{"url_path":"/sec/forty/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 OPERATING AND FINANCIAL REVIEW AND","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":26967,"has_tables":true,"body_markdown":"**ITEM 5. OPERATING AND FINANCIAL REVIEW AND\nPROSPECTS**\n\n \n\n**Overview**\n\n \n\nWe are a global software solutions\nand IT professional services holdings company that is principally engaged through our directly held investees in providing proprietary\nand non-proprietary software solutions and IT professional services, software product marketing and support, computer infrastructure and\nintegration solutions and learning and integration. We deliver our solutions in numerous countries worldwide to customers with complex\nIT services needs, including a number of “Fortune 1000” companies.\n\n \n\nSince our inception, we have\nacquired effective controlling interests, and have invested, in companies which are engaged in the IT solutions and services business.\nWe, together with our investees, are known as the Formula Group.\n\n \n\nOther than our joint control\nof TSG Systems, in which each of Formula and Israeli Aerospace Industries Ltd. holds 37.33% of its voting power (as of December 31, 2025),\nour approximate 18.68% indirect equity interest in Sapiens (held via our interest in SI Swan, Sapiens’ ultimate parent company),\nand our 21.45% share interest in an associate company, we currently have effective control under IFRS 10 in each of our other investees,\nconsisting of Matrix (including Matrix’s wholly-owned subsidiary, Magic Software), Michpal, Ofek Aerial Photography, InSync, Shamrad\nElectronics, Zap Group Formula Infrastructure and Hashahar Telecom, despite the lack of absolute majority of voting power in Matrix (and,\naccordingly, its wholly-owned subsidiary, Magic Software). As a result of our effective control in these investees as of December 31,\n2025, and in accordance with IFRS 10, we consolidated their financial results with ours throughout the period covered by the financial\nstatements included in Item 18 of this annual report. Prior to our transition to reporting under IFRS, we consolidated investees in which\nwe held an equity interest only if we held a controlling interest in those companies. Under IFRS 10, we may consolidate entities in which\nwe have effective control. For further information, please see Note 2(4) to our consolidated financial statements included in Item 18\nof this annual report.\n\n \n\nBecause we ceased to have\na controlling interest in Sapiens as of the closing of the acquisition of Sapiens by Advent in December 2025, we present the results of\nSapiens separately as discontinued operations in our consolidated financial statements for the years ended December 31, 2025 and 2024\nincluded in this annual report, in accordance with IFRS 5. Accordingly, in this Operating and Financial Review and Prospects, we exclude\nthe results of Sapiens from our consolidated results of operations (other than under the separate category of discontinued operations)\nfor each of the years ended December 31, 2025 and 2024, on a retroactive basis (as if Sapiens was not included in our consolidated results\nof operations for the year December 31, 2024 as well, although it was only acquired by Advent in December 2025).\n\n \n\nExcept for providing our investees\nwith our management, technical expertise and marketing experience to help them create a consecutive positive economic impact and long-term\nvalue and direct their overall strategy through our active involvement, we do not conduct independent operations at our parent company\nlevel. Our operating results are, and have been, directly influenced by the business operations of our subsidiaries and affiliated company.\n\n \n\nOur consolidated financial\nstatements for the years ended December 31, 2025 and 2024 are prepared in accordance with IFRS. We have presented herein consolidated\nstatements of financial position that comply with IFRS applicable as of December 31, 2025 and 2024. Our consolidated statements of profit\nor loss presented herein in IFRS cover the years ended December 31, 2025, 2024, and 2023.\n\n \n\nWe recognize revenues in two\ncategories: the delivery of software services and the delivery of proprietary software solutions and related services. All of our investees\nrecognize revenues from the delivery of software services, and most of them recognize revenues in both revenue categories. For ease of\nreference, we have separated our subsidiaries into these categories in accordance with the category in which each subsidiary has earned\nmost of its revenues (although each type of revenue is nevertheless recorded according to actual revenue type, rather than based on strict,\nsubsidiary-demarcated categories).\n\n \n\n81\n\n \n\n \n\n**Key Measures of Our Performance**\n\n** **\n\nWe supplement our IFRS financial\ndisclosures with certain key operating and financial metrics that our management uses to evaluate our performance and monitor trends in\nour business.\n\n** **\n\n**Formula Stand-Alone Financial Position**\n\n* *\n\nAs a holding company of\nvarious investees, we use certain stand-alone financial measures to reflect Formula’s stand-alone financial position in reference\nto its assets and liabilities— as the parent company of its group of companies. These financial measures are prepared consistently\nwith the accounting principles applied in the consolidated financial statements of the Formula Group. These measures consist of: the value\nof Formula’s investments in its subsidiaries and a jointly controlled entity measured at cost, as adjusted by Formula’s share\nin its investees’ accumulated undistributed earnings and other comprehensive income or loss.\n\n \n\nFormula believes that these\nfinancial measures provide useful information to Formula’s management and investors regarding its stand-alone financial position.\nFormula’s management uses these measures to compare Formula’s performance in any current period to that of prior periods for\ntrend analysis. These measures are also used in financial reports prepared for Formula’s management and in quarterly financial reports\npresented to Formula’s board of directors. Formula believes that the use of these stand-alone financial measures provides an additional\ntool for investors to use in evaluating Formula’s financial position.\n\n \n\nManagement of Formula does\nnot consider these stand-alone measures in isolation or as an alternative to financial measures determined in accordance with IFRS. Formula\nurges investors to review the consolidated financial statements prepared in accordance with IFRS which are included in this annual report\nand in Formula’s quarterly earnings releases furnished to the SEC as exhibits to its Reports of Foreign Private Issuer on Form 6-K,\nand not to rely on any single financial measure to evaluate Formula’s business or financial position.\n\n* *\n\nIn measuring its stand-alone\nfinancial position as of December 31, 2025, as compared to as of December 31, 2024, Formula’s current assets grew by 1,784.2% over\nthe course of 2025, driven by a 2,998.3% growth in cash and cash equivalents (from $25.6 million to $793.1 million), primarily reflecting\nthe cash proceeds from our disposition of our Sapiens subsidiary in 2025. While Formula’s total investment in its subsidiaries and\na jointly controlled entity fell by 26.16%, reflecting the elimination of its investment in Sapiens, its financial assets measured at\nfair value through profit or loss went from $0 to $300 million, reflecting our investment in SI Swan, in which we hold an approximate\n18.68% ownership stake and which serves as the ultimate parent company of our former subsidiary, Sapiens, thereby causing its total non-current\nassets to increase by 13.1% in 2025, from $777.8 million as of December 31, 2024 to $879.9 million as of December 31, 2025. Overall, therefore,\ntotal assets also grew significantly, by 104.7% in 2025, from $820.2 million as of December 31, 2024 to $1.679 billion as of December\n31, 2025. Similarly, Formula’s stand-alone equity grew from $679.3 million as of December 31, 2024 to $1.353 billion as of December\n31, 2025, reflecting that increase in total assets, as offset in part by smaller increases in total current liabilities (from $52.4 million\nto $230.0 million, primarily reflecting the growth of other accounts payable from $2.1 million to $152.6 million) and total long-term\nliabilities (from $88.5 million to $95.7 million).\n\n** **\n\n**Our Functional and Reporting Currency**\n\n \n\nEffective January 1, 2026, subsequent to the reporting period, we changed\nour functional currency from NIS to U.S. dollars, following a change in the primary economic environment in which we operate. We assessed\nthe relevant primary and secondary indicators in accordance with IAS 21 and determined that the U.S. dollar has become the currency that\nmost faithfully represents the economic effects of our underlying transactions, events and conditions, primarily reflected in the currency\nin which we hold and manages our monetary assets and conduct our financing activities. The change in functional currency is accounted\nfor prospectively from the date of the change and, therefore, did not affect our financial statements for the year ended December 31,\n2025. Since our presentation currency is already the U.S. dollar, no change was made to the presentation currency.\n\n \n\n82\n\n \n\n \n\nWe have elected to use the\ndollar as our reporting currency for all years presented since we believe that financial statements in U.S. dollars provide more relevant\ninformation to our investors and users of the financial statements.\n\n \n\nAssets, including fair value\nadjustments upon acquisition, and liabilities of an investee which is a foreign operation, are translated at the closing rate at each\nreporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences\nare recognized in other comprehensive income (loss).\n\n \n\nIntragroup loans for which\nsettlement is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in the foreign\noperation and, accordingly, the exchange rate differences from these loans (net of the tax effect) are recorded in other comprehensive\nincome (loss).\n\n \n\nUpon the full or partial disposal\nof a foreign operation resulting in loss of control in the foreign operation, the cumulative gain (loss) from the foreign operation which\nhad been recognized in other comprehensive income is transferred to profit or loss. Upon the partial disposal of a foreign operation which\nresults in the retention of control in the subsidiary, the relative portion of the amount recognized in other comprehensive income is\nreattributed to non-controlling interests.\n\n \n\nTransactions denominated in\nforeign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition,\nmonetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at\nthe exchange rate at that date. Exchange rate differences, other than those capitalized to qualifying assets or accounted for as hedging\ntransactions in equity, are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currency and measured\nat cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign\ncurrency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the\nfair value was determined.\n\n \n\nFor those subsidiaries whose\nfunctional currency has been determined to be their local currency, assets and liabilities are translated at year-end exchange rates and\nstatement of income items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded\nas a separate component of accumulated other comprehensive income (loss) in equity.\n\n \n\n**A.**\n**Operating Results**\n\n \n\nThis section presents an analysis\nof our results of operations, on a comparative basis, for the years ended December 31, 2025 and 2024. We have omitted herein a comparative\nanalysis of our results of operations for the years ended December 31, 2024 and 2023. In order to view that analysis, please see “*Item\n5. Operating and Financial Review and Prospects— A. Operating Results— Year Ended December 31, 2024 Compared to Year Ended\nDecember 31, 2023*” in our Annual Report on Form 20-F for the year ended December 31, 2024, which we filed with the SEC on May\n15, 2025, which analysis is incorporated by reference herein. The results of Sapiens are included in our results of operations for purposes\nof that 2024-2023 analysis, as Sapiens was a member of our group of companies in each of the years ended December 31, 2024 and 2023. Consequently,\nour results of operations for the year ended December 31, 2024 as appearing in that 2024-2023 analysis differ in that presentation than\nin the 2025-2024 analysis that appears herein.\n\n \n\n83\n\n \n\n \n\n**Year Ended December\n31, 2025 Compared to Year Ended December 31, 2024**\n\n \n\nThe following tables set forth\ncertain data from our consolidated statements of profit or loss for the years ended December 31, 2025 and 2024, as well as such data as\na percentage of our revenues for those years. The data has been derived from our audited consolidated financial statements included elsewhere\nin this annual report. The operating results for the below years should not be considered indicative of results for any future period.\nThis information should be read in conjunction with the audited consolidated financial statements and notes thereto included in this annual\nreport.\n\n** **\n\n**Consolidated Statements of Profits or Loss**\n\n**(U.S. dollars, in thousands)**\n\n \n\n  \n2025*  \n2024* \n\nRevenues \n$2,627,124  \n$2,218,434 \n\nCost of revenues \n 2,107,962  \n 1,772,678 \n\nGross profit \n 519,162  \n 445,756 \n\nResearch and development costs, net \n 20,023  \n 18,077 \n\nSelling, marketing, and general and administrative expenses \n 311,988  \n 249,716 \n\nOther income, net \n 9,226  \n 5,369 \n\nOperating income \n 196,377  \n 183,332 \n\nFinancial expenses, net \n 49,988  \n 24,467 \n\n  \n    \n   \n\nIncome before taxes on income \n 146,389  \n 158,865 \n\nShare of profit of companies accounted for at equity, net \n 3,654  \n 2,077 \n\nTaxes on income \n 40,459  \n 38,773 \n\n  \n    \n   \n\nNet income from continued operations \n 109,584  \n 122,169 \n\nNet income from discontinued operations \n 559,480  \n 71,621 \n\n  \n    \n   \n\nNet income \n 669,064  \n 193,790 \n\n  \n    \n   \n\nNet income (loss) attributable to non-controlling interests: \n    \n   \n\nFrom continued operations \n 73,070  \n 73,626 \n\nFrom discontinued operations \n (10,485) \n 40,494 \n\nNet income (loss) attributable to non-controlling interests \n    \n   \n\n  \n    \n   \n\nNet income attributable to Formula’s shareholders: \n    \n   \n\nFrom continued operations \n 36,514  \n 48,543 \n\nFrom discontinued operations \n 569,965  \n 31,127 \n\nNet income attributable to Formula’s shareholders \n 606,479  \n 79,670 \n\n \n\n*As described above in this annual report, following the completion\nof the acquisition of Sapiens by Advent in December 2025, the results of Sapiens and the impact of that transaction (whereby most of\nour interest in Sapiens was disposed of) are presented as discontinued operations in our statements of profits or loss for the year ended\nDecember 31, 2025. Comparative figures for the year ended December 31, 2024 have been reclassified accordingly to conform with that presentation.\n\n \n\n84\n\n \n\n \n\n**Statement of Profits or Loss as a**\n\n**Percentage of Revenues**\n\n \n\n  \n 2025* \n 2024*\n\nRevenues \n 100% \n 100%\n\nCost of revenues \n 80.24  \n 79.91 \n\nGross profit \n 19.76  \n 20.09 \n\nResearch and development costs, net \n 0.76  \n 0.81 \n\nSelling, marketing, and general and administrative expenses \n 11.88  \n 11.26 \n\nOther income, net \n 0.4  \n 0.24 \n\nOperating income \n 7.47  \n 8.26 \n\nFinancial expenses, net \n (1.9) \n (1.1)\n\n  \n    \n   \n\nIncome before taxes on income \n 5.57  \n 7.16 \n\nShare of profit of companies accounted for at equity, net \n 0.14  \n 0.09 \n\nTaxes on income \n 1.54  \n 1.75 \n\n  \n    \n   \n\nNet income from continued operations \n 4.17  \n 5.50 \n\nNet income from discontinued operations \n 21.3  \n 3.23 \n\n  \n    \n   \n\nNet income \n 25.47  \n 8.73 \n\n  \n    \n   \n\nNet income (loss) attributable to non-controlling interests: \n    \n   \n\nFrom continued operations \n 2.78  \n 3.32 \n\nFrom discontinued operations \n (0.40) \n 1.83 \n\nNet income (loss) attributable to non-controlling interests \n 2.38  \n 5.15 \n\n  \n    \n   \n\nNet income attributable to Formula’s shareholders: \n    \n   \n\nFrom continued operations \n 1.39  \n 2.19 \n\nFrom discontinued operations \n 21.7  \n 1.40 \n\nNet income attributable to Formula’s shareholders \n 23.09  \n 3.59 \n\n** **\n\n*As described above in this annual report, following the completion\nof the acquisition of Sapiens by Advent in December 2025, the results of Sapiens and the impact of that transaction (whereby most of\nour interest in Sapiens was disposed of) are presented as discontinued operations in our statements of profits or loss for the year ended\nDecember 31, 2025. Comparative figures for the year ended December 31, 2024 have been reclassified accordingly to conform with that presentation.\n\n** **\n\n**Revenues.**Revenues\nin 2025 increased by approximately 18.4%, from $2,218.4 million in 2024 to $2,627.1 million in 2025. Revenues from the two categories\nof our operations were as follows: revenues from the delivery of software services increased by approximately 19.0%, from $2,032.6 million\nin 2024 to $2,418.4 million in 2025, and revenues from the sale of our proprietary software products and related services increased by\napproximately 12.3%, from $185.8 million in 2024 to $208.7 million in 2025.\n\n \n\n**Software Services Revenues**\n\n \n\nThe increase in software services\nrevenues was mainly recorded across the following of our investees reporting under this revenue stream— Matrix, Magic Software and\nHashahar Telecom (the last of which was included for the first time in our revenues for a full year in 2025, following its consolidation\nas of October 2024)— and was primarily due to growth in their revenues as described below.\n\n \n\n85\n\n \n\n \n\n**Matrix**\n\n \n\nMatrix’s revenues reported\nunder this revenue stream increased from NIS 5,411.7 million (approximately $1,463.1 million) in 2024 to NIS 6,067.0 million (approximately\n$1,763.6 million) in 2025, reflecting an increase of approximately 12.1% when measured in NIS, Matrix’s local currency (compared\nto 20.5% when measured in U.S dollars). The increase in Matrix’s revenues in 2025 compared to the corresponding period in the prior\nyear was primarily attributable to growth in activity in the IT Solutions and Services, Consulting and Management in Israel segment and\nin the Cloud and Infrastructure segment. This increase was partially offset by a decline in revenues in the Software Products Sales, Marketing\nand Support segment, as well as a slight decrease in revenues in the IT Solutions and Services segment in the United States (in NIS terms,\ncompared to an increase in revenues in U.S. dollar terms). The growth in revenues in 2025 was also impacted by the first-time consolidation\nof the results of companies acquired by the Company—Gav Systems (from the first quarter of 2025), Ortec (from December 2024 and\nincluded for the first time for a full year in 2025) and ALACER (from the fourth quarter of 2024 and included for the first time for a\nfull year in 2025). Excluding the effect of the first-time consolidation of these companies, Matrix recorded organic revenue growth of\napproximately 7.1% in 2025 (when measured in NIS).\n\n** **\n\n**Magic Software**\n\n \n\nMagic Software’s revenues\nunder this revenue stream increased by approximately 15.2%, from $472.0 million in 2024 to $543.6 million in 2025. This growth (the majority\nof it was organic) was primarily driven by: (i) strong demand from existing customers in Israel and internationally— particularly\nwithin the financial, high-tech, healthcare and defense sectors, for Magic Software’s professional services; and (ii) the full-year\nconsolidation of revenues from its subsidiary, Theoris Inc., or Theoris, acquired in April, 2025.\n\n \n\n**Hashahar Telecom**\n\n* *\n\nHashahar Telecom’s revenues,\nreported under this revenue stream, increased from $3.3 million in 2024 to $16.1 million in 2025. The increase in Hashahar Telecom’s\nrevenues reported under this revenue stream was primarily attributable to its first-time consolidation for a full year in 2025, following\nits consolidation as of October 2024.\n\n \n\n*Proprietary Software Products and Related Services\nRevenues*\n\n \n\nThe increase in revenues from\nproprietary software products and related services was primarily attributable to the increase in Michpal’s revenues by approximately\n47.6% from $34.2 million in 2024 to $50.5 million in 2025.\n\n \n\n**Michpal**\n\n \n\nMichpal’s revenue reported\nunder this revenue stream increased from approximately NIS 126.8 million (approximately $34.2 million) in 2024 to approximately NIS 173.8\nmillion (approximately $50.5 million) in 2025, reflecting an increase of 37.1% when measured in NIS. The increase in revenues of approximately\nNIS 47.0 million for the year ended December 31, 2025, was primarily attributable to increased demand for Michpal’s payroll and\nfinancial solutions and the first-time full-year consolidation in 2025 of revenues from Meida Computers Software Solutions (G.D) Ltd.\n(consolidated as of July 2024) and Y-IT Ltd. (consolidated as of October 2024), as well as the acquisition of Mishmarot in July 2025.\nThis increase was partially offset by a decrease in the level of activity of Effective Solutions (a former subsidiary) and the deconsolidation\nof its results as of July 1, 2025.