UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 0-19415
MAGIC SOFTWARE ENTERPRISES LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
Terminal Center, Yahadut Canada 1 Street, Or Yehuda 6037501, Israel
(Address of principal executive offices)
Asaf Berenstin; +972 (3) 538 9243; asafb@magicsoftware.com
Yahadut Canada 1 Street, Or Yehuda 6037501, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, NIS 0.1 Par Value
Trading Symbol(s)
MGIC
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual
report:
As of December 31, 2023, the Registrant had 49,099,305 Ordinary Shares, par value NIS 0.1 per share, outstanding
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer:
Non-accelerated filer:
☐
☐
Accelerated filer:
Emerging growth company
☒
☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the
Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☐ U.S. GAAP
☒ International Financial Reporting Standards as issued
by the International Accounting Standards Board
☐ Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 17 ☐ Item 18 ☐
This annual report on Form 20-F is incorporated by reference into the registrant’s Registration Statements on Form S-8, File Nos. 333-113552, 333-
132221 and 333-149553.
Yes ☐ No ☒
INTRODUCTION
Our legal and commercial name is Magic Software Enterprises Ltd., and we were organized and registered in Israel on February 10, 1983 and began
operations in 1986. Together with our subsidiaries we are a global provider of: (i) software services and Information Technologies (“IT”) outsourcing
software services; (ii) proprietary application development and business process integration platforms; (iii) selected packaged vertical software solutions,
as well as (iv) cloud-based services for end-to-end digital transformation.
Our software technology is used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and
cost effectively. In addition, our technology enables enterprises to accelerate the process of delivering business solutions that meet current and future
needs and allow customers to dramatically improve their business performance and return on investment.
As part of our software services and IT outsourcing services, we offer to hundreds of customers mainly in Israel and in North America an extensive
portfolio of professional services in the areas of infrastructure design and delivery, application development, technology consulting planning and
implementation services, integration projects, project management, software testing and quality assurance, engineering consulting (including supervision
of engineering projects), support services, cloud, cyber, digital, data and DevOps, all according to the specific needs of the customer, and in accordance
with the professional expertise required in each case with the goal to create significant value for our clients in managing, streamlining, accelerating and
helping their businesses thrive.
In addition, we offer a variety of proprietary comprehensive packaged software solutions through certain of our subsidiaries for (i) enterprise-wide and
fully integrated medical platform (“Clicks”), specializing in the design and management of patient-file oriented software solutions for managed care and
large-scale health care providers. This platform aims to allow healthcare service providers to securely access an individual’s electronic health record at
the point of care, and it organizes and proactively delivers information with potentially real time feedback to meet the specific needs of physicians,
nurses, laboratory technicians, pharmacists, front and back-office professionals and consumers; (ii) enterprise management system for both hubs and
traditional air cargo ground handling operations from physical handling and cargo documentation through customs, seamless electronic data interchange,
or EDI communications, dangerous goods, special handling, track and trace, security to billing (“Hermes”); (iii) enterprise human capital management, or
HCM, solutions, to facilitate the collection, analysis and interpretation of quality data about people, their jobs and their performance, to enhance HCM
decision making (“HR Pulse”); (iv) revenue management and monetization solutions in mobile, wireline, broadband and mobile virtual network
operator/enabler, or MVNO/E (“Leap”); (v) comprehensive system for managing broadcast channels in the area of TV broadcast management through
cloud-based on-demand service or on-premise solutions; (vi) comprehensive solution for sales and distribution field activities, such as order taking, route
accounting, trade marketing, retail execution, proof of deliveries and B2B E-commerce (“Mobisale”); and (vii) comprehensive solution for efficient
management of all types of rehabilitation centers (“Nativ”). Selected by many of the largest rehabilitation and treatment centers in Israel, Nativ serves as
a comprehensive solution, the largest and most specialized and equipped system in Israel, with all the capabilities required for operating all aspects of
organizations engaged in rehabilitation and treatment. Nativ enables control of all levels of rehabilitation bodies, including monitoring detailed
rehabilitation plans, finance, collection, account management, recruitment, working hours, asset management, employment, medical files and
management of large organization.
Based on our technological capabilities and our specialists, our software solutions and software services enable our clients to respond to rapidly evolving
market needs and regulatory changes, while improving the efficiency of their core operations. We have approximately 3,628 employees, who serve our
clients at any given time and whose skills and specialization are a significant source of competitive differentiation. We operate through a large network of
independent software vendors, or ISVs, who we refer to as Magic Software Providers, or MSPs, and hundreds of system integrators, distributors,
resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50 countries use our products and services.
Our application development and business process integration platforms consist of:
● Magic xpa – a proprietary low-code application platform for developing and deploying business applications.
● AppBuilder – a proprietary low-code application platform for building, deploying, and maintaining high-end, mainframe-grade business
applications.
● Magic xpi – a proprietary low-code platform for on premises application integration.
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● Magic xpi cloud native – a configuration based on Kubernetes focuses on scalability, security and resilience.
● FactoryEye – a cloud-based pre-packaged but flexible end-to-end data management platform for manufacturers enabling smooth migration to
Industry 4.0 smart factories. Real-time factory floor visibility and optimization is provided as part of the end-to-end visibility to maximize
production performance and ongoing improvement.
● Magic Data Management and Analytics Platform– a cloud-based pre-packaged but flexible end-to-end data management platform for all
verticals enabling smooth digital transformation and full organizational business intelligence
● Magic SmartUX – a proprietary low-code enterprise mobile development application platform for citizen to professional developers to rapidly
design, build, analyze, and run cross-platform mobile business applications.
Our vertical packaged software solutions include:
● Clicks™ – a proprietary comprehensive core software solution for medical record information management system, used in the design and
management of patient-files for managed care and large-scale healthcare providers. The platform is connected to each provider’s clinical,
administrative and financial data base system, residing at the provider’s central computer, and allows immediate analysis of complex data with
potentially real-time feedback to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office
professionals and consumers.
● Leap™ – a proprietary comprehensive core software solution for Business Support Systems, or BSS, including convergent charging, billing,
customer management, policy control, mobile money and payment software solutions for the telecommunications, content, Machine to
Machine/Internet of Things or M2M/IoT, payment and other industries.
● Hermes Cargo – Hermes Air Cargo Management System and Hub Management System is a proprietary, state-of-the-art, cloud-first event
driven software solution for managing air cargo ground handling. The Hermes SaaS, offered as a complete Managed Service, includes Hermes
Cloud CMS and HMS, Hermes Business Intelligence (BI) and Data Lakes, Hermes Landside Management, Hermes Track & Trace, Hermes
Learning Management System, and Hermes Integration APIs, providing lower entry costs and a pay-as-you-go offering for its customers, as well
as pushing customers’ digital credentials. The Hermes Solution covers all aspects of cargo handling, from physical handling and cargo
documentation through customs, seamless EDI communications, dangerous goods and special handling, tracking and tracing, security and
billing. Customers benefit through faster processing and more accurate billing, reporting and ultimately enhanced revenue. the system also
features the Hermes Business Intelligence (HBI) solution, adding unprecedented data analysis capabilities and management-decision support
tools. The Hermes Solution is delivered on a licensed or fully hosted basis.
● HR Pulse – A customizable single-tenant SaaS tool that helps organizations to monitor employee performance, progress and potential through a
menu of templates that can create new HCM solutions, complement existing processes, and/or integrate with legacy HR systems already in use
by organizations.
● MBS Solution – a proprietary comprehensive core system for TV broadcast management for use in managing broadcast channels.
● Nativ – a proprietary comprehensive core system for management of rehabilitation centers
● Mobisale – a proprietary comprehensive core system for sales and distribution field activities for consumer goods manufacturers and
wholesalers
Our software solutions and software services enable our clients to improve their business performance and return on investment by supporting cost-
effective and rapid delivery integration of business applications, systems and databases. Using our platforms and our specialists, enterprises and MSPs
can achieve fast time-to-market by rapidly building integrated solutions and deploy them in multiple environments while leveraging existing IT resources.
In addition, our software solutions are scalable and platform-agnostic, enabling our clients to build software applications by specifying their business
logic requirements in a high-level language rather than in computer code, and to benefit from seamless platform upgrades and cross-platform
functionality without the need to re-write their applications. Our platforms also support the development of mobile applications that can be deployed on a
variety of mobile devices, and in a cloud environment. In addition, we continuously evolve our platforms to include the latest technologies to meet the
demands of our customers and the markets in which they operate.
We sell our platforms and our services globally through a broad channel network, including our own direct sales representatives and offices, independent
country distributors, MSPs that use our technology to develop and sell solutions to their customers, and system integrators. We also offer software
maintenance, support, training and consulting services to supplement with our products, thus aiding in the successful implementation of Magic xpa,
AppBuilder, Magic xpi, Magic Data Management and Analytics Platform, Magic Smart UX and FactoryEye projects, and assuring successful operation
of the platforms once installed.
ii
In addition, we provide on an increasingly global basis a broad range of advanced software professional services and IT outsourcing services in the areas
of infrastructure design and delivery, application development, technology consulting planning and implementation services, support services, Digital,
DevOps (Development & Operations), Mobile, Open Source, Big Data and Analytical BI, M/F, Security & Cyber, cloud computing for deployment of
highly available and massively-scalable applications and APIs and supplemental IT outsourcing services to a wide variety of companies, including
Fortune 1000 companies, all in accordance with the professional expertise required in each case with our goal to create significant value for our clients in
managing, streamlining, accelerating and helping their businesses thrive.
We have substantial experience in end-to-end development of tailored high-end software solutions, beginning with collection and analysis of system
requirements, continuing with architecture specifications and setup, to software implementation, component integration and testing. From concept to
implementation, from application of the ideas of startups requiring the early development of an application or a device, to somewhat larger, more
established enterprises, vendors or system houses who need our team of experts to take full responsibility for the development of their systems and
products. With our ability to draw on our pool of resources, comprised of hundreds of highly trained, skilled, educated and flexible engineers, we adhere
to timelines and budget and work in full transparency with our customers every step of the way to create a tailor-made and cost-effective solution to
answer our customers’ unique needs.
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with International Financial
Reporting Standards, or IFRS.
We have obtained trademark registrations for SmartUX® in the United States and for Magic® in the United States, Canada, Israel, the Netherlands
(Benelux), Switzerland, Thailand and the United Kingdom. All other trademarks and trade names appearing in this annual report are owned by their
respective holders.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements
or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any
previous filling with the SEC, you may read the document itself for a complete recitation of its terms.
Definitions
In this annual report, unless the context otherwise requires:
● References to “Magic Software” the “Company,” the “Registrant,” “our company,” “us,” “we” and “our” refer to Magic Software Enterprises
Ltd. and its consolidated subsidiaries;
● References to “our shares,” “Ordinary Shares” and similar expressions refer to Magic’s Ordinary Shares, par value NIS 0. 1 per share;
● References to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;
● References to “Euro” or “€” are to the Euro, the official currency of the Eurozone in the European Union;
● References to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;
● References to the “Articles” are to our Amended Articles of Association, as currently in effect;
● References to the “Securities Act” are to the Securities Act of 1933, as amended;
● References to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
● References to “Nasdaq” are to the Nasdaq Stock Market;
● References to the “TASE” are to the Tel Aviv Stock Exchange; and
● References to the “SEC” are to the United States Securities and Exchange Commission.
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Cautionary Note Regarding Forward-Looking Statements
Certain matters discussed in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of
the Exchange Act and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our beliefs, assumptions
and expectations, as well as information currently available to us. Such forward-looking statements may be identified by the use of the words
“anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views with respect to
future events and are subject to certain risks and uncertainties. There are important factors that could cause our actual results, levels of activity,
performance, or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-
looking statements, including, but not limited to:
● the degree of our success in our plans to leverage our global footprint to grow our sales;
● the degree of our success in integrating the companies that we have acquired through the implementation of our M&A growth strategy;
● the lengthy development cycles for our solutions, which may frustrate our ability to realize revenues and/or profits from our potential new
solutions;
● our lengthy and complex sales cycles, which do not always result in the realization of revenues;
● the degree of our success in retaining our existing customers and competing effectively for greater market share;
● difficulties in successfully planning and managing changes in the size of our operations;
● the challenges and potential liability that heightened privacy laws and regulations pose to our business;
● occasional disputes with clients, which may adversely impact our results of operations and our reputation;
● various intellectual property issues related to our business;
● potential unanticipated product vulnerabilities or cybersecurity breaches of our or our customers’ systems, particularly in the current hybrid
office/work-from-home environment;
● risks posed by our global sales and operations, such as changes in regulatory requirements, wide-spread viruses and epidemics, or fluctuations in
currency exchange rates; and
● risks related to our principal location in Israel.
The forward-looking statements made in this annual report speak only to our views as of the date on which the statements are made. While we believe
such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks
or uncertainties materialize, our actual results may differ materially from those expressed or implied by the forward-looking statements. Please read the
risks discussed in Item 3 – “Key Information” under the caption “Risk Factors” and cautionary statements appearing elsewhere in this annual report in
order to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the
forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking
statements for any reason after the date of this annual report, to conform these statements to actual results or to changes in our expectations.
iv
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
TABLE OF CONTENTS
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3.
KEY INFORMATION
ITEM 4.
A. Reserved
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
INFORMATION ON THE COMPANY
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plants and Equipment
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development
D. Trend Information
E. Critical Accounting Estimates.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
F. Disclosure of a registrant’s action to recover erroneously awarded compensation
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts and Counsel
ITEM 8.
FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
B. Significant Changes
ITEM 9.
THE OFFER AND LISTING
A. Offer and Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholders
E. Dilution
F. Expenses of the Issue
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23
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45
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57
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77
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ITEM 10.
ADDITIONAL INFORMATION
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15.
CONTROLS AND PROCEDURES
ITEM 16.
RESERVED
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B.
CODE OF ETHICS
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G.
CORPORATE GOVERNANCE
ITEM 16H.
MINE SAFETY DISCLOSURE
ITEM 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
ITEM 16J.
INSIDER TRADING POLICIES
ITEM 16K.
CYBERSECURITY
ITEM 17.
FINANCIAL STATEMENTS
ITEM 18.
FINANCIAL STATEMENTS
ITEM 19.
EXHIBITS
S I G N A T U R E S
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not applicable.
ITEM 3. KEY INFORMATION
A. RESERVED
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Investing in our ordinary shares involves a high degree of risk and uncertainty. We operate globally in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some, but not all, of those risks and uncertainties that may have a material adverse
effect on our business, financial position, results of operations or cash flows. You should carefully consider the risks and uncertainties described below
before investing in our ordinary shares.
Risks Related to Our Business and Our Industry
● The implementation of our M&A growth strategy involves significant risks, and the failure to integrate acquired companies successfully may
adversely affect our future results.
● Our development cycles are lengthy, and we incur significant expenses before we generate revenues, if any, from our solutions.
● Our products have a lengthy sales cycle that could adversely affect our revenues.
● We are dependent on a limited number of core product families.
● Macro-economic headwinds may again, adversely impact our revenues, profitability and cash flows.
● Our inability to respond to the evolving technological environment could materially affect our results of operations
● Rapid technological changes may adversely affect the market acceptance of our products and services, and our business, results of operations
and financial condition could be adversely affected.
● If we are unable to keep our supply of skills and resources in balance with client demand around the world and attract, motivate and retain
professionals with strong leadership skills, our business, the utilization rate of our professionals and our results of operations may be materially
adversely affected.
1
● Failure to manage our growth— both organic and non-organic—could harm our business.
● If we fail to successfully plan and manage changes in the size of our operations in response to changes in demand for our products and services,
our business will suffer.
● If existing customers are not satisfied with our solutions and services, fail to make subsequent purchases from us, or discontinue use of such
solutions and services, or if our relationships with our largest customers are impaired, our revenue could be negatively affected.
● We enter from time to time into fixed-price contracts that could subject us to losses in the event we fail to properly estimate our costs.
● We face intense competition in the markets in which we operate and we might not be able to compete effectively. This could adversely affect our
business, results of operations and financial condition.
● Unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
● We are exposed to economic and market conditions that impact the communications industry.
● A reduction of government spending in Israel on IT services, from which some of our revenues are derived, may reduce our revenues and
profitability.
● Intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the future.
● Changes in the ratio of our revenues generated from different revenue elements may adversely affect our gross profit margins.
● We may encounter difficulties with our international operations and sales that could adversely affect our business, results of operations and
financial condition.
● Fluctuations in foreign currency exchange rates have in recent past adversely affecting, and could again to adversely affect our business.
● Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
● Security vulnerabilities in our software solutions could lead to reduced revenue or to liability claims.
● Changes in privacy regulations may impose additional costs and liabilities on us, limit our use of information, and adversely affect our business.
● Errors or defects in our software solutions could inevitably arise.
● Third parties may assert that we have infringed their intellectual property rights.
● We may be liable to our clients for damages caused by a violation of intellectual property rights, unsatisfactory performance of services, or
similar matters and our insurance policies may not be sufficient to cover these damages.
● Our intellectual property rights and our source code insufficiently protected.
● The loss of third-party technology and intellectual property could limit the functionality of our products.
● We could be required to provide the source code of our products to our customers.
2
● Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require our
release of source code.
● Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our
competitors from benefiting from the expertise of some of our former employees.
● Our business may be materially affected by changes to fiscal and tax policies.
● Certain of our credit facility agreements are subject to a number of restrictive covenants.
● Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our
Environmental, Social and Governance, or ESG, policies may impose additional costs on us or expose us to additional risks.
● We identified a material weakness in our internal control over financial reporting. If we are unable to maintain effective internal control over
financial reporting in accordance with Sections 302 and 404(a) of the Sarbanes-Oxley Act of 2002, the reliability of our financial statements may
be questioned.
Risk Related to Our Ordinary Shares
● Our Ordinary Shares are traded on more than one market, which may result in price variations.
● There is relatively limited trading volume for our shares, which reduces and increases volatility.
● We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange
Act, and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of
disclosure that you receive.
● As of April 1, 2024, our controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 46.71% of our outstanding
Ordinary Shares and therefore has a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of
control that may benefit our public shareholders.
● We have a history of quarterly fluctuations in results of operations which contributes and expect these fluctuations to continue.
3
Risks Related to Our Location in Israel
● The ongoing war and hostilities between Israel and terrorist groups— Hamas in Gaza, and Hezbollah in Lebanon— may limit our ability to sell
our products and services.
● Our results of operations may be adversely affected by the obligation of our personnel to perform military service.
● We currently have the ability to benefit from certain government tax benefits, which may be cancelled or reduced in the future.
● Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
● The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
Risks Related to Our Business and Our Industry
The implementation of our M&A growth strategy, which requires the integration of multiple acquired companies and their respective businesses,
operations and employees with our own, involves significant risks, and the failure to integrate successfully may adversely affect our future results.
In the past decade we have completed a significant number of important acquisitions. Most recently, on June 8, 2023, we acquired a 60% share interest in
K.M.T. (M.H.) Technologies Communication Computer Ltd., an Israeli provider of secured private, public and hybrid cloud computing managed services
along with full spectrum of IT communication and professional services - from IT support and helpdesk to IT infrastructure and telephony services.
During 2023, we also increased our holdings in Mobisoft Ltd. (an Israeli provider of proprietary comprehensive core system for sales and distribution
field activities for consumer goods manufacturers and wholesalers) from 73.7% to 98.5% and in Appush Ltd. (formerly known as Vidstart Ltd.), a
provider of a video advertising platform that offers personalized automated methods and real-time smart optimization in the competitive digital
ecosystem, to 100%, transforming it into a wholly-owned subsidiary. All such acquisitions are part of our integrated M&A growth strategy, which is
centered on three key factors: growing our customer base, expanding our geographic footprint and adding complementary solutions and services to our
portfolio— all while we seek to ensure our continued high quality of services and product delivery. Any failure to successfully integrate the business,
operations and employees of our acquired companies, or to otherwise realize the anticipated benefits of these acquisitions, could harm our results of
operations. Our ability to realize these benefits will depend on the timely integration and consolidation of organizations, operations, facilities, procedures,
policies and technologies, and the harmonization of differences in the business cultures between these companies and their personnel. Integration of these
businesses will be complex and time consuming, will involve additional expense and could disrupt our business and divert management’s attention from
ongoing business concerns. The challenges involved in integrating K.M.T. (M.H.) Technologies Communication Computer Ltd and other businesses that
we have acquired or may acquire from time to time include:
● Preserving customer, supplier and other important relationships
● Integrating complex, core products and services that we acquire with our existing products and services
● Integrating financial forecasting and controls, procedures and reporting cycles
● Combining and integrating information technology, or IT, systems
● Integrating employees and related HR systems and benefits, maintaining employee morale and retaining key employees
● Potential confusion that we may have in our dealings with customers and prospective customers as to the products we are offering to them and
potential overlap among those products
● Investment of significant management time and attention towards the integration process
The benefits we expect to realize from these acquisitions are, necessarily, based on projections and assumptions about the combined businesses of our
company, and assume, among other things, the successful integration of these acquired entities into our business and operations. Our projections and
assumptions concerning our acquisitions may be inaccurate, however, and we may not successfully integrate the acquired companies and our operations
in a timely manner, or at all. We may also be exposed to unexpected contingencies or liabilities of the acquired companies. If we do not realize the
anticipated benefits of these transactions, our growth strategy and future profitability could be adversely affected.
4
Our development cycles are lengthy, and we may not have the resources available to complete development of new, enhanced or modified solutions.
We may incur significant expenses before we generate revenues, if any, from our solutions.
Because our software solutions are complex and require rigorous testing, development cycles can be lengthy, taking us up to two years to develop and
introduce new, enhanced or modified solutions. Moreover, development projects can be technically challenging and expensive. The nature of these
development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we
generate revenues, if any, from such expenses. In addition, adapting to evolving technologies may require us to invest a significant amount of resources,
time and attention into the development, integration, support and marketing of those technologies. The acceptance and growth of cloud computing is an
example of a rapidly changing technology, which we have adapted into our products, packaged software solution and software service offerings. This
required us to make a substantial financial investment to develop and implement cloud computing into our software solution models and has required
significant attention from our management to refine our business strategies to include the delivery of such solution.
As the market continues to adopt new technologies, we expect to continue to make substantial investments in our software solutions, system integrations
and professional services related to these changing technologies, and in the future we may not have sufficient funds or other resources to make the
required investments. Furthermore, we may invest substantial resources in the development of solutions that do not achieve market acceptance or
commercial success. Even if we succeed in adapting to a new technology by developing attractive products and services and successfully bringing them
to market, there is no assurance that the new product or service will have a positive impact on our financial performance and could even result in lower
revenue, lower margins and higher costs and therefore could negatively impact our financial performance. If release dates of any future products or
enhancements are delayed our business, financial condition and results of operations could be adversely affected.
Our products have a lengthy sales cycle that could adversely affect our revenues.
The typical sales cycle for our solutions and services is lengthy and unpredictable, sometimes requires pre-purchase evaluation by a significant number of
persons in our clients’ organizations, and often involves a significant operational decision by our customers as they typically use our software solutions
and services to develop and deploy as well as to integrate applications that are critical to their businesses. Our sales efforts involve educating our clients,
partners and consultants about the use and benefits of our solutions, including the technical capabilities of our solutions and the efficiencies achievable by
organizations deploying our solutions. Because of the long approval process that typically accompanies strategic initiatives or capital expenditures by
companies, our sales process is often delayed, with little or no control over any delays encountered by us. Our sales cycle, which generally ranges from
three to twelve months, can be further extended for sales made through third party distributors. We spend substantial time, effort and money in our sales
efforts without any assurance that such efforts will produce any sales.
We are dependent on a limited number of core product families and a decrease in revenues from these products would adversely affect our business,
results of operations and financial condition; our future success will be largely dependent on the acceptance of future releases of our core product
offerings and if we are unsuccessful with these efforts, our business, results of operations and financial condition will be adversely affected.
We derive a significant portion of our revenues and profits from sales of application and integration platforms and vertical software solutions and from
related professional services, software maintenance and technical support. Our future growth depends heavily on our ability to effectively develop and
sell new products developed by us or acquired from third parties as well as add new features to existing products and new software service offerings. A
decrease in revenues from our principal products and related services would adversely affect our business, results of operations and financial condition.
Our future success depends in part on the continued acceptance of our application platforms and integration products primarily under our Magic xpa,
Magic xpi, AppBuilder, Leap, FactoryEye, Magic Data Management and Analytics platform and Magic SmartUX brands and our vertical packaged
software solutions, primarily Clicks, Leap™, the Hermes solution and HR Pulse, Mobisale and Nativ. The continued acceptance of these platforms and
software solutions will be dependent in part on the continued acceptance and growth of the cloud market, including rich internet applications, or RIAs,
mobile and software as a service, or SaaS, for which certain of them are particularly useful and advantageous. We will need to continue to enhance our
products to meet evolving requirements and if new versions of such products are not accepted, our business, results of operations and financial condition
may be adversely affected.
5
Macro-economic headwinds caused by inflation, relatively high interest rates, global supply problems and fluctuations in currency exchange rates
have, in the recent past, and may again, adversely impact our revenues, profitability and cash flows.
Our business depends on overall demand within the global information technology sector, the economic health of our current and prospective clients, and
worldwide economic conditions. We market and sell our software solutions and services primarily in North America and in Israel, as well as, to a smaller
extent, in various parts of the rest of the world. Uncertain economic conditions in those markets, including due to lingering inflation, current relatively
high interest rates and potential decreased economic output may reduce overall demand for our insurance software solutions and services. These factors
could also delay or lengthen our sales cycles, and inhibit our international expansion, and may also lead to longer collection cycles for payments due from
our customers, as well as result in an increase in customer bad debt. In addition, the weakening of New Israeli Shekel and the European currencies in
comparison to the U.S. dollar adversely impacted in a material manner, our revenues and our results of operations as measured in U.S. dollars in 2023
compared to 2022 and may continue to adversely impact them in the future. While the implications of these macroeconomic trends for our business,
results of operations and overall financial position remain uncertain over the long term, the headwinds that were generated by these trends have created
challenges for our business in 2023 as we experienced a slower growth rate in revenues, profitability and cash flows as a result of those headwinds.
In addition to exerting the foregoing impact, macro-economic headwinds may amplify a number of risks for us, including, but not limited to, the
following:
● our ability to increase sales of new, enhanced solutions to existing customers may be hindered due to more cautious purchasing and investment
strategies by corporate customers;
● reduced economic activity, which could lead to a recession, could negatively impact customer discretionary spending on insurance solutions,
which in turn could substantially impact our business operations and financial condition in an adverse manner;
● our customer success efforts, our ability to enter into new markets and to acquire new customers may be impeded, in part due to lengthening of
our sales cycles;
● there may be an increase in our credit losses reserves as customers face economic hardship and collectability becomes more uncertain, including
due to the risk of bankruptcies;
● our ability to retain, attract and recruit employees may be adversely impacted if our growth rate and profitability decrease;
● our ability to complete acquisitions may be hampered if we need to seek financing for such acquisitions; and
● our ability to raise capital may be hurt.
The full impact of economic headwinds on our business and our future performance may also have the effect of heightening any of our other risk factors
described in this annual report and is difficult to predict when and whether those trends will continue, so there is some level of risk that any guidance we
provide to the market may turn out to be incorrect.
Our business depends on generating and maintaining ongoing, profitable client demand for our services and solutions, including through the
adaptation and expansion of our services and solutions in response to ongoing changes in technology and offerings, and a significant reduction in
such demand or an inability to respond to the evolving technological environment could materially affect our results of operations.
Our revenue and profitability depend on the demand for our services and solutions with favorable margins, which could be negatively affected by
numerous factors, many of which are beyond our control and unrelated to our work product. As described above, volatile, negative, or uncertain global
economic and political conditions and lower growth or contraction in the markets we serve have adversely affected and could in the future adversely
affect client demand for our services and software solutions. Our success depends, in part, on our ability to continue to develop and implement services
and software solutions that anticipate and respond to rapid and continuing changes in technology and offerings to serve the evolving needs of our clients.
Examples of areas of significant change include digital-, cloud- and security-related offerings, which are continually evolving, as well as developments in
areas such as artificial intelligence, augmented reality, automation, Internet of Things, network engineering, digital engineering and manufacturing, and
as-a-service solutions. As we expand our services and solutions into these new areas, we may be exposed to operational, legal, regulatory, ethical,
technological and other risks specific to such new areas, which may negatively affect our reputation and demand for our services and solutions.
6
Technological developments may materially affect the cost and use of technology by our clients and, in the case of cloud and as-a-service solutions, could
affect the nature of how we generate revenue. Some of these technological developments have reduced and replaced some of our historical services and
solutions and may continue to do so in the future. This has caused, and may in the future cause, clients to delay spending under existing contracts and
engagements and to delay entering into new contracts while they evaluate new technologies. Such technological developments and spending delays can
negatively impact our results of operations if we are unable to introduce new pricing or commercial models that reflect the value of these technological
developments or if the pace and level of spending on new technologies are not sufficient to make up any shortfall.
Developments in the industries we serve, which may be rapid, could also shift demand to new services and solutions. If, as a result of new technologies or
changes in the industries we serve, our clients demand new services and solutions, we may be less competitive in these new areas or need to make
significant investment to meet that demand. Our growth strategy focuses on responding to these types of developments by driving innovation that will
enable us to expand our business into new growth areas. If we do not sufficiently invest in new technology and adapt to industry developments or evolve
and expand our business at sufficient speed and scale, or if we do not make the right strategic investments to respond to these developments and
successfully drive innovation, our services and solutions, our results of operations, and our ability to develop and maintain a competitive advantage and to
execute on our growth strategy could be adversely affected.
We operate in a rapidly evolving environment in which there currently are, and we expect will continue to be, new technology entrants. New services or
technologies offered by competitors or new entrants may make our offerings less differentiated or less competitive when compared to other alternatives,
which may adversely affect the results of our operations. In addition, companies in the industries we serve sometimes seek to achieve economies of scale
and other synergies by combining with or acquiring other companies. If one of our current clients merges or consolidates with a company that relies on
another provider for the services and solutions we offer, we may lose work from that client or lose the opportunity to gain additional work if we are not
successful in generating new opportunities from the merger or consolidation.
Many of our consulting contracts are less than 12 months in duration, and these contracts typically permit a client to terminate the agreement with as little
as 30 days’ notice. Longer-term, larger and more complex contracts, generally require a longer notice period for termination and often include an early
termination charge to be paid to us, but this charge might not be sufficient to cover our costs or make up for anticipated ongoing revenues and profits lost
upon termination of the contract. Many of our contracts allow clients to terminate, delay, reduce or eliminate spending on the services we provide.
Additionally, a client could choose not to retain us for additional stages of a project, try to renegotiate the terms of its contract or cancel or delay
additional planned work. When contracts are terminated or not renewed, we lose the anticipated revenues, and it may take significant time to replace the
level of revenues lost. Consequently, our results of operations in subsequent periods could be materially lower than expected.
We may encounter difficulties in realizing the potential financial or strategic benefits of recent business acquisitions. We expect to make additional
acquisitions in the future that could disrupt our operations and harm our operating results.
A significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three key factors: growing our
customer base, expanding our geographic footprint and adding complementary solutions to our portfolio—all while we seek to ensure our continued high
quality of services and product delivery. In the past five years we made numerous acquisitions.
Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our
future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition. In the future, we may seek to
acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances
with third parties in order to expand our business. Failure to manage and successfully integrate such acquisitions could materially harm our business and
operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products technologies and
professional services to a failure to do so. Even when an acquired company has previously developed and marketed products, there can be no assurance
that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible issues that might
arise with respect to such products. If we acquire other businesses, we may face difficulties, including:
● Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
● Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread
operations resulting from acquisitions;
● Integrating financial forecasting and controls, procedures and reporting cycles;
● Potential difficulties in completing projects associated with in-process research and development;
● Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger
market positions;
● Insufficient revenue to offset increased expenses associated with acquisitions; and
● The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and
continuing after announcement of acquisition plans.
7
Rapid technological changes may adversely affect the market acceptance of our products and services, and our business, results of operations and
financial condition could be adversely affected.
We compete in a market that is characterized by rapid technological changes. Other companies are also seeking to offer integration solutions, low-code
development solutions, enterprise mobility solutions, internet-related solutions, such as cloud computing, and complementary services to generate
growth. These companies may develop technological or business model innovations or offer services in the markets that we seek to address that are, or
are perceived to be, equivalent or superior to our software solutions and services. In addition, our customers’ business models may change in ways that
we do not anticipate and these changes could reduce or eliminate our customers’ needs for our products and services. Our operating results depend on our
ability to adapt to market changes and develop and introduce new products and services into existing and emerging markets.
The introduction of new technologies and devices could render existing products and services obsolete and unmarketable and could exert price pressures
on our products and services. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by:
● Supporting existing and emerging hardware, software, databases and networking platforms; and
● Developing and introducing new and enhanced software development technology and applications that keeps pace with such technological
developments, emerging new product markets and changing customer requirements.
If we are unable to keep our supply of skills and resources in balance with client demand around the world and attract, motivate and retain
professionals with strong leadership skills, our business, the utilization rate of our professionals and our results of operations may be materially
adversely affected.
Our success is dependent, in large part, on our ability to keep our supply of market-leading skills and capabilities in balance with client demand around
the world and our ability to attract and retain personnel with the knowledge and skills to lead our business globally. We must hire or reskill, retain and
motivate appropriate numbers of talented people with diverse skills in order to serve clients across the globe, respond quickly to rapid and ongoing
changes in demand, technology, industry and the macroeconomic environment, and continuously innovate to grow our business. For example, if we are
unable to hire or retrain our employees to keep pace with the rapid and continuous changes in technology and the industries we serve, we may not be able
to innovate and deliver new services and solutions to fulfill client demand. There is competition for scarce talent with market-leading skills and
capabilities in new technologies, and our competitors have directly targeted our employees with these highly sought-after skills and will likely continue to
do so. As a result, we may be unable to cost effectively hire and retain employees with these market-leading skills, which may cause us to incur increased
costs, or be unable to fulfill client demand for our services and solutions.
We are particularly dependent on retaining members of our leadership with critical capabilities. If we are unable to do so, our ability to innovate, generate
new business opportunities and effectively lead large and complex transformations and client relationships could be jeopardized. We depend on
identifying, developing and retaining top talent to innovate and lead our businesses. This includes developing talent and leadership capabilities. Our
ability to expand in the markets we operate depends, in large part, on our ability to attract, develop, retain and integrate both leaders for the local business
and people with critical capabilities.
Similarly, our profitability depends on our ability to effectively source and staff people with the right mix of skills and experience to perform services for
our clients, including our ability to transition employees to new assignments on a timely basis. The costs associated with recruiting and training
employees are significant. If we are unable to effectively deploy our employees globally and remotely on a timely basis to fulfill the needs of our clients,
our profitability could suffer. If our utilization rate is too low, our profitability and the engagement of our employees could suffer. If the utilization rate of
our professionals is too high, it could have an adverse effect on employee engagement and attrition, the quality of the work performed as well as our
ability to staff projects.
Our incentive compensation plans are designed to reward high-performing individuals for their contributions and provide incentives for them to remain
with us. If the anticipated value of such incentives does not materialize or if our total compensation package is not viewed as being competitive, our
ability to attract and retain the personnel we need could be adversely affected.
There is a risk that at certain points in time, we may have more personnel than we need in certain skill sets or at compensation levels that are not aligned
with skill sets. In these situations, we have engaged, and may in the future engage, in actions to rebalance our resources, including reducing the rate of
new hires and increasing involuntary terminations as a means to keep our supply of skills and resources in balance with client demand. At certain times,
we will find it difficult to hire and retain a sufficient number of employees with the skills or backgrounds to meet current and/or future demand. In these
cases, we might need to redeploy existing personnel or increase our reliance on subcontractors to fill certain labor needs, and if not done effectively, our
profitability could be negatively impacted. Additionally, as demand for our services and solutions has escalated at a high rate, to hire and retain people
with the skills necessary to meet demand we have and may continue to adjust compensation, which puts upward pressure on our costs and may adversely
affect our profitability if we are unable to recover these increased costs. If we are not successful in these initiatives, our results of operations could be
adversely affected.
8
Moreover, our research and development, product delivery, and general and administrative, activities are conducted at locations where the competition
for skilled professionals is particularly intense. While there historically has been strong competition for qualified human resources in the high-tech
industry, it has experienced record growth and activity over the last few years. This flurry of growth and activity caused a sharp increase in job openings
in both high-tech companies and research and development centers, as well as the intensification of competition between employers to attract qualified
employees. Employee attrition— for all fields and professions, and for all levels of management—accompanied this strong competition, and high-tech
companies such as ours that are based in Israel and other jurisdictions have recently faced a severe shortage of skilled human capital, including
engineering, research and development, sales and customer support personnel.
While the foregoing trend has moderated over the last one to two years, if, going forward, we are unable to hire or retain qualified personnel we may be
unable to meet the needs of our customers. Even if we succeed at retaining the necessary skilled personnel, our investments in our personnel may increase
our costs of operations and thereby reduce our profitability, unless accompanied by increased revenues. As a result of the intense competition for
qualified human resources, the high-tech market in which we operate has experienced and may continue to experience significant wage inflation.
Accordingly, our efforts to attract, retain and develop personnel may also result in significant additional expenses, which could adversely affect our
profitability. Given the highly competitive industry in which we operate and its continued evolution, we may not succeed in increasing our revenues in
line with our increasing investments in our personnel and research and development efforts.
Failure to manage our growth— both organic and non-organic—could effectively harm our business.
In recent years, we experienced, and expect to continue to experience growth in our operations that has placed, and will continue to place, a significant
strain on our operational and financial resources and on our personnel. To manage our anticipated future growth effectively, we must maintain and may
need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations and
employees in geographically diverse locations. We also must attract, train and retain a significant number of additional qualified sales and marketing
personnel, professional services personnel, and management personnel. Our failure to manage our growth effectively could have a material adverse effect
on our business, results of operations and financial condition. Our growth could require significant capital expenditures and may divert financial
resources from other projects, such as the development of new services or product enhancements. For example, it may take as long as three to six months
to hire and train a new member of our professional services staff. We make decisions regarding the size of our professional services staff based upon our
expectations with respect to customer demand for our products and services. If these expectations are incorrect, and we increase the size of our
professional services organization without experiencing an increase in sales of our products and services, we will experience reductions in our gross and
operating margins and net income. If we are unable to effectively manage our growth, our expenses may increase more than expected, our revenues could
decline or grow more slowly than expected and we may be unable to implement our business strategy. Our growth may also be accompanied by greater
exposure to litigation, including suits by clients, vendors, employees or former employees, as the sizes of our workforce and our overall international
operations increase. All such litigation carries with it related costs and could divert management’s attention from ongoing business concerns.
We may be required to increase or decrease the scope of our operations in response to changes in the demand for our products and services, and if we
fail to successfully plan and manage changes in the size of our operations, our business will suffer.
In recent past years, we have both grown and contracted our operations, in some cases rapidly, to profitably offer our software solutions and services in a
continuously changing market. If we are unable to manage these changes, or to plan and manage any future changes in the size and scope of our
operations, our business may be negatively impacted.
Restructurings and cost reduction measures that we have implemented in the past as during the second half of 2023 have reduced the size of our
operations and workforce. Reductions in personnel can result in significant severance, administrative and legal expenses, and may also adversely affect or
delay various sales, marketing and product development programs and activities. These cost reduction measures have included and may in the future
include employee separation costs and consolidating and/or relocating certain of our operations to different geographic locations.
During periods of expansion, we may need to serve several new customers or implement new large-scale projects in short periods of time. This may
require us to attract and train additional IT professionals at a rapid rate, as well as quickly expand our facilities, which may be difficult to successfully
implement.
If existing customers are not satisfied with our solutions and services and either do not make subsequent purchases from us or do not continue using
such solutions and services, or if our relationships with our largest customers are impaired, our revenue could be negatively affected.
We depend heavily on repeated software and services revenues from our base of existing clients. Two of our largest clients accounted together for 20.6%
and 16.8% of our revenues in the years ended December 31, 2022 and 2023, respectively and five of our largest clients accounted for 26.4% and 22.9%
of our revenues in the years ended December 31, 2022 and 2023, respectively. Our ability to attract and retain clients depends to a large extent on our
relationships with our clients and our reputation for high quality solutions, professional services and integrity. As a result, if a customer is not satisfied
with our services or solutions, including those of subcontractors we engage, our reputation may be damaged. Our failure to meet these goals or a
customer’s expectations may result in a less profitable or an unprofitable engagement. Moreover, if we fail to meet our customers’ expectations, we may
lose customers and be subject to legal liability, particularly if such failure adversely affects our customers’ businesses. Accordingly, In accordance, a
significant decline in our revenue stream from existing clients, including due to termination of agreement(s), would have a material adverse effect on our
business, results of operations and financial condition. For example, in 2023, one of our largest revenue generating clients, without advance notice, and
due to reasons unrelated to our services, suspended significant parts of its active time and material based services with us.
9
In addition, a portion of our projects may be considered critical to the operations of our clients’ businesses. Our exposure to legal liability may be
increased in the case of contracts in which we become more involved in our customers’ operations. While we typically strive to include provisions
designed to limit our exposure to legal claims relating to our services and the solutions we develop, these provisions may not adequately protect us or
may not be enforceable in all cases. The general liability insurance coverage that we maintain, including coverage for errors and omissions, is subject to
important exclusions and limitations. We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in
sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or
more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could adversely affect our profitability.
We enter from time to time into fixed-price contracts that could subject us to losses in the event we fail to properly estimate our costs.
We enter from time to time into firm fixed-price contracts where our delivery requirements sometimes span more than one year. Because certain of these
contracts may involve new technologies and applications, unforeseen events, such as technological difficulties and other cost overruns, can result in the
contract pricing becoming less favorable or even unprofitable to us and have an adverse impact on our financial results. Furthermore, we sometimes are
dependent on the assistance of third-parties in implementing such projects, and such assistance may not be provided in a timely manner. Similarly, delays
in the implementation of our projects (whether fixed price or not) may affect our revenue and cause our operating results to vary widely. Payment terms
are generally based on periodic payments or on the achievement of milestones. Any delays in payment or in the achievement of milestones may have a
material adverse effect on our results of operations, financial position or cash flows.If our overall cost-to-completion of a project significantly exceeds
estimated costs, we could experience a loss on the related contract, which (when multiplied by multiple projects) could have a material adverse effect on
our results of operations, financial position and cash flow.
For non-fixed price contracts, we generally provide our customers with up-front estimates regarding the duration, budget and costs associated with the
implementation of our services. However, we may not meet those upfront estimates and/or the expectations of our customers, which could lead to a
dispute with a client.
We face intense competition in the markets in which we operate and we might not be able to compete effectively. This could adversely affect our
business, results of operations and financial condition.
The markets in which we offer our services and solutions are highly competitive. Our competitors include:
● multinational IT service providers, including the services arms of global technology providers;
● off-shore IT service providers in lower-cost locations such as India and Eastern Europe;
● accounting firms and consultancies that provide consulting and other IT services and solutions;
● solution or service providers that compete with us in a specific geographic market, industry or service area, including advertising agencies,
engineering services providers and technology start-ups and other companies that can scale rapidly to focus on or disrupt certain markets and
provide new or alternative products, services or delivery models; and
● in-house IT departments that use their own resources, rather than engage an outside firm.
Some of our existing and potential competitors are larger companies, have greater financial, marketing or other resources than we do and, therefore, may
be better able to compete for new work and skilled professionals, may be able to innovate and provide new services and solutions faster than we can or
may be able to anticipate the need for services and solutions before we do. Some of our competitors may also team together to create competing
offerings. Even if we have potential offerings that address client needs, competitors may be more successful at selling similar services they offer,
including to companies that are our clients. Some competitors may be more established in certain markets and may make executing our growth strategy to
expand in these markets more challenging. Additionally, competitors may also offer more aggressive contractual terms, which may affect our ability to
win work. Our future performance is largely dependent on our ability to compete successfully and expand in the markets we currently serve. If we are
unable to compete successfully, we could lose clients to competitors, which could materially adversely affect our results of operations. In addition, we
may face greater competition due to consolidation of companies in the technology sector through strategic mergers, acquisitions or teaming arrangements.
Consolidation activity may result in new competitors with greater scale, a broader footprint or offerings that are more attractive than ours. The technology
companies described above, including many of our alliance partners, are increasingly able to offer services related to their software, platform, cloud
migration and other solutions, or are developing software, platform, cloud migration and other solutions that require integration services to a lesser extent.
These more integrated services and solutions may represent more attractive alternatives to clients than some of our services and solutions, which may
materially adversely affect our competitive position and our results of operations.
10
Unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
Global macroeconomic and geopolitical conditions affect our clients’ businesses and the markets they serve. During periods of slowing economic
activity, our customers may reduce their demand for our products, technology and professional services, which would reduce our sales, and our business,
operating results and financial condition may be adversely affected. Economic challenges may develop, including threatened sovereign defaults, credit
downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of products and services. These developments, or
the perception that any of them could occur, could result in longer sales cycles, slower adoption of new technologies and increased price competition for
our products and services. We could also be exposed to credit risk and payment delinquencies on our accounts receivable, which are not covered by
collateral.
In particular, there is currently significant uncertainty about the future relationship between the U.S. and various other countries, with respect to trade
policies, treaties, government regulations, and tariffs. For example, the recent imposition of tariffs and/or changes in tariffs on various products by the
U.S. and other countries, including China and Canada, have introduced greater uncertainty with respect to trade policies and government regulations
affecting trade between the U.S. and other countries.
Major developments in trade relations, including the imposition of new or increased tariffs by the U.S. and/or other countries, and any emerging
nationalist trends in specific countries could alter the trade environment and consumer purchasing behavior which, in turn, could have a material effect on
our financial condition and results of operations. If such actions impacting our international distribution and sales channels result in increased costs for us
or our international partners, such changes could result in higher costs to us, adversely affecting our operations, particularly as we expand our
international presence.
In response to the to the invasion of the Ukraine by Russia in February 2022, the U.S. and other countries have imposed various sanctions against Russia
including restrictions on selling or importing goods, services or technology in or from affected regions and travel bans and asset freezes impacting
connected individuals and political, military, business and financial organizations in Russia. The U.S. and other countries could impose wider sanctions
and take other actions. It is not possible to predict the broader consequences of this conflict, which could include further sanctions, embargoes, regional
instability, geopolitical shifts in the Middle East and worldwide and adverse effects on macroeconomic conditions, currency exchange rates and financial
markets, all of which could impact our business, financial condition and results of operations.
If global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key markets, remain uncertain or weaken,
our business, operating results and financial condition may be adversely affected.
We are exposed to economic and market conditions that impact the communications industry.
We provide packaged software and software services to service providers in the telecom industry, and our business may therefore be highly dependent
upon conditions in that industry. Developments in the telecom industry, such as the impact of global economic conditions, industry consolidation,
emergence of new competitors, commoditization of voice, video and data services and changes in the regulatory environment, at times have had, and
could continue to have, a material adverse effect on our existing or potential customers. In the past, these conditions reduced the high growth rates that
the communications industry had previously experienced and caused the market value, financial results and prospects and capital spending levels of many
telecom companies to decline or degrade. Industry consolidation involving our customers may place us at risk of losing business to the incumbent
provider to one of the parties to the consolidation or to new competitors. During previous economic downturns, the telecom industry experienced
significant financial pressures that caused many in the industry to cut expenses and limit investment in capital intensive projects and, in some cases, led to
restructurings and bankruptcies. Continuing uncertainty as to economic recovery in recent years may have adverse consequences for our customers and
our business.
We are impacted by inflationary increases in wages, benefits and other costs. In all countries in which we operate, wage and benefit inflation, whether
driven by competition for talent, or ordinary course pay increases and other inflationary pressure, may increase our cost of providing services and reduce
our profitability. Furthermore, as a result of our global operations, wage increases in emerging markets may increase at a faster rate than wages in
developed markets, which increases our exposure to inflation risks. If we are not able to pass increased wage and other costs resulting from inflation onto
our clients our profitability may decline.
