for a total of NIS 29.6 million.\n\n \n\n3\n\n \n\n \n\nIn February 2026, Formula\nInfrastructure completed the acquisition of 73% of the issued and outstanding share capital of M.L.B.S. Technologies Ltd, an Israel-based,\nprovider of infrastructure services specializing in subsurface utility projects for telecommunications, transportation and municipal sectors,\nfor total consideration of approximately NIS 53.0 million (approximately $17.1 million). Also in February 2026, Formula Infrastructure\ncompleted the acquisition of 70% of the issued and outstanding share capital of David Barhom Engineers & Consultants Ltd, an Israeli-based\nengineering and consulting firm specializing in the planning and design of electrical, communications and control systems for infrastructure\nprojects, for total consideration of approximately NIS 42 million (approximately $13.6 million).\n\n \n\nIn October 2025, Formula Infrastructure,\ncompleted the acquisition of 60% of the issued and outstanding share capital of Advance Engineering Ltd, an Israel-based provider of multi-disciplinary\nquality management (QA/QC), field Inspection, and design management services in wide range of construction projects, which include civil,\ninfrastructures, electrical and mechanical process disciplines for a total consideration of approximately NIS 20.1 million (approximately\n$6.2 million) including an additional conditional payment, amounting to approximately NIS 2.2 million (or $0.7 million) to be paid to\nthe seller in 2026, subject to the achievement of the goals set in relation to the results of Advance’s activity in 2026.\n\n \n\nAll such past or prospective\nacquisitions or business combinations are part of our integrated M&A growth strategy, which is centered on three key factors: growing\nour customer base, expanding our geographic footprint and adding complementary solutions and services to our offerings, all while we seek\nto ensure our continued high quality of services and product delivery. Any failure to successfully integrate the business, operations\nand employees of our acquired companies, or to otherwise realize the anticipated benefits of these acquisitions, could harm our results\nof operations. Our ability to realize these benefits will depend on the timely integration and consolidation of organizations, operations,\nfacilities, procedures, policies and technologies, and the harmonization of differences in the business cultures between these companies\nand their personnel. Integration of these businesses will be complex and time-consuming, will involve additional expense, and could disrupt\nour business and divert management’s attention from ongoing business concerns. The challenges involved in integrating these acquired\nentities and other former acquisitions include:\n\n \n\n●Preserving customer and other\nimportant relationships\n\n \n\n●Integrating complex, core products\nand services that we acquire with our existing products and services\n\n \n\n●Integrating financial forecasting\nand controls, procedures and reporting cycles\n\n \n\n●Combining and integrating information\ntechnology, or IT, systems\n\n \n\n●Integrating employees and related\nHR systems and benefits, maintaining employee morale and retaining key employees\n\n \n\n●Potential confusion that we\nmay have in our dealings with customers and prospective customers as to the products we are offering to them and potential overlap among\nthose products\n\n \n\n●Investment of significant management\ntime and attention towards the integration process\n\n \n\nThe benefits we expect to\nrealize from our acquisitions or business combinations are, necessarily, based on projections and assumptions about the combined businesses\nof our Group, and assume, among other things, the successful integration of the acquired entities into our business and operations. Our\nprojections and assumptions concerning our acquisitions may be inaccurate, however, and we may not successfully integrate the acquired\ncompanies and our operations in a timely manner, or at all. We may also be exposed to unexpected contingencies or liabilities of the acquired\ncompanies. If we do not realize the anticipated benefits of these transactions, our growth strategy and future profitability could be\nadversely affected.\n\n** **\n\n4\n\n \n\n** **\n\n**If we do not successfully develop and deploy\nnew technologies to address the updated needs of our customers, our business and results of operations could suffer.**\n\n \n\nOur recent success has been\nbased in part on our ability to design software solutions that enable our customers to facilitate, improve and automate traditional processes\nto make them easier for end-customers, by utilizing advanced technologies, such as digital engagement, low-code/no-code, API layer, advanced\nanalytics and cloud computing. We spend substantial amounts of time and money researching and developing new technologies and enhanced\nversions of existing features to meet our customers’ and potential customers’ rapidly evolving needs. There is no assurance\nthat our enhancements to our solutions or our new solutions’ features, capabilities, or offerings, will be compelling to our customers\nor gain market acceptance. If our research and development investments do not accurately anticipate customer demand or if we fail to develop\nour solutions in a manner that satisfies customer preferences in a timely and cost-effective manner, we may fail to retain our existing\ncustomers or increase demand for our solutions.\n\n \n\nIntroduction of new products\nand services by competitors or the development of entirely new technologies to replace existing offerings could make our solutions obsolete\nor adversely affect our business, financial condition, and results of operations. We may experience difficulties with software development,\ndesign, or marketing that delay or prevent our development, introduction, or implementation of new solutions, features, or capabilities.\nWe have in the past from time to time experienced delays in our internally planned release dates of new features and capabilities, and\nthere can be no assurance that new solutions, features, or capabilities will be released according to schedule. Any delays could result\nin adverse publicity, loss of revenue or market acceptance, or claims by customers brought against us, any of which could harm our business.\nMoreover, the design and development of new solutions or new features and capabilities to our existing solutions may require substantial\ninvestment, and we have no assurance that such investments will be successful. If customers do not widely adopt our new solutions, experiences,\nfeatures, and capabilities, we may not be able to realize a return on our investment and our business, financial condition, and results\nof operations may be adversely affected.\n\n \n\nOur new and existing solutions\nand changes to our existing solutions could fail to attain sufficient market acceptance for many reasons, including:\n\n \n\n●Our failure to predict market\ndemand accurately in terms of product functionality and to supply offerings that meet that demand in a timely fashion;\n\n \n\n●Product defects, errors, or\nfailures or our inability to satisfy customer service level requirements;\n\n \n\n●Negative publicity or negative\nprivate statements about the security, performance, or effectiveness of our solutions or product enhancements;\n\n \n\n●Delays in releasing to the\nmarket our new offerings or enhancements to our existing offerings, including new product modules;\n\n \n\n●Introduction or anticipated\nintroduction of competing solutions or functionalities by our competitors;\n\n \n\n●Inability of our solutions\nor product enhancements to scale and perform to meet customer demands;\n\n \n\n●Receiving qualified or adverse\nopinions in connection with security or penetration testing, certifications or audits, such as those related to IT controls and security\nstandards and frameworks or compliance;\n\n \n\n●Poor business conditions for\nour customers, causing them to delay software purchases;\n\n \n\n●Reluctance of customers to\npurchase proprietary software solutions; and\n\n \n\n●Reluctance of customers to\npurchase products incorporating open source software.\n\n \n\n5\n\n \n\n \n\nIf we are not able to continue\nto identify challenges faced by our customers and develop, license, or acquire new features and capabilities for our solutions in a timely\nand cost-effective manner, or if such enhancements do not achieve market acceptance, our business, financial condition, results of operations,\nand prospects may suffer and our anticipated revenue growth may not be achieved.\n\n \n\nBecause we derive, and expect\nto continue to derive, a material portion of our revenue from implementation of our solutions, along with post-implementation services\nsuch as ongoing support and maintenance and professional services, market acceptance of these solutions, and any enhancements or changes\nthereto, is important to our success.\n\n** **\n\n**Our development cycles are often lengthy,\nand we may not have the resources available to complete development of new, enhanced or modified solutions. We may incur significant expenses\nbefore we generate revenues, if any, from our solutions.**\n\n \n\nBecause certain of our solutions\nare complex and require rigorous testing, development cycles can be lengthy, taking us up to two years to develop and introduce new, enhanced\nor modified solutions. Moreover, development projects can be technically challenging and expensive. The nature of these development cycles\nmay cause us to experience delays between the time we incur expenses associated with research and development and the time we generate\nrevenues, if any, from such expenses. We may not have, in the future, sufficient funds or other resources to make the required investments\nin product development. Furthermore, we may invest substantial resources in the development of solutions that do not achieve market acceptance\nor commercial success. Even where we succeed in our sales efforts and obtain new orders from customers, the complexity that may be involved\nin delivering our solutions to such customers makes it more difficult for us to consummate delivery in a timely manner and to recognize\nrevenue and maximize profitability. Failure to deliver our solutions in a timely manner could result in order cancellations, damage our\nreputation and require us to indemnify our customers. Any of these risks relating to our lengthy and expensive development cycle could\nhave a material adverse effect on our business, financial conditions and results of operations.\n\n \n\n**Our sales cycle is variable and often lengthy,\ndepending upon many factors outside our control, which requires us to expend significant time and resources prior to generating associated\nrevenues.**\n\n \n\nThe typical sales cycle for\ncertain of our solutions and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of people\nin our customers’ organizations, and often involves a significant operational decision by our customers. Our sales efforts sometimes\ninvolve educating our customers, industry analysts and consultants about the use and benefits of our solutions, including the technical\ncapabilities of those solutions and the efficiencies achievable by organizations deploying our solutions. Customers typically undertake\na significant evaluation process, which frequently involves not only our solutions, but also those of our competitors, and can result\nin a lengthy sales cycle. Our sales cycle for certain new customers is sometimes one to two years and can extend even longer in some cases.\nWe often spend substantial time, effort and money on our sales efforts without any assurance that such efforts will produce any sales.\n\n \n\n**Macro-economic factors, including lingering\ninflation, elevated interest rates, fluctuations in foreign currency exchange rates and increased tariffs may adversely affect our revenues,\nprofitability and cash flows.**\n\n \n\nA substantial portion of our\noperations is conducted in Israel, and a majority of our revenues are derived from our activities in Israel. As a result, our business\nis particularly sensitive to economic conditions, political developments and geopolitical risks affecting Israel. An economic slowdown,\nrecession, or heightened economic or political uncertainty in Israel, including as a result of inflationary pressures or increases in\ninterest rates, could adversely affect overall economic activity and, in turn, demand for our services and solutions. Adverse economic\nconditions in Israel may lead our customers to reduce or delay spending, including cutbacks in IT procurement budgets and technology investments.\nThis may result in, among other things, delays or cancellations of projects, reductions in workforce, increased competition for skilled\nemployees (including hiring of our personnel by our customers), pricing pressure, reduced demand for software and hardware products, and\nother cost-reduction measures by our customers, any of which could adversely affect our revenues and profitability.\n\n \n\n6\n\n \n\n \n\nIn addition, a deterioration\nin the geopolitical environment or in Israel’s international standing could adversely affect our relationships with business partners,\nincluding global technology vendors, and may result in reduced willingness of such partners to conduct business in Israel or with Israeli\ncompanies, including us.\n\n \n\nFurthermore, adverse economic\nconditions may impair the ability of some of our customers to meet their payment obligations, which could lead to increased credit risk,\nhigher levels of bad debt and negatively impact our cash flows.\n\n \n\nMore broadly, our business\ndepends, in part, on the economic condition of our current and prospective customers and on global economic conditions. Adverse macro-economic\nfactors, including inflation and elevated interest rates, have in recent periods negatively affected the capital spending and investment\npriorities of our customers, which may reduce demand for our products and services. Higher interest rates may also constrain access to\nfinancing and increase the cost of capital for our customers, thereby adversely affecting their ability to purchase our offerings. Although\ninflation and interest rates have moderated from prior peak levels, they remain elevated relative to historical norms, and any continued\nor renewed increases could further adversely affect our results of operations. These factors have in the past, and may in the future,\ndelay or lengthen sales cycles, reduce the pace of customer decision-making, and adversely affect the growth of our international operations.\nThey may also lead to extended payment cycles and increased risk of customer defaults. In addition, fluctuations in foreign currency exchange\nrates have adversely affected, and may continue to adversely affect, our financial results. For example, in 2022, the weakening of certain\nEuropean currencies against the U.S. dollar adversely impacted our results. Similarly, depreciation of the New Israeli Shekel against\nthe U.S. dollar has adversely affected our revenues and results of operations, as measured in U.S. dollars, including in 2023 compared\nto 2022, and may do so again in the future. For additional information, see “*Risks Relating to our International Operations—Our\ninternational operations expose us to risks associated with fluctuations in foreign currency exchange rates that have in the recent past\nadversely affected, and could once again adversely affect, our business”*.\n\n \n\nIn addition to exerting the\nforegoing impact, macro-economic factors may amplify a number of risks for us, including, but not limited to, the following:\n\n \n\n●our ability to increase sales\nof new, enhanced solutions to existing customers may be hindered due to more cautious purchasing and investment strategies by corporate\ncustomers;\n\n \n\n●reduced economic activity could\nnegatively impact customer discretionary spending on software solutions and services, which in turn could substantially impact our business\noperations and financial condition in an adverse manner;\n\n \n\n●our customer success efforts\nand our ability to enter into new markets and to acquire new customers may be impeded, in part due to the lengthening of our sales cycles;\n\n \n\n●there may be an increase in\nour credit losses reserves as customers face economic hardship and collectability becomes more uncertain, including due to the risk of\nbankruptcies;\n\n \n\n●our ability to retain, attract\nand recruit employees may be adversely impacted if our growth rate and profitability decrease;\n\n \n\n●our ability to complete acquisitions\nmay be hampered if we need to seek financing for such acquisitions; and\n\n \n\n●our ability to raise capital\nmay be hurt.\n\n \n\n7\n\n \n\n \n\nThe full impact of economic\nheadwinds on our business and our future performance may also have the effect of heightening any of our other risk factors described in\nthis annual report, and is difficult to predict how long those trends will continue, so there is some level of risk that any guidance\nwe provide to the market may turn out to be incorrect.\n\n \n\nIn addition, there is current\nconcern regarding the potential impact that increased and reciprocal tariffs imposed by the United States and other countries may have\non the economic environment in which our clients operate, which could adversely affect our sales of services and solutions in various\ncountries and regions.