\n\n \n\n**Matrix and Magic Software:**\n\n \n\nMatrix’s and Magic Software’s\nrevenues, reported under this revenue stream, increased by approximately 5.4%, from $125.9 million in 2024 to $132.7 million in 2025.\nThe increase in Matrix’s and Magic Software’s revenues reported under this revenue stream was primarily attributable to increased\ndemand for Matrix’s and Magic Software’s software solutions and third-party products.\n\n \n\n86\n\n \n\n \n\nA breakdown of our overall\nrevenues into (i) proprietary software products and related services revenues and (ii) software services revenues for the years ended\nDecember 31, 2025 and 2024, the percentage those respective categories of revenues constituted out of our total revenues in those years,\nand the percentage change for each such category of revenues from 2024 to 2025, are provided in the below table:\n\n \n\n  \nYear ended\nDecember 31,  \nYear-over  \nYear ended\nDecember 31, \n\n  \n2025  \nYear  \n2024 \n\n  \nRevenues  \nPercentage  \nchange  \nRevenues  \nPercentage \n\n  \n($ in thousands) \n\nRevenue category \n   \n   \n   \n   \n  \n\nProprietary software products and related services \n 208,694  \n 7.9% \n 12.3  \n 185,793  \n 8.4%\n\nSoftware services \n 2,418,430  \n 92.1% \n 19.0  \n 2,032,641  \n 91.6%\n\nTotal \n 2,627,124  \n 100% \n 18.4  \n 2,218,434  \n 100%\n\n \n\n**Revenues by geographical region**\n\n \n\nThe dollar amount of our revenues\nattributable to each of the geographical regions in which we conduct our operations for the years ended December 31, 2025 and 2024, respectively,\nwere as follows:\n\n \n\n  \nYear ended\nDecember 31, \n\n  \n2025  \n2024 \n\n  \n($ in thousands) \n\nIsrael \n$2,092,849  \n$1,725,764 \n\nInternational: \n    \n   \n\nUnited States \n 435,800  \n 387,864 \n\nEurope \n 83,86  \n 88,000 \n\nJapan \n 11,920  \n 12,673 \n\nOther (mainly Asia pacific) \n 2,689  \n 4,133 \n\nTotal \n$2,627,124  \n$2,218,434 \n\n \n\n**Cost of Revenues***.*Cost of revenues consists primarily of compensation expense to employees and subcontractors, royalties and licenses payable to third\nparties, amortization of acquired technologies, capitalized software and depreciation, cloud-related cost, and hardware and other materials\ncosts. Cost of revenues increased by 18.9%, from $1,772.7 million in 2024 to $2,108 million in 2025. As a percentage of total revenues,\ncosts of revenues in 2024 and 2025 remained relatively stable at 79.9% in 2024 and 80.2% in 2025.\n\n \n\nOur proprietary software solutions\nand related services sales are generally characterized by a higher gross margin than sales of our software services. The cost of revenues\nfor proprietary software solutions and related services increased from $76.3 million in 2024 to $88.9 million in 2025. As a percentage\nof our proprietary software solutions and related services revenues, costs of revenues for proprietary software solutions and related\nservices increased from 41.1% in 2024 to 42.6% in 2025.\n\n \n\nThe cost of revenues for software\nservices increased from $1,696.3 million in 2024 to $2,019.1 million in 2025. As a percentage of software services revenues, costs of\nrevenues for software services remained at 83.5% in 2025 as it was in 2024.\n\n \n\n87\n\n \n\n \n\n**Matrix**\n\n \n\nMatrix’s cost of revenues\nincreased by approximately 11.6%, when measured in NIS, Matrix’s local currency, from NIS 4,746.5 (approximately $1,283.3 million)\nin 2024 to NIS 5,299.3 (approximately $1,540.3 million) in 2025. The increase in absolute cost of revenues was in line with the increase\nin Matrix revenues. As a percentage of total revenues, costs of revenues in 2024 and 2025 remained relatively stable at 85.1% in 2024\nand 84.9% in 2025.\n\n \n\nMatrix’s cost of revenues\nfor each of the years ended December 31, 2025 and 2024 does not include amounts of share-based compensation.\n\n \n\n**Magic Software**\n\n \n\nMagic Software’s cost\nof revenues increased by approximately 15.5%, from $394.7 million in 2024 to $456.0 million in 2025. This increase was consistent with\nthe year-over-year growth in total revenues, which rose by 13.4% from $552.5 million in 2024 to $626.3 million in 2025. As a percentage\nof revenues, cost of revenues increased from 71.4% in 2024 to 72.8% in 2025. The corresponding decrease in gross margin primarily reflects\nchanges in the composition of Magic Software’s revenue mix. Revenues derived from its proprietary software solutions and related\nservices are characterized by higher gross margins compared to its software services activities. During 2025, revenues from software services,\nwhich carry lower gross margins, grew at a higher rate than revenues from proprietary software solutions and related services. As a result,\nthe overall gross margin declined. By way of reference, gross margins in 2025 for proprietary software solutions and related services\nare approximately 68%, compared to approximately 21% for software services operations. Magic Software’s cost of revenues for each\nof the years ended December 31, 2025 and 2024 does not include amounts of share-based compensation.\n\n \n\n**Hashahar Telecom**\n\n \n\nHashahar Telecom’s cost\nof revenues increased from $2.9 million in 2024 to $12.9 million in 2025, in line with the increase in Hashahar Telecom’s revenues.\nThe increase in Hashahar Telecom’s cost of revenues was primarily attributable to its first-time consolidation for a full year in\n2025, following its consolidation as of October 2024.\n\n** **\n\n**Michpal**\n\n* *\n\nMichpal’s cost of revenues\nincreased by approximately 36.3% from $16.1 million in 2024 to $22.0 million in 2025, in line with the increase in Michpal’s revenues,\nwhich grew by 34.1% year over year. The increase in Michpal’s cost of revenues was primarily attributable to increased demand for\nMichpal Group’s payroll and financial solutions and the first-time full-year consolidation in 2025 of cost of revenues from Meida\nComputers Software Solutions (G.D) Ltd. (consolidated as of July 2024) and Y-IT Ltd. (consolidated as of October 2024), as well as the\nacquisition of Mishmarot in July 2025. This increase was partially offset by a decrease in the level of activity of Effective Solutions\n(a former subsidiary) and the deconsolidation of its results as of July 1, 2025.\n\n \n\n**Operating Expenses***:*\n\n \n\n**Research and Development\nExpenses, net***.*Research and development, or R&D, expenses consist primarily of compensation expense to employees\nand subcontractors engaged in research and development. Research and development expenses, net, consist of research and development expenses,\ngross, less capitalized software costs.\n\n \n\nResearch and development expenses,\ngross, increased from $20.9 million in 2024 to $22.6 million in 2025, mainly due to first-time full-year consolidation in 2025 of research\nand development expenses from Meida Computers Software Solutions (G.D) Ltd. (consolidated as of July 2024) and Y-IT Ltd. (consolidated\nas of October 2024), as well as the acquisition of Mishmarot in July 2025.\n\n \n\n88\n\n \n\n \n\nCapitalization of software\ncosts in 2025 and 2024 was attributable to our subsidiaries engaged in providing proprietary software solutions (i.e., Magic Software\nand certain of its subsidiaries, and Michpal and certain of its subsidiaries). Research and development expenses, net, increased from\n$18.1 million in 2024 to $20.0 million in 2025, mainly due to the factors described above.\n\n \n\nAs a percentage of revenues, research and development expenses, net,\nslightly decreased from 0.81% in 2024 to 0.76% in 2025. Research and development expenses for the years ended December 31, 2025 and 2024\ndo not include expense amounts for share-based compensation.\n\n \n\n**Selling, Marketing\nGeneral and Administrative Expenses.** Selling, marketing, general and administrative, or SMG&A, expenses consist primarily\nof cost of compensation expense to employees and subcontractors involved in sales, marketing, management and administrative functions,\ntravel expenses, selling expenses, rent, utilities, communications expenses, expenses related to external consultants, depreciation, amortization\nand other expenses. Selling, marketing, general and administrative expenses increased from $249.7 million in 2024 to $312.0 million in\n2025. As a percentage of revenues, SMG&A expenses slightly increased from 11.3% in 2024 to 11.9% in 2025.\n\n \n\nThe increase in SMG&A\nexpenses in 2025 was mainly attributable to:\n\n \n\n(i) an increase of $18.0 million\nto Matrix’s SMG&A expenses, primarily resulting from the expansion in the scale of Matrix’s operations in 2025 compared\nto 2024 and the recognition of one-time costs related to Magic Software’s merger transaction. Notably, despite the absolute increase,\nthese expenses declined as a percentage of Matrix’s total revenues from 6.9% in 2024 to 6.7% in 2025. Matrix’s SMG&A expenses\nfor 2025 included NIS 28.9 million (approximately $8.4 million) in amortization of intangible assets recognized in connection with business\ncombinations, compared to NIS 22.2 million (approximately $6.0 million) in the prior year. Matrix’s administrative and general expenses\nfor 2025 included NIS 8.2 million (approximately $2.4 million) related to share-based compensation, compared to NIS 18.0 million (approximately\n$4.9 million) in 2024.\n\n \n\n(ii) an increase of $6.1 million\nto Michpal’s SMG&A, primarily attributable to the first-time full-year consolidation in 2025 of SMG&A from Meida Computers\nSoftware Solutions (G.D) Ltd. (consolidated as of July 2024) and Y-IT Ltd. (consolidated as of October 2024), as well as the acquisition\nof Mishmarot in July 2025, and was in line with the increase in Michpal’s revenues, which grew by 34.1% year over year. Michpal’s\n2025 SMG&A expenses amounted to approximately $18.4 million (approximately 32.0% of Michpal’s revenues for the year 2025), compared\nto approximately $12.4 million (approximately 28.8% of Michpal’s revenues for the year 2024).\n\n \n\n(iii) an increase of $14.1\nmillion to Magic Software’s SMG&A expenses, primarily resulting from the expansion in the scale of Magic Software’s operations\nin 2025 compared to 2024 and the recognition of one-time costs related to Magic Software’s merger transaction. Notably, these expenses\nincreased as a percentage of Magic Software’s total revenues from 15.1% in 2024 to 15.5% in 2025. Magic Software’s SMG&A\nexpenses for 2025 included $7.8 million in amortization of intangible assets recognized in connection with business combinations, compared\nto $7.7 million in the prior year. Magic Software’s administrative and general expenses for 2025 included $0.1 million related to\nshare-based compensation, compared to $1.6 million in 2024.\n\n \n\n(iv) an increase in amortization\nexpenses of approximately $18.7 million attributable to our reassessment and revision of the estimated useful lives of certain acquired\ncustomer relationship intangible assets related to a non-core activity that is not a strategic focus of our operations. The revision reflects,\namong other factors, changes in the expected pattern of economic benefits from these assets, including the impact of evolving technology\nconditions and market conditions in Israel over the past two years, which have adversely affected the relevant sector.\n\n \n\nConsolidated share-based compensation\nexpenses recorded under selling, marketing general and administrative expenses for the years ended December 31, 2025 and 2024 amounted\nto $31.1 million and $16.2 million, respectively.\n\n \n\n89\n\n \n\n \n\n**Operating Income**.\nOur operating income increased from $183.3 million in 2024 to $196.4 million in 2025. As a percentage of revenue, our operating income\ndecreased from 8.3% in 2024 to 7.5% in 2025. The increase in our operating income during the year ended December 31, 2025 relative to\nthe year ended December 31, 2024 as an absolute amount was attributable to the various gross profit and operating expenses trends described\nabove.\n\n \n\n**Financial Expenses,\nnet**. Financial expenses increased from $34.9 million in 2024 to $63.6 million in 2025. Financial expenses, net increased from\n$24.5 million in 2024 to $50.0 million in 2025. Financial expenses are influenced by various factors, including: our cash balances; loan\nbalances; outstanding debentures; changes in liabilities related to business combinations; changes in the exchange rate of the NIS against\nthe dollar; changes in the exchange rate of the dollar against the Euro; and changes in the Israeli consumer price index, or CPI.\n\n \n\nThe increase in net financial\nexpenses in 2025 was primarily attributable to: (i) an increase in financial expenses related to liabilities in respect of business combinations\nfrom $0.4 million in 2024 to $13.3 million in 2025; (ii) an increase in interest expenses on loans and borrowings from $17.9 million in\n2024 to $18.7 million in 2025; (iii) an increase in financial costs related to debentures from $3.6 million to $5.0 million; and (iv)\nan increase in bank charges, negative foreign exchange differences and other financial expenses from $8.3 million in 2024 to $19.8 million\nin 2025. These increases in financial expenses were offset, in part, by an increase in interest income from deposits, positive foreign\nexchange differences and other financial income from $10.5 million to $13.6 million.\n\n \n\n**Taxes on Income**.\nTaxes on income increased from $38.8 million in 2024 to $40.5 million in 2025. As a percentage of pre-tax income, tax expenses amounted\nto approximately 27.6% in 2025, compared to 24.4% in 2024. The increase in the effective tax rate is mainly due to the recognition of\nnon-deductible one-time costs related to the Matrix-Magic Software merger transaction.\n\n** **\n\n**Share of profits\nof companies accounted for at equity, net***.*Share of profits of companies accounted for at equity, net, increased from\n$2.1 million in 2024 to $3.7 million in 2025. The increase in our share of profits of companies accounted for at equity was primarily\nattributable to $0.9 million of additional profit recorded with respect to our investment in TSG Systems and to $0.8 million of additional\nprofit recorded with respect to our 21.45% equity interest investment in an Israel-based private technology company specializing in artificial\nintelligence-powered product comparison and e-commerce guidance platforms.\n\n \n\n**Net income from continued\noperations.**Our net income from continued operations decreased from $122.2 million in 2024 to $109.6 million in 2025. As a\npercentage of revenue, our net income from continued operations decreased from 5.5% in 2024 to 4.2% in 2025. The decrease in our net income\nfrom continued operations during the year ended December 31, 2025 relative to the year ended December 31, 2024 as an absolute amount was\nattributable to the various gross profit, operating expenses and financial expenses trends described above.\n\n** **\n\n**Net income from discontinued\noperations**. Following the completion of the disposition of Sapiens in December 2025, the Company ceased to have a controlling\ninterest in Sapiens and, accordingly, Sapiens results were presented as discontinued operations in accordance with IFRS 5. As part of\nthe transaction, we disposed of the majority of our holdings in Sapiens and retained an indirect minority interest of approximately 18.68%.\nNet income from discontinued operations for the year ended December 31, 2025 primarily reflects a capital gain recognized in connection\nwith the transaction of approximately $578.3 million, including the remeasurement of the retained investment to fair value, partially\noffset by the Company’s share in Sapiens’ results up to the date of the transaction. The total contribution from discontinued\noperations attributable to our shareholders amounted to approximately $570 million.\n\n \n\n**Net income attributable\nto non-controlling interests from continued operations**. Net income attributable to non-controlling interests refers to the\nnet income attributable to the non-controlling interests held by other shareholders in our consolidated companies that were not wholly\nowned by Formula during each of the periods indicated. Net income attributable to non-controlling interests from continued operations\ndecreased from $73.6 million in 2024 to $73.1 million in 2025.\n\n \n\n90\n\n \n\n** **\n\n**Impact of Inflation and Currency Fluctuations on Results of Operations**\n\n \n\nOur financial statements are\nstated in U.S. dollars. However, most of our revenues and expenses from our software services revenue line are denominated in NIS and\na substantial portion of our revenues and costs from our proprietary software products and related services revenue line are incurred\nin non-U.S. dollar currencies, particularly the NIS, Euro, Japanese yen, Indian rupee and British pound. We also maintain substantial\nnon-U.S. dollar balances of assets, including cash, accounts receivable, and liabilities, including accounts payable, debentures and debt\nto financial institutions. Therefore, fluctuations in the value of the currencies in which we do business relative to the U.S. dollar\nmay adversely affect our business, results of operations and financial condition. For financial reporting purposes, we translate all non-U.S.\ndollar denominated transactions into dollars using the average exchange rate over the period during which the transactions occur, in accordance\nwith IFRS. Therefore, we are exposed to the risk that the devaluation of the NIS relative to the U.S. dollar may reduce the revenue growth\nrate and profitability for our software services in dollar terms. The average of the daily representative exchange rates of the NIS to\nthe dollar in 2025 and 2024, as reported by the Bank of Israel, were NIS 3.45 per $1 U.S. dollar, and NIS 3.70 per $1 U.S. dollar, respectively.\nThis appreciation of the NIS relative to the U.S. dollar in 2025 had a positive material impact on the dollar value of our NIS-based revenues\nand profitability for our Israeli software services in 2025 compared to 2024.\n\n \n\nA substantial portion of our\nrevenues from proprietary software products and related services is currently mainly denominated in U.S dollars, Euros, Japanese yen,\nIndian rupee and the British pound, whereas a substantial portion of our expenses relating to those products, principally salaries and\nrelated personnel expenses, are denominated in NIS or U.S dollar. As a result, the devaluation of the Euro, Japanese yen, Indian rupee\nand the British pound relative to the U.S. dollar (in which our financial results are reported) reduces the revenue growth rate and profitability\nfor our proprietary software products and related services in dollar terms, thereby adversely affecting our operating results. From the\nperspective of expenses (and contrary to the trend involving software services), the devaluation of the NIS relative to the dollar decreases\nthe relative value, in U.S. dollars, of the NIS-denominated operating costs related to our proprietary software product revenues. The\nsignificant appreciation of the NIS relative to the U.S. dollar in 2025 compared to in 2024 therefore materially increased, in U.S. dollar\nterms, our expenses related to our proprietary software products and related services, and reduced our profitability, thereby offsetting\nthe positive impact that such movement had on our revenues and our profitability from our software services.\n\n \n\nSince most of our expenses\nare incurred in NIS, the dollar cost of our operations related to proprietary software products and related services also rises as a result\nof any increase in the rate of inflation in Israel, to the extent that such inflation is not offset, or is only offset on a lagging basis,\nby the devaluation (if any) of the NIS against the dollar during a relevant period of time. The average Israeli rate of inflation on an\nannual basis amounted to 2.6%, 3.2% and 3.0% for the years ended December 31, 2025, 2024 and 2023, respectively. Therefore, in 2025, the\nreduced inflation rate in Israel relative to 2024 tempered the growth of our NIS-based operating expenses in U.S. dollar terms that was\ncaused by the appreciation of the NIS relative to the U.S. dollar in 2025. In 2024, the slight rise in Israeli inflation relative to 2023\nincreased the U.S. dollar value of our NIS-based expenses, thereby offsetting the slight decrease in U.S. dollar terms of our NIS-based\nexpenses caused by the slight depreciation of the NIS relative to the U.S. dollar in 2024. In 2023, the decrease in Israeli inflation\n(relative to 2022) furthered the decrease in U.S. dollar terms of our NIS-based expenses caused by the depreciation of the NIS relative\nto the U.S. dollar in 2023.\n\n \n\nAn increase in the rate of\ninflation in Israel may also have a material adverse effect on our financial results by increasing our operational expenses, as certain\nof our operating lease and rent agreements are denominated in NIS and are generally linked to the Israeli CPI, so to the extent that the\nIsraeli CPI rises, so will our operational expenses.\n\n \n\nThough, to date, we have not\nengaged in significant currency hedging transactions, we do periodically engage in certain economic hedging in order to help protect against\nfluctuation in foreign currency exchange rates. Instruments that we use to manage currency exchange risks may include foreign currency\nforward contracts. The purpose of our foreign currency hedging activities is to reduce our exposure, from the perspective of our profitability,\nto the risks that arise from the adverse impact that exchange rates bear on our revenues and expenses that are denominated in non-U.S.\ncurrencies. Instruments are used selectively to manage risks, but there can be no assurance that we will be fully protected against material\nforeign currency fluctuations. We do not use these instruments for speculative or trading purposes. In the future, we may enter into more\nor larger currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the NIS,\nEuro, Danish Krone, Swedish Krona, Japanese yen or British pound against the U.S dollar, and from increases in the Israeli inflation rate.