Downturns in the business climate for telecom companies have previously resulted in slower customer buying decisions and price pressures that
adversely affected our ability to generate revenue. Adverse market conditions may have a negative impact on our business by decreasing our new
customer engagements and the size of initial spending commitments under those engagements, as well as decreasing the level of discretionary spending
by existing customers. In addition, a slowdown in buying decisions may extend our sales cycle period and may limit our ability to forecast our flow of
new contracts. If such adverse business conditions arise in the future, our business may be harmed.
As some of our revenues are derived from the Israeli government sector, a reduction of government spending in Israel on IT services may reduce our
revenues and profitability; and any delay in the annual budget approval process may negatively impact our cash flows.
We perform work for a wide range of Israeli governmental agencies and related subcontractors. Any reduction in total Israeli government spending or
elimination for political or economic reasons (that could happen for example as a result of the “Iron Sword War” (Israel’s retaliatory war against the
terrorist group Hamas in Gaza) or political instability, or cuts in Israel’s future state budget, or a pandemic, like it previously happened with COVID-19)
may reduce our revenues and profitability. In addition, the Government of Israel has experienced significant delays in the approval of its annual budget in
recent years. Such delays in the future could negatively affect our cash flows by delaying the receipt of payments from the government of Israel for
services performed.
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The increasing amount of intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the future.
The amount of goodwill and identifiable intangible assets on our consolidated statements of financial position has increased significantly over the last
five years from approximately $136 million as of December 31, 2018 to $217 million as of December 31, 2023 because of our acquisitions and may
increase further following future acquisitions. We regularly review our long-lived assets, including identifiable intangible assets and goodwill, for
impairment. Goodwill and indefinite life intangible assets are subject to impairment review at least annually. Other long-lived assets are reviewed when
there is an indication that impairment may have occurred. Impairment testing under IFRS, subject to downturns in our operating results and financial
condition, may lead to impairment charges in the future. Any significant impairment charges could have a material adverse effect on our results of
operations.
Changes in the ratio of our revenues generated from different revenue elements may adversely affect our gross profit margins.
We derive our revenues from the sale of software licenses, related professional services, maintenance and technical support as well as from other IT
professional services. In recent years the decline in our gross margin was mainly affected by the change in proportion of our revenues generated from the
sale of each of those elements of our revenues. Our revenues from the sale of our software licenses, related professional services, maintenance and
technical support have significantly higher gross margins than our revenues from IT professional and outsourcing services. Our software licenses
revenues also include the sale of third-party software licenses, which have a lower gross margin than sales of our proprietary software products. Any
increase in the portion of third-party software license sales out of total license sales will decrease our gross profit margin. If the relative proportion of our
revenues from the sale of IT professional services continues to increase as a percentage of our total revenues, our gross profit margins may continue to
decline in the future.
We may encounter difficulties with our international operations and sales that could adversely affect our business, results of operations and financial
condition.
While our principal executive offices are located in Israel, 62%, 64% and 60% of our sales in the years ended December 31, 2021, 2022 and 2023,
respectively, were generated in other regions and countries including, but not limited to the Americas, Europe, Japan, Asia-Pacific, India, and Africa. Our
success in becoming a stronger competitor in the sale of professional services, development application platforms, integration solutions and packaged
software solutions is dependent upon our ability to increase our sales in all our markets. Our efforts to increase our penetration into these markets are
subject to risks inherent to such markets, including the high cost of doing business in such locations. Our efforts may be costly and they may not result in
profits, which could adversely affect our business, results of operations and financial condition.
Our current international operation and our plans to further expand our international operations subjects us to many risks inherent to international
business activities, including:
● Limitations and disruptions resulting from the imposition of government controls;
● Compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries;
● Import and export license requirements, tariffs, taxes and other trade barriers;
● Increased exposure to global macroeconomic uncertainty caused by inflation and relatively high interest rates;
● Political, social and economic instability abroad, terrorist attacks and general security concerns
● Increased exposure to fluctuations in foreign currency exchange rates;
● Complexity in our tax planning, and increased exposure to changes in tax regulations in various jurisdictions in which we operate, which could
adversely affect our operating results and hinder our ability to conduct effective tax planning;
● Increased financial accounting and reporting requirements and complexities;
● Weaker protection of intellectual property rights in some countries;
● Greater difficulty in safeguarding intellectual property;
● Increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;
● Longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;
● The need to localize our products and licensing programs for international customers;
● Lack of familiarity with and unexpected changes in foreign regulatory requirements;
● The burden of complying with a wide variety of foreign laws and legal standards;
● Multiple and possibly overlapping tax regimes.
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As we continue to expand our business globally, our success will depend, largely, on our ability to anticipate and effectively manage these and other risks
associated with our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely
affecting our business, results of operations, financial condition and growth prospects.
Our international operations expose us to risks associated with fluctuations in currency exchange rates that have in recent past adversely affected
and could once again adversely affect our business.
Our financial statements are stated in U.S. dollars, our functional currency. However, in the years ended December 31, 2021, 2022 and 2023,
approximately 47%, 46% and 53% of our revenues, respectively, were derived from sales outside the United States, particularly, Israel, Europe, Japan
and Asia-Pacific, and Africa. We also maintain substantial non-U.S. dollar balances of assets, including cash and accounts receivable, and liabilities,
including accounts payable and debts to banks and financial institutions. Similarly, a significant portion of our expenses, primarily salaries, related
personnel expenses, subcontractors expenses, interest expenses and the leases of our offices and related administrative expenses, were incurred outside
the United States. Therefore, fluctuations in the value of the currencies in which we do business relative to the U.S. dollar, primarily NIS, Euros and
Japanese yen, may adversely affect our business, results of operations and financial condition, by decreasing the U.S. dollar value of assets held in other
currencies and increasing the U.S. dollar amount of liabilities payable in other currencies, or by decreasing the U.S. dollar value of our revenues in other
currencies and increasing the U.S. dollar amount of our expenses in other currencies. In 2023 and in 2022, the NIS and Japanese yen depreciated relative
to the US dollar by 9.7% and 6.9%, respectively and 4% and 19.7%, respectively (based on the average exchange rates over the course of 2023 as
compared to 2022 and 2022 as compared to 2021, respectively), thereby decreasing the US dollar value of the revenues that we generated in those other
currencies and having a negative impact on our revenues and on our results of operations. However, in 2021, the NIS appreciated relative to the US dollar
by 6% which had positive impact on our revenues and on our results of operations. A continued trend of depreciation of such currencies relative to the US
dollar in future periods would have a similar adverse impact.
Even if we use derivatives or engage in any currency-hedging transactions intended to reduce the effect of fluctuations of foreign currency exchange rates
on our financial position and results of operations, there can be no assurance that any such hedging transactions will materially reduce the effect of
fluctuation in foreign currency exchange rates on such results. In addition, if for any reason exchange or price controls or other restrictions on the
conversion of foreign currencies were imposed, our financial position and results of operations could be adversely affected.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our
systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attacks, malware,
computer viruses and other means of unauthorized access, which could also impact the operation of our products and services. The potential liabilities
associated with these events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a
limited period of time, may result in significant expenses or loss of market share to other competitors. In addition, a failure to protect the privacy of
customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. From time to time we
experience cyber-attacks and other security incidents of varying degrees (such as phishing attempts), none of which have had a material adverse effect on
our business or operations to date. However, we could incur significant costs in order to investigate and respond to future attacks, to respond to evolving
regulatory oversight requirements, to upgrade our cybersecurity systems and controls, and to remediate security compromise or damage. In response to
past threats and attacks, we have implemented further controls and planned preventative actions to further strengthen our systems against future attacks.
We also have in place disclosure controls that require the reporting of a cyber-attack internally, which help to ensure that our senior management team
has relevant information concerning such an attack in a timely manner upon its discovery. However, such measures do not provide absolute security, that
we will be able to react in a timely manner, or that our remediation efforts following past or future attacks will be successful.
Outside parties have in the past, and may in the future, attempt to fraudulently induce our employees to disclose sensitive, personal or confidential
information via illegal electronic spamming, phishing or other tactics. This existing risk is compounded in the aftermath of the intense period of the
COVID-19 pandemic, as we have implemented in our offices a hybrid model where a large portion of our workforce spend a portion of their time
working in our offices and a portion of their time working from home. Unauthorized parties may also attempt to gain physical access to our facilities to
infiltrate our information systems or attempt to gain access to our products, services, or information systems for the purpose of exfiltrating content and
data. These actual and potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of
proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or disclosure of
such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees or our customers to a risk of
loss or misuse of this information. This may result in litigation and liability or fines, our compliance with costly and time-intensive notice requirements,
governmental inquiry or oversight or a loss of customer confidence, any of which could harm our business or damage our brand and reputation, thereby
requiring time and resources to mitigate these impacts.
We have invested in advanced detection, prevention and proactive systems to reduce these risks. Based on independent audits, we believe that our level of
protection is in keeping with the industry standards of peer technology companies. We also maintain a disaster recovery solution, as a means of assuring
that a breach or cyber- attack does not necessarily cause the loss of our information. We furthermore review our protections and remedial measures
periodically in order to ensure that they are adequate. We devote resources to address security vulnerabilities through enhancing security and reliability
features in our systems, code hardening, conducting rigorous penetration tests, deploying updates to address security vulnerabilities, providing resources
such as mandatory security training for our workforce and improving our incident response time, but security vulnerabilities cannot be totally eliminated.
The cost of these steps could reduce our operating margins.
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Despite these protective systems and remedial measures, techniques used to obtain unauthorized access are constantly changing, are becoming
increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. We may be unable to anticipate these
techniques or implement sufficient preventative measures, and we therefore cannot assure you that our preventative measures will be successful in
preventing compromise and/or disruption of our information technology systems and related data. We furthermore cannot be certain that our remedial
measures will fully mitigate the adverse financial consequences of any cyber-attack or incident. If we do not make a sufficient level of investment in our
technology systems or if our systems become out-of-date or obsolete and we are not able to deliver the quality of data security that meet our independent
security control certification requirements, our business could be adversely affected.
Security vulnerabilities in our software solutions could lead to reduced revenue or to liability claims.
Maintaining the security of the software solutions and related services that we offer is a critical issue for us and our customers. Security researchers,
criminal hackers and other third parties regularly develop new techniques to penetrate our customers’ end points, information systems and network
security measures. Cyber threats are constantly evolving and becoming increasingly sophisticated and complex, making it increasingly difficult to detect
and successfully defend against them. Unauthorized parties have, in the past, infiltrated our internal IT systems, gaining access to certain proprietary
information. If they were to similarly breach the security related to, and misuse, software solutions that we offer, they might access the authentication,
payment and personal information of our customers. In addition, cyber-attackers (which may include individuals or groups, as well as sophisticated
groups such as nation-state and state-sponsored attackers, who can deploy significant resources to plan and carry out exploits) also develop and deploy
viruses, worms, credential stuffing attack tools and other malicious software programs, some of which may be specifically designed to attack the
solutions and services that we offer.
Software and operating system applications that we develop have contained and may contain defects in design or manufacture, including bugs,
vulnerabilities and other problems that could unexpectedly compromise the security of the software or impair a customer’s ability to operate or use our
solutions. The costs to prevent, eliminate, mitigate, or alleviate cyber-attacks or other security problems, bugs, viruses, worms, malicious software
programs and security vulnerabilities are significant, and our efforts to address these problems, including notifying affected parties, may not be successful
or may be delayed and could result in interruptions, delays, cessation of service and loss of existing or potential customers. It is impossible to predict the
extent, frequency or impact these problems may have on us.
Actual and potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary
information or sensitive, personal or confidential data about our customers, including the potential loss or disclosure of such information or data as a
result of hacking, fraud, trickery or other forms of deception, could expose our customers to a risk of loss or misuse of this information. This may result
in litigation and liability or fines, our compliance with costly and time-intensive notice requirements, governmental inquiry or oversight or a loss of
customer confidence, any of which could harm our business or damage our brand and reputation, thereby requiring time and resources to mitigate these
impacts.
From time to time we have identified, and in the future we may identify other, vulnerabilities in some of our solutions and services. We devote significant
resources to address security vulnerabilities through engineering more secure solutions, enhancing security and reliability features in our solutions and
services, code hardening, conducting rigorous penetration tests, deploying updates to address security vulnerabilities, regularly reviewing our solutions’
security controls, reviewing and auditing our solutions against independent security control frameworks (such as ISO 27001, SOC 2), providing resources
such as security training for our customers’ workforces and improving our incident response time, but security vulnerabilities cannot be totally
eliminated. The cost of these steps could reduce our operating margins, and we may be unable to implement these measures quickly enough to prevent
cyber-attackers from gaining unauthorized access into our solutions. Despite our preventative efforts, actual or perceived security vulnerabilities in our
solutions may harm our reputation or lead to claims against us (and have in the past led to such claims) and could lead some customers to stop using
certain systems or services, to reduce or delay future purchases of solutions or services, or to use competing solutions or services. If we do not make the
appropriate level of investment in our solutions or if our solutions become out-of-date or obsolete and we are not able to deliver the quality of data
security our customers require, our business could be adversely affected. Customers may also adopt security measures designed to protect their existing
computer systems from attack, which could delay their adoption of our new solutions. Moreover, delayed sales, lower margins or lost customers resulting
from disruptions caused by cyber-attacks and implementation of preventative measures could adversely affect our financial results, share price and
reputation.
Changes in privacy regulations may impose additional costs and liabilities on us, limit our use of information, and adversely affect our business.
Personal privacy has become a significant issue in the United States, Europe, and many other countries where we operate. Many government agencies
and industry regulators continue to impose new restrictions and modify existing requirements about the collection, use, and disclosure of personal
information. Changes to laws or regulations affecting privacy and security may impose additional liability and costs on us and may limit our use of such
information in providing our services to customers. If we were required to change our business activities, revise or eliminate services or products, or
implement burdensome compliance measures, our business and results of operations may be harmed. Additionally, we may be subject to regulatory
enforcement actions resulting in fines, penalties, and potential litigation if we fail to comply with applicable privacy laws and regulations.
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In particular, our European activities are subject to the European Union General Data Protection Regulation, or GDPR, which has created additional
compliance requirements for us. GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires
organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how their data
can be used. GDPR became enforceable on May 25, 2018 and non-compliance may expose entities such as our company to significant fines or other
regulatory claims. In the United States, the privacy regulations to which we may be subject include those promulgated under the authority of the Federal
Trade Commission, state regulators and regulator enforcement positions and expectations. At the state level, all states have implemented security breach
notification laws. Many states have adopted issue-specific laws pertaining to the use of GPS and biometrics, among other technologies. Additionally,
several states, including California, Virginia, Maryland and Utah, have enacted laws creating new individual privacy rights for consumers (as that word is
broadly defined in each law) and placing increased privacy and security obligations on entities handling personal data of consumers or households. In
California, we are subject to the California Consumer Privacy Act, or CCPA. The CCPA imposes enhanced disclosure requirements for us regarding our
interactions with customers who are residents of California, such as comprehensive privacy notices for consumers when we, or our agents, collect their
personal information. We are further required to ensure third-party compliance, as under the CCPA we could be liable if third parties that collect, process
or retain personal information on our behalf violate the CCPA’s privacy requirements. The sanctions for non-compliance include fines and/or civil
lawsuits. Other U.S. states, including Colorado, Virginia, Utah, Texas and Connecticut, have enacted similar - but not identical - laws, which either are or
will go into effect.
Any failure or perceived failure (including as a result of deficiencies in our policies, procedures or measures relating to privacy, data protection,
marketing or client communications) by us to comply with laws, regulations, policies, legal or contractual obligations, industry standards or regulatory
guidance relating to privacy or data security, may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse
publicity and could cause our clients and partners to lose trust in us, which could have an adverse effect on our reputation and business. We expect that
there will continue to be new proposed laws, regulations and industry standards relating to privacy, data protection, marketing, consumer communications
and information security in the United States, the European Economic Union and other jurisdictions, and we cannot determine the impact such future
laws, regulations and standards may have on our business. While we have invested in, and intend to continue to invest in, reasonably necessary resources
to comply with these standards, to the extent that we fail to adequately comply, that failure could have an adverse effect on our business, financial
conditions, results of operations and cash flows.
In addition, the application of existing laws to cloud-based solutions is particularly uncertain and cloud-based solutions may be subject to further
regulation, the impact of which cannot be fully understood at this time. Moreover, these laws may be interpreted and applied in a manner that is
inconsistent with our data and privacy practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data
and privacy practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to
incur substantial costs or require us to change our business practices in a manner adverse to our business. In addition, any new regulation, or
interpretation of existing regulation, imposing greater fees or taxes on internet-based services, or restricting information exchange over the Web, could
result in a decline in the use and adversely affect sales of our products and our results of operations.
Errors or defects in our software solutions could inevitably arise and would harm our profitability and our reputation with customers and could even
give rise to claims against us.
The quality of our solutions, including new, modified or enhanced versions thereof, is critical to our success. Since our software solutions are complex,
they may contain errors that cannot be detected at any point in their testing phase. While we continually test our solutions for errors or defects and work
with customers to identify and correct them, errors in our technology may be found in the future. Testing for errors or defects is complicated because it is
difficult to simulate the breadth of operating systems, user applications and computing environments that our customers use, and our solutions themselves
are increasingly complex. Errors or defects in our technology have resulted in terminated work orders and could result in delayed or lost revenue,
diversion of development resources and increased services, termination of work orders, damage to our brand and warranty and insurance costs in the
future. In addition, time-consuming implementations may also increase the number of services personnel we must allocate to each customer, thereby
increasing our costs and adversely affecting our business, results of operations and financial condition.
In addition, since our customers rely on our solutions to operate, monitor and improve the performance of their business processes, they are sensitive to
potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related to
software errors in the future. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Regardless
of whether we prevail, diversion of key employees’ time and attention from our business, the incurrence of substantial expenses and potential damage to
our reputation might result. While the terms of our sales contracts typically limit our exposure to potential liability claims and we carry errors and
omissions insurance against such claims, there can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or that
such insurance will provide us with adequate protection against any such claims. A significant liability claim against us could have a material adverse
effect on our business, results of operations and financial position. Our standard license agreement with our customers contains provisions designed to
limit our exposure to potential product liability claims that may not be effective or enforceable under the laws of some jurisdictions. In addition, the
professional liability insurance that we maintain may not be sufficient against potential claims. Accordingly, we could fail to realize revenues and suffer
damage to our reputation as a result of, or in defense of, a substantial claim.
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Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and
substantially harm our business and results of operations.
The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other
intellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade
secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert patent,
copyright, trademark or other intellectual property claims against us, our customers and partners, and those from whom we license technology and
intellectual property.
Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third
parties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertions
will not require us to enter into royalty arrangements or result in costly litigation or result in us being unable to use certain intellectual property. We
cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights. Infringement assertions from third parties
may involve patent holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents
may provide little or no deterrence to these patent owners in bringing intellectual property rights claims against us.
Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license
technology and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive position
regardless of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without
merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of
such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we
are found to have willfully infringed on a party’s intellectual property; cease making, licensing or using our products or services that are alleged to
infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our products or services; enter into
potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners,
customers, and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and
may require significant royalty payments and other expenditures. Any of these events could seriously harm our business, results of operations and
financial condition. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and divert
the time and attention of our management and technical personnel.
We may be liable to our clients for damages caused by a violation of intellectual property rights, the disclosure of confidential information, including
personally identifiable information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient
to cover these damages.
In certain cases we have access to, and are required to collect and store, sensitive or confidential client information, including personally identifiable
information. Some of our client agreements do not limit our potential liability for breaches of confidentiality, infringement indemnity and certain other
matters. Furthermore, breaches of confidentiality may entitle the aggrieved party to equitable remedies, including injunctive relief. If any person,
including any of our employees and subcontractors, penetrates our network security or misappropriates sensitive or confidential client information,
including personally identifiable information, we could be subject to significant liability from our clients or from our clients’ customers for breaching
contractual confidentiality provisions or privacy laws. Despite measures we take to protect the intellectual property and other confidential information or
personally identifiable information of our clients, unauthorized parties, including our employees and subcontractors, may attempt to misappropriate
certain intellectual property rights that are proprietary to our clients or otherwise breach our clients’ confidences. Unauthorized disclosure of sensitive or
confidential client information, including personally identifiable information, or a violation of intellectual property rights, whether through employee
misconduct, breach of our computer systems, systems failure or otherwise, may subject us to liabilities, damage our reputation and cause us to lose
clients.
Many of our contracts involve projects that are critical to the operations of our clients’ businesses and provide benefits to our clients that may be difficult
to quantify. Any failure in a client’s system or any breach of security could result in a claim for substantial damages against us, regardless of our
responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a client, or poor execution of such services,
could result in a client terminating our engagement and seeking damages from us.
In addition, while we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain
through usage of our cloud-based services, our security measures may be breached. If a cyber-attack or other security incident were to result in
unauthorized access to or modification of our customers’ data or our own data or our IT systems or in disruption of the services we provide to our
customers, or if our software solutions or services are perceived as having security vulnerabilities, we could suffer significant damage to our business and
reputation.
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Although we apply measures to protect our intellectual property rights and our source code, there can be no assurance that the measures that we
employ to do so will be successful.
In accordance with industry practice, since we have no registered patents on our software solution technologies, we rely on a combination of contractual
provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic nature of the computer and software
industries, copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the frequency of
product enhancements and the timeliness and quality of our support services. We seek to protect the source code of our products as trade secret
information and as unpublished copyright works. We also rely on security and copy protection features in our proprietary software. We distribute our
products under software license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions
prohibiting the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect trade secrets and other proprietary
information through non-disclosure agreements with employees, consultants and distributors, not all of our employees have signed invention assignment
agreements. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. Our failure to protect
our rights, or the improper use of our products by others without licensing them from us could have a material adverse effect on our results of operations
and financial condition.
We and our customers rely on technology and intellectual property of third-parties, the loss of which could limit the functionality of our products and
disrupt our business.
We use technology and intellectual property licensed from unaffiliated third-parties in certain of our products, and we may license additional third-party
technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that
could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially
reasonable terms, or at all. The loss of the right to license and distribute this third-party technology could limit the functionality of our products and might
require us to redesign our products.
Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use and
distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products
until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any
technology and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer
offered to us on commercially reasonable terms. In either case, we would be required either to attempt to redesign our products to function with
technology and intellectual property available from other parties or to develop these components ourselves, which would result in increased costs and
could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in
affected products. Any of these results could harm our business and impact our results of operations.
We could be required to provide the source code of our products to our customers.
Some of our customers have the right to require the source code of our products to be deposited into a source code escrow. Under certain circumstances,
our source code could be released to our customers. The conditions triggering the release of our source code vary by customer. A release of our source
code would give our customers access to our trade secrets and other proprietary and confidential information that could harm our business, results of
operations and financial condition. A few of our customers have the right to use the source code of some of our products based on the license agreements
signed with such clients (mostly with respect to older versions of our solutions), although such use is limited for specific matters and cases, these clients
are exposed to some of our trade secrets and other proprietary and confidential information which could harm us.
Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require that we
release the source code of certain products subject to those licenses.
Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU
General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software
can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of
the software. Additionally, open source licenses typically require that source code subject to the license be made available to the public and that any
modifications or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically
mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. If we combine
our proprietary software with open source software, we could be required to release the source code of our proprietary software.
We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways that would require our
proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these
licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design our
proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software
code that they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain
that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future.
In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release
the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each
of which could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and
prospects.
17
Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors
from benefiting from the expertise of some of our former employees.
We generally enter into non-competition agreements with our employees. These agreements prohibit our employees from competing directly with us or
working for our competitors or clients for a limited period after they cease working for us. We may be unable to enforce these agreements under the laws
of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our
former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete
undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material
interests of the employer that have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the
protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from
benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.
Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies,
or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.
As a multinational corporation, we are subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide. Significant
judgment and management attention and resources are required in evaluating our tax positions and our worldwide provision for taxes. In the ordinary
course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and
effective tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws, regulations, principles and interpretations. This
may include recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated
earnings in jurisdictions where we have higher statutory rates, changes in foreign currency exchange rates, or changes in the valuation of our deferred tax
assets and liabilities.
We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. If we experience unfavorable results from one
or more such tax audits, there could be an adverse effect on our tax rate and therefore on our net income. Although we believe our tax estimates are
reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could
have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made. Additionally, we are
subject to transfer pricing rules and regulations, including those relating to the flow of funds between us and our affiliates, which are designed to ensure
that appropriate levels of income are reported in each jurisdiction in which we operate.
Certain of our credit facility agreements with banks and other financial institutions are subject to a number of restrictive covenants that, if breached,
could result in acceleration of our obligation to repay our debt.
In the context of our engagements with banks and other financial institutions for receiving various credit facilities, we have undertaken to maintain a
number of conditions and limitations on the manner in which we can operate our business, including a negative pledge and limitations on our ability to
distribute dividends. These credit facilities agreements also contain various financial covenants that require us to maintain certain financial ratios related
to shareholders’ equity, total rate of financial liabilities and minimum outstanding balance of total cash and short-term investments. These limitations and
covenants may force us to pursue less than optimal business strategies or forego business arrangements that could have been financially advantageous to
us and, by extension, to our shareholders. A breach of the restrictive covenants could result in the acceleration of our obligations to repay our debt. As of
December 31, 2023, we were in compliance with all of our financial covenants to banks and other financial institutions. See Note 10 and Note 12 to our
consolidated financial statements for additional information on liabilities to banks and other financial institutions.
Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our Environmental,
Social and Governance, or ESG, policies may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Investors, lenders and other market participants are
increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. The
increased focus and activism related to ESG may hinder our access to capital, as investors and lenders may reconsider their capital investment allocation
as a result of their assessment of our ESG practices. If we do not adapt to or comply with investor, lender or other industry shareholder expectations and
standards, which are evolving, or if we are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether
there is a legal requirement to do so, we may suffer from reputational damage and the business, financial condition and the price of our company’s shares
could be materially and adversely affected.
We identified a material weakness in our internal control over financial reporting. If we are unable to maintain effective internal control over
financial reporting in accordance with Sections 302 and 404(a) of the Sarbanes-Oxley Act of 2002, the reliability of our financial statements may be
questioned and our share price may suffer.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and on our executives and directors. To comply with this statute, we are required to
document and test our internal control over financial reporting, and our independent registered public accounting firm must issue an attestation report on
our internal control procedures, and our management is required to assess and issue a report concerning our internal control over financial reporting. Our
efforts to comply with these requirements have resulted in increased general and administrative expenses and a diversion of management time and
attention, and we expect these efforts to require the continued commitment of significant resources.
18
We identified a material weakness in our internal control over financial reporting as of December 31, 2023 with respect to not retaining complete
documentation as evidence for performing certain (i) business processes controls (including automated and IT-dependent manual) (ii) sufficiently precise
management review controls and (iii) evidence to demonstrate completeness and accuracy of information prepared by entity (“IPE”).
We are in the process of remediating these deficiencies. As we continue to implement our remediation plan, we may decide to take additional further
measures to address the material weakness or adjust the remediation steps accordingly. We will continue testing and evaluating the implementation of
internal controls and revised processes to ensure whether they are designed and operating effectively to provide reasonable assurance that they will
prevent or detect a material error in our financial statements.
We believe that upon completion of all these actions, the material weakness will be fully remediated. However, the material weakness will not be
considered remediated, until all applicable controls operate for a sufficient period of time and management has concluded, through testing, that controls
are operating effectively.
We may in the future identify additional material weaknesses or significant deficiencies in our assessments of our internal controls over financial
reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities, and
could adversely affect our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.
Risks Related to an Investment in Our Ordinary Shares
Our Ordinary Shares are traded on more than one market and this may result in price variations.
Our Ordinary Shares are traded primarily on the NASDAQ Global Select Market and on the TASE. Trading of our Ordinary Shares on these markets is
made in different currencies (U.S. dollars on the NASDAQ Global Select Market and NIS on the TASE) and at different times (resulting from different
time zones, different trading days and different public holidays in the United States and Israel). Consequently, the trading prices of our Ordinary Shares
on these two markets may differ. Any decrease in the trading price of our Ordinary Shares on one of these markets could cause a decrease in the trading
price of our Ordinary Shares on the other market.
There is a relatively limited trading volume for our shares, which reduces liquidity for our shareholders, and may cause the share price to be volatile,
all of which may lead to losses by investors.
There has historically been limited trading volume in our Ordinary Shares, both on the NASDAQ Global Select Market and the TASE, which results in
reduced liquidity for our shareholders. As a further result of the historically limited volume, our Ordinary Shares have experienced significant market
price volatility in the past as in 2023 and may experience significant market price and volume fluctuations in the future, in response to factors such as
announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general
conditions in the industry in which we compete.
We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act
and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure
that you receive.
As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose
certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with
the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to comply with
Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal
shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the
Exchange Act with respect to their purchases and sales of our Ordinary Shares. Accordingly, you receive less information about our company than you
would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws than you would be afforded in
holding securities of a domestic U.S. company.
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the NASDAQ Stock Market Rules. Among other things, as a foreign private issuer we may also
follow home country practice with regard to, the composition of the board of directors, director nomination procedure, compensation of officers and
quorum at shareholders’ meetings. In addition, we may follow our home country law, instead of the NASDAQ Stock Market Rules, which require that we
obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an
issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more
interest in the company and certain acquisitions of the stock or assets of another company. Accordingly, our shareholders may not be afforded the same
protection as provided under NASDAQ’s corporate governance rules. In addition, as foreign private issuer, we are not required to file quarterly reviewed
financial statements. A foreign private issuer that elects to follow a home country practice instead of such requirements must submit to NASDAQ in
advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the
home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not
follow and describe the home country practice followed by the issuer instead of any such requirement.
19
As of April 1, 2024 our controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 46.71% of our outstanding Ordinary
Shares and therefore has a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control that
may benefit our public shareholders.
Formula Systems (1985) Ltd., or Formula Systems (symbol: FORTY), an Israeli company whose shares trade on the NASDAQ Global Select Market and
the TASE, beneficially owned 22,933,809 or 46.71%, of our outstanding Ordinary Shares as of April 1, 2024. Asseco Poland S.A., or Asseco, a Polish
company listed on Warsaw Stock Exchange, beneficially owns 25.82% of the outstanding shares of Formula Systems. Guy Bernstein, our Chief
Executive Officer who is also the Chief Executive Officer of Formula Systems, owns as of April 1, 2024 approximately 11.73% of the outstanding shares
of Formula Systems.
Although transactions between us and our controlling shareholders are subject to special approvals under Israeli law, Formula and Asseco may exercise
their controlling influence over our operations and business strategy and use their sufficient voting power to control the outcome of various matters
requiring shareholder approval. These matters may include:
● The composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers;
● Approving or rejecting a merger, consolidation or other business combination;
● Raising future capital; and
● Amending our Articles, which govern the rights attached to our Ordinary Shares.
This concentration of ownership of our Ordinary Shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or
other purchases of our Ordinary Shares that might otherwise give one the opportunity to realize a premium over the then-prevailing market price of our
Ordinary Shares. This concentration of ownership may also adversely affect our share price.
Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a “controlled foreign
corporation”.
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which
may be measured in part by the market value of our Ordinary Shares, which is subject to change) are held for the production of, or produce, passive
income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes under the Internal Revenue
Code of 1986, as amended, or the Code. Based on our gross income and gross assets, and the nature of our business, we believe that we were not
classified as a PFIC for the taxable year ended December 31, 2023. Because PFIC status is determined annually based on our income, assets and activities
for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for the taxable year ending December 31, 2024, or
for any subsequent year, until we finalize our financial statements for that year. Furthermore, because the value of our gross assets is likely to be
determined in large part by reference to our market capitalization, a decline in the value of our Ordinary Shares may result in our becoming a PFIC.
Accordingly, there can be no assurance that we will not be considered a PFIC for any taxable year. Our characterization as a PFIC could result in material
adverse tax consequences for U.S. investors, including: having gains realized on the sale of our Ordinary Shares treated as ordinary income, rather than a
capital gain; the loss of the preferential rate applicable to dividends received on our Ordinary Shares by individuals who are U.S. holders; and having
interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences
of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our Ordinary Shares. Prospective U.S. investors should
consult their own tax advisers regarding the potential application of the PFIC rules to them. Prospective U.S. investors should refer to “Item 10E.
“Additional Information – Taxation” for discussion of additional U.S. income tax considerations applicable to them based on our treatment as a PFIC.
Certain U.S. holders of our Ordinary Shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a
“controlled foreign corporation,” or a CFC, under Section 957(a) of the Code. Certain changes to the CFC constructive ownership rules under Section
958(b) of the Code introduced by the U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) may cause one or more of our non-U.S. subsidiaries to be treated as
CFCs, may also impact our CFC status, and may adversely affect United States holders of our Ordinary Shares. Generally, for U.S. shareholders that own
10% or more of the combined vote or combined value of our Ordinary Shares, this may result in adverse U.S. federal income tax consequences and these
shareholders may be subject to certain reporting requirements with the U.S. Internal Revenue Service. Any such 10% U.S. shareholder should consult its
own tax advisors regarding the U.S. tax consequences of acquiring, owning, or disposing of our Ordinary Shares and the impact of the TCJA, especially
the changes to the rules relating to CFCs.
The enactment of legislation implementing changes in taxation of international business activities, the adoption of other corporate tax reform
policies, or changes in tax legislation or policies could impact our future financial position and results of operations.
Corporate tax reform, base-erosion efforts and tax transparency continue to be high priorities in many tax jurisdictions where we have business
operations. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform
legislation is being proposed or enacted in a number of jurisdictions.
20
In 2015, the Organization for Economic Co-operation and Development, or the OECD, released various reports under its Base Erosion and Profit
Shifting, or BEPS, action plan to reform international tax systems and prevent tax avoidance and aggressive tax planning. These actions aim to
standardize and modernize global corporate tax policy, including cross-border taxes, transfer-pricing documentation rules and nexus-based tax incentive
practices which in part are focused on challenges arising from the digitalization of the economy. The reports have a very broad scope including, but not
limited to, neutralizing the effects of hybrid mismatch arrangements, limiting base erosion involving interest deductions and other financial payments,
countering harmful tax practices, preventing the granting of treaty benefits in inappropriate circumstances and imposing mandatory disclosure rules. It is
the responsibility of OECD members to consider how the BEPS recommendations should be reflected in their national legislation. Many countries are
beginning to implement legislation and other guidance to align their international tax rules with the OECD’s BEPS recommendations, for example, by
signing up to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, or the MLI, which currently has been signed by
over 85 jurisdictions, including Israel, which signed the MLI on September 13, 2018. The MLI implements some of the measures that the BEPS initiative
proposes to be transposed into existing treaties of participating states. Such measures include the inclusion in tax treaties of one, or both, of a “limitation-
on-benefit”, or LOB, rule and a “principle purposes test”, or PPT, rule. The application of the LOB rule or the PPT rule could deny the availability of tax
treaty benefits (such as a reduced rate of withholding tax) under tax treaties. There are likely to be significant changes in the tax legislation of various
OECD jurisdictions during the period of implementation of BEPS. Such legislative initiatives may materially and adversely affect our plans to expand
internationally and may negatively impact our financial condition, tax liability, results of operations and could increase our administrative efforts.
In addition, the OECD has published proposals covering a number of issues, including country-by-country reporting, permanent establishment rules,
transfer pricing rules, tax treaties and taxation of the digital economy. Future tax reform resulting from this development may result in changes to long-
standing tax principles, which could adversely affect our effective tax rate or result in higher cash tax liabilities, to the extent those changes are deemed
applicable to us.
We have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue.
We have experienced, and in the future may continue to experience, significant fluctuations in our quarterly results of operations. Factors that may
contribute to fluctuations in our quarterly results of operations include:
● The size and timing of orders;
● The high level of competition that we encounter;
● The timing of our products introductions or enhancements or those of our competitors or of providers of complementary products;
● Market acceptance of our new products, applications and services;
● The purchasing patterns and budget cycles of our customers and end-users;
● The mix of product sales;
● Fluctuations in currency exchange rates;
● General economic conditions; and
● The integration of newly acquired businesses.
Our customers ordinarily require the delivery of our license software solutions promptly after we accept their orders. With the exception of contracts for
services and packaged software solution projects, which normally would extend between nine to eighteen months, we usually do not have a backlog of
orders for our products. Consequently, revenues from our products in any quarter depend on orders received and products provided by us and accepted by
the customers in that quarter. A deferral in the placement and acceptance of any large order from one quarter to another or from one year to another could
adversely affect our results of operations for the respective quarter or year. Our customers sometimes require an acceptance test for services and packaged
software solutions projects we provide and as a result, we may have a significant backlog of orders arising from those services and projects. Our revenues
from services depend on orders received and services provided by us and accepted by our customers in that quarter. If sales in any quarter or year do not
increase correspondingly or if we do not reduce our expenses in response to level or declining revenues in a timely fashion, our financial results for that
period may be adversely affected. For these reasons, quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and you
should not rely on the results of our operations in any particular quarter as an indication of future performance.
Risks Related to Our Location in Israel
Political and economic conditions in Israel, including the ongoing war and hostilities between Israel and Hamas Terror Organization, and Israel and
the Hezbollah Terror Organization in Lebanon, may limit our ability to sell our products. This could have a material adverse effect on our operations
and business condition, harm our results of operations and adversely affect our share price.
We are incorporated under the laws of the State of Israel, where we also maintain our headquarters and most of our research and development facilities.
As a result, political, economic and military conditions affecting Israel directly influence us. Any major hostilities involving Israel, a full or partial
mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade or air traffic between Israel and its trading partners, or a
significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations.
21
In October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military
targets. Hamas also launched extensive rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza Strip and
in other areas within the State of Israel. These attacks resulted in extensive deaths, injuries and kidnapping of civilians and soldiers. Following the
attacks, Israel’s security cabinet declared war against Hamas and a military campaign against these terrorist organizations commenced in parallel to their
continued rocket and terror attacks. Since the war in Gaza with Hamas commenced, the Israel Defense Force, or the IDF, has called up more than 350,000
of its reserve forces to serve. Two management employees and 19 non-management employees are currently subject to military service in the IDF and
have been called to serve. In addition, the family members of many of our Israeli team members were called to serve in the IDF. Our operations could be
disrupted by a significant absence of one or more of our key employees or a significant number of other employees.
Following the attack by Hamas on Israel’s southern border, Hezbollah in Lebanon has also launched missile, rocket, and shooting attacks against Israeli
military sites, troops, and Israeli towns in northern Israel. In response to these attacks, the Israeli army has carried out a number of targeted strikes on sites
belonging to Hezbollah in southern Lebanon. Furthermore, and more recently, Iran also initiated missiles and rocket attacks against Israeli military sites
in southern Israel. As such, relations between Israel and Iran continue to be seriously strained, especially with regard to Iran’s nuclear program, and Iran’s
targeted cyber-attacks against Israeli entities.
Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government
currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government
coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have a material adverse
effect on our business. Any armed conflicts or political instability in the region could negatively affect our business conditions and harm our results of
operations.
The intensity and duration of Israel’s current war against Hamas is difficult to predict, as are such war’s economic implications on our business and
operations and on Israel’s economy in general.
Conflicts in North Africa and the Middle East, including in Syria which borders Israel, have resulted in continued political uncertainty and violence in the
region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result in a permanent solution, and there have been numerous
periods of hostility in recent years. Such instability may affect the economy, could negatively affect business conditions and, therefore, could adversely
affect our operations. Furthermore, the ongoing conflict in Yemen, particularly the Houthi rebel group’s attacks on commercial vessels in the Red Sea,
presents another layer of risk. These incidents, which have led major shipping companies to avoid the area, could disrupt global trade routes and
potentially impact us too. To date, these matters have not had any material effect on our business and results of operations; however, the regional security
situation and worldwide perceptions of it are outside of our control and there can be no assurance that these matters will not negatively affect our
business, financial condition and results of operations in the future.
Even when a war or military conflict is not actively ongoing between Israel and its adversaries, unstable security, economic and political conditions in
Israel may adversely affect our business. Israel’s economic standing may be hurt by downgrades in its credit rating by rating agencies (such as the recent
downgrade by both Moody’s and S&P Global Ratings of their credit rating of Israel, Moody’s downgraded its rating by one notch from A1 to A2, as well
as downgrading of its outlook rating from “stable” to “negative” and S&P Global Ratings downgraded its rating by one notch from AA- to A+ with a
negative outlook), which may indirectly adversely impact our own financial standing. Politically, there have been increased efforts by countries, activists
and organizations to cause companies and consumers to boycott goods and services of Israeli companies. The January 2024 interim ruling of the
International Court of Justice, or ICJ, ordering Israel, among other things, to take measures to prevent genocidal acts, prevent and punish incitement to
genocide, and take steps to provide basic services and humanitarian aid to civilians in Gaza, enhanced the anti-Israeli political efforts, and it could
potentially cause certain companies to terminate commercial relationships with Israel-based businesses. Political instability in Israel could also adversely
affect operations of Israel-located companies such as ours.
While Israel and the United Arab Emirates signed a normalization agreement in 2020, there are a number of countries, primarily in the Middle East, as
well as Malaysia and Indonesia that restrict business with Israel or Israeli companies, and we are precluded from marketing our products to these
countries directly from Israel. Restrictive laws or policies directed towards Israel or Israeli businesses may have an adverse impact on our operations, our
financial results or the expansion of our business. In addition, there have been increased efforts by activists to cause companies and consumers to boycott
Israeli goods. Such actions, particularly if they become more widespread, may adversely impact our ability to sell our products.
Furthermore, prior to October 2023, the Israeli government was pursuing extensive changes to Israel’s judicial system. Actual or perceived instability
with respect to the current public dispute over changes to the Israeli legal systems or the impact thereof, may individually or in the aggregate adversely
affect the Israeli economy and our ability to do business, financial condition, results of operations, growth prospects, and share price.
Our results of operations may be adversely affected by the obligation of our personnel to perform military service.
Many of our executive officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for
active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for
extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key
employees or a significant number of other employees due to military service. Any disruption in our operations could adversely affect our business. Since
the beginning of the war in Israel on October 7, 2023 approximately 200 out of approximately 1,554 of our Israeli employees were called to active
military service.
22
We currently have the ability to benefit from certain government tax benefits, which may be cancelled or reduced in the future.
We are currently eligible to receive certain tax benefits under programs of the Government of Israel. In order to maintain our eligibility for these tax
benefits, we must continue to meet specific requirements. If we fail to comply with these requirements in the future, such tax benefits may be cancelled.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
We are organized in Israel and some of our directors and executive officers reside outside the United States. Service of process upon them may be
difficult to effect within the United States. Furthermore, most of our assets and the assets of some of our executive officers are located outside the United
States. Therefore, a judgment obtained against us or any of them in the United States, including one based on the civil liability provisions of the U.S.
federal securities laws may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult to assert U.S.
securities law claims in original actions instituted in Israel.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the
price of our shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. These provisions of Israeli
corporate and tax law may have the effect of delaying, preventing or complicating a merger with, or other acquisition of, us. This could cause our
Ordinary Shares to trade at prices below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise
willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli
law.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
We are organized under Israeli law. The rights and responsibilities of holders of our Ordinary Shares are governed by our memorandum of association,
articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his
or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in
voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes at the general
meeting with respect to, among other things, amendments to a company’s articles of association, compensation policy, increases in a company’s
authorized share capital, mergers and actions and transactions involving interests of officers, directors or other interested parties which require the
shareholders’ general meeting’s approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that he or she
possesses the power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s articles of association,
the power to appoint or prevent the appointment of an office holder in the company, or any other power with respect to the company, has a duty of
fairness toward the company. The Israeli Companies Law does not establish criteria for determining whether or not a shareholder has acted in good faith.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Corporate details
Our legal and commercial name is Magic Software Enterprises Ltd. We were organized and registered in Israel on February 10, 1983 and began
operations in 1986. We are a public limited liability company and operate under the provisions of the state of Israel. Our Ordinary Shares have been listed
on the NASDAQ Global Stock Market (symbol: MGIC) since our initial public offering in the United States on August 16, 1991. On January 3, 2011, our
shares were transferred to the NASDAQ Global Select Market. Since November 16, 2000, our Ordinary Shares have also traded on the Tel Aviv Stock
Exchange, or the TASE, and since December 15, 2011, our shares have been included in the TASE TA-125 Index.
Capital Transactions since January 1, 2021
On January 1, 2021, we, through one of our Israeli subsidiaries, acquired 60% of the shares of 9540 Y.G. Soft IT Ltd. (“Soft IT”), an Israel-based services
company which specializes in outsourcing of software development services for a total consideration of up to $1.1 million. We paid $0.4 million upon
closing, $0.3 million was paid on July 4, 2021, and the remaining amount of $0.4 million constitutes a contingent payment depending on the future
operating results of IT Soft. The fair value of the contingent consideration amounted to $0.5 million as of the acquisition date. We and Soft IT minority
shareholder hold mutual call and put options for the remaining 40% interest.
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On April 1, 2021, we acquired EnableIT, LLC and its subsidiary (“EnableIT”), a U.S.-based services company, specializing in IT staffing and recruiting,
for a total consideration of $6.0 million, of which $4.0 million was paid upon closing and the remaining $2.0 million was paid in two equal installments
on April 1, 2022 and April 1, 2023.
Also on April 1, 2021, we acquired Menarva Ltd. (“Menarva”), an Israeli-based services company which specializes in software solutions for non-profit
organizations for a total estimated consideration of up to $5.594 million, of which, $3.0 million was paid upon closing, with the remaining $2.594 million
payable in two equal installments on April 1, 2022 and 2023, contingent upon the operational results of Menarva. On March 31, 2022, we paid an amount
of $1.1 million.
On December 2, 2021, we entered into a share purchase agreement to acquire 50.1% of the outstanding share capital of Appush Ltd. (formerly known as
“Vidstart Ltd.”, “Appush”), and we acquired the remainder of Appush’s shares (30% ed on December 31, 2022, and 19.9% on December 31, 2023) for a
price contingent upon Appush’s operating results during 2022 and 2023. Appush is a provider of a video advertising platform that offers personalized
automated methods and real-time smart optimization, helping its clients achieve high yields in the competitive digital ecosystem. The final closing and
execution of the Appush Agreement occurred on January 27, 2022. The total purchase price was approximately $21.6 million, of which $12.5 million was
paid in cash during 2022, $5.3 million during 2023, $2.7 million in 2024, and $1.1 million to be paid in equal installments in April 2025 and April 2026.
On August 23, 2022, we acquired The Goodkind Group, LLC (“TGG”). TGG provides permanent and temporary staffing needs in various sectors
including: Information Technology, Accounting& Finance, Digital Media, Marketing, Human Resource, Financial Services. TGG specializes in
customizing solutions and programs to their clients. With On-Site programs and sourcing models TGG solutions include functions which differ from
standard staffing companies. TGG provides assistance in the areas of compensation design and development, employee opinion surveys, employment
policies and practices, performance management, regulatory and compliance issues and succession planning, for a total consideration of $11.6 million,
subject to net working capital adjustments. $8 million of the consideration was paid upon closing. The remainder constitutes a deferred payment, payable
in 2023 and 2024.
On July 1, 2022, we acquired Intrabases SAS (“Intrabases”), a provider of IT professional services based in Nantes, France for $3.4 million in cash.
On June 8, 2023, we acquired 60% of the outstanding share capital of K.M.T. (M.H.) Technologies Communication Computer Ltd. (“KMT”). KMT is an
Israeli provider of secured private, public and hybrid cloud computing managed services along with full spectrum ICT products, VoIP, technical support
and planning and construction of computing infrastructure. KMT was acquired for a maximum cash consideration of approximately $16.2 million paid in
full to the seller upon closing (4.1 million contingent upon KMT meeting certain operational target with respect to years 2023-2025). If KMT does not
meet these certain pre-defined operational targets in years 2023-2025, seller will be required to pay back part or all of the contingent consideration.
In December 2022 and in June 2023, we acquired in two parts an additional 3.75% share interest and 24.77% share interest, respectively in Mobisoft Ltd.,
(“Mobisoft”), an Israeli provider of proprietary comprehensive core system for sales and distribution field activities for consumer goods manufacturers
and wholesalers We paid total cash consideration of approximately $ 6.2 million. Subsequent to the share purchase, the Company holds 98.52% of
Mobisoft.