\n\n** **\n\n**Our business depends on generating and maintaining\nongoing, profitable client demand for our services and solutions, including through the adaptation and expansion of our services and solutions\nin response to ongoing changes in technology and offerings, and a significant reduction in such demand or an inability to respond to the\nevolving technological environment could materially affect our results of operations.**\n\n \n\nOur revenue and profitability\ndepend on sustained demand for our services and solutions with favorable margins, which may be adversely affected by numerous factors,\nmany of which are beyond our control. As described above, adverse global economic and political conditions have affected, and may continue\nto affect, client demand. In addition, our success depends on our ability to develop and implement services and software solutions that\nanticipate and respond to rapid and continuing technological change. Technological developments may also materially affect the cost and\nuse of technology by our clients and may alter the manner in which we generate revenue, particularly with respect to cloud-based and as-a-service\nmodels. Certain technological advancements have reduced or replaced demand for some of our historical services and may continue to do\nso. These developments may cause clients to delay or reduce spending under existing engagements or defer entering into new contracts while\nevaluating emerging technologies, which could adversely affect our results of operations.\n\n \n\nThe markets in which we operate\nare characterized by significant and accelerating technological developments, particularly in artificial intelligence (AI), which has\nevolved rapidly in recent periods. While the adoption of AI technologies may create opportunities to enhance our offerings and increase\ndemand, it also presents significant risks. There is a risk that we may not be able to keep pace with these technological developments,\nwhich could impair our competitive position and result in loss of clients or revenues. In addition, increased adoption of AI tools by\nour clients may reduce demand for certain of our traditional services, particularly professional services related to software development\nand testing. The increased use of AI technologies also raises regulatory, legal and ethical challenges, including requirements relating\nto transparency, data privacy and information security. Changes in applicable laws and regulations may require us to incur additional\ncosts to achieve compliance or may limit the use of certain technologies. In addition, reliance on AI systems in our operations or in\nthe services we provide may expose us to risks arising from errors in algorithms, biases in data, system failures, or cybersecurity vulnerabilities.\nSuch risks could result in inaccurate outputs, operational disruptions, harm to our reputation, financial losses, or potential legal claims.\nFurthermore, errors or failures in AI systems, whether during development, implementation or operation, may adversely affect the reliability\nof our services and could expose both us and our clients to operational, financial or legal risks. Any such failures could negatively\nimpact our relationships with clients and third parties that rely on our solutions. Although we invest resources in monitoring technological\ndevelopments, including AI, and in developing processes to manage associated technological and regulatory risks, there can be no assurance\nthat these measures will be effective. If we fail to adequately respond to technological developments or to manage the risks associated\nwith AI and other emerging technologies, our business, results of operations, financial condition, reputation and competitive position\ncould be adversely affected. We operate in a highly competitive and rapidly evolving environment, including from new technology entrants.\nNew services or technologies offered by competitors or new entrants may make our offerings less competitive or less differentiated. In\naddition, consolidation among our clients may reduce demand for our services if merged entities rely on other providers.\n\n \n\n8\n\n \n\n \n\n**Investment in highly skilled research and\ndevelopment, product implementation, customer support and other personnel is a critical factor in our ability to develop and enhance our\nsolutions and support our customers, but that personnel may nevertheless be hard to retain and an increase in that investment may furthermore\nreduce our profitability.**\n\n \n\nAs a provider of proprietary software solutions that rely upon technological\nadvancements, we rely heavily on our research and development activities to remain competitive. We consequently depend in large part on\nthe ability to attract, train, motivate and retain highly skilled information technology professionals for our research and development\nteam, as well as software programmers and communications engineers, and product implementation experts. Because our software solutions\nmay in some parts be highly complex and often may be used by our customers to perform critical business functions, we also depend heavily\non other skilled technology professionals to provide ongoing support to our customers. Skilled technology professionals are often in high\ndemand and short supply.\n\n \n\nOur research and development,\nproduct delivery, and general and administrative, activities are conducted at locations where the competition for skilled technology professionals\nis particularly intense (mainly in Israel and in North America). While there has been strong competition for qualified human resources\nin the high-tech industry historically, the industry experienced record growth and activity over the last few years, both at the earlier\nstages of venture capital and growth equity financings, and at the exit stage of initial public offerings and mergers and acquisitions.\nThis flurry of growth and activity caused a sharp increase in job openings in both high-tech companies and research and development centers,\nas well as the intensification of competition between employers to attract qualified employees in those jurisdictions. Employee attrition—\nfor all fields and professions, and for all levels of management— accompanied this strong competition, and high-tech companies such\nas ours that are based in Israel and these other jurisdictions have recently faced a shortage of skilled human capital, including engineering,\nresearch and development, sales and customer support personnel. Many of the companies with which we compete for qualified personnel may\nhave greater resources than we do, and we may not succeed in recruiting additional experienced or professional personnel, retaining personnel\nor effectively replacing current personnel who may depart with qualified or effective successors.\n\n \n\nWhile the foregoing trend\nhas significantly moderated over the last couple of years, if, going forward we are unable to hire or retain qualified research and development\npersonnel and other technology professionals to develop, implement and modify our solutions, we may be unable to meet the needs of our\ncustomers. Even if we succeed at retaining the necessary skilled personnel in our research and development and customer support efforts,\nour investments in our personnel and product development efforts increase our costs of operations and thereby reduce our profitability,\nunless accompanied by increased revenues. As a result of the intense competition for qualified human resources, the high-tech market in\nwhich we operate has experienced and may continue to experience significant wage inflation. Accordingly, our efforts to attract, retain\nand develop personnel may also result in significant additional expenses, which could adversely affect our profitability. Given the highly\ncompetitive industry in which we operate, we may not succeed in increasing our revenues in line with our increasing investments in our\npersonnel and research and development efforts.\n\n \n\nIn addition, changes in demand\nfor technology-related human capital, including as a result of the increasing adoption of artificial intelligence (AI) and the automation\nof software development and IT operations processes, may affect the mix of skills required within our workforce. In particular, demand\nis shifting toward advanced skill sets in areas such as AI, cloud computing and cybersecurity, which may be in limited supply. As a result,\nwe may face challenges in recruiting, training and retaining personnel with the necessary expertise, which could adversely affect our\nability to deliver services and execute on our growth strategy.\n\n \n\nAt the same time, increased\nadoption of AI and automation by our customers may reduce demand for certain traditional services, particularly those involving professional\npersonnel for software development and testing. These trends may require us to invest in re-skilling our workforce and adapting our service\nofferings, which may increase our operating costs and negatively affect our margins if we are unable to offset such costs through increased\ndemand for new services. Furthermore, increases in the cost of living, particularly in markets where we operate, may continue to result\nin upward pressure on wages. As a result, we may be required to incur higher compensation costs and make additional investments in recruitment,\nretention and workforce development initiatives, which could adversely affect our profitability.\n\n \n\n9\n\n \n\n \n\nIn addition, our operations\nare subject to extensive and evolving labor and employment regulations, including changes in applicable laws, collective arrangements,\ncourt rulings and other regulatory requirements. Compliance with such changes may increase our operating costs and administrative burden,\nand could expose us to claims or disputes with employees. Any such developments could adversely affect our results of operations and financial\ncondition.\n\n \n\nFurthermore, as we seek to\nexpand the marketing and offering of our products and services into new territories, it requires the retention of new, additional skilled\npersonnel with knowledge of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable\ncost relative to the additional revenues that we expect to generate in those territories, or may not be available at all. In particular,\nwage costs in lower-cost markets where we have recently added personnel, such as India, are increasing and we may need to increase the\nlevels of our employee compensation more rapidly than in the past to remain competitive. The transition of projects to new locations may\nalso lead to business disruptions due to differing levels of employee knowledge and organizational and leadership skills. Although we\nhave never experienced an organized labor dispute, strike or work stoppage, any such occurrence, including with unionization efforts,\ncould disrupt our business and operations and harm our financial condition. In addition, we may need to attract and train additional IT\nprofessionals at a rapid rate in order to serve several new customers or implement several new large-scale projects in a short period\nof time. If there is a downturn in economic conditions generally or in areas in which our solutions and services are provided in particular\nand we need to lay off some of those employees, that will result in our loss of the time and resources that we had invested in training\nthem, and our loss of their accumulated know-how.\n\n \n\n**Failure to manage our growth— both organic and non-organic—\ncould effectively harm our business.**\n\n \n\nIn recent years, we experienced,\nand expect to continue to experience in the future, growth in our operations that has placed, and will continue to place, a significant\nstrain on our operational and financial resources and our personnel. To manage our anticipated future growth effectively, we must continue\nto maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage\nexpanded operations and employees in geographically distributed locations. We also must attract, train and retain a significant number\nof additional qualified sales and marketing personnel, professional services personnel, software engineers, technical personnel and management\npersonnel. Our failure to manage our growth effectively could have a material adverse effect on our business, results of operations and\nfinancial condition. Our growth could require significant capital expenditures and may divert financial resources from other projects,\nsuch as the development of new services or product enhancements. For example, since it may take as long as six months to hire and train\na new member of our professional services staff, we make decisions regarding the size of our professional services staff based upon our\nexpectations with respect to customer demand for our products and services. If these expectations are incorrect, and we increase the size\nof our professional services organization without experiencing an increase in sales of our products and services, we will experience reductions\nin our gross and operating margins and net income. If we are unable to effectively manage our growth, our expenses may increase more than\nexpected, our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy. Our growth\nmay also be accompanied by greater exposure to litigation, including suits by clients, vendors, employees or former employees, as the\nsizes of our workforce and our overall international operations increase. All such litigation carries with it related costs and could\ndivert our management’s attention from ongoing business concerns. We also intend to continue to expand into additional international\nmarkets which, if not technologically or commercially successful, could harm our financial condition and prospects.\n\n** **\n\n**The market for software solutions and related\nservices is highly competitive and dynamic, and we need to adapt quickly to trends in order to retain or grow our market share.**\n\n \n\nThe market for software solutions\nand related services, in which we compete, is highly competitive and continuously evolving.\n\n \n\n10\n\n \n\n \n\nOur competitors include, with\nrespect to Matrix and its subsidiary Magic Software:\n\n \n\n●multinational IT service providers,\nincluding the services arms of global technology providers;\n\n \n\n●offshore IT service providers\nin lower-cost locations such as India and Eastern Europe;\n\n \n\n●accounting firms and consultancies\nthat provide consulting and other IT services and solutions;\n\n \n\n●solution or service providers\nthat compete with us in a specific geographic market, industry or service area, including advertising agencies, engineering services\nproviders and technology start-ups and other companies that can scale rapidly to focus on or disrupt certain markets and provide new\nor alternative products, services or delivery models; and\n\n \n\n●in-house IT departments that\nuse their own resources, rather than engage an outside firm.\n\n \n\nWith respect to Magic Software’s\ntechnology tools and developed software solutions and Michpal’s payroll and human resources software solutions and services, our\ncompetitors generally consist of:\n\n \n\n●global software providers with\ntheir own IP;\n\n \n\n●local/domestic software vendors\nwith their own IP, operating in a designated geographic market and/or within a designated segment of the insurance, payroll and human\ncapital industries;\n\n \n\n●internal IT departments, who\noften prefer to develop solutions in-house; and\n\n \n\n●new companies with niche solutions.\n\n \n\nOur failure to adapt to changing\nmarket conditions and to compete successfully with established or new competitors could have a material adverse effect on our results\nof operations and financial condition. Many of our smaller competitors have been acquired by larger competitors, which provides those\nsmaller competitors with greater resources and potentially a larger client base for which they can develop solutions. Our customers or\npotential customers may prefer suppliers that are larger than us, are better known in the market or that have a greater global reach.\nIn lieu of being acquired by larger competitors, current and potential competitors have established, and may establish in the future,\ncooperative relationships among themselves, or with third parties to increase their abilities to address the needs of our existing, or\nprospective, customers. As a result, our competitors may be able to adapt more quickly than us to new or emerging technologies and changes\nin customer requirements, and may be able to devote greater resources to the promotion and sale of their products.\n\n \n\nA number of our competitors\nalso have operational advantages relative to us, as they are generally private companies that are not required to report results of operations\non a regular basis, and can consequently benefit from the ability to take more risky actions in the hope of building up strong brand name\nrecognition, such as payment of higher salaries as a recruitment tool, sale of products at cheaper prices, and very rapid growth of sales\nand marketing teams, even if those actions result in operating losses.\n\n \n\nTo compete in the rapidly\nchanging environment, and win the competition for end-customers, we also need to offer coherent digital and data propositions, allowing\nour insurance provider customers to better interact with their own customers in a digital and omni-channel manner. If we fail to adapt\nand accelerate the development of our digital and data offerings, that may adversely impact our ability to compete in some of our target\nmarkets. Consolidation in the insurance industry in which some of our clients operate also increases competitiveness for us by reducing\nthe number of potential clients for whose business we and our competitors compete. The high level of continuity with which insurance and\nother financial services clients remain with their providers of software-related services also increases general competitiveness by tying\nclients to their service providers and thereby shrinking the market of potential clients.