\nHowever, we cannot assure you that these measures will adequately protect us from the adverse effects of those fluctuations.\n\n \n\n91\n\n \n\n \n\nThe following table presents\na summary of the most relevant monetary indicators for the reported periods:\n\n \n\nFor the year ended December 31, \nInflation rate in Israel  \nDevaluation (appreciation) of NIS against the US$*  \nDevaluation (appreciation) of Euro against the US$* \n\n  \n **%**  \n %  \n **%** \n\n2025 \n 2.6% \n (12.6)% \n (11.8)%\n\n2024 \n 3.2% \n 0.3% \n 0.1%\n\n2023 \n 3.0% \n 9.9% \n (2.7)%\n\n \n\n*Reflects the change in the daily\nexchange rate from the start of such year until the end of such year rather than the change in the average daily exchange rate over the\ncourse of that year relative to the previous year.\n\n \n\n**Effective Corporate Tax Rates in Israel**\n\n \n\nTax regulations have a material\nimpact on our business, particularly in Israel where we have our headquarters. The following is a summary of some of the current tax laws\napplicable to companies in Israel, with special reference to their effect on us.\n\n \n\n**Corporate Tax**\n\n \n\nGenerally, Israeli companies\nare subject to corporate tax on their taxable income. As of 2018 and thereafter, the corporate tax rate is 23%. Pursuant to the Minimum\nCorporate Tax on Multinational Groups Law, 2025, which became effective for tax years beginning on or after January 1, 2026, Israel has\nimplemented a Qualified Domestic Minimum Top-Up Tax, or the QDMTT. The QDMTT ensures that multinational enterprise groups with annual\nconsolidated revenues of at least €750 million are subject to a minimum effective tax rate of 15% on their Israeli-sourced income.\nHowever, the effective tax rate payable by a company that derives income from an AE, BE, PFE or a PTE, in each case, as defined and further\ndiscussed below, may be considerably lower. See “*Law for the Encouragement of Capital Investments*” in this Item 5.A\nbelow. In addition, Israeli companies are currently subject to regular corporate tax rate on their capital gains.\n\n \n\nBesides being subject to the\ngeneral corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and received certain\ngrants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.\n\n \n\n**Taxation of Non-Israeli Subsidiaries Held\nby an Israeli Parent Company**\n\n \n\nNon-Israeli subsidiaries of\nan Israeli parent company are generally subject to tax in their countries of residence under tax laws applicable to them in such countries.\nSuch subsidiaries could also be subject to Israeli corporate tax on their income if they were to be managed and controlled from Israel.\nIn such case, double taxation could ensue unless an applicable tax treaty provides applicable rules for relief from double taxation or\nsuch relief is available under internal law.\n\n \n\n92\n\n \n\n \n\nAn Israeli parent company\nmay also be required to include in its income on a current basis, as a deemed dividend, certain income derived by its subsidiaries under\nthe Israeli Controlled Foreign Corporation rules, or CFC, regardless of whether such income is distributed or not. Under these rules,\na non-Israeli subsidiary is considered to be a CFC, if, among other things, (i) a majority of the subsidiary’s means of control\nare held by Israeli residents, (ii) most of its revenues or income is passive (such as interest, dividends, royalties, rental income or\nincome from capital gains) and (iii) such income is taxed at a rate that does not exceed 15%. An Israeli parent company that is subject\nto Israeli taxes on such deemed dividend income, may generally receive a credit for foreign taxes paid by its subsidiaries in their country\nof residence and for deemed foreign taxes to be withheld upon the actual distribution of such income.\n\n** **\n\n**Law for the Encouragement of Industry (Taxes),\n5729-1969**\n\n \n\nThe Law for the Encouragement\nof Industry (Taxes), 5729-1969, or the Industry Encouragement Law, provides several tax benefits for an “Industrial Company.”\nPursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company which was\nincorporated in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from\nan “Industrial Enterprise” that it owns and is located in Israel or in the “Area,” in accordance with the definition\nunder Section 3A of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance. An “Industrial Enterprise” is defined\nas an enterprise which is held by an Industrial Company whose major activity, in a given tax year, is industrial production.\n\n \n\nAn Industrial Company is entitled\nto certain tax benefits, including:\n\n \n\n■Amortization of the cost of\nthe purchases of patents, or the right to use a patent or know-how that were purchased in good faith and used for the development or\npromotion of the Industrial Enterprise, over an eight-year period commencing on the year in which such rights were first exercised;\n\n \n\n■the right to elect, under certain\nconditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it; and\n\n \n\n■Expenses related to a public\noffering are deductible in equal amounts over three years beginning from the year of the offering.\n\n \n\nEligibility for benefits under\nthe Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.\n\n \n\nWe believe that certain of\nour Israeli subsidiaries and affiliate currently qualify as Industrial Companies within the definition under the Industry Encouragement\nLaw. We cannot assure you that they will continue to qualify as Industrial Companies or that the benefits described above will be available\nin the future.\n\n \n\n**Law for the Encouragement of Capital Investments,\n5719-1959**\n\n \n\nThe Law for the Encouragement\nof Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a production facility\n(or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law,\nreferred to as an Approved Enterprise, or AE, a Benefitted Enterprise, or BE, or a Preferred Enterprise, or PFE, or a Special Preferred\nEnterprise, or SPFE, or a Preferred Technological Enterprise, or PTE, or a Special Preferred Technological Enterprise, or SPTE is entitled\nto benefits as discussed below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among\nother things, the geographic location in Israel of the facility in which the investment is made. In order to qualify for these incentives,\nan AE, BE, PFE, SPFE PTE or SPTE is required to comply with the requirements of the Investment Law.\n\n \n\n93\n\n \n\n \n\nThe Investment Law has been\namended several times over the years, with the three most significant changes effective as of April 1, 2005 (referred to as the 2005 Amendment),\nas of January 1, 2011 (referred to as the 2011 Amendment) and as of January 1, 2017 (referred to as the 2017 Amendment). Pursuant to the\n2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment\nremain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011\nAmendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the\n2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 were entitled to choose\nto continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and\nelect the benefits of the 2011 Amendment. The 2017 Amendment introduced new benefits for Technological Enterprises, alongside the existing\ntax benefits.\n\n \n\n**Tax benefits under the 2011 Amendment that\nbecame effective on January 1, 2011.**\n\n \n\nThe 2011 Amendment canceled\nthe availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced\nnew benefits for income generated by a “Preferred Company” through its PFE (as such terms are defined in the Investment Law)\nas of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental\nentity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners\nare companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, PFE status and is\ncontrolled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of\n15% with respect to its preferred income, or PFI, attributed to its PFE in 2011 and 2012, unless the PFE is located in a certain development\nzone, in which case the rate will be 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased\nto 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for a\nPFE that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate for other development\nzones remains 16%. Income derived by a Preferred Company from a Special Preferred Enterprise, or SPFE (as such term is defined in the\nInvestment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the SPFE is located\nin a certain development zone. As of January 1, 2017, the definition for SPFE includes less stringent conditions.\n\n \n\nThe classification of income\ngenerated from the provision of usage rights in know-how or software that were developed in a PFE, as well as royalty income received\nwith respect to such usage, is subject, as PFE income, to the issuance of a pre-ruling from the Israel Tax Authority, or ITA, that stipulates\nthat such income is associated with the productive activity of the PFE in Israel.\n\n \n\nDividends paid to Israeli\nshareholders out of PFI attributed to a PFE or to a Special PFE are generally subject to withholding tax at source at the rate of 20%(in\ncase of non-Israeli residents - subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate,\n20%, or such lower rate as may be provided in an applicable tax treaty). However, if such dividends are paid to an Israeli company, no\ntax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company the aforesaid\nwill apply).\n\n \n\nOn November 15, 2021, the\nEconomic Efficiency Law (Legislative Amendments for Achieving Budget Targets for the 2021 and 2022 Budget Years), 2021, which we refer\nto as the Economic Efficiency Law, was enacted. This law established a temporary order, or the Temporary Order, allowing Israeli companies\nto release tax-exempt earnings, which we refer to as trapped earnings or accumulated earnings, that had accumulated until December 31,\n2020, through a mechanism established for a reduced corporate income tax rate applicable to those earnings. In addition to reducing the\ncorporate income tax (or CIT) rate, the Economic Efficiency Law amended Article 74 of the Investment Law, whereby effective from August\n15, 2021, for any dividend distribution (including a dividend specified in Article 51B of the Investment Law) by a company which has trapped\nearnings, there is a requirement to allocate a portion of that distribution to the trapped earnings. Under the Temporary Order, the reduction\nof CIT applies to earnings that are released (with no requirement for an actual distribution) within a period of one year from the date\nof enactment of the Temporary Order. The reduction in the CIT is dependent on the proportion of the trapped earnings that are released\nrelative to the total trapped earnings, and on the foreign investment percentage in the years the earnings were generated. Consequently,\nthe larger the proportion of the trapped earnings that are released, the lower the tax in respect of the distribution. The minimum tax\nrate is 6%. Further, a company that elects to pay a reduced CIT is required to invest in its industrial enterprise a designated amount\nin accordance with the Economic Efficiency Law within a period of five years commencing from the tax year in which the election is made.\nThe designated investment should be utilized for the acquisition of production assets, and/or investments in research and development\nand/or compensation to additional new employees.\n\n \n\n94\n\n \n\n \n\n**New Tax benefits under the 2017 Amendment\nthat became effective on January 1, 2017**\n\n \n\nThe 2017 Amendment provided\nnew tax benefits for two types of Technology Enterprises, as described below, and is in addition to the other existing tax beneficial\nprograms under the Investment Law.\n\n \n\nThe 2017 Amendment provided\nthat a technology company satisfying certain conditions will qualify as a PTE, and will thereby enjoy a reduced corporate tax rate of\n12% on income that qualifies as Preferred Technology Income, or PTI, as defined in the Investment Law. The tax rate is further reduced\nto 7.5% for a PTE located in development zone “A”. In addition, a Preferred Technology Company will enjoy a reduced corporate\ntax rate of 12% on capital gain derived from the sale of certain Benefited Intangible Assets (as defined in the Investment Law). to a\nrelated foreign company if the “Benefitted Intangible Assets” (as defined under the Investment Law) were acquired from a foreign\ncompany on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the Israeli Innovation Authority,\nor the IIA.\n\n \n\nThe 2017 Amendment further\nprovided that a technology company satisfying certain conditions will qualify as a SPTE (an enterprise for which, among others, total\nconsolidated revenues of its parent company and all subsidiaries is at least NIS 10 billion) and will thereby enjoy a reduced corporate\ntax rate of 6% on PTI regardless of the company’s geographic location within Israel. In addition, a SPTE will enjoy a reduced corporate\ntax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company\nif the Benefited Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign company\non or after January 1, 2017, and the sale received prior approval from IIA. A SPTE that acquires Benefitted Intangible Assets from a foreign\ncompany for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified\nin the Investment Law.\n\n \n\nWe examined the impact of\nthe 2017 Amendment and the degree to which certain of our Israeli subsidiaries will qualify as a PTE or SPTE, and the amount of PTI that\nwe may have, or other benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of our Group’s taxable income\nwith respect to certain operations under certain of our Israeli subsidiaries became entitled to a preferred 12% tax rate under the 2017\nAmendment. In addition, from 2019 onwards, certain of our Israeli subsidiaries are considered a SPTE and as such are entitled to a SPTE\ntax rate of 6%, as described above.\n\n \n\n**Tax Benefits and Grants for Research and\nDevelopment**\n\n \n\nIsraeli tax law allows, under\ncertain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in which they\nare incurred. Such expenditures must relate to scientific research and development projects and must be approved by the relevant Israeli\ngovernment ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company’s\nbusiness and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is\nreduced by the sum of any funds received through government grants for the finance of such scientific research and development projects.\nExpenditures not so approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over\na three-year period.\n\n \n\n**Effect of Tax Regulations on our Operating\nResults**\n\n \n\n*Global Minimum Tax Pillar\nTwo*\n\n \n\nIn December 2022, the European\nCouncil adopted Council Directive (EU) 2022/2523, which ensures a global minimum level of taxation for multinational enterprise groups\nand large-scale domestic groups in the EU, and introduced within the EU the solutions previously formulated by the Organization for Economic\nCooperation and Development (OECD) and accepted by more than 140 countries under the BEPS 2.0 (Base Erosion Profit Shifting) project.\n\n \n\n95\n\n \n\n \n\nThe Global Minimum Tax rules\n(the so-called Pillar Two) impose new tax and reporting obligations on companies which belong to capital groups (Polish and multinational)\nwith revenues of at least EUR 750 million, and, therefore, they apply to the Asseco Group (and to our company as a member of the Asseco\nGroup). The purpose of Pillar Two is to equalize taxation rules and it is implemented by imposing a minimum tax of 15% on qualifying income\nof capital groups. The effective tax rate, not the nominal rate, will be taken into account, and the tax rate will be calculated on a\ncountry-by-country (jurisdiction) basis, i.e., on an aggregate basis for all group companies in each country.\n\n \n\nIn Israel, the regulations\nof Pillar Two became effective beginning on January 1, 2026. Certain countries in which we operate have enacted such legislation while\nother countries are in the process of doing so; however, this did not have a material effect on our income tax provision for the 2025\nfiscal year.\n\n \n\n**B.**\n**Liquidity and Capital Resources**\n\n \n\nSince inception, we have financed\nour growth and business primarily through cash provided by operations and through public debt and equity offerings, as well as through\nprivate and public debt and equity offerings of our subsidiaries. In addition, we finance our business operations through short-term and\nlong-term loans and borrowings available under our credit facilities.\n\n \n\n**Current Outlook**\n\n \n\nWe had cash and cash equivalents and short-term investments (including\nmarketable securities) of $1,280.5 million and $563.2 million as of December 31, 2025 and 2024, respectively. At December 31, 2025 and\n2024, we had indebtedness to banks and others, including debentures, of $441.6 million and $479.4 million, respectively, of which $254.6\nmillion and $228.6 million were current liabilities and $187.0 million and $250.8 million were long-term liabilities as of those respective\ndates. Included in the balance of our indebtedness to banks and others as of December 31, 2025 and 2024, Formula had (on a stand-alone\nbasis) indebtedness of $114.6 million and $136.6 million, in the aggregate, outstanding including Formula’s Series C Secured Debentures\nand Series D Secured Debentures, respectively, which Formula sold in public offerings in Israel in March 2019 (extended in April 2021\nand August 2022), and September 2024, respectively, in each case, as described below.\n\n \n\nWe had cash and cash equivalents\nand short term deposits (including marketable securities) that were held outside of Israel and that would have been subject to income\ntaxes if distributed as a dividend as of December 31, 2025 and 2024 in amounts of $105.2 million and $89.5 million, respectively.\n\n \n\n**Sources of Financing**\n\n \n\n*Formula Financing Activities*\n\n* *\n\n*Series C Secured Debenture\nFinancings*\n\n \n\nOn March 31, 2019, Formula\nconsummated a public offering in Israel of a new series of secured debentures— Series C Secured Debentures— in an aggregate\nNIS 300.0 million par value amount, at a price of NIS 1,000 for each unit of NIS 1,000 principal amount. The aggregate gross proceeds\nfrom the public offering totaled NIS 300.0 million (approximately $82.6 million) excluding issuance costs of $0.9 million. The Series\nC Secured Debentures are secured by liens on the shares of Formula’s subsidiaries and are listed for trading only on the TASE. Each\nSeries C Secured Debenture unit bears interest at a fixed annual rate equal to 2.29%, which interest will be paid out on a semi-annual\nbasis. The principal amount of the Series C Debentures will be payable by Formula in seven annual installments from December 1, 2020 through\nDecember 1, 2026, the first five of which will each constitute 11% of the principal, and the final two of which will each constitute 22.5%\nof the principal.\n\n \n\n96\n\n \n\n \n\n*April 2021 Private Placement*\n\n \n\nOn April 12, 2021, Formula\nconsummated a private placement to qualified investors in Israel of an aggregate NIS 160 million (approximately $48.6 million) principal\namount of its non-convertible Series C Secured Debentures at a price of NIS 1,037 for each NIS 1,000 principal amount. The total aggregate\ngross proceeds received by Formula from the investors was NIS 165.92 million (approximately $50.4 million), out of which NIS 1.7 million\nwas attributed to interest payable (approximately $0.5 million). Debt premium of NIS 4.4 million (approximately $1.0 million) net of issuance\ncosts of NIS 0.9 million (approximately $0.3 million) were allocated to the Formula Systems Series C Secured Debentures and are amortized\nas financial income over the remaining term of Formula Systems’ Series C Secured Debentures, for which the final installment payment\nis due in December 2026.\n\n \n\nThe additional debentures\nwere sold by means of an increase in the outstanding principal amount of Series C Secured Debentures. As a result of this private placement,\nthe total outstanding principal amount of the Series C Debentures increased to approximately NIS 427 million. The Series C Secured Debentures\nsold in the private placement are subject to the terms of the deed of trust, entered into in March 2019, by and between Formula, as the\nissuer of the debentures, and Reznick Paz Nevo Trusts Ltd., as trustee on behalf of the debenture holders.\n\n \n\nThe terms of the Series C\nDebentures sold in the April 2021 private placement were identical in all respects to those of the Series C Debentures sold in Formula’s\nMarch 2019 public offering.\n\n \n\n*August 2022 Private Placement*\n\n \n\nOn August 22, 2022, Formula\nentered into agreements with qualified investors in Israel for the private placement to those investors of an additional aggregate of\nNIS 200 million principal amount of Formula’s Series C Secured Debentures, at a price of NIS 975 for each NIS 1,000 principal amount.\nThe total aggregate gross proceeds received by Formula from the investors was NIS 195 million (of which NIS 1.1 million was attributed\nto interest payable, or approximately $0.3 million). The additional debentures were sold by means of an increase in the outstanding principal\namount of Series C Secured Debentures.\n\n \n\nThe terms of the Series\nC Debentures sold in the August 2022 private placement were identical in all respects to those of the Series C Debentures sold in Formula’s\nMarch 2019 public offering.