Our fixed assets capital expenditures for the years ended December 31, 2021, 2022 and 2023 were approximately $1.4 million, $4.4 million, and $1.6
million, respectively. These expenditures were principally for network equipment and computer hardware, as well as for vehicles, furniture, office
equipment and leasehold improvements.
B. BUSINESS OVERVIEW
Our legal and commercial name is Magic Software Enterprises Ltd., and we were organized and registered in Israel on February 10, 1983 and began
operations in 1986. Together with our subsidiaries we are a global provider of: (i) software services and Information Technologies (“IT”) outsourcing
software services; (ii) proprietary application development and business process integration platforms; (iii) selected packaged vertical software solutions,
as well as (iv) cloud-based services for end to end digital transformation.
Our software technology is used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and
cost effectively. In addition, our technology enables enterprises to accelerate the process of delivering business solutions that meet current and future
needs and allow customers to dramatically improve their business performance and return on investment. We also provide selected verticals with a
complete software solution and return on investment.
As part of our software services and IT outsourcing services, we offer to hundreds of customers mainly in Israel and in North America an extensive
portfolio of professional services in the areas of infrastructure design and delivery, application development, technology consulting planning and
implementation services, integration projects, project management, software testing and quality assurance, engineering consulting (including supervision
of engineering projects), support services, cloud, cyber, digital, data and DevOps, all according to the specific needs of the customer, and in accordance
with the professional expertise required in each case with the goal to create significant value for our clients in managing, streamlining, accelerating and
helping their businesses thrive.
We have approximately 3,628 employees, who serve our clients at any given time and whose skills and specialization are a significant source of
competitive differentiation. We operate through a large network of independent software vendors, or ISVs, who we refer to as Magic Software Providers,
or MSPs, and hundreds of system integrators, distributors, resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50
countries use our products and services.
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Our software technology platforms
Organizations across all industries are digitally transforming by leveraging software to automate and optimize mission critical business processes,
enhance customer experiences, and drive competitive differentiation. Historically, organizations have principally relied on off-the-shelf packaged
software and custom software solutions to operationalize and automate their business processes. Packaged software often fails to address unique use cases
or to enable differentiation. It also requires organizations to adapt their business (processes, systems of record, etc.) to the software package, as opposed
to adapting the software to their unique business needs. While traditional custom software solutions can be differentiated and tailored to meet strategic
objectives, development requires a long, iterative, and cumbersome process, as well as costly integration that relies on scarce developer talent. Through
our unified platform we enable organizations to differentiate themselves from their competition using a low-code approach, creating applications and
workflows tailored to their unique business requirements.
Throughout our history, we have traditionally maintained two major lines of products, one is our application development platform, which today is
known as Magic xpa Application Platform, an evolution of our original metadata-based development platform; and the second is our application
integration platform, Magic xpi Integration Platform, originally introduced in 2003 under the name iBOLT. In December 2011, we acquired the
AppBuilder development platform of BluePhoenix Solutions Ltd., a leading provider of value-driven legacy IT modernization solutions. AppBuilder is a
comprehensive application development infrastructure used by many Fortune 1000 enterprises around the world. This enterprise application development
environment is a powerful, model-driven tool that enables development teams to build, deploy, and maintain large-scale, custom-built business
applications. On April 2019, we acquired the SmartUX development platform of PowWow Inc., a leading Low-Code enterprise mobile development
application platform for citizen to professional developers to rapidly design, build, analyze, and run cross-platform mobile business applications.
Our low-code platforms employ an intuitive, visual interface and pre-built development modules that reduce the time required to build powerful and
unique business applications and workflows. It is unified, reduces training times and dependencies on additional tools, and is built for enterprise-grade
applications requiring high reliability, security, and scalability. Our platform automates the creation of forms, workflows, data structures, reports, user
interfaces, and other software elements that would otherwise need to be manually coded. This functionality greatly reduces the iterative development
process, allowing for real-time optimization and ultimately shortening the time it takes to design, build, and deploy applications.
Our customers leverage our technologies to apply the right automation approach for their specific use case. We believe our unified low-code platforms
are a differentiator in the marketplace. We strive to deeply integrate our capabilities so that they are all interoperable and low-code making it easier and
faster for our clients to address complex use cases, particularly those that involve multiple departments within an organization
Our software technology platforms consist of:
○ Magic xpa Application Platform – a proprietary low-code application platform for developing and deploying Client Server/Mobile/Web
business applications.
○ AppBuilder Application Platform – a proprietary low-code application platform for building, deploying, and maintaining high-end,
mainframe-grade business applications.
○ Magic xpi Integration Platform – a proprietary low-code platform for application integration.
○ Magic xpi cloud native – an environment configurations platform based on Kubernetes focuses on scalability, security and resilience.
○ Magic SmartUX – a proprietary low-code enterprise mobile development application platform for citizen to professional developers to rapidly
design, build, analyze, and run cross-platform mobile business applications.
○ FactoryEye – a cloud-based pre-packaged but flexible end-to-end data management platform for manufacturers enabling smooth migration to
Industry 4.0 smart factories. Real-time factory floor visibility and optimization is provided as part of the end-to-end visibility to maximize
production performance and ongoing improvement.
○ Magic Data Management and Analytics Platform – a cloud-based pre-packaged but flexible end-to-end data management platform for all
verticals enabling smooth digital transformation and full organizational business intelligence.
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Our vertical software packages
○ Clicks™ – offered by our Roshtov subsidiary, is a proprietary comprehensive core software solution for medical record information
management systems, used in the design and management of patient-file for managed care and large-scale healthcare providers. The platform is
connected to each provider clinical, administrative and financial data base system, residing at the provider’s central computer, and allows
immediate analysis of complex data with potentially real-time feedback to meet the specific needs of physicians, nurses, laboratory technicians,
pharmacists, front- and back-office professionals and consumers.
○ Leap™ – offered by our FTS subsidiary, is a proprietary comprehensive core software solution for BSS, including convergent charging, billing,
customer management, policy control, mobile money and payment software solutions for the telecommunications, content, Machine to
Machine/Internet of Things or M2M/IoT, payment and other industries.
○ Hermes Cargo – offered by our Hermes Logistics Technologies Ltd. subsidiary, the Hermes Air Cargo Management System is a proprietary,
state-of-the-art, packaged software solution for managing air cargo ground handling. Our Hermes Solution covers all aspects of cargo handling,
from physical handling and cargo documentation through customs, seamless EDI communications, dangerous goods and special handling,
tracking and tracing, security and billing. Customers benefit through faster processing and more accurate billing, reporting and ultimately
enhanced revenue. The Hermes Solution is delivered on a licensed or fully hosted basis. Hermes recently supplemented its offering with the
Hermes Business Intelligence (HBI) solution, adding unprecedented data analysis capabilities and management-decision support tools.
○ HR Pulse – Offered by our Pilat NAI, Inc. and Pilat Europe Ltd. subsidiaries, Pulse (now in its 10th release) is a proprietary tool for the creation
of customizable HCM solutions quickly and affordably. It has been used by Pilat to create products, such as Pilat Frist and Pilat Professional,
that provide “out of the box” SaaS solutions for organizations that implement Continuous Performance and/or Talent Management.
○ MBS Solution – offered by our Complete Business Solutions Ltd. subsidiary, is a proprietary comprehensive core system for managing TV
broadcast channels.
○ Nativ – offered by our Menarva Ltd. subsidiary, is a proprietary comprehensive core system for management of rehabilitation centers.
○ Mobisale – offered by our Mobisoft Ltd. subsidiary, is a proprietary comprehensive core system for sales and distribution field activities for
consumer goods manufacturers and wholesalers.
Our professional software and IT services
Our global software professional services offerings include a vast portfolio of professional services and IT outsourcing services in the areas of
infrastructure design and delivery, application development, technology consulting planning and implementation services, support services, Digital,
DevOps (Development & Operations), Mobile, Open source, embedded systems and IoT devices, advanced algorithms for AI, Big Data and Analytical
BI, M/F, Security & Cyber, cloud computing for deployment of highly available and massively-scalable applications and APIs and supplemental IT
outsourcing services to a wide variety of companies, including Fortune 1000 companies, all in accordance with the professional expertise required in each
case with our goal to create significant value for our clients in managing, streamlining, accelerating and helping their businesses thrive.
We have substantial experience in end-to-end development of high-end software solutions, beginning with collection and analysis of system
requirements, continuing with architecture specifications and setup, to software implementation, component integration and testing. We take the time to
truly learn our customers’ business goals and choose the most appropriate technologies, architecture and approaches for each project, so we can
consistently provide effective and efficient solutions. Our research and development teams are at the technological forefront, constantly learning and
developing. They work alongside experts from the widest range of fields and disciplines. From concept to implementation, from application of the ideas
of startups requiring the early development of an application or a device, to somewhat larger, more established enterprises, vendors or system houses who
need our team of experts to take full responsibility for the development of their systems and products. With our ability to draw on our pool of resources,
comprised of hundreds of highly trained, skilled, educated and flexible engineers, we adhere to timelines and budget and work in full transparency with
our customers every step of the way to create a tailor-made and cost-effective solution to answer all of our customers’ unique needs.
Our IT services subsidiaries consist of:
● Coretech Consulting Group LLC
● Fusion Solutions LLC
● Xsell Resources Inc.
● AllStates Consulting Services LLC
● Futurewave Systems, Inc.
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● NetEffects, Inc.
● The GoodKind Group LLC.
● CommIT Group
● Comblack IT Ltd
● Infinigy Solutions
● Shavit Software Ltd.
● OnTarget Group Inc
● Aptonet Inc
● Stockell information systems
● EnableIT LLC
● Appush Ltd
● K.M.T. (M.H.) Technologies Communication Computer Ltd
Partnerships and Alliances:
We continue to build on our existing strategic partnerships that include partnerships with Oracle, JD Edwards, SAP, Salesforce.com, Microsoft, AWS,
GCP, IBM and SugarCRM to enhance our mobile, integration and cloud offerings.
In May 2020, our CommIT Group, achieved Amazon AWS SaaS Competency status. AWS SaaS Competency is designated to help customers find top
AWS consulting partners with deep specialization and experience in designing and building software-as-a-service solutions on AWS. Organizations are
interested in software that is easy to use, implement, and operate. They are looking to reduce time-to-value and obtain access to innovative product
features and flexible software procurement on a consumption or contractual basis. AWS SaaS Competency Partners follow Amazon Web Services
(AWS) best practices for designing and building SaaS solutions through their professional services practices. To qualify for the AWS SaaS Competency
designation, organizations have undergone rigorous technical validation by AWS Partner Solutions Architects and demonstrated proven customer
success.
In November 2023, our CommIT group was awarded with AWS System Integrator Partner of the Year in Israel for 2023 in the field of integration,
specialized services, and consulting (System Integrator). This award reflects Commit’s expertise and innovation in leveraging AWS technologies to
deliver comprehensive and effective solutions for its clients. For the third time in four years, Commit has been honored by AWS, previously earning
accolades as Partner of the Year in the Public Sector and Rising Star of the Year. Commit’s expertise plays a pivotal role in facilitating its clients’
seamless migration to the cloud, optimizing workloads, and implementing innovative strategies such as cost optimization. The proven capabilities of
Commit’s cloud experts encompass architecture services, migration execution, modernization processes for existing systems, and the establishment of
new cloud environments, with specialization in SaaS, IoT, Cyber, Big Data, AI that result in substantial cost savings and cutting-edge cloud applications
and services development to its clients.
In April 2024, our CommIT Group was awarded with Google Cloud Sales Partner of the Year in Israel for 2023. This highly regarded award was
presented to Commit for its significant contribution to promoting unique innovation and building successful integrated solutions for its Google Cloud
customers. This prestigious award recognizes Commit’s contribution as a leading Google Cloud partner, demonstrating unique and outstanding positive
results to Google Cloud’s partner and sales team. Commit’s win of this award joins the previous recognition of four of Commit’s team members as
“Google Cloud Partner All-Stars for 2023” in the Marketing, Sales, and Solutions Engineering classifications. Commit, is a Premier Partner for Google
Cloud in the Sell Engagement Model, which provides services and technology solutions to Google Cloud customers. CommIT has recruited more than
100 new customers in Israel to Google Cloud over the past year alone. Over the years, and particularly over the past year, Commit has helped many
customers move to Google Cloud, streamline cloud workloads, save cloud usage costs considerably, and develop new cloud-based apps and services. One
of Commit’s specialties is assisting in the comprehensive integration of complex cases and maximizing the optimization of existing cloud capabilities
using Google Cloud’s advanced generative AII capabilities.
In recent years, Commit has successfully led, developed and produced many SaaS solutions on AWS, Azure and GCP, for companies across many
business sectors, including high-tech and startups, industrial and retail, and insurance and finance. CommIT concluded 2023 with a 50% growth in cloud
customers and a 150% increase in the number of cloud experts it employs, which amounts to over 200. Its unique, flexible R&D model, which provides
complete flexibility in determining the mix of experts, allows for full control of budgets and schedules throughout the development project. In this
framework, we accompany our clients in their digital journey and in their entry into the SaaS world, providing design and build services for application
environments or migration services for applications from existing models to cloud SaaS models. These processes require software architecture,
construction, and software development from both Digital and SaaS, all of which take into account performance aspects, information security, scalability,
infrastructure monitoring, customer experience and billing. Achieving AWS SaaS Competency status allows us to expand our business offering and even
accompany the organizational change for customers who are in the process of transitioning to SaaS.
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Industry Overview
In recent years, the number of available enterprise applications has grown significantly which has led information system complexity within many
organizations to a level that has obstructed business progress and evolution, reduced business agility and led to significantly higher costs. We believe this
complexity will continue to increase in the future. Although it is not unusual for organizations to operate multiple applications, systems and platforms that
were created utilizing disparate programming languages, the complexity of these environments typically reduces an organization’s operating flexibility,
hinders decision-making processes and leads to costly inefficiencies and redundancies. When organizations seek to swiftly change, update and upgrade IT
assets to support new business processes or to cope with changes in business and regulatory environments, they often find that the introduction and
integration of new or upgraded business applications is more complex than expected, requires significant implementation resources, takes a long time to
implement and is costly. The proliferation of smartphones and mobile platforms necessitates device-independent and future-proof business solutions for
fast, simple, and cost-effective mobile deployment. In addition, new cloud computing technologies present enterprises with an opportunity to realize
greater agility and meaningful cost savings to businesses, creating a growing need for further changes to enterprises’ IT applications and systems.
The pace of digital transformation is also accelerating at companies all around the world. Customers are increasingly demanding an all-digital experience
from the companies they do business with. They seek instant gratification through real-time updates or instant customer service without having to talk to
or wait for other human beings. Employees are also pushing for a more digital experience in their workplaces. The confluence of these internal and
external forces is causing companies of all sizes to put digital transformation goals at the top of the agenda. It is becoming clearer that companies will
need to embrace and prioritize the creation of a digital operating environment to gain a competitive edge and be able to recruit and maintain a talented
employee base.
Manual coding and application development is a complex and time-consuming process with an end result that is not guaranteed. The process requires
constant iteration as bugs are discovered and new features are integrated. In addition, the communication gap and general disconnect between developers
and end-users are critical shortcomings of manual coding that results in business applications that are less than ideally designed. Many of these problems
can be addressed by low-code and no-code development platforms. The enterprise application development software market consists of several
application development sub-segments and includes large dominant players such as IBM, Microsoft, Oracle, Salesforce, HP, CA Technologies and
Compuware as well as a large number of highly specialized vendors, with focused capabilities for specific vertical markets. Huge backlogs of enterprise
app development work and growing demand for apps coupled with shortage and expense of skilled programmers, is increasingly leading enterprises to
turn to low-code/no-code application development platforms that democratize the development process and give business users the ability to develop
applications themselves with minimal or no assistance from IT. Through the adoption of business applications, these business users are increasingly
looking for ways to automate manual workflows and become more efficient and effective by reallocating their time to solving more complex business
problems. Even IT resources and developers are using low-code development tools to increase their development speed and reduce backlog.
Although the market for low-code development platforms is not new by any means, it has certainly started to gain more traction over the past couple of
years and is expected to continue its strong growth due to continued demand for applications and a shortage of skilled developers. Low-code development
is a natural evolution of rising abstraction levels in application development, which will eventually lead to viable cross-enterprise, highly scalable citizen
development and composition of applications. According to market analysts spending on low-code development technologies (excluding RPA) is
expected to expand to more than $18 billion in 2026, with a CAGR of more than 20%. The increasing need of digitalization and maturity of agile DevOps
practices are expected to enhance the use of low-code development platform market across the globe. Web application is considered as a face of an
organization and by using the low-code development platform organizations can roll out user-defined web-based applications quickly. Instead of writing
the programming language for the development of web-based applications, employees with less development experience can also create sophisticated
applications. For those who have relevant experience, this platform can ease out the daily work chores and can even help them create more custom web-
based applications by integrating already existing digital ecosystems. North America has the presence of several prominent market players delivering
low-code development platform and services to all end users in the region. The US and Canada both have strong economic conditions and are expected to
be major contributors to the growth of the low-code development platform market. The geographical presence, significant research and development
(R&D) activities, partnerships, and acquisitions and mergers are the major factors for the deployment of low-code development platform and services.
The IT services segment of the market is comprised of a broad array of specific segments such as infrastructure design and delivery, application
development, technology consulting planning and implementation services, support services and supplemental outsourcing services. In addition, IT
professional services include quality assurance, product engineering services and process consulting. The IT services segment is also undergoing a
profound transition, with some key trends that have accelerated recently. Growing demand for mobile and cloud-based applications as well as Big Data
solutions also entails more complex IT development and integration projects which management and implementation require a higher level of expertise.
In addition, the typical software-based projects of IT consulting have been gradually shifting towards software and technology-driven solutions that can
be embedded into clients’ systems, providing ongoing engagement services. This transition has been accentuated by an underlying change in IT services
sourcing processes: the need for a faster go-to-market process as well as constrained resources in IT departments is resulting in greater influence by
specific business units on the purchasing decision as opposed to the traditional sourcing process. The traditional outsourcing business model of capacity
on demand is also transitioning towards a model of capability on demand. Information technology service buyers are increasingly looking at outcome-
driven managed services with a tighter integration between software, service and infrastructure.
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We have identified the following trends that are relevant to the markets we operate in:
● Increasingly complex business integration: In recent years, enterprises operate multiple applications and platforms, using various
programming languages, resulting in complex enterprise information systems. Such systems and the ability to swiftly change, update, and
upgrade them to support new business processes are crucial to the enterprise’s ability to cope with changes in the business, economic and
regulatory environment. However, the introduction and integration of new business applications is complex, requires significant time and human
resources and entails significant and often unpredicted costs. Therefore, enterprises are in need of solutions that will facilitate the rapid and
seamless deployment of business applications.
● Reusing IT assets/enterprise applications: In an increasingly dynamic technology, business and economic environment, organizations face
mounting pressure to continue to leverage their large IT investments in enterprise applications, such as ERP and CRM, while increasing their
ability to change business processes and support new ones. Tools to support lightweight yet rapid, iterative and modular development
methodologies, reusable architectures and application life-cycle management are primary drivers for spending on application development
worldwide.
● Enterprise mobility: With the proliferation of smartphones and mobile platforms that support enterprise mobility, enterprise users now expect
instant access to real-time information, a rich user experience, seamless integration with various enterprise systems and support to multiple
mobile devices. As such, enterprises need to be able to develop device-independent and robust business solutions for fast and cost-effective
mobile deployment.
● Cloud, Platform-as-a-Service and Software-as-a-Service: Cloud, Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) are each
becoming a well-established phenomenon in some areas of enterprise IT. Cloud-hosted applications continue to grow as alternatives to internally
managed systems as they deliver greater agility and meaningful cost savings to businesses. In addition, fast time-to-deployment, low cost-of-
entry, and adoption of pay-as-you-go models drive growing adoption of SaaS applications. In turn, SaaS applications enable the rapid
construction, deployment and management of some custom-built applications accessed as a service in the cloud. With more SaaS deployments,
the need for integration tools that bridge the cloud apps with on-premise application increases.
● Big Data: The amount of digital information that is being generated by enterprises each year, across a number of diverse data sources and
formats, is growing rapidly. Enterprises are required to retain, process and analyze data to attain meaningful insights and gain competitive
advantages, and therefore require versatile and flexible tools in order to quickly and reliably process these increasingly large amounts of data.
● IT Consulting: The typical software-based projects of IT consulting have been gradually shifting towards software and technology-driven
solutions that can be embedded into clients’ systems, providing ongoing engagement services.
● Sourcing processes: The need for a faster go-to-market process as well as constrained resources in IT departments is resulting in greater
influence by specific business units on the purchasing decision as opposed to the traditional sourcing process. The traditional outsourcing
business model of capacity on demand is also transitioning towards a model of capability on demand. Information technology service buyers are
increasingly looking at outcome-driven managed services with a tighter integration between software, service and infrastructure.
● Mobility & IT skills shortage: Growth in mobility skills demand is outpacing organizations’ ability to keep up, resulting in mobile strategists
facing a skills shortage across the entire mobility ecosystem, with mobile application development skills in greatest demand. Poor availability of
skilled staff is driving mobile strategists to outsource many functions across the mobility ecosystem, including application development and
testing services. The increasing mobility skills gap will force mobile strategists to use a multifaceted application development and delivery
approach.
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Magic’s Software Solutions
Our software solutions enable enterprises to accelerate the planning, development, deployment and integration of on-premise, mobile and cloud business
applications that can be rapidly customized to meet current and future needs. Our software solutions and complementary professional services empower
customers to dramatically improve their business performance and return on investment by enabling the cost-effective and rapid delivery, integration and
mobilization of business applications, systems and databases. Our technology and solutions are especially in demand when time-to-market considerations
are critical, budgets are tight, and integration is required with multiple platforms or applications, databases or existing systems and business processes, as
well as for RIA and SaaS applications. Our technology also provides the option to deploy our software capabilities in the cloud, hosted in a web services
cloud computing environment. We believe these capabilities provide organizations with a faster deployment path and lower total cost of ownership. Our
technology also allows developers to stage multiple applications before going live in production.
Development communities are facing high complexity, cost and extended pay-back periods in order to deliver cloud, RIAs, mobile and SaaS applications.
Magic xpa, AppBuilder, Magic SmartUX, Magic xpi, Magic FactoeyEye and Magic’s Data Management and Analytics platform all provide MSPs with
the ability to rapidly build integrated applications in a more productive manner, deploy them in multiple modes and architectures as needed, lower IT
maintenance costs and speed time-to-market. Our solutions are comprehensive and industry proven. These technologies can be applied to the entire
software development market, from the implementation of micro-vertical solutions, through tactical application modernization and process automation
solutions, to enterprise spanning service-oriented architecture, or SOA, migrations and composite applications initiatives. Unlike most competing
platforms, we offer a coherent and unified toolset based on the same proven metadata driven and rules-based declarative technology. Our low-code,
metadata platforms consist of pre-compiled and pre-written technical and administrative functions, which are essentially ready-made business application
coding that enables developers to bypass the intensive technical code-writing stage of application development and integration, concentrate on building
the correct logic for their apps and move quickly and efficiently to deployment. Through the use of metadata-driven platforms such as Magic xpa,
AppBuilder, Magic SmartUX, Magic xpi, Magic FactoryEye and Magic’s Data Management and Analytics platform, software vendors and enterprise
customers can experience unprecedented cost savings through fast and easy implementation and reduced project risk.
Our software technology solutions include application platforms for developing and deploying specialized and high-end large-scale business applications
and integration platforms that allow the integration and interoperability of diverse solutions, applications and systems in a quick and efficient manner.
These solutions enable our customers to improve their business performance and return on investment by supporting the affordable and rapid delivery and
integration of business applications, systems, and databases. Using our software solutions, enterprises and ISVs can accelerate time-to-market by rapidly
building integrated solutions, deploying them in multiple environments while leveraging existing IT resources. In addition, our solutions are scalable and
platform-agnostic, enabling our customers to build solutions by specifying their business logic requirements in a commonly used language rather than in
computer code, and to benefit from seamless platform upgrades and cross-platform functionality without the need to re-write applications. Our
technology also enables future-proof protection and supports current market trends such as the development of mobile applications that can be deployed
on a variety of smartphones and tablets, and cloud environments. In addition, we also offer a variety of vertical-targeted products that are focused on the
needs and requirements of specific growing markets. Certain of these products were developed utilizing our application development platform.
We sell our solutions globally through our own direct sales representatives and offices and through a broad sales distribution network, including
independent country distributors, independent service vendors that use our technology to develop and sell solutions to their customers, and system
integrators. We also offer software maintenance, support, training, and consulting services in connection with our products, thus aiding the successful
implementation of projects and assuring successful operation of the platforms once installed. We sell our integration solutions to customers using specific
popular software applications, such as SAP, Salesforce.com, IBM i (AS/400), Oracle JD Edwards, Microsoft SharePoint, Microsoft Dynamics,
SugarCRM and other eco-systems. As such, we enjoy a well-diversified client base across geographies and industries including oil & gas companies,
telecommunications groups, financial institutions, healthcare providers, industrial companies, public institutions, and international agencies.
The underlying principles and purpose of our technology are to provide:
● Simplicity – the use of code-free/low code development tools instead of hard coding and multiple programming languages to solve critical and
complex challenges;
● Business focus – the use of pre-compiled business logic and components eliminates repetitive, low level technical and coding tasks;
● Comprehensiveness – the use of a comprehensive development and deployment platform offers a full end-to-end development, deployment and
integration capability;
● Automation of mundane tasks – to accelerate development and maintenance and reduce risk; and
● Interoperability – to support business logic across multiple hardware and software platforms, operating systems and geographies.
We offer three complementary application platforms that address the wide spectrum of composite applications, Magic xpa, Magic SmartUX and
AppBuilder. Our Magic xpi integration platform, Magic FactoryEye and Magic’s Data Management and Anaytics platform deliver fast and simple
integration and orchestration of business processes and applications. Our customers operate in a wide variety of industries, including financial services,
life sciences, government, telecommunications, energy and manufacturing.
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Magic xpa Application Platform
Magic xpa Application Platform, our metadata driven application platform, provides a simple and unified, low code and cost-effective development and
deployment environment that lets organizations and MSPs quickly create user-friendly, enterprise-grade, multi-channel mobile and desktop business app
that employ the latest advanced functionalities and technologies. The Magic xpa Application Platform, formerly named uniPaaS, was first released in
2008 and is an evolution of our original eDeveloper product, a graphical, rules-based and event-driven framework that offered a pre-compiled engine for
database business tasks and a wide variety of generic runtime services and functions which was released in 2001.
We have continually enhanced our Magic xpa application platform to respond to major market trends such as the growing demand for cloud-based
offerings including Rich Internet Applications (RIA), mobile applications and SaaS. Accordingly, we have added new functionalities and extensions to
our application platform, with the objective of enabling the development of RIA, SaaS, mobile and cloud-enabled applications. SaaS is a business and
technical model for delivering software applications, similar to a phone or cable TV model, in which the software applications are installed and hosted in
dedicated data centers and users subscribe to these centers and use the applications over an internet connection. This model requires the ability to deliver
RIA. Magic xpa is a comprehensive RIA platform. It uses a single development paradigm that handles all ends of the application development and
deployment process including client and server partitioning and the inter-communicating layers.
Magic xpa offers customers the power to choose how they deploy their applications, whether full client or web; on-premise or on-demand; in the cloud or
behind the corporate firewall; software or mobile or SaaS; global or local. Our Magic xpa Application Platform complies with event driven and service
oriented architectural principles. By offering technology transparency, this product allows customers to focus on their business requirements rather than
technological means. The Magic xpa single development paradigm significantly reduces the time and costs associated with the development and
deployment of cloud-based applications, including RIAs, mobile and SaaS. In addition, application owners can leverage their initial investment when
moving from full client mode to cloud mode, and modify these choices as the situation requires. Enterprises can use cloud-based Magic xpa applications
in a SaaS model and still maintain their databases in the privacy of their own data centers. Magic xpa also supports most hardware and operating system
environments such as Windows, Unix, Linux and AS/400, as well as multiple databases and is interoperable with .NET and Java technologies.
Magic xpa can be applied to the full range of software development, from the implementation of micro-vertical solutions, through tactical application
modernization and process automation solutions, to enterprise spanning SOA migrations and composite applications initiatives. Unlike most competing
platforms, we offer a coherent and unified toolset based on the same proven metadata driven and rules based declarative technology, resulting in
increased cost savings through fast and easy implementation and reduced project risk.
Magic xpa enables organizations to differentiate themselves from their competition through software-enabled digital transformation. With our platform,
organizations can rapidly and easily design, build and implement powerful, enterprise-grade custom applications through our intuitive, visual interface,
with little or no coding required. Our Solution ensures that applications developed on our platform can be immediately and natively deployed across a full
range of mobile and desktop devices with no additional customization, including desktop web browsers, tablets and mobile phones. We also enable
organizations to easily modify and enhance applications and automatically disseminate these updates across device types to ensure that all users benefit
from the most up-to-date functionality.
Key benefits of our platform include:
● Powerful applications to solve critical and complex challenges. At the core of our platform is an advanced engine that enables the modeling,
modification and management of complex processes and business rules. Our heritage provides us with this differentiated understanding of
complex processes, and we have incorporated that expertise into our platform to enable the development of powerful applications. Organizations
have used our platform to launch new business lines, build large procurement systems, manage retail store layouts, conduct predictive
maintenance on field equipment and manage trading platforms, among a range of other use cases.
● Rapid and simple innovation through our powerful platform. Our platform employs a low-code, intuitive, visual interface and pre-built
development modules that reduce the time required to build powerful and unique applications. Our platform automates the creation of forms,
data flows, records, reports and other software elements that would otherwise need to be manually coded or configured. This functionality
greatly reduces the iterative development process, allowing for real-time application optimization and ultimately shortening the time from idea to
deployment. In turn, organizations can better leverage scarce and costly developer talent to accomplish more digital transformation objectives.
● Build once, deploy everywhere. Our technology allows developers to build an application once and use it everywhere with the consistency of
experience and optimal performance levels that users expect. Applications developed on our platform can be immediately and natively deployed
across a full range of mobile and desktop devices with no additional customization, including desktop web browsers, tablets and mobile phones.
We also enable organizations to easily modify and enhance applications and automatically disseminate these updates across device types to
ensure all users benefit from the most up-to-date functionality.
● Deployment flexibility to serve customer needs. Our platform can be installed in any cloud or on-premises, with organizations able to access
the same functionality and data sources in all cases. Our flexible deployment model also preserves a seamless path to future cloud deployments
for organizations initially choosing on-premises for their most sensitive workloads.
Our approach to digital transformation goes beyond simply enabling organizations to build custom applications fast. We empower decision makers to
reimagine their products, services, processes and customer interactions with software by removing much of the complexity and many of the challenges
associated with traditional approaches to software development. Because we make application development easy, organizations can build specific and
competitively differentiated functionality into applications to deliver enhanced user experiences and streamlined business operations.
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In 2020, we significantly enhanced our new Angular based web client capabilities, provided GIT version control capability as an integral part of
expanding its CI/CD overall capabilities, as well as enhanced compare and merge functionality under its xpa 4.7 release.
In 2022, we moved our Magic xpa platform to be a cloud native platform deployed by dockers container, opening the door to our customer to take their
applications to be a full SaaS products.
AppBuilder Application Platform
AppBuilder, a platform we acquired in December 2011, is a proprietary development environment used for managing, maintaining and reusing
complicated applications needed by large businesses. AppBuilder provides the infrastructure for enterprises worldwide, across several industries, with
applications running millions of transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy and maintain large-scale custom-
built business applications for years without being dependent on any particular technology. The AppBuilder deployment environments include IBM
mainframe, Unix, Linux and Windows. AppBuilder is intended to increase productivity and agility in the creation and deployment of enterprise class
computing.
AppBuilder follows the 4GL development paradigm to help enterprises focus on the business needs and definition and overlook technical hurdles.
AppBuilder developers define the business roles and prior to deployment the code is generated from the development environment to the required run
time environment. Several large MSPs have utilized AppBuilder to build state of the art applications that are deployed through many large customers.
AppBuilder implements a model driven architecture approach to application development. It provides the ability to design an application at the business
modeling level and generate forward to an application. AppBuilder has a platform-independent, business-rules language that enables generation to
multiple platforms. It is possible to generate the client part of an application as Java and the server part as COBOL. As businesses change, the server part
can be generated as Java without changing the application logic. Only a simple configuration option needs to be changed.
AppBuilder contains everything a development environment needs to create any type of simple or complex business application with platform-
independent functionality, including:
● System administration security controls for scope and permissions;
● Migration, testing, and deployment functions;
● Architecture-independent development;
● An integrated toolset for designing, developing, and deploying applications;
● Object-based components managed from host, server, or client repositories;
● Support for Java/J2EE, COBOL, C#, and C programming languages;
● An efficient, cross-platform code generation facility;
● Ready-to-use business logic and libraries;
● A remote prepare facility for mainframe development;
● Multiple language user interface support; and
● DBCS support.
Magic xpi Integration Platform
We believe data is the most valuable competitive asset today as companies increasingly pursue digital transformation initiatives to modernize their
businesses. Enormous amounts of data are being generated by people, applications, and devices worldwide. Enterprises are seeking to connect data across
their various applications, systems, and IT environments in order to become data-driven businesses. Understanding and connecting these data assets as
well as migrating workloads to the cloud, enables superior insights across the business organization, better service of customers, automation of supply
chains, and the democratization of secure, governed data access for all employees.
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The rise of cloud computing, low-cost data storage and the proliferation of applications that generate and access data, combined with the increasing
volume of data from mobile, social and IoT, is resulting in an explosion of the volume, variety, and velocity of data. According to a March 2022 report
from IDC, “The amount of digital data created over the next five years will be greater than twice the amount of data created since the advent of digital
storage.” This new data creates opportunities to generate greater business insights and pursue new market opportunities, but is overwhelming for
organizations to manage, aggregate, and normalize. As enterprises undertake the massive transition to cloud, we believe a majority of their workloads
will remain on-premises for the foreseeable future due to the mission-critical processes they support. The complexity of this hybrid world will be further
exacerbated as enterprises also employ multi-cloud strategies. As a result, we expect enterprises will require new technologies purpose-built to connect,
analyze, manage, and normalize data anywhere it resides using modern, cloud-native architectures that can seamlessly be deployed in any IT
environment.
Our Magic xpi integration platform (an evolution of our original and formerly branded iBOLT platform, launched in 2003) is a graphical, wizard-based
code-free solution delivering fast and simple integration and orchestration of business processes and applications. Magic xpi allows businesses to more
easily view, access, and leverage their mission-critical information, delivering true enterprise application integration, or EAI, business process
management, or BPM, and SOA infrastructure. Increasing the usability and life span of existing legacy and other IT systems, Magic xpi allows fast EAI,
development and customization of diverse applications, systems and databases, assuring rapid return on invested capital and time-to-market, increased
profitability and customer satisfaction.
Magic xpi allows the integration and interoperability of diverse solutions, including legacy applications, in a quick and efficient manner. In January 2010,
we released Magic xpi 3.2 and since then we have continued to develop the Magic xpi channel. We entered into agreements with additional system
integrators, consultancies and service providers, who acquired Magic xpi skills and offer Magic xpi licenses and related services to their customers. We
also offer special editions of Magic xpi with optimized and certified connectors for specific enterprise application vendor ecosystems, such as SAP,
Oracle JD Edwards, Microsoft SharePoint and Salesforce.com. These special editions contain specific features and pricing tailored for these market
sectors.
Data engineers, Extract-Transform-Load (ETL) developers, and citizen integrators have the ability to use our platform to ingest, transform and integrate
data spanning departmental to enterprise scale workloads. These workloads include diverse and distributed data sources in multi-cloud, hybrid
environments. The breadth and depth of our data integration capabilities accelerate the aggregation and processing of data to ready it for analytics, data
science and enterprise reporting initiatives. Leveraging a simple graphical design experience, users can develop workloads across ETL, Extract-Load-
Transform (ELT), real-time and streaming data integration patterns. Our platform is designed to integrate structured and unstructured data across on-
premises and cloud-native applications, databases, business intelligence tools, data modeling tools, data lakes, data warehouses, mainframes, messaging
systems, file systems and IoT devices. Our data-lake architecture allows data stewards and business analysts to create an authoritative single-source view
of all business-critical data from internal and external sources across multiple data domains, including customers, locations, assets, and employees and
many other domain types.
Our heritage as a veteran player in the integration market provides us with a differentiated understanding and ability to automate complex processes, and
we have incorporated that expertise into our platform to enable the development of powerful business software. Magic xpi can leverage a complete stack
of automation technologies, applying the right automation approach for each specific use case.
Key benefits of our platform include:
● Business Process Management. At the core of our platform is an advanced engine that enables the modeling, modification and management of
complex processes. This engine enables orchestration of any business workflow.
● Decision Rules. Appian includes a declarative environment for defining and executing business logic or rules. These rules can be highly
complex and can be applied within the Appian platform to many use cases, ranging from automated decision making to user experience
personalization.
● Seamless integration with existing systems and data. In contrast to typical enterprise software, our platform does not require that data reside
within it in order to enable robust data analysis and cross-department and cross-application insight. Our platform seamlessly integrates with
many of the most popular enterprise software applications and data repositories and can be used within many legacy environments. For example,
organizations frequently use our platform to extend the life and enhance the functionality of legacy systems of record, such as those used for
enterprise resource planning, human capital management and customer relationship management, by building new applications that enhance the
functionality of those systems and by leveraging the data within those systems to further optimize and automate operations.
● Embrace the full benefits of the public cloud. Our platform helps customers accelerate the migration of their on-premises workloads to the
cloud. Our platform modernizes our customers’ applications and data management capabilities to accelerate migrations to the cloud, allowing
them to embrace innovation, create digital-first business models, reduce operating costs, and generate new revenue streams.
● Deliver rich 360-degree business experiences. By enabling our customers to aggregate, consolidate and normalize their data to build a single
source of truth, we empower them to deliver highly engaging and personalized customer experiences. This allows our customers to embrace a
digital-first business strategy, build better connections and relationships with their end users, and modernize their supply chains by intelligently
matching supply with demand patterns.
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In the aggregate, these core capabilities enable Magic to automate and govern end-to-end processes. Magic complements these automation technologies
with related features like process reporting, analytics and management, which make it simple for organizations to quickly improve and upgrade their
automations as business needs change.
In March 2018, we released Magic xpi version 4.7 with a new OData Provider connector, Active Directory Federation Services (ADFS) support for the
SharePoint Online (MOSS) connector, ability to write new connectors based on Magic xpa Application Platform’s runtime technology and multiple
features to improve programming productivity, such as visual indicators of data flow status and an enhanced monitor to provide an even more accurate
bird’s eye view of all running projects.
In October 2018, we announced that Magic xpi Integration Platform 4 achieved SAP-certified integration with SAP S/4HANA, enabling our customers to
optimize business processes through automation across leading ERP, CRM, finance, and other enterprise systems using a single platform.
In February 2019, we released Magic xpi version 4.9 with a new REST client connector, ODATA connector enhancements, inherent UPSERT support in
the data mapper, and built-in cloud support.
In August 2019, we released Magic xpi version 4.11, enabling access to remote connectors residing at another site, without the need for a VPN (aka
‘Local Agent’ capability). In addition, in the beginning of 2020 we released the major released Magic xpi 4.12, which includes 64-bit support for our
Run-Time engine as-well as integration with one of the industry’s API management solutions suites. During 2019, we also released additional features
pursuant to customer requests.
In 2020, Magic Software enhanced the above Local Agent capability with more functionality, added additional connectors (e.g., OPC for manufacturing)
and invested more resources in the overall product stability. In addition, Magic Software has added various features to the platform to expand its product
offering, per customer requests.
In 2021, we enhanced Magic xpi Local Agent capabilities with more functionalities, added additional connectors (e.g., OPC for manufacturing) and
invested more resources in the overall product stability. In addition, we moved our Magic xpi platform to be a cloud native platform deployed by dockers
container.
In March 2023 we launched Magic xpi Cloud Native, allowing shifting xpi integration projects to the cloud smoothly. The xpi Cloud Native environment
configurations based on Kubernetes, focuses on scalability, security, and resilience. The deployment process is made effortless with our new “Cloud
Manager”. Cloud Manager interface hides all the complexities of cloud deployment and clustering and performs all the heavy lifting through easy to use
and intuitive set of Rest API’s. These APIs also bring agility and efficiency to organizations CI/CD practices via “Continuous Deployment” capabilities.
In 2024, we plan to continue to expand our product offering with additional features, per customer requests.
Magic SmartUX
Magic SmartUX, a platform we acquired in April 2019, is a low-code development platform for mobilizing and modernizing enterprise business
application designed for citizen to professional developers to rapidly design, build, analyze, and run cross-platform mobile business applications.
The Magic SmartUX platform addresses the three biggest challenges enterprises are facing in the road to Digital Transformation:
● Multi-platform: end client devices are abundant and diverse, we provide an omni-channel solution.
● Many Systems of Record: over the years enterprise adopted (home grown and third party) solutions that scattered the business flow over many
different system, Magic SmartUX enable the enterprise to expose complex business flows to modern technology with now changes and overhead
to the existing working applications.
● Talent Gap: Mobile and integration are the hardest skillsets for IT orgs to find, with the Magic SmartUX platform addressing Citizens
Developers, we allow any intern tech savvy individual to deliver complex and robust Mobile business application.
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FactoryEye
On May 2019, Magic Software launched the release of FactoryEye, a proprietary high performance, low-code, flexible, cloud platform built specially for
manufacturers based on a modern architecture enabling advanced manufacturing and organizational intelligence, real-time virtualizations and actionable
insights for cross- organizational effectiveness and increased bottom line. Magic Software has hundreds of manufacturing customers, and drew on over
35 years of manufacturing experience to develop FactoryEye. The product’s intuitive and user-friendly workspace empower manufacturers by providing
all the analysis the report they need in order to make faster and smarter decisions based on real time data and analytics. This translates into improved
productivity, faster delivery times, and better control over the manufacturing processes, leading to increased customer satisfaction and higher profit
margins. FactoryEye offers dozens of prebuilt connectors to a range of enterprise applications and MRP systems, such as SAP, JD Edwards, and Infor, as
well as MES, CRM, and PLM systems.
FactoryEye collects real-time data from existing machinery, operational and organizational systems and transforms it into actionable intelligence for
immediate results and continuous improvement in the manufacturing process and operational efficiency. The solution brings the benefits of Industry 4.0
connectivity to mid-sized manufacturers in several industry verticals, including automotive parts, food & beverage, medical devices, metal processing,
packaging, plastics & rubber specialty manufacturing and more.
The addition of FactoryEye to Magic Software’s software portfolio allows Magic Software to provide to its new and existing manufacturing clients, with
a comprehensive Industry 4.0 digital transformation solution and aligns with Magic Software strategy of enhancing its portfolio with enterprise grade
technologies.
FactoryEye’s end-to-end solution incorporates several key features:
● Powered by Magic Software plug and play IIoT Integration platform.
● Incorporates advanced analytics and AI into decision support
● Leverages investments and quick ROI by integrating existing systems
● Centralized visibility across operations
● Access to information necessary to quickly make smart decisions
● Flexible, simplified and incremental digital transformation
● Increased equipment productivity and operational efficiency
● Improved machine uptime and reduced maintenance costs
● Tools and technology to promote continuous improvement
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In addition to offering a dynamic cloud-based software solution, FactoryEye manufacturing consultants work with customers to harmonize their systems
and fit the right tools for their needs. Consultants analyze business processes for what is working, formulate a plan to add what is missing from existing
systems and create sprints to deliver immediate results. A dynamic cycle of data collection and analysis allows for continuous improvement and
flexibility in the optimization process.
Since its launch, Magic Software made a targeted effort to reach mid-sized manufacturers who are looking to improve the efficiency of their factories.
Our goal is to position FactoryEye as a solution that offers more than mere factory floor visibility through IIoT connectivity, while remaining more cost
effective and customizable than offerings from “Tier 1” companies. To that end, Magic Software has built a new website for FactoryEye, as well as blogs,
whitepapers, e-books, public relations activities, exhibitions and events, round tables and on-line campaigns, all in the purpose of spreading the awareness
of this new offering and benefits for mid-sized manufacturers.
FactoryEye brings the benefits of Industry 4.0 to mid-sized manufacturing companies, with an easy, affordable, and flexible approach that does not
require changing existing systems and infrastructure. This Industry 4.0 solution captures vast amounts of production data, transforms it into actionable
intelligence, and empowers workers, managers, and executives to make informed decisions in real-time.
In addition, we continue to market Magic Software’s application and integration products. These products continue to provide value and convenience for
our customers as low code options to integrate their disparate systems.
Vertical software solutions
Clicks™
Our Roshtov subsidiary has approximately three decades of proven experience based on its proprietary comprehensive core software solution for medical
record information management systems, using in the design and management of patient-file for managed care and large-scale healthcare providers. The
platform, which can be tailor-made to the specific needs of the healthcare provider, is connected to the clinical, administrative and financial data base
system, residing at the provider’s central computer, and allows immediate analysis of complex data with potentially real-time feedback to meet the
specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers.
All of our clients that buy or subscribe to our Clicks software solution also enter into software support agreements with us for maintenance and support of
their medical record management systems. In addition to immediate software support in the event of problems, these agreements allow clients to access
new releases covered by support agreements. In addition, each client has 12-hour access, six days a week (6 hours on Friday) to the applicable call-center
support teams.
We employ a team of 35 research and development specialists that together with our clients create a future where the health care system works to improve
the well-being of individuals and communities. Roshtov’s proven ability to innovate has led to what we believe to be an industry leading architectures
and a breadth and depth of solutions and services.
There are four healthcare service providers in Israel, of which, Maccabi Healthcare Services and Clalit, which are the two largest healthcare providers in
Israel accounting for 78% of the Israeli market, have been our customers since the early 1990’s.
Leap™
Our FTS subsidiary has over 20 years of BSS experience, based on dozens of projects delivered to customers worldwide. We implement revenue
management and monetization solutions in mobile, wireline, broadband, MVNO/E, payments, e-commerce, M2M / Internet of Things, mobile money,
cable, cloud and content markets under the brand name of Leap™. Our Leap™ solutions lower the total cost of ownership (TCO) for telecom, content
and payment service providers.
FTS works with telecommunications, content and payment service providers globally to help them manage complex transactions and relationships with
greater flexibility and independence. Analyzing transactions from a business standpoint, FTS offers end-to-end and add-on telecom billing, charging,
policy control and payments solutions to customers worldwide, and services both growing and major providers.
FTS targets mid to lower level tier service providers, supporting their BSS needs with end-to-end, turnkey billing and other BSS projects. In addition,
FTS offers upper-tiers of service providers with BSS and monetization solutions for specific needs, including policy control and charging solutions, M2M
billing, billing for content services, MVNE/MVNO billing, mobile money software solutions, payment and mobile financial services solutions and others.
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Our Leap™ offering is comprised of:
Leap™ BCCF (Business Control and Charging Function) – a proprietary packaged software solution which serves as the underlying foundation of our
Leap™ products and solutions. Leap BCCF enables service providers to handle the aspects of event processing, from defining the system’s business
logic, through importing events and formatting, to charging and executing business rules. With Leap BCCF, new services are deployed on the fly, and
strategic business rules are formulated more easily, ensuring real-time responses to both service and customer-related events and providing a baseline for
policy control.
Leap™ Billing 6.3 – a convergent charging, billing and customer care solution that realizes substantial reductions in OPEX and CAPEX while increasing
customer satisfaction and retention. Leap Billing software’s flexibility and ease of use enables the service providers’ billing platform to work more at the
speed of marketing by offering new marketing plans or services in a rapid time-to-market.
Leap™ Policy Control - Leap Policy Control is an integrated charging and policy control solution (a full PCC solution based on PCRF & online/offline
charging). Compliant with the 3GPP’s Diameter policy control standard, Leap Policy Control provides traffic and subscriber management strategies.