\n\n \n\n11\n\n \n\n \n\nThe markets in which\nwe operate are increasingly shifting toward cloud-based solutions. Our ability to compete effectively depends on our ability to develop,\ndeliver and support solutions that can be deployed in cloud environments. This transition requires significant and ongoing investment\nin technical, financial, legal, sales, information technology and operational resources. If we are unable to adapt our offerings at a\npace consistent with customer adoption of cloud-based solutions, our competitive position and results of operations could be adversely\naffected.\n\n \n\nMarket acceptance of cloud-based\nsolutions is influenced by a variety of factors, including concerns regarding security, data privacy, service availability and reliability,\nperformance, scalability, integration capabilities, and the availability of tools and qualified service providers to support cloud migration.\nIn addition, customer preferences, existing licensing models and regulatory requirements may affect the pace and extent of adoption. The\ncontinued shift of our customers toward cloud-based solutions presents both opportunities and risks. While it may enable us to expand\nour cloud-based offerings, it may also reduce demand for certain of our traditional products and services. In many cases, cloud-based\nsolutions serve as substitutes for our legacy software products and related services, including perpetual license-based offerings. If\nthe decrease in demand for our traditional offerings exceeds the growth in demand for our cloud-based solutions, our revenues and results\nof operations could be adversely affected. In addition, the gross margins associated with cloud-based solutions are generally lower than\nthose associated with traditional solutions that they replace. As a result, even if revenues from cloud-based offerings increase, our\noverall profitability may be adversely affected due to margin compression.\n\n \n\n**We may be required to increase or decrease\nthe scope of our operations in response to changes in the demand for our products and services, and if we fail to successfully plan and\nmanage changes in the size of our operations, our business will suffer.**\n\n \n\nIn the past, we have both\ngrown and contracted our operations, in some cases rapidly, to profitably offer our products and services in a continuously changing market.\nIf we are unable to manage these changes, or to plan and manage any future changes in the size and scope of our operations, our business\nmay be negatively impacted.\n\n \n\nRestructurings and cost reduction\nmeasures that we have implemented in the past have reduced the size of our subsidiaries’ operations and workforce. Reductions in\npersonnel can result in significant severance, administrative and legal expenses, and may also adversely affect or delay various sales,\nmarketing and product development programs and activities. These cost reduction measures have included, and may in the future include,\nemployee separation costs and consolidating and/or relocating certain of our subsidiaries’ operations to different geographic locations.\n\n \n\nAcquisitions, organic growth\nand absorption of significant numbers of customers’ employees in connection with managed services projects have, from time to time,\nincreased our subsidiaries’ headcount. During periods of expansion, our subsidiaries may need to serve several new customers or\nimplement several new large-scale projects in short periods of time. This may require our subsidiaries to attract and train additional\nIT professionals at a rapid rate, as well as quickly expand their facilities, which may be difficult to successfully implement.\n\n \n\n**If existing customers are not satisfied\nwith our solutions and services and either do not make subsequent purchases from us or do not continue using such solutions and services,\nor if our relationships with our largest customers are impaired, our revenue could be negatively affected.**\n\n \n\nWe depend to an extent on\nrepeat product and service revenues from our base of existing customers. For example, Michpal’s largest client accounted for 13.1%\nand 16.7% of its revenues in the years ended December 31, 2025 and 2024, respectively. Two of Magic Software’s largest clients accounted\ntogether for 13.3% and 13.2% of its revenues in the years ended December 31, 2025 and 2024, respectively, and five of Magic Software’s\nlargest clients accounted for 22.5% and 23.0% of its revenues in the years ended December 31, 2025 and 2024, respectively. If our existing\ncustomers are not satisfied with our solutions and services, they may not enter into new project contracts with us or continue using our\ntechnologies. A significant decline in our revenue stream from existing customers, including due to termination of agreement(s), would\nhave an adverse effect on our business, results of operations and financial condition. For example, in 2023, one of Magic Software’s\nlargest revenue generating clients, without advance notice, and due to reasons unrelated to Magic Software’s services, suspended\nsignificant parts of its active time and material-based projects with Magic Software. Such services were later increased in the following\nyears.\n\n \n\n12\n\n \n\n \n\n**We are in part dependent on a limited number\nof core product families, and a decrease in revenues from these products would adversely affect our business, results of operations and\nfinancial condition; our future success will be partially dependent on the acceptance of future releases of our core product offerings,\nand if we are unsuccessful with these efforts, our business, results of operations and financial condition will be adversely affected.**\n\n** **\n\nWe, through our subsidiaries\nMichpal and Matrix (in the case of Matrix, to a great extent via its Magic Software subsidiary), derive a portion of our revenues and\nprofits from sales of application and integration platforms and vertical software solutions and from related professional services, software\nmaintenance and technical support. Our future growth depends in substantial part on our ability to effectively develop and sell new products\ndeveloped by us or acquired from third parties as well as add new features to existing products and new software service offerings. A\ndecrease in revenues from our principal products and related services would adversely affect our business, results of operations and financial\ncondition.\n\n \n\nOur future success depends\nin part on the continued acceptance of our application platforms and integration products and our vertical packaged software solutions.\nThe continued acceptance of our platforms and software solutions will be dependent in part on the continued acceptance and growth of the\ncloud market, mobile and software as a service, or SaaS, for which certain of them are particularly useful and advantageous. We will need\nto continue to enhance our products to meet evolving requirements and if new versions of such products are not accepted, our business,\nresults of operations and financial condition may be adversely affected.\n\n** **\n\n**Our business sometimes involves long-term,\nlarge, complex implementation projects across the globe, which involve uncertainties, mainly during the implementation period, such as\nchanges to the estimated project costs and changes in project schedule. Such changes may cause disputes between us and our customers,\nwhether or not due to failure on our part, and may in some cases result in cancellation of those projects. Such cancellation can adversely\nimpact our revenues, profitability and/or, in some cases, our relationship with the relevant customer.**\n\n \n\nOur business is, in part,\ncharacterized by relatively large, complex implementation projects or engagements that can have a material impact on our total revenue\nand cost of revenue from quarter to quarter. A material percentage of our expenses, particularly employee compensation, are relatively\nfixed. Therefore, variations in the timing of the initiation, estimated scope of work, progress or completion of projects or engagements\ncan cause significant variations in operating results from quarter to quarter.\n\n \n\nThis is particularly the case\nfor fixed-price contracts, where our delivery requirements sometimes span more than one year. For a highly complex, fixed-price project\nthat requires customization, we may not be able to accurately estimate our actual costs of completing the project. We are sometimes dependent\non the assistance of third parties (such as our customers’ vendors or IT employees, or our system integrator partners) in implementing\nsuch projects, which may not be provided in a timely manner. If our actual cost-to-completion of a project significantly exceeds the estimated\ncosts, we could experience a loss on the related contract, which (when multiplied by multiple projects) could have an adverse effect on\nour results of operations, financial position and cash flow.\n\n \n\nSimilarly, delays in implementation\nprojects (whether fixed price or not) may affect our revenue and cause our operating results to vary. Some of our solutions are delivered\nover periods of time ranging from several months to a few years. Payment terms for those solutions are generally based on periodic payments\nor on the achievement of milestones. Any delays in payment or in the achievement of milestones may have an adverse effect on our results\nof operations, financial position or cash flows.\n\n \n\n13\n\n \n\n \n\nFor non-fixed price contracts,\nwe generally provide our customers with up-front estimates regarding the duration, scope, budget and costs associated with the implementation\nof their project. Due to the complexities described above, we may not meet those upfront estimates and/or the expectations of our customers,\nfor various reasons, which may be attributed to either us or the customers. This could lead to a potential dispute with a client. We expect\nthat we may have cancellations by our customers during the implementation phase. These terminations, if coupled with disputes with significant\ncustomers, whether or not due to failure on our part, could result in lost revenues, lower profit margins, legal claims against us and\neven the refund of the customers’ money and could harm our reputation, thereby adversely affecting our ability to attract new customers\nand to sell additional solutions and services to existing customers.\n\n** **\n\n**We may encounter difficulties in realizing\nthe potential financial or strategic benefits of recent business acquisitions. We expect to make additional acquisitions in the future\nthat could disrupt our operations and harm our operating results.**\n\n \n\nA significant component of\nour growth strategy is the expansion of our business through mergers and acquisitions, as well as strategic investments and partnerships,\nwith a focus on growing our customer base, expanding our geographic footprint and adding complementary solutions to our portfolio, while\nmaintaining the quality of our services and product delivery. In recent years, we have completed numerous acquisitions, and we expect\nto continue to pursue such opportunities in the future.\n\n \n\nAcquisitions and strategic\ninvestments are inherently risky and subject to many factors beyond our control. There can be no assurance that we will be able to identify\nor consummate suitable acquisition or investment opportunities, in Israel or internationally, on acceptable terms, or at all. In addition,\nwe may compete for such opportunities with well-capitalized companies, including private equity funds and large professional services\nfirms, which may have greater financial resources than we do. Increased competition for acquisition targets may result in higher acquisition\nprices or limit our ability to execute our growth strategy. Furthermore, the global trend of higher interest rates has increased the cost\nof financing acquisitions, which may reduce the attractiveness or feasibility of potential transactions. As a result, we may be required\nto allocate additional resources to complete acquisitions or may decide not to pursue certain opportunities. Even when acquisitions are\ncompleted, their integration is complex and may not be successful. Failure to effectively integrate acquired businesses may adversely\naffect our ability to realize expected benefits, including synergies, cost savings and growth opportunities, and may harm our results\nof operations. In particular, integration efforts may involve significant operational and organizational challenges, including the integration\nof business activities, information systems, personnel, corporate cultures, operational processes and sales and marketing functions.\n\n \n\nPrior acquisitions have resulted\nin a range of outcomes, from successful expansion of our offerings to less favorable results. Even where acquired companies have established\nproducts or services, there can be no assurance that anticipated benefits will be realized or that due diligence will have identified\nall potential risks. If we acquire other businesses, we may face difficulties, including\n\n \n\n●Difficulties in integrating\nthe operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;\n\n  \n\n●Diversion of management’s\nattention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting\nfrom acquisitions;\n\n \n\n●Challenges in integrating financial\nreporting, forecasting, controls and procedures;\n\n \n\n●Potential delays or difficulties\nin completing projects associated with in-process research and development;\n\n \n\n●Difficulties in entering markets\nin which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;\n\n \n\n●Insufficient revenue to offset\nincreased expenses associated with acquisitions; and\n\n \n\n●The potential loss of key employees,\ncustomers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement\nof acquisition plans.\n\n** **\n\n14\n\n \n\n** **\n\nIf we are unable to successfully\nexecute our acquisition strategy or integrate acquired businesses in a timely and efficient manner, our ability to achieve our growth\nobjectives may be adversely affected, and we may incur losses from unsuccessful acquisitions.\n\n** **\n\n**We may be liable to our clients for damages\ncaused by a violation of their confidential information, including their intellectual property rights and their personally identifiable\ninformation, whether due to our system failures, errors or unsatisfactory performance of services, and our insurance policies may not\nbe sufficient to cover these damages. This risk is particularly heightened as certain of our subsidiaries are transitioning towards cloud-based\nsolutions**.\n\n \n\nWe often have access to, and\nare required to collect and store, sensitive or confidential client information, including personally identifiable information. Certain\nof our cloud-based solutions and services utilized by our clients furthermore collect and store such sensitive client information. Some\nof our clients’ agreements do not limit our potential liability for breaches of confidentiality, infringement indemnity and certain\nother matters. Furthermore, breaches of confidentiality may entitle the aggrieved party to equitable remedies, including injunctive relief.\nIf any person, including any of our employees and subcontractors, penetrates our network security or misappropriates sensitive or confidential\nclient information, including personally identifiable information, we could be subject to significant liability from our clients or from\nour clients’ customers for breaching contractual confidentiality provisions or privacy laws. Despite measures we take to protect\nthe intellectual property and other confidential information or personally identifiable information of our clients, unauthorized parties,\nincluding our employees and subcontractors, may attempt to misappropriate certain intellectual property rights that are proprietary to\nour clients or otherwise breach our clients’ confidences. Unauthorized disclosure of sensitive or confidential client information,\nincluding personally identifiable information, or a violation of intellectual property rights, whether through employee misconduct, breach\nof our computer systems, systems failure or otherwise, may subject us to liabilities, damage our reputation and cause us to lose clients.\n\n \n\nMany of our contracts involve\nprojects that are critical to the operations of our clients’ businesses and provide benefits to our clients that may be difficult\nto quantify. Any failure in a client’s system or any breach of security could result in a claim for substantial damages against\nus, regardless of our responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a client,\nor poor execution of such services, could result in a client terminating our engagement and seeking damages from us.\n\n \n\nIn addition, while we have\ntaken steps to protect the confidential information that we have access to, including confidential information we may obtain through the\nuse of our cloud-based services, our security measures may be breached. If a cyber-attack or other security incident were to result in\nunauthorized access to or modification of our customers’ data or our own data or our IT systems or in disruption of the services\nwe provide to our customers, or if our products or services are perceived as having security vulnerabilities, we could suffer significant\ndamage to our business and reputation.