\n\n \n\n*Series D Secured Debenture\nFinancing*\n\n \n\nOn September 17 and 19, 2024,\nFormula consummated a public offering in Israel of a new series of secured debentures-Series D Secured Debentures- in an aggregate NIS\n150.0 million par value amount, at a price of NIS 1,000 for each unit of NIS 1,000 principal amount. The aggregate gross proceeds from\nthe public offering totaled NIS 150.0 million (approximately $39.8 million) excluding issuance costs of NIS 2.0 million (approximately\n$0.5 million). The Series D Secured Debentures are secured by liens on the shares of Formula’s subsidiaries and are listed for trading\nonly on the TASE. Each Series D Secured Debenture unit bears interest at a fixed annual rate equal to 5.68%, which interest will be paid\nout on a semi-annual basis, beginning on December 1, 2024 and then on June 1 and December 1 of each of 2025 through 2034. The principal\namount of the Series D Secured Debentures will be payable by Formula in eight annual installments on December 1 of each of 2027 through\n2034, the first seven of which will each constitute 12% of the principal, and the eighth and final of which will constitute the remaining\n16% of the principal.\n\n \n\nThe total principal amount\nof all debentures— including Series C Secured Debentures and Series D Secured Debentures— issued by Formula that remain outstanding\nas of March 31, 2026 constitute NIS 165.8 million (approximately $52.4 million).\n\n \n\n97\n\n \n\n* *\n\n*General Terms of Outstanding\nDebentures*\n\n \n\nFormula’s Series C Secured\nDebentures and Series D Secured Debentures contain, in addition to standard terms and obligations, the following obligations on our part:\n\n \n\n●a negative pledge, subject to\ncertain exceptions;\n\n \n\n●a covenant not to distribute\ndividends unless: (i) shareholders’ equity (not including minority interests) is at least $370 million (for the Series D Secured\nDebentures) or $290 million (for the Series C Secured Debentures); (ii) Formula’s consolidated net financial indebtedness (financial\nindebtedness net of cash, marketable securities, deposits and other liquid financial instruments) does not exceed 50% (for each of the\nSeries D Secured Debentures and the Series C Secured Debentures) of net CAP (which is defined as financial indebtedness, net, plus shareholders\nequity); (iii) the amount of the distributions (including, in the case of the Series D Secured Debentures, any previous distribution\nstarting from January 1, 2022 and the case of the Series C Secured Debentures, any previous distribution starting from January 1, 2016)\ndoes not exceed that aggregated amount of the profit accrued for, in the case of the Series D Secured Debentures, the year 2021 and 75%\nof profits accrued from January 1, 2022 until the distribution, and in the case of the Series C Secured Debentures, the year 2015 and\n75% of profits accrued from January 1, 2016 until the distribution; (iv) no event of default shall have occurred; and (v) no material\nbreach of obligations under the debentures shall have occurred; and\n\n \n\n●Financial covenants, including:\n(i) the equity attributable to the shareholders of Formula, as reported in Formula’s annual or quarterly financial statements,\nwill not be less than $215 million (for the Series C Secured Debentures) or $325 million (for the Series D Secured Debentures); (ii)\nFormula’s consolidated net financial indebtedness (financial indebtedness net of cash, marketable securities, deposits and other\nliquid financial instruments) shall not exceed 65% of net CAP (which is defined as financial indebtedness, net, plus shareholders equity);\n(iii) Formula’s consolidated net financial indebtedness shall not exceed five times EBITDA (which is defined as the consolidated\nnet profit plus taxes, net financing expenses, depreciation and amortization and without expenses for employee stock option, expenses\nfor transactions and one-time income/expenses) (in the case of the Series D Secured Debentures, for two consecutive quarters); and (iv)\nin the case of the Series C Secured Debentures, at all times, Formula’s cash balance will not be less than the annual interest\npayment (compounded) for the unpaid principal amount of the Series C Secured Debentures.\n\n \n\nWe have agreed to standard\nevents of default under the Series C Secured Debentures and Series D Secured Debentures, together with the following additional events\nof default due to any of the following:\n\n \n\n●cross default initiated in relation\nto the other series of debentures or other indebtedness (other than non-recourse debt) over NIS 75 million ($23.5 million as of December\n31, 2025) in the case of the Series C Secured Debentures or over NIS 250 million ($78. 4 million as of December 31, 2025) in the case\nof the Series D Secured Debentures;\n\n \n\n●suspension of trading of the\ndebentures on the TASE over a period of 60 days;\n\n \n\n●failure to have the debentures\nrated over a period of 60 days;\n\n \n\n●if the rating of the debentures\nis less than BBB- by Standard and Poors Maalot or equivalent rating of other rating agencies;\n\n \n\n●if there is a change in control\nwithout consent of the rating agency;\n\n \n\n●if Formula fails to provide\nadditional security when the loan-to-value of the securities securing Series C Secured Debentures or Series D Secured Debentures (as\napplicable) falls below the required ratio;\n\n \n\n●the existence of a real concern\nthat Formula will not meet its material undertakings towards the debenture holders;\n\n \n\n98\n\n \n\n \n\n●the inclusion in Formula’s\nfinancial statements of a note regarding the existence of significant doubt as to Formula’s ability to continue as a going concern;\n\n \n\n●breach of Formula’s undertakings\nregarding the issuance of additional debentures;\n\n \n\n●Formula’s failure to continue\nto control any of its subsidiaries; and\n\n \n\n●failure to comply with the negative\npledge covenant.\n\n* *\n\n*Subsidiary and Affiliate Financing Activities*\n\n \n\nFrom time to time, our subsidiaries\nand affiliated companies also maintain credit facilities with banks and other financial institutions and issue debt instruments such as\ndebentures in accordance with their cash requirements. These credit facilities and debentures include, inter alia, certain standard events\nof defaults related to our subsidiaries’ operations, which restrict their ability to: (i) undergo a change of control, (ii) distribute\ndividends, (iii) incur debt or apply a floating charge on their assets, or (iv) undergo an asset sale or other change that would result\nin a fundamental change in their operations. The subsidiaries’ and affiliated companies’ indebtedness also requires that they\ncomply with certain financial covenants, including maintenance of certain financial ratios related to their shareholders’ equity,\ntotal rate of debt and liabilities, minimum outstanding balance of total cash and short-term investments and operating results that are\ncustomary for companies of comparable size and risk level. Some of our subsidiaries’ assets are pledged to the lender banks and\ndebenture holders. If we or any of our subsidiaries do not meet the covenants specified in our credit agreements or indentures (or equivalent\nagreement with the debenture holders), and a waiver with respect to the fulfillment of such covenants has not been received from the lender\nbank or representative of the debenture holders, the lender bank or debenture holders (via the action of their representative) may foreclose\non the pledged assets to satisfy a debt.\n\n \n\nAs of December 31, 2025, Matrix\nand its subsidiaries, Magic Software and its subsidiaries , Zap Group and its subsidiaries, Michpal Technologies and its subsidiaries,\nFormula Infrastructure and its subsidiaries, and Formula have material credit facilities and/or debentures outstanding. The long-term\ndebt obligations of Matrix for NIS-denominated loans bear fixed interest at an average annual rate of 1.9%-5.94% (including Matrix’s\nSeries B Debentures issued in September 2022 and extended in December 2022). The long-term debt obligations of Magic Software for NIS-denominated\nloans bear floating interest at an annual rate between the Israeli prime interest rate +0.2% and the Israeli prime interest rate +0.95%.\nThe long-term debt obligations of Magic Software for U.S. dollar- denominated loans bear floating interest at a rate between SOFR + 2.25%\nand SOFR + 3.38%. The long-term debt obligations of Zap Group for NIS-denominated loans bear floating interest in NIS at a rate of the\nIsraeli prime interest rate +0.84%. The long-term debt obligations of Michpal for NIS-denominated loans bear floating interest at a rate\nbetween the Israeli prime interest rate -0.3% and the Israeli prime interest rate +0.02%.\n\n \n\nSubsequent to December 31,\n2025, and following the completion of the merger between Matrix and Magic Software, Magic Software prepaid, in full, and retired its long-term\ndebt in March 2026.\n\n \n\nAs of December 31, 2025, Matrix\nhad aggregate short-term obligations to banks and others (excluding current maturities of debentures) of NIS 380.4 million (approximately\n$119.2 million) and aggregate long-term obligations to banks and others of NIS 63.9 million (approximately $20.0 million) under its credit\nfacilities. As of December 31, 2025, Magic Software had aggregate short-term obligations to banks and others of $31.8 million and aggregate\nlong-term obligations to banks and others of $39.7 million under its credit facilities. As of December 31, 2025, Zap Group had aggregate\nshort-term obligations to banks and others of NIS 6.0 million (approximately $1.9 million) and aggregate long-term obligations to banks\nand others of NIS 4.7 million (approximately $1.5 million) under its credit facilities. As of December 31, 2025, Michpal Technologies\nhad aggregate short-term obligations to banks and others of NIS 30.6 million (approximately $9.6 million) and aggregate long-term obligations\nto banks and others of NIS 20.0 million (approximately $6.3 million) under its credit facilities. During the second half of 2022, in an\neffort to hedge its exposure to the effects of the increase in interest rates, Matrix effected two Series B Debenture issuances, yielding\na net amount (minus issuance expenses) of approximately NIS 471.4 million (approximately $140.4). The principal due under the Matrix Series\nB Debentures is payable in thirteen (13) semi-annual installments, each equal to approximately 7.14% of the aggregate principal amount\n(or approximately NIS 33,959) on February 1st and on August 1st of each of the years 2023 through 2029, with the\nlast payment equal to 7.18% of the aggregate principal amount (or approximately NIS 34,148) to be paid on February 1, 2030. The outstanding\nprincipal amount under the Matrix Series B Debentures bears interest at a fixed rate of 4.1% per annum (subject to adjustments based on\nthe credit rating of the debentures), payable on February 1st and August 1st of each of the years 2023 through 2030.\n\n \n\n99\n\n \n\n \n\nOn February 4, 2026, Matrix\ncompleted an issuance of additional debentures (Series 2), which are convertible, with a nominal value of approximately NIS 297 million,\nfor gross proceeds of approximately NIS 300.6 million. The debentures bear annual interest at a rate of 0.5% and are repayable in a single\ninstallment on February 1, 2031. The debentures (Series 2) are convertible on any trading day, such that each NIS 180 nominal value of\ndebentures is convertible into one ordinary share of Matrix (subject to customary adjustments, including adjustments for dividend distributions).\n\n \n\n As of the date of the\nfinancial statements included in this annual report, each of Formula, Magic Software, Zap Group, Michpal and Matrix was in compliance\nwith each of its respective financial covenants under the terms of its applicable indebtedness.\n\n \n\nWe believe that our current\ncash reserves, together with cash that may be distributed to us from the ongoing operations of our subsidiaries and any credit that we\nmay choose to draw upon that is available under our (and our subsidiaries’ and affiliated company’s) existing credit facilities\nshould be sufficient for our present working capital requirements for at least the next 12 months at our current level of operations.\nWe may consider in the future additional equity issuances, debt issuances or borrowings from banks if necessary to meet cash needs for\nour growth, including if needed to consummate one or more acquisitions for consideration consisting of all or a substantial portion of\nour available cash. Should we require additional financing in the future, we cannot assure you that such financing will be available on\nfavorable terms or at all.\n\n \n\n*Credit Ratings for Formula/Subsidiary Indebtedness*\n\n \n\nIn connection with the issuance\nof Formula’s Series C and Series D Secured Debentures, we received from Midroog Ltd. (an affiliate of Moody’s Corporation,\nwhich holds a 51% equity interest in Midroog) a corporate credit rating, as well as ratings for the Series C and Series D Secured Debentures,\nof ilAa3 with a stable outlook. These ratings were reaffirmed by Midroog as of December 2025. In addition, we were assigned by Standard\n& Poor’s Maalot Ltd., or S&P Maalot, a subsidiary of S&P Global, a corporate credit rating and ratings for our Series\nC and Series D Secured Debentures outstanding of ilAA- with a stable outlook. These ratings were reaffirmed by Maalot as of August 2025.\n\n \n\nIn connection with Matrix’s\nAugust 2022 offering of its Series B Debentures (then extended in December 2022 in a private placement) and its February 2026 offering\nof Series 2 Convertible Debentures, Matrix received from Midroog corporate credit ratings and ratings for the Series B Debentures and\nSeries 2 Convertible Debentures of ilAa3.il, with stable outlook, each of which was affirmed by Midroog as of March 2026.\n\n \n\n**Cash Provided by Operating Activities**\n\n \n\nCash flows provided by our\noperating activities increased from $324.5 million in 2024 to $382.0 million in 2025, mainly resulting from: (i) an increase in Matrix’s\ncash provided by operating activities from NIS 619.2 million (approximately $167.4 million) in 2024 to NIS 835.3 million (approximately\n$230.3 million) in 2025; and (ii) an increase in Michpal’s cash provided by operating activities from NIS 48.5 million (approximately\n$12.4 million) in 2024 to NIS 60.2 million (approximately $17.6 million) in 2025. These increases were offset in part by a decrease in\nMagic Software’s cash provided by operating activities from $74.8 million in 2024 to $61.7 million in 2025.\n\n \n\n100\n\n \n\n \n\n*Year Ended December 31, 2025*\n\n \n\nNet cash provided by operating\nactivities in 2025 consisted primarily of the cash generated by our subsidiaries’ ongoing operating activities and of net income\nstemming therefrom, as adjusted for non-cash activity, including changes in operating assets and liabilities. The material upwards adjustments\nin cash flow reflecting non-cash activity included adjustments due to: (i) depreciation and amortization of capitalized research and development\nassets, other intangible assets (mainly customer relations), property, plants and equipment and operating right-of-use assets in an aggregate\namount of $152.5 million; (ii) an increase in trade payables in an amount of $24.2 million; (iii) share-based compensation expenses in\nan amount of $31.1 million; (iv) a decrease in trade receivables in an amount of $51.9 million; (v) an increase in other accounts payable\nand employees and payroll accrual in an amount of $47.8 million; and (vi) a change in inventories in an amount of $5.1 million. These\nupwards adjustments were offset in part by downwards adjustments attributable to: (a) gain on disposal of discontinued operations, net\nof tax in an amount of $578.3 million; (b) gain from secondary equity issuance of TSG in an amount of $9.2 million; and (c) a decrease\nin other current and long-term accounts receivable in an amount of $15.5 million.\n\n \n\n*Year Ended December 31, 2024*\n\n \n\nNet cash provided by operating\nactivities in 2024 consisted primarily of the cash generated by our subsidiaries’ ongoing operating activities and of net income\nstemming therefrom, as adjusted for non-cash activity, including changes in operating assets and liabilities. The material upwards adjustments\nin cash flow reflecting non-cash activity included adjustments due to: (i) depreciation and amortization of capitalized research and development\nassets, other intangible assets (mainly customer relations), property, plants and equipment and operating right-of-use assets in an aggregate\namount of $115.5 million; (ii) an increase in trade payables in an amount of $40.0 million; (iii) share-based compensation expenses in\nan amount of $16.2 million; (iv) an increase in deferred revenues in an amount of $7.4 million; (v) an increase in other accounts payable\nand employees and payroll accrual in an amount of $44.7 million; and (vi) a change in inventories in an amount of $11.7 million, offset\nin part by: (a) a change in deferred taxes, net in an amount of $12.4 million; (b) an increase in trade receivables in an amount of $81.2\nmillion; (c) a change in liability in respect of business combinations in an amount of $1.8 million; (d) capital gain resulting from TSG\nSystems’ IPO in an amount of $4.1 million; and (f) change in share of profits of companies accounted for at equity, net in an amount\nof $2.1 million.\n\n \n\n**Cash Used in Financing Activities**\n\n \n\nCash flow used in financing\nactivities was $223.5 million in 2025, compared to cash flow used in financing activities in an amount of $185.0 million in 2024, mainly\nreflecting the cumulative effect of the following financing-related transactions that occurred over the course of those years:\n\n* *\n\n*Year Ended December 31, 2025*\n\n* *\n\nOverall, net cash used in\nfinancing activities in 2025 was attributable to: (i) dividends paid to non-controlling interests in subsidiaries in an amount of $99.5\nmillion; (ii) dividends paid to Formula’s shareholders in an amount of $28.7 million; (iii) repayment of long-term loans from banks\nand others in an amount of $101.7 million; (iv) repayment of debentures in an amount of $107.3 million; (v) repayment of lease liabilities\nin an amount of $54.4 million; (vi) purchase of non-controlling interests in an amount of $0.5 million; (vii) a decrease in short-term\nbank credit, net in an amount of $3.8 million; and (viii) cash paid due to exercise of put option by non-controlling interests in an amount\nof $14.4 million, offset, in part, by: (a) $100.2 million of cash provided by long-term loans received from banks and others; and (b)\nproceeds from the issuance of Michpal’s ordinary shares in its IPO in an amount of $83.7 million.\n\n \n\nThe above-referenced dividends\npaid to non-controlling interests in subsidiaries that contributed to cash used in financing activities in 2025 were the following dividends\nby our subsidiaries:\n\n \n\nIn 2025, Magic Software declared cash dividends to its shareholders\nin an aggregate amount of approximately $38.0 million, of which $20.3 million was allocated to non-controlling interests.\n\n \n\n101\n\n \n\n \n\nIn 2025, Matrix declared cash dividends to its shareholders in an aggregate\namount of approximately NIS 220.8 million (approximately $65.3 million, based on the exchange rate as of the payment date of each respective\ndividend), of which NIS 114.5 million (approximately $33.9 million) was paid to non-controlling interests.\n\n \n\n*Year Ended December 31, 2024*\n\n* *\n\nOverall, net cash used in\nfinancing activities in 2024 was attributable to: (i) dividends paid to non-controlling interests in subsidiaries in an amount of $66.3\nmillion; (ii) dividends paid to Formula’s shareholders in an amount of $18.8 million; (iii) repayment of long-term loans from banks\nand others in an amount of $93.3 million; (iv) repayment of debentures in an amount of $69.3 million; (v) repayment of lease liabilities\nin an amount of $50.1 million; (vi) purchase of non-controlling interests in an amount of $4.9 million; and (vii) a decrease in short-term\nbank credit, net in an amount of $4.6 million, offset, in part, by: (a) $63.3 million of cash provided by long-term loans received from\nbanks and others; and (b) $67.1 million of cash provided by the issuance of debentures.\n\n \n\nThe above-referenced dividends\npaid to non-controlling interests in subsidiaries that contributed to cash used in financing activities in 2024 were the following dividends\nby our subsidiaries:\n\n \n\nIn 2024, Magic Software declared\ncash dividends to its shareholders in an aggregate amount of approximately $21.6 million (out of which $11.6 million were paid on January\n8, 2025) of which $11.51 million was allocated to non-controlling interests (of which $6.2 million was paid on January 8, 2025).\n\n \n\nIn 2024, Matrix declared cash\ndividends to its shareholders in an aggregate amount of approximately NIS 232.5 million (approximately $63.1 million, based on the exchange\nrate as of the payment date of each respective dividend), of which NIS 120.4 million (approximately $32.7 million) was paid to non-controlling\ninterests.\n\n \n\n*Cash Provided by or Used in Investing Activities*\n\n \n\nNet cash provided by our investing\nactivities was $564.1 million in 2025, compared to $78.2 million used in our investing activities in 2024.