Leap Policy Control gives operators the power to monitor usage in real time and, using fully configurable business rules, define how they manage
network resources, applications, and subscribers – in real time – while generating revenue from personalized mobile applications, content and services.
Leap Policy Control can be implemented as a stand-alone solution or as part of a larger BSS project implementation.
FTS Express™ - FTS express™ is an all-in-one software appliance for online charging, billing, AAA, balance management, customer care, policy control
and interconnect, designed for entry-level operations of MVNOs, LTE, VoIP, ISP, broadband, IPTV and more.
The following is a sample of the monetization solutions offered by FTS:
● End-to-end, turnkey billing and customer care solutions;
● Convergent, online charging and billing;
● Policy control and charging;
● MVNO/E billing;
● Billing for content;
● Interconnect billing;
● M2M / IoT billing;
● Broadband and multi-play billing;
● Mobile money solutions;
● E-commerce and M-commerce solutions;
● Payments and mobile payments solutions;
● Smart revenue sharing and partner management solutions; and
● Billing service bureau.
FTS’s solutions are delivered via cloud, on-premises or in a fully managed-services mode and are backed by our Israel and Bulgaria-based experienced
professional services support team.
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HR Pulse
Now in its 10th release, HR Pulse is a proprietary platform that creates and customizes software applications for HCM, with the goal to combine
technology with effective processes, to facilitate the collection, analysis and interpretation of quality data about people, their jobs and their performance,
to enhance HCM decision making, resulting in increased organizational efficiency and effectiveness. HR Pulse addresses four distinct functional areas
with the ability to also work as one consolidated system:
● Performance and goal management:
● Development management;
● Talent management and succession planning; and
● Compensation and merit review.
Our offering includes customizable “out of the box” HCM SaaS Solutions, such as Pilat Frist and Pilat Professional, that provides a menu of templates
that can be used to affordably and expeditiously create customized HCM solutions for companies. The HR Pulse platform promotes the building and
implementation of solutions that address broader business challenges as well. Such offerings include 360-degree feedback, employee surveys, leadership
and management development, coaching and job evaluation.
Hermes Cargo
Hermes has been developing and evolving cargo management systems for the air cargo industry since 2002. Hermes Air Cargo Management System is a
proprietary, state-of-the-art, packaged software solution for managing air cargo ground handling. Our Hermes Solution covers all aspects of cargo
handling, from physical handling and cargo documentation through customs, seamless EDI communications, dangerous goods and special handling,
tracking and tracing, security and billing. Over the last 10 years Hermes systems have been implemented in over 70 terminals on five continents,
providing efficient and accurate handling of more than 8 million tons of freight annually. Customers benefit through faster processing and more accurate
billing, reporting and ultimately enhanced revenue. Customers include independent ground handlers, airlines with a cargo arm, hubs belonging to an
individual airline or those catering to a number of airlines transiting cargo to additional destinations. The Hermes Solution is delivered on a licensed or
fully hosted basis.
Hermes systems are built with the specific needs of air cargo handlers and airlines in mind and are amongst the most versatile and sophisticated around.
Hermes Solutions are focused on maximizing customer profits by streamlining ground handling processes and employing built-in best practices to reduce
handling errors. Hermes team of cargo experts carry out a full business analysis, listen to our customers’ requirements, suggest additional functionality
and work with them to deliver an air cargo management solution that is streamlined around their processes and customized to their needs. Hermes works
with everyone from smaller cargo handlers to large airlines all over the world and counts Menzies Aviation, Frankfurt Cargo Services, Etihad Airport
Services, Pactl’ (Shanghai) and dnata Network among their customers.
Nativ:
Offered by our Menarva Ltd subsidiary, Nativ is the leading system for efficient management of all types of rehabilitation centers. Selected by many of
the largest rehabilitation and treatment centers in Israel, Nativ serves as a comprehensive solution, the largest and most specialized and equipped system
in Israel, with all the capabilities required for operating all aspects of organizations engaged in patient rehabilitation and treatment. From rehabilitation
programs to recruitment, Nativ enables control of all levels of rehabilitation bodies, including monitoring detailed rehabilitation plans, finance, collection,
account management, recruitment, working hours, asset management, employment and medical files.
In addition, Nativ also contains many integral interfaces, including the Israel’s Ministry of Health’s suppliers portal, Israel’s Ministry of Welfare’s
suppliers portal, rent transfers from the Israel’s Ministry of Housing, accounting systems, payroll systems and more. The system produces a wide range of
reports, including a receipt report from Israel’s Ministry of Health, Welfare, Economy and Security, comprehensive and detailed information divided into
units and services, a detailed living allowance report, patient report, condition report, emergency report and more.
Menarva has extensive experience gained in its work over the past 10 years with dozens of clients in Israel, an experience that has given rise to in-depth
insights into the field of rehabilitation. Nativ is supported by the cloud and allows connection at any time and from any place for maximum efficiency,
including a mobile application for continuous monitoring of field personnel in real time.
Nativ offers maximum survivability, due to the need for high reliability and comprehensive information security, all infrastructure is owned by Menarva
and the system complies with all standards and guidelines of Israel’s Privacy Protection Authority, including ISO standards: Standard 9001 for
information systems development, Standard 27001.
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Strategy
Our goal is to continue our profitable and cash generative growth within our software solutions and professional services markets. We plan to achieve this
goal by focusing on the following principles:
● Expand sales to existing customers. We have a strong track-record of expanding within our existing customers. We believe there are
significant cross-sell and upsell opportunities within our existing customer base by adding new products, addressing new areas of expertise, and
growing with our customers’ overall business footprint. We intend to capitalize on the opportunity to more effectively cross-sell solutions and
services across our existing customer base. In addition to selling complementary software solutions to customers that already use our
development application solutions or packaged software solutions, we believe our strong customer, MSP and partner relationships and execution
track record position us to successfully grow our revenues by delivering complementary development and integration tools from our product
offering to our existing IT services customers and by delivering IT services to our existing application development customer base.
● Capitalize on opportunities created by new technological trends. We believe that emerging industry trends such as mobile applications,
cloud applications, SaaS and big data will require our enterprise customers and partners to continue and upgrade existing systems and to
integrate their current infrastructure with new mobile and cloud applications or with new big data management solutions. We intend to market
the capabilities of our software solutions and professional services offerings to customers that are currently impacted or will potentially be
impacted by the increased complexity resulting from these trends. For instance, we intend to promote Magic xpa through Rich Internet
Applications (RIAs).
● Grow our customer base through new offerings. We plan to grow our business by attracting new ISV enterprise customers with new
technology offerings and new professional services through our already established expertise in the areas of mobile technologies and projects,
cloud applications, SaaS and Big Data solutions, and integration solutions. Due to our track record in these industry segments, we believe we are
well positioned to develop and offer new application development and integration solutions that will enable us to attract new customers. In
addition, we believe our familiarity with these verticals will allow us to differentiate our IT services offering and grow our market share in this
vertical as well.
● Provide new solutions to new ecosystems. We expect the same industry trends of mobile, cloud, SaaS and big data to lead to the creation of
additional enterprise applications ecosystems. We intend to continue to develop new solutions that will allow us to form new partnerships, which
in turn will grow our revenues. We also intend to focus on recruiting OEM partners that will incorporate our Magic xpi integration technology
into their product offerings.
● Acquire complementary businesses. As part of our growth strategy, we will continue to seek and evaluate opportunities to grow through
acquisitions of companies and operations with complementary software solutions, technologies and related intellectual property, packaged
software solutions, augmenting integration and services capabilities, additional distribution channels or market share. We have a strict
acquisition policy pursuant to which we only pursue acquisitions in cases we identify as having a clear business opportunity and a clear path to
revenue growth. In addition, we only pursue acquisitions which we believe entail low integration and operational risk as a result of our internal
familiarity with the target or the industry in which it operates, through our network of MSPs, system integrators, distributors, resellers, and
consulting and OEM partners. We intend to balance any investments in such acquisitions with investments in our existing business and our
policy of returning value to shareholders in the form of dividends.
Our partner strategy is focused on delivering complete end-to-end solutions for our customers, driving general awareness of our platforms and service
capabilities and broadening our distribution and reach to new customers. We have deep relationships with global system integrators, with which we
partner closely. We co-create and co-sell solutions to solve customer needs where we combine the power of our innovation and their services to deliver
against the customer business objectives. We have a scaled and well-defined alliances program where we partner with value-added resellers and
distributors across the world to expand our reach in international markets. Our relationship with these channel partners ranges from fulfilment services to
co-sell or independent resell in some markets.
Product Development
We place considerable emphasis on research and development in order to improve and expand the functionality of our technologies and to develop new
applications. We believe that our future success depends upon our ability to maintain our technological leadership, to enhance our existing products and
to introduce new commercially viable products addressing the needs of our customers on a timely basis. We also intend to support emerging technologies
as they are introduced in the same way we have supported new technologies in the past. We will continue to devote a significant portion of our resources
to research and development. We believe that internal development of our technology is the most effective means of achieving our strategic objective of
providing an extensive, integrated and feature-rich development technology. For significant version release see “Magic’s Software Solutions” discussed
above.
39
Product Related Services
Professional Services. We offer fee-based consulting services in connection with installation assurance, application audits and performance enhancement,
application migration and application prototyping and design. Consulting services are aimed at generating both additional revenues and ensuring
successful implementation of Magic xpa, Appbuilder, Magic xpi, Magic’s Data Management and Analytics platform, SmartUX and FactoryEye projects
through knowledge transfer. As part of management efforts to focus on license sales, our goal is to provide such activities as a complementary service to
our customers and partners. We believe that the availability of effective consulting services is an important factor in achieving widespread market
acceptance.
Services are offered as separately purchased add-on packages or as part of an overall software development and deployment technology framework. Over
the last several years, we have built upon our established global presence to form business alliances with our MSPs that use our technology to develop
solutions for their customers, and distributors to deliver successful solutions in focused market sectors.
Maintenance. We offer our customers annual maintenance contracts providing for unspecified upgrades and new versions and enhancements for our
products on a when-and-if-available basis for an annual fee.
Customer Support. We believe that a high level of customer support is important to the successful marketing and sale of our products. Our in-house
technical support group provides training and post-sale support. We believe that effective technical support during product evaluation as well as after the
sale has substantially contributed to product acceptance and customer satisfaction and will continue to do so in the future.
We offer online support systems for our MSPs and end users, providing them with the ability to instantaneously enter, confirm and track support requests
through the Internet. These systems support MSPs and end-users worldwide. As part of this online support, we offer Support Knowledge Base tools
providing the full range of technical notes and other documentation including technical papers, product information, and answers to most common
customer queries and known issues that have already been reported.
Training. We conduct formal and organized training on our development tools and packaged software solutions. We develop courses, pertaining to our
principal products and provide trainer and student guidebooks. Course materials are available both in traditional, classroom courses and as web-based
training modules, which can be downloaded and studied at the student’s own pace and location. The courses and course materials are designed to
accelerate the learning process, using an intensive technical curriculum in an atmosphere conducive to productive training.
IT Services
Background
The core of our growth strategy is to serve as a one-stop-shop for our clients, helping them accelerate their digital transformation to enhance
competitiveness, grow profitability and deliver sustainable stakeholder value. We use our deep industry and functional expertise to help clients capture
more growth and solve a diverse set of business challenges, including identifying and developing new products and services; improving sales and
customer experience; optimizing cost structures; maximizing human performance; harnessing data to improve decision-making; mitigating risk and
enhancing security; shaping and delivering value from large-scale cloud migrations; and digitizing manufacturing and operations with smart, connected
products and platforms.
Technology is the single biggest driver of change in companies today. Despite the potential impacts of the Omicron variant, we expect an economic
recovery with high expectations for increased technology investments. According to Gartner, 2023 should have ended with a 3.3% increase in global IT
spending. In Israel, the forecasts for IT expenses in 2023 were greatly influenced by the war, the geopolitical situation of Israel, and the uncertainties
derived from it. Analysts predicted that the increase in IT spending in Israel in 2023, in light of the ongoing war, was to reach only 4%, but it was only
reduced by 2% due to the war, which reflects the stability and resilience of the Israeli IT market. Looking ahead, analysts expect a recovery in 2024.
According to Forrester, the year 2024 is expected to end with a 5.3% increase in global IT spending, with the software solutions sector expected to grow
by 10.5% and the IT services sector by 8.3%. According to Gartner, the growth is expected to reach only 6.8%, with the software solutions sector
expected to grow by 12.7%, and the IT services sector by 8.7%. Furthermore, according to Gartner, in 2024, the fastest growing areas are cloud
computing with an expected increase of 19% (of which IaaS will increase by 24%), data and business applications (CRM, ERP) with an increase of 14%,
and Cyber with an increase of 14 % in 2024. Also, according to Gartner, the expected increase in Cloud computing expenses in 2023 was 17.8%, and in
2024would be 19%, while in the field of infrastructure cloud (IaaS) there was an increase of 24%. The growth rate of Cloud computing is the fastest
growing area in IT between five and six times the average growth of IT expenses.
40
We help our clients use technology to build their digital core to drive enterprise-wide transformation—such as moving them to the cloud, leveraging data
and artificial intelligence, and embedding security and sustainability across the enterprise; by transforming their operations; and by accelerating their
revenue growth. We leverage our scale and global footprint, innovation capabilities, and strong ecosystem partnerships, together with our platforms
including to consistently deliver tangible value for our clients.
Our IT services offerings consist of a variety of professional services that can be grouped into integration and other IT services. Our integration services
include:
● Infrastructure analysis, design and delivery - management of complex, tailor-made projects and telecom infrastructure projects in wireless
and wire-line as well as IT consulting services, mainly for the defense and public sectors.
● Technology consulting and implementation services - planning and execution of end-to-end, large-scale, complex solutions in networking,
cyber security, command & control and high-performance transaction systems.
● Application development - We specialize in end-to-end projects that feature an array of technologies, from development and implementation of
concepts for startups to overall responsibility for the development of systems for large enterprises. Our development services include
development of on-premise, mobile and cloud applications as well as Embedded and real time software development.
We are a talent- and innovation-led organization with approximately 3,628 people as of December 31, 2023, who serve our clients at any given time and
whose skills and specialization are a significant source of competitive differentiation. With approximately 3,000 experts, the majority of which are in the
U.S, Israel and Europe, and hundreds of projects gone live in a variety of advanced technologies, we have developed significant expertise and
accumulated vast experience in integration projects. Such projects are typically more complex and require a high level of industry knowledge and highly
skilled professionals. Our integration expertise, as well as our global reach allows us to deliver comprehensive, value added services to our customers.
Our IT services customers include major global telecoms, OEMs and engineering, furnish and installation service companies.
Strategic Consulting and Outsourcing Services
We provide a broad range of IT consulting services in the areas of infrastructure design and delivery, application development, technology planning and
implementation services, cloud computing, as well as supplemental outsourcing services. Our wholly-owned subsidiaries, Fusion Solutions LLC, Xsell
Resources Inc., Allstates Consulting Services LLC, Futurewave Systems, Inc., NetEffects, Inc, OnTarget Group, Inc, the Commit Group, Infinigy
Solutions LLC., EnableIT LLC, Comblack IT Ltd., Shavit Software (2009) Ltd., and K.M.T. (M.H.) Technologies Communication Computer, provide
advanced IT consulting and outsourcing services to a wide variety of companies including Fortune 1000 companies. Our technical personnel generally
supplement the in-house capabilities of our customers. Our approach is to make available a broad range of technical personnel to meet the requirements
of our customers rather than focusing on specific specialized areas. We have extensive knowledge of and have worked with virtually all types of wireless
and wireline telecom infrastructure technologies as well as in the areas of infrastructure design and delivery, application development, project
management, technology planning and implementation services. Our consulting partners come from a wide range of industries, including finance,
insurance, government, health care, logistics, manufacturing, media, retail and telecommunications. With an experienced team of recruiters in the telecom
and IT areas and with a substantial and a growing database of telecom talent, we can rapidly respond to a wide range of requirements with well qualified
candidates. Our customer list includes major global telecoms, OEMs and engineering, furnish and installation service companies. We have built long-
term relationships with our customers by providing expert telecom talent. We provide individual consultants for contract and contract-to-hire assignments
as well as candidates for full time placement. In addition, we configure teams of technical consultants for assigned projects at our customers’ sites.
41
Customers, End-Users and Markets
We market and sell our products and services in more than 50 countries worldwide. The following tables present our revenues by revenue type and
geographical market for the periods indicated:
Software sales
Maintenance and technical support
Consulting services
Total revenues
United States
Israel
Europe
Japan
Other
Total revenues
$
$
$
$
2021
Year ended December 31,
2022
(in thousands)
2023
30,934
36,149
413,242
480,325
$
$
32,930
34,762
499,100
566,792
$
$
32,694
33,999
468,359
535,052
2021
Year ended December 31,
2022
(in thousands)
2023
254,342
180,462
30,085
11,443
3,993
480,325
$
$
308,485
205,258
39,247
10,121
3,681
566,792
$
$
250,842
214,129
55,180
10,847
4,054
535,052
Our Magic xpa, Magic xpi, Magic’s Data Management and Analytics platform, Magic SmartUX, Magic FactoryEye, and AppBuilder technologies are
used by a wide variety of developers, integrators and solution providers, that can generally be divided into two sectors (i) those performing in-house
development (corporate IT departments), and (ii) MSPs, including large system integrators and smaller independent developers, and VARs that use our
technology to develop or provide solutions to their customers. MSPs who are packaged software publishers use our technology to write standard
packaged software products that are sold to multiple customers, typically within a vertical industry sector or a horizontal business function.
Sales, Marketing and Distribution
We market, sell and support our products and services through our own global offices and marketing department, as well as through a broad global
channel-network of MSPs, system integrators, value-added distributors and resellers, and OEM and consulting partners. Our sales force is based in our
regional offices in the United States, Japan, Germany, United Kingdom, Netherlands, France, Hungary, South Africa, India and Israel, and through
regional distributors elsewhere. Our sales network is present in about 50 countries worldwide.
Direct Sales. For Magic xpa and AppBuilder, our direct sales force pursues software solution providers and enterprise accounts. Our sales personnel carry
out strategic sales with a direct approach to decision makers, managing a constantly monitored consultative type of sales cycle. Magic xpi, FactoryEye
and Magic’s Data Management and Analytics platform are mostly sold through indirect channels and through our ecosystem business relationships, but
we have some direct customers with integration needs.
As of December 31, 2023, we employed approximately 202 sales and marketing personnel including, a team of sales engineers who provide pre-sale
technical support, presentations and demonstrations in order to support our sales force.
Indirect Sales. We maintain an indirect sales channel, through our ecosystem business relationships, as well as through system integrators, value added
distributors and resellers, OEM partners, as well as consultancies and service providers. We maintain an indirect sales channel for Magic xpa through
MSPs and system integrators, who use our application and integration platforms to develop and deploy different applications for sale to their end-user
customers.
Distributors. In general, we distribute our products through regional non-exclusive distributors in those countries where we do not have a sales office. A
regional distributor is typically a software marketing organization with the capability to add value with consulting, training and support. Distributors that
are also MSPs are generally responsible for the implementation of both our application platform and business and process integration suite and
localization into their native languages. The distributors also translate our marketing literature and technical documentation. Distributors must undergo
our program of sales and technical training. Marketing, sales, training, consulting, product and customer support are provided by the local distributor. We
are available for backup support for the distributor and for end-users. In coordination with the local subsidiaries and distributors, we also provide sales
support for large and multinational accounts.
42
VARs. In general, we resell our products through VARs that extend their capabilities with our offerings. These include SAP VARs.
Global Marketing Activities. We carry out a wide range of marketing activities aimed at generating awareness of our solutions offerings and to promote
sales. Among our activities, we focus both on both outbound and inbound marketing, including a content-rich website available in eight foreign
languages, social networks communication, search engine optimization, on-line advertising, lead generation campaigns, public relations, case studies,
blogs, industry analyst relations, attendance at conferences and trade shows and lead generation campaigns around key professional white papers and
webinars. We conduct distributor and user conferences to update our worldwide affiliates and user base on our new product offerings, marketing and
promotional activities, pricing, best practices, technical information and other information.
We use the Salesforce.com CRM platform and the Hubsopt marketing automation tool globally to connect all our lead generation campaigns with our
sales pipeline management. We have aligned all our local offices to work according to the same global sales and marketing processes. We have also used
our own Magic xpi Integration Platform to automate processes between our Salesforce and SAP systems to increase efficiency.
Our sales cycle varies by size of the customer, the number of products purchased and the complexity of the customer’s infrastructure, ranging from
several weeks for incremental sales to existing customers to several months for large deployments.
Competition
The markets for our Enterprise Mobility Solution, and Magic xpa and Magic xpi platforms are characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions, mergers and acquisitions, and rapidly changing customer requirements. These markets are
therefore highly competitive, and we expect competition to continue to intensify. The growth of the cloud adoption and mobile markets increases the
competition in these areas. We constantly follow and analyze the market trends and our competitors in order to effectively compete in these markets and
avoid losing market share to our direct competitors and other players.
With Magic xpa, we compete in the low-code application platform, SOA architecture and enterprise mobility markets. Our main competitors fall into two
categories: (1) providers of custom software and customer software solutions that address, or are developed to address, some of the use cases that can be
addressed by applications developed on our platform; and (2) providers of low-code development platforms, such as Microsoft, Salesforce.com,
ServiceNow, OutSystems, Appian, Pegasystems and Mendix.
As our market grows, we expect it will attract more highly specialized vendors as well as larger vendors that may continue to acquire or bundle their
products more effectively. The principal competitive factors in our market include:
● Platform features, reliability, performance, and effectiveness;
● Ease of use and speed;
● Platform extensibility and ability to integrate with other technology infrastructures;
● Deployment flexibility;
● Robustness of professional services and customer support;
● Price and total cost of ownership;
● Strength of platform security and adherence to industry standards and certifications;
● Strength of sales and marketing efforts; and
● Brand awareness and reputation.
With Magic xpi, we compete in the integration platform market, which is highly competitive and rapidly evolving. Among our current competitors are
IBM, Informatica, TIBCO, MuleSoft, Jitterbit, Talend, Dell–Boomi, Scribe and Software AG.
There are several similar products in the market utilizing the model driven architecture, or MDA, approach utilized by AppBuilder. The market for this
type of platform is highly competitive. Companies such as CA and IBM have tools that compete directly with AppBuilder. Furthermore, new
development paradigms have become very popular in IT software development and developers today have many alternatives.
43
As our market grows, we expect that it will attract more highly specialized vendors as well as larger vendors that may continue to acquire or bundle their
products more effectively. The principal competitive factors in our market include:
● platform features, reliability, performance and effectiveness;
● ease of use and speed;
● platform extensibility and ability to integrate with other technology infrastructures;
● deployment flexibility;
● robustness of professional services and customer support;
● price and total cost of ownership;
● strength of platform security and adherence to industry standards and certifications; and
● strength of sales and marketing efforts.
We believe we generally compete favorably with our competitors with respect to the features, security and performance of our platform, the ease of
integration of our applications and the relatively low total cost of ownership of our applications. However, many of our competitors have substantially
greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets, broader distribution, more diversified
product lines and larger and more mature intellectual property portfolios.
Our goal is to maintain our technological advantages, time to market and worldwide sales and distribution network. We believe that the principal
competitive factors affecting the market for our products include developer productivity, rapid results, product functionality, performance, reliability,
scalability, portability, interoperability, ease-of-use, demonstrable economic benefits for developers and users relative to cost, quality of customer support
and documentation, ease of installation, vendor reputation and experience, financial stability as well as intuitive and out-of-the-box solutions to extend
the capabilities of ERP, CRM and other application vendors for enterprise integration.
Intellectual Property
In accordance with industry practice, since we have no registered patents on our software solution technologies, we rely upon a combination of copyright,
trademark, trade secret laws and contractual restrictions to protect our rights in our software products. Our policy has been to pursue copyright protection
for our software and related documentation and trademark registration of our product names. In addition, our key employees and independent contractors
and distributors are required to sign non-disclosure and secrecy agreements.
We provide our products to customers under a non-exclusive, non-transferable license. Usually, we have not required end-users of our products to sign
license agreements. Generally, a “shrink wrap” license agreement is included in the product packaging, which explains that by opening the package seal,
the user is agreeing to the terms contained therein. It is uncertain whether license agreements of this type are legally enforceable in all of the countries in
which the software is marketed.
We do not believe that patent laws are a significant source of protection for our products since the software industry is characterized by rapid
technological changes, the policing of unauthorized use of software is a difficult task and software piracy is expected to continue to be a persistent
problem for the packaged software industry. As there can be no assurance that the above-mentioned means of legal protection will be effective against
piracy of our products, and since policing unauthorized use of software is difficult, software piracy can be expected to be a persistent potential problem.
We believe that because of the rapid pace of technological change in the software industry, the legal protections for our products are less significant
factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality
of our support services.
Our trademark rights include rights associated with our use of our trademarks and rights obtained by registration of our trademarks. The initial terms of
the registration of our trademarks range from 10 to 20 years and are renewable thereafter. Our use and registration of our trademarks do not ensure that
we have superior rights to others that may have registered or used identical or related marks on related goods or services. We have registered a copyright
for our software in the United States and Japan. In addition, we have registered copyrights for some of our manuals in the United States and have
acquired an International Standard Book Number (ISBN) for some of our manuals. Our copyrights expire 70 years from date of first publication.
44
Environmental, Social & Governance Matters
We place emphasis on, and devote considerable time towards, business responsibility, sustainability, and delivering value for our customer base,
employees, investors, suppliers, and each of our respective communities. We have developed a strong set of corporate values that inspire ethical behavior
throughout their decision-making process and that promote one of our business objectives of bringing together a diverse group with the unique skill sets,
knowledge, and talents to effectuate our vision.
C. ORGANIZATIONAL STRUCTURE
The following table sets forth the legal name, location and country or state of incorporation and percentage ownership of our subsidiaries and affiliates as
of December 31, 2023:
Subsidiaries and affiliate
9540 Y.G. Soft I.T Ltd. (shares held by CommIT Software Ltd.)
Allstates Consulting Services LLC (shares held by Magic Software Enterprises Inc.)
AppBuilder Solutions Ltd
Appush Technologies Ltd (Formerly known as Vidstart Ltd)
Appush Inc. (Shares held by Appush Technologies Ltd)
Aptonet, Inc.
B.A Microwaves Ltd. (shares held by CommIT Embedded Ltd.)
BridgeQuest Labs, Inc. (shares held by BridgeQuest, Inc.)
BridgeQuest, Inc. (shares held by Magic Software Enterprises Inc.)
Comblack IT Ltd
Comblack Municipal Services Ltd. (shares held by Comblack IT Ltd.)
CommIT Technology Solutions Ltd
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Comm-IT USA, Inc. (shares held by Comm-IT Technology Solutions Ltd.)
Complete Business Solutions Ltd
Coretech Consulting Group Inc (shares held by Magic Software Enterprises Inc)
Coretech Consulting Group LLC (shares held by Magic Software Enterprises Inc)
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Datamind Technologies Ltd (shares held by Complete Business Solutions Ltd)
Enable IT Consulting Services Canada Inc. (shares held by Enable IT LLC.)
Enable IT LLC. (shares held by Coretech Consulting Group LLC)
F.T.S. - Formula Telecom Solutions Ltd.
Fusion Solutions LLC. (shares held by Coretech Consulting Group LLC)
Fusion Technical Solutions LLC. (shares held by Fusion Solutions LLC)
Futurewave Systems, Inc. (shares held by Fusion Solutions LLC.)
The Goodkind Group LLC
Goodkind Hospitality, LLC (shares held by Coretech Consulting Group LLC)
Hermes Logistics Technologies Limited (shares held by Magic Software Enterprises (UK) Ltd)
Infinigy (UK) Holdings Limited
Infinigy (US) Holding Inc (shares held by Infinigy (UK) Holdings Limited)
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.).
Infinigy Solutions LLC. (shares held by Infinigy (US) Holding Inc)
Intrabases SAS
K.M.T. (M.H.) Technologies Communication Computer Ltd.
Knowledge & Solutions Software B.V.
Magic Beheer B.V. (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Benelux B.V. (shares held by Magic Beheer B.V.)
Magic Hands B.V.
Magic Software Enterprises (Israel) Ltd
Magic Software Enterprises (UK) Ltd (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Software Enterprises France (shares held by Magic Software Enterprises Netherlands B.V.)
45
Country of
Incorporation
Israel
Delaware
United Kingdom
Israel
Delaware
Georgia
Israel
North Carolina
North Carolina
Israel
Israel
Israel
Israel
Israel
Delaware
Israel
Pennsylvania
Delaware
Israel
Israel
Canada
Delaware
Israel
Delaware
Delaware
Georgia
New York
Delaware
United Kingdom
United Kingdom
Georgia
Georgia
Georgia
France
Israel
Netherlands
Netherlands
Netherlands
Netherlands
Israel
United Kingdom
France
Ownership
Percentage
60%
100%
100%
100%
100%
100%
56.67%
100%
100%
80.1%
70%
77.8%
100%
75%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
60%
100%
100%
100%
100%
100%
100%
100%
Subsidiaries and affiliate
Magic Software Enterprises GMBH (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Software Enterprises Inc.
Magic Software Enterprises India Pvt. Ltd
Magic Software Enterprises Netherlands B.V.
Magic Software Enterprises Spain Ltd (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Software Japan K.K
Magix Integration (Proprietary) Ltd
Menarva Ltd.
Mobisoft Ltd.
NetEffects, Inc. (shares held by Coretech Consulting Group LLC)
OnTarget Group, Inc
OnTarget Labs Inc
OnTarget Labs Latvia
OnTarget Labs LLC Russia
Magic Quest Labs LLC
Onyx Magyarorszag Szsoftverhaz (shares held by Magic Software Enterprises Netherlands B.V.)
Pilat (North America), Inc.
Pilat Europe Ltd.
PowWow Inc.
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Roshtov Software Industries Ltd
Sanjer AI Ltd. (shares held by CommIT Software Ltd.)
Shavit Human resource Ltd.
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
Skysoft Solutions Ltd. (shares held by CommIT Embedded Ltd.)
Stockell Information Systems Inc.
The Goodkind Group, LLC
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
Xsell Resources Inc. (shares held by Coretech Consulting Group LLC)
Yes-IT Ltd. (shares held by Comblack IT Ltd)
D. PROPERTY, PLANTS AND EQUIPMENT
Country of
Incorporation
Germany
Delaware
India
Netherlands
Spain
Japan
South Africa
Israel
Israel
Missouri
North Carolina
Russia
Latvia
Russia
Georgia
Hungary
New Jersey
United Kingdom
California
Israel
Israel
Israel
Israel
Israel
Israel
Missouri
New York
Israel
Israel
Pennsylvania
Israel
Ownership
Percentage
100%
100%
100%
100%
100%
100%
100%
100%
98.52%
100%
100
100%
100%
100%
100%
100%
100%
100%
100%
100%
80%
33%
100%
100%
75%
100%
100%
60%
100%
100%
100%
Our headquarters and principal administrative, finance, sales, marketing and research and development office is located in a 32,404 square foot office
facility that we lease in Or Yehuda, Israel, a suburb of Tel Aviv. In 2023, we paid $0.7 million in annual rent for the Or Yehuda facilities under a lease
agreement expiring in June 2033, with two additional five (5) year options to extend our lease agreement for.
Our subsidiaries lease office space in Laguna Hills, California; King of Prussia, Pennsylvania; Dallas, Texas; Houston, Texas; New Jersey; Atlanta,
Georgia; Paris, France; Munich, Germany; Pune, India; Bangalore, India; Tokyo, Japan; Budapest, Hungary; Houten, the Netherlands; Johannesburg,
South Africa; Bracknell, the United Kingdom; Saint Petersburg, Russia; New York, New York and various locations in Israel. The aggregate annual cost
for such facilities was $3.1 million during the year ended December 31, 2023.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which
appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs
and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below and elsewhere in this annual report.
46
Background
We were organized under the laws of Israel on February 10, 1983 and began operations in 1986. Our Ordinary Shares have been listed on the NASDAQ
Stock Market (symbol: MGIC) since our initial public offering in the United States on August 16, 1991. On January 3, 2011, our shares were transferred
to the NASDAQ Global Select Market. Since November 16, 2000, our Ordinary Shares have also traded on the Tel Aviv Stock Exchange, or the TASE,
and since December 15, 2011, our shares have been included in the TASE’s TA-125 Index.
Overview
We develop market, sell and support application platforms, business and process integration and selected vertical comprehensive software solutions
packages. We have 72 active subsidiaries and affiliate in the United States, Israel, Europe, Asia and South Africa. Of such subsidiaries, 31 are engaged in
developing, marketing and supporting vertical applications, as well as in selling and supporting our products, and 41 subsidiaries specialize in providing
broad range of IT consulting and outsourcing services in the areas of infrastructure design and delivery, application development, technology planning
and implementation services, as well as supplemental outsourcing services.
As an IT technology innovator, we have many years of experience in assisting software companies and enterprises worldwide to produce and integrate
their business applications. Our application platforms, Magic xpa, Magic SmartUX and AppBuilder, are used by thousands of enterprises and MSPs to
develop solutions for their users and customers in approximately 50 countries. We also provide maintenance and technical support as well as professional
services to our enterprise customers and to MSPs. In addition, we sell our Magic xpi and FactoryEye technologies for business integration to enterprises
using specific popular software applications, such as SAP, Salesforce.com, IBM i (AS/400) or Oracle JD Edwards and other business applications. We
refer to these vendor-centered market sectors as ecosystems.
Our consolidated financial statements for the years ended December 31, 2022 and 2023 are prepared in accordance with IFRS. For all periods up to and
including the year ended December 31, 2021, we had historically prepared our financial statements in accordance with U.S GAAP. In order to comply
with requirements of the SEC related to our transition to IFRS, we set the date of transition as January 1, 2021 and retrospectively applied IFRS as of that
date and for the year ended December 31, 2021. Our consolidated statements of profit or loss presented herein in IFRS cover the years ended December
31, 2022 and 2023, as well as the year ended December 31, 2021 (as adjusted from its prior preparation in accordance with U.S. GAAP).
General
Our consolidated financial statements appearing in this annual report have been prepared in U.S. dollars and in accordance with IFRS.
Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in currencies other than
the U.S. dollar are converted into dollars in accordance with the International Accounting Standard 21 (IAS 21) “The Effects of Changes in Foreign
Exchange Rates.” The majority of our sales are made outside of Israel and a substantial part of them is in dollars. In addition, a substantial portion of our
costs is incurred in dollars. Since the dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the
dollar is our functional and reporting currency and accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into
dollars using the foreign exchange rate in effect at each balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured
and recorded at the exchange rate in effect at the date of the transaction. For certain foreign subsidiaries whose functional currency is other than the U.S.
dollar, all balance sheet accounts have been translated using the exchange rates in effect at each balance sheet date. Operational accounts have been
translated using the average exchange rate prevailing during each year. The resulting translation adjustments are reported as a component of accumulated
other comprehensive income (loss) in equity.
Vision and Focus Areas
Our vision of how the industry will evolve is being driven by the change in enterprise mobility, cloud computing , Big Data and AI. We believe that our
technology and extensive services will allow us to expand our offerings into the cloud and mobile enterprise markets with speed, scale and flexibility. We
intend to remain focused on both the technology and business architectures that will enable our customers to take advantage of the cost efficiencies and
competitive advantages conveyed by these technologies. We intend to continue to prudently take advantage of opportunities to capture market transitions
and to put our assets to use in existing and new markets as the recovery continues. We believe that our strategy and our ability to innovate and execute
may enable us to improve our competitive position in difficult business conditions and may continue to provide us with long-term growth opportunities.
47
Key Factors Affecting Our Business
Our operations and the operating metrics discussed below have been and will likely continue to be affected by certain key factors as well as certain
historical events and actions. The key factors affecting our business and results of operations include among others, dependence on a limited number of
core product families, selected vertical software solutions and services, competition, ability to realize benefits from business acquisitions, dependence on
a key customer for a significant percentage of our revenues and changes in the mix of revenues generated by different revenue elements affect our gross
margins and profitability. For further discussion of the factors affecting our results of operations, see “Risk Factors.”
Dependence on a limited number of core product families and services
We derive a significant portion of our revenues from sales of application and integration platforms primarily under our Magic xpa, Magic xpi,
FactoryEye, Magic SmartUX and AppBuilder brands and from related professional services, software maintenance and technical support as well as from
packaged software solutions in several business verticals (mainly human recourses, cargo handling, patient medical records and billing), and from other
IT professional services, which include IT consulting and outsourcing services. Our future growth depends heavily on our ability to effectively develop
and sell new products developed by us or acquired from third parties as well as add new features to existing products. A decrease in revenues from our
principal products and services would adversely affect our business, results of operations and financial condition.
Competition
We compete with other companies in the areas of application platforms, business integration and business process management, and in the applications
and services markets in which we operate. The growth of the SaaS and Enterprise Mobility market has increased the competition in these areas. We
expect that such competition will continue to increase in the future, both with respect to our technology, applications and services which we currently
offer and applications and services which we and other vendors are developing. Increased competition, direct and indirect, could adversely affect our
business, financial condition and results of operations.
We also compete with other companies in the technical IT consulting and outsourcing services industry. This industry is highly competitive and
fragmented and has low entry barriers. We, through eight of our subsidiaries in the United States and five of our subsidiaries in Israel, compete for
potential customers with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical IT consulting
services and, to a lesser extent, temporary personnel agencies. We expect competition to increase, and we may not be able to remain competitive.
Some of our existing and potential competitors are larger companies, have substantially greater resources than us, including financial, technological,
marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us. We may not be able to differentiate our
products and services from those of our competitors, offer our products as part of integrated systems or solutions to the same extent as our competitors, or
successfully develop or introduce new products that are more cost-effective, or offer better performance than our competitors. Failure to do so could
adversely affect our business, financial condition and results of operations.
Dependence on key customers
We depend heavily on repeat software and professional services revenues from our base of existing customers. Our two largest customers accounted for
20.6% and 16.8% of our revenues in the years ended December 31, 2022 and 2023, respectively, and our five largest customers accounted for 26.4% and
22.9% of our revenues in the years ended December 31, 2022 and 2023, respectively. If these existing customers decide not to continue utilizing our
professional services, not to renew their existing engagements, not to continue using our products, or decide to significantly decrease their total
expenditures with us, it may adversely affect our business, results of operations and financial condition. While one of these five customers is under a
contract until December 31, 2027, under their master services agreements, the other customers may terminate their agreements with us upon only a 30-
days’ notice and without any penalty.
The decrease we experienced in 2023 in the share of two of our largest clients out of our overall revenues, resulted from our largest revenue generating
client, which without any advance notification and due to internal reasons unrelated to our software services, decided during the third quarter of 2023 and
going forward to immediately suspend significant parts of its active time and materials-based projects.
48
Revenue Mix
We derive our revenues from the sale of proprietary and third-party software licenses, related professional services, maintenance and technical support as
well as from other IT professional services. In recent years the decline in our gross margin was primarily affected by the change in proportion of our
revenues generated from the sale of each of those elements of our revenues. Our revenues from the sale of our proprietary software licenses, related
professional services, maintenance and technical support have higher gross margins than our revenues from third party software licenses and IT
professional and outsourcing services. Any increase in the portion of third-party software license sales out of total license sales will decrease our gross
profit margin. If the relative proportion of our revenues from the sale of IT professional services continues to increase as a percentage of our total
revenues, our gross profit margins may continue to decline in the future.
The breakdown of our revenue mix for the twelve-month period of 2023 remained stable as approximately 17.4% related to our software solutions and
82.6% related to our professional services, compared to 17.5% related to our software and 82.5% related to our professional services in 2022. The
decrease in our revenues from professional services is due: (i) to currency headwinds caused by the significant deterioration of the New Israeli Shekel
(NIS) relative to the U.S. dollar in 2023 (reaching 9.7% for the year), which has hurt our Israeli shekel-denominated operations by approximately $22.9
million for the year; and (ii) to a substantial and unexpected decline in demand for our Professional services from several of our important U.S.-based
blue-chip customers (including our largest client) which, without any advance notification and due to internal reasons unrelated to our software services,
decided during the third quarter and going forward to suspend significant parts of their active time and materials based projects. Behind the decline also
lies the ongoing challenging macroeconomic climate, which did not help our ability to overcome the primary adverse factors that weigh against us and the
outbreak of the Israel’s war against the terrorist organization Hamas, which, among other things, has over the course of the fourth quarter led to the
drafting to active military service of approximately 200 out of our 1,554 Israeli employees.
The breakdown of our gross profit mix for the twelve-month period of 2023 changed to approximately 36% of our gross profit related to our software
solutions and 64% related to our professional services in 2023 as a whole, compared to 40% related to our software and 60% related to our professional
services in 2022 as a whole.
We may encounter difficulties in realizing the potential financial or strategic benefits of recent and future business acquisitions.
A significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three key factors: growing our
customer base, expanding geographically and adding complementary solutions to our portfolio— all while we seek to ensure our continued high quality
of services and product delivery. As such, in recent years we made numerous of acquisitions. Mergers and acquisitions of companies are inherently risky
and subject to many factors outside of our control and no assurance can be given that our future acquisitions will be successful and will not adversely
affect our business, operating results, or financial condition. In the future, we may seek to acquire or make strategic investments in complementary
businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order to expand our
business. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Prior acquisitions have
resulted in a wide range of outcomes, from successful introduction of new products and technologies to a failure to do so. Even when an acquired
company has previously developed and marketed products, there can be no assurance that new product enhancements will be made in a timely manner or
that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.
If we acquire another business, we may face difficulties, including:
● Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
● Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread
operations resulting from acquisitions;
● Potential difficulties in completing projects associated with in-process research and development;
● Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger
market positions;
● Insufficient revenue to offset increased expenses associated with acquisitions; and
● The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and
continuing after announcement of acquisition plans.
49
Impact of Currency Fluctuations and of Inflation
Our financial statements are stated in U.S. dollars, our functional currency. However, a substantial portion of our revenues and costs are incurred in other
currencies, particularly NIS, Euros, Japanese yen, and the British pound. We also maintain substantial non-U.S. dollar balances of assets, including cash,
accounts receivable, and liabilities, including accounts payable and debts to banks and financial institutions. Therefore, fluctuations in the value of the
currencies in which we do business relative to the U.S. dollar may adversely affect our business, results of operations and financial condition. The
depreciation of such other currencies in relation to the U.S. dollar has the effect of reducing the U.S. dollar value of any of our liabilities which are
payable in those other currencies (unless such costs or payables are linked to the U.S. dollar). Such depreciation also has the effect of decreasing the U.S.
dollar value of any asset that is denominated in such other currencies or receivables payable in such other currencies (unless such receivables are linked to
the U.S. dollar). In addition, the U.S. dollar value of revenues and expenses denominated in such other currencies would decrease. Conversely, the
appreciation of any currency in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked assets and the U.S. dollar
amounts of any unlinked liabilities and increasing the U.S. dollar value of revenues and expenses denominated in other currencies.
In addition, while we incur a portion of our costs in NIS, the U.S. dollar cost of our operations in Israel is influenced by the extent to which any increase
in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the U.S. dollar.
Because exchange rates between the NIS, euro, Japanese Yen and the British pound and the U.S. dollar fluctuate continuously, exchange rate fluctuations
and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. We cannot assure you
that in the future our results of operations may not be adversely affected by currency fluctuations.
In 2023 and in 2022, the NIS and Japanese yen depreciated relative to the US dollar by 9.7% and 6.9%, respectively and 4% and 19.7%, respectively
(based on the average exchange rates over the course of 2023 as compared to 2022 and 2022 as compared to 2021, respectively), thereby decreasing the
US dollar value of the revenues that we generated in those other currencies and having a negative impact on our revenues and on our results of
operations. However, in 2021, the NIS appreciated relative to the US dollar by 6% which had a positive impact on our revenues and on our results of
operations. A continued trend of depreciation of such currencies relative to the US dollar in future periods would have a similar adverse impact.
The following table sets forth for the periods indicated (depreciation) or appreciation of the U.S. dollar against the most important currencies for our
business and the Israeli consumer price index:
New Israeli Shekel
Euro
Japanese Yen
British Pound
Israeli Consumer Price Index
Segments
2019
Year Ended December 31,
2021
2020
2022
2023
(7.8)%
2.0%
(1.2)%
(3.1)%
0.6%
(7.0)%
(8.5)%
(5.0)%
(3.4)%
(0.7)%
(3.3)%
8.4%
(11.7)%
1.1%
2.8%
13.2%
6.1%
14.6%
12.2%
5.3%
3.1%
(3.6)%
7.2%
(5.5)%
3.0%
We report our results on the basis of two reportable business segments: software services (which include proprietary and non-proprietary software
technology and complementary services) and IT professional services. Set forth below is segment information for the years ended December 31, 2021,
2022 and 2023.
2023
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation expenses
Capitalized software development costs
EBITDA
Software
services
Unallocated
IT professional
services
expense
(U.S. dollars in thousands)
Total
$
$
$
92,906
71,863
21,043
9,614
(3,183)
27,474
$
$
$
$
$
442,146
400,949
41,197
14,333
$
-
5,132
(5,132) $
404
55,530
$
(4,728) $
535,052
477,944
57,108
24,351
(3,183)
78,276
50
2022
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation expenses
Capitalized software development costs
EBITDA
2021
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation expenses
Capitalized software development costs
EBITDA
Explanation of Key Income Statement Items
Software
services
Unallocated
IT professional
services
expense
(U.S. dollars in thousands)
Total
99,374
72,115
27,259
10,321
(3,059)
34,521
$
$
$
467,418
427,446
39,972
9,102
-
49,074
$
$
$
$
-
5,469
(5,469) $
372
-
(5,097) $
566,792
505,030
61,762
19,795
(3,059)
78,498
Software
services
IT professional
services
expense
(U.S. dollars in thousands)
Unallocated
Total
95,589
74,863
20,726
10,619
(3,193)
28,152
$
$
$
$
$
384,736
347,712
37,024
8,846
$
-
5,627
(5,627) $
372
45,870
$
(5,255) $
480,325
428,202
52,123
19,837
(3,193)
68,767
$
$
$
$
$
$
Revenues. Revenues are derived from sales of software licenses (proprietary and non-proprietary), related professional services, maintenance and
technical support and other IT professional services, which include, cloud computing and IT consulting and outsourcing services. Revenues may continue
to be affected by factors including market uncertainty, which can result in cautious spending in our global markets; changes in the geopolitical
environment; sales cycles; fluctuation of exchange rates; changes in the mix of direct sales and indirect sales and variations in sales channels.
Cost of Revenues. Cost of revenues for software sales consist primarily of software production costs, royalties and licenses payable to third parties, as
well as amortization of capitalized and acquired software costs. Cost of revenues for maintenance and technical support and professional services consists
primarily of personnel expenses, subcontracting and other related costs. Cost of revenues for software sales is affected by changes in the mix of products
sold; price competition; sales discounts; fluctuation of exchange rates; and increases in labor costs. Service gross margin may be impacted by various
factors such as the change in mix between technical support services and advanced IT professional services, the timing of technical support service
contract initiations and renewals and the timing of our strategic investments in headcount and resources to support this business.
Research and Development Expenses, Net. Research and development costs consist primarily of personnel expenses of employees engaged in on-going
research and development activities, subcontracting, development tools and other related expenses. The capitalization of software development costs is
applied as reductions to gross research and development costs to calculate net research and development expenses.
51
The following table sets forth the gross research and development costs, capitalized software development costs, and the net research and development
expenses for the periods indicated:
Gross research and development costs
Less capitalized software development costs
Research and development expenses, net
2021
Year ended December 31,
2022
(U.S. dollars in thousands)
2023
$
$
12,188
(3,193)
8,995
$
$
13,149
(3,059)
10,090
$
$
13,511
(3,183)
10,328
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related expenses for sales and marketing personnel,
sales commissions, third party royalties, marketing programs and campaigns, website related expenses, public relations, on-line advertising, industry
analyst relations, promotional materials, travel expenses and conferences and trade shows exhibit expenses, as well as amortization of acquired customer
relationships recorded as a result of business combinations.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses for executive, accounting,
human resources and administrative personnel, professional fees, legal expenses, provisions for credit losses, and other general and administrative
corporate expenses.