\n\n \n\nAlthough we attempt to limit\nour contractual liability for consequential damages in rendering our services, these limitations on liability may not apply in all circumstances,\nmay be unenforceable in some cases, or may be insufficient to protect us from liability for damages. There may be instances when liabilities\nfor damages are greater than the insurance coverage we hold, and we will have to internalize those losses, damages and liabilities not\ncovered by our insurance.\n\n** **\n\n**Changes in privacy regulations may impose\nadditional costs and liabilities on us, limit our use of information, and adversely affect our business.**\n\n \n\nPersonal privacy has become\na significant issue in the United States, Europe, Israel and many other countries where we operate. Many government agencies and industry\nregulators continue to impose new restrictions and modify existing requirements about the collection, use, storage, transmission and disclosure\nof personal information. Changes to laws or regulations affecting privacy and security may impose additional liability and costs on us\nand may limit our use of such information in providing our services to customers. If we were required to change our business activities,\nrevise or eliminate services or products, or implement burdensome compliance measures, our business and results of operations may be harmed.\nAdditionally, we may be subject to regulatory enforcement actions resulting in fines, penalties, and potential litigation if we fail to\ncomply with applicable privacy laws and regulations.\n\n \n\n15\n\n \n\n \n\nIn particular, our European\nactivities are subject to the European Union General Data Protection Regulation, or GDPR, which has created additional compliance requirements\nfor us. GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires organizations to\nreport data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how their data can\nbe used. GDPR became enforceable on May 25, 2018, and non-compliance may expose entities such as our company to significant fines or other\nregulatory claims. In the United States, our operations in various states, such as New York and California, are now subject to expanded\nprivacy regulations. In California, we are subject to the California Consumer Privacy Act, a statute that went into effect on January\n1, 2020 (as amended by the California Privacy Rights Act, or the CCPA, which entered into substantial effect on January 1, 2023). The\nCCPA imposes enhanced disclosure requirements for us regarding our interactions with customers who are residents of California, such as\ncomprehensive privacy notices for consumers when we, or our agents, collect their personal information. We may be further required to\nensure third-party compliance, as under the CCPA we could be liable if third parties that collect, process or retain personal information\non our behalf violate the CCPA’s privacy requirements. The sanctions for non-compliance could include fines and/or civil lawsuits.\nOther states including Colorado, Texas, Virginia, Connecticut, Montana, Florida, Oregon, Delaware, Iowa, New Jersey, Nebraska, New Hampshire\nand Utah have also passed comprehensive data protection laws, none of which are identical. In addition, numerous states have pending data\nprotection or issue-specific privacy laws. Furthermore, on December 27, 2024, the Department of Justice issued a Final Rule to implement\nthe Executive Order (E.O.) 14117 “Preventing Access to Americans’ Bulk Sensitive Personal Data and United States Government-Related\nData by Countries of Concern” (or the Final Rule). This Final Rule came into effect on April 8, 2025, with certain affirmative due\ndiligence, reporting, and auditing requirements taking effect as of October 6, 2025. The Justice Department established and implemented\na new regulatory program to address the urgent and extraordinary national security threat posed by the continuing efforts of countries\nof concern to access and exploit Americans’ bulk sensitive personal data and certain U.S. Government-related data. This presents\nnew risks for companies operating globally. We monitor our compliance with these national security directives to ensure that our offerings\ndo not run afoul of these increasingly stringent data-localization and technology-transfer restrictions.\n\n \n\nIn Israel, where we and\nmost of our subsidiaries have corporate headquarters and significant operations, we are subject to the Israeli Privacy Protection Law,\n1981, or PPL, and its regulations, including but not limited the Israeli Privacy Protection Regulations (Data Security) 2017, referred\nto as the Security Regulations, as well as the guidelines of the Israeli Privacy Protection Authority, or PPA, which impose obligations\nwith respect to the manner certain personal data is processed, maintained, transferred, disclosed, accessed, and secured. As a result,\nmaterial changes to the PPL or Security Regulations may require us to adjust our data protection and data security practices. In particular,\nmaterial amendments to the PPL, which we refer to collectively as Amendment 13, were approved by the Israeli Parliament in August 2024\nand came into effect on August 14, 2025. Among other things, Amendment 13 expanded the authority of the PPA to investigate incidents where\nthere is concern of privacy violation and to impose monetary sanctions which are considerably higher than those currently available under\nthe PPL and its regulations. In addition, Amendment 13 introduced additional obligations that apply to parties that process personal data\nand therefore may require us to modify our data practices, and policies, require to appoint a mandatory position and incur substantial\ncosts and expenses in order to adjust our privacy and data protection practices in Israel. Moreover, in January 2025, the Privacy Protection\nRegulations (Provisions Regarding Information Transferred to Israel from the European Economic Area), 2023, or the EU Regulations, entered\ninto effect also with respect to personal data pertaining to Israeli individuals.\n\n \n\nOn January 22, 2026, the Israeli\ngovernment published the National Cyber Protection Law Draft Bill, 5786-2026. If enacted, this law would designate “digital service\nproviders” and “SaaS providers” that meet certain thresholds as entities subject to binding cybersecurity standards,\nmandatory incident reporting, and direct supervision by the National Cyber Directorate. We are monitoring the progress of this legislation,\nas it would introduce significant new enforcement mechanisms, including administrative fines and potential criminal liability for non-compliance\nwith emergency cyber directives.\n\n \n\n16\n\n \n\n \n\nIn February 2026, the PPA\npublished comprehensive new guidance regarding the “Consent Principle” and the use of personal data in AI systems. This guidance\nclarifies that informed consent must be granular and explicitly obtained for the use of personal data in both the training and operational\nphases of AI models. It also mandates increased transparency, including the disclosure of algorithmic logic where feasible and explicit\nnotification when users interact with automated systems.\n\n \n\nTherefore, significant changes\nto the PPL and its regulations may necessitate adjustments to our data protection and security practices.\n\n \n\nAny failure or perceived failure\n(including as a result of deficiencies in our policies, procedures or measures relating to privacy, data protection, marketing or client\ncommunications) by us to comply with laws, regulations, policies, legal or contractual obligations, industry standards or regulatory guidance\nrelating to privacy or data security, may result in governmental investigations and enforcement actions, litigation, fines and penalties\nor adverse publicity and could cause our clients and partners to lose trust in us, which could have an adverse effect on our reputation\nand business. We expect that there will continue to be new proposed laws, regulations and industry standards relating to privacy, data\nprotection, marketing, consumer communications and information security in the United States, the United Kingdom, the European Economic\nArea and other jurisdictions, and we cannot determine the impact such future laws, regulations and standards may have on our business.\nWhile we have invested in, and intend to continue to invest in, reasonably necessary resources to comply with these standards, to the\nextent that we fail to adequately comply, that failure could have an adverse effect on our business, financial conditions, results of\noperations and cash flows.\n\n \n\n**Significant disruptions of our information technology systems\nor breaches of our data security could adversely affect our business.**\n\n \n\nA significant invasion, interruption,\ndestruction or breakdown of our information technology, or IT, systems and/or infrastructure by persons with authorized or unauthorized\naccess could negatively impact our business and operations. We could also experience business interruption, data theft and/or reputational\ndamage from cyber-attacks, which may compromise our systems and result in unauthorized access to, disclosure, misuse, alteration or destruction\nof sensitive data, including financial, operational and proprietary information.\n\n \n\nCybersecurity threats have\nbecome more frequent and more sophisticated in recent years, including ransomware attacks, identity theft and other forms of cybercrime.\nIn particular, advances in AI technologies may further increase these risks by enabling more targeted and effective cyber-attacks, including\nadvanced phishing, deepfake-based impersonation, and automated intrusion techniques. In addition, companies operating in Israel have experienced\nelevated levels of cyber threats, and this trend may continue or intensify. Cyber incidents may disrupt our operations and the services\nwe provide to our customers, including impairing the performance or availability of our systems, delaying or interrupting development\nprojects, and adversely affecting our ability to deliver services. Any such disruption could also adversely affect our relationships with\ncustomers and may result in the loss of existing or potential business opportunities.\n\n \n\nAny breach of our or our subsidiaries’\nsecurity measures, whether resulting from external attacks, insider actions, human error or failures in third-party systems, could expose\nus to risks of data loss or misuse. Such incidents may result in litigation, regulatory investigations, fines, contractual liabilities,\nor increased compliance costs, as well as damage to our reputation and loss of customer confidence. In addition, a significant cyber incident\naffecting our systems or those of our customers or third-party service providers could impair existing or future customer engagements\nand result in material financial losses.\n\n \n\n17\n\n \n\n \n\nWe rely on third-party vendors,\nincluding providers of cloud services and other technology infrastructure, which increases our exposure to cybersecurity risks. A cyber\nincident affecting such third parties or their supply chains could disrupt our operations or compromise our data and systems. Although\nwe and our subsidiaries invest significant resources in cybersecurity measures and continuously seek to enhance our protections, the techniques\nused to obtain unauthorized access are constantly evolving and may not be identified until after an incident has occurred. As cyber threats\ncontinue to increase in frequency, sophistication and severity, we may be required to devote additional resources to cybersecurity, which\ncould increase our operating costs and adversely affect our results of operations. Despite these efforts, we cannot assure you that our\nsecurity measures will be effective in preventing cyber incidents or mitigating their impact. Any failure to adequately protect our information\nsystems or data could materially adversely affect our business, financial condition, results of operations and reputation.\n\n \n\n**We have put an emphasis on the development\nand use of AI in our business, which is accompanied by certain risks.**\n\n** **\n\nWe use artificial intelligence,\nor AI, Generative AI, machine learning, and automated decision-making technologies (collectively referred to as AI Technologies) throughout\nour businesses, and are making significant investments in this area. We use AI Technologies to enhance our products and services and to\nadd additional capabilities to our products. We expect that increased investment will be required in the future to continuously improve\nour use of AI Technologies. As with many technological innovations, there are significant risks involved in developing, maintaining and\ndeploying these technologies and there can be no assurance that the usage of, or our investments in, such technologies will always enhance\nour products or services or be beneficial to our business, including our efficiency or profitability. In particular, if any of the following\nproblems develops with the models underlying our AI Technologies, the performance of our products, services and business, as well as our\nreputation and potentially the reputations of our customers, could suffer or we could incur liability resulting from the violation of\nlaws or contracts to which we are a party, or civil claims:\n\n \n\n●the models are incorrectly\ndesigned or implemented, or are trained or reliant on incomplete, inadequate, inaccurate, biased or otherwise poor quality data, or on\ndata to which we do not have sufficient rights or in relation to which we and/or the providers of such data have not implemented sufficient\nlegal compliance measures;\n\n \n\n●the models are used without\nsufficient oversight and governance to ensure their responsible use, and/or\n\n \n\n●the models are adversely impacted\nby unforeseen defects, technical challenges, cybersecurity threats or material performance issues.\n\n \n\nWe use AI Technologies licensed\nfrom third parties in our technologies and our ability to continue to use such technologies at the scale we need may be dependent on access\nto specific third-party software and infrastructure. We cannot control the availability or pricing of such third-party AI Technologies,\nespecially in a highly competitive environment, and we may be unable to negotiate favorable economic terms with the applicable providers.\nIf any such third-party AI Technologies become incompatible with our solutions or unavailable for use, or if the providers of such models\nunfavorably change the terms on which their AI Technologies are offered or terminate their relationship with us, our solutions may become\nless appealing to our customers and our business will be harmed. In addition, to the extent any third-party AI Technologies are used as\na hosted service, any disruption, outage, or loss of information through such hosted services could disrupt our operations or solutions,\ndamage our reputation, cause a loss of confidence in our solutions, or result in legal claims or proceedings, for which we may be unable\nto recover damages from the affected provider. Any of the foregoing could have a material adverse impact on our results of operations.\n\n \n\nWith respect to our products\nor services that incorporate AI Technologies, the market for such products and services is rapidly evolving and important assumptions\nabout the characteristics of targeted markets, pricing, sales cycles, cost, performance, and perceived value associated with our services\nor products may be inaccurate. We cannot be sure that the market will continue to grow or that it will grow in ways we anticipate. In\naddition, market acceptance of products and services that incorporate AI Technologies is uncertain. Our failure to successfully develop\nand commercialize our products or services involving AI Technologies could depress the market price of our stock and impair our ability\nto: raise capital; expand our business; provide, improve and diversify our product offerings; continue our operations and efficiently\nmanage our operating expenses; and respond effectively to competitive developments.\n\n** **\n\n18\n\n \n\n** **\n\n**Security vulnerabilities in our software solutions could lead\nto reduced revenue or to liability claims.**\n\n \n\nMaintaining the security of\nthe software solutions and related services that we offer is a critical issue for us and our customers. Security researchers, criminal\nhackers and other third parties regularly develop new techniques to penetrate our customers’ end points, information systems and\nnetwork security measures. Our increased reliance on cloud-based solutions and services for our customers’ information furthermore\nheightens the potential exposure of that information. Cyber threats are constantly evolving and becoming increasingly sophisticated and\ncomplex, making it increasingly difficult to detect and successfully defend against them. Unauthorized parties have, in the past, infiltrated\nSapiens’ internal IT systems, gaining access to certain proprietary information. If they were to similarly breach the security related\nto, and misuse, software solutions that we offer, they might access the authentication, payment and personal information of our customers.