\n\n \n\nNet cash provided by our investing\nactivities in 2025 was attributable to: (i) net proceeds from the disposal of a subsidiary, classified as discontinued operations, in\nconnection with the Sapiens transaction in an amount of $676.1 million; (ii) proceeds from maturity and sale net of investment in debt\ninstruments at fair value through other comprehensive income or loss, net in an amount of $3.7 million; (iii) net decrease in short-term\nand long-term deposits in an amount of $55.6 million; (iv) dividends from companies accounted for at equity in an amount of $6.0 million;\nand (v) proceeds from sale of property and equipment in an amount of $1.0 million. This cash provided by our investing activities was\noffset in part by the following cash amounts used in investing activities in 2025: (i) expenditures (net of cash acquired) with respect\nto business acquisitions in an aggregate amount of $135.7 million; (ii) purchase of property and equipment and intangible assets in an\namount of $17.6 million; (iii) capitalization of software development and other costs in an amount of $10.1 million; (iv) payment to former\nshareholders of a consolidated company in an amount of $6.1 million, and (v) payments in conjunction with deferred payments and contingent\nliabilities related to business combinations in an amount of $3.1 million\n\n \n\nNet cash used in investing\nactivities in 2024 was attributable to: (i) expenditures (net of cash acquired) with respect to business acquisitions in an aggregate\namount of $50.2 million; (ii) purchase of property and equipment and intangible assets in an amount of $17.3 million; (iii) purchase of\nother investments in an amount of $15.5 million; (iv) capitalization of software development and other costs in an amount of $11.6 million;\n(v) payment to former shareholders of a consolidated company in an amount of $6.1 million; and (vi) payments in conjunction with deferred\npayments and contingent liabilities related to business combinations in an amount of $8.4 million. This cash use was offset in part by\nthe following cash amounts provided by investing activities in 2024: (a) proceeds from maturity and sale net of investment in debt instruments\nat fair value through other comprehensive income or loss, net in an amount of $5.2 million; (b) net decrease in short-term and long-term\ndeposits in an amount of $24.1 million; and (c) proceeds from sale of property and equipment in an amount of $0.8 million.\n\n \n\n102\n\n \n\n \n\n**Company Commitments**\n\n \n\nThe total principal amount\nof all debentures-including Series C Secured Debentures and Series D Secured Debentures-issued by Formula (on a stand-alone basis) that\nremain outstanding as of March 31, 2026 constituted NIS 315.6 million (approximately $99.7 million).\n\n \n\nFor a description of the amounts\noutstanding under these debenture series and the related covenants and restrictions to which we are subject, please see “*Sources\nof Financing*” above in this Item 5.B (“*Liquidity and Capital Resources*”).\n\n \n\nWe do not have material commitments\nfor capital expenditures by Formula as of December 31, 2025 or as of the date of this annual report.\n\n \n\nWe have entered into an undertaking\nto indemnify our office holders in specified limited categories of events and in specified amounts, subject to certain limitations. For\nmore information, see “*Item 7. Major Shareholders and Related Party Transactions— Related Party Transactions— Indemnification\nof Office Holders*.”\n\n \n\n**Subsidiary Commitments**\n\n \n\nOur subsidiaries do not have\nany material commitments for capital expenditures as of December 31, 2025 or as of the date of this annual report.\n\n \n\nAs alluded to above (see “*Sources\nof Financing— Subsidiary and Affiliate Financing Activities*” in this Item 5.B (“*Liquidity and Capital Resources*”)),\nthe loan agreements, debentures and indentures to which we are party contain a number of conditions and limitations on the way in which\nwe (Matrix, Magic Software, Zap Group, Michpal and Formula) can operate our businesses, including limitations on our ability to raise\ndebt and sell or acquire assets not in normal business activity. For example, Matrix’s loan agreement includes a negative pledge\nwith respect to Matrix’s assets, as well as limitations on Matrix’s ability to provide guarantees to third parties and sell\nor transfer its assets. Matrix’s loan agreements also contain various covenants which require it to maintain certain financial ratios\nrelated to shareholders’ equity and operating results that are customary for companies of comparable size.\n\n \n\nOur subsidiaries and affiliates\nhave provided bank guarantees aggregating to approximately $53.3 million as of December 31, 2025 as security for the performance of various\ncontracts with customers. If our subsidiaries and affiliates were to breach certain terms of such contracts, the customers could demand\nthat the banks providing the guarantees pay amounts claimed to be due.\n\n \n\nOur subsidiaries and affiliates\nhave also provided additional bank guarantees aggregating to $5.6 million as of December 31, 2025 as security for rent to be paid for\ntheir offices. If our subsidiary and affiliate were to breach certain terms of their leases, the lessors could demand that the banks providing\nthe guarantees pay amounts claimed to be due.\n\n \n\n103\n\n \n\n \n\nPursuant to Formula’s\nSeries C Secured Debentures and Series D Secured Debentures described above, liens have been incurred over a certain portion of our investment\nin outstanding shares of Matrix, in respect of the amounts shown in the table below:\n\n \n\n  \nAs of December 31, 2025 \n\n  \nFormula’s Series C Secured Debentures  \nFormula’s Series D Secured Debentures \n\nMatrix ordinary shares, par value NIS 1 per share, pledged by Formula to secure indebtedness \n 2,265,931  \n 2,350,272 \n\n \n\n**C.**\n**Research and Development, Patents and Licenses, etc.**\n\n \n\nThe net amounts that we spent\non research and development activities in 2025 and 2024 were $20.0 million and $18.1 million, respectively. For more information about\nour research and development activities, see “*Item 4. Information on the Company— Business Overview— Software Development*.”\n\n \n\nFor information concerning\nour intellectual property rights, see “*Item 4. Information on the Company— Business Overview— Intellectual Property\nRights*.”\n\n \n\n**D.**\n**Trend Information**\n\n \n\n**Trends Impacting Our\nIndustry and Our Business**\n\n** **\n\n*Macroeconomic Trends*\n\n \n\nFor a description of the\nmacroeconomic trends impacting our Group’s business generally, both globally and in Israel in particular, please see “*Item\n4. Information on the Company— B. Business Overview— The Formula Group— Overview of Macroeconomic Environment in which\nthe Formula Group Operates”* above in this annual report.\n\n \n\n*Trends in the Information\nTechnology (IT) Industry*\n\n \n\nFor a description of the industry-specific\ntrends impacting our Group’s business in IT markets, both globally and in Israel in particular, please see “*Item 4. Information\non the Company— B. Business Overview— The Formula Group—Overview of IT Industries in which Matrix and Magic Software\nOperate”*above in this annual report.\n\n \n\n*Trend in Israeli Defense\nSpending*\n\n** **\n\nOverall, against the backdrop\nof geopolitical uncertainty worldwide and the security situation in Israel, there has been an increase in the activity levels of defense\ncompanies, as well as in the volume of their contracts and backlogs. This trend accordingly generates strong demand from defense customers\nfor development services, professional services, and other work scopes from these customers. Additionally, the uncertainty arising from\nescalating geopolitical tensions in Israel and worldwide increases the threat levels faced by customers in the fields of cybersecurity\nand information security. Accordingly, this drives strong demand in these areas, as well as in the sale and marketing of infrastructure\nand equipment to establish or enhance business continuity (BCP) and disaster recovery plans.\n\n \n\nOur Matrix subsidiary (including\nits Magic Software subsidiary) and our TSG Systems affiliate employ hundreds of experts with extensive operational and technological experience,\nproviding services to the Israeli Defense Forces, or IDF, the Israeli Ministry of Defense, and leading defense industries, as well as\nparticipating in projects for international defense organizations.\n\n \n\nWe specialize in engineering,\ntechnology, cybersecurity, and deep learning (AI & Deep Learning), integrating advanced technologies into complex operational environments,\nplanning and executing technological projects in fields such as Geographic Information Systems (GIS), NLP, video and image processing,\nadvanced cybersecurity and intelligence— including embedded devices, embedded computer systems, and national defense systems (national\nCERT)— as well as the development of command and control systems, intelligence, simulation systems, and more.\n\n \n\n104\n\n \n\n \n\nUnder our defense operations,\nwe operate one of the largest and most diverse defense consulting bodies in Israel, combining deep operational understanding with technology.\nOur expertise includes initiating processes, strategic consulting, business planning within the domain, market research and competitive\nintelligence, concept development, system planning and specification, as well as leading performance analysis capabilities in Israel.\nOur defense operations have been awarded new projects, including those in public and private cloud environments, AI, data, and cybersecurity,\nand continue to execute projects for foreign governments.\n\n** **\n\nIn response to the challenges\nposed by Israel’s significant recent and ongoing conflicts with Iran and its terrorist proxies, Hamas in Gaza and Hezbollah in Lebanon,\nMatrix Defense faced a dual challenge: on one hand, the massive mobilization of reservists among our employees, and on the other, the\nurgent need to provide critical support and adapt our operations to the evolving operational and security needs of our customers. This\nincluded a special commitment to the Ministry of Defense and the defense industries, rapid system deployments, round-the-clock 24/7 operations,\nand continuous support for customer systems, all of which contributed to our growth in this sector.\n\n \n\n*Trends in Cyber Spending*\n\n \n\nThe escalation of cyber\nthreats, particularly amid heightened geopolitical tensions— including the ongoing conflicts between Israel and Iran and its terrorist\nproxies— has led to a significant increase in the frequency, intensity, sophistication, and complexity of cyberattacks. These developments\nhave materially heightened exposure to cyber risks, particularly for Israeli-based entities. In this context, the risk of a material cyber\nincident targeting our subsidiaries core systems— whether those used in the management of their day-to-day operations, in the delivery\nof services to customers, or in the storage and processing of third-party data— has increased.\n\n \n\nShould such a cyber threat\nmaterialize, it could adversely affect our operations, impair our ability to provide uninterrupted services to our customers, damage our\nreputation, expose us and our subsidiaries and affiliates to legal and regulatory proceedings, and jeopardize existing or prospective\nbusiness engagements. Such an event may also result in significant financial losses.\n\n \n\nAt the same time, heightened\nconcern regarding cyber threats has had a positive effect on the market’s awareness of the need for robust information security,\nwhich has supported demand for our subsidiaries’ (especially Matrix and its subsidiary Magic Software’s) cybersecurity offerings,\nparticularly our managed cyber solutions and related services.\n\n \n\nOur Group, which offers,\nthrough our subsidiaries, information security and cybersecurity services as part of their core portfolio, allocates substantial resources\nand engages in ongoing efforts to protect our systems against cyber threats. These measures include the implementation of advanced technological\nsolutions, establishment of internal policies and procedures for incident response and risk mitigation, deployment of protective mechanisms\n(such as multi-factor remote authentication), and adherence to recognized cybersecurity standards and frameworks.\n\n \n\nAdditional steps taken include\nregular reviews and updates of our information security policies, employee training and awareness programs, and periodic internal and\nexternal audits. We also conduct cybersecurity simulations to test our defenses and make ongoing improvements based on simulation outcomes\nand industry best practices.\n\n \n\nThe board of directors of\neach of our publicly traded subsidiaries receives periodic briefings on their companies cybersecurity posture and preparedness. Responsibility\nfor cybersecurity oversight rests with a dedicated management structure, including Chief Information Security Officers (CISOs) and specialized\nInformation Security Departments staffed by certified professionals. These departments, in collaboration with external experts, conduct\nregular assessments of their company’s network defenses and information assets. Assessment methodologies include risk assessments,\npenetration testing, vulnerability analysis, compliance surveys, internal audits, and more.\n\n \n\n105\n\n \n\n \n\nWe believe that the continuation\nof technological advancement, the ongoing digital transformation of organizations, and persisting geopolitical tensions—including\nthe ongoing conflicts between Israel and Iran and its terrorist proxies, and the continuing Russia-Ukraine conflict— are likely\nto sustain or even intensify cybersecurity challenges in 2026 and beyond.\n\n \n\nFurthermore, global cybersecurity\nspending generally is experiencing robust growth, as it was projected to rise by 12.5% to 15% in 2025, reaching roughly $212–$213\nbillion (*Forrester’s Global Cybersecurity Market Forecast, 2024 To 2029*). This upward trend is driven by intensifying ransomware\nthreats, the need to secure AI-driven applications, and compliance pressures, with global spending projected to exceed $300 billion by\n2029 billion (*Forrester’s Global Cybersecurity Market Forecast, 2024 To 2029*).\n\n \n\n Other than as disclosed\nelsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January\n1, 2025 through the date of this annual report that are reasonably likely to have a material adverse effect on our revenue, profitability,\nliquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating\nresults or financial condition.\n\n \n\nFor additional trend information,\nplease see the discussion in “*Item 4. Information on the Company— Business Overview*” and “*Item 5. Operating\nand Financial Review and Prospects— Results of Operations*.”\n\n  \n\n**E.**\n**Accounting Policies and Critical Accounting Estimates**\n\n \n\nOur discussion and analysis\nof our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in\naccordance with IFRS. The preparation of our financial statements required us, in certain circumstances, to make estimations, assumptions\nand judgments that affect the reporting amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets\nand liabilities within the reporting period. We have based our estimates on historical experience and on various other assumptions that\nare believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the values of assets\nand liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions\nor conditions. More detailed descriptions of these policies are provided in Note 2 to our consolidated financial statements contained\nelsewhere in this annual report.\n\n \n\n**Basis of presentation\nof the financial statements**\n\n** **\n\nThe consolidated financial\nstatements included in this annual report have been prepared in accordance with International Financial Reporting Standards as issued\nby the International Accounting Standards Board, which we refer to as IFRS.\n\n \n\nOur financial statements have\nbeen prepared on a cost basis, except for certain assets and liabilities such as: financial assets measured at fair value through other\ncomprehensive income; liabilities in respect of business combination; other financial assets and liabilities (including derivatives),\nwhich are presented at fair value through profit or loss; provisions; employee benefit assets and liabilities; and investments in associates\nand joint ventures.\n\n \n\nWe have elected to present\nthe profit or loss items using the function of expense method.\n\n \n\n**Use of estimates, judgments\nand assumptions**\n\n** **\n\nThe preparation of the consolidated financial statements requires management\nto make estimates, judgments, and assumptions, that have an effect on the application of the accounting policies and on the reported amounts\nof assets, liabilities, revenues and expenses in the financial statements. Such estimates, judgments and assumptions are related, but\nnot limited to, effective control and Estimate of Percentage of Completion for Measurement of Progress on Long-Term Fixed-Price Contracts.\nThe Company’s management believes that the estimates, judgments, and assumptions used are reasonable based upon information available\nat the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure\nof contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses\nduring the reporting periods. Actual results could differ from those estimates. Changes in accounting estimates are reported in the period\nof the change in estimate.\n\n \n\n106\n\n \n\n \n\n**Consolidated financial\nstatements**\n\n \n\nOur consolidated financial\nstatements consolidate the results reflected in the financial statements of companies that we controlled as of December 31, 2025 (our\nsubsidiaries). Control is achieved when we are exposed, or have rights, to variable returns from our involvement with the investee and\nhave the ability to affect those returns through our power over the investee. Potential voting rights are considered when assessing whether\nan entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when\nsuch control ceases.\n\n \n\nThe financial statements of the Company and of the Investees, after\nbeing adjusted to comply with IFRS, are prepared for the same reporting period and using consistent accounting treatment of similar transactions\nand economic activities. Any discrepancies in the applied accounting policies are eliminated by making appropriate adjustments. Significant\nintragroup balances and transactions and gains or losses resulting from intragroup transactions are eliminated in full in the consolidated\nfinancial statements.\n\n \n\nA change in the ownership\ninterest of a subsidiary, without a loss of control, is accounted for as a change in equity by adjusting the carrying amount of the non-controlling\ninterests with a corresponding adjustment of the equity attributable to equity holders of the Company less / plus the consideration paid\nor received.\n\n \n\nUpon the disposal of a subsidiary\nresulting in loss of control, we:\n\n \n\n●derecognize the subsidiary’s assets (including goodwill)\nand liabilities;\n\n \n\n●derecognize the carrying amount of non-controlling interests;\n\n \n\n●derecognize the adjustments arising from translating financial\nstatements carried to equity;\n\n \n\n●recognize the fair value of the consideration received;\n\n \n\n●recognize the fair value of any remaining investment;\n\n \n\n●reclassify the components previously recognized in other comprehensive\nincome (loss) on the same basis as would be required if the subsidiary had directly disposed of the related assets or liabilities; and\n\n \n\n●recognize any resulting difference (surplus or deficit) as\ngain or loss\n\n \n\n**Effective control**\n\n \n\nIn a situation where we hold\nless than a majority of voting power in a given entity, but that power is sufficient to enable us to unilaterally direct the relevant\nactivities of such entity, then control is exercised. When assessing whether the voting rights we hold are sufficient to give us power,\nwe consider all facts and circumstances, including: the amount of those voting rights relative to the amount and dispersion of other vote\nholders; potential voting rights we hold and other shareholders or parties; rights arising from other contractual arrangements; significant\npersonal ties; and any additional facts and circumstances that may indicate that we have, or do not have, the ability to direct the relevant\nactivities when decisions need to be made, inclusive of voting patterns observed at previous meetings of shareholders.\n\n \n\nOur management has concluded\nthat despite the lack of absolute majority of voting power at the general meetings of shareholders of Matrix and Magic Software (prior\nto its merger with Matrix in February 2026), in accordance with IFRS 10, these investees are under our control. The conclusion regarding\nthe existence of control during the years ended December 31, 2025, 2024 and 2023 with respect to Matrix and Magic Software, in accordance\nwith IFRS 10, was made in accordance with the following factors:\n\n \n\n107\n\n \n\n \n\n*Matrix*\n\n \n\nAs of December 31, 2025, we\nheld 48.12% of the outstanding ordinary shares of Matrix. The conclusion regarding the existence of control in Matrix, in line with IFRS\n10, was made considering the following additional factors:\n\n \n\n*Governing bodies of Matrix*\n\n \n\nDecisions of Matrix’s\ngeneral meetings of shareholders are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general\nmeeting adopts resolutions to elect individual directors, appoint Matrix’s independent auditors for the next year, as well as approve\nMatrix’s financial statements and its management’s report on operations; in accordance with Matrix’s articles of association,\nthe board of directors of Matrix is responsible for managing its current business operations and is authorized to take substantially all\ndecisions which are not specifically reserved to Matrix’s shareholders by its articles of association, including the decision to\npay out dividends; Matrix’s board of directors is composed of five members, two of whom are external directors as required by the\nIsraeli Companies Law, 5759-1999, another one of whom is an independent director, while the remaining two directors are associated with\nFormula, including Formula’s chief executive officer who serves as the chairman of Matrix’s board of directors.