Financial income (expenses), net. Net financial income (expenses) consists primarily of interest earned on cash equivalents deposits and marketable
securities, bank fees and interest paid on loans received, interest expenses related to liabilities in connection with acquisitions and impact of foreign
currency exchange rates fluctuations.
Results of Operations
The following table presents selected consolidated statement of operations data for the periods indicated as a percentage of total revenues:
Revenues:
Software
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Operating costs and expenses:
Research and development, net
Selling and marketing,
General and administrative
Change in valuation of contingent consideration related to acquisitions
Total operating expenses, net
Operating income
Financial income (expenses), net
Increase in valuation of contingent consideration related to acquisitions
Income before taxes on income
Tax on income
Net income attributable to non-controlling interests
Net income attributable to Magic’s shareholders
52
Year ended
December 31,
2022
2023
5.8%
6.1%
88.1%
100.0%
1.9%
0.6%
70.1%
72.6%
27.4%
1.8%
8.3%
6.6%
(0.2)%
16.5%
10.9%
(0.6)%
(0.1)%
10.2%
(2.0)%
(1.0)%
7.1%
6.1%
6.4%
87.5%
100.0%
2.2%
0.6%
68.6%
71.4%
28.6%
1.9%
8.3%
7.6%
0.1%
17.9%
10.7%
(0.8)%
(0.1)%
9.8%
(1.9)%
(1.0)%
6.9%
Year Ended December 31, 2023 Compared with Year Ended December 31, 2022
Revenues. Revenues in 2023 decreased by 5.6% from $566.8 million in 2022 to $535.1 million in 2023.
Revenues from the software services business segment decreased by 6.5% from $99.4 million in 2022 to $92.9 million in 2023. On a constant currency
basis (calculated based on average currency exchange rates for the twelve months ended December 31, 2022), revenues for 2023 would have decreased
by approximately 2.6% to $96.8 million compared to 2022, $3.9m million higher than our reported revenue figure for the year.
Revenues from the IT professional services business segment decreased by 5.4% from $467.4 million in 2022 to $442.2 million in 2023. The decrease in
revenues was mainly attributable to i) a decrease of $54.1 million in our professional services in North America and ii) a decrease of $19.0 million mainly
due to the devaluation of the NIS versus U.S dollar. The decrease we experienced in 2023 in North America, resulted mainly from our largest revenue
generating client, which without any advance notification and due to internal reasons unrelated to our software services, decided during the third quarter
of 2023 and going forward to immediately suspend significant parts of its active time and materials-based project, this was offset by i) first time
consolidation of our subsidiary KMT acquired on June 8, 2023 which contributed $4.4 million and ii) a strong demand from existing customers in Israel
for our professional services mainly in the financial and defense sectors.
The following table summarizes our revenues by geographical market for the years ended December 31, 2022 and 2023:
United States
Israel
Europe
Japan
Other
Total revenues
2021
Year ended December 31,
2022
(U.S. dollars in thousands)
2023
$
$
254,342
180,462
30,085
11,443
3,993
480,325
$
$
308,485
205,258
39,247
10,121
3,681
566,792
$
$
250,842
214,129
55,180
10,847
4,055
535,052
Cost of Revenues. Cost of revenues decreased by approximately 7.1% from $411.4 million in 2022 to $382.1 million in 2023.
Cost of revenues from the software services business segment decreased by 0.1% from $37.7 million in 2022 to $37.6 million in 2023. As percentage of
revenues, cost of revenues from the software services business segment increased from 38% in 2022 to 40.5% in 2023.
Cost of revenues from the IT professional services business segment decreased by 7.8% from $373.7 million in 2022 to $344.5 million in 2023. As
percentage of revenues, cost of revenues from the IT professional services business segment decreased by 210 basis points from 80.0% in 2022 to 77.9%
in 2023. The decrease in cost of revenues from the IT professional services business segment in absolute numbers is in line with the decrease in revenues
from the IT professional services business segment.
Gross Margin. Gross margin increased by 120 basis points from 27.4% in 2022 to 28.6% in 2023. The increase in our gross margin is attributable to the
favorable change of our revenue mix related to our software solutions which carries a higher gross margin compared to our professional which carries a
lower gross margin.
Research and Development Expenses, Net. Gross research and development costs increase by 3.0% from 13.1 million in 2022 to $13.5 million in 2023.
Net research and development costs increased by 2.4% from $10.1 million in 2022 to $10.3 million in 2023. In 2023, we capitalized $3.2 million of
software development costs compared to $3.1 million in 2022. Gross (Net) research and development costs as a percentage of revenues was 2.5% (1.9%)
in 2023 compared to 2.3% (1.8%) in 2022.
Selling and Marketing Expenses. Selling and marketing expenses decreased by 5.0% from $46.9 million in 2022 to $44.5 million in 2023. Selling and
marketing expenses as a percentage of revenues remained stable at 8.3% in both 2022 and 2023. The decrease in the sales and marketing expenses in
absolute numbers is due to the decline in revenues in our IT professional services in north American market which resulted with lower level of costs
recorded with respect to payroll, commission and bonuses of our sales and marketing teams and reduced headcount.
53
General and Administrative Expenses. General and administrative expenses increased by 12.2% from $36.6 million in 2022 to $41.1 million in 2023.
General and administrative expenses as a percentage of revenues increased from 6.5% in 2022 to 7.7% in 2023. The increase in expenses is attributable
mainly to i) an increase of $1.7 million in our stock based compensation costs from $2.1 million in 2022 to $3.8 million in 2023, ii) and increase of $1.7
million resulted from the first full year inclusion of The Goodkind Group, LLC (consolidated upon acquisition as of August 2022) and the first-time
inclusion of KMT (consolidated upon acquisition as of June 2023) and iii) an increase of $1.1 million related to costs recorded with respect to increase in
valuation of contingent consideration related to acquisitions.
Financial Expenses, Net. We recorded net financial expenses of $3.6 million in 2022 compared to $4.2 million in 2023. The increase is mainly attributed
to i) $3.3 million increase in interest expenses with respect to loans from financial institutions and ii) increase of $0.6 million in bank charges, negative
foreign exchange differences and other financial expenses offset by $3.5 million increase in interest income from deposits, positive foreign exchange
differences and other financial income.
Taxes on Income. We recorded taxes on income of $11.1 million in 2022 compared to $9.9 million in 2023. The decrease in our tax expenses is in line
with the decrease in our taxable income. As a percentage of pre-tax income, tax expenses amounted to approximately 19.4% in 2022, compared to 18.9%
in 2023.
Net Income Attributable to Our Shareholders. Our net income decreased from $40.5 million in 2022 to $37 million in 2023, primarily attributable to the
decrease in our operating income of $4.7 million.
Year Ended December 31, 2022 Compared with Year Ended December 31, 2021
Please see Item 5A of our Form 20-F for the Year ended December 31, 2022 filed on May 11, 2023 for this comparison.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations through cashflow generated by our operations, proceeds from our public offerings in 1991 (approximately
$8.5 million), 1996 (approximately $5.0 million), 2000 (approximately $79.6 million) and 2014 (approximately $54.7 million), private equity investments
in 1998 (approximately $12.2 million), 2010 (approximately $20.3 million), and in 2018 (approximately $34.6 million). In addition, we have also
financed our operations through short-term and long-term loans from financial institutions.
In November 2016, we obtained a NIS 120 million loan linked to the New Israel Shekel from an Israeli financial institution. We intended to use the
proceeds from this loan for our general corporate purposes, which may include the funding of our working capital needs and the funding of potential
acquisitions. The principal amount of the loan is payable in seven equal annual payments and the final payment was paid on November 2, 2023. The loan
carried a fixed interest rate of 2.60% per annum, payable in two semi-annually payments.
On June 1, 2021, we obtained a loan (“Loan A”) in the amount of $ 15 million from an Israeli bank. The principal amount of Loan A is payable in eight
equal semi-annual installments with the final payment due on December 1, 2025 and bears a fixed interest rate of SOFR + 2.1% per annum, payable in
two semi-annual payments.
On March 31, 2022, we entered into a secured credit agreement, or the Credit Agreement, with an Israeli bank. Pursuant to the Credit Agreement, we
borrowed $25 million for a five-year term. This loan will mature on March 31, 2027, and will be repaid in 5 equal annual installments, whereas the
interest will be paid and calculated on a quarterly basis. This loan bears interest at the rate of SOFR + 2.25%.
On March 27, 2023, we entered into a loan agreement (“Loan B”) with an Israeli bank, pursuant to which we borrowed $20,000 for a four-year term.
Loan B will mature on March 27, 2027, and will be repaid in four (4) equal annual instalments of $6,052 (including interest) starting March 27, 2024.
Loan B bears interest at the rate SOFR + 3.38%.
On June 7, 2023, the Company entered into a loan agreement (“Loan C”) with an Israeli bank, pursuant to which, the Company borrowed ILS 60,000
thousand for a five-year term (the “Bank Loan”). The Bank Loan will mature on May 7, 2028, and will be repaid in five (5) equal annual instalments of
ILS 12,000 thousand (not including interest) starting May 7, 2024. The Bank Loan bears an interest rate of prime + 0.92% per annum, payable in two
semi-annual payments.
54
Loans B and C which may be prepaid under certain circumstances, is subject to various financial covenants which mainly consist of the following:
a. Our equity will not be lower than $150 million (one hundred million U.S. Dollars at all times);
c. The ratio of our total financial debts less cash to total assets will not exceed 30%;
c. The ratio of our total financial debts less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not exceed
3.25 to 1;
To date, we are in full compliance with the financial covenants of Loans B and C.
As of December 31, 2023, we had $109 million in cash and cash equivalents, short-term bank deposits and available-for-sale marketable securities with
net working capital of approximately $114.9 million and long term debts to banks and others of approximately $52.3 million compared to $87.0 million
in cash and cash equivalents and available-for-sale marketable securities, with net working capital of approximately $93.0 million and long term debts to
banks and others of approximately $30.4 million, as of December 31, 2022.
As of December 31, 2022, and 2023, our long-term and short-term debt amounted to $51.1 million and $81.2 million, respectively and our put options for
non-controlling interests as of December 31, 2022 and 2023 amounted to $28.3 million and $18.9 million, respectively.
Based on our current operating forecast, we believe that our cash and cash equivalents (including available-for-sale marketable securities and existing
working capital), will be sufficient to meet our cash requirements for working capital and capital expenditures for at least the next 12 months. We assume
that our cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating
results, accounts receivable collections, payments of loans and the timing and amount of tax and other payments.
We believe the overall credit quality of our portfolio is strong, with our cash equivalents and fixed income portfolio invested in securities with a
weighted-average credit rating exceeding A. Our fixed income and publicly traded equity securities are classified as Level 2 investments, as measured
under IFRS 13, “Fair Value Measurements,” as these vendors either provide a quoted market price in an active market or use observable inputs.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Net income from operations
Adjustments to reconcile net income to net cash provided by operating activities
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Year ended
December 31,
2022
2023
(U.S. dollars in thousands)
$
$
$
46,279
10,336
56,615
(34,458)
(18,276)
(8,909)
(5,028) $
42,502
26,490
68,992
(27,616)
(17,293)
(1,202)
22,881
Net cash provided by operating activities was $89.0 million for the year ended December 31, 2023, compared to $56.6 million for the years ended
December 31, 2022.
Net cash provided by operations in 2023 consisted primarily of $42.5 million of net income adjusted for non-cash activities. The material upwards
adjustments in cash flow reflecting non-cash activity included adjustments due to $20.5 million of depreciation and amortization of capitalized research
and development assets, other intangible assets, property, plants and equipment and operating right-of-use assets, $3.8 million of stock-based
compensation expenses, a $18.4 million increase in trade receivables, offset in part by a $7.2 million decrease in accrued expenses and other accounts
payable, payments in connection with contingent considerations arising from acquisitions in the amount of $6.6 million and a $3.2 million change in
deferred taxes.
55
Net cash provided by operations in 2022 consisted primarily of $46.3 million of net income adjusted for non-cash activities, including $19.8 million of
depreciation and amortization of capitalized research and development assets, other intangible assets, property, plants and equipment and operating right-
of-use assets, $2.1 million of stock-based compensation expenses, a $1.9 million decrease in other long term and short term accounts receivable and
prepaid expenses, a $0.1 million increase in trade payables, a $1.0 million decrease in accrued expenses and other accounts payable, payments in
connection with contingent considerations arising from acquisitions in the amount of $3.9 million. and a $0.5 million decrease in deferred revenues,
offset by a $3.9 million change in deferred taxes, net and a $2.6 million increase in trade receivables.
Net cash used in investing activities was $27.6 million for the year ended December 31, 2023, compared to net cash used in investing activities of $34.5
million for the year ended December 31, 2022.
Net cash used in investing activities in 2023 is primarily attributable to $14.2 million used in our acquisition of KMT and $11.3 million related to cash
paid in conjunction with deferred payments and contingent liabilities related to our prior years acquisitions.
Net cash used in investing activities in 2022 is primarily attributable to $21.7 million used in business combinations, $4.4 million used to purchase
property and equipment and $3.1 million of capitalized software development costs, loan extended to related party in the amount of $2.3 million, as well
as investment in short-term bank deposits which amounted to $1.7 million.
Net cash used in financing activities was $17.3 million for the year ended December 31, 2023, primarily attributable to dividend distributions of $30.8
million, dividends paid to non-controlling interests of $4.1 million and repayment of short-term and long-term loans of $21 million, which were offset by
proceeds from short-term and long-term loans received in the amount of $49.5 million.
Net cash used in financing activities was $18.3 million for the year ended December 31, 2022, primarily attributable to dividend distributions of $24.8
million, dividends paid to non-controlling interests of $4.2 million and repayment of short-term and long-term loans of $14.3 million, which were offset
by proceeds from short-term and long-term loans received in the amount of $30.7 million.
Dividends
We have paid dividends since September 2012 consistent with our Board of Directors’ dividend policy. On August 2017, our board of directors amended
our dividend distribution policy, whereas, each year we distribute a dividend of up to 75% of our annual net income attributable to our shareholders
(previously 50%), subject to applicable law. Our Board of Directors may at its discretion and at any time, change, whether as a result of a one-time
decision or a change in policy, the rate of dividend distributions or decide not to distribute a dividend. The dividend is to be distributed on a semi-annual
basis.
For information about our dividend policy and distributions, see Item 8A. “Financial Information - Consolidated Statements and Other Financial
Information.”
General
Our consolidated financial statements appearing in this annual report have been prepared in U.S. dollars and in accordance with IFRS.
Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in currencies other than
the U.S. dollar are converted into dollars in accordance with the International Accounting Standard 21 (IAS 21) “The Effects of Changes in Foreign
Exchange Rates.” The majority of our sales are made outside of Israel and a substantial part of them is in dollars. In addition, a substantial portion of our
costs is incurred in dollars. Since the dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the
dollar is our functional and reporting currency and accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into
dollars using the foreign exchange rate in effect at each balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured
and recorded at the exchange rate in effect at the date of the transaction. For certain foreign subsidiaries whose functional currency is other than the U.S.
dollar, all balance sheet accounts have been translated using the exchange rates in effect at each balance sheet date. Operational accounts have been
translated using the average exchange rate prevailing during each year. The resulting translation adjustments are reported as a component of accumulated
other comprehensive income (loss) in equity.
56
C. RESEARCH AND DEVELOPMENT
Our research and development and support personnel work closely with our customers, our prospective customers and relevant market analysts to
determine our requirements and to design enhancements and new releases to meet market needs. We periodically release enhancements and upgrades to
our core products. In the years ended December 31, 2021, 2022 and 2023, we invested $12.2 million, $13.2 million and $13.5 million in research and
development, respectively. Research and development activities take place in our facilities in Israel, India, and Japan.
As of December 31, 2023, we employed 256 employees in research and development activities, of which 99 persons were located in Israel, 131 persons
in India, 20 persons in Russia, 5 persons in Japan (when measured on a full time basis) and 1 person in the US. Our product development team includes
technical writers who prepare user documentation for our products. In addition, we have also entered into arrangements with subcontractors for the
preparation of product user documentation and certain product development work.
For additional information regarding product development see Item 4. “Information on the Company - Business Overview - Product Development.”
D. TREND INFORMATION
For information see discussion in Item 4. “Information on the Company-Business Overview-Industry Background and Trends” and Item 5. “Operating
and Financial Review and Prospects - Results of Operations.”
E. CRITICAL ACCOUNTING POLICIES AND ESTIMATIONS
Critical Accounting Policies and Estimations
We have identified the policies below as critical to the understanding of our financial statements. The preparation of our consolidated financial statements
in conformity with IFRS requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the
accompanying financial statements and the related footnotes. Actual results may differ from these estimates. To facilitate the understanding of our
business activities, certain of our accounting policies that we believe are the most important to the portrayal of our financial condition and results of
operations and that require management’s subjective judgments are described below. We base our judgments on our experience and various assumptions
that we believe are reasonable.
Revenue Recognition
Revenue from contracts with customers is recognized when control of the promised goods or services are transferred to the customers. The transaction
price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties
(such as taxes).
The Company enters into contracts that can include various combinations of products, software and professional services, as detailed below, which are
generally distinct from each other and accounted for as separate performance obligations.
The Company derives its revenues from licensing the rights to use its software (proprietary and non-proprietary), provision of related professional
services, maintenance and technical support as well as from other software and IT professional services (either fixed price or based on time and
materials). The Company sells its products primarily through direct sales force and indirectly through distributors and value-added resellers.
The Company recognizes revenue when or as it satisfies a performance obligation by transferring software license or software related services to the
customer, either at a point in time or over time.
When the Company enters into a contract for the sale of software license which does not require significant implementation services, and the customer
receives the rights to use the perpetual or term-based software license, the Company recognizes revenue from the sale of the software license at the time
of delivery, when the customer receives control of the software license. The software license is considered a distinct performance obligation recognized at
a point-in-time, as the customer can benefit from the software on its own or together with other readily available resources.
57
Revenue from long-term contracts which involve significant implementation, customization, or integration of the Company’s software license to
customer-specific requirements are considered as one performance obligation satisfied over-time. The underlying deliverable is owned and controlled by
the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue of such contracts over time using
cost inputs, which recognize revenue and gross profit as work is performed based on a ratio between actual costs incurred compared to the total estimated
costs for the contract, to measure progress toward completion of its performance obligations.
In addition, the Company provides professional services that do not involve significant customization to customer-specific specifications (typically
staffing or consulting services). The revenue is recognized as the services are performed, either on a straight-line basis or based on the hours of services
(time and material) that were provided to the customer, in accordance with the terms of the contracts.
The Company’s revenues from post contract support are derived from annual maintenance contracts providing for unspecified upgrades for new versions
and enhancements on a when-and-if-available basis for an annual fee, as well as technical support for software licenses previously sold. The right for an
unspecified upgrade for new versions and enhancements on a when-and-if-available basis do not specify the features, functionality and release date of
future product enhancements for the customer to know what will be made available and the general timeframe in which it will be delivered. The
Company considers the post contract support performance obligation as a distinct performance obligation that is satisfied over time and recognized on a
straight-line basis over the contractual period.
Revenues from professional services, both related to software and IT professional services businesses consists of either fixed price or time and materials,
are considered performance obligations that are satisfied over time and revenues are recognized as the services are provided.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Stand-alone selling prices of
software licenses are typically estimated using the residual approach. Stand-alone selling prices of services are typically estimated based on observable
transactions when these services are sold on a standalone basis.
When another party is involved in providing goods or services to the customer, the Company examines whether the nature of its promise is a performance
obligation to provide the defined goods or services itself, which means the Company is a principal and therefore recognizes revenue in the gross amount
of the consideration, or to arrange that another party provide the goods or services which means the Company is an agent and therefore recognizes
revenue in the amount of the net commission.
The Company is a principal when it controls the promised goods or services before their transfer to the customer. Indicators that the Company controls
the goods or services before their transfer to the customer include, inter alia, as follows: the Company is responsible for fulfilling the promises in the
contract; the Company has inventory risk before the goods or services are transferred to the customer; and the Company has discretion in setting the
prices of the goods or services.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross and net
reporting of revenue depends on the relative facts and circumstances of each sale.
The Company pays commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales or
profit goals. The Company expenses sales commissions as they are incurred when the amortization period would have been less than one year. In
addition, generally, sales commissions which are paid upon contract renewal are commensurate with the initial commissions as the renewal amounts are
substantially identical to the initial commission costs. During the years ended December 31, 2023 and 2022, no costs have been capitalized.
The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period
between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
58
Research and development costs
Research expenditures incurred in the process of software development are recognized in profit or loss when incurred. An intangible asset arising from a
software development project or from the development phase of an internal project is recognized if we can demonstrate the technical feasibility of
completing the intangible asset so that it will be available for use or sale; our intention to complete the intangible asset and use or sell it; the ability to use
or sell the intangible asset; how the intangible asset will generate future economic benefits; the availability of adequate technical, financial and other
resources to complete the intangible asset; and the ability to measure reliably the respective expenditure asset during its development. We establish
technological feasibility upon completion of a detailed program design or a working model.
Capitalized software costs are measured at cost less any accumulated amortization and any accumulated impairment losses on a product-by-product basis.
Amortization of capitalized software costs begin when development is complete, and the product is available for use or for sale. We consider a product to
be available for use when we complete its internal validation of the product that is necessary to establish that the product meets its design specifications
including functions, features, and technical performance requirements. Internal validation includes the completion of coding, documentation and testing
that ensure bugs are reduced to a minimum. The internal validation of the product takes place a few weeks before the product is made available to the
market. In certain instances, we enter into a short pre-release stage, during which the product is made available to a selected number of customers as a
beta program for their own review and familiarization. Subsequently, the release is made generally available to customers. Once a product is considered
available for use, the capitalization of costs ceases and amortization of such costs to “cost of sales” begins.
Capitalized software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software product
(between 3-5 years, due to their high rates of acceptance, the continued reliance on these products by existing customers, and the demand for such
products from prospective customers, all of which validate our expectations) which provides greater amortization expense compared to the revenue-curve
method.
We assess the recoverability of these intangible assets on a regular basis by assessing the net realizable value of these intangible assets based on the
estimated future gross revenues from each product reduced by the estimated future costs of completing and disposing of it, including the estimated costs
of performing maintenance and customer support over its remaining economical useful life using internally generated projections of future revenues
generated by the products, cost of completion of products and cost of delivery to customers over its remaining economical useful life.
During the years ended December 31, 2021, 2022 and 2023, no such unrecoverable amounts were identified.
Consolidated financial statements
The consolidated financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control is
achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee. Potential voting rights are considered when assessing whether an entity has control. The consolidation of the
financial statements commences on the date on which control is obtained and ends when such control ceases.
Non-controlling interests
Non-controlling interests in subsidiaries, represent the equity in subsidiaries not attributable, directly or indirectly, to a parent. Non-controlling interests
are presented in equity separately from the equity attributable to the equity holders of the Company. Profit or loss and components of other
comprehensive income are attributed to the Company and to non-controlling interests. Losses are attributed to non-controlling interests even if they result
in a negative balance of non-controlling interests in the consolidated statement of financial position. A change in the ownership interest of a subsidiary,
without a loss of control, is accounted for as a change in equity by adjusting the carrying amount of the non-controlling interests with a corresponding
adjustment of the equity attributable to equity holders of the Company less / plus the consideration paid or received.
Put option granted to non-controlling interests
When the Company grants to non-controlling interests a put option to sell part or all of their interests in a subsidiary, during a certain period, even if such
purchase obligation is conditional on the counterparty’s exercise of its contractual right to cause such redemption, if the put option agreement does not
transfer to the Company any benefits incidental to ownership of the equity instrument (i.e. the Company does not have a present ownership in the shares
concerned) then at the end of each reporting period the non-controlling interests (to which a portion of net profit attributable to non-controlling interests is
allocated) are classified as a financial liability, as if such put-able equity instrument was redeemed on that date. The difference between the non-
controlling interests carrying amount at the end of the reporting period and the present value of the liability is recognized directly in equity of the
Company, under “Additional paid-in capital”.
59
The Company re-measures the financial liability at the end of each reporting period based on the estimated present value of the consideration to be
transferred upon the exercise of the put option.
If the option is exercised in subsequent periods, the consideration paid upon exercise is treated as settlement of the liability. If the put option expires, the
liability is settled and a portion of the investment in the subsidiary disposed of, without loss of control therein.
Business Combinations and goodwill
Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration
transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, the Company chooses
whether to measure the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their proportionate share in the fair
value of the acquiree’s net identifiable assets.
A put option granted by the Group to non-controlling interests is accounted for using the expected purchase approach under the presumption that the put
option will be exercised, and therefore the parent effectively holds an interest in the subsidiary’s shares as if the put option had been exercised. A put
option granted by the Group to non-controlling interests for which the consideration to be paid in cash or other financial asset is recognized as a liability
in the amount of the present value of the option’s exercise price.
Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IFRS 9.
Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net
identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date.
Impairment of non-financial assets
The Company evaluates the need to record an impairment of non-financial assets (property, plant and equipment, capitalized software costs and other
intangible assets, goodwill) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of
non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair
value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that
reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-
generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated, at the acquisition date, to each of our cash-generating
units that are expected to benefit from the synergies of the combination. The Company reviews goodwill for impairment once a year, on December 31, or
more frequently if events or changes in circumstances indicate that there is an impairment.
Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the
goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of cash-generating units)
to which goodwill has been allocated is less than the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment
loss is allocated first to goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent periods.
During the years ended December 31, 2021, 2022 and 2023, no impairment loss was identified.
60
Stock-based Compensation
The Company’s senior management officers are entitled to remuneration in the form of equity-settled share-based payment transactions. The cost of
equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date. The fair value is determined using
an acceptable option pricing model.
The cost of equity-settled transactions is recognized in profit or loss together with a corresponding increase in equity during the period which the
performance and/or service conditions are to be satisfied ending on the date on which the relevant employees become entitled to the award (“the vesting
period”). The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to
which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are
treated as vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions (service and/or performance) are
satisfied.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method over the
requisite service period of each of the awards. The Company accounts for forfeitures as they occur.
Contingencies
From time to time, we are subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of
business, including claims with respect to intellectual property, contracts, employment and other matters. We accrue a liability when it is both probable
that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of
probability and the determination as to whether a loss is reasonably estimable. These accruals are reviewed and adjusted to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s principal market,
or in the absence of a principal market, in the most advantageous market.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming
that market participants act in their economic best interest. Fair value measurement of a non-financial asset takes into account a market participant’s
ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in
its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to
measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
Level 1
Level 2
Level 3
-
-
-
quoted prices (unadjusted) in active markets for identical assets or liabilities.
inputs other than quoted prices included within Level 1 that are observable directly or indirectly.
inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market
data).
All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the
lowest level input that is significant to the entire fair value measurement.
61
Income Tax
Current or deferred taxes are recognized in profit or loss, except to the extent that they relate to items which are recognized in other comprehensive
income or equity.
● Current taxes:
The current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date as well
as adjustments required in connection with the tax liability in respect of previous years.
● Deferred taxes:
Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts
attributed for tax purposes. Deferred taxes are measured at the tax rate that is expected to apply when the asset is realized or the liability is
settled, based on tax laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are reviewed at each
reporting date and reduced to the extent that it is not probable that they will be utilized. Deductible carryforward losses and temporary
differences for which deferred tax assets had not been recognized are reviewed at each reporting date and a respective deferred tax asset is
recognized to the extent that their utilization is probable.
Taxes that would apply in the event of the disposal of investments in investees have not been considered in computing deferred taxes, as long as
the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would apply in the event of
distribution of earnings by investees as dividends have not been considered in computing deferred taxes, since the distribution of dividends does
not involve an additional tax liability or since it is the Company’s policy not to initiate distribution of dividends from a subsidiary that would
trigger an additional tax liability.
Taxes on income that relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted for pursuant to
IAS 12.
Deferred taxes are offset if there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred taxes
relate to the same taxpayer and the same taxation authority.
● Uncertain tax position:
A provision for uncertain tax positions, including additional tax and interest expenses, is recognized when it is more likely than not that the
Company will have to use its economic resources to pay the obligation.
Changes in accounting policies – initial adoption of new financial reporting and accounting standards:
1. Amendment to IAS 1, “Presentation of Financial Statements”:
In January 2020, the IASB issued an amendment to IAS 1, “Presentation of Financial Statements” regarding the criteria for determining the
classification of liabilities as current or non-current (“the Original Amendment”). In October 2022, the IASB issued a subsequent amendment
(“the Subsequent Amendment”).
According to the Subsequent Amendment:
● Only financial covenants with which an entity must comply on or before the reporting date will affect a liability’s classification as
current or non-current.
● In respect of a liability for which compliance with financial covenants is to be evaluated within twelve months from the reporting date,
disclosure is required to enable users of the financial statements to assess the risks related to that liability. The Subsequent Amendment
requires disclosure of the carrying amount of the liability, information about the financial covenants, and the facts and circumstances at
the end of the reporting period that could result in the conclusion that the entity may have difficulty in complying with the financial
covenants.
62
According to the Original Amendment, the conversion option of a liability affects the classification of the entire liability as current or non-
current unless the conversion component is an equity instrument.
The Original Amendment and Subsequent Amendment are both effective for annual periods beginning on or after January 1, 2024 and must be
applied retrospectively. Early adoption is permitted.
The above Amendments are not expected to have a material impact on the Company’s consolidated financial statements.
2. Amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures”:
In May 2023, the IASB issued amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures” (“the
Amendments”) to address the presentation of liabilities and the associated cash flows arising out of supplier finance arrangements, as well as
disclosures required for such arrangements.
The disclosure requirements in the Amendments are intended to assist users of financial statements in understanding the effects of supplier
finance arrangements on an entity’s liabilities, cash flows and exposure to liquidity risk.
The Amendments are effective for annual reporting periods beginning on or after January 1, 2024. Early adoption is permitted but will need to
be disclosed.
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements.
3. Amendments to IAS 21, “The Effects of Changes in Foreign Exchange Rates”:
In August 2023, the IASB issued “Amendments to IAS 21: Lack of Exchangeability (Amendments to IAS 21, “The Effects of Changes in
Foreign Exchange Rates”)” (“the Amendments”) to clarify how an entity should assess whether a currency is exchangeable and how it should
measure and determine a spot exchange rate when exchangeability is lacking.
The Amendments set out the requirements for determining the spot exchange rate when a currency lacks exchangeability. The Amendments
require disclosure of information that will enable users of financial statements to understand how a currency not being exchangeable affects or is
expected to affect the entity’s financial performance, financial position and cash flows.
The Amendments apply for annual reporting periods beginning on or after January 1, 2025. Earlier adoption is permitted, in which case, an
entity is required to disclose that fact. When applying the Amendments, an entity should not restate comparative information. Instead, if the
foreign currency is not exchangeable at the beginning of the annual reporting period in which the Amendments are first applied (the initial
application date), the entity should translate affected assets, liabilities and equity as required by the Amendments and recognize the differences
as of the initial application date as an adjustment to the opening balance of retained earnings and/or to the foreign currency translation reserve, as
required by the Amendments.
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements.
63
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
Name
Guy Bernstein
Sagi Schliesser (1)
Ron Ettlinger (1)
Naamit Salomon
Avi Zakay (1)
Sami Totah
Asaf Berenstin
Arik Kilman
Yakov Tsaroya
Yael Ilan
Arik Faingold
Idan Faingold
Eli Schwartz
Yuval Baruch
Hanan Shahaf
Yuval Lavi
Age
56
52
57
59
45
66
46
71
54
55
47
46
41
57
72
55
Position
Chief Executive Officer and Director
External Director
External Director
Director
Director
Director
Chief Financial Officer
Chairman, Software Solutions division
Chief Executive Officer of Coretech Consulting Services
Chief Executive Officer of Complete Business Solutions
President, Integration Solutions division
Chief Executive Officer of CommIT Technology Solutions Ltd
Chief Executive Officer of Comblack IT Ltd
Chief Executive Officer of Hermes Logistics
Chief Executive Officer of Roshtov Software Industries Ltd
Vice President Technology and innovation of Software Solutions division
(1) Member of our Audit and Compensation Committees
Messrs. Guy Bernstein, Avi Zakay, Sami Totah and Ms. Naamit Salomon were re-elected as directors at our May 13, 2024 annual general meeting of
shareholders to serve as directors until our next annual general meeting of shareholders.
Mr. Sagi Schliesser is serving as external director pursuant to the provisions of the Israeli Companies Law for his third three-year term.
Mr. Ron Ettlinger was re-elected at our May 13, 2024 annual general meeting of shareholders to serve as external director for a one-year term pursuant to
the provisions of the Israeli Companies Law.
Messrs. Guy Bernstein and Asaf Berenstin are first cousins. Mr. Arik Faingold is the brother of Mr. Idan Faingold who is an executive officer of the
Commit Group and the two brothers are the owners of the 13.6% minority interest in that company. Other than such relationships, there are no family
relationships among our directors and senior executives.
Guy Bernstein has served as our chief executive officer since April 2010 and has served as a director of our company since January 2007 and served as
the chairman of our board of directors from April 2008 to April 2010. Mr. Bernstein has served as the chief executive officer of Formula Systems, our
parent company, since January 2008. From December 2006 to November 2010, Mr. Bernstein served as a director and the chief executive officer of
Emblaze Ltd. or Emblaze, our former controlling shareholder. Mr. Bernstein also serves as the chairman of the board of directors of Sapiens International
Corporation N.V., or Sapiens, and is the chairman of the board of directors of Matrix IT Ltd., both of which are subsidiaries of Formula Systems. From
April 2004 to December 2006, Mr. Bernstein served as the chief financial officer of Emblaze and he has served as a director of Emblaze since April 2004.
Prior to that and from 1999, Mr. Bernstein served as our chief financial and operations officer. Prior to joining our company, Mr. Bernstein was senior
manager at Kost Forer Gabbay & Kasierer, a member of Ernst& Young Global, from 1994 to 1997. Mr. Bernstein holds a B.A. degree in accounting and
economics from Tel Aviv University and is a certified public accountant (CPA) in Israel.
Sagi Schliesser has served as an external director of our company since November 2015 and is a member of our audit committee. Mr. Schliesser has been
the co-founder and chief executive officer of TabTale, a creator of innovative games, interactive books and educational apps since 2010. Prior to
founding TabTale, Mr. Schliesser was the CTO of Sapiens International Corporation (NASDAQ and TASE: SPNS), managing Sapiens Technologies.
Previously Mr. Schliesser served for seven years as VP of R&D and CTO of IDIT Technologies Ltd., a global provider of insurance software solutions.
Before that Mr. Schliesser was one of the founders of WWCOM, a B2B enablement software startup. Mr. Schliesser holds a B.Sc. degree with honors in
Computer Science and Psychology from Tel Aviv University, as well as a Master’s degree in Computer Science from the Interdisciplinary Center in
Herzliya and an M.B.A. degree with honors in Business Psychology from Hamaslool Ha’akademi Shel Hamichlala Leminhal.
64
Ron Ettlinger has served as an external director of our company since December 2014 and is a member of our audit committee. Mr. Ettlinger is the
founder and has been the chief executive officer of “Nippon Europe Israel Ltd.,” a leading provider of car multimedia advanced systems, since October
2000. Prior to that, Mr. Ettlinger was the owner and general manager of Universal Ltd., a car service. Mr. Ettlinger is the founder and since July 2014 has
served as chief executive officer of Nippon Lights Ltd., a leading provider of LED lights and panels. Mr. Ettlinger holds a B.A. degree in Business, with a
major in finance and marketing from Tel-Aviv College of Management.
Naamit Salomon has served as director of our company since March 2003. Since January 2010, Ms. Salomon has served as a partner in an investment
company. Ms. Salomon also serves as a director of Sapiens, which is part of the Formula group. Ms. Salomon served as the chief financial officer of
Formula Systems from August 1997 until December 2009. From 1990 through August 1997, Ms. Salomon served as the controller of two large privately
held companies in the Formula group. Ms. Salomon holds a B.A. degree in Economics and Business administration from Ben Gurion University and an
LL.M. degree from Bar-Ilan University.
Avi Zakay has served as director of our company since February 2018. Mr. Zakay has been the sales manager of the Volkswagen dealership and
showroom in Rishon Letzion (Champion Motors) since 2014. In 2013, he served as the sales manager of the showroom of Mitsubishi Motors in Netanya,
and from 2007 to 2013, he served as a sales manager of BMW and Mercedes-Benz in Tel Aviv. Mr. Zakay holds a B.A. degree in Business
Administration and studied for an M.B.A. degree, both from College of Management in Tel-Aviv.
Sami Totah (66) has been a General Partner at Viola Growth, a private equity firm investing in the hi-tech arena, for the last 15 years. He is a seasoned
executive with over 25 years of international management leadership in the IT industry. He has extensive knowledge and execution experience in
overseeing very large IT projects, and has built an extensive global network with customers, partners, investors and executives. From 2002 to 2008, he
served as an active chairman in several leading startup companies, defining long-term strategy and assisting in company scale-up. He has served as a
board member in ECtel (NASDAQ: ECTX) and Pilat Media (AIM: PGB). Mr. Totah formerly served as Senior Vice President of Operations (COO) at
Amdocs (NYSE:DOX), Israel’s largest software company.
Asaf Berenstin has served as our chief financial officer since April 2010. In November 2011, Mr. Berenstin was appointed as Chief Financial Officer of
our parent company Formula Systems (1985) Ltd. in addition to his position as chief financial officer of our company. Prior to that and from August
2008, Mr. Berenstin served as our corporate controller. Mr. Berenstin also serves as a director of Michpal Micro Computers (1983) Ltd., a director at
TSG IT Advanced Systems Ltd., and is a director at InSync staffing, all of them are subsidiaries of Formula Systems. Prior to joining our company and
from July 2007, Mr. Berenstin served as a controller at Gilat Satellite Networks Ltd. (NASDAQ: GILT). From October 2003 to July 2008, Mr. Berenstin
was a certified public accountant at Kesselman & Kesselman, a member of PriceWaterhouseCoopers. Mr. Berenstin holds a B.A. degree in Accounting
and Economics and an M.B.A. degree, both from Tel Aviv University, and is a certified public accountant (CPA) in Israel.
Yuval Lavi has served as Vice President Technology and Innovation since 2017. Prior to that and from April 2013, Mr. Lavi served as vice president,
Corporate Professional Services& Support. Mr. Lavi joined our company in 2013. Before joining our company, Mr. Lavi served for 18 years as the Chief
Technology Officer and joint founder of Kopel Reem Ltd.
Arik Kilman has served as chairman of our Software Solutions division since January 2017 and president of AppBuilder Software Solutions division
since January 2012, following our acquisition of AppBuilder Solutions Ltd. at which time he was named Chief Executive Officer of AppBuilder. Prior to
joining our company, Mr. Kilman served as Chief Executive Officer of BluePhoenix Solutions Ltd., the former parent of AppBuilder from May 2003 to
January 2009 and from April 2010 to December 2011. Mr. Kilman holds a B.A. degree in Economics and Computer Science from New York City
College of Technology.
Yakov Tsaroya has served as chief executive officer of our subsidiary, CoreTech Consulting Group LLC, since 2006. Mr. Tsaroya has also served as
Chief Executive Officer of Fusion Solution LLC and Xsell Resources Inc. since our acquisition of these companies in 2010. Mr. Tsaroya holds a B.A.
degree in Accounting and Finance from the College of Administration in Israel and is a certified public accountant (CPA) in Israel.
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Yael Ilan joined Complete Business Solutions as CEO in 2023 after spending six years as CEO at Formula Telecom Solution. Prior to joining Magic
group, Yael held several managerial positions in Amdocs USA and Amdocs Israel Professional Services groups, supporting large operations for
communication service providers in Israel and abroad. Yael also served as an independent consultant of operations management and control for high-tech
and low-tech companies. Yael holds a B.A degree from Jerusalem’s Hebrew University in Economics and Business Administration and a professional
Diploma in Computer Sciences.
Arik Faingold has served as president of our Integration Solutions division since July 2012. Mr. Faingold has served as chairman of Comm-IT Group
since 2009. Mr. Faingold was General Manager of Open TV Israel, part of OpenTV Global, from 2003 to 2009. Mr. Faingold served as Co-founder and
CTO of Betting Corp from 1999 to 2003. Mr. Faingold holds a B.A. degree in Computer Science from the Interdisciplinary Center in Herzliya and an
M.B.A. degree from Tel Aviv University.
Idan Faingold has served as chief executive officer of CommIT Technology Solutions since September 2005. Mr. Faingold brings extensive experience
from the IT and Communication arena after serving close to a decade in the software unit of the Israeli Air Force where he managed Security and Data
Communication. During his tenure in the army, he also held numerous senior management positions, leading large, cutting-edge technology projects. Mr.
Faingold holds a B.A. degree in Computer Science from the Academic College of Tel Aviv-Yaffo.
Eli Schwartz has served as chief executive officer of Comblack IT since September 2009. Mr. Schwartz brings extensive experience from the IT and
main frame arena after serving close to a decade at Mamram (Israel Defense Force Center of Computing and Information Systems). Mr. Schwartz holds a
B.A. degree in Management and Computer Science from the Open University of Israel.
Yuval Baruch has served as an officer of our company since his appointment in September 2012 as the chief executive officer of Hermes Logistics
Technologies (HLT). Mr. Baruch has also served as the chief executive officer of Pilat HR solutions since April 2013. Mr. Baruch was chief executive
officer of J.R. Holdings & Development from November 2007 to January 2012. Mr. Baruch has served as an external director of Matrix IT, a publicly
traded company in Israel, since 2011. Between 2004 and 2008 Mr. Baruch launched, managed and divested a chain of fitness centers in Israel. Mr.
Baruch holds a B.A. degree in Marketing and Finance from The College of Management in Israel and an M.B.A. degree from the Stanford Graduate
School of Business.
Hanan Shahaf became an officer of our company in July 2016, as part of the Roshtov Software Industries Ltd. acquisition. Mr. Shahaf was one of
Roshtov’s founders in 1989 and has served as its Chief Executive Officer and a director since its inception. He also served as a director and chairman on
several board of private companies. Mr. Shahaf holds a B.sc degree in Industrial engineering and Management and an M.B.A. from Northwestern
University (Kellogg School of Management) and Tel Aviv University (Recanati Graduate School of Business Administration).
B. COMPENSATION
The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December
31, 2023.
All directors and executive officers as a group (16 persons)
Salaries,
fees,
commissions,
stock-based
compensation
and bonuses
8,369,000
$
Pension,
retirement
and similar
benefits
$
223,000
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including
the requirement to disclose information concerning the amount and type of compensation paid to our chief executive officer, chief financial officer and
the three other most highly compensated executive officers, rather than on an aggregate basis. Nevertheless, a recent amendment to the regulations
promulgated under the Israeli Companies Law requires us to disclose the annual compensation of our five most highly compensated officers on an
individual basis, rather than on an aggregate basis, as was previously permitted for Israeli public companies listed overseas. Under the Companies Law
regulations, this disclosure is required to be included in the annual proxy statement for our annual meeting of shareholders each year, which we furnish to
the SEC under cover of a Report of Foreign Private Issuer on Form 6-K. Because of that disclosure requirement under Israeli law, we are also including
such information in this annual report, pursuant to the disclosure requirements of Form 20-F.
66
The table below reflects the compensation granted to our five most highly compensated officers during or with respect to the year ended December 31,
2023. All amounts reported in the table reflect the cost to our company, as recognized in our financial statements for the year ended December 31, 2023.
2023 Summary Compensation Table
Name and Position
Idan Faingold,
Chief Executive Officer of CommIT Technology Solutions
Ltd
Arik Faingold, President, Integration Solutions Division
Yakov Tsaroya
Chief Executive Officer of Coretech Consulting Services
Eli Schwartz, Chief Executive Officer of Comblack I.T. Ltd.
Arik Kilman, Chairman, Software Group
$
$
$
$
$
Salary
Bonus(1)
Equity Based
Compensation
(2)
All Other
Compensation
(3)
Total
281,000
411,000
400,000
423,000
-
$
$
$
$
$
145,000
145,000
1,142,000
233,000
611,000
$
$
$
$
$
1,430,000
1,428,000
-
-
-
$
$
$
$
$
98,000
-
9,000
-
-
$
$
$
$
$
1,954,000
1,984,000
1,551,000
656,000
611,000
(1) Amounts reported in this column represent annual incentive bonuses granted to the covered executives based on performance-metric based formulas
set forth in their respective employment agreements.
(2) Amounts reported in this column represent the grant date fair value computed in accordance with accounting guidance for share-based compensation.
(3) Amounts reported in this column include personal benefits and perquisites, including those mandated by applicable law. Such benefits and
perquisites may include, to the extent applicable to the respective covered executive, payments, contributions and/or allocations for savings funds
(e.g., Managers Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, vacation, car or car
allowance, medical insurances and benefits, risk insurance (e.g., life insurance or work disability insurance), telephone expense reimbursement,
convalescence or recreation pay, relocation reimbursement, payments for social security, and other personal benefits and perquisites consistent with
our company’s guidelines. All amounts reported in the table represent incremental cost to our company.
During the year ended December 31, 2023, we paid to each of our outside and independent directors an annual fee of $20,660 and a per-meeting
attendance fee of $768. Such fees are paid based on the fees detailed in a schedule published semi-annually by the Committee for Public Directors under
the Israeli Securities Law. The above compensation excludes stock-based compensation costs in accordance with IFRS 2.
As of April 1, 2024, our directors and executive officers as a group, then consisting of 16 persons, held 190,725. All such options were granted under our
2007 Incentive Compensation Plan. See Item 6E “Directors, Senior Management and Employees - Share Ownership - Stock-Based Compensation Plans.”
C. BOARD PRACTICES
Introduction
According to the Israeli Companies Law and our Articles of Association, the management of our business is vested in our board of directors. The board
of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our executive officers are responsible
for our day-to-day management. The executive officers have individual responsibilities established by our board of directors. Executive officers are
appointed by and serve at the discretion of the board of directors, subject to any applicable agreements.
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Election of Directors
Our articles of association provide for a board of directors consisting of no less than three and no more than eleven members or such other number as may
be determined from time to time at a general meeting of shareholders. Our board of directors is currently composed of five directors.
Pursuant to our articles of association, all of our directors are elected at our annual general meeting of shareholders, which are required to be held at least
once during every calendar year and not more than 15 months after the last preceding meeting. Except for our external directors (as described below), our
directors are elected by a vote of the holders of a majority of the voting power represented and voting at such meeting and hold office until the next
annual meeting of shareholders following the annual meeting at which they were appointed. Directors (other than external directors) may be removed
earlier from office by resolution passed at a general meeting of our shareholders. Our board of directors may temporarily fill vacancies in the board until
the next annual meeting of shareholders, provided that the total number of directors will not exceed the maximum number permitted under our articles of
association.
Under the Israeli Companies Law, our board of directors is required to determine the minimum number of directors who must have “accounting and
financial expertise” (as such term is defined in regulations promulgated under the Israeli Companies Law). In determining such number, the board of
directors must consider, among other things, the type and size of the company and the scope of and complexity of its operations. Our board of directors
has determined that at least one director must have “accounting and financial expertise,” within the meaning of the regulations promulgated under the
Israeli Companies Law.
External and Independent Directors
External Directors. The Israeli Companies Law requires companies organized under the laws of the State of Israel with shares that have been offered to
the public in or outside of Israel to appoint at least two external directors. No person may be appointed as an external director if the person is a relative of
the controlling shareholder of the company or if the person or the person’s relative, partner, employer or any entity under the person’s control has or had,
on or within the two years preceding the date of the person’s appointment to serve as an external director, any affiliation with the company or the
controlling shareholder of the company or the controlling shareholder’s relative or any entity controlled by the company or by the controlling shareholder
of the company. If the company does not have a controlling shareholder or a person or entity which holds 25% of the total voting rights of the company,
an external director may also not have an affiliation with chairman of the board, the chief executive officer, beneficial owner of 5% or more of the issued
shares or the voting power of the company and the most senior executive officer of the company in the finance field. The term “affiliation” includes an
employment relationship, a business or professional relationship maintained on a regular basis (other than negligible relationships), control and service as
an “office holder” as defined in the Israeli Companies Law, however, “affiliation” does not include service as a director of a private company prior to its
first public offering if the director was appointed to such office for the purpose of serving as an external director following the company’s first public
offering. In addition, no person may serve as an external director if the person’s position or other activities create or may create a conflict of interest with
the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. In addition, a
director in a company may not be appointed as an external director in another company if at that time, a director of the other company serves as an
external director in the first company. Moreover, a person may not be appointed as an external director, if he or she is employed by the Israeli Securities
Authority or by Tel-Aviv Stock Exchange. If, at the time external directors are to be appointed, all current members of the board of directors which are
not the controlling shareholders of the company or their relatives are of the same gender, then at least one external director must be of the other gender.