\nIn addition, cyber-attackers (which may include individuals or groups, as well as sophisticated groups such as nation-state and state-sponsored\nattackers, which can deploy significant resources to plan and carry out exploits) also develop and deploy viruses, worms, credential stuffing\nattack tools and other malicious software programs, some of which may be specifically designed to attack the solutions and services that\nwe offer. Software and operating system applications that we develop have contained and may contain defects in design or manufacture,\nincluding bugs, vulnerabilities and other problems that could unexpectedly compromise the security of the software or impair a customer’s\nability to operate or use our solutions. The costs to prevent, eliminate, mitigate, or alleviate cyber- or other security problems, bugs,\nviruses, worms, malicious software programs and security vulnerabilities are significant, and our efforts to address these problems, including\nnotifying affected parties, may not be successful or may be delayed and could result in interruptions, delays, cessation of service and\nloss of existing or potential customers. It is impossible to predict the extent, frequency or impact these problems may have on us.\n\n \n\nActual and potential breaches\nof our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive,\npersonal or confidential data about our customers, including the potential loss or disclosure of such information or data as a result\nof hacking, fraud, trickery or other forms of deception, could expose our customers to a risk of loss or misuse of this information. This\nmay result in litigation and liability or fines, our compliance with costly and time-intensive notice requirements, governmental inquiry\nor oversight or a loss of customer confidence, any of which could harm our business or damage our brand and reputation, thereby requiring\ntime and resources to mitigate these impacts.\n\n \n\nFrom time to time we have\nidentified, and in the future we may identify other, vulnerabilities in some of our solutions and services. We devote significant resources\nto address security vulnerabilities through engineering more secure solutions, enhancing security and reliability features in our solutions\nand services, code hardening, conducting rigorous penetration tests, deploying updates to address security vulnerabilities, regularly\nreviewing our solutions’ security controls, reviewing and auditing our solutions against independent security control frameworks\n(such as ISO 27001, SOC 2), providing resources such as security training for our customers’ workforces and improving our incident\nresponse time, but security vulnerabilities cannot be totally eliminated. The cost of these steps could reduce our subsidiaries’\nor our operating margins, and we may be unable to implement these measures quickly enough to prevent cyber-attackers from gaining unauthorized\naccess to our solutions. Despite our preventative efforts, actual or perceived security vulnerabilities in our solutions may harm our\nsubsidiaries’ or our reputation or lead to claims against our subsidiaries (and have in the past led to such claims) or us, and\ncould lead some customers to stop using certain systems or services, to reduce or delay future purchases of solutions or services, or\nto use competing solutions or services. If we do not make the appropriate level of investment in our solutions or if our solutions become\nout-of-date or obsolete and we are not able to deliver the quality of data security our customers require, our business could be adversely\naffected. Customers may also adopt security measures designed to protect their existing computer systems from attack, which could delay\ntheir adoption of our new solutions. Moreover, delayed sales, lower margins or lost customers resulting from disruptions caused by cyber-attacks\nand implementation of preventative measures could adversely affect our financial results, share price and reputation.\n\n** **\n\n19\n\n \n\n** **\n\n**Errors or defects in our software solutions\ncould inevitably arise and harm our profitability and our reputation with customers, and could even give rise to claims against us.**\n\n \n\nThe quality of our solutions,\nincluding new, modified or enhanced versions thereof, is critical to our success. Since our software solutions are complex, they may contain\nerrors that cannot be detected at any point in their testing phase. While we continually test our solutions for errors or defects and\nwork with customers to identify and correct them, errors in our technology may be found in the future. Quality assurance is complicated\nbecause it is difficult to simulate the breadth of operating systems, user applications and computing environments that our customers\nuse, and our solutions themselves are increasingly complex. Errors or defects in our technology have resulted in terminated work orders\nand could result in delayed or lost revenue, diversion of development resources and increased services, termination of work orders, damage\nto our brand and warranty and insurance costs in the future. In addition, time-consuming implementations may also increase the number\nof services personnel we must allocate to each customer, thereby increasing our costs and adversely affecting our business, results of\noperations and financial condition.\n\n \n\nIn addition, since our customers\nrely on our solutions to operate, monitor and improve the performance of their business processes, they are sensitive to potential disruptions\nthat may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related to software\nerrors in the future. Liability claims could require us to spend significant time and money in litigation or to pay significant damages.\nRegardless of whether we prevail, the diversion of our subsidiaries’ key employees’ time and attention from our business,\nthe incurrence of substantial expenses and potential damage to our reputation might result. While the terms of our sales contracts typically\nlimit our exposure to potential liability claims and we carry errors and omissions insurance against such claims, there can be no assurance\nthat such insurance will continue to be available on acceptable terms, if at all, or that such insurance will provide us with adequate\nprotection against any such claims. A significant liability claim against us could have a material adverse effect on our business, results\nof operations and financial position.\n\n** **\n\n**Incorrect or improper use of our products\nor our failure to properly train customers on how to implement or utilize our products could result in customer dissatisfaction and negatively\naffect our business, results of operations, financial condition and growth prospects.**\n\n \n\nSome of our products are more\ncomplex than others and are deployed in a wide variety of network environments. The proper use of our solutions requires training of the\ncustomer. If our solutions are not used correctly or as intended, inadequate performance may result. Additionally, our customers or third-party\npartners may incorrectly implement or use our solutions. Our solutions may also be intentionally misused or abused by customers or their\nemployees or third parties who are able to access or use our solutions. Similarly, our solutions are sometimes installed or maintained\nby customers or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and, consequently,\nperformance that is less than the level anticipated by the customer. Because our customers rely on our software, services and maintenance\nsupport to manage a wide range of operations, the incorrect or improper use of our solutions, our failure to properly train customers\non how to efficiently and effectively use our solutions, or our failure to properly provide implementation or maintenance services to\nour customers, has resulted in terminated work orders and may result in termination of work orders, negative publicity or legal claims\nagainst us in the future. Also, as we continue to expand our customer base, any failure by us to properly provide these services will\nlikely result in lost opportunities for follow-on sales of our software and services.\n\n \n\nIn addition, if there is substantial\nturnover of customer personnel responsible for implementation and use of our products, or if customer personnel are not well trained in\nthe use of our products, customers may defer the deployment of our products, may deploy them in a more limited manner than originally\nanticipated or may not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for implementation\nand use of our products, our ability to make additional sales may be substantially limited.\n\n** **\n\n20\n\n \n\n** **\n\n**The significant amount of goodwill and identifiable\nintangible assets recorded on our consolidated statements of financial position may result in future impairment charges which could adversely\naffect our results of operations.**\n\n** **\n\nThe amount of goodwill and\nidentifiable intangible assets on our consolidated statements of financial position has increased significantly in recent years as a result\nof our acquisitions and may continue to increase in the future as we pursue additional acquisitions. As of December 31, 2025, we had $793.9\nmillion of goodwill and identifiable intangible assets recorded on our consolidated statements of financial position. We are required\nto periodically assess goodwill and other intangible assets for impairment. Goodwill and indefinite-lived intangible assets are tested\nfor impairment at least annually, and more frequently if events or changes in circumstances indicate that the carrying value may not be\nrecoverable. Other long-lived assets are tested for impairment when such indicators are present. The determination of whether an impairment\nhas occurred involves significant management judgment, including assumptions regarding future revenues, operating margins, discount rates,\nmarket conditions and other factors. These assumptions are inherently uncertain and may be affected by changes in our business, market\nconditions or broader economic environment. Events or circumstances that could result in impairment include, among others, adverse changes\nin macroeconomic conditions, increased competition, loss of key customers, underperformance of acquired businesses, failure to achieve\nexpected synergies, changes in technology or market demand (including shifts toward cloud-based or AI-driven solutions), or increases\nin interest rates affecting discount rates used in valuation models. If the carrying value of goodwill or other intangible assets exceeds\ntheir recoverable amount, we would be required to record an impairment charge, which could be material and could adversely affect our\nresults of operations and financial condition.\n\n \n\n**Downturns or volatility in the capital markets\nmay adversely affect our customers and the industries in which we operate, which could reduce demand for our services and negatively impact\nour revenues and growth.**\n\n \n\nSome of our customers, and,\nin particular, those of Matrix, Magic Software and Michpal, are active participants in the capital markets or are otherwise affected by\ncapital market conditions. Adverse developments in the capital markets, including significant declines in asset values, reduced liquidity\nor increased volatility, may negatively affect the financial condition and investment activity of those customers. As a result, our customers\nmay reduce or delay spending, including postponing or canceling purchases of our products and services or scaling back existing engagements.\nSuch conditions may also impair our ability to attract new customers or expand relationships with existing customers. In addition, broader\ndisruptions in the capital markets may have a negative impact on overall economic activity, which could further reduce demand for our\nofferings. Any such reductions in customer spending or disruptions in the markets we serve could adversely affect our revenues, customer\nbase, and results of operations.\n\n** **\n\n**There may be consolidation in the markets\nin which we operate, which could reduce the use of our products and services and adversely affect our revenues.**\n\n \n\nMergers or consolidations\namong our customers could reduce the number of our customers and potential customers. This could adversely affect our revenues even if\nthese events do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with\nor are acquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue or\nreduce their use of our products and services. Any of these developments could materially and adversely affect our results of operations\nand cash flows.\n\n \n\n21\n\n \n\n** **\n\n**Our and our investees’ credit facility\nagreements with banks and other financial institutions, and our investees’ debentures, are subject to a number of restrictive covenants\nwhich, if breached, could result in acceleration of our obligation to repay our debt.**\n\n \n\nIn the context of our and\nour subsidiaries’ and affiliate’s engagements with banks and other financial institutions for receiving various credit facilities\nand under the terms governing our Series C Secured Debentures and Series D Secured Debentures, and Matrix’s Series B Debentures\nand Series 2 Convertible Debentures, we have undertaken to comply with a number of conditions and limitations on the manner in which we\ncan operate our business. These include limitations on our ability to undergo a change of control, distribute dividends, incur debt or\na floating charge on our assets, or undergo an asset sale or other change that results in a fundamental change in our operations. These\ncredit facilities, agreements and deed of trusts that we and our subsidiaries have entered into with the trustees for the holders of each\nof our debentures also require us and our subsidiaries to comply with certain financial covenants. Those covenants include maintenance\nof certain financial ratios related to shareholders’ equity, total rate of debt and liabilities, minimum outstanding balance of\ntotal cash and short-term investments, and operating results that are customary for companies of comparable size, and maintenance of a\nminimum rating level for the debentures. These limitations and covenants may force us to pursue less than optimal business strategies\nor forego business arrangements which could have been financially advantageous to us and, by extension, to our shareholders. The deeds\nof trust of each of our debentures furthermore provides for an upwards adjustment in the interest rate payable under the debentures in\nthe event that our debentures’ rating is downgraded below a certain level. A breach of the financial covenants for more than two\nsuccessive quarters or a substantial downgrade in the rating of any of our debentures (below BBB-) would constitute an event of default\nthat could result in the acceleration of our obligation to repay the debentures, which accelerated repayment may be difficult for us to\neffect. In addition, Formula’s Series C Secured Debentures and Series D Secured Debentures are secured by the shares of Formula’s\npublicly held subsidiary— Matrix. A breach of the restrictive covenants could result in the acceleration of our obligations to repay\nFormula’s or its subsidiaries’ debt.\n\n \n\n**We may not realize all of the anticipated\nbenefits of the recently completed merger between Matrix and Magic Software, or such benefits may take longer than expected to be realized.**\n\n** **\n\nOn February 24, 2026, our\nsubsidiaries Matrix and Magic Software completed a reverse triangular merger transaction, pursuant to which Magic Software became a wholly\nowned subsidiary of Matrix. The consideration paid to Magic Software’s shareholders consisted solely of ordinary shares of Matrix,\nwith the shareholders of Matrix and Magic Software holding 68.875% and 31.125%, respectively, of Matrix outstanding share capital on a\nfully diluted basis following the transaction. Following the transaction, Matrix’s ordinary shares continue to trade on the TASE,\nalthough neither Magic Software’s nor Matrix’s ordinary shares are traded on Nasdaq. If the integration of the two companies\nis not completed successfully or on a timely basis, or if it requires greater resources or costs than anticipated, the expected benefits\nof the merger, including synergies, cost savings and growth opportunities, may not be realized, or may be delayed. In addition, the integration\nprocess may result in unanticipated difficulties, including operational disruptions, increased expenses, loss of customer relationships,\ncompetitive responses and diversion of management’s attention, any of which could adversely affect the business, financial condition\nand results of operations of Matrix, Magic Software and the Company.\n\n \n\nThe challenges associated\nwith integrating the operations of the companies include, among others:\n\n \n\n●Managing a larger and more\ncomplex organization and aligning organizational structures;\n\n \n\n●Maintaining employee morale\nand retaining key personnel;\n\n \n\n●Integrating corporate cultures,\nwhich may differ;\n\n \n\n●Retaining existing customers\nand successfully onboarding new customers;\n\n \n\n●Consolidating corporate and\nadministrative functions and eliminating redundancies;\n\n \n\n●Integrating information technology,\ncommunications and other systems;\n\n \n\n●Aligning financial reporting,\ncontrols and processes; and\n\n \n\n●Managing tax matters, regulatory\nrequirements and potential delays.\n\n \n\n22\n\n \n\n \n\nMany\nof these factors are beyond the control of the companies and any such factor could result in increased costs, reduced revenues and diversion\nof management’s time and resources. Even if the integration is completed successfully, the anticipated benefits of the merger may\nnot be realized in full or within the expected timeframe, or at all, which could adversely affect our results of operations and financial\ncondition.