\n\n \n\n*Shareholders\nstructure of Matrix*\n\n \n\nMatrix’s shareholders’\nstructure may be considered dispersed because, apart from the Company, only three shareholders (each, an Israeli institutional investor)\nheld more than 5% of Matrix’s voting power as of December 31, 2025 (holding 8.5%, 6.4% and 5.7%, respectively). There is no evidence\nthat any of the shareholders has or had granted to any other shareholder a voting proxy at the general meeting. Over the last three years\n(i.e., 2023-2025), Matrix’s general meetings were attended by shareholders representing in the aggregate between 82% and 86% of\nMatrix’s total voting rights. Therefore, the level of activity of Matrix’s shareholders is relatively moderate. Bearing in\nmind that Formula presently holds approximately 48.12% of the total voting rights of Matrix, the attendance of shareholders would have\nto be higher than 96.24% in order to deprive Formula of an absolute majority of votes at the general meeting. We believe that achieving\nsuch high attendance seems unlikely. In addition, Israeli law provides that institutional investors may not possess the ability to direct\nthe company’s business and as such each institutional investor cannot exceed 20% ownership in a public company. An institutional\ninvestor also cannot appoint more than 20% of the members of a public company’s board of directors. Looking at the entire Israeli\nmarket, the practice is that institutional investors do not appoint members of boards of directors, as having such appointees in those\npositions would impact institutional investors’ ability to effect certain transactions on the market (due to insider trading concerns).\nIf institutional investors cooperate among themselves, they may be considered to violate that rule. If they furthermore vote in the same\nway as one another, and contrary to the preference of the major shareholder, they might be accused of cooperation and violation of the\nrule. Hence, there are both legal and practical limitations that prevent institutional investors from coordinating their approaches with\none another.\n\n \n\nTherefore it is our management’s\nopinion that despite our lack of ownership of an absolute majority of Matrix’s outstanding shares as of December 31, 2025, we were\nstill able to influence the appointment of directors at Matrix and therefore could affect Matrix’s development policies, as well\nas its business operations as of that date.\n\n \n\n*Magic Software*\n\n \n\nAs of December 31, 2025, we\nheld 46.71% of the outstanding ordinary shares of Magic Software. The conclusion regarding the existence of control in Magic Software,\nin line with IFRS 10, was made considering the following factors:\n\n \n\n*Governing bodies of Magic\nSoftware*\n\n \n\nDecisions of Magic Software’s\ngeneral meetings of shareholders are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general\nmeeting adopts resolutions to elect individual directors, appoint Magic Software’s independent auditors for the next year, as well\nas to approve Magic Software’s financial statements and its management’s report on operations; in accordance with Magic Software’s\narticles of association, the board of directors of Magic Software is responsible for managing Magic Software’s current business\noperations and is authorized to take substantially all decisions which are not specifically reserved to Magic Software’s shareholders\nby its articles of association, including the decision to pay out dividends; and, Magic Software’s board of directors is composed\nof six members, four of whom are external or independent directors, and the other two of whom are associated with Formula, including Formula’s\nchief executive officer, who also serves as Magic Software’s chief executive officer.\n\n \n\n108\n\n \n\n \n\n*Shareholders structure\nof Magic Software*\n\n \n\nMagic Software shareholders’\nstructure is dispersed because, apart from the Company, as of December 31, 2025, three financial Israeli institutional shareholders held\nmore than 5% of Magic Software’s voting rights (holding 13.9%, 7.0%, and 5.1%, respectively); there is no evidence that any of the\nshareholders have or had granted to any other shareholder a voting proxy at a general meeting; and, over the last three years (i.e., 2023\nthrough2025), Magic Software’s general meetings were attended by shareholders representing between 84%-86% of the total voting rights.\nTherefore, the level of activity of Magic Software’s shareholders is relatively moderate. Bearing in mind that as of December 31,\n2025, Formula held approximately 46.71% of the total voting rights of Magic Software, the attendance from shareholders would have to be\nhigher than 93.42% in order to deprive Formula of an absolute majority of votes at the general meeting. We believe that achieving such\nhigh attendance seems unlikely. In addition, Israeli law provides that institutional investors may not possess the ability to direct the\ncompany’s business and as such each institutional investor cannot exceed 20% ownership in a public company. An institutional investor\nalso cannot appoint more than 20% of the members of a public company’s board of directors. Looking at the entire Israeli market,\nthe practice is that institutional investors do not appoint members of boards of directors, as having such appointees in those positions\nwould impact institutional investors’ ability to effect certain transactions on the market (due to insider trading concerns). If\ninstitutional investors cooperate among themselves, they may be considered to violate that rule. If they furthermore vote in the same\nway as one another, and contrary to the preference of the major shareholder, they might be accused of cooperation and violation of the\nrule. Hence, there are both legal and practical limitations that prevent institutional investors from coordinating their approaches with\none another.\n\n \n\nTherefore, it is our management’s\nopinion that despite our lack of ownership of an absolute majority of Magic Software’s outstanding ordinary shares as of December\n31, 2025, we were still able to influence the appointment of directors at Magic Software and therefore could affect Magic Software’s\ndevelopment policies as well as its business operations as of that date.\n\n \n\nOther than our joint control\nof TSG Systems, in which each of we and Israeli Aerospace Industries Ltd. holds 37.33% of its voting power (as of December 31, 2025),\nour 21.45% share interest in an associate company, and our 18.68% equity interest in SI Swan UK Topco Limited, we currently have effective\ncontrol under IFRS 10 of each of our other investees, Matrix, Magic Software, Zap Group, Michpal, Ofek Aerial Photography, Shamrad, Formula\nInfrastructure, Hashahar Telecom and InSync, despite our lacking absolute majority of voting power in Matrix and Magic Software. As a\nresult of our effective control in these investees as of December 31, 2025 and in accordance with IFRS 10, we consolidated their financial\nresults with ours throughout the period covered by the financial statements included in Item 18 of this annual report.\n\n \n\n**Non-controlling interests**\n\n \n\nNon-controlling interests\nin subsidiaries represent the equity in subsidiaries not attributable, directly or indirectly, to a parent. Non-controlling interests\nare presented in equity separately from the equity attributable to the equity holders of the Company. Profit or loss and components of\nother comprehensive income are attributed to the Company and to non-controlling interests. Losses are attributed to non-controlling interests\neven if they result in a negative balance of non-controlling interests in the consolidated statement of financial position. A change in\nthe ownership interest of a subsidiary, without a loss of control, is accounted for as a change in equity by adjusting the carrying amount\nof the non-controlling interests with a corresponding adjustment of the equity attributable to equity holders of the Company less / plus\nthe consideration paid or received. For more information regarding put options to the non-controlling interests of companies whose financial\nresults were consolidated with ours throughout the period covered by the financial statements, please see “*Item 4. Information\non the Company—A. History and Development of the Company***”** of this annual report.\n\n \n\n109\n\n \n\n \n\n**Business combinations\nand goodwill**\n\n \n\nBusiness combinations are\naccounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred\non the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, we consider whether\nto measures the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their proportionate\nshare in the fair value of the acquiree’s net identifiable assets.\n\n \n\nDirect acquisition costs are\ncarried to the statement of profit or loss as incurred.\n\n \n\nContingent consideration is\nrecognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IFRS 9, “Financial\nInstruments”. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. If the contingent\nconsideration is classified as an equity instrument, it is measured at fair value on the acquisition date without subsequent remeasurement.\nA put option granted by the Group to non-controlling interests is accounted for using the expected purchase approach under the presumption\nthat the put option will be exercised, and therefore the parent effectively holds an interest in the subsidiary’s shares as if the\nput option had been exercised. A put option granted by the Group to non-controlling interests for which the consideration to be paid in\ncash or other financial asset is recognized as a liability in the amount of the present value of the option’s exercise price. Contingent\nconsideration is recognized at fair value on the acquisition date. If the contingent consideration is classified as a financial asset\nor liability in accordance with IFRS 9, subsequent changes in the fair value of the contingent consideration are recognized in profit\nor loss. If the contingent consideration is classified as an equity instrument, it is measured at fair value on the acquisition date without\nsubsequent remeasurement\n\n \n\nGoodwill is initially measured\nat cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable\nassets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition\ndate.\n\n \n\n**Acquisition of a single\nasset company**\n\n \n\nUpon the acquisition of a\nsingle asset company, we evaluate whether it is the acquisition of a business or of an asset. To be considered a business, the acquisition\nmust include, at a minimum, an input and a substantive process that together can significantly contribute to the creation of outputs.\nThe acquisition is accounted for as a business combination if the single asset company is a business. If it is not a business, the acquisition\nis accounted for as the acquisition of assets and liabilities. In such an acquisition, the cost of the acquisition includes transaction\ncosts which are allocated to the identifiable acquired assets and liabilities proportionally based on their fair value on the acquisition\ndate. In such case, goodwill and deferred taxes in respect of the temporary differences existing as of the acquisition date are not recognized\n\n \n\n**Investment in joint\narrangements**\n\n \n\nJoint arrangements are arrangements\nin which the Company has joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only\nwhen decisions about the relevant activities require the unanimous consent of the parties sharing control.\n\n \n\n**Joint ventures**\n\n** **\n\nIn joint ventures the parties\nthat have joint control of the arrangement have rights to the net assets of the arrangement. A joint venture is accounted for by using\nthe equity method.\n\n \n\n110\n\n \n\n \n\n**Investments in associates**\n\n** **\n\nAssociates are companies in\nwhich the Group has significant influence over the financial and operating policies without having control. The investment in an associate\nis accounted for using the equity method.\n\n** **\n\n**Functional currency,\npresentation currency and foreign currency**\n\n \n\nThe presentation currency\nof our consolidated financial statements is the U.S. dollar (the “dollar”), since we believe that financial statements in\nU.S. dollars provide more relevant information to our investors and users of the financial statements. The functional currency applied\nby Formula, on a stand-alone basis, until December 31, 2018, was the dollar. Following an examination and reevaluation of the primary\neconomic environment in which Formula currently operates and expects to continue operating and taking into consideration the recent trends\nand its forward-looking business strategy, in accordance with the International Accounting Standard 21 (IAS 21), Formula concluded that\nour functional currency on a stand-alone basis commencing January 1, 2019 is the NIS. The functional currencies applied by our subsidiaries\nand associates are the currencies of the primary economic environment in which each one of them operates.\n\n \n\nAssets and liabilities of\nan investee which is a foreign operation, including fair value adjustments upon acquisition, are translated at the closing rate at each\nreporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences\nare recognized in other comprehensive income.\n\n \n\nIntragroup loans for which\nsettlement is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in the foreign\noperation and, accordingly, the exchange rate differences from these loans (net of the tax effect) are recorded in other comprehensive\nincome (loss).\n\n \n\nUpon the full or partial disposal\nof a foreign operation resulting in loss of control in the foreign operation, the cumulative gain (loss) from the foreign operation which\nhad been recognized in other comprehensive income is transferred to profit or loss. Upon the partial disposal of a foreign operation which\nresults in the retention of control in the subsidiary, the relative portion of the amount recognized in other comprehensive income is\nreattributed to non-controlling interests.\n\n \n\nSubsequent to the reporting\nperiod, effective January 1, 2026, we changed our functional currency from NIS to U.S. dollars, following a change in the primary economic\nenvironment in which we operate. Management assessed the relevant primary and secondary indicators in accordance with IAS 21 and determined\nthat the U.S. dollar has become the currency that most faithfully represents the economic effects of the underlying transactions, events\nand conditions, primarily reflected in the currency in which we hold and manage our monetary assets and conduct our financing activities.\nThe change in functional currency is accounted for prospectively from the date of the change and, therefore, did not affect our financial\nstatements for the year ended December 31, 2025. Since our presentation currency is already the U.S. dollar, no change was made to the\npresentation currency\n\n \n\n*Transactions, assets and\nliabilities in foreign currency*.\n\n \n\nTransactions denominated in\nforeign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition,\nmonetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at\nthe exchange rate at that date. Exchange rate differences are recognized in profit or loss. Non-monetary assets and liabilities denominated\nin foreign currency and measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities\ndenominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing\nat the date when the fair value was determined.\n\n \n\n111\n\n \n\n \n\n**Short-term deposits**\n\n \n\nShort-term deposits are deposits\nwith an original maturity of more than three months from the date of investment and which do not meet the definition of cash equivalents.\nThe deposits are presented according to their terms of deposit. Restricted deposits include deposits used to secure certain subsidiaries’\nongoing projects, as well as security deposits with respect to leases, and are classified under other short-term and long-term receivables.\n\n \n\n**Inventories**\n\n \n\nInventories are measured at\nthe lower of cost and net realizable value. The cost of inventories comprises costs of purchase and costs incurred in bringing the inventories\nto their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less estimated\ncosts of completion and estimated costs necessary to make the sale. Inventories are mainly comprised of purchased merchandise and products\nwhich consist of educational software kits, computers, peripheral equipment and spare parts. Cost is determined on the “first in\n- first out” basis. The Group periodically evaluates the condition and aging of its inventories and makes provisions for slow-moving\ninventories accordingly. No such impairments have been recognized in any period presented.\n\n** **\n\n**Investment in joint\narrangements**\n\n \n\nJoint arrangements are arrangements\nin which we have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when\ndecisions about the relevant activities require the unanimous consent of the parties sharing control.\n\n \n\nIn joint ventures the parties\nthat have joint control of the arrangement have rights to the net assets of the arrangement. A joint venture is accounted for by using\nthe equity method.\n\n \n\n**Revenue recognition**\n\n \n\nRevenue from contracts with\ncustomers is recognized when the control over the goods or services is transferred to the customer. The transaction price is the amount\nof the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties\n(such as taxes).\n\n \n\nIn determining the amount\nof revenue from contracts with customers, we evaluate whether we are the principal or the agent in the arrangement. We are considered\nas the principal when we control the promised goods or services before transferring them to the customer. In these circumstances, we recognize\nrevenue for the gross amount of the consideration. When we are considered as the agent, we recognize revenue for the net amount of the\nconsideration, after deducting the amount due to the principal.\n\n \n\nThe following are principles\nthat we utilize in determining revenue recognition for us and our consolidated subsidiaries and affiliate companies:\n\n \n\ni.*Sale of software licensing,\nmaintenance services and post implementation consulting services*\n\n \n\nA software licensing transaction\nthat does not require significant implementation services is considered a distinct performance obligation, as the customer can benefit\nfrom the software on its own or together with other readily available resources.\n\n \n\nWe recognize revenue from\nsoftware licensing transactions at a point in time when we provide the customer a right to use our intellectual property as it exists\nat the point in time at which the license is granted to the customer. We recognize revenue from software licensing transactions over time\nwhen we provide the customer a right to access our intellectual property throughout the license term.\n\n \n\nWe may generate revenue from\nsale of software licensing which includes significant implementation and customization services. In such contracts we are normally committed\nto provide the customer with a functional IT system and the customer can only benefit from such functional system, being the final product\nthat would normally be comprised of proprietary licenses and significant related services. Revenues from these contracts are based on\neither fixed price or time and material.\n\n \n\n112\n\n \n\n \n\nSoftware licensing transactions\nwhich involve significant implementation, customization, or integration of our software license to customer-specific requirements, are\nconsidered as one performance obligation satisfied over-time. The underlying deliverable is owned and controlled by the customer and does\nnot create an asset with an alternative use to the Group. In addition, we have an enforceable right to payment for performance completed\nthroughout the duration of the contract.\n\n \n\nAccordingly, we recognize\nrevenue from such contracts over time, using the percentage of completion accounting method. We recognize revenue and gross profit as\nthe work is performed based on a ratio between actual costs incurred compared to the total estimated costs for the contract. Provisions\nfor estimated losses on uncompleted contracts are made during the period in which such losses are first determined, in the amount of the\nestimated loss for the entire contract\n\n \n\nWhen post-implementation and\nconsulting services do not involve significant customization, we account for such services as performance obligations satisfied over time\nand revenues are recognized as the services are provided.\n\n \n\nRevenue from maintenance is\nrecognized over time, during the period the customer simultaneously receives and consumes the benefits provided by our performance. When\npayments from customers are made before or after the service is performed, we recognize the resulting contract asset or liability.\n\n \n\nii.*Sale of hardware and infrastructure*\n\n \n\nRevenue from sale of hardware\nand infrastructure is recognized in profit or loss at the point in time when the control of the goods is transferred to the customer,\ngenerally upon delivery of the goods to the customer.\n\n \n\niii.