At least one of the external directors must have “accounting and financial expertise” and the other external directors must have “professional expertise,”
as such terms are defined by regulations promulgated under the Israeli Companies Law.
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The election of the nominee for external director requires the affirmative vote of (i) the majority of the votes actually cast with respect to such proposal
including at least a majority of the voting power of the non-controlling shareholders (as such term is defined in the Israel Securities Law, 1968) or those
shareholders who do not have a personal interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s
connections with the controlling shareholder, who are present in person or by proxy and vote on such proposal, or (ii) the majority of the votes cast on
such proposal at the meeting, provided that the total votes cast in opposition to such proposal by the non-controlling shareholders or those shareholders
who do not have a personal interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s connections
with the controlling shareholder (as such term is defined in the Israel Securities Law, 1968) does not exceed 2% of all the voting power in the Company.
External directors serve for a three-year term. However, in accordance with the Israeli Companies Law regulations, external directors of a public
company whose shares are traded on the NASDAQ may be appointed for additional periods of three-year each provided that the audit committee and the
board of directors have approved that, given the external director’s expertise and contribution to the board and committee meetings, such appointment is
for the company’s benefit and provided further that the nomination to additional periods of three-year terms is approved through one of the following
mechanisms: (i) the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint
external directors for their initial term (described above); or (ii) one or more shareholders holding 1% or more of the voting rights proposed the nominee,
and the nominee is approved by the majority of the votes actually cast with respect to such proposal and all of the following conditions are met: (a) the
majority of votes does not include the votes of the controlling shareholder or votes of shareholders who have a personal interest in approval of the
nomination except for a personal interest that is not as a result of the shareholder’s connections with the controlling shareholder and (b) the total votes
cast in favor of such proposal by the non-controlling shareholders or those shareholders who do not have a personal interest in the approval of the
nomination except for a personal interest that is not as a result of the shareholder’s connections with the controlling shareholder exceed 2% of all the
voting power in the company.
External directors may be removed from office only by the same percentage of shareholders as is required for their election, or by a court, and then only
if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a
court to be unable to perform his or hers duties on a full time basis. External directors may also be removed by the court if they are found guilty of
bribery, fraud, administrative offenses or use of inside information.
Each committee of the board of directors that may exercise a responsibility of the board of directors must include at least one external director. The audit
committee must be comprised of at least three directors and include all the external directors. An external director is entitled to compensation as provided
in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in
connection with such service.
Until the lapse of two years from termination of office, we may not engage an external director, or his or her spouse or child to service as an office holder
and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.
Independent Directors. NASDAQ Stock Market Rules require us to establish an audit committee comprised of at least three members and only of
independent directors each of whom satisfies the respective “independence” requirements of the SEC and NASDAQ.
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Pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an external director; or (ii) a
director that serves as a board member less than nine years and the audit committee has approved that he or she meets the independence requirements of
an external director. A majority of the members serving on the audit committee must be independent under the Israeli Companies Law. In addition, an
Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of association pursuant to which a majority of its board of
directors will constitute individuals complying with certain independence criteria prescribed by the Israeli Companies Law. We have not included such a
provision in our articles of association. Pursuant to Israeli regulations adopted in January 2011, directors who comply with the independence
requirements of NASDAQ and the SEC are deemed to comply with the independence requirements of the Israeli Companies Law.
Our board of directors has determined that Mr. Sagi Schliesser, Mr. Ron Ettlinger both qualify as independent directors under the SEC and NASDAQ
requirements and as external directors under the Israeli Companies Law requirements. Our board of directors has further determined that Mr. Avi Zakay
and Mr. Sami Totah both qualify as independent directors under the SEC, NASDAQ and Israeli Companies Law requirements.
Committees of the Board of Directors
Audit Committee. Our audit committee, established in accordance with Sections 114-117 of the Israeli Companies Law and Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, assists our board of directors in overseeing the accounting and financial reporting processes of our company and audits
of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent public
accountants’ qualifications and independence, the performance of our internal audit function and independent public accountants, finding any
irregularities in the business management of our company for which purpose the audit committee may consult with our independent auditors and internal
auditor, proposing to the board of directors ways to correct such irregularities and such other duties as may be directed by our board of directors. The
responsibilities of the audit committee also include approving related-party transactions as required by law. The audit committee is also required to
determine whether any action is material and whether any transaction is an extraordinary transaction or non-negligible transaction, for the purpose of
approving such action or transaction as required by the Israeli Companies Law. Under Israeli law, an audit committee may not approve an action or a
transaction with a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members of the
audit committee and at least one of the external directors was present at the meeting in which an approval was granted.
Our audit committee is currently composed of Messrs. Ettlinger, Schliesser, Zakay and Totah, each of whom satisfies the “independence” requirements of
both the SEC and NASDAQ. We also comply with Israeli law requirements for audit committee members. Our board of directors has determined that Mr.
Ettlinger and Mr. Totah both qualify as a financial experts. The audit committee meets at least once each quarter.
Compensation Committee. In accordance with the Israeli Companies Law, we have a compensation committee, whose role is to: (i) recommend a
compensation policy for office holders and to recommend to the board, once every three years, on the approval of the continued validity of the
compensation policy that was determined for a period exceeding three years; (ii) recommend an update the compensation policy from time to time and to
examine its implementation; (iii) determine whether to approve the terms of service and employment of office holders that require the committee’s
approval; and (iv) exempt a transaction from the requirement of shareholders’ approval in accordance with the provisions of the Israeli companies Law.
The compensation committee also has oversight authority over the actual terms of employment of directors and officers and may make recommendations
to the board of directors and the shareholders (where applicable) with respect to deviation from the compensation policy that was adopted by the
company.
Under the Israeli Companies Law, a compensation committee must consist of no less than three members, including all of the external directors (who
must constitute a majority of the members of the committee), and the remainder of the members of the compensation committee must be directors whose
terms of service and employment were determined pursuant to the applicable regulations. The same restrictions on the actions and membership in the
audit committee as discussed above under “Audit Committee,” including the requirement that an external director serve as the chairman of the committee
and the list of persons who may not serve on the committee, also apply to the compensation committee. We have established a compensation committee
that is currently composed of Messrs. Ettlinger, Schliesser, Zakay and Totah.
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Internal Auditor
The Israeli Companies Law also requires the board of directors of a public company to appoint an internal auditor proposed by the audit committee. A
person who does not satisfy the Israeli Companies Law’s independence requirements may not be appointed as an internal auditor.
The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business
practice. Our internal auditor complies with the requirements of the Israeli Companies Law. Alkalay Monarov currently serves as our internal auditor.
Directors’ Service Contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand,
providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An “office
holder” is defined in the Israeli Companies Law as a chief executive officer, chief business manager, deputy general manager, vice general manager, any
other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title or a director or any other manager
directly subordinate to the general manager. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires
an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes
the duty to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought for his approval or performed by
him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty includes (i) avoiding any
conflict of interest between the office holder’s position in the company and any other position he holds or his personal affairs, (ii) avoiding any
competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the
office holder or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has
received due to his position as an office holder.
Disclosure of Personal Interests of an Office Holder
The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered,
disclose any personal interest that he or she may have and all related material information known to him or her and any documents in their position, in
connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than
in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the
office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s
descendants and the spouses of any of the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one director or the general manager.
Approval of Transactions with Office Holders and Controlling Shareholders
Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has a personal interest) must be
approved by the board of directors and, in some cases, by the audit committee or the compensation committee and by the board of directors, and under
certain circumstances shareholder approval may also be required, provided, however, that such transactions are for the benefit of the company. Subject to
certain exceptions. A person who has a personal interest in the approval of a transaction by the audit committee or the Board may not be present and take
part in the voting. An officer or a director who has a personal interest, may be present at the meeting for the purpose of presenting the transaction if the
chairman of the audit committee or the Board, as relevant, has determined that the presence of the officer or director is required. A director may be
present and vote at the meetings of the audit committee and Board if the majority of the directors have a personal interest in the approval of the
transaction. In such case, the transaction also requires approval by the general meeting. The disclosure requirements which apply to an office holder also
apply to such transaction with respect to his or her personal interest in the transaction.
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The Companies Law provides for certain procedural constraints on a public company entering into a transaction in which a controlling shareholder and
other interested parties have a personal interest. More specifically, Section 275 of the Companies Law provides that an extraordinary transaction (which
is defined as a transaction that is either not in a company’s ordinary course of business; or a transaction that is not undertaken in market conditions; or a
transaction that is likely to substantially influence the profitability of a company, its property or liabilities) between a public company and its controlling
shareholder, or an extraordinary transaction of a public company with a third party in which the controlling shareholder has a personal interest, including
a transaction of a public company with a controlling shareholder, directly or indirectly, for the receipt of services therefrom (and including a transaction
concerning the compensation arrangement of a controlling shareholder in its capacity as an employee or office holder of the company) (a “Controlling
Party Transaction”), requires the approval of the audit committee (and with respect to a transaction concerning the compensation arrangement – the
compensation committee), the board of directors and the general meeting of shareholders, provided however that the majority approving the transaction
shall include at least one half of the votes of shareholders who do not have a personal interest in the transaction and are participating in the vote, or that
the aggregate number of votes against the approval of the transaction, voted by shareholders who do not have such personal interest do not exceed 2% of
the entire voting rights in the company. Section 275 of the Companies Law further provides that if the term of the Controlling Party Transaction extends
beyond three years, the above approvals are required once every three years. However, if such transaction does not relate to a compensation arrangement,
then the audit committee may approve the transaction for a longer duration, provided that the audit committee determines that such duration is reasonable
under the circumstances. In accordance with the Israeli Companies law the audit committee is responsible to determine that Controlling Party
Transactions shall be subject to a competitive procedure or other similar procedure before such transactions are approved.
During the year ended December 31, 2023, we sold approximately $3.7 million of services to affiliated companies of Formula Systems. In 2023, we also
purchased from those affiliated companies approximately $3.4 million of hardware, software and services. We also provided Formula Systems cash
management, accounting and bookkeeping services for total consideration of $0.2 million.
Approval Process of Terms of Service and Employment of Office Holders
Under the Israeli Companies Law, the method of approval of Terms of Service and Employment of office holders must be approved as follows:
● With respect to an office holder who is not the general manager, a director, a controlling shareholder or a relative of the controlling shareholder:
● In the event the transaction is in accordance with the compensation policy of the company – approval (in the following order) of: (i)
compensation committee and (ii) board of directors.
● In the event the transaction is not in accordance with the compensation policy of the company – approval, in special cases (in the following
order), by the (i) compensation committee, (ii) board of directors and (iii) company’s shareholders, by a simple majority, provided that such
majority shall include (i) at least one half of the votes of shareholders who are participating in the vote and are not controlling shareholders or do
not have a personal interest regarding the approval of the compensation policy, or (ii) the aggregate number of the opposing votes, voted by
shareholders who do not have such personal interest or are not controlling shareholders, do not exceed two percent (2%) of the entire voting
rights in the company (the “Special Majority”). Under these circumstances, the compensation committee and board of directors are required to
approve the transaction based on certain considerations and include certain instructions in connection with the compensation policy. In the event
the company’s shareholders do not approve the compensation of the office holder, the compensation committee and board of directors may still
approve the transaction, in special cases and with detailed reasons and after discussion and examining the rejection of the company’s
shareholders.
● With respect to a company’s general manager (generally the equivalent of a CEO):
● In the event the transaction is in accordance with the compensation policy - approval (in the following order) by the: (i) compensation
committee, (ii) board of directors and (iii) company’s shareholders with the “Special Majority” described above.
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● In the event the transaction is not in accordance with the compensation policy – the approval process and requirements are the same as the
approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a relative of the
controlling shareholder.
● The Israeli Companies Law includes an exception from the shareholder approval requirement in connection with the approval of a transaction
with a general manager candidate, subject to certain conditions. In addition, in the event the company’s shareholders do not approve the
compensation of the general manager, the compensation committee and board of directors may still approve the transaction, in special cases and
with detailed reasons and after discussion and examining the rejection of the company’s shareholders.
● With respect to a director who is not a controlling shareholder or a relative of the controlling shareholder:
● In the event the transaction is in accordance with the compensation policy – approval (in the following order) by the: (i) compensation
committee, (ii) board of directors and (iii) company’s shareholders with a regular majority.
● In the event the transaction is not in accordance with the compensation policy – the approval process and requirements are the same as the
approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a relative of the
controlling shareholder (other than the possibility to approve a transaction that was not approved by the shareholders).
● With respect to a controlling shareholder or a relative of a controlling shareholder:
● In the event the transaction is in accordance with the compensation policy - approval (in the following order) by the: (i) compensation
committee, (ii) board of directors and (iii) company’s shareholders with the “Special Majority” described above.
● In the event the transaction is not in accordance with the compensation policy: the approval process and requirements are the same as the
approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a relative of the
controlling shareholder (other than the possibility to approve a transaction that was not approved by the shareholders).
In accordance with the Israeli Companies Law, the audit committee is responsible to determine that Controlling Party Transactions shall be subject to a
competitive procedure or other similar procedure before such transactions are approved.
Our latest amended compensation policy was adopted on February 25, 2021.
Provisions Restricting Change in Control of Our Company
Tender Offer. In certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would hold 25% or more of the voting rights in the company (unless there is already a 25% or greater shareholder of the
company) or more than 45% of the voting rights in the company (unless there is already a shareholder that holds more than 45% of the voting rights in the
company). If, as a result of an acquisition, the acquirer would hold more than 90% of a company’s shares or voting rights, the acquisition must be made
by means of a tender offer for all of the shares. A purchase by a tender offer is subject to additional requirements as specified in the Israeli Law and
regulations promulgated thereunder.
Merger. The Israeli Companies Law generally requires that a merger be approved by the board of directors and by the general meeting of the
shareholders. Upon the request of any creditor of a merging company, a court may delay or prevent the merger if it concludes that there is a reasonable
concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations. In addition, a merger may generally not be
completed unless at least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies, and (ii) 30 days have
passed since the merger was approved by the shareholders of each of the merging companies. The approval of merger by the company is also subject to
additional approval requirements as specified in the Israeli Companies Law and regulations promulgated thereunder.
73
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation and Indemnification of Office Holders
The Israeli Companies Law and our Articles of Association authorize us, subject to the receipt of requisite corporate approvals, to indemnify and exempt
our directors and officers, subject to certain conditions and limitations. Most recently, in November 2011 our shareholders approved a form of
indemnification and exculpation letter to ensure that our directors and officers (including any director and officer who may be deemed to be a controlling
shareholder, within the meaning of the Israeli Companies Law) are afforded protection to the fullest extent permitted by law as currently in effect. Under
the approved form of indemnification and exculpation letter, the total amount of indemnification allowed may not exceed an amount equal to 25% of our
shareholders’ equity in the aggregate, calculated with respect to each of our directors and officers.
The Israeli Companies Law provides that an Israeli company may not exculpate an office holder from liability for a breach of the duty of loyalty of the
office holder. The company may, however, approve an office holder’s act performed in breach of the duty of loyalty, provided that the office holder acted
in good faith, the act or its approval does not harm the company and the office holder discloses the nature of his or her personal interest in the act and all
material facts and documents a reasonable time before discussion of the approval. An Israeli company may exculpate an office holder in advance from
liability to the company, in whole or in part, for a breach of duty of care, but only if a provision authorizing such exculpation is inserted in its articles of
association. An Israeli company may also not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders.
The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for acts or omissions
performed by the office holder in such capacity for:
● A financial liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award
approved by a court;
● Reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding
instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an
indictment against the office holder or the imposition of any financial liability instead of criminal proceedings, or concluded without the filing of
an indictment against the office holder and a financial liability was imposed on the officer holder instead of criminal proceedings with respect to
a criminal offense that does not require proof of criminal intent;
● Reasonable litigation expenses, including attorneys’ fees, incurred by such office holder or which were imposed on him by a court, in
proceedings the company instituted against the office holder or that were instituted on the company’s behalf or by another person, or in a
criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a crime
which does not require proof of criminal intent; and
● Expenses, including reasonable litigation expenses and legal fees, incurred by such office holder as a result of a proceeding instituted against
him in relation to (A) infringements that may result in imposition of financial sanction pursuant to the provisions of Chapter H’3 under the
Israeli Securities Law or (B) administrative infringements pursuant to the provisions of Chapter H’4 under the Israeli Securities Law or (C)
infringements pursuant to the provisions of Chapter I’1 under the Israeli Securities Law; and (e) payments to an injured party of infringement
under Section 52ND(a)(1)(a) of the Israeli Securities Law.
74
In accordance with the Israeli Companies Law, a company’s articles of association may permit the company to:
● Undertake in advance to indemnify an office holder, except that with respect to a financial liability imposed on the office holder by any
judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of occurrences, which, in the opinion of the
company’s board of directors, are, at the time of the undertaking, foreseeable due to the company’s activities and to an amount or standard that
the board of directors has determined is reasonable under the circumstances; and
● Retroactively indemnify an office holder of the company.
Insurance for Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, insure an office holder for acts or omissions
performed by the office holder in such capacity for:
● A breach of his or her duty of care to the company or to another person;
● A breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that
his act would not prejudice the company’s interests; and
● A financial liability imposed upon the office holder in favor of another person.
Subject to the provisions of the Israeli Companies Law and the Israeli Securities Law, a company may also enter into a contract to insure an office holder
for (A) expenses, including reasonable litigation expenses and legal fees, incurred by the office holder as a result of a proceeding instituted against such
office holder in relation to (1) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 under the Israeli Securities
Law or (2) administrative infringements pursuant to the provisions of Chapter H’4 under the Israeli Securities Law or (3) infringements pursuant to the
provisions of Chapter I’1 under the Israeli Securities Law and (B) payments made to the injured parties of such infringement under Section 52ND(a)(1)
(a) of the Israeli Securities Law.
Limitations on Exculpation, Insurance and Indemnification
The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the
liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an
office holder, nor a provision in the articles of association exempting an office holder from duty to the company shall be valid, where such insurance,
indemnification or exemption relates to any of the following:
● A breach by the office holder of his duty of loyalty, except with respect to insurance coverage or indemnification if the office holder acted in
good faith and had reasonable grounds to assume that the act would not prejudice the company;
● A breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only
negligently;
75
● Any act or omission committed with intent to derive an unlawful personal gain; and
● Any fine, civil fine, financial sanction or forfeiture imposed on the office holder.
In addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance coverage for, an undertaking to indemnify or indemnification
of an office holder must be approved by the compensation committee and the board of directors and, if such office holder is a director or a controlling
shareholder or a relative of the controlling shareholder, also by the shareholders general meeting.
Our articles of association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject to the provisions of
the Israeli Companies Law.
On February 25, 2021, our shareholders approved that the coverage of our directors’ and officers’ liability insurance policy will be up to a maximum
amount of $60,000,000, both per claim and in the aggregate, plus up to $10,000,000 of Side A Difference in Conditions coverage. In addition, it was
approved that we may pay an annual premium not exceeding $2,000,000 per year (which may be increased by no more than 20% per year), and that any
renewal, extension or replacement thereof will be on terms substantially similar to or better (from the perspective of the directors and officers) than those
of the then-effective insurance policy.
Board Diversity
While we do not have a formal policy on diversity, our Board considers diversity to include the skill set, background, reputation, type and length of
business experience of our board members, as well as a particular nominee’s contribution to that mix. Although there are many other factors, the Board
seeks individuals with experience in our industry, sales and marketing, legal and accounting skills and board experience.
Board Diversity Matrix
Board Diversity Matrix for Magic Software Enterprises Ltd.
(As of 12/31/2023)
Country of Principal Executive Offices
Foreign Private Issuer
Disclosure Prohibited Under Home Country Law
Total Number of Directors
Part I: Gender Identity
Directors
Part II: Demographic Background
Underrepresented Individual in Home Country Jurisdiction
LGBTQ+
Did Not Disclose Demographic Background
Israel
Yes
No
6
Did Not
Disclose
Gender
Female
Male
Non-Binary
5
-
-
1
0
0
0
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D. EMPLOYEES
The following table presents the number of our employees categorized by geographic location as of December 31, 2021, 2022 and 2023:
Israel
Asia
North America
South Africa
Europe
Total
Year ended
December 31,
2022
1,415
216
1,965
8
557
4,161
2021
1,268
190
1,709
12
498
3,677
The following table presents the number of our employees categorized by activity as of December 31, 2021, 2022 and 2023:
Technical support and consulting
Research and development
Marketing and sales
Operations and administrations
Total
Year ended
December 31,
2022
3,513
257
231
160
4,161
2021
3,137
228
166
146
3,677
2023
1,554
226
1,321
11
516
3,628
2023
3,001
256
202
169
3,628
We consider our employees the most valuable asset of our company. We offer competitive compensation and comprehensive benefits to attract and retain
our employees. The remuneration and rewards include retention through share-based compensation and performance-based bonuses.
We believe that an engaged workforce is key to maintaining our ability to innovate. We have steadily increased our workforce and have been successful
in integrating our new employees and keeping our employees engaged. Investing in our employees’ career growth and development is an important focus
for us. We offer learning opportunities and training programs including workshops, guest speakers and various conferences to enable our employees to
advance in their chosen professional paths.
Our relationships with our employees in Israel are governed by Israeli labor legislation and regulations, extension orders of the Israeli Ministry of Labor
and personal employment agreements. Israeli labor laws and regulations are applicable to all of our employees in Israel. The laws concern various
matters, including severance pay rights at termination, notice period for termination, retirement or death, length of workday and workweek, minimum
wage, overtime payments and insurance for work-related accidents. We currently fund our ongoing legal severance pay obligations by paying monthly
premiums for our employees’ insurance policies and or pension funds. At the time of commencement of employment, our employees generally sign
written employment agreements specifying basic terms and conditions of employment as well as non-disclosure, confidentiality and non-compete
provisions.
77
E. SHARE OWNERSHIP
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of May 1, 2024 regarding the beneficial ownership by each of our directors and executive officers:
Name
Guy Bernstein
Asaf Berenstin
Ron Ettlinger
Naamit Salomon
Sagi Schliesser
Avi Zakay
Sami Totah
Arik Faingold
Yuval Baruch
Arik Kilman
Yakov Tsaroya
Yuval Lavi
Yael Ilan
Hanan Shahaf
*
Less than 1%
Number of
Ordinary
Shares
Beneficially
Owned (1)
150,000
38,225
--
--
--
--
--
--
--
--
2,500
--
--
--
Percentage of
Ownership (2)
*
*
--
--
--
--
--
--
--
--
*
--
--
--
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to
securities. Ordinary Shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for
computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting
and investment power with respect to all shares shown as beneficially owned by them.
(2) The percentages shown are based on 49,099,305 Ordinary Shares issued and outstanding as of April 1, 2024.
Stock-Based Compensation Plans
2007 Incentive Compensation Plan
In 2007, we adopted our 2007 Incentive Compensation Plan, or the 2007 Plan, under which we may grant options, restricted shares, restricted share units
and performance awards to employees, officers, directors and consultants of our company and its subsidiaries. The shares subject to the 2007 Plan may be
either authorized or unissued shares or previously issued shares acquired by our company or any of its subsidiaries. The total number of shares that may
be delivered pursuant to awards under the 2007 Plan shall not exceed 1,500,000 shares in the aggregate. If any award shall expire, terminate, be cancelled
or forfeited without having been fully exercised or satisfied by the issuance of shares, then the shares subject to such award shall be available again for
delivery in connection with future awards under the 2007 Plan.
In September 2013, our shareholders approved a 1,000,000 share increase in the number of Ordinary Shares available for issuance under the 2007 Stock
Option Plan.
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On December 31, 2015 our board of directors increased the amount of Ordinary Shares reserved for issuance by an additional 250,000 Ordinary Shares
and extended the plan by 10 years until August 1, 2027. As of December 31, 2023, an aggregate of 952,500 Ordinary Shares are available for future
grants under the Plan.
The 2007 Plan will terminate upon the earliest of: (i) August 31, 2027; (ii) the termination of all outstanding awards in connection with a corporate
transaction; or (iii) in connection with, and as a result of, any other relevant event, including the 2007 Plan’s termination by the Board of Directors.
Under the 2007 Plan, the option committee shall have full discretionary authority to grant or, when so restricted by applicable law, recommend the Board
of Directors to grant, pursuant to the terms of the 2007 Plan, options and restricted shares and restricted share units to those individuals who are eligible
to receive awards.
The 2007 Plan provides that each option will expire on the date stated in the award agreement, which will not be more than ten years from its date of
grant. The exercise price of an option shall be determined by the option committee of the Board of Directors and set forth in the award agreement. Unless
determined otherwise by the Board of Directors, the exercise price shall be equal to, or higher than, the fair market value of our company’s shares on the
date of grant.
Under the 2007 Plan, restricted shares and restricted share units shall not be purchased for less than the ordinary share’s par value, unless determined
otherwise by the Board of Directors.
Under the 2007 Plan in the event of any reclassification, recapitalization, merger or consolidation, reorganization, stock dividend, cash dividend,
distribution of subscription rights or other distribution in securities of the Company, stock split or reverse stock split, combination or exchange of shares,
repurchase of shares, or other similar change in corporate structure, that proportionally apply to all of our Ordinary Shares, we, shall substitute or adjust,
as applicable, the number, class and kind of securities which may be delivered under Section 4.1; the number, class and kind, and/or price (such as the
Option Price of Options) of securities subject to outstanding awards; and other value determinations applicable to outstanding awards, as determined by
our Board of Directors, in order to prevent dilution or enlargement of participants’ rights under the 2007 Plan; provided, however, that the number of
Ordinary Shares subject to any award shall always be a whole number. The Board of Directors shall also make appropriate adjustments and
modifications, in the terms of any outstanding awards to reflect such changes in our share capital, including modifications of performance goals and
changes in the length of performance periods, if applicable.
Our Board of Directors may, from time to time, alter, amend, suspend or terminate the 2007 Plan, with respect to awards that have not been granted,
subject to shareholder approval, if and to the extent required by applicable law. In addition, no such amendment, alteration, suspension or termination of
the 2007 Plan or any award theretofore granted, shall be made which would materially impair the previously accrued rights of a participant under any
outstanding award without the written consent of such participant, provided, however, that the Board of Directors may amend or alter the 2007 Plan and
the option committee may amend or alter any award, including any agreement, either retroactively or prospectively, without the consent of the applicable
participant, (i) so as to preserve or come within any exemptions from liability under any law or the rules and releases promulgated by the SEC, or (ii) if
the Board of Directors or the option committee determines in its discretion that such amendment or alteration either is (a) required or advisable for us, the
2007 Plan or the award to satisfy, comply with or meet the requirements of any law, regulation, rule or accounting standard, or (b) not reasonably likely
to significantly diminish the benefits provided under such award, or that such diminishment has been or will be adequately compensated.
During 2023, options to purchase an aggregate of 6,250 Ordinary Shares were exercised under the 2007 Plan at an average exercise price of $3.81 per
share, and 20,000 options were forfeited. As of December 31, 2023, our executive officers and directors as a group, consisting of 16 persons, held
190,725 Ordinary Shares.
F. DISCLOSURE OF A REGISTRANT’S ACTION TO RECOVER ERRONEOUSLY AWARDED COMPENSATION
Not applicable.
79
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
As of April 1, 2024, Formula Systems, an Israeli company traded on the NASDAQ Global Select Market and the TASE, held 22,933,809 or 46.71% of
our outstanding Ordinary Shares. Formula Systems is controlled by Asseco, a Polish company listed on the Warsaw Stock Exchange, which held as of
April 1, 2024 approximately 25.82% of the Ordinary Shares of Formula Systems. Based on the foregoing beneficial ownership by each of Formula and
Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us.
The following table sets forth as of December 31, 2023 certain information regarding the beneficial ownership by all shareholders known to us to own
beneficially 5.0% or more of our ordinary shares:
Name
Formula Systems (1985) Ltd. (3)
Harel Insurance (4)
Clal Insurance Enterprises Holdings Ltd. (5)
Number of
Ordinary
Shares
Beneficially
Owned(1)
22,933,809
5,255,936
3,420,060
Percentage of
Ownership(2)
46.71%
10.70%
6.97%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to
securities. Ordinary Shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for
computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting
and investment power with respect to all shares shown as beneficially owned by them.
(2) The percentages shown are based on 49,099,305 Ordinary Shares issued and outstanding as of December 31, 2023.
(3) Based on Amendment No. 19 to Schedule 13D filed by Formula Systems (1985) Ltd., or Formula Systems, with the SEC on May 23, 2022. Asseco
Poland S.A., or Asseco, holds 3,915,601 ordinary shares, representing 25.6% of the outstanding ordinary shares, of Formula Systems, as reported in
Asseco’s Amendment No. 5 to its beneficial ownership statement on Schedule 13D filed with the SEC on December 7, 2022. Asseco may therefore.
be deemed to be the indirect beneficial owner of the aggregate 22,933,809 ordinary shares of our company held directly by Formula Systems. The
address of Formula Systems is 1 Yahadut Canada Street, Or-Yehuda, Israel. The address of Asseco is 35-322 Rzeszow, ul.Olchowa 14, Poland.
(4) Based on Amendment No. 5 to the beneficial ownership report on Schedule 13G filed by Harel Insurance Investments & Financial Services Ltd., or
Harel Insurance, on January 30, 2024. Harel Insurance is a publicly held Israeli company. All of the 5,255,936 ordinary shares beneficially owned by
Harel Insurance are held for members of the public through, among others, provident funds and/or mutual funds and/or pension funds and/or
insurance policies and/or exchange traded funds, which are managed by subsidiaries of Harel Insurance, each of which subsidiaries operates under
independent management and makes independent voting and investment decisions.
(5) Based on Amendment No. 5 to the beneficial ownership report on Schedule 13G filed by Clal Insurance Enterprises Holdings Ltd., or Clal, on
February 13, 2023, reflecting its holdings as of December 31, 2022. Clal is a publicly held Israeli company. All 3,420,060 ordinary shares
beneficially owned by Clal are held for members of the public through, among others, provident funds and/or mutual funds and/or pension funds
and/or insurance policies and/or exchange traded funds, which are managed by subsidiaries of Clal, each of which subsidiaries operates under
independent management and makes independent voting and investment decisions.
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Significant Changes in the Ownership of Major Shareholders
Formula filed a Schedule 13D amendment on May 23, 2022 reflecting that it had purchased an aggregate of 629,638 Ordinary Shares in open market
transactions, for an aggregate purchase price of $8,978,481, as a result of which Formula’s beneficial ownership percentage of the outstanding Ordinary
Shares has increased from 45.3% to 46.3%.
Based on a Schedule 13G amendment filed on January 23, 2020, Harel Insurance Investments & Financial Services Ltd. held 3,622,378or 7.4% of our
Ordinary Shares. A Schedule 13G amendment filed with the SEC on January 27, 2021, reflected ownership of 4,835,262, or 9.86% of our Ordinary
Shares. A Schedule 13G amendment filed with the SEC on January 31, 2022, reflected ownership of 4,595,281, or 9.37% of our Ordinary Shares. A
Schedule 13G amendment filed with the SEC on January 17, 2023, reflected ownership of 4,627,166, or 9.4% of our Ordinary Shares. A Schedule 13G
amendment filed with the SEC on January 30, 2024, reflected ownership of 5,255,936, or 10.71% of our Ordinary Shares.
Clal filed a Schedule 13G/A filed with the SEC on February 10, 2020, reflected an ownership of 4,144,717, or 8.5% of our Ordinary Shares. A Schedule
13G/A filed with the SEC on February 16, 2021, reflected an ownership of 3,765,068, or 7.68% of our Ordinary Shares. A Schedule 13G/A filed with the
SEC on February 10, 2022, reflected an ownership of 3,681,659, or 7.51% of our Ordinary Shares. A Schedule 13G/A filed with the SEC on February 13,
2023, reflected a decrease in ownership to 3,420,060, or 6.97% of our Ordinary Shares.
Major Shareholders Voting Rights
Our major shareholders do not have different voting rights.
Record Holders
Based on a review of the information provided to us by our U.S. transfer agent, as of May 10, 2024, there were 48 record holders, of which 37 record
holders holding approximately 96.6% of our Ordinary Shares had registered addresses in the United States. These numbers are not representative of the
number of beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of these Ordinary Shares were
held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 96.5% of our outstanding
Ordinary Shares as of such date).
B. RELATED PARTY TRANSACTIONS
For information about related party transactions see “Item 6C. Directors, Senior Management and Employees – Board Practices - Approval of Related
Party Transactions Under Israeli Law.”
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the consolidated financial statements, including the notes thereto, included in Item 18.
Legal Proceedings
We and our subsidiaries are, from time to time, subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the
ordinary course of business, including claims with respect to intellectual property, contracts, employment and other matters. Based upon the advice of
counsel, we do not believe that the ultimate resolution of these matters will materially affect our consolidated financial position, results of operations or
cash flows.
Dividend Distribution Policy
In September 2012, our Board of Directors adopted a policy for distributing dividends, under which we will distribute a dividend of up to 50% of our
annual net income attributable to our shareholders each year, subject to any applicable law. On August 2019, our Board of Directors amended our
dividend distribution policy, whereas, each year we will distribute a dividend of up to 75% of our annual net income attributable to our shareholders. It is
possible that our Board of Directors will decide, subject to the conditions stated above, to declare additional dividend distributions. Our Board of
Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a change in policy, the rate of dividend distributions
or not to distribute a dividend.
According to the Israeli Companies Law, a registrant may distribute dividends out of its profits provided that there is no reasonable concern that such
dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due. Notwithstanding the
foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that such dividend distribution will prevent
the company from satisfying its current and foreseeable obligations, as they become due. Profits, for purposes of the Israeli Companies Law, means the
greater of retained earnings or earnings accumulated during the preceding two years, after deducting previous distributions that were not deducted from
the surpluses.
B. SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2023.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Our ordinary shares are traded on the NASDAQ Global Select Market under the ticker symbol “MGIC”.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our Ordinary Shares are listed on the NASDAQ Global Select Market (symbol: MGIC). Our Ordinary Shares have also traded on the TASE, and are
included in the TASE’s TA-125 Index.
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D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Set out below is a description of certain provisions of our Articles of Association and of the Israeli Companies Law related to such provisions. This
description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Articles of Association, which are
incorporated by reference as an exhibit to this Annual Report.
Purposes and Objects of the Company
We are a public company registered with the Israeli Companies Registry as Magic Software Enterprises Ltd., registration number 52-003674-0. Section 2
of our memorandum of association provides that we were established for the purpose of engaging in all fields of the computer business and in any other
lawful activity permissible under Israeli law.
The Powers of the Directors
According to our articles of association, and under the limitations described therein, our board of directors may cause the company to borrow or secure
the payment of any sum or sums of money for the purposes of the company, and set aside any amount out of our profits as a reserve for any purpose.
Under our articles of association, retirement of directors from office is not subject to any age limitation and our directors are not required to own shares in
our company in order to qualify to serve as directors.
Rights Attached to Shares
Annual and Extraordinary Meetings
Under the Israeli Companies Law, a company must convene an annual meeting of shareholders at least once every calendar year and within fifteen
months of the last annual meeting. Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is
required. Our board of directors may, in its discretion, convene additional meetings as “extraordinary general meetings.” In addition, the board must
convene an extraordinary general meeting upon the demand of two of the directors or 25% of the nominated directors, one or more shareholders holding
at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders holding at least 5% of the
voting power in the company.
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Please refer to Exhibit 2.2 for Items 10.B.3, B.4, B.6, B.7, B.8, B.9 and B.10.
C. MATERIAL CONTRACTS
While we have numerous contracts with customers, resellers, distributors and property owners, we do not deem any such individual contract to be
material contracts that are not in the ordinary course of our business.
D. EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our Ordinary Shares.
Non-residents of Israel who purchase our Ordinary Shares will be able to convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our Ordinary Shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
E. TAXATION
The following is a discussion of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on new
tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be
accepted by the appropriate tax authorities or the courts. The discussion is not intended, and should not be construed, as legal or professional tax advice
and is not exhaustive of all possible tax considerations.
Holders of our Ordinary Shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of Ordinary Shares, including, in particular, the effect of any foreign, state or local taxes.
ISRAELI TAX CONSIDERATIONS
Tax regulations have a material impact on our business, particularly in Israel where we have our headquarters. The following is a summary of some of the
current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli tax
consequences to our shareholders and government programs benefiting us. To the extent that the discussion is based on tax legislation that has not been
subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax
authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all
possible tax considerations.
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on their taxable income. As of 2023 the corporate tax rate is 23%. However, 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 discussed below, may be considerably
lower. See “Law for the Encouragement of Capital Investments” in this Item 5.A below. In addition, Israeli companies are currently subject to regular
corporate tax rate on their capital gains.
Besides being subject to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and received
certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.
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Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 5729-1969 (the “Industry Encouragement Law”) provides several tax benefits for an “Industrial
Company.” Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company which was
incorporated in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an “Industrial
Enterprise” that it owns and is located in Israel or in the “Area,” in accordance with the definition under Section 3A of the Israeli Income Tax Ordinance
(New Version) 1961, or the Ordinance. An “Industrial Enterprise” is defined as an enterprise whose major activity, in a given tax year, is industrial
production.
An Industrial Company is entitled to certain corporate tax benefits, including:
● Amortization of the cost of the purchases of patents, or the right to use a patent or know-how used for the development or promotion of the
Industrial Enterprise, over an eight-year period commencing on the year in which such rights were first exercised;
● The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it; and
● Expenses related to a public offering are deductible in equal amounts over three years beginning from the year of the offering.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of our Israeli subsidiaries currently qualify as Industrial Companies within the definition under the Industry Encouragement Law.
We cannot assure you that they will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a
production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment
Law, referred to as an Approved Enterprise, or AE, a Benefitted Enterprise, or BE, or a Preferred Enterprise, or PFE, or a Preferred Technological
Enterprise, or PTE, or a Special Preferred Technological Enterprise, or SPFE is entitled to benefits as discussed below. These benefits may include cash
grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the
investment is made. In order to qualify for these incentives, an AE, BE, PFE, PTE or SPFE is required to comply with the requirements of the Investment
Law.
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005 (referred
to as the 2005 Amendment), as 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 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005
Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011
Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011
Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 were entitled to choose to continue to
enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect the benefits of the 2011
Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
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Tax benefits under the 2011 Amendment became effective on January 1, 2011
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and,
instead, introduced new benefits for income generated by a “Preferred Company” through its PFE (as such terms are defined in the Investment Law) as 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 entity or
(ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporated in
Israel, but not all of them are governmental entities; which has, among other things, PFE status and is controlled and managed from Israel. Pursuant to the
2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% 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 zone, 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 to 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017
and thereafter, the corporate tax rate for a PFE that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate
for other development zones remains 16%. Income derived by a Preferred Company from a Special PFE (as such term is defined in the Investment Law)
would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special PFE is located in a certain development
zone. As of January 1, 2017, the definition for special PFE includes less stringent conditions.
The classification of income generated from the provision of usage rights in know-how or software that were developed in a PFE, as well as royalty
income received with respect to such usage, is subject, as PFE income, to the issuance of a pre-ruling from the Israel Tax Authority that stipulates that
such income is associated with the productive activity of the PFE in Israel.
Dividends paid 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% or such lower rate
as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced
tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will
apply). From 2017 to 2019, dividends paid out of PFI attributed to a PFE, directly to a foreign parent company, were subject to withholding tax at source
at the rate of 5% (temporary provisions).
On November 15, 2021, the Economic Efficiency Law (Legislative Amendments for Achieving Budget Targets for the 2022 and 2021 Budget Years),
2021, which we refer to as the Economic Efficiency Law, was enacted. This law established a temporary order, or the Temporary Order, allowing Israeli
companies to release tax-exempt earnings, which we refer to as trapped earnings or accumulated earnings, that had accumulated until December 31, 2020,
through a mechanism established for a reduced corporate income tax rate applicable to those earnings. In addition to reducing the corporate income tax
(or CIT) rate, the Economic Efficiency Law amended Article 74 of the Investment Law, whereby effective from August 15, 2021, for any dividend
distribution (including a dividend specified in Article 51B of the Investment Law) by a company which has trapped earnings, there is a requirement to
allocate a portion of that distribution to the trapped earnings. Under the Temporary Order, the reduction of CIT applies to earnings that are released (with
no requirement for an actual distribution) within a period of one year from the date of enactment of the Temporary Order. The reduction in the CIT is
dependent on the proportion of the trapped earnings that are released relative to the total trapped earnings, and on the foreign investment percentage in the
years the earnings were generated. Consequently, the larger the proportion of the trapped earnings that are released, the lower the tax in respect of the
distribution. The minimum tax rate is 6%. Further, a company that elects to pay a reduced CIT is required to invest in its industrial enterprise a designated
amount in accordance with the Economic Efficiency Law within a period of five years commencing from the tax year in which the election is made. The
designated investment should be utilized for the acquisition of production assets, and/or investments in research and development and/or compensation to
additional new employees.
In 2022, the Company filed its application for the Temporary Order and paid the required amount to the ITA. As of December 31, 2022 all the trapped
earnings were released.
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New Tax benefits under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1,
2017. The 2017 Amendment provides new tax benefits for two types of Technology Enterprises, as described below, and is in addition to the other
existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a PTE, and will thereby enjoy a reduced corporate
tax rate of 12% on income that qualifies as Preferred Technology Income, or PTI, as defined in the Investment Law. The tax rate is further reduced to
7.5% for a PTE located in development zone “A”. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital
gain derived from the sale of certain Benefited Intangible Assets (as defined in the Investment Law) to a related foreign company if the Benefited
Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval
from the National Authority for Technological Innovation (previously known as the Israeli Office of the Chief Scientist) (referred to as IIA).
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a Special PTE (an enterprise for which,
among others, total consolidated revenues of its parent company and all subsidiaries is at least NIS 10 billion) and will thereby enjoy a reduced corporate
tax rate of 6% on PTI regardless of the company’s geographic location within Israel. In addition, a Special PTE will enjoy a reduced corporate tax rate of
6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were
either developed by the Special Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received
prior approval from IIA. A Special PTE that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible
for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a PTE or a Special PTE, paid out of PTI, are generally subject to withholding tax at source at the rate of 20% or such lower rate
as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced
tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed from such Israeli company to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in
an applicable tax treaty will apply). If such dividends are distributed to a foreign company that holds solely or together with other foreign companies 90%
or more in the Israeli company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject
to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
We examined the impact of the 2017 Amendment and the degree to which we will qualify as a PTE or Special PTE, and the amount of PTI that we may
have, or other benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of the Company taxable income in Israel is entitled to a
preferred 6% tax rate under the 2017 Amendment.
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in
which they are incurred. Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli
government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company’s
business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is reduced by the
sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved
by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period.
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Israeli Capital Gains Tax
The following is a short summary of the material provisions of the tax environment to which shareholders may be subject. This summary is based on the
current provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative
interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.
The summary does not address all of the tax consequences that may be relevant to all purchasers of our Ordinary Shares in light of each purchaser’s
particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders
in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our Ordinary Shares should consult their own tax
adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of Ordinary Shares. The following is not
intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should
consult his or her own tax or legal adviser.
Tax Consequences Regarding Disposition of Our Ordinary Shares
Overview
Israeli law generally imposes a capital gain tax on the sale of capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or
unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Capital Gain” and
“Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain, which is equivalent to the increase of the relevant asset’s purchase
price, which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the
date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.
Capital gain
Israeli Resident Shareholders
As of January 1, 2012, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares, whether or not listed on a stock
exchange, is 25%, unless such shareholder claims a deduction for interest and linkage differences expenses in connection with the purchase and holding
of such shares, in which case the gain will generally be taxed at a rate of 30%. However, if such shareholder is considered a Substantial Shareholder (i.e.,
a person who holds, directly or indirectly, alone or together with another person who collaborates with such person on a permanent basis, 10% or more of
any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive the
company’s liquidation proceeds and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period, such gain
will be taxed at the rate of 30%. Individual shareholders dealing in securities in Israel are taxed at their marginal tax rates applicable to business income
(up to 47% in 2018 and thereafter).
Under current Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an
Israeli company is the general corporate tax rate. As described above, the corporate tax rate as of 2018 and thereafter is 23%.
Non-Israeli Resident Shareholders
Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights
to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the
seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (23% in 2018
and thereafter) if generated by a company, or at the rate of 25% or 30%, if generated by an individual. Individual and corporate shareholders dealing in
securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for
an individual in 2018 and thereafter).
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Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain
tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock
exchange outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli
resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a
recognized stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985.
However, non-Israeli corporations will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in
such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to
be business income.
In addition, a sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the
U.S.-Israel Tax Treaty, or the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S. resident
(for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gain tax unless either (i) the shareholder holds,
directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale, exchange or
disposition; (ii) the shareholder, if an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the
applicable taxable year; (iii) the capital gain arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in
Israel; (iv) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (v) the capital gain arising from
such sale, exchange or disposition is attributed to royalties; or (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Treaty) and is not
holding the shares as a capital asset. In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable;
however, under the U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed
with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does not
provide such credit against any U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be
subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in
order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in
the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms
specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence
of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxes applicable to Dividends
Israeli Resident Shareholders
Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our Ordinary Shares (other than bonus shares or
share dividends) at 25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any time during the
preceding 12-month period. However, dividends distributed from taxable income allocated and accrued during the benefits period of an AE are subject to
withholding tax at the rate of 15% (if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such
period, except with respect to an FIC, in which case the 12 year limit does not apply) or 20% with respect to PFE. An average rate will be set in case the
dividend is distributed from mixed types of income (regular and Approved/Beneficiary/ Preferred income).
Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations (like our
Ordinary Shares). However, dividends distributed from taxable income accrued during the benefits period of an AE are subject to withholding tax at the
rate of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period.
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Non-Israeli Resident Shareholders
Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights
to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the
seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (23% in 2018
and thereafter) if generated by a company, or at the rate of 25% if generated by an individual, or 30%, if generated by an individual who is a “substantial
shareholder” (as defined under the Tax Ordinance), at the time of sale or at any time during the preceding 12-month period (or if the shareholder claims a
deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares). A “substantial shareholder” is
generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds,
directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include, among others, the right to
vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights
how to act, regardless of the source of such right. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable
to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for an individual in 2018 and thereafter (excluding excess
tax as discussed below)) unless contrary provisions in a relevant tax treaty apply.
Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) generally should be exempt from Israeli capital
gain tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock
exchange outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli
resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a
recognized stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985.
However, non-Israeli corporations will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in
such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to
be business income.
In addition, a sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the
U.S.-Israel Tax Treaty, or the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S. resident
(for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gain tax unless either (i) the shareholder holds,
directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale, exchange or
disposition; (ii) the shareholder, if an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the
applicable taxable year; (iii) the capital gain arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in
Israel; (iv) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (v) the capital gain arising from
such sale, exchange or disposition is attributed to royalties; or (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Treaty) and is not
holding the shares as a capital asset. In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable;
however, under the U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed
with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does not
provide such credit against any U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their Common Shares, the payment of the consideration may be
subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in
order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in
the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this
authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident, and, in the absence of such declarations or
exemptions, may require the purchaser of the shares to withhold taxes at source.