\n\n \n\n**Risks Related to Intellectual Property**\n\n** **\n\n**Assertions by third parties of infringement\nor other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and\nresults of operations.**\n\n \n\nThe software industry is characterized\nby the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property\nrights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade secrets,\nwhich they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert\npatent, copyright, trademark or other intellectual property claims against us, our customers and partners, and those from whom we license\ntechnology and intellectual property.\n\n \n\nAlthough we believe that our\nproducts and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third parties\nwill not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any\nsuch assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to\nuse certain intellectual property. We cannot assure you that we are not infringing or otherwise violating any third-party intellectual\nproperty rights. Infringement assertions from third parties may involve patent holding companies or other patent owners who have no relevant\nproduct revenues, and therefore our own issued and pending patents may provide little or no deterrence to these patent owners in bringing\nintellectual property rights claims against us.\n\n \n\nAny intellectual property\ninfringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license technology and\nintellectual property, could have a material adverse effect on our business, financial condition, reputation and competitive position\nregardless of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are\nwith or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial\nresources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including\ntreble damages and attorneys’ fees, if we are found to have willfully infringed on a party’s intellectual property; cease\nmaking, licensing or using our products or services that are alleged to infringe or misappropriate the intellectual property of others;\nexpend additional development resources to redesign our products or services; enter into potentially unfavorable royalty or license agreements\nin order to obtain the right to use necessary technologies or works; and to indemnify our partners, customers, and other third parties.\nRoyalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant\nroyalty payments and other expenditures. Any of these events could seriously harm our business, results of operations and financial condition.\nIn addition, any lawsuits regarding intellectual property rights, regardless of their success, could be costly to resolve and divert the\ntime and attention of our management and technical personnel.\n\n** **\n\n**Although we apply measures to protect our\nintellectual property rights and our source code, there can be no assurance that the measures that we employ to do so will be successful.**\n\n \n\nIn accordance with industry\npractice, we rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology. We believe\nthat due to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as\nthe knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of\nour support services. We seek to protect the source code of our products as trade secret information and as unpublished copyright works.\nWe also rely on security and copy protection features in our proprietary software. We distribute our products under software license agreements\nthat grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized\nreproduction or transfer of our products. In addition, while we attempt to protect trade secrets and other proprietary information through\nnon-disclosure agreements with employees, consultants and distributors, not all of our employees have signed invention assignment agreements.\nAlthough we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. Our failure to\nprotect our rights, or the improper use of our products by others without licensing them from us could have a material adverse effect\non our results of operations and financial condition.\n\n \n\n23\n\n \n\n** **\n\n**We and our customers rely on technology\nand intellectual property of third parties, the loss of which could limit the functionality of our products and disrupt our business.**\n\n \n\nWe use technology and intellectual\nproperty licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and\nintellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors\nthat could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on\ncommercially reasonable terms, or at all. The loss of the right to license and distribute this third-party technology could limit the\nfunctionality of our products and might require us to redesign our products. Further, although we believe that there are currently adequate\nreplacements for the third-party technology and intellectual property we presently use and distribute, the loss of our right to use any\nof this technology and intellectual property could result in delays in producing or delivering affected products until equivalent technology\nor intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technology\nand intellectual property we license from others or functional equivalents of this software were either no longer available to us or no\nlonger offered to us on commercially reasonable terms. In either case, we would be required either to attempt to redesign our products\nto function with technology and intellectual property available from other parties or to develop these components ourselves, which would\nresult in increased costs and could result in delays in product sales and the release of new product offerings. Alternatively, we might\nbe forced to limit the features available in affected products. Any of these results could harm our business and impact our results of\noperations.\n\n** **\n\n**We could be required to provide the source code of our products\nto our customers.**\n\n \n\nSome of our customers have\nthe right to require the source code of our products to be deposited into a source code escrow. Under certain circumstances, our source\ncode could be released to our customers. The conditions triggering the release of our source code vary by customer. The release of our\nsource code would give our customers access to our trade secrets and other proprietary and confidential information which could harm our\nbusiness, results of operations and financial condition. A few of our customers have the right to use the source code of some of our products\nbased on the license agreements signed with such clients (mostly with respect to older versions of our solutions), although such use is\nlimited for specific matters and cases, these clients are exposed to some of our trade secrets and other proprietary and confidential\ninformation which could harm us.\n\n** **\n\n**Some of our services and technologies may\nuse “open source” software, which may restrict how we use or distribute our services or require that we release the source\ncode of certain products subject to those licenses.**\n\n \n\nSome of our services and technologies\nmay incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General Public\nLicense and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open-source software\ncan lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or\ncontrols on the origin of the software. Additionally, open-source licenses typically require that source code subject to the license be\nmade available to the public and that any modifications or derivative works to open-source software continue to be licensed under open-source\nlicenses. These open-source licenses typically mandate that proprietary software, when combined in specific ways with open-source software,\nbecome subject to the open-source license. If we combine our proprietary software with open-source software, we could be required to release\nthe source code of our proprietary software.\n\n \n\n24\n\n \n\n \n\nWe take steps to ensure that\nour proprietary software is not combined with, and does not incorporate, open-source software in ways that would require our proprietary\nsoftware to be subject to an open-source license. However, few courts have interpreted open-source licenses, and the manner in which these\nlicenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers\nto design our proprietary technologies, and although we take steps to prevent our programmers from including open source software in the\ntechnologies and software code that they design, write and modify, we do not exercise complete control over the development efforts of\nour programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary products\nand technologies or that they will not do so in the future. In the event that portions of our proprietary technology are determined to\nbe subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all\nor a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate\nthe value of our services and technologies and materially and adversely affect our business, results of operations and prospects.\n\n** **\n\n**Risks Relating to Our International Operations**\n\n** **\n\n**Our international operations expose us to\nrisks associated with fluctuations in foreign currency exchange rates that have in the recent past adversely affected, and could once\nagain adversely affect, our business.**\n\n \n\nMany of our subsidiaries derive\nrevenues from international operations that are conducted in local currencies. Those operations are conducted in currencies that include\nthe U.S. dollar, British pound sterling, or GBP, Euro and NIS. In 2025, the NIS, Euro and GBP appreciated significantly relative to the\nU.S. dollar, by approximately 7.1%, 5.8% and 2.8% (based on the average exchange rates over the course of 2025 as compared to 2024), respectively,\nthereby increasing the U.S. dollar value of the revenues and operational profits that we generated in those currencies. If the current\ntrend of appreciation of the NIS relative to the U.S. dollar continues (as it has thus far in 2026), that would continue to increase the\nvalue of our Israeli revenues and operational profits as reported in U.S. dollars, which would have a positive impact on our results of\noperations. However, in the recent past, in 2022, the NIS and those European currencies significantly depreciated relative to the U.S.\ndollar— by 3.9%, 11.1% and 10.3%, respectively— which had an adverse impact on the U.S. dollar value of our NIS, Euro and\nGBP denominated revenues and operational profits, and, consequently, on our U.S. dollar reported results of operations. In 2023, a more\nsignificant depreciation of the NIS relative to the U.S. dollar occurred— by 8.9% (based on the average exchange rates over the\ncourse of 2023 as compared to 2022)— thereby decreasing the U.S. dollar value of our Israeli revenues and operational profits. If\nthat prior trend from 2022 and 2023 were to recur once again, that would adversely affect our U.S. dollar-reported results of operations.\n\n \n\nFor additional information\nrelating to the exchange rates between different relevant currencies, see “*Item 5. Operating and Financial Review and Prospects—\nOverview— Our Functional and Reporting Currency*.”\n\n** **\n\n**Our international sales and operations subject\nus to additional risks that can adversely affect our business, results of operations and financial condition.**\n\n \n\nWe are continuing to expand\nour international operations as part of our growth strategy. In fiscal years 2025 and 2024, approximately 20.3% and 22.2%, respectively,\nof our revenues were derived from outside of Israel. Our current international operations and our plans to further expand our international\noperations subject us to a variety of risks, including:\n\n \n\n●Increased exposure to fluctuations\nin foreign currency exchange rates.\n\n \n\n●Increased exposure to global\nmacroeconomic uncertainty caused by new and reciprocal tariffs being imposed by the United States and other countries, inflation and\nrelatively high interest rates.\n\n \n\n●Complexity in our tax planning,\nand increased exposure to changes in tax regulations in various jurisdictions in which we operate, which could adversely affect our operating\nresults and hinder our ability to conduct effective tax planning.\n\n \n\n25\n\n \n\n \n\n●Increased management, travel,\ninfrastructure and legal compliance costs associated with having multiple international operations.\n\n \n\n●Longer payment cycles and difficulties\nin enforcing contracts and collecting accounts receivable.\n\n \n\n●The need to localize our products\nand licensing programs for international customers.\n\n \n\n●Lack of familiarity with and\nunexpected changes in foreign regulatory requirements.\n\n \n\n●The burden of complying with\na wide variety of foreign laws and legal standards.\n\n \n\n●Compliance with the U.S. Foreign\nCorrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries.\n\n \n\n●Import and export license requirements,\ncustoms, taxes and other trade barriers.\n\n \n\n●Increased financial accounting\nand reporting burdens and complexities.\n\n \n\n●Weaker protection of intellectual\nproperty rights in some countries.\n\n \n\n●Multiple and possibly overlapping\ntax regimes.\n\n \n\n●Political, social and economic\ninstability abroad, terrorist attacks and general security concerns.\n\n \n\nAs we continue to expand our\nbusiness globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated\nwith our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely\naffecting our business, results of operations, financial condition and growth prospects.\n\n** **\n\n**Our business may be materially affected\nby changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding\ntheir potential effects, could adversely affect our results of operations and share price.**\n\n \n\nAs a multinational corporation,\nwe are subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide. Significant judgment and management\nattention and resources are required in evaluating our tax positions and our worldwide provision for taxes. In the ordinary course of\nbusiness, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations\nand effective tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws, regulations, principles\nand interpretations. This may include recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory\nrates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, changes in foreign currency exchange\nrates, or changes in the valuation of our deferred tax assets and liabilities.\n\n \n\nWe may be audited in various\njurisdictions, and such jurisdictions may assess additional taxes against us. If we experience unfavorable results from one or more such\ntax audits, there could be an adverse effect on our tax rate and therefore on our net income. Although we believe our tax estimates are\nreasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and\naccruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination\nis made. Additionally, we are subject to transfer pricing rules and regulations, including those relating to the flow of funds between\nus and our affiliates, which are designed to ensure that appropriate levels of income are reported in each jurisdiction in which we operate.\n\n \n\n26\n\n \n\n \n\n**Risks Related to an Investment in Our Traded\nSecurities and to Our Consolidated Holdings**\n\n \n\n**There is limited trading volume for our\nADSs and ordinary shares, and the ordinary shares of our investees Matrix and Michpal, which reduces liquidity for our shareholders, and\nmay furthermore cause the share price to be volatile, all of which may lead to losses by investors.**\n\n \n\nThere has historically been\nlimited trading volume for our ADSs and ordinary shares on the Nasdaq Global Select Market and the TASE, respectively, as well as for\nthe ordinary shares of our publicly traded investees Matrix and Michpal (each of whose shares are traded on the TASE), such that trading\nhas still not reached the level that enables shareholders to freely sell their securities in substantial quantities on an ongoing basis\nand thereby readily achieve liquidity for their investment. As a further result of the limited volume, our securities and our publicly\ntraded investees’ ordinary shares have experienced significant market price volatility in the past and may experience significant\nmarket price and volume fluctuations in the future, in response to factors such as announcements of developments related to our (via our\nsubsidiaries and affiliate company) or our investees’ business, announcements by competitors of ours (via our subsidiaries and affiliate\ncompany) or our investees’, quarterly fluctuations in our or our investees’ financial results, and general conditions in the\nindustry in which we (via our subsidiaries and affiliate company) or our investees compete.\n\n \n\n**We have a history of quarterly fluctuations\nin our results of operations, which make it difficult for investors to make reliable period-to-period comparisons, may also contribute\nto volatility in the market price of our ordinary shares and American Depositary Shares.**\n\n \n\nWe have experienced, and in\nthe future may continue to experience, significant fluctuations in our quarterly results of operations. Factors that may contribute to\nfluctuations in our quarterly results of operations include:\n\n \n\n●general global economic conditions;\n\n \n\n●acquisitions and dispositions;\n\n \n\n●the size, time and recognition\nof revenue from significant contracts;\n\n \n\n●timing of product releases\nor enhancements;\n\n \n\n●timing of contracts;\n\n \n\n●timing of completion of specified\nmilestones and delays in implementation;\n\n \n\n●changes in the proportion of\nservice and license revenues;\n\n \n\n●price and product competition;\n\n \n\n●market acceptance of our new\nproducts, applications and services;\n\n \n\n●increases in selling and marketing\nexpenses, as well as other operating expenses;\n\n \n\n●currency exchange rate fluctuations;\nand\n\n \n\n●consolidation of our customers.