*Sale of training and implementation\nservices*\n\n \n\nRevenues from training and\nimplementation services are recognized when the service is provided. revenue from training services in respect of public courses whose\noperating range is up to 3 months will be recognized at the end of the course period. Revenues from training services in respect of long-term\ncourses will be recognized over the term of the course. Revenues from implementation projects ordered by organizations will be recognized\naccording to actual inputs (actually worked hours).\n\n \n\niv.*Revenue from contracts according\nto actual inputs*\n\n \n\nRevenue from framework agreements\nfor the performance of work according to actual inputs is recognized according to the hours invested.\n\n \n\nv.*Revenue from fixed price\ncontracts*\n\n \n\nRevenue from long-term fixed-price contracts that involve significant\nimplementation, customization, or integration to customer-specific requirements is recognized over time. The underlying deliverable is\nowned and controlled by the customer or does not create an asset with an alternative use to the Group and the Group has an enforceable\nright to payment for performance completed throughout the duration of the contract.\n\n \n\nWe apply a cost-based input\nmethod for measuring the progress of performance obligations that are satisfied over time. In applying this cost-based input method, we\nestimate the costs to complete contract performance in order to determine the amount of the revenue to be recognized. These estimated\ncosts include the direct costs and the indirect costs that are directly attributable to a contract based on a reasonable allocation method.\nIn certain circumstances, we are unable to measure the outcome of a contract, but we expect to recover the costs incurred in fulfilling\nthe contract as of the reporting date. In such circumstances, we recognize revenue to the extent of the costs incurred as of the reporting\ndate until such time the outcome of the contract can be reasonably measured. If a loss is anticipated from a contract, the loss is recognized\nin full regardless of the percentage of completion.\n\n \n\n113\n\n \n\n \n\nWhen appropriate, we also\napply a practical expedient permitted under IFRS 15 whereby if the we have a right to a consideration from a customer in an amount that\ncorresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which an\nentity bills a fixed amount for each hour of service provided), we may recognize revenue in the amount it is entitled to invoice. Deferred\nrevenues, which represent a contract liability, include unearned amounts received under maintenance and support (mainly) and amounts received\nfrom customers for which revenues have not yet been recognized.\n\n  \n\nvi.*Allocating the transaction\nprice*\n\n \n\nFor contracts that consist\nof more than one performance obligation, at contract inception we allocate the contract transaction price to each performance obligation\nidentified in the contract on a relative stand-alone selling price basis. The stand-alone selling price is the price at which we would\nsell the promised goods or services separately to a customer. We determine the standalone selling price for the purpose of allocating\nthe transaction price to each performance obligation by considering several external and internal factors including, but not limited to,\ntransactions where the specific performance obligation is sold separately, historical actual pricing practices and geographies in which\nwe offer our products and services. If a specific performance obligation, such as the software license, is sold for a broad range of amounts\n(that is, the selling price is highly variable) or if we have not yet established a price for that good or service, and the good or service\nhas not previously been sold on a standalone basis (that is, the selling price is uncertain), we apply the residual approach whereby all\nother performance obligations within a contract are first allocated a portion of the transaction price based upon their respective stand-alone\nselling prices, with any residual amount of transaction price allocated to the remaining specific performance obligation.\n\n \n\nvii.*Variable consideration*\n\n \n\nWe determine the transaction\nprice separately for each contract with a customer. When exercising this judgment, we evaluate the effect of each variable amount in the\ncontract, taking into consideration discounts, penalties, variations, claims, and non-cash consideration. In determining the effect of\nthe variable consideration, we normally use the “most likely amount” method described in the Standard. Pursuant to this method,\nthe amount of the consideration is determined as the single most likely amount in the range of possible consideration amounts in the contract.\nAccording to the Standard, variable consideration is included in the transaction price only to the extent that it is highly probable that\na significant reversal in the amount of revenue recognized will not occur when the uncertainty associated with the variable consideration\nis subsequently resolved.\n\n \n\nviii.*Costs of obtaining a contract*\n\n \n\nIn order to obtain certain\ncontracts with customers, we incur incremental costs in obtaining the contract (such as sales commissions which are contingent on making\nbinding sales). Costs incurred in obtaining the contract with the customer which would not have been incurred if the contract had not\nbeen obtained and which we expect to recover are recognized as an asset and amortized on a systematic basis that is consistent with the\nprovision of the services under the specific contract.\n\n \n\nAn impairment loss in respect\nof capitalized costs of obtaining a contract is recognized in profit or loss when the carrying amount of the asset exceeds the remaining\namount of consideration that we expect to receive for the goods or services to which the asset relates, less the costs that relate directly\nto providing those goods or services and that have not been recognized as expenses.\n\n \n\nWe have elected to apply the\npractical expedient allowed by IFRS 15 according to which incremental costs of obtaining contract are recognized as an expense when incurred\nif the amortization period of the asset is one year or less.\n\n \n\n114\n\n \n\n \n\nix.*Revenues that include warranty\nservices*\n\n \n\nIn certain cases, we also\nprovide a warranty for goods and services sold (i.e., extended warranties when we contractually undertake to repair any errors in the\ndelivered software within a strictly specified time limit and/or when the scope of which is broader than just an assurance to the customer\nthat the product/service complies with agreed-upon specifications). We have ascertained that such warranties granted by us meet the definition\nof service. The conclusion regarding the extended nature of a warranty is made whenever we contractually undertake to repair any errors\nin the delivered software within a strictly specified time limit and/or when such warranty is more extensive than the minimum required\nby law. Under IFRS 15, the fact of granting an extended warranty indicates that we provide an additional service. As such, we recognize\nan extended warranty as a separate performance obligation and allocate a portion of the transaction price to such service. In all cases\nwhere an extended warranty is accompanied by a maintenance service, which is even a broader category than the extended warranty itself,\nrevenues are recognized over time because the customer consumes the benefits of such service as it is performed by the provider. If this\nis the case, we continue to allocate a portion of the transaction price to such maintenance service. Likewise, in cases where a warranty\nservice is provided after the project completion and is not accompanied by any maintenance service, then a portion of the transaction\nprice and analogically recognition of a portion of contract revenues will have to be deferred until the warranty service is actually fulfilled.\n\n  \n\nx.*Disaggregation of revenue*\n\n \n\nService revenue includes contracts\nprimarily for the provision of supplies and services other than design, development, customization, implementation, software maintenance\nand support and software updates associated with delivery of products or proprietary software. It may be a standalone service contract\nor a service performance obligation which is distinct from a contract or performance obligation for design, development, customization,\nsupport and upgrade or delivery of product. Our service contracts include contracts in which the customer simultaneously receives and\nconsumes the benefits provided as the performance obligations are satisfied. Our service contracts primarily include operation-type contracts,\noutsourcing, consulting, remote development services, digital advertising management, training and similar activities.\n\n \n\nxi.*Transaction prices allocated\nto performance obligation*\n\n \n\nRemaining performance obligations\nrepresent contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized\nas revenue in future periods. The aggregate amount of consideration allocated to performance obligations either not satisfied or partially\nunsatisfied was approximately $2,960,923 as of December 31, 2025. Remaining performance obligations include the remaining non-cancelable,\ncommitted and fixed portion of these contracts for their entire duration. The remaining performance obligations related to professional\nservices contracts that are on a time and materials basis were excluded, as the Company elected to apply the practical expedient in accordance\nwith IFRS 15. We expect to recognize approximately 77.18% in 2026 from remaining performance obligations as of December 31, 2025, and\nthe remainder thereafter.\n\n** **\n\n**Income tax**\n\n \n\nCurrent or deferred taxes\nare recognized in profit or loss, except to the extent that they relate to items which are recognized in other comprehensive income or\nequity.\n\n \n\ni.*Current taxes*\n\n \n\nThe current tax liability\nis measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date as well as adjustments\nrequired in connection with the tax liability in respect of previous years.\n\n \n\n115\n\n \n\n \n\nii.*Deferred taxes*\n\n \n\nDeferred taxes are computed\nin respect of temporary differences between the carrying amounts in the financial statements and the amounts attributed for tax purposes.\nDeferred taxes are measured at the tax rate that is expected to apply when the asset is realized or the liability is settled, based on\ntax laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are reviewed at each reporting date\nand reduced to the extent that it is not probable that they will be utilized. Deductible carry forward losses and temporary differences\nfor which deferred tax assets had not been recognized are reviewed at each reporting date and a respective deferred tax asset is recognized\nto the extent that their utilization is probable.\n\n \n\nTaxes that would apply in\nthe event of the disposal of investments in investees have not been taken into account in computing deferred taxes, as long as the disposal\nof the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would apply in the event of distribution\nof earnings by investees as dividends have not been taken into account in computing deferred taxes, since the distribution of dividends\ndoes not involve an additional tax liability or since it is our policy not to initiate distribution of dividends from a subsidiary that\nwould trigger an additional tax liability.\n\n \n\nTaxes on income that relate\nto distributions of an equity instrument and to transaction costs of an equity transaction are accounted for pursuant to IAS 12.\n\n \n\nDeferred taxes are offset\nif there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred taxes relate to\nthe same taxpayer and the same taxation authority.\n\n \n\n**Leases**\n\n \n\nThe Group accounts for a\ncontract as a lease when the contract terms convey the right to control the use of an identified asset for a period of time in exchange\nfor consideration.\n\n \n\n*The Group as lessee*\n\n \n\nFor leases in which the\nGroup is the lessee, the Group recognizes on the commencement date of the lease a right-of-use asset and a lease liability, excluding\nleases whose term is up to twelve months and leases for which the underlying asset is of low value. For these excluded leases, the Group\nhas elected to recognize the lease payments as an expense in profit or loss on a straight-line basis over the lease term. In measuring\nthe lease liability, the Group has elected to apply the practical expedient in the Standard and does not separate the lease components\nfrom the non-lease components (such as management and maintenance services, etc.) included in a single contract. Leases which entitle\nemployees to a company car as part of their employment terms are accounted for as employee benefits in accordance with the provisions\nof IAS 19 and not as subleases.\n\n \n\nOn the commencement date,\nthe lease liability includes all unpaid lease payments discounted at the interest rate implicit in the lease, if that rate can be readily\ndetermined, or otherwise using the Group’s incremental borrowing rate. After the commencement date, the Group measures the lease\nliability using the effective interest rate method.\n\n \n\nOn the commencement date,\nthe right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already made on or before the commencement\ndate and initial direct costs incurred. The right-of-use asset is measured applying the cost model and depreciated over the shorter of\nits useful life and the lease term.\n\n \n\nFollowing are the amortization\nperiods of the right-of-use assets by class of underlying asset:\n\n \n\n  \nYears  \nMainly \n\n  \n   \n  \n\nLand and Buildings \n 2-12  \n 3 \n\nMotor vehicles \n 2-3  \n 3 \n\n \n\n116\n\n \n\n \n\nThe Group tests for impairment\nof the right-of-use asset whenever there are indications of impairment pursuant to the provisions of IAS 36.\n\n \n\n*Lease extension and termination\noptions*\n\n \n\nA non-cancelable lease term\nincludes both the periods covered by an option to extend the lease when it is reasonably certain that the extension option will be exercised\nand the periods covered by a lease termination option when it is reasonably certain that the termination option will not be exercised.\n\n \n\nIn the event of any change\nin the expected exercise of the lease extension option or in the expected non-exercise of the lease termination option, the Group remeasures\nthe lease liability based on the revised lease term using a revised discount rate as of the date of the change in expectations. The total\nchange is recognized in the carrying amount of the right-of-use asset until it is reduced to zero, and any further reductions are recognized\nin profit or loss.\n\n \n\n*Lease modifications*\n\n \n\nIf a lease modification does\nnot reduce the scope of the lease and does not result in a separate lease, the Group remeasures the lease liability based on the modified\nlease terms using a revised discount rate as of the modification date and records the change in the lease liability as an adjustment to\nthe right-of-use asset. If a lease modification reduces the scope of the lease, the Group recognizes a gain or loss arising from the partial\nor full reduction of the carrying amount of the right-of-use asset and the lease liability. The Group subsequently remeasures the carrying\namount of the lease liability according to the revised lease terms, at the revised discount rate as of the modification date and records\nthe change in the lease liability as an adjustment to the right-of-use asset.\n\n \n\n*Property, plant and equipment,\nnet*\n\n* *\n\nProperty, plant and equipment\nare measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment losses and any related\ninvestment grants and excluding day-to-day servicing expenses. Cost includes spare parts and auxiliary equipment that are used in connection\nwith plant and equipment. The cost of an item of property, plant and equipment comprises the initial estimate of the costs of dismantling\nand removing the item and restoring the site on which the item is located.\n\n \n\nDepreciation is calculated\non a straight-line basis over the useful life of the assets at annual rates as follows:\n\n \n\n \n \n**%**\n\n \n \n \n\nComputers, software, and peripheral equipment\n \n20 - 66 (mainly 33)\n\nOffice furniture and equipment\n \n6 - 33 (mainly 7)\n\nMotor vehicles\n \n13 - 20 (mainly 15)\n\n \n\nLeasehold improvements are\namortized using the straight-line method over the term of the lease (including option terms that are deemed to be reasonably assured)\nor the estimated useful life of the improvements, whichever is shorter.\n\n \n\nThe useful life, the depreciation\nmethod and the residual value of an asset are reviewed at least each year-end (at the end of the year) and any changes are accounted for\nprospectively as a change in accounting estimate. Depreciation of an asset ceases at the earlier of the date that the asset is classified\nas held for sale and the date that the asset is derecognized. For impairment testing of property, plant and equipment, see note 2(18)\nto the financial statements in this annual report.\n\n \n\n117\n\n \n\n \n\n*Intangible assets*\n\n \n\nSeparately acquired intangible\nassets are measured on initial recognition at cost including directly attributable costs. Intangible assets acquired in a business combination\nare measured at fair value at the acquisition date. Expenditures relating to internally generated intangible assets, excluding capitalized\ndevelopment costs, are recognized in profit or loss when incurred.\n\n \n\nIntangible assets with a finite\nuseful life are amortized over their useful life and reviewed for impairment whenever there is an indication that the asset may be impaired.\nThe amortization period and the amortization method for an intangible asset are reviewed at least at each year end.\n\n \n\nCapitalized software costs\nare measured at cost less any accumulated amortization and any accumulated impairment losses on a product-by-product basis. Amortization\nof capitalized software costs begin when the development is complete, and the product is available for use or for sale. The Company considers\na product to be available for use when the Company completes its internal validation of the product that is necessary to establish that\nthe product meets its design specifications including functions, features, and technical performance requirements. Internal validation\nincludes the completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The internal validation of the\nproduct takes place a few weeks before the product is made available to the market. In certain instances, the Company enters into a short\npre-release stage, during which the product is made available to a selected number of customers as a beta program for their own review\nand familiarization. Subsequently, the release is made generally available to customers. Once a product is considered available for use,\nthe capitalization of costs ceases and amortization of such costs to “cost of sales” begins. Capitalized software costs are\namortized on a product-by-product basis by the straight-line method over the estimated useful life of the software product (between 3-7\nyears).\n\n \n\n \n \n**Years**\n \n\nCustomer relationship, backlog and distribution rights\n \n1-10\n \n\nAcquired technology\n \n2-7\n \n\nPatents\n \n10\n \n\n \n\nGains or losses arising from\nthe derecognition of an intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of\nthe asset and are recognized in the statement of profit or loss.\n\n \n\nThe useful life of these assets\nis reviewed annually to determine whether their indefinite life assessment continues to be supportable. If the events and circumstances\ndo not continue to support the assessment, the change in the useful life assessment from indefinite to finite is accounted for prospectively\nas a change in accounting estimate, and on that date the asset is tested for impairment. Commencing from that date, the asset is amortized\nsystematically over its useful life.\n\n \n\nDuring the period, we identified\nindicators that resulted in a reassessment of the useful life of certain customer relationships. As a result, the estimated useful lives\nof these assets were shortened, leading to accelerated amortization, which was recognized in profit or loss and accounted for as a change\nin accounting estimate. which resulted in an additional amortization expense of approximately $18.7 million during the year ended December\n31, 2025.\n\n \n\n*Impairment of non-financial\nassets*\n\n \n\nWe evaluate the need to record\nan impairment of non-financial assets (property, plant and equipment, capitalized software costs and other intangible assets, goodwill,\ninvestments in joint venture) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the\ncarrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable\namount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are\ndiscounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not\ngenerate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized\nin profit or loss.\n\n \n\n118\n\n \n\n \n\nAn impairment loss of an asset,\nother than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount\nsince the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the\ncarrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset\nin prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss.\n\n \n\nThe following criteria are\napplied in assessing impairment of these specific assets:\n\n \n\ni.*Goodwill in respect of subsidiaries*\n\n \n\nFor the purpose\nof impairment testing, goodwill acquired in a business combination is allocated, at the acquisition date, to each of our cash-generating\nunits that are expected to benefit from the synergies of the combination. We review goodwill for impairment once a year, on December 31,\nor more frequently if events or changes in circumstances indicate that there is an impairment.