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Excess Tax
Individuals who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional tax
for income exceeding a certain level. For 2017 and onwards, the additional tax is at a rate of 3% on annual income exceeding NIS 698,290 for 2023
(approximately $182,894 based on an exchange rate of NIS 3.818 per U.S. dollar as of April 28, 2024) which amount is linked to the annual change in the
Israeli consumer price index, including, but not limited to, dividends, interest and capital gain.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
United States Federal Income Taxation
The following is a general discussion of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our Ordinary
Shares. This description addresses only the U.S. federal income tax considerations that may be relevant to U.S. Holders (as defined below) who hold our
Ordinary Shares as capital assets. This summary is based on the U.S. Internal Revenue Code of 1986, as amended, (the “Code”) Treasury regulations
promulgated thereunder, judicial and administrative interpretations thereof and the U.S.-Israel Tax Treaty (the “Treaty”), all as in effect on the date hereof
and all of which are subject to change either prospectively or retroactively or to differing interpretations. There can be no assurance that the U.S. Internal
Revenue Service (“IRS”) will not take a different position concerning the tax consequences of the acquisition, ownership or disposition of our Ordinary
Shares or that such a position would not be sustained. This discussion does not address all tax considerations that may be relevant to a U.S. Holder of
Ordinary Shares. In addition, this description does not account for the specific circumstances of any particular investor, such as:
● broker-dealers;
● financial institutions or financial services entities;
● certain insurance companies;
● investors liable for alternative minimum tax;
● regulated investment companies, real estate investment trusts, or grantor trusts;
● dealers or traders in securities, commodities or currencies;
● tax-exempt organizations;
● retirement plans;
● S corporations:
● pension funds;
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● certain former citizens or long-term residents of the United States;
● non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar;
● persons who hold Ordinary Shares through partnerships or other pass-through entities;
● persons who acquire their Ordinary Shares through the exercise or cancellation of employee stock options or otherwise as compensation for
services;
● direct, indirect or constructive owners of investors that actually or constructively own at least 10% of the total combined voting power of our
shares or at least 10% of our shares by value; or
● investors holding Ordinary Shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns our Ordinary Shares, the U.S. federal income tax treatment
of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns our
Ordinary Shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and
disposing of Ordinary Shares.
This summary does not address the effect of any U.S. federal taxation (such as estate and gift tax) other than U.S. federal income taxation. In addition,
this summary does not include any discussion of state, local or non-U.S. taxation.
For purposes of this summary the term “U.S. Holder” means a person that is eligible for the benefits of the Treaty and is a beneficial owner of Ordinary
Shares who is, for U.S. federal income tax purposes:
● an individual who is a citizen or a resident of the United States;
● a corporation or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or under the laws of
the United States or any political subdivision thereof;
● an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
● a trust resident in the United States, to the extent such trust’s income is subject to US tax as the income of a resident.
Unless otherwise indicated, it is assumed for the purposes of this discussion that the Company is not, and will not become, a “passive foreign investment
company” (“PFIC”) for U.S. federal income tax purposes. See “—Passive Foreign Investment Companies” below.
Taxation of Distributions
Subject to the discussion below under the heading “—Passive Foreign Investment Companies,” the gross amount of any distributions received with
respect to our Ordinary Shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax
purposes when such distribution is actually or constructively received, to the extent such distribution is paid out of our current and accumulated earnings
and profits, as determined for U.S. federal income tax purposes. Because we do not expect to maintain calculations of our earnings and profits under U.S.
federal income tax principles, you should expect that the entire amount of any distribution will be taxable to you as dividend income. Dividends are
included in gross income at ordinary income rates, unless such dividends constitute “qualified dividend income,” as set forth in more detail below.
Distributions in excess of our current and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of your
adjusted tax basis in our Ordinary Shares and any amount in excess of your tax basis would be treated as gain from the sale of Ordinary Shares. See
“—Sale, Exchange or Other Disposition of Ordinary Shares” below for a discussion of the taxation of capital gains. Our dividends would not qualify for
the dividends-received deduction generally available to corporations under section 243 of the Code.
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Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day such dividends are received, regardless of whether the payment is in fact converted into
U.S. dollars. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day
may have a foreign currency exchange gain or loss that would generally be treated as U.S.-source ordinary income or loss. U.S. Holders should consult
their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, some of which vary depending upon the U.S. Holder’s circumstances, any Israeli withholding tax imposed on dividends
paid with respect to our Ordinary Shares, may be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or,
alternatively, for deduction against income in determining such tax liability). Israeli taxes withheld in excess of the applicable rate allowed by the Treaty
(if any) will not be eligible for credit against a U.S. Holder’s federal income tax liability. The limitation on foreign income taxes eligible for credit is
calculated separately with respect to specific classes of income. Dividends paid with respect to our common stock generally will be treated as foreign-
source passive category income or, in the case of certain U.S. Holders, general category income for U.S. foreign tax credit purposes. Further, there are
special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax rate. A U.S. Holder may be
denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on our Ordinary Shares if such U.S. Holder fails to satisfy
certain minimum holding period requirements or to the extent such U.S. Holder’s position in Ordinary Shares is hedged. An election to deduct foreign
taxes instead of claiming a foreign tax credit applies to all foreign taxes paid or accrued in the taxable year. The rules relating to the determination of the
foreign tax credit are complex. You should consult with your own tax advisors to determine whether and to what extent you would be entitled to this
credit.
Subject to certain limitations (including the PFIC rules discussed below), “qualified dividend income” received by a non-corporate U.S. Holder may be
subject to tax at the lower long-term capital gain rates (currently, a maximum rate of 20%). Distributions taxable as dividends paid on our Ordinary
Shares should qualify for a reduced rate if we are a “qualified foreign corporation,” as defined in Code section 1(h)(11)(C). We will be a qualified foreign
corporation if either: (i) we are entitled to benefits under the Treaty or (ii) our Ordinary Shares are readily tradable on an established securities market in
the United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that our Ordinary Shares
currently are readily tradable on an established securities market in the United States. However, no assurance can be given that our Ordinary Shares will
remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied, nor does it apply to dividends received
from a PFIC (see discussion below), in respect of certain risk-reduction transactions, or in certain other situations. U.S. Holders of our Ordinary Shares
should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion of the PFIC rules below, if you sell or otherwise dispose of our Ordinary Shares (other than with respect to certain non-
recognition transactions), you will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the
amount realized on the sale or other disposition and your adjusted tax basis in our Ordinary Shares, in each case determined in U.S. dollars. Such gain or
loss will generally be capital gain or loss and will be long-term capital gain or loss if you have held the Ordinary Shares for more than one year at the
time of the sale or other disposition. Long-term capital gain realized by a non-corporate U.S. Holder, who does not have a tax home outside of the United
States, is generally eligible for a preferential tax rate (currently at a maximum of 20%). In general, any gain that you recognize on the sale or other
disposition of Ordinary Shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the Code.
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In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of our Ordinary Shares, the amount realized will be
based on the U.S. dollar value of the NIS received with respect to the Ordinary Shares as determined on the settlement date of such exchange. A cash
basis U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at a conversion rate other than the rate in effect on the settlement date
may have a foreign currency exchange gain or loss, based on any appreciation or depreciation in the value of NIS against the U.S. dollar, which would be
treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment of currency exchange gain or loss required of cash basis taxpayers with respect to a sale or
disposition of our Ordinary Shares that are traded on an established securities market, provided that the election is applied consistently from year to year.
Such election may not be changed without the consent of the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash
basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder is required to calculate the value of the
proceeds as of the “trade date” and may have a foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between
the U.S. dollar value of NIS prevailing on the trade date and on the settlement date. Any such currency gain or loss generally would be treated as U.S.-
source ordinary income or loss and would be subject to tax in addition to the gain or loss, if any, recognized by such U.S. Holder on the sale or
disposition of such Ordinary Shares.
Passive Foreign Investment Company Considerations
Based on the composition of our income, assets (including the value of our goodwill, going-concern value or any other unbooked intangibles, which may
be determined based on the price of the ordinary shares), and operations, we believe we will not be classified as a “passive foreign investment company”,
or PFIC, for the 2023 taxable year. However, because PFIC status is based on our income, assets and activities for the entire taxable year, it is not
possible to determine whether we will be characterized as a PFIC for our current taxable year or future taxable years until after the close of the applicable
taxable year. Moreover, we must determine our PFIC status annually based on tests that are factual in nature, and our status in the current year and future
years will depend on our income, assets and activities in each of those years and, as a result, cannot be predicted with certainty as of the date hereof.
If we were a PFIC for any taxable year during which a U.S. Holder owned Ordinary Shares, certain adverse consequences could apply to the U.S. Holder.
Specifically, unless a U.S. Holder makes one of the elections mentioned below, gain recognized by the U.S. Holder on a sale or other disposition of
Ordinary Shares would be allocated ratably over the U.S. Holder’s holding period for the Ordinary Shares. The amounts allocated to the taxable year of
the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable
year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would
be imposed on the resulting tax liability. Further, any distribution in excess of 125% of the average of the annual distributions received by the U.S.
Holder on our Ordinary Shares during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as
described immediately above. In addition, if we were a PFIC for a taxable year in which we pay a dividend or the immediately preceding taxable year, the
preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. If we were a PFIC for
any taxable year in which a U.S. Holder owned our shares, the U.S. Holder would generally be required to file annual returns with the IRS on IRS Form
8621.
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If we are treated as a PFIC with respect to you for any taxable year, you will be deemed to own shares in any entities in which we own equity that are also
PFICs (“lower tier PFICs”), and you may be subject to the tax consequences described above with respect to the shares of such lower tier PFIC you
would be deemed to own.
i. Mark-to-market elections
If we are a PFIC for any taxable year during which you hold ordinary shares, then instead of being subject to the tax and interest charge rules discussed
above, you may make an election to include gain on the ordinary shares as ordinary income under a mark-to-market method, provided that such ordinary
shares are “marketable.” The ordinary shares will be marketable if they are “regularly traded” on a qualified exchange or other market, as defined in
applicable U.S. Treasury regulations, such as the New York Stock Exchange (or on a foreign stock exchange that meets certain conditions). For these
purposes, the ordinary shares will be considered regularly traded during any calendar year during which they are traded, other than in de minimis
quantities, on at least 15 days during each calendar quarter. Any trades that have as their principal purpose meeting this requirement will be disregarded.
However, because a mark-to-market election cannot be made for any lower tier PFICs that we may own, you will generally continue to be subject to the
PFIC rules discussed above with respect to your indirect interest in any investments we own that are treated as an equity interest in a PFIC for U.S.
federal income tax purposes. As a result, it is possible that any mark-to-market election with respect to the ordinary shares will be of limited benefit.
If you make an effective mark-to-market election, in each year that we are a PFIC, you will include in ordinary income the excess of the fair market value
of your ordinary shares at the end of the year over your adjusted tax basis in the ordinary shares. You will be entitled to deduct as an ordinary loss in each
such year the excess of your adjusted tax basis in the ordinary shares over their fair market value at the end of the year, but only to the extent of the net
amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, in each year that we
are a PFIC, any gain that you recognize upon the sale or other disposition of your ordinary shares will be treated as ordinary income and any loss will be
treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election.
Your adjusted tax basis in the ordinary shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions
under the mark-to-market rules discussed above. If you make an effective mark-to-market election, it will be effective for the taxable year for which the
election is made and all subsequent taxable years unless the ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to
the revocation of the election. You should consult your tax advisor about the availability of the mark-to-market election, and whether making the election
would be advisable in your particular circumstances.
ii. Qualified electing fund elections
In certain circumstances, a U.S. equity holder in a PFIC may avoid the adverse tax and interest charge regime described above by making a “qualified
electing fund” election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified electing fund
election with respect to the ordinary shares only if we agree to furnish you annually with a PFIC annual information statement as specified in the
applicable U.S. Treasury regulations. We do not intend to provide the information necessary for you to make a qualified electing fund election if we are
classified as a PFIC. Therefore, you should assume that you will not receive such information from us and would therefore be unable to make a qualified
electing fund election with respect to any of our ordinary shares were we to be or become a PFIC.
Additional Tax on Investment Income
In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds may be
subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains from the sale or exchange of our
Ordinary Shares.
95
Backup Withholding and Information Reporting
Payments in respect of our Ordinary Shares may be subject to information reporting to the IRS and to U.S. backup withholding tax at the rate (currently)
of 24%. Backup withholding will not apply, however, if you (i) fall within certain exempt categories and demonstrate the fact when required or (ii)
furnish a correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax
liability. A U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the IRS.
U.S. citizens and individuals taxable as resident aliens of the United States that (i) own “specified foreign financial assets” (as defined in Section 6038D
of the Code and the regulations thereunder) with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules in
Treasury regulations) and (ii) are required to file U.S. federal income tax returns generally will be required to file an information report with respect to
those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts
maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred
compensation plans. Under those rules, our Ordinary Shares, whether owned directly or through a financial institution, estate or pension or deferred
compensation plan, would be “specified foreign financial assets.” Under Treasury regulations, the reporting obligation applies to certain U.S. entities that
hold, directly or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. In addition, in the
event a U.S. Holder that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S.
federal income taxes of such U.S. Holder for the related tax year may not close until three years after the date that the required information is filed. A
U.S. Holder is urged to consult the U.S. Holder’s tax advisor regarding the reporting obligation.
Any U.S. Holder who acquires more than $100,000 of our Ordinary Shares or holds 10% or more of our Ordinary Shares by vote or value may be subject
to certain additional U.S. information reporting requirements.
The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition
of our Ordinary Shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to certain of the reporting requirements of the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the
Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not
subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our officers
and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we
are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities
are registered under the Exchange Act. However, we file with the SEC an annual report on Form 20-F containing financial statements audited by an
independent accounting firm. We also submit to the SEC reports on Form 6-K containing (among other things) press releases and unaudited financial
information. We post our annual report on Form 20-F on our website (www.magicsoftware.com) promptly following the filing of our annual report with
the SEC. The information on our website is not incorporated by reference into this annual report.
96
The Exchange Act file number for our SEC filings is 000-19415.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that
make electronic filings with the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
The documents concerning our company that are referred to in this annual report may also be inspected at our offices located at Yahadut Canada 1 Street,
Or Yehuda 6037501, Israel.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to a variety of market risks, primarily changes in interest rates affecting our investments in marketable securities and foreign currency
fluctuations.
Cash Investments and Interest Rate Risk
Our cash investment policy seeks to preserve principal and maintain adequate liquidity while maximizing the income we receive from our investments
without significantly increasing the risk of loss. To minimize investment risk, we maintain a diversified portfolio across various maturities, types of
investments and issuers, which may include, from time to time, money market funds, U.S. government bonds, state debt, bank deposits and certificates of
deposit, and investment grade corporate debt. Our cash management policy does not allow us to purchase or hold commodity instruments, structures or
“sub-prime” related holdings (such as auction rate securities and collateralized debt obligation) or other financial instruments for trading purposes.
As of December 31, 2023, we had approximately $106.7 million in cash and cash equivalents and short term bank deposits.
Foreign Currency Exchange Risk
Our financial results may be negatively impacted by foreign currency fluctuations. Our foreign operations are transacted through a global network of
subsidiaries. These sales and related expenses are generally denominated in currencies other than the U.S. dollar. Because our financial results are
reported in U.S. dollars, our results of operations may be adversely impacted by fluctuations in the rates of exchange between the U.S. dollar and such
other currencies as the financial results of our foreign subsidiaries are converted into U.S. dollars in consolidation. Our earnings are predominantly
affected by fluctuations in the value of the U.S. dollar as compared to the NIS, as well as the value of the U.S. dollar as compared to the euro, Japanese
Yen and British Pound.
We measure and record non-monetary accounts in our balance sheet (principally fixed assets and prepaid expenses) in U.S. dollars. For this measurement,
we use the U.S. dollar value in effect at the date that the asset or liability was initially recorded in our balance sheet (the date of the transaction).
Our operating expenses may be affected by fluctuations in the value of the U.S. dollar as it relates to foreign currencies, with NIS, euro and Japanese Yen
having the greatest potential impact. In managing our foreign exchange risk, we periodically enter into foreign exchange hedging contracts. Our goal is to
mitigate the potential exposure with these contracts. By way of example, an increase of 10% in the value of the NIS relative to the U.S. dollar in 2023
would have resulted in an increase in the U.S. dollar reporting value of our operating income of $3.3 million for that year, while a decrease of 10% in the
value of the NIS relative to the U.S. dollar in 2023 would have resulted in a decrease in the U.S. dollar reporting value of our operating income of $2.7
million for the year. An increase of 10% in the value of the euro, the Japanese yen and the British Pound relative to the U.S. dollar in 2023 would have
resulted in an increase in the U.S. dollar reporting value of our operating income of $1.1 million, $0.3 million and $0.1 million, respectively, for that year,
while a decrease of 10% in the value of the euro, Japanese Yen and British Pound relative to the U.S. dollar in 2023 would have resulted in a decrease in
the U.S. dollar reporting value of our operating income of $0.9 million, $0.3 million and $0.1 million, respectively, for that year.
Equity Price Risk
As of December 31, 2023, we had no trading securities that are classified as available for sale.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer, and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2023. Based on such evaluation, the Chief
Executive Officer, and the Chief Financial Officer, have concluded that, as of December 31, 2023, our disclosure controls and procedures were
ineffective as a result of the material weakness outlined below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-
15(f) and 15d-15(f) of the Exchange Act. Our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the end of the
period covered by this report.
Based on that evaluation, as of December 31, 2023, management has identified that it did not retain complete documentation as evidence for performing
certain (i) business processes controls (including automated and IT-dependent manual) (ii) sufficiently precise management review controls and (iii)
evidence to demonstrate completeness and accuracy of information prepared by entity (“IPE”). As a result, we could not monitor and oversee the
completion of our assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner.
Notwithstanding the conclusion by our Chief Executive Officer and our Chief Financial Officer regarding the ineffectiveness of our controls and
procedures as of December 31, 2023, and the material weakness in our internal control over financial reporting described above, management believes
that the consolidated financial statements and related financial information included in this Annual Report on Form 20-F fairly present in all material
respects our financial position, results of operations and cash flows as of December 31, 2023 and 2022, and for the three years period ended on December
31, 2023, in conformity with IFRS.
Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of
the business of K.M.T. (M.H.) Technologies Communication Computer Ltd., that was acquired during 2023 and included in our 2023 consolidated
financial statements and constituted 1.2% and 1.7% of total and net assets, respectively as of December 31, 2023 and 0.7% and 2.3% of revenues and net
income, respectively, for the year then ended.
Remediation Plan for the Material Weakness
Management continues to be committed to implement the necessary measures to ensure the complete remediation of the material weakness described
above, as well as the continued improvement of the Company’s internal control over financial reporting. Management has implemented and will continue
implementing the necessary measures to ensure that the remaining control deficiencies contributing to the material weakness are remediated, such that
these controls are designed, implemented and operating effectively.
98
During 2023 and 2024, management has continued to make significant strides to develop and execute a comprehensive remediation plan to improve our
internal control over financial reporting and remediate the control deficiencies that led to the material weakness, including but not limited to, (a) hiring
additional personnel with appropriate skillsets, (b) developing an execution plan and resourcing to test controls and to complete remediation (c) actively
monitoring corrective actions and providing status reporting to management on the progress.
We have also specifically taken a number of other measures to strengthen our internal control over financial reporting, including (i) continuing to upgrade
our financial system to enhance its effectiveness and enhance control of financial analysis; (ii) continuing to organize regular training for our accounting
staffs, especially the trainings related to the issues we encountered; and (iii) continuing to establish effective oversight and clarifying reporting
requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in
compliance with reporting requirements.
As we continue to implement our remediation plan, management may decide to take additional further measures to address the material weakness or
adjust the remediation steps accordingly. Management will continue testing and evaluating the implementation of internal controls and revised processes
to ensure whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in our
financial statements.
Management believes that upon completion of all these actions, the material weakness will be fully remediated. However, the material weakness will not
be considered remediated, until all applicable controls operate for a sufficient period of time and management has concluded, through testing, that
controls are operating effectively.
Attestation Report of the Registered Public Accounting Firm
The attestation report of Kost Forer Gabbay& Kasierer, a member of EY Global, an independent registered public accounting firm in Israel, on
our management’s assessment of our internal control over financial reporting as of December 31, 2023 is provided on page F-4, as included
under Item 18 of this annual report.
Changes in Internal Control over Financial Reporting
Based on the evaluation conducted by our Chief Executive Officer and our Chief Financial Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the
Exchange Act, our management has concluded that except for the remediation efforts described above taken to address the material weakness during the
period covered by this Annual Report, there was no change in our internal control over financial reporting that occurred during the year ended December
31, 2023 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Ettlinger, an external director within the meaning of the Israeli Companies Law, meets the definition of an
audit committee financial expert, as defined by rules of the SEC. For a brief listing of Mr. Ettlinger’s relevant experience, see Item 6A. “Directors, Senior
Management and Employees -- Directors and Senior Management.”
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to any chief executive officer and all senior financial officers of our company, including the chief financial
officer, chief accounting officer or controller, or persons performing similar functions. The code of ethics is available on our website. Written copies are
available upon request. If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision
of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm Fees
The following table sets forth, for each of the years indicated, the fees billed by our principal independent registered public accounting firm. All of such
fees were pre-approved by our Audit Committee.
Services Rendered
Audit (1)
Tax and other (2)
Total
Year Ended
December 31,
2022
2023
$
$
$
741,000
108,000
849,000
$
$
$
629,000
210,000
839,000
(1) Audit fees relate to audit services provided for each of the years shown in the table, including fees associated with the annual audit, the filing of a
shelf registration statement, various accounting issues and audit services provided in connection with other statutory or regulatory filings.
(2) Tax fees relate to services performed by the tax division for tax compliance, planning and advice.
Pre-Approval Policies and Procedures
Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered
public accountants, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. Pre-approval of an audit or non-audit service may be given as a
general pre-approval, as part of the audit committee’s approval of the scope of the engagement of our independent auditor, or on an individual basis. Any
proposed services that exceed general pre-approved levels also require specific pre-approval by our audit committee. The policy prohibits retention of the
independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of
the SEC, and also requires the Audit Committee to consider whether proposed services are compatible with the independence of the public accountants.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
NASDAQ Stock Market Rules and Home Country Practice
Under NASDAQ Stock Market Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate
governance practices instead of certain provisions of the NASDAQ Stock Market Rules. A foreign private issuer that elects to follow a home country
practice instead of any of such NASDAQ requirements must submit to NASDAQ, in advance, a written statement from an independent counsel in such
issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. We provided NASDAQ with such a letter of
non-compliance with respect to:
● The Rule requiring maintaining a majority of independent directors (Rule 5605(b)(1)). Instead, under Israeli law and practice, we are required to
appoint at least two external directors, within the meaning of the Israeli Companies Law, to our board of directors.
● The Rule requiring that our independent directors have regularly scheduled meetings at which only independent directors are present (Rule 5605
(b)(2)). Instead, we follow Israeli law according to which independent directors are not required to hold executive sessions.
100
● The Rule regarding independent director oversight of director nominations process for directors (Rule 5605(e)). Instead, we follow Israeli law
and practice according to which our board of directors recommends directors for election by our shareholders.
● The requirement to obtain shareholder approval for the establishment or amendment of certain equity based compensation plans (Rule 5635(c)),
an issuance that will result in a change of control of the company (Rule 5635(b)), certain transactions other than a public offering involving
issuances of a 20% or more interest in the company (Rule 5635(d)) and certain acquisitions of the stock or assets of another company (Rule 5635
(a)). Instead, we follow Israeli law and practice in approving such procedures, according to which Board approval may suffice in certain
circumstances.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 16J. INSIDER TRADING POLICIES
Not applicable.
ITEM 16K. CYBERSECURITY
Cybersecurity Risk Management
As part of our overall risk management system, we have established certain procedures to assess, identify, and manage material risks from cybersecurity
threats. Our cybersecurity risk management system is designed to align with industry best practices, including International Organization for
Standardization, or ISO, standards, provide a framework for handling cybersecurity threats and incidents, and facilitate coordination across different
departments of our company. As part of this system, we have a formally documented information security management program and conduct regular
tabletop exercises that include participation from executive officers. In addition, we engage consultants and other third parties who are experts in the
cybersecurity risk management field to review and provide testing services as well as general incident management services. These engagements directly
contribute to industry certifications and attestations that demonstrate our dedication to protecting the data that we are entrusted with by customers. Our
Governance, Risk and Compliance team within the information security management program oversees and identifies material cybersecurity risks
associated with our use of these third-party service providers through a formal vendor security risk management program.
Governance
Our board of directors is responsible for overseeing our cybersecurity risk management. Our board of directors will (i) maintain oversight of the
disclosure relating to cybersecurity matters in current reports or periodic reports of our company, (ii) review updates to the status of any material
cybersecurity incidents or material risks from cybersecurity threats to our company, and the disclosure issues, if any, presented by our chief executive
officer, chief financial officer, and other personnel in charge of cybersecurity matters on a quarterly basis, and (iii) review disclosure concerning
cybersecurity matters in our annual report on Form 20-F presented by our chief executive officer, chief financial officer, and other personnel in charge of
cybersecurity matters.
At management level, our chief executive officer and chief financial officer are responsible for assessing, identifying, and managing material risks from
cybersecurity threats to our company and monitoring the prevention, detection, mitigation, and remediation of material cybersecurity incident. They
report to our board of directors on (i) a quarterly basis on updates to the status of any material cybersecurity incidents or material risks from cybersecurity
threats to our company, and the disclosure issues, if any, and (ii) on disclosure concerning cybersecurity matters in our annual report on Form 20-F.
101
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
PART III
Index to Financial Statements
Reports of Independent Registered Public Accounting Firm (PCAOB ID 1281)
Consolidated Statements of Financial Position
Consolidated Statements of Profit or Loss
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements – Details of Subsidiaries and Affiliate
102
Page
F-1
F-2- F-5
F-6 - F-7
F-8
F-9
F-10 - F-12
F-13 - F-15
F-16 - F-64
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit
1.1
1.2
2.1
2.2
4.1
4.2
8.1
12.1
12.2
13.1
13.2
15.1
15.2
97.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Description
Memorandum of Association of the Registrant1
Articles of Association of the Registrant2
Specimen of Ordinary Share Certificate3
Description of the rights of each class of securities registered under Section 12 of the Securities Exchange Act of 19344
2000 Employee Stock Option Plan5
2007 Incentive Compensation Plan6
List of Subsidiaries of the Registrant
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Consent of Kost Forer Gabbay & Kasierer, a Member of EY Global
Consent of KDA Audit Corporation (relating to Magic Software Japan K.K.)
Clawback policy
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded
within the Inline XBRL document)
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Label Linkbase Document
Inline XBRL Taxonomy Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) Filed as Exhibit 3.2 to the registrant’s registration statement on Form F-1, registration number 33-41486, and incorporated herein by reference.
(2) Filed as an Item to the registrant’s Form 6-K for the month of December 2011, filed on December 7, 2011, and incorporated herein by reference.
(3) Filed as Exhibit 4.1 to the registrant’s registration statement on Form F-1, registration number 33-41486, and incorporated herein by reference.
(4) Filed as Exhibit 2.2 to the registrant’s registration statement on Form 20-F for the year ended December 31, 2019, and incorporated herein by
reference.
(5) Filed as Exhibit 10.2 to the registrant’s annual report on Form 20-F for the year ended December 31, 2000, and incorporated herein by reference.
(6) Filed as Exhibit 4.3 to the registrant’s annual report on Form 20-F for the year ended December 31, 2007, and incorporated herein by reference.
103
MAGIC SOFTWARE ENTERPRISES LTD
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm (PCAOB ID 1281)
Consolidated Statements of Financial Position
Consolidated Statements of Profit or Loss
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - - - - - - - - - -
F-1
Page
F-2 - F-5
F-6 - F-7
F-8
F-9
F-10 - F-12
F-13 - F-15
F-16 - F-64
Kost Forer Gabbay & Kasierer
144 Menachem Begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Magic Software Enterprises Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Magic Software Enterprises Ltd. (the Company) as of
December 31, 2022 and December 31, 2023, and the related consolidated statements of profit or loss, comprehensive income, changes in equity and cash
flows and for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, based on our audits and the report of other auditors, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2022 and December 31, 2023, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2023, in conformity with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
We did not audit the financial statements of Magic Software Japan K.K., a wholly-owned subsidiary, which reflect total assets constituting 1%,
and 1% at December 31, 2022 and December 31, 2023, respectively, and total revenues constituting 2%, 2% and 2% for the years ended December 31,
2021, 2022 and 2023, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Magic Software Japan K.K., is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 13, 2024 expressed an
adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
F-2
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of audit evidence over revenue
Description of the Matter
As discussed in Note 2 and 20 to the consolidated financial statements, the Company had $ 535,052 thousands
in revenue for the year ended December 31, 2023. The Company’s revenue includes multiple revenue streams
throughout various consolidated legal entities.
How We Addressed the Matter in Our
Audit
We identified the evaluation of audit evidence over certain revenue streams, as a critical audit matter. The
number of revenue streams over various legal entities required a high-degree of auditor judgment and
extensive audit effort to evaluate the scope and the sufficiency of data used as audit evidence over revenue.
Subjective auditor judgment was required to evaluate that sufficient data was captured and aggregated
throughout these various entities.
The primary procedures we performed to address this critical audit matter included the following: We applied
auditor judgment to determine scope, nature and extent of procedures to be performed over revenue. We
assessed the recorded revenue by selecting a sample of transactions in various legal entities and comparing the
amounts recognized for consistency with underlying documentation, such as, contracts with customers and
cash received. Finally, we evaluated the overall sufficiency of audit evidence obtained over revenue by
assessing the results of procedures performed and the appropriateness of the related disclosures in the
consolidated financial statements.
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of EY Global
We have served as the Company’s auditor since 1984.
Tel-Aviv, Israel
May 13, 2024
F-3
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Magic Software Enterprises Ltd.
Opinion on Internal Control Over Financial Reporting
We have audited Magic Software Enterprises Ltd.’s internal control over financial reporting as of December 31, 2023, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). In our opinion, based on our audit and the report of other auditors, because of the effect of the material weakness
described below on the achievement of the objectives of the control criteria, Magic Software Enterprises Ltd. (the Company) has not maintained effective
internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We did not examine the effectiveness of internal control over financial reporting of Magic Software Japan K.K, a wholly owned subsidiary,
whose financial statements reflect total assets and revenues constituting 1% and 2%, respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2023. The effectiveness of Magic Software Japan K.K.’s internal control over financial reporting was audited
by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Magic Software Japan K.K.’s internal
control over financial reporting, is based solely on the report of the other auditors.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and
conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the business of K.M.T. (M.H.)
Technologies Communication Computer Ltd. which is included in the 2023 consolidated financial statements of the Company and constituted 1.2% and
1.7% of the total and net assets, respectively, as of December 31, 2023 and 0.7% and 2.3% of revenues and net income, respectively, for the year then
ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial
reporting of the business of K.M.T. (M.H.) Technologies Communication Computer Ltd.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management’s assessment. Management has identified the following material weakness
in internal controls:
The Company did not retain complete documentation as evidence for performing certain (i) business processes controls (including automated
and IT-dependent manual) (ii) sufficiently precise management review controls and (iii) evidence to demonstrate completeness and accuracy of
information prepared by entity (“IPE”). As a result, the Company could not monitor and oversee the completion of its assessment of the design and
operating effectiveness of internal control over financial reporting in a timely manner.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated statements of financial position of the Company as of December 31, 2022 and December 31, 2023, the related consolidated statements of
profit or loss, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2023, and the related
notes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2023 consolidated
financial statements, and this report does not affect our report dated May 13, 2024, which expressed an unqualified opinion thereon, based on our audit
and the report of the other auditors.
F-4
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit and the report of other auditors provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of EY Global
Tel-Aviv, Israel
May 13, 2024
F-5
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD
Note
2022
2023
December 31,
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term bank deposits
Trade receivables (net of allowance for credit losses of $5,416 and $7,066 as of December 31,
$
83,062
3,904
$
2022 and 2023, respectively)
Unbilled receivables and contract assets
Other accounts receivable and prepaid expenses
Total current assets
LONG-TERM ASSETS:
Deferred tax assets
Right-of-use assets
Other long-term receivables
Property, plants and equipment, net
Intangible assets, net
Goodwill
Total long-term assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F-6
5
19
14
7
8
9
118,126
30,354
13,652
249,098
3,618
27,536
5,795
8,338
52,057
158,699
256,043
105,943
751
108,385
22,713
18,833
256,625
6,729
25,718
8,623
7,988
50,658
166,065
265,781
$
505,141
$
522,406
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Cont.)
U.S. dollars in thousands (except share and per share data)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short term debts
Trade payables
Accrued expenses and other accounts payable
Current maturities of lease liabilities
Put options for non-controlling interests
Liability in respect of business combinations
Deferred revenues and customer advances
Total current liabilities
LONG-TERM LIABILITIES:
Long-term debt
Long-term lease liabilities
Liability in respect of business combinations
Deferred tax liabilities
Put options for non-controlling interests
Employee benefit liabilities
Total long-term liabilities
COMMITMENTS AND CONTINGENCIES
EQUITY
Magic Software Enterprises Ltd shareholders’ equity:
Share capital:
Ordinary shares of NIS 1 par value - Authorized: 50,000,000 shares at, December 31, 2022
and 2023; Issued and Outstanding: 49,093,055 and 49,099,305 shares as of December 31,
2022 and 2023, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total equity attributable to Magic Software Enterprises Ltd shareholders
Non-controlling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
F-7
MAGIC SOFTWARE ENTERPRISES LTD
Note
2022
2023
December 31,
10
11
14
6
6
12
14
6
19
6
16
17
18
$
$
20,755
27,598
46,842
4,591
27,172
19,287
9,808
28,941
28,415
41,492
4,406
18,252
6,656
13,537
156,053
141,699
30,412
24,282
5,376
10,686
1,120
901
72,777
52,267
23,101
1,049
11,610
620
1,116
89,763
1,166
182,031
(6,559)
86,289
262,927
13,384
1,166
182,607
(10,314)
92,522
265,981
24,963
276,311
290,944
$
505,141
$
522,406
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS
U.S. dollars in thousands (except share and per share data)
Revenues:
Software services
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software services
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Research and development expenses, net
Selling and marketing expenses
General and administrative expenses
Change in valuation of contingent consideration related to acquisitions
Operating income
Financial expenses
Financial income
Increase in valuation of consideration related to acquisitions
Group’s share of earnings (losses) of a company accounted for at equity, net
Income before taxes on income
Taxes on income
Net income
Attributable to:
Equity holders of the Company
Non-controlling interests
Net earnings per share attributable to equity holders of the Company
Basic and diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
F-8
MAGIC SOFTWARE ENTERPRISES LTD
Note
20
20
20
Year ended December 31,
2022
2021
2023
$
$
30,934
36,149
413,242
$
32,930
34,762
499,100
32,694
33,999
468,359
480,325
566,792
535,052
12,182
4,144
331,005
10,701
3,494
397,242
11,730
3,238
367,097
347,331
411,437
382,065
132,994
155,355
152,987
8,995
38,147
31,222
2,507
52,123
(3,802)
113
(2,817)
-
45,617
10,278
10,090
46,857
37,552
(906)
61,762
(4,993)
1,392
(744)
-
57,417
11,138
10,328
44,500
40,811
240
57,108
(9,227)
4,901
(290)
(56)
52,436
9,934
$
$
$
35,339
$
46,279
$
42,502
29,767
5,572
35,339
$
40,470
5,809
46,279
$
37,031
5,471
42,502
0.61
$
0.82
$
0.75
21a
21b
21c
6
21d
21d
6
19
21e
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD
Year ended December 31,
2022
2023
2021
Net income
$
35,339
$
46,279
$
42,502
Other comprehensive income (loss) net of tax effect:
Amounts that will be or that have been reclassified to profit or loss when specific conditions are
met:
Foreign exchange differences on translation of foreign operations
Total other comprehensive income (loss), net of tax
Total comprehensive income
Total comprehensive income attributable to:
Equity holders of the Company
Non-controlling interests
The accompanying notes are an integral part of the consolidated financial statements.
F-9
2,750
2,750
(19,099)
(19,099)
(4,429)
(4,429)
38,089
27,180
38,073
31,594
6,495
24,647
2,533
33,276
4,797
$
38,089
$
27,180
$
38,073
MAGIC SOFTWARE ENTERPRISES LTD
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands (except share and per share data)
Share Capital
Number
Amount
Additional
paid-in
Capital
Retained
earnings
Accumulated
other
Comprehensive
Income
Non-
controlling
interests
Total
Equity
Balance as of January 1, 2021
49,035,055
$
1,164
$
188,415
$
62,673
$
7,437
$
8,718
$
268,407
Net income
Other comprehensive income
Total comprehensive income
Exercise of options
Dividend to Magic’s shareholders
Dividend to non-controlling interests in
subsidiaries
Cost of share-based payment
Acquisition of subsidiaries
Settlement of put options over non-
controlling interest
-
-
-
38,000
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
40
-
-
956
-
(5,364)
29,767
-
29,767
-
(21,780)
-
-
-
-
-
1,827
1,827
-
-
-
-
-
-
5,572
923
35,339
2,750
6,495
38,089
-
-
41
(21,780)
(4,233)
-
719
(4,233)
956
719
(1,279)
(6,643)
Balance as of December 31, 2021
49,073,055
$
1,165
$
184,047
$
70,660
$
9,264
$
10,420
$
275,556
The accompanying notes are an integral part of the consolidated financial statements.
F-10
MAGIC SOFTWARE ENTERPRISES LTD
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Cont.)
U.S. dollars in thousands (except share and per share data)
Share Capital
Number
Amount
Additional
paid-in
capital
Retained
earnings
Accumulated
other
Comprehensive
Income
Non-
controlling
interests
Total
Equity
Balance as of January 1, 2022
49,073,055
$
1,165
$
184,047
$
70,660
$
9,264
$
10,420
$
275,556
Net income
Other comprehensive loss
Total comprehensive income
Exercise of options
Dividend to Magic’s shareholders
Dividend to non-controlling interests in
subsidiaries
Cost of share-based payment
Acquisition of subsidiaries
Settlement of put options over non-
controlling interest
-
-
-
20,000
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
-
-
-
(56)
(721)
(1,239)
40,470
-
40,470
-
(24,841)
-
-
-
-
-
(15,823)
5,809
(3,276)
46,279
(19,099)
(15,823)
2,533
27,180
-
-
-
-
-
-
-
-
1
(24,841)
(4,170)
2,135
(133)
(4,170)
2,079
(854)
2,599
1,360
Balance as of December 31, 2022
49,093,055
$
1,166
$
182,031
$
86,289
$
(6,559) $
13,384
$
276,311
The accompanying notes are an integral part of the consolidated financial statements.
F-11
MAGIC SOFTWARE ENTERPRISES LTD
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Cont.)
U.S. dollars in thousands (except share and per share data)
Share Capital
Number
Amount
Additional
paid-in
capital
Retained
earnings
Accumulated
Other
Comprehensive
Income (loss)
Non-
controlling
interests
Total
Equity
Balance as of January 1, 2023
49,093,055
$
1,166
$
182,031
$
86,289
$
(6,559) $
13,384
$
276,311
Net income
Other comprehensive loss
Total comprehensive income
Exercise of options
Dividend to Magic’s shareholders
Dividend to non-controlling interests in
subsidiaries
Cost of share-based payment
Non-controlling interests arising from
initially consolidated companies
Acquisition of non-controlling interests
Settlement of put options over non-
controlling interest
-
-
-
6,250
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
22
-
-
(225)
-
(67)
846
37,031
-
37,031
-
(30,798)
-
-
-
-
-
-
(3,755)
(3,755)
5,471
(674)
42,502
(4,429)
4,797
38,073
-
-
-
-
-
-
-
-
-
22
(30,798)
(4,055)
4,023
3,644
(3,199)
(4,055)
3,798
3,644
(3,266)
6,369
7,215
Balance as of December 31, 2023
49,099,305
$
1,166
$
182,607
$
92,522
$
(10,314) $
24,963
$
290,944
The accompanying notes are an integral part of the consolidated financial statements.
F-12
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Cost of share-based payment
Changes in value of short-term and long-term loans from banks and others and deposits, net
Changes in deferred taxes, net
Payments of deferred and contingent consideration related to acquisitions
Capital gain from sale of property, plant and equipment
Effect of exchange rate on of cash and cash equivalents held in currencies other than the
functional currency
Amortization of premium and accrued interest on debt instruments at fair value through other
comprehensive income
Working capital adjustments:
Trade receivables
Accrued expenses and other accounts payable
Other current and long-term accounts receivable
Trade payables
Deferred revenues
MAGIC SOFTWARE ENTERPRISES LTD
2021
2022
2023
$
35,339
$
46,279
$
42,502
19,837
956
71
(3,080)
(556)
-
-
96
(27,539)
5,415
263
8,792
4,080
19,795
2,079
(1,686)
(3,904)
(3,919)
-
3,747
76
(2,569)
(975)
(1,934)
139
(513)
20,553
3,798
1,533
(3,238)
(6,572)
(42)
285
(114)
18,426
(7,190)
(5,586)
858
3,779
Net cash provided by operating activities
$
43,674
$
56,615
$
68,992
The accompanying notes are an integral part of the consolidated financial statements.
F-13
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
U.S. dollars in thousands
Cash flows from investing activities:
MAGIC SOFTWARE ENTERPRISES LTD
Year ended December 31,
2022
2023
2021
Payments for business acquisitions, net of cash acquired (Appendix A)
Loans to related party
Proceeds from sale of property, plant and equipment
Payments to former shareholders of consolidated company
Purchase of financial assets measured at fair value through other comprehensive income
Cash paid in conjunction with deferred payments and contingent liabilities related to business
$
(6,833) $
-
-
-
-
(21,670) $
(2,250)
-
-
-
combinations
Purchase of intangible assets
Purchase of property and equipment
Redemption of marketable securities
Investment in a company accounted for at equity
Change in short-term and long-term deposits
Capitalization of software development
Net cash used in investing activities
Cash flows from financing activities:
Exercise of employees’ stock options
Dividend paid to non-controlling interests
Dividend to Magic’s shareholders
Repayment of long-term loans from banks and others
Receipt of long-term loans from banks and others
Repayment of lease liabilities
Cash paid due to exercise of put option by non-controlling interests
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
(14,244)
909
54
(583)
(1,243)
(11,320)
-
(1,618)
-
(498)
4,110
(3,183)
(5,342)
-
(1,439)
-
-
(5,390)
(3,193)
(4,870)
(219)
(4,381)
309
-
1,682
(3,059)
(22,197)
(34,458)
(27,616)
41
(4,233)
(21,780)
(14,467)
25,558
(5,874)
(511)
1
(4,170)
(24,841)
(14,323)
30,703
(4,792)
(854)
22
(4,055)
(30,798)
(20,994)
49,465
(5,690)
(5,243)
(21,266)
(18,276)
(17,293)
(248)
(37)
88,127
(8,909)
(5,028)
88,090
(1,202)
22,881
83,062
Cash and cash equivalents at end of year
$
88,090
$
83,062
$
105,943
The accompanying notes are an integral part of the consolidated financial statements.
F-14
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
U.S. dollars in thousands
Appendix A
Cash paid in conjunction with acquisitions, net of acquired cash:
Fair value of assets acquired and liabilities assumed at the date of acquisition:
Net assets, excluding acquired cash
Intangible assets, net of deferred taxes
Goodwill
Deferred and contingent liabilities assumed in current year business combinations
Non-controlling interests
Appendix B
Supplementary information on investing and financing activities not involving cash flows:
Non-cash activities:
Right-of-use asset recognized with corresponding lease liability
Appendix C
Supplemental disclosure of cash flow activities:
Cash paid, net during the year for:
Income taxes
Interest
The accompanying notes form an integral part of the consolidated financial statements.
F-15
MAGIC SOFTWARE ENTERPRISES LTD
Year ended December 31,
2022
2021
2023
$
506
(4,817)
(8,544)
5,303
719
(1,168) $
(13,552)
(22,370)
15,420
-
(197)
(8,281)
(9,410)
-
3,644
(6,833) $
(21,670) $
(14,244)
2,801
$
6,349
$
2,787
13,050
1,264
$
$
14,457
1,306
$
$
15,886
3,208
$
$
$
$
$
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
Magic Software Enterprises Ltd., an Israeli company (“the Company” or “the Company”), is a global: (i) provider of proprietary application development
and business process integration platforms that accelerate the planning, development, deployment and integration of on-premise, mobile and cloud
business applications (“the Magic Technology”); (ii) provider of selected packaged vertical software solutions; and (iii) vendor of software services and
IT outsourcing software services.
Magic Technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and allow customers to
dramatically improve their business performance and return on investment. To complement its software products and to increase its traction with
customers, the Company also offers a complete portfolio of software services in the areas of infrastructure design and delivery, application development,
technology planning and implementation services, communications services and solutions, and supplemental IT professional outsourcing services. The
Company reports its results on the basis of two reportable business segments: software services (which include proprietary and non-proprietary software
solutions, maintenance and support and related services) and IT professional services (see Note 22 for further details).
The Company’s principal markets are the United States, Israel, Europe and Japan (see Note 22).
For information about the Company’s holdings in subsidiaries and affiliates, see Appendix to the consolidated financial statements.
NOTE 2:- MATERIAL ACCOUNTING POLICIES
The following accounting policies have been applied consistently in the financial statements for all periods presented, unless otherwise stated.
1)
Basis of presentation of the financial statements
These financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board (“IFRS”).
Measurement basis:
The Company’s consolidated financial statements are prepared on a cost basis, except for financial assets measured at fair value through other
comprehensive income (“OCI”), provisions, employee benefit assets and liabilities, and financial assets and liabilities which are presented at fair
value through profit or loss. (See Note 6).
The Company has elected to present the profit or loss items using the function of expense method.
2)
Use of estimates, judgments and assumptions:
The preparation of the consolidated financial statements requires management to make estimates, judgments, and assumptions, that have an
effect on the application of the accounting policies and on the reported amounts of assets, liabilities, revenues and expenses in the financial
statements. Such judgments, estimates and assumptions are related, but not limited to liabilities in respect of business combinations, goodwill
and intangible assets and their subsequent impairment analysis, determination of fair value of put options of non-controlling interests, legal
contingencies, research and development capitalization as well as amortization periods, classification of leases as well as the determination of
the lease term and the incremental borrowing rate, income tax uncertainties, share-based compensation, as well as the determination of revenue
recognition from contracts accounted for based on the estimate of percentage of completion, identification of performance obligations and the
determination of the transaction price as well as the standalone selling prices, and evaluating expected credit losses (“ECL”). The Company’s
management believes that the estimates, judgments, and assumptions used, are reasonable based upon information available at the time they are
made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. Changes in accounting estimates are reported in the period of the change in estimate.
3)
Consolidated financial statements:
The consolidated financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control
is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee. Potential voting rights are considered when assessing whether an entity has control. The
consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases.
F-16
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
4)
Non-controlling interests
Non-controlling interests in subsidiaries, represent the equity in subsidiaries not attributable, directly or indirectly, to a parent. Non-controlling
interests are presented in equity separately from the equity attributable
to the equity holders of the Company. Profit or loss and components of other comprehensive income are attributed to the Company and to non-
controlling interests. Losses are attributed to non-controlling interests even if they result in a negative balance of non-controlling interests in the
consolidated statement of financial position. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as a
change in equity by adjusting the carrying amount of the non-controlling interests with a corresponding adjustment of the equity attributable to
equity holders of the Company less / plus the consideration paid or received.
5)
Business combinations and goodwill:
Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the
consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, the
Company chooses whether to measure the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their
proportionate share in the fair value of the acquiree’s net identifiable assets.
A put option granted by the Group to non-controlling interests is accounted for using the expected purchase approach under the presumption that
the put option will be exercised, and therefore the parent effectively holds an interest in the subsidiary’s shares as if the put option had been
exercised. A put option granted by the Group to non-controlling interests for which the consideration to be paid in cash or other financial asset is
recognized as a liability in the amount of the present value of the option’s exercise price.
Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IFRS
9. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests
over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on
the acquisition date.