\n\n \n\nA substantial portion of our\nexpenses, including most product development and selling and marketing expenses, must be incurred in advance of when revenue is generated.\nIf our projected revenue does not meet our expectations, we are likely to experience an even larger shortfall in our operating profit\nrelative to our expectations. The gross margins of our individual subsidiaries vary both among themselves and over time. As a result,\nchanges in the revenue mix from these subsidiaries may affect our quarterly operating results. In addition, we may derive a significant\nportion of our net income from the sale of our investments or the sale of our proprietary software technology. These events do not occur\non a regular basis and their timing is difficult to predict. As a result, we believe that period-to-period comparisons of our historical\nresults of operations are not necessarily meaningful and that you should not rely on them as an indication for future performance. Also,\nit is possible that our quarterly and annual results of operations may be below the expectations of public market analysts and investors.\nIf this happens, the prices of our ordinary shares and ADSs will likely decrease.\n\n \n\n27\n\n \n\n \n\n**The market prices of our ordinary shares\nand ADSs may be adversely affected if the market prices of our publicly traded investees decrease.**\n\n \n\nA significant portion of our\nassets is comprised of equity securities of directly held publicly traded companies. Our publicly traded investees are currently Matrix,\nMichpal and TSG Systems. The share prices of these publicly traded companies have been extremely volatile over the years and have been\nsubject to fluctuations due to market conditions and other factors which are often unrelated to operating results and which are beyond\nour control. Fluctuations in the market price and valuations of our holdings in these companies may affect the market’s valuation\nof the price of our ordinary shares and ADSs and may also impact our results of operations. If the value of our assets decreases significantly\nas a result of a decrease in the value of our interest in our publicly traded investees, our business, operating results and financial\ncondition may be materially and adversely affected and the market price of our ordinary shares and ADSs may also fall as a result.\n\n \n\n**Our securities are traded on more than one\nmarket, and this may result in price variations.**\n\n \n\nFormula’s ordinary shares\nare traded on the TASE and its ADSs are traded on the Nasdaq Global Select Market. Trading in those ordinary shares and ADSs on those\nmarkets takes place in different currencies (dollars on the Nasdaq Global Select Market and NIS on the TASE), and at different times (resulting\nfrom different time zones, different trading hours, and different public holidays in the United States as opposed to Israel). The trading\nprices of our ordinary shares and ADSs on these two markets may differ due to these and other factors. Any decrease in the trading price\nof our ordinary shares or ADSs, as applicable, on one of these markets could likely adversely affect, and cause a decrease in, the trading\nprice on the other market.\n\n \n\n**Our largest shareholder, Asseco Poland S.A.,\ncan significantly influence the outcome of matters that require shareholder approval.**\n\n \n\nAsseco Poland S.A., or Asseco,\nour largest shareholder, owned as of May 1, 2026 approximately 25.82% of our outstanding share capital and therefore has effective voting\npower over in excess of one-quarter of our outstanding ordinary shares (which excludes shares that we have repurchased that lack voting\nrights and shares subject to restrictions that are voted in proportion to the votes of our other shares). Therefore, Asseco can significantly\ninfluence the outcome of those matters requiring shareholder approval, including the election of directors and approval of significant\ncorporate transactions. This voting power may have the effect of delaying or preventing a change in control which may otherwise be favorable\nto our minority shareholders. In addition, potential conflicts of interest may arise in the event that we or any of our investees enters\ninto any agreements or transactions with affiliates of Asseco. Although Israeli law imposes certain procedures (including the requirement\nto obtain shareholder approval, which in certain cases includes a “majority of the minority”) for approval of certain related\nparty transactions, we cannot assure you that these procedures will eliminate the possible detrimental effects of these conflicts of interest.\nIf certain transactions are not approved in accordance with required procedures under applicable Israeli law, these transactions may be\nvoid or voidable.\n\n \n\n**If we are unable to maintain effective internal\ncontrol over financial reporting in accordance with Sections 302 and 404(a) of the Sarbanes-Oxley Act of 2002, the reliability of our\nfinancial statements may be questioned and our share price may suffer.**\n\n \n\nWe are subject to a range\nof requirements relating to internal controls over financial reporting. Despite our internal control measures, we may still be subject\nto financial reporting errors or even fraud, which may not be detected. A control system, which is increasingly based on computerized\nprocesses, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met.\nIn addition, the benefit of each control must be considered relative to its cost, and the design of a control system must reflect such\nreasonable resource constraints. Implementation of changes or updates to our control systems, including implementation of our investees\nenterprise resource planning (ERP) systems at additional sites, may encounter unexpected difficulties. These inherent limitations include\nthe fact that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls\ncan be circumvented by individual acts, by collusion of two or more persons or by management override of the controls. Over time, a control\nmay be inadequate because of changes in conditions or the degree of compliance with applicable policies or procedures may deteriorate.\nFailure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities,\nand could adversely affect our operating results, investor confidence in our reported financial information and the market price of our\nordinary shares and ADSs.\n\n \n\n28\n\n \n\n \n\nAs an example of that risk,\nas part of its assessment of the adequacy of internal controls over financial reporting for the year ended December 31, 2024, the management\nof one of our subsidiaries, Magic Software (when it was still a public company with securities traded on Nasdaq and the TASE, before its\nmerger in February 2026 whereby it became a private company wholly owned by our other subsidiary, Matrix), identified a material weakness\nin its internal control over financial reporting. Magic Software’s management team noted that, as of December 31, 2024, documentation\nsupporting the execution of certain internal controls within Magic Software’s revenue cycle relating to staffing professional services\nprovided by its U.S.-based entities was not comprehensively retained. This primarily pertains to business process controls and procedures\nintended to support the completeness and accuracy of Information Produced by the Entity (IPE). As a result, Magic Software’s management\nwas limited in its ability to fully evidence the performance of those controls as part of its assessment of the effectiveness of internal\ncontrol over financial reporting (ICFR). Those inadequacies led to the conclusion that Magic Software’s disclosure controls and\nprocedures were not effective, and that there was a material weakness in Magic Software’s internal control over financial reporting,\nas of December 31, 2024. In light of that conclusion, Magic Software’s management expressed its commitment to the continued remediation\nprocess of the foregoing material weakness, as well as the continued improvement of Magic Software’s internal control over financial\nreporting. The subject inadequacies did not rise to a sufficiently material level to cause our consolidated internal controls over financial\nreporting to be deemed deficient, given Magic Software’s size relative to that of the consolidated Group. Nevertheless, if management\nof any of our current subsidiaries or investees were to discover deficiencies in internal controls that would rise, individually or in\nthe aggregate, above the threshold of materiality for our consolidated Group, that could cause (i) a loss in the reliability of, or (ii)\nthe potential required restatement of, our financial statements, or (iii) investigation or sanctions by regulatory authorities, among\nother potential adverse consequences, and could cause a decrease in the trading price of our ordinary shares and ADSs.\n\n** **\n\n**The enactment of legislation implementing\nchanges in taxation of international business activities, the adoption of other corporate tax reform policies, or changes in tax legislation\nor policies could adversely impact our future financial position and results of operations.**\n\n \n\nCorporate tax reform, base-erosion\nefforts and tax transparency continue to be high priorities in many tax jurisdictions where we have business operations. As a result,\npolicies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform legislation\nis being proposed or enacted in a number of jurisdictions.\n\n \n\nIn 2015, the Organization\nfor Economic Co-operation and Development, or the OECD, released various reports under its Base Erosion and Profit Shifting, or BEPS,\naction plan to reform international tax systems and prevent tax avoidance and aggressive tax planning. These actions aim to standardize\nand modernize global corporate tax policy, including cross-border taxes, transfer-pricing documentation rules and nexus-based tax incentive\npractices which in part are focused on challenges arising from the digitalization of the economy. The reports have a very broad scope\nincluding, but not limited to, neutralizing the effects of hybrid mismatch arrangements, limiting base erosion involving interest deductions\nand other financial payments, countering harmful tax practices, preventing the granting of treaty benefits in inappropriate circumstances\nand imposing mandatory disclosure rules. It is the responsibility of OECD members to consider how the BEPS recommendations should be reflected\nin their national legislation. Many countries are beginning to implement legislation and other guidance to align their international tax\nrules with the OECD’s BEPS recommendations, for example, by signing up to the Multilateral Convention to Implement Tax Treaty Related\nMeasures to Prevent BEPS, or the MLI, which currently has been signed by over 100 jurisdictions, including Israel, which signed the MLI\non September 13, 2018. The MLI implements some of the measures that the BEPS initiative proposes to be transposed into existing treaties\nof participating states. Such measures include the inclusion in tax treaties of one, or both, of a “limitation-on-benefit”,\nor LOB, rule and a “principle purposes test”, or PPT, rule. The application of the LOB rule or the PPT rule could deny the\navailability of tax treaty benefits (such as a reduced rate of withholding tax) under tax treaties.\n\n \n\n29\n\n \n\n \n\nFurther to its plan, the OECD\nhas introduced BEPS Pillar Two rules that impose a global minimum tax rate of 15% for large multinational corporations. On December 12,\n2022, the EU Council announced that EU member states had reached an agreement to implement the minimum taxation component of 15% of the\nOECD’s reform of international taxation. Nearly 60 jurisdictions have enacted Pillar Two rules, with many having become effective\nin 2024. The OECD continues to release additional guidance and we are monitoring the new rules and country agreements. The Israeli Ministry\nof Finance published on October 5, 2025 a draft bill to implement the principles of the OECD’s Pillar Two. Even if adopted, Israel\nintends at this stage to apply only the Qualified Domestic Minimum Top-up Tax mechanism, starting in 2026. The two other main taxation\nmechanisms of Pillar Two– the Income Inclusion Rule and the Under Taxed Profits Rule– will be reconsidered in the future but\nare not part of the existing draft bill. We are currently evaluating the potential impact of this development on our consolidated financial\nstatements and related disclosures.\n\n \n\nThere are likely to be further\nsignificant changes in the tax legislation of various OECD jurisdictions during the period of implementation of BEPS, as the OECD has\npublished proposals covering a number of issues, including country-by-country reporting, permanent establishment rules, transfer pricing\nrules, tax treaties and taxation of the digital economy. Such legislative initiatives may result in changes to long-standing tax principles,\nwhich could adversely affect our effective tax rate or result in higher cash tax liabilities, to the extent those changes are deemed applicable\nto us, thereby materially and adversely affecting our plans to expand internationally and negatively impacting our financial condition,\ntax liability, and results of operations.\n\n \n\n**Risks Related to Operations in Israel and Other\nSpecific Geographic Locations**\n\n \n\n**Political and economic\nconditions in Israel, including the recent wars and hostilities between Israel, on the one hand, and Iran and its sponsored terrorist\norganizations, Hamas, Hezbollah and the Houthis, on the other hand, may hinder our ability to sell our products. This could have a material\nadverse effect on our operations and business condition, harm our results of operations and adversely affect our share price.**\n\n \n\nBecause\nthe majority of our and our subsidiaries’ operations are conducted in Israel and certain members of our board of directors and management\nas well as many of our subsidiaries’ employees and consultants’, including employees of our service providers, are located\nin Israel, our business and operations, as well as those of our subsidiaries, are directly affected by economic, political, geopolitical\nand military conditions in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between\nIsrael and its neighboring countries and terrorist organizations active in the region. These conflicts have involved missile strikes,\nhostile infiltrations and terrorism against civilian targets in various parts of Israel, which have negatively affected business conditions\nin Israel.\n\n \n\nDuring the last few years in particular, Israel has been involved in\nvarious defensive wars in response to, or in preemption of, Middle East terrorist or state-sponsored attacks on civilian targets in Israel.\nIn late February 2026, military operations involving Israel, the United States and Iran, in order to eliminate Iran’s nuclear and\nballistic missile capabilities, and to target the Islamic fundamentalist regime governing Iran, which has threatened Israel’s existence.\nAs part of this conflict, Iran and Hezbollah (a terrorist group sponsored by Iran operating out of Lebanon) launched missile attacks throughout\nIsrael, and to the northern part of Israel, respectively. This war followed upon similar conflicts in June 2025, and April 2024 and October\n2024, during which Iran launched ballistic missile attacks against Israel, and Israel conducted strikes against Iranian military and nuclear\ninfrastructure. The direct conflicts with Iran ran parallel to, and followed upon, a two-year war (from October 2023 until October 2025)\nduring which Israel was attacked by Hezbollah and Hamas, the latter of which is a terrorist group sponsored by Iran operating out of the\nGaza Strip, and declared war in response, which included ground operations in the Gaza Strip and southern Lebanon. Other Iranian-sponsored\nterrorist organizations in the Middle East, including the Houthi terrorist group in Yemen, have also attacked Israel with various types\nof missiles and drones as part of these conflicts, and Israel has responded with air force attacks. Nearby in the region, the fall of\nthe Assad regime in Syria led Israel to conduct limited military operations in Syria targeting Iranian military assets and infrastructure\nlinked to Hezbollah and other Iran-supported groups.\n\n \n\n30\n\n \n\n \n\nWhile our and our subsidiaries’\nfacilities have not been damaged during the recent wars, the hostilities have caused and may continue to cause damage to private and public\nfacilities, infrastructure, utilities, and telecommunication networks, which could potentially disrupt our operations and supply chains.\nIn addition, Israeli companies have been subject to extensive cyber attacks, which could lead to increased costs, risks to employee safety,\nand challenges to business continuity, with potential financial losses. If the hostilities disrupt our and our subsidiaries’ ongoing\noperations, our collective ability to deliver or provide products and services in a timely manner and to meet our contractual obligations\ntowards customers and vendors could be adversely affected. Parties with whom our subsidiaries have agreements involving performance in\nIsrael could also claim that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions\nin such agreements due to the security situation in Israel.