\n\n \n\nGoodwill is tested\nfor impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill\nhas been allocated.\n\n \n\nAn impairment loss\nis recognized if the recoverable amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated\nis less than the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first\nto goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent periods.\n\n \n\nThe discounted cash\nflow method is used to determine the recoverable amount of a cash-generating unit or the group of cash-generating units to which goodwill\nis allocated. The projected cash flows are derived from the budget for the next five years and do not include restructuring activities\nto which we are not yet committed or significant future investments that will enhance the performance of the assets of our cash-generating\nunit being tested. The recoverable amount is sensitive to key assumptions used to determine the recoverable amount, including discount\nrates and future growth rate. The discount rates are calculated based on a risk-free rate of interest and a market risk premium. The discount\nrates reflect the current market assessment of the risks specific to each group of our cash-generating units by taking into account specific\ngroup information on beta factors, leverage and cost of debt. We performed annual impairment tests as of December 31, 2025, 2024 and 2023\nand did not identify any impairments.\n\n \n\nii.*Investment in associate or\njoint venture using the equity method*\n\n \n\nAfter application\nof the equity method, we determine whether it is necessary to recognize any additional impairment loss with respect to the investment\nin associates or joint ventures. We determine at each reporting date whether there is objective evidence that the carrying amount of the\ninvestment in the associate or the joint venture is impaired. The test of impairment is carried out with reference to the entire investment,\nincluding the goodwill attributed to the associate or the joint venture.\n\n \n\niii.*Intangible assets with an indefinite\nuseful life / capitalized development costs that have not yet been systematically amortized*\n\n \n\nThe impairment test is performed\nannually, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment.\n\n \n\nDuring the years ended December\n31, 2023, 2024, and 2025 no impairment indicators were identified.\n\n \n\n119\n\n \n\n \n\n**Financial instruments**\n\n \n\nA.*Financial assets*\n\n \n\nFinancial assets\nare measured upon initial recognition at fair value plus transaction costs that are directly attributable to the acquisition of the financial\nassets, except for financial assets measured at fair value through profit or loss in respect of which transaction costs are recorded in\nprofit or loss.\n\n  \n\nB.*Financial liabilities*:\n\n \n\ni.*Financial liabilities measured\nat amortized cost*\n\n \n\nFinancial liabilities\nare initially recognized at fair value less transaction costs that are directly attributable to the issue of the financial liability.\nAfter initial recognition, we measure all financial liabilities at amortized cost using the effective interest rate method, except for:\n\n \n\n●Financial liabilities at fair\nvalue through profit or loss, such as derivatives;\n\n \n\n●Financial liabilities that arise\nwhen a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies;\n\n \n\n●Financial guarantee contracts;\nand\n\n \n\n●Contingent consideration recognized\nby an acquirer in a business combination as to which IFRS 3 applies.\n\n \n\nii.*Financial liabilities measured\nat fair value through profit or loss*\n\n \n\nAt initial recognition,\nwe measure financial liabilities that are not measured at amortized cost at fair value. Transaction costs are recognized in profit or\nloss. After initial recognition, changes in fair value are recognized in profit or loss.\n\n \n\nC.*Derecognition of financial\nliabilities*\n\n \n\nA financial liability\nis derecognized when it is extinguished, that is, when the obligation is discharged or cancelled or expires. A financial liability is\nextinguished when the debtor discharges the liability by paying in cash, other financial assets, goods or services or is legally released\nfrom the liability. When there is a modification to the terms of an existing financial liability, we evaluate whether the modification\nis substantial.\n\n \n\nIf the terms of\nan existing financial liability are substantially modified, such modification is accounted for as an extinguishment of the original liability\nand the recognition of a new liability. The difference between the carrying amounts of the above liabilities is recognized in profit or\nloss.\n\n \n\nIf the modification\nis not substantial, we recalculate the carrying amount of the liability by discounting the revised cash flows at the original effective\ninterest rate and any resulting difference is recognized in profit or loss.\n\n \n\nD.*Compound financial instruments*\n\n \n\ni.Convertible debentures which contain\nboth an equity component and a liability component are separated into two components. This separation is performed by first determining\nthe liability component based on the fair value of an equivalent non-convertible liability. The value of the conversion component is\ndetermined to be the residual amount. Directly attributable transaction costs are apportioned between the equity component and the liability\ncomponent based on the allocation of proceeds to the equity and liability components.\n\n \n\n120\n\n \n\n \n\nii.Convertible debentures that are\ndenominated in foreign currency contain two components: the conversion component and the debt component. The liability conversion component\nis initially recognized as a financial derivative at fair value. The balance is attributed to the debt component. Directly attributable\ntransaction costs are allocated between the liability conversion component and the liability debt component based on the allocation of\nthe proceeds to each component.\n\n  \n\nE.*Put option granted to non-controlling\ninterests*\n\n \n\nWhen we grant to\nnon-controlling interests a put option to sell part or all of their interests in a subsidiary, during a certain period, even if such purchase\nobligation is conditional on the counterparty’s exercise of its contractual right to cause such redemption, if the put option agreement\ndoes not transfer to us any benefits incidental to ownership of the equity instrument (i.e. the we do not have a present ownership in\nthe shares concerned) then at the end of each reporting period the non-controlling interests (to which a portion of net profit attributable\nto non-controlling interests is allocated) are classified as a financial liability, as if such put-able equity instrument was redeemed\non that date. The difference between the non-controlling interests carrying amount at the end of the reporting period and the present\nvalue of the liability is recognized directly in our equity, under “Additional paid-in capital”.\n\n \n\nWe remeasure the\nfinancial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred upon\nthe exercise of the put option.\n\n \n\nIf the option is exercised in subsequent periods, the consideration\npaid upon exercise is treated as settlement of the liability. If the put option expires, the liability is settled and a portion of the\ninvestment in the subsidiary is accounted for as if it was disposed of, without loss of control therein.\n\n \n\nIf we have present\nownership of the non-controlling interests, these non-controlling interests are accounted for as if they are held by us, and changes in\nthe amount of the liability are carried to profit or loss.\n\n** **\n\n**Fair value measurement**\n\n \n\nFair value is the price that\nwould be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement\ndate. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s\nprincipal market, or in the absence of a principal market, in the most advantageous market. The fair value of an asset or a liability\nis measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants\nact in their economic best interest. Fair value measurement of a non-financial asset takes into account a market participant’s ability\nto generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would\nuse the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which\nsufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable\ninputs.\n\n \n\n121\n\n \n\n \n\nAll assets and liabilities\nmeasured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest\nlevel input that is significant to the entire fair value measurement:\n\n \n\n \nLevel 1\n-\nquoted prices (unadjusted) in active markets for identical assets or liabilities.\n\n \n \n \n \n\n \nLevel 2\n-\nLevel inputs\nother than quoted prices included within Level 1 that are observable directly or indirectly.\n\n \n \n \n \n\n \nLevel 3\n-\nLevel inputs\nthat are not based on observable market data (valuation techniques which use inputs that are not based on observable market\ndata).\n\n \n\n**Provisions**\n\n** **\n\nA provision in accordance\nwith IAS 37 is recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable\nthat an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made\nof the amount of the obligation. If the effect is material, provisions are measured according to the estimated future cash flows discounted\nusing a pre-tax interest rate that reflects the market assessments of the time value of money and, where appropriate, those risks specific\nto the liability. When the Group expects part or all of the expense to be reimbursed, for example under an insurance contract, the reimbursement\nis recognized as a separate asset but only when the reimbursement is virtually certain. The expense is recognized in the statement of\nprofit or loss net of any reimbursement.\n\n \n\nThe following are the types\nof provisions included in our financial statements:\n\n \n\ni.*Legal claims*\n\n \n\nA provision for\nclaims is recognized when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than\nnot that an outflow of resources embodying economic benefits will be required by the Group to settle the obligation and a reliable estimate\ncan be made of the amount of the obligation.\n\n \n\nii.*Contingent liability recognized\nin a business combination*\n\n \n\nA contingent liability\nin a business combination is measured at fair value upon initial recognition. In subsequent periods, it is measured at the higher of the\namount initially recognized less, when appropriate, cumulative amortization, and the amount that would be recognized at the end of the\nreporting period in accordance with IAS 37.\n\n** **\n\n**Employee benefit liabilities**\n\n \n\nWe maintain several employee\nbenefit plans. We describe the accounting treatment for various types of benefits under those plans below:\n\n \n\ni.*Short-term employee benefits*\n\n \n\nShort-term employee\nbenefits are benefits that are expected to be settled wholly before twelve (12) months after the end of the annual reporting period in\nwhich the employees render the related services. These benefits include salaries, paid annual leave, paid sick leave, recreation and social\nsecurity contributions and are recognized as expenses as the services are rendered. A liability in respect of a cash bonus or a profit-sharing\nplan is recognized when the Group has a legal or constructive obligation to make such payment as a result of past service rendered by\nan employee and a reliable estimate of the amount can be made. The short-term employee benefit liability in the statement of financial\nposition is measured on an undiscounted basis.\n\n \n\n122\n\n \n\n \n\nii.*Post-employment benefits*\n\n \n\nThe plans are normally\nfinanced by contributions to insurance companies and classified as defined contribution plans or as defined benefit plans. Formula’s\nand its Israeli subsidiaries and associates accounted for at equity (as defined with respect to their Israeli employee contribution plans\npursuant to section 14 of Israel’s Severance Pay Law, 1963 (the “Severance Pay Law”)) pay fixed contributions to those\nplans and will have no legal or constructive obligation to pay further contributions if the fund into which those contributions are paid\ndoes not hold sufficient amounts to pay all employee benefits relating to employee service in the current and prior periods. Contributions\nto the defined contribution plan in respect of severance or retirement pay are recognized as an expense when contributed concurrently\nwith performance of the employee’s services.\n\n \n\nFormula and its\nIsraeli subsidiaries and companies accounted for at equity also operate a defined benefit plan in respect of severance or retirement pay\nto their Israeli employees pursuant to the Severance Pay Law. According to the Severance Pay Law, employees are entitled to severance\npay upon dismissal or retirement. The liability for termination of employment is measured using the projected unit credit method. The\nactuarial assumptions include rates of employee turnover and future salary increases based on the estimated timing of payment. The amounts\nare presented based on discounted expected future cash flows using a discount rate determined by reference to market yields at the reporting\ndate on high quality corporate bonds that are linked to Israel’s Consumer Price Index with a term that is consistent with the estimated\nterm of the severance pay obligation. In respect of its severance pay obligation to certain of its employees, the Group makes current\ndeposits in pension funds and insurance companies, which we refer to as the plan assets. Plan assets comprise assets held by a long-term\nemployee benefit fund or qualifying insurance policies. Plan assets are not available to the Group’s own creditors and cannot be\nreturned directly to the Group.\n\n \n\nThe liability for\nemployee benefits shown in the statement of financial position reflects the present value of the defined benefit obligation, less the\nfair value of the plan assets. Remeasurements of the net liability are recognized in other comprehensive income in the period in which\nthey occur.\n\n \n\niii.*Other long-term employee\nbenefits*\n\n \n\nCertain employees\nof the Group are entitled to benefits in respect of adaptation grants. These benefits are accounted for as other long-term benefits since\nthe Group estimates that these benefits will be utilized and the Group’s respective obligation will be settled during the employment\nperiod and more than twelve months after the end of the annual reporting period in which the employees rendered the related service.\n\n \n\nThe Group’s\nnet obligation for other long-term employee benefits, which is computed based on actuarial assumptions, is for the future benefit due\nto employees for services rendered in the current period and in prior periods and considering expected salary increases. The amount of\nthese benefits is discounted to its present value. The discount rate is determined by reference at the reporting date to market yields\non high quality corporate bonds that are linked to the Consumer Price Index and whose term is consistent with the term of the Group’s\nobligation.\n\n \n\nRemeasurement of\nthe net obligation is recognized in the statement of comprehensive income in the incurred period.\n\n \n\n**Share-based payment\ntransactions**\n\n** **\n\nOur employees and\ncertain service providers are entitled to remuneration in the form of equity-settled share-based payment transactions. The cost of equity-settled\ntransactions with employees is measured at the fair value of the equity instruments granted at grant date. The fair value is determined\nusing an acceptable option pricing model. As for other service providers, the cost of the transactions is measured at the fair value of\nthe goods or services received as consideration for equity instruments granted.\n\n \n\n123\n\n \n\n \n\nThe cost of equity-settled\ntransactions is recognized in profit or loss together with a corresponding increase in equity during the period which the performance\nand/or service conditions are to be satisfied ending on the date on which the relevant employees become entitled to the award (the “vesting\nperiod”). The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting\ndate reflects the extent to which the vesting period has expired and our best estimate of the number of equity instruments that will ultimately\nvest.\n\n \n\nNo expense is recognized\nfor awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting\nirrespective of whether the market condition is satisfied, provided that all other vesting conditions (service and/or performance) are\nsatisfied.\n\n \n\nIf we modify the\nconditions on which equity-instruments were granted, an additional expense is recognized for any modification that increases the total\nfair value of the share-based payment arrangement or is otherwise beneficial to the employee/other service provider at the modification\ndate.\n\n \n\nIf a grant of an\nequity instrument is canceled, it is accounted for as if it had vested on the cancelation date and any expense not yet recognized for\nthe grant is recognized immediately. However, if a new grant replaces the canceled grant and is identified as a replacement grant on the\ngrant date, the canceled and new grants are accounted for as a modification of the original grant, as described above.\n\n \n\n**Concentration of credit\nrisk**\n\n** **\n\nFinancial instruments\nthat potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, short-term deposits,\nrestricted cash, trade receivables.\n\n \n\nThe majority of\nthe Group’s cash and cash equivalents, deposits, and other financial instruments are invested with major banks in Israel, the United\nStates and across Europe. Management believes that these financial instruments are held in financial institutions with high credit standing,\nand accordingly, minimal credit risk exists with respect to these investments. Cash and cash equivalents and short-term deposits in the\nUnited States may be in excess of insured limits and are not insured in other jurisdictions. Generally, these banks deposits may be redeemed\nupon demand and therefore bear minimal risk.\n\n \n\nThe Group’s trade receivables are generally derived from sales\nto large organizations located mainly in Israel, North America, Europe and Asia Pacific. The Group performs ongoing credit evaluations\nof its customers using a reliable outside source to determine payment terms and credit limits which are approved based on the size of\nthe customer and to date has not experienced any material losses. In certain circumstances, Formula and its subsidiaries and companies\naccounted for at equity may require letters of credit, other collateral or additional guarantees. The Group maintains an allowance for\ncredit losses based upon management’s experience and estimate of collectability of each outstanding invoice. The allowance for credit\nlosses is determined with respect to specific debts or which collection is doubtful. The risk of collection associated with accounts receivable\nis mitigated by the diversity and number of customers.\n\n \n\n**Liquidity risk**\n\n** **\n\nLiquidity risk arises\nfrom managing the Group’s working capital as well as from financial expenses and principal payments of the Group’s debt instruments.\nLiquidity risk consists of the risk that the Group will have difficulty in fulfilling obligations relating to financial liabilities. The\nGroup’s policy is to ascertain constant cash adequacy needed for settling its liabilities when due. For this purpose, the Group\naims to hold cash balances (or adequate credit lines) that will meet anticipated demands.\n\n \n\n124\n\n \n\n \n\nFormula and its\nsubsidiaries and companies accounted for at equity examine cash flow forecasts on a monthly basis as well as information regarding cash\nbalances. As of the reporting date, these forecasts indicate that the Group can expect sufficient liquid sources for covering its entire\nliabilities under reasonable assumptions.\n\n \n\n**Disclosure of Newly Issued but Not Yet Effective\nIFRS Standards**\n\n** **\n\n*IFRS 18 – “Presentation\nand Disclosure in Financial Statements”*\n\n \n\nIn April 2024, the International\nAccounting Standards Board, or the IASB, issued IFRS 18, “Presentation and Disclosure in Financial Statements”, or IFRS 18,\nwhich replaces IAS 1, “Presentation of Financial Statements”. IFRS 18 is aimed at improving comparability and transparency\nof communication in financial statements.\n\n \n\nIFRS 18 retains certain existing\nrequirements of IAS 1 and introduces new requirements on presentation within the statement of profit or loss, including specified totals\nand subtotals. It also requires disclosure of management-defined performance measures and includes new requirements for aggregation and\ndisaggregation of financial information.\n\n \n\nIFRS 18 does not modify the\nrecognition and measurement provisions of items in the financial statements. However, since items within the statement of profit or loss\nmust be classified into one of five categories (operating, investing, financing, taxes on income and discontinued operations), it may\nchange the entity’s operating profit. Moreover, the publication of IFRS 18 resulted in consequential narrow scope amendments to\nother accounting standards, including IAS 7, “Statement of Cash Flows” and IAS 34, “Interim Financial Reporting”.\nIFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027, and is to be applied retrospectively. Early adoption\nis permitted, subject to disclosure.\n\n \n\nWe are assessing the impact\nof the new standard, including the effects of the amendments to other accounting standards resulting from the new standard, on our consolidated\nfinancial statements."}