\n\n \n\nThe recent wars have also\nimpacted the availability of our workforce in various ways. Some of our subsidiaries’ employees in Israel have been called to active\nduty (and were released after a period of time), and others have supported friends or family members engaged in the war. If hostilities\nresume, our subsidiaries’ employees may be called up for additional reserve duty soon, additional employees may be called for service,\nand such persons may be absent for extended periods of time. This may materially and adversely affect our business operations, including\nproduct development, and our ability to meet our customers’ expectations, and could cause our competitive position to be impacted\nand our sales to decrease. In the recent, renewed conflict with Iran and Hezbollah that began in February 2026, 500 employees employed\nin Israel by our subsidiaries were called up for reserve military service.\n\n \n\nThe mobilization of employees\nfor military service has had a limited adverse effect on our financial performance, primarily due to reduced revenues from Time and Material\n(T&M) contracts, and the fact that salaries paid to mobilized employees are not fully reimbursed by the State of Israel.\n\n \n\nOther than as described above,\nour and our subsidiaries’ activities in Israel remain largely unaffected, and we and they maintain business continuity plans. As\nof the date of this annual report, the impact of the recent wars on our consolidated results of operations and financial condition has\nnot been material, but such impact may increase, and could become material, as a result of the continuation, escalation or expansion of\nIsrael’s wars with Iran and its proxies.\n\n \n\nOur commercial insurance does\nnot cover losses that may occur as a result of the current war or any other event associated with the security situation in the Middle\nEast. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by\nterrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or if maintained, will be sufficient\nto compensate us fully for damages incurred. Any losses or damages incurred by our Israeli operations could have a material adverse effect\non our business. The current (and any future) armed conflicts or political instability in the region could negatively affect business\nconditions generally and harm our results of operations.\n\n** **\n\n**As some of our revenues are derived from\nthe Israeli government sector, a reduction of government spending in Israel on IT services may reduce our revenues and profitability;\nand any delay in the annual budget approval process may negatively impact our cash flows.**\n\n** **\n\nOur Matrix subsidiary (including\nthe operations acquired as part of its merger with Magic Software in February 2026) and our TSG Systems affiliate provide services to\na broad range of Israeli governmental agencies and related subcontractors. A significant portion of these activities is conducted through\nparticipation in Israeli government tenders. Accordingly, our business is exposed to changes in government spending priorities and procurement\npractices. Any reduction or reallocation of Israeli government spending, whether due to political or economic factors, including increased\ndefense expenditures, geopolitical developments, political instability or reductions in future state budgets, may result in decreased\nspending on information technology and other relevant sectors. Such developments could reduce demand for our services and adversely affect\nour revenues and profitability.\n\n \n\n31\n\n \n\n \n\nFurthermore, the government\nof Israel has experienced delays in the approval of its annual budget in certain recent years. Any similar delays in the future could\npostpone the initiation of new projects, delay payments for services performed, and adversely affect our cash flows\n\n \n\nReductions in government budgets\nor changes in procurement priorities may also lead to a decrease in the volume of government tenders, the non-renewal of existing contracts,\nor our inability to secure significant future tenders. Moreover, increased competition for a reduced number of tenders may require us\nto submit bids with lower profit margins, which could adversely affect our profitability and overall financial performance.\n\n \n\n**Our business may be materially affected\nby changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding\ntheir potential effects, could adversely affect our results of operations and share price.**\n\n \n\nAs a multinational Group,\nwe are subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide. Significant judgment and management\nattention and resources are required in evaluating our tax positions and our worldwide provision for taxes. In the ordinary course of\nbusiness, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations\nand effective tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws, regulations, principles\nand interpretations. This may include recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory\nrates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, changes in foreign currency exchange\nrates, or changes in the valuation of our deferred tax assets and liabilities.\n\n \n\nWe may be audited in various\njurisdictions, and such jurisdictions may assess additional taxes against us. If we experience unfavorable results from one or more such\ntax audits, there could be an adverse effect on our tax rate and therefore on our net income. Although we believe our tax estimates are\nreasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and\naccruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination\nis made. Additionally, we and our subsidiaries are subject to transfer pricing rules and regulations, including those relating to the\nflow of funds between each of us and our respective affiliates, which are designed to ensure that appropriate levels of income are reported\nin each jurisdiction in which we operate.\n\n \n\n**The tax benefits that will be available\nto certain of our Israeli subsidiaries and our Israeli affiliate will require us to continue to meet various conditions and may be terminated\nor reduced in the future, which could increase our costs and taxes.**\n\n \n\nSome of our Israeli subsidiaries\nderive and expect to continue to derive benefits from various programs, including Israeli tax benefits relating to our “Preferred\nTechnological Enterprise”, or PTE, and our “Special Preferred Technological Enterprise,” or SPTE, programs. To be eligible\nfor tax benefits as a PTE or SPTE, these Israeli subsidiaries must continue to meet certain conditions including, with respect to Magic\nSoftware (now included within Matrix), consolidated group revenue at the level of Asseco (its and our controlling shareholder) of at least\nNIS 10 billion. If they do not meet the conditions stipulated in the Israeli Law for the Encouragement of Capital Investments, 5719-1959,\nor the Investment Law and the regulations promulgated thereunder, as amended, for the PTE, any of the associated tax benefits may be cancelled\nand they would be required to repay the amount of such benefits, in whole or in part, including interest and consumer price index, or\nCPI, linkage (or other monetary penalties). Further, in the future these tax benefits may be reduced or discontinued. While we believe\nthat certain of our Israeli subsidiaries have met and continue to meet the conditions that entitle then to previously-obtained Israeli\ntax benefits, there can be no assurance that the Israeli Tax Authority will agree (for example, with respect to Magic Software, in case\nthe overall revenue at the Asseco group level is lower than NIS 10 billion).\n\n \n\n32\n\n \n\n \n\n**It may be difficult to serve process and\nenforce judgments against our directors and officers in the United States or in Israel.**\n\n \n\nWe are organized under the\nlaws of the State of Israel. All of our executive officers and directors are nonresidents of the United States, and a substantial portion\nof our assets and the assets of these persons are located outside of the United States. Therefore, it may be difficult to:\n\n \n\n●effect service of process within\nthe United States on us or any of our executive officers or directors;\n\n \n\n●enforce court judgments obtained\nin the United States including those predicated upon the civil liability provisions of the United States federal securities laws, against\nus or against any of our executive officers or directors, in the United States or Israel; and\n\n \n\n●bring an original action in\nan Israeli court against us or against any of our executive officers or directors to enforce liabilities based upon the United States\nfederal securities laws.\n\n \n\nIsraeli courts may refuse\nto hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which\nto bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law\nis applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert\nwitnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There\nis little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing\na judgment against us in Israel, an investor may not be able to collect any damages awarded by either a U.S. or foreign court.\n\n \n\n**Provisions of Israeli law may delay, prevent\nor make difficult an acquisition of us, which could prevent a change of control and therefore depress the price of our shares.**\n\n \n\nThe Companies Law regulates\nmergers and requires that tender offers for acquisitions of shares above specified thresholds be approved via special shareholder approvals.\nThe Companies Law furthermore requires shareholder approvals for transactions involving directors, officers or significant shareholders\nand regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential\ntransactions unappealing to us or to some of our shareholders. These provisions of Israeli corporate and tax law may have the effect of\ndelaying, preventing or complicating a merger with, or other acquisition of, us. This could cause our ordinary shares to trade at prices\nbelow the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay\na premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli\nlaw. Asseco’s control of a significant percentage of our outstanding ordinary shares may also discourage potential acquirers from\npaying a premium to our shareholders pursuant to a change of control transaction. Please see the risk factor above titled “*Our\nlargest shareholder, Asseco Poland S.A., can significantly influence the outcome of matters that require shareholder approval.*”\n\n \n\n**Your rights and responsibilities as a shareholder\nare governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.**\n\n \n\nWe are incorporated under\nIsraeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, amended\nand restated articles of association, which we sometimes refer to as our articles, and Israeli law. These rights and responsibilities\ndiffer in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder\nof an Israeli company has a duty to act in good faith in exercising the rights thereof and fulfilling the obligations thereof toward the\ncompany and other shareholders and to refrain from abusing the power thereof in the company, including, among other things, in voting\nat the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes\nat the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s\nauthorized share capital, mergers and acquisitions and transactions involving interests of officers, directors or other interested parties\nwhich require the shareholders’ approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows\nthat he or she possesses the power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s\narticles of association, the power to appoint or prevent the appointment of an office holder in the company, or any other power with respect\nto the company, has a duty of fairness toward the company. The Companies Law does not establish criteria for determining whether or not\na shareholder has acted in good faith.\n\n \n\n33\n\n \n\n \n\n**As a foreign private issuer whose ADSs are\nlisted on the Nasdaq Global Select Market, we may follow certain home country corporate governance practices instead of certain Nasdaq\nrequirements.**\n\n \n\nAs a foreign private issuer\nwhose ADSs are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate governance practices\ninstead of certain requirements of the Listing Rules of the Nasdaq Stock Market including the proxy rules, which impose certain disclosure\nand procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with\nthe SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required\nto comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our\nprincipal shareholders are exempt from the reporting provisions, and our officers, directors and principal shareholders are exempt from\nthe “short-swing” profit recovery provisions, of Section 16 of the Exchange Act and the rules under the Exchange Act with\nrespect to their purchases and sales of our ordinary shares. Accordingly, you receive less information about our company than you would\nreceive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws, than you would be afforded\nin holding securities of a domestic U.S. company.\n\n \n\nA foreign private issuer that\nelects to follow a home country practice instead of such requirements must submit to Nasdaq a written statement from independent counsel\nin such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.\nIn addition, a foreign private issuer must disclose in its annual reports filed with the SEC or on its website, each such requirement\nthat it does not follow and describe the home country practice followed by the issuer in lieu of any such requirement. In keeping with\nthese leniencies, we have elected to follow home country practice with regard to, among other things, composition of our board of directors,\ndirector nomination procedure, compensation of officers, quorum at shareholders’ meetings and timing of our annual shareholders’\nmeetings. We have furthermore elected to follow our home country law, in lieu of those rules of the Nasdaq Stock Market that require that\nwe obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain share-based compensation\nplans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving\nissuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company. Accordingly, our\nshareholders and ADS holders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules.\n\n \n\n**Our U.S. shareholders may incur adverse\nU.S. federal income tax consequences if we are classified as a passive foreign investment company or as a “controlled foreign corporation.”**\n\n \n\nGenerally, if for any taxable\nyear 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be measured\nin part by the market value of our ordinary shares (including shares represented by ADSs), which is subject to change) are held for the\nproduction of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal\nincome tax purposes under the Code. Based on our gross income and gross assets, and the nature of our business, we believe that we were\nnot classified as a PFIC for the taxable year ended December 31, 2025. Because PFIC status is determined annually based on our income,\nassets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for the\ntaxable year ending December 31, 2026, or for any subsequent year, until we finalize our financial statements for that year. Furthermore,\nbecause the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in\nthe value of our ordinary shares may result in our becoming a PFIC. Accordingly, there can be no assurance that we will not be considered\na PFIC for any taxable year. Our characterization as a PFIC could result in material adverse U.S. federal income tax consequences for\nyou if you are a U.S. investor, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather\nthan a capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are\nU.S. holders, and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may\nalleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment)\nof our ordinary shares. Prospective U.S. investors should consult their own tax advisers regarding the potential application of the PFIC\nrules to them. Prospective U.S. investors should refer to “*Item 10.E. Taxation— U.S. Federal Income Tax Considerations*”\nfor discussion of additional U.S. income tax considerations applicable to them based on our treatment as a PFIC.\n\n \n\n34\n\n \n\n \n\nCertain U.S. holders of our\nordinary shares (or ADSs) may incur adverse U.S. federal income tax consequences if we or any of our non-U.S. subsidiaries are characterized\nas a “controlled foreign corporation,” or a CFC, under Section 957(a) of the Code. In addition, the CFC constructive ownership\nrules under Section 958(b) of the Code introduced by the U.S. Tax Act may cause one or more of our non-U.S. subsidiaries to be treated\nas CFCs and impact our CFC status, and adversely affect holders of our ordinary shares or ADSs that are United States shareholders. Generally,\nfor U.S. shareholders that own 10% or more of the combined vote or combined value of our ordinary shares (including shares represented\nby ADSs), this may result in adverse U.S. federal income tax consequences and these shareholders may be subject to certain reporting requirements\nwith the U.S. Internal Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the U.S. tax consequences\nof acquiring, owning, or disposing our ordinary shares (including ADSs), especially the changes to the rules relating to CFCs."}