6)
Functional currency and presentation currency:
The presentation currency of these financial statements is the U.S dollar (the “dollar”), since the Company believes that financial statements in
U.S dollars provide more relevant information to its investors and users of the financial statements. Also, the dollar is the currency of the
primary economic environment in which the Company and certain subsidiaries operate. Thus, the functional and reporting currency of the
Company and certain subsidiaries is the dollar. The functional currency of each subsidiary represents the primary economic environment in
which each subsidiary operates.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
7)
Revenue recognition:
MAGIC SOFTWARE ENTERPRISES LTD
Revenue from contracts with customers is recognized when control of the promised goods or services are transferred to the customers. The
transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on
behalf of third parties (such as taxes).
The Company enters into contracts that can include various combinations of products, software and professional services, as detailed below,
which are generally distinct from each other and accounted for as separate performance obligations.
The Company derives its revenues from licensing the rights to use its software (proprietary and non-proprietary), provision of related
professional services, maintenance and technical support as well as from other software and IT professional services (either fixed price or based
on time and materials). The Company sells its products primarily through direct sales force and indirectly through distributors and value-added
resellers.
The Company recognizes revenue when or as it satisfies a performance obligation by transferring software license or software related services to
the customer, either at a point in time or over time.
When the Company enters into a contract for the sale of a software license which does not require significant implementation services and the
customer receives the rights to use the perpetual or term-based software license, the Company recognizes revenue from the sale of the software
license at the time of delivery, when the customer receives control of the software license. The software license is considered a distinct
performance obligation recognized at a point-in-time, as the customer can benefit from the software on its own or together with other readily
available resources.
Revenue from long-term contracts which involve significant implementation, customization, or integration of the Company’s software license to
customer-specific requirements are considered as one performance obligation satisfied over-time. The underlying deliverable is owned and
controlled by the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue of such
contracts over time using cost inputs, which recognize revenue and gross profit as work is performed based on a ratio between actual costs
incurred compared to the total estimated costs for the contract, to measure progress toward completion of its performance obligations.
In addition, the Company provides professional services that do not involve significant customization to customer-specific specifications
(typically staffing or consulting services). The revenue is recognized as the services are performed, either on a straight-line basis or based on the
hours of services (time and material) that were provided to the customer, in accordance with the terms of the contracts.
The Company’s revenues from post contract support are derived from annual maintenance contracts providing for unspecified upgrades for new
versions and enhancements on a when-and-if-available basis for an annual fee, as well as technical support for software licenses previously sold.
The right for an unspecified upgrade for new versions and enhancements on a when-and-if-available basis do not specify the features,
functionality and release date of future product enhancements for the customer to know what will be made available and the general timeframe
in which it will be delivered. The Company considers the post contract support performance obligation as a distinct performance obligation that
is satisfied over time and recognized on a straight-line basis over the contractual period.
F-18
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
Revenues from professional services, both related to software and IT professional services businesses consists of either fixed price or time and
materials, are considered performance obligations that are satisfied over time and revenues are recognized as the services are provided.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Stand-alone selling prices
of software licenses are typically estimated using the residual approach. Stand-alone selling prices of services are typically estimated based on
observable transactions when these services are sold on a standalone basis.
When another party is involved in providing goods or services to the customer, the Company examines whether the nature of its promise is a
performance obligation to provide the defined goods or services itself, which means the Company is a principal and therefore recognizes revenue
in the gross amount of the consideration, or to arrange that another party provide the goods or services which means the Company is an agent
and therefore recognizes revenue in the amount of the net commission.
The Company is a principal when it controls the promised goods or services before their transfer to the customer. Indicators that the Company
controls the goods or services before their transfer to the customer include, inter alia, as follows: the Company is responsible for fulfilling the
promises in the contract; the Company has inventory risk before the goods or services are transferred to the customer; and the Company has
discretion in setting the prices of the goods or services.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross
and net reporting of revenue depends on the relative facts and circumstances of each sale.
The Company pays commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined
sales or profit goals. The Company expenses sales commissions as they are incurred when the amortization period would have been less than one
year. In addition, generally, sales commissions which are paid upon contract renewal are commensurate with the initial commissions as the
renewal amounts are substantially identical to the initial commission costs. During the years ended December 31, 2023 and 2022, no costs have
been capitalized.
The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the
period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
8)
Income tax:
Current or deferred taxes are recognized in profit or loss, except to the extent that they relate to items which are recognized in other
comprehensive income or equity.
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
● Current taxes:
MAGIC SOFTWARE ENTERPRISES LTD
The current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date as
well as adjustments required in connection with the tax liability in respect of previous years.
● Deferred taxes:
Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts
attributed for tax purposes. Deferred taxes are measured at the tax rate that is expected to apply when the asset is realized or the liability is
settled, based on tax laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are reviewed at each
reporting date and reduced to the extent that it is not probable that they will be utilized. Deductible carryforward losses and temporary
differences for which deferred tax assets had not been recognized are reviewed at each reporting date and a respective deferred tax asset is
recognized to the extent that their utilization is probable.
Taxes that would apply in the event of the disposal of investments in investees have not been considered in computing deferred taxes, as
long as the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would apply in the
event of distribution of earnings by investees as dividends have not been considered in computing deferred taxes, since the distribution of
dividends does not involve an additional tax liability or since it is the Company’s policy not to initiate distribution of dividends from a
subsidiary that would trigger an additional tax liability.
Taxes on income that relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted for
pursuant to IAS 12.
Deferred taxes are offset if there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred
taxes relate to the same taxpayer and the same taxation authority.
● Uncertain tax position:
A provision for uncertain tax positions, including additional tax and interest expenses, is recognized when it is more likely than not that the
Company will have to use its economic resources to pay the obligation.
F-20
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
9)
Leases:
The Company accounts for a contract as a lease when the contract terms convey the right to control the use of an identified asset for a period of
time in exchange for consideration.
i) The Company as lessee:
For leases in which the Company is the lessee, the Company recognizes on the commencement date of the lease a right-of-use asset and a
lease liability, excluding leases whose term is up to twelve months and leases for which the underlying asset is of low value. For these
excluded leases, the Company has elected to recognize the lease payments as an expense in profit or loss on a straight-line basis over the
lease term. In measuring the lease liability, the Company has elected to apply the practical expedient in the Standard and does not separate
the lease components from the non-lease components (such as management and maintenance services, etc.) included in a single contract.
Leases which entitle employees to a company car as part of their employment terms are accounted for as employee benefits in accordance
with the provisions of IAS 19 and not as subleases.
On the commencement date, the lease liability includes all unpaid lease payments discounted at the interest rate implicit in the lease, if that
rate can be readily determined, or otherwise using the Company’s incremental borrowing rate. After the commencement date, the Company
measures the lease liability using the effective interest rate method.
On the commencement date, the right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already made
on or before the commencement date and initial direct costs incurred. The right-of-use asset is measured applying the cost model and
depreciated over the shorter of its useful life and the lease term.
Following are the amortization periods of the right-of-use assets by class of underlying asset:
Land and buildings
Motor vehicles
Years
Mainly
1-12
1-5
3
3
The Company tests for impairment of the right-of-use asset whenever there are indications of impairment pursuant to the provisions of IAS
36.
ii) Lease extension and termination options:
A non-cancelable lease term includes both the periods covered by an option to extend the lease when it is reasonably certain that the
extension option will be exercised and the periods covered by a lease termination option when it is reasonably certain that the termination
option will not be exercised.
In the event of any change in the expected exercise of the lease extension option or in the expected non-exercise of the lease termination
option, the Company remeasures the lease liability based on the revised lease term using a revised discount rate as of the date of the change
in expectations. The total change is recognized in the carrying amount of the right-of-use asset until it is reduced to zero, and any further
reductions are recognized in profit or loss.
F-21
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
10)
Property, plant and equipment, net:
Property, plant and equipment are measured at cost, including directly attributable costs, less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets at annual rates as follows:
Software
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Years
3-5 (mainly 5)
3-5
7-15 (mainly 7)
7
Leasehold improvements are amortized using the straight-line method over the term of the lease (including option terms that are deemed to be
reasonably assured) or the estimated useful life of the improvements, whichever is shorter.
The useful life, the depreciation method and the residual value of an asset are reviewed at least each year-end (at the end of the year) and any
changes are accounted for prospectively as a change in accounting estimate. Depreciation of an asset ceases at the earlier of the date that the
asset is classified as held for sale and the date that the asset is derecognized.
11)
Intangible assets:
Separately acquired intangible assets are measured on initial recognition at cost, including directly attributable costs. Intangible assets acquired
in a business combination are measured at fair value at the acquisition date. Expenditures relating to internally generated intangible assets,
excluding capitalized development costs, are recognized in profit or loss when incurred.
Intangible assets with a finite useful life are amortized over their useful life and reviewed for impairment whenever there is an indication that the
asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least at each year end.
Research and development expenditures
Research expenditures incurred in the process of software development are recognized in profit or loss when incurred. An intangible asset
arising from a software development project or from the development phase of an internal project is recognized if the Company can demonstrate
the technical feasibility of completing the intangible asset so that it will be available for use or sale; the Company’s intention to complete the
intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits;
the availability of adequate technical, financial and other resources to complete the intangible asset; and the ability to measure reliably the
respective expenditure asset during its development. The Company establishes technological feasibility upon completion of a detailed program
design or a working model.
F-22
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
Capitalized software costs are measured at cost less any accumulated amortization and any accumulated impairment losses on a product-by-
product basis. Amortization of capitalized software costs begin when development is complete, and the product is available for use or for sale.
The Company considers a product to be available for use when the Company completes its internal validation of the product that is necessary to
establish that the product meets its design specifications including functions, features, and technical performance requirements. Internal
validation includes the completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The internal validation of
the product takes place a few weeks before the product is made available to the market. In certain instances, the Company enters into a short pre-
release stage, during which the product is made available to a selected number of customers as a beta program for their own review and
familiarization. Subsequently, the release is made generally available to customers. Once a product is considered available for use, the
capitalization of costs ceases and amortization of such costs to “cost of sales” begins.
Capitalized software costs are amortized on a product-by-product basis by the straight-line method over the estimated useful life of the software
product (between 3-5 years).
Research and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
The Company assesses the recoverability of its capitalized software costs on a regular basis by assessing the net realizable value of these
intangible assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing and
disposing of it, including the estimated costs of performing maintenance and customer support over its remaining economical useful life using
internally generated projections of future revenues generated by the products, cost of completion of products and cost of delivery to customers
over its remaining economical useful life.
During the years ended December 31, 2021, 2022 and 2023, no such unrecoverable amounts were identified.
Other intangible assets
Intangible assets excluding capitalized development costs are comprised mainly of customer-related intangible assets, backlogs, acquired
technology and patent, and are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic
benefits of the intangible assets are consumed or otherwise used up. The useful life of intangible assets is as follows:
Customer relationships
Acquired technology
F-23
Years
Up to 15
Up to 10 (mainly 5)
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
The useful life of these assets is reviewed annually to determine whether their indefinite life assessment continues to be supportable. If the
events and circumstances do not continue to support the assessment, the change in the useful life assessment from indefinite to finite is
accounted for prospectively as a change in accounting estimate, and on that date the asset is tested for impairment. Commencing from that date,
the asset is amortized systematically over its useful life.
12)
Impairment of non-financial assets:
The Company evaluates the need to record an impairment of non-financial assets (property, plant and equipment, capitalized software costs and
other intangible assets, goodwill) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the
carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable
amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted
using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent
cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated, at the acquisition date, to each of our cash-
generating units that are expected to benefit from the synergies of the combination. The Company reviews goodwill for impairment once a year,
on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment.
Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which
the goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of cash-
generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating unit (or group of cash-generating
units). Any impairment loss is allocated first to goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent periods.
During the years ended December 31, 2021, 2022 and 2023, no impairment loss was identified.
13)
Financial instruments:
The accounting policy for financial instruments in accordance with IFRS 9, “Financial Instruments” is as follows:
1. Financial assets
Financial assets are measured upon initial recognition at fair value plus transaction costs that are directly attributable to the acquisition of
the financial assets, except for financial assets measured at fair value through profit or loss in respect of which transaction costs are recorded
in profit or loss.
Impairment of financial assets:
The Company evaluates at the end of each reporting period the loss allowance for financial debt instruments which are not measured at fair
value through profit or loss.
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD
An impairment loss on debt instruments measured at amortized cost is recognized in profit or loss with a corresponding loss allowance that
is offset from the carrying amount of the financial asset.
The Company has short-term financial assets such as trade receivables in respect of which the Company applies a simplified approach in
IFRS 9 and measures the loss allowance in an amount equal to the lifetime expected credit losses. Trade receivables include original
invoiced amounts less an allowance for any potential uncollectible amounts and less invoiced amounts from maintenance and professional
services contracts which haven’t been recognized yet. The Company makes estimates of expected credit losses for the allowance for
doubtful accounts based upon its assessment of various factors, including historical experience, the age of the trade receivable balances,
credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other
factors that may affect its ability to collect from customers. The estimated credit loss allowance is recorded as general and administrative
expenses on the Company’s consolidated statements of profit or loss. Such allowance charge amounted of $892, $1,778 and $2,116,
respectively for the years ended December 31, 2021, 2022 and 2023.
2. Financial liabilities
a) Financial liabilities measured at amortized cost:
Financial liabilities are initially recognized at fair value less transaction costs that are directly attributable to the issue of the financial
liability.
After initial recognition, the Company measures all financial liabilities at amortized cost using the effective interest rate method, except for
financial liabilities at fair value through profit or loss.
b) Financial liabilities measured at fair value through profit or loss:
At initial recognition, the Company measures financial liabilities that are not measured at amortized cost at fair value. Transaction costs are
recognized in profit or loss.
After initial recognition, changes in fair value are recognized in profit or loss, except for put option granted to non-controlling interests.
Put option granted to non-controlling interests:
When the Company grants to non-controlling interests a put option to sell part or all of their interests in a subsidiary, during a certain period,
even if such purchase obligation is conditional on the counterparty’s exercise of its contractual right to cause such redemption, if the put
option agreement does not transfer to the Company any benefits incidental to ownership of the equity instrument (i.e. the Company does not
have a present ownership in the shares concerned) then at the end of each reporting period the non-controlling interests (to which a portion
of net profit attributable to non-controlling interests is allocated) are classified as a financial liability, as if such put-able equity instrument
was redeemed on that date. The difference between the non-controlling interests carrying amount at the end of the reporting period and the
present value of the liability is recognized directly in equity of the Company, under “Additional paid-in capital”.
F-25
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
The Company remeasures the financial liability at the end of each reporting period based on the estimated present value of the consideration
to be transferred upon the exercise of the put option.
If the option is exercised in subsequent periods, the consideration paid upon exercise is treated as settlement of the liability. If the put option
expires, the liability is settled and a portion of the investment in the subsidiary disposed of, without loss of control therein.
14)
Fair value measurement:
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s
principal market, or in the absence of a principal market, in the most advantageous market.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest. Fair value measurement of a non-financial asset takes into account a market
participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that
would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable
inputs.
Level 1
- quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
- inputs other than quoted prices included within Level 1 that are observable directly or indirectly.
Level 3
- inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market
data).
All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy
based on the lowest level input that is significant to the entire fair value measurement.
15)
Provisions:
A provision in accordance with IAS 37 is recognized when the Company has a present (legal or constructive) obligation as a result of a past
event, it is expected to require the use of economic resources to clear the obligation and a reliable estimate has been made.
F-26
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
Following are the types of provisions included in the financial statements:
i.
Legal claims:
A provision for claims is recognized when the Company has a present legal or constructive obligation as a result of a past event, it is more
likely than not that an outflow of resources embodying economic benefits will be required by the Company to settle the obligation and a
reliable estimate can be made of the amount of the obligation.
ii. Contingent liability recognized in a business combination:
A contingent liability in a business combination is measured at fair value upon initial recognition. In subsequent periods, it is measured at
the higher of the amount initially recognized less, when appropriate, cumulative amortization, and the amount that would be recognized at
the end of the reporting period in accordance with IAS 37.
16)
Employee benefits:
The Company maintains several employee benefit plans:
i.
Short-term employee benefits:
Short-term employee benefits are benefits that are expected to be settled wholly before twelve months after the end of the annual reporting
period in which the employees render the related services. These benefits include salaries, paid annual leave, paid sick leave, recreation and
social security contributions and are recognized as expenses as the services are rendered. A liability in respect of a cash bonus or a profit-
sharing plan is recognized when the Company has a legal or constructive obligation to make such payment as a result of past service
rendered by an employee and a reliable estimate of the amount can be made.
ii. Post-employment benefits:
The plans are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined benefit
plans.
Magic and its Israeli subsidiaries (as defined with respect to their Israeli employee contribution plans pursuant to section 14 of Israel’s
Severance Pay Law, 1963 (the “Severance Pay Law”)) pay fixed contributions to those plans and will have no legal or constructive
obligation to pay further contributions if the fund into which those contributions are paid does not hold sufficient amounts to pay all
employee benefits relating to employee service in the current and prior periods. Contributions to the defined contribution plan in respect of
severance or retirement pay are recognized as an expense when contributed concurrently with performance of the employee’s services.
F-27
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
Magic and its Israeli subsidiaries also operate a defined benefit plan in respect of severance or retirement pay to their Israeli employees
pursuant to the Severance Pay Law. According to the Severance Pay Law, employees are entitled to severance pay upon dismissal or
retirement.
In respect of its severance pay obligation to certain of its employees, the Company makes current deposits in pension funds and insurance
companies (the “plan assets”). Plan assets comprise assets held by a long-term employee benefit fund or qualifying insurance policies. Plan
assets are not available to the Company’s own creditors and cannot be returned directly to the Company.
The liability for employee benefits shown in the statement of financial position reflects the present value of the defined benefit obligation,
less the fair value of the plan assets. Remeasurements of the net liability are recognized in other comprehensive income in the period in
which they occur.
17)
Share-based payment:
The Company’s senior management are entitled to remuneration in the form of equity-settled share-based payment transactions. The cost of
equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date. The fair value is
determined using an acceptable option pricing model.
The cost of equity-settled transactions is recognized in profit or loss together with a corresponding increase in equity during the period which the
performance and/or service conditions are to be satisfied ending on the date on which the relevant employees become entitled to the award (“the
vesting period”). The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date
reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will
ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which
are treated as vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions (service and/or
performance) are satisfied.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method over
the requisite service period of each of the awards. The Company accounts for forfeitures as they occur.
18)
Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,
short-term bank deposits, trade receivables and foreign currency derivative contracts.
The majority of the Company’s cash and cash equivalents, bank deposits and other financial instruments are invested with major banks in Israel,
the United States and across Europe. Management believes that these financial instruments are held in financial institutions with high credit
standing, and accordingly, minimal credit risk exists with respect to these investments. Cash and cash equivalents and short-term deposits in the
United States may be in excess of insured limits and are not insured in other jurisdictions. Generally, these banks deposits may be redeemed
upon demand and therefore bear minimal risk.
F-28
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
The Company’s trade receivables are generally derived from sales to large organizations located mainly in Israel, North America, Europe and
Asia Pacific. The Company performs ongoing credit evaluations of its customers using a reliable outside source to determine payment terms and
credit limits which are approved based on the size of the customer and to date has not experienced any material losses. In certain circumstances,
Magic and its subsidiaries may require letters of credit or other collateral or additional guarantees.
The Company maintains an allowance for credit losses based upon management’s experience and estimate of collectability of each outstanding
invoice. The allowance for credit losses is determined with respect to specific debts or which collection is doubtful. The risk of collection
associated with accounts receivable is mitigated by the diversity and number of customers.
19)
Liquidity risk:
Liquidity risk arises from managing the Company’s working capital as well as from financial expenses and principal payments of the
Company’s debt instruments. Liquidity risk consists of the risk that the Company will have difficulty in fulfilling obligations relating to financial
liabilities. The Company’s policy is to ascertain constant cash adequacy needed for settling its liabilities when due. For this purpose, the
Company aims to hold cash balances (or adequate credit lines) that will meet anticipated demands.
Magic and its subsidiaries examine cash flow forecasts on a monthly basis as well as information regarding cash balances. As of the reporting
date, these forecasts indicate that the Company can expect sufficient liquid sources for covering its entire liabilities under reasonable
assumptions.
20)
Reclassification of prior years presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the
reported results of operations.
21)
Changes in accounting policies – initial adoption of new financial reporting and accounting standards:
1. Amendment to IAS 1, “Presentation of Financial Statements”:
In January 2020, the IASB issued an amendment to IAS 1, “Presentation of Financial Statements” regarding the criteria for determining the
classification of liabilities as current or non-current (“the Original Amendment”). In October 2022, the IASB issued a subsequent
amendment (“the Subsequent Amendment”).
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
According to the Subsequent Amendment:
MAGIC SOFTWARE ENTERPRISES LTD
● Only financial covenants with which an entity must comply on or before the reporting date will affect a liability’s classification as
current or non-current.
● In respect of a liability for which compliance with financial covenants is to be evaluated within twelve months from the reporting date,
disclosure is required to enable users of the financial statements to assess the risks related to that liability. The Subsequent Amendment
requires disclosure of the carrying amount of the liability, information about the financial covenants, and the facts and circumstances at
the end of the reporting period that could result in the conclusion that the entity may have difficulty in complying with the financial
covenants.
According to the Original Amendment, the conversion option of a liability affects the classification of the entire liability as current or
non-current unless the conversion component is an equity instrument.
The Original Amendment and Subsequent Amendment are both effective for annual periods beginning on or after January 1, 2024 and
must be applied retrospectively. Early adoption is permitted.
The above amendments are not expected to have a material impact on the Company’s consolidated financial statements.
2. Amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures”:
In May 2023, the IASB issued amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures” (“the
Amendments”) to address the presentation of liabilities and the associated cash flows arising out of supplier finance arrangements, as well
as disclosures required for such arrangements.
The disclosure requirements in the Amendments are intended to assist users of financial statements in understanding the effects of supplier
finance arrangements on an entity’s liabilities, cash flows and exposure to liquidity risk.
The Amendments are effective for annual reporting periods beginning on or after January 1, 2024. Early adoption is permitted but will need
to be disclosed.
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements.
3. Amendments to IAS 21, “The Effects of Changes in Foreign Exchange Rates”:
In August 2023, the IASB issued “Amendments to IAS 21: Lack of Exchangeability (Amendments to IAS 21, “The Effects of Changes in
Foreign Exchange Rates”)” (“the Amendments”) to clarify how an entity should assess whether a currency is exchangeable and how it
should measure and determine a spot exchange rate when exchangeability is lacking.
F-30
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- MATERIAL ACCOUNTING POLICIES (Cont.)
The Amendments set out the requirements for determining the spot exchange rate when a currency lacks exchangeability. The Amendments
require disclosure of information that will enable users of financial statements to understand how a currency not being exchangeable affects
or is expected to affect the entity’s financial performance, financial position and cash flows.
The Amendments apply for annual reporting periods beginning on or after January 1, 2025. Earlier adoption is permitted, in which case, an
entity is required to disclose that fact. When applying the Amendments, an entity should not restate comparative information. Instead, if the
foreign currency is not exchangeable at the beginning of the annual reporting period in which the Amendments are first applied (the initial
application date), the entity should translate affected assets, liabilities and equity as required by the Amendments and recognize the
differences as of the initial application date as an adjustment to the opening balance of retained earnings and/or to the foreign currency
translation reserve, as required by the Amendments .
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements.
NOTE 3:- BUSINESS COMBINATIONS
Current year acquisitions
On June 8, 2023, the Company acquired 60% of K.M.T. (M.H.) Technologies Communication Computer Ltd. (“KMT”). KMT delivers a broad spectrum
of ICT products, cloud platform, VoIP, technical support and planning and construction of computing. KMT was acquired for a total consideration of NIS
55,039 ($ 14,875). NIS 60 million was paid upon closing of which a payment of NIS 15 million is related to a contingent consideration depending on the
future operating results achieved by KMT referring to years 2023-2025. If the future operating results will not be fully achieved, the seller will be
required to return the whole or part of the contingent consideration. This contingent consideration was accounted for as a financial asset measured at its
fair value as of the acquisition date of NIS 5 million ($1.4 million).
The results of operations were included in the consolidated financial statements of the Company commencing June 30, 2023. Acquisition-related costs
were immaterial. Unaudited pro forma condensed results of operations were not presented since they were not material to the Company’s consolidated
statement of profit or loss.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding $632 of cash acquired
Intangible assets, net of deferred tax liabilities
Non-controlling interests
Goodwill
Total assets acquired
F-31
$
$
197
8,281
(3,644)
9,410
14,244
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- BUSINESS COMBINATIONS (Cont.)
The goodwill from the acquisition of KMT is primarily attributable to potential synergy with Magic, as well as certain intangible assets that do not
qualify for separate recognition. The goodwill is not deductible for income tax purposes.
Previous year acquisitions
a. On December 2, 2021, the Company entered into a Share Purchase Agreement (“the Agreement”) to acquire 50.1% of the outstanding share
capital of Appush Ltd. (formerly known as Vidstart Ltd.) (“Appush”), a provider of a video advertising platform that offers personalized
automated methods and real-time smart optimization, helping its clients achieve high yields in the competitive digital ecosystem, for
$21,492. Of which, $11,042 was paid upon closing. The final closing and execution of the Agreement occurred on January 27, 2022. In
addition, the Company paid $1.5 million as an advance payment for future acquisition of the remainder of Appush’s shares. According to
the Agreement, the Company is obliged to purchase the remainder of Appush’s shares in stages until it will hold 100% of Appush’s shares
on or before December 31, 2026. This obligation was accounted for as a financial liability measured at its fair value as of the acquisition
date of $10,450. Beyond the $11,042 paid in 2021, the Company paid $239 in 2022 and $4,962 in 2023. The fair value of the financial
liability at December 31, 2023 was $4,634.
The results of operations were included in the consolidated financial statements of the Company commencing January 27, 2022.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net liabilities, excluding $1,548 of cash acquired
Intangible assets, net of deferred tax liabilities
Goodwill
Total assets acquired
$
$
(2,762)
7,445
15,261
19,944
The goodwill from the acquisition of Appush is primarily attributable to potential synergy with Magic, as well as certain intangible assets
that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.
b. On August 23, 2022, the Company acquired The Goodkind Group, LLC (“TGG”) for a total consideration of $11,629, subject to net
working capital adjustments. Of which, $7,993 was paid upon closing. The remainder constitutes a deferred payment payable in 2023 and
2024. TGG provides permanent and temporary staffing needs in various sectors including: Information Technology, Accounting & Finance,
Digital Media, Marketing, Human Resources, Financial Services. TGG specializes in customizing solutions and programs to their clients.
With On-Site programs and sourcing models the Company solutions includes functions which differs from standard staffing companies.
TGG provides assistance in the areas of compensation design and development, employee opinion surveys, employment policies and
practices, performance management, regulatory and compliance issues and succession planning.
F-32
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- BUSINESS COMBINATIONS (Cont.)
The results of operations were included in the consolidated financial statements of the Company commencing August 23, 2022.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Net assets, excluding $147 of cash acquired
Customer relationships, net of deferred tax liabilities
Goodwill
Total assets acquired
$
$
3,177
3,901
4,404
11,482
The goodwill from the acquisition of TGG is primarily attributable to potential synergy with Magic, as well as certain intangible assets that
do not qualify for separate recognition.
c. On July 1, 2022, the Company acquired Intrabases SAS (“Intrabases”), a provider of IT professional services based in Nantes, France. The
consideration of the transaction is comprised solely from a cash consideration in an amount of $3,428.
The results of operations were included in the consolidated financial statements of the Company commencing July 1, 2022.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Net assets, excluding $447 of cash acquired
Customer relationships, net of deferred tax liabilities
Goodwill
Total assets acquired
$
$
120
1,054
1,807
2,981
The goodwill from the acquisition of Intrabases is primarily attributable to potential synergy with Magic, as well as certain intangible assets
that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes.
d. During 2022, the Company entered into two separate Asset Purchase Agreements which meet the definition of a business. Therefore, the
Company deemed them as business combinations which were accounted for in accordance with IFRS 3. These aforementioned acquisitions
are immaterial, both individually and in aggregate. The total consideration paid for these acquisitions was $1,753.
F-33
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- BUSINESS COMBINATIONS (Cont.)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisitions:
Net liabilities
Customer relationships, net of deferred tax liabilities
Goodwill
Total assets acquired
(308)
1,163
898
1,753
$
The goodwill from these acquisitions is primarily attributable to potential synergy with Magic, as well as certain intangible assets that do not qualify for
separate recognition.
NOTE 4:- CASH AND CASH EQUIVALENTS
Balance nominated in USD
Balance nominated in NIS
Balance nominated in other currencies
NOTE 5:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
The following table summarizes the composition of the Company’s other accounts receivable and prepaid expenses:
Prepaid expenses
Government authorities
Related parties
Marketable securities and others
NOTE 6:- FAIR VALUE MEASUREMENT
December 31,
2022
2023
38,688
25,197
19,177
83,062
$
$
57,653
35,034
13,256
105,943
December 31,
2022
2023
4,262
3,659
3,077
2,654
13,652
$
$
5,606
5,289
3,178
4,760
18,833
$
$
$
$
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable
inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- FAIR VALUE MEASUREMENT (Cont.)
The Company’s financial assets and liabilities measured at fair value on a recurring basis, including accrued interest components, consisted of the
following types of instruments as of December 31, 2022 and 2023:
MAGIC SOFTWARE ENTERPRISES LTD
Assets:
Assets in respect of business combinations
Liabilities:
Liability in respect of business combinations
Put options of non-controlling interests
Liabilities:
Liability in respect of business combinations
Put options of non-controlling interests
There were no Level 1 or Level 2 instruments during neither of the reported periods.
The movement in the contingent consideration in respect of the business combinations is as follows:
Opening balance
Increase in contingent consideration due to acquisitions
Payment of contingent consideration
Increase in fair value of contingent consideration
Decrease in fair value of contingent consideration
Foreign currency translation adjustments
Amortization of interest and exchange rate
Closing balance
F-35
$
$
$
$
$
$
$
Fair value measurements
December 31, 2023
Level 3
Total
1,368
1,368
6,175
18,872
$
$
$
1,368
1,368
6,175
18,872
25,047
$
25,047
Fair value measurements
December 31, 2022
Level 3
Total
19,693
28,292
$
19,693
28,292
47,985
$
47,985
December 31,
2022
2023
$
17,772
10,670
(8,547)
119
(1,025)
(598)
1,302
19,693
-
(13,908)
880
(640)
(146)
296
$
19,693
$
6,175
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- FAIR VALUE MEASUREMENT (Cont.)
The movement in the deferred consideration in respect of the business combinations is as follows:
Opening balance
Increase in deferred consideration due to acquisitions
Payment of deferred consideration
Amortization of interest and exchange rate
Working capital adjustments and other
Closing balance
MAGIC SOFTWARE ENTERPRISES LTD
December 31,
2022
2023
$
2,755
4,744
(1,742)
74
(861)
4,970
-
(3,757)
62
255
4,970
$
1,530
$
$
The financial assets and liabilities in the consolidated statements of financial position are classified by groups of financial instruments pursuant to IFRS 9:
Financial assets
Financial assets at cost:
Cash and cash equivalents
Short-term bank deposits
Trade receivables, net
Marketable securities
Total financial assets at cost measured at cost:
Financial assets at fair value through profit or loss:
Assets in respect of business combinations
Total financial assets
Financial liabilities at fair value through equity:
Put options of non-controlling interests
Financial liabilities at fair value through profit or loss:
Liability in respect of business combinations
Financial liabilities measured at amortized cost:
Loans from bank and financial institutions (short-term and long-term debts
Lease liabilities
Total financial liabilities measured at amortized cost:
Total financial and lease liabilities
F-36
December 31,
2022
2023
$
$
$
$
$
$
$
$
$
83,062
3,904
118,126
757
205,849
-
205,849
28,292
$
$
$
$
$
105,943
751
108,385
2,316
217,395
1,368
218,763
18,872
24,663
$
7,705
51,167
28,873
80,040
132,995
$
$
$
81,208
27,507
108,715
135,292
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:- PROPERTY, PLANTS AND EQUIPMENT, NET
Composition and movement:
Cost:
Balance as of January 1, 2022
Additions during the year:
Purchases
Acquisition of subsidiaries
Adjustments arising from translating financial statements
of foreign operations
Decreases during the year:
Disposals
Balance as of December 31, 2022
Accumulated depreciation:
Balance as of January 1, 2022
Additions during the year:
Depreciation
Disposals
Adjustments arising from translating financial statements
of foreign operations
Balance as of December 31, 2022
Depreciated cost at December 31, 2022
Cost:
Balance as of January 1, 2023
Additions during the year:
Purchases
Acquisitions of subsidiaries
Adjustments arising from translating financial statements
of foreign operations
Decreases during the year:
Disposals
Balance as of December 31, 2023
Accumulated depreciation:
Balance as of January 1, 2023
Additions during the year:
Depreciation
Disposals
Acquisitions of subsidiaries
Adjustments arising from translating financial statements
of foreign operations
Balance as of December 31, 2023
Depreciated cost at December 31, 2023
Software
Motor
vehicles
Office
furniture
and
equipment
Computers
and
peripheral
equipment
Leasehold
improvements
Total
$
1,623
$
1,444
$
3,839
$
8,106
$
3,725
$
18,737
110
4
(220)
(25)
9
-
(181)
(2)
1,365
55
(555)
(309)
2,702
112
195
8
4,381
179
(1,668)
1,996
(628)
(632)
(44)
(1,012)
1,492
$
1,270
$
4,395
$
8,620
$
5,880
$
21,657
1,510
$
1,240
$
2,480
$
6,594
$
1,041
$
12,865
47
(23)
(135)
1,399
93
$
$
4
(2)
(152)
583
(284)
104
1,192
(580)
(520)
84
(41)
177
1,910
(930)
(526)
1,090
2,883
180
$
1,512
$
$
6,686
1,934
$
$
1,261
4,619
$
$
13,319
8,338
Software
Motor
vehicles
Office
furniture
and
equipment
Computers
and
peripheral
equipment
Leasehold
improvements
Total
$
$
$
$
$
1,492
$
1,270
$
4,395
$
8,620
$
5,880
$
21,657
463
25
(22)
(3)
3
2
(19)
(94)
491
302
(255)
(52)
591
616
(150)
(58)
70
43
(136)
(7)
1,618
988
(582)
(214)
1,955
$
1,162
$
4,881
$
9,619
$
5,850
$
23,467
1,399
$
1,090
2,883
$
6,686
$
1,261
$
13,319
46
(3)
21
(36)
48
(94)
-
(48)
563
(51)
257
(46)
816
(48)
528
(241)
448
(7)
37
(30)
1,921
(203)
843
(401)
1,427
528
$
$
996
3,606
166
$
1,275
$
$
7,741
1,878
$
$
1,709
4,141
$
$
15,479
7,988
$
$
$
$
F-37
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:- INTANGIBLE ASSETS, NET
Composition and movement:
Capitalized
Software
development
costs
Customer
relationship
Acquired
technology
Others
Total
Cost:
Balance as of January 1, 2022
Capitalized development costs
Purchase of intangible asset
Acquisition of subsidiaries
Adjustments arising from translating financial statements of
foreign operations
Balance as of December 31, 2022
Accumulated amortization and impairment:
Balance as of January 1, 2022
Amortization recognized in the year
Adjustments arising from translating financial statements of
foreign operations
Balance as of December 31, 2022
Amortized cost at December 31, 2022
$
$
$
$
$
$
90,101
3,059
-
-
$
86,651
-
219
11,319
$
18,371
-
-
2,707
(103)
(5,055)
(1,030)
$
637
-
-
-
(53)
195,760
3,059
219
14,026
(6,241)
93,057
$
93,134
$
20,048
$
584
$
206,823
79,354
3,817
-
83,171
9,886
$
$
$
54,494
7,865
(2,930)
59,429
33,705
$
$
$
10,329
1,797
(244)
11,882
8,166
$
$
$
193
95
(4)
284
300
$
$
$
144,370
13,574
(3,178)
154,766
52,057
Capitalized
Software
development
costs
Customer
relationship
Acquired
technology
Others
Total
Cost:
Balance as of January 1, 2023
Capitalized development costs
Acquisition of subsidiaries
Adjustments arising from translating financial statements of
foreign operations
Balance as of December 31, 2023
Accumulated amortization and impairment:
Balance as of January 1, 2023
Amortization recognized in the year
Adjustments arising from translating financial statements of
foreign operations
$
$
$
93,057
3,183
-
$
93,134
-
7,704
$
20,048
-
-
$
584
-
1,706
206,823
3,183
9,410
(32)
(1,172)
(332)
(13)
(1,549)
96,208
99,666
19,716
2,277
217,867
83,171
3,545
$
59,429
7,925
$
11,882
1,712
$
$
284
291
154,766
13,473
-
(864)
(163)
(3)
572
(1,030)
167,209
Balance as of December 31, 2023
86,716
66,490
13,431
Amortized cost at December 31, 2023
$
9,492
$
33,176
$
6,285
$
1,705
$
50,658
F-38
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:- INTANGIBLE ASSETS, NET (Cont.)
During the years ended December 31, 2021, 2022 and 2023 the Company recognized amortization expenses related to intangible assets as follows:
Year ended December 31,
2022
2021
2023
Cost of revenues
Selling and marketing expenses
Intangible assets composition by reportable segment as of December 31, 2023:
Capitalized Software development costs
Customer relationship
Acquired technology
Others
Total
$
$
$
$
6,068
6,968
13,036
$
$
5,405
8,169
13,574
IT
professional
services
Software
services
788
24,517
1,439
1,487
28,231
$
$
8,704
8,659
4,846
218
22,427
The estimated future amortization expense of intangible assets as of December 31, 2023 is as follows:
2024
2025
2026
2027
2028 and thereafter
F-39
$
$
$
$
$
$
5,471
8,002
13,473
Total
9,492
33,176
6,285
1,705
50,658
13,136
11,040
9,011
6,338
11,133
50,658
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- GOODWILL
The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2023:
MAGIC SOFTWARE ENTERPRISES LTD
As of January 1, 2022
Business combinations
Measurement period adjustments
Foreign currency translation adjustments
As of January 1, 2023
Business combinations
Foreign currency translation adjustments
As of December 31, 2023
IT
professional
services
Software
services
Total
75,603
$
71,200
$
146,803
19,622
(902)
(4,326)
2,705
(176)
(5,027)
22,327
(1,078)
(9,353)
89,997
$
68,702
$
158,699
9,410
(959)
-
(1,085)
9,410
(2,044)
98,448
$
67,617
$
166,065
$
$
$
The Company performed annual impairment tests as of December 31, 2022 and 2023 and did not identify any impairment losses (see Note 2).
The goodwill is allocated to both the IT Professional Services and Software Services segments, which represent the lowest level within the Company at
which goodwill is monitored for internal management purposes.
Impairment test of goodwill for the year ended on December 31, 2023:
Impairment loss for goodwill is recognized if the recoverable amount of the goodwill is less than the carrying amount. The recoverable amount is the
greater of fair value less costs of disposal, or value in use of the relevant reporting level (i.e. a CGU of a group of CGU’s).
The Company performed an assessment for goodwill impairment for both of its segments, which is the level at which goodwill is monitored for internal
management purposes and concluded that there is no impairment loss for the year ended December 31, 2023, based on the assumptions presented below:
Carrying amount
Weighted average cost of capital
Terminal value growth rate
December 31, 2023
IT
professional
services
Software
services
$
187,183
$
74,009
15%
3%
13.9%
3%
Actual results may differ from those assumed in the Company’s valuation method. It is reasonably possible that the Company’s assumptions described
above could change in future periods. If any of these were to vary materially from the Company’s plans, it may record impairment of goodwill allocated
to this reporting unit in the future.
Based on the Company’s abovementioned assessment as of December 31, 2023, no goodwill was determined to be impaired, since the fair value of the
Company’s group of cash-generating units significantly exceeded their carrying amount.
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SHORT TERM DEBTS
Short-term loans from banks
Current maturities of long-term loans from financial institutions and banks
Current maturities of long-term loans from banks
Accrued interest on long term debt
Accrued interest on long term debt
December 31,
2023
Interest rate
%
3.4-6.8
2.1-7.2
7.5-8.1
2.6- 3.14
6.07
NOTE 11:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
Accrued expenses and other accounts payable are comprised of the following as of the below dates:
Employees and payroll accruals
Accrued expenses
Government authorities and other
Total
NOTE 12:- LONG TERM DEBTS
a.
Long term liabilities to banks and others are comprised of the following as of the below dates:
NIS
NIS
USD
NIS
USD
Loans from banks and others
Bank loans
Other long-term debts
Less current maturities
Linkage
basis
NIS
USD
JPY
NIS, USD
Interest
rate
%
2.12 – 7.2
3.4 – 8.1
1.71
F-41
MAGIC SOFTWARE ENTERPRISES LTD
Currency
2022
2023
December 31,
$
$
$
$
$
$
$
2,449
9,310
8,908
23
65
20,755
$
$
2,772
11,226
13,209
75
1,659
28,941
December 31,
2022
2023
29,746
10,239
6,857
46,842
$
$
27,460
9,296
4,736
41,492
December 31,
2022
2023
12,161
36,408
61
48,630
(18,218)
$
$
29,010
47,634
58
76,701
(24,435)
30,412
$
52,267
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- LONG TERM DEBTS (Cont.)
b.
Maturity dates:
First year (Current maturities)
Second year
Third year
Fourth year
Fifth year and thereafter
Total
c.
Financial Covenants:
MAGIC SOFTWARE ENTERPRISES LTD
December 31,
2022
2023
18,218
10,043
9,818
5,000
5,551
48,630
$
$
24,435
18,731
14,617
15,037
3,881
76,701
$
$
On March 27, 2023, the Company entered into a loan agreement with an Israeli bank, pursuant to which, the Company borrowed $20,000 for a
four-year term (the “Bank Loan”). The Bank Loan will mature on March 27, 2027, and will be repaid in four (4) equal annual instalments of
$6,052 (including interest) starting March 27, 2024. The Bank Loan bears interest at the rate SOFR + 3.38%. The interest is paid on a yearly
basis.
On June 7, 2023, the Company entered into a loan agreement with an Israeli bank, pursuant to which, the Company borrowed ILS 60,000
thousands for a five-year term (the “Bank Loan”). The Bank Loan will mature on May 7, 2028, and will be repaid in five (5) equal annual
instalments of ILS 12,000 thousands (not including interest) starting May 7, 2024. The Bank Loan bears an interest rate of prime + 0.92% per
annum, payable in two semi-annual payments.
These two Bank Loans, which may be prepaid under certain circumstances, are subject to various financial covenants which mainly consist of
the following:
Under the terms of the Loans, the Company has undertaken to maintain the following financial covenants, as they will be expressed in its
consolidated financial statements, as described:
a. The Company’s total equity shall not be lower than $150 million (one hundred and fifty million U.S. Dollars) at all times;
b. The ratio of the Company’s total financial debts less cash, short-term deposits and short-term marketable securities to the total assets will
not exceed 30%;
c. The ratio of the Company’s total financial debts less cash, short-term deposits and short-term marketable securities to the annual EBITDA
will not exceed 3.25 to 1.
As of December 31, 2023, the Company was in compliance with the financial covenants.
F-42
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- RELATED PARTIES TRANSACTIONS
Agreements with controlling shareholder and its affiliates:
The Company has in effect agreements with affiliated companies pursuant to which the Company has rendered services amounting to
approximately $5,615, $6,990, and $3,678, in aggregate for the years ended December 31, 2021, 2022 and 2023, respectively and acquired
services amounting to approximately $2,639, $3,088 and $3,371 for the years ended December 31, 2021, 2022 and 2023, respectively.
As of December 31, 2022 and 2023, the Company had trade and other receivables balances due to its related parties in amount of approximately
$8,519 and $5,494, respectively. In addition, as of December 31, 2022 and 2023, the Company had trade payables balances due from its related
parties in amount of approximately $124 and $322, respectively.
NOTE 14:- LEASES
The Company leases substantially all of its office space and vehicles under operating leases. The Company’s leases have original lease periods expiring
between 2024 and 2034. Some leases include one or more options to renew. The Company does not assume renewals in its determination of the lease
term unless the renewals are deemed to be reasonably certain at lease commencement. Lease payments included in the measurement of the lease liability
comprise the following: the fixed non-cancellable lease payments, payments for optional renewal periods where it is reasonably certain the renewal
period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
In July 2020, the Company entered into a lease agreement for new corporate offices for the Company in Or Yehuda, Israel. The lease expires in June
2033, with an option by the Company to extend for an additional 10-years term. The Company deemed this option as reasonably certain to be renewed.
The Company has several leased offices in the United States, with expiry dates varying between 2024 and 2026, with renewal options varying between
2024 and 2029.
In November 2021, one of the Company’s subsidiaries in Israel entered into a lease agreement for new corporate offices. The lease commenced in July
2022 with a lease term through 2029, with an option to terminate the lease after a 4-year term following a 12-month notice in advance, and an option to
renew the lease to an additional 5-year term, through 2034. The Company deemed this option as reasonably certain to be renewed.
Under IFRS 16, all leases with durations greater than 12 months, including non-cancellable operating leases, are now recognized on the statement of
financial position. The aggregated present value of lease agreements is recorded as a long-term asset titled operating lease right-of-use assets.
The corresponding lease liabilities are classified between operating lease liabilities which are current and long-term.
F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- LEASES (Cont.)
Maturity analysis of undiscounted future lease payments for lease liabilities:
2024
2025
2026
2027
2028
2029 and thereafter
Total undiscounted cash flows
Less imputed interest
Present value of lease liabilities
a.
Information on leases:
Expenses relating to operating lease costs
Expenses relating to short-term leases
Expenses relating to variable lease payments
Total cash outflow for leases
MAGIC SOFTWARE ENTERPRISES LTD
December 31,
2023
$
$
$
5,309
4,367
3,265
2,561
2,086
15,663
33,251
(5,744)
27,507
Year ended December 31,
2022
2023
$
$
$
$
1,930
109
2,753
4,792
$
$
$
$
2,225
62
2,872
5,159
The following is a summary of weighted average remaining lease terms and discount rates for all of the Company’s operating leases:
Weighted average remaining lease term (years)
Weighted average discount rate
F-44
December 31,
2023
11.80
3.89%
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- LEASES (Cont.)
b. Disclosures in respect of right-of-use assets:
Cost:
Balance as of January 1, 2022
Additions during the year:
New leases
Modification of leases
Adjustments for indexation
Adjustments arising from translating financial statements of foreign operations
Acquisition of subsidiaries
Disposals during the year:
Termination of leases
Balance as of December 31, 2022
Accumulated depreciation:
Balance as of January 1, 2022
Additions during the year:
Depreciation
Adjustments arising from translating financial statements of foreign operations
Disposals during the year:
Termination of leases
Balance as of December 31, 2022
Depreciated cost at December 31, 2022
F-45
MAGIC SOFTWARE ENTERPRISES LTD
Buildings
Motor
vehicles
Total
$
33,241
$
3,505
$
36,746
4,881
589
947
(1,228)
2,714
(692)
1,468
89
95
7
40
(333)
6,349
678
1,042
(1,221)
2,754
(1,025)
$
40,452
$
4,871
$
45,323
11,943
3,151
665
(509)
1,523
1,169
29
(184)
13,466
4,320
694
(693)
15,250
2,537
17,787
$
25,202
$
2,334
$
27,536
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- LEASES (Cont.)
Cost:
Balance as of January 1, 2023
Additions during the year:
New leases
Modification of leases
Adjustments for indexation
Adjustments arising from translating financial statements of foreign operations
Acquisition of subsidiaries
Disposals during the year:
Termination of leases
Balance as of December 31, 2023
Accumulated depreciation:
Balance as of January 1, 2023
Additions during the year:
Depreciation
Adjustments arising from translating financial statements of foreign operations
Disposals during the year:
Termination of leases
Balance as of December 31, 2023
Depreciated cost at December 31, 2023
NOTE 15:- SHARE BASED PAYMENTS
a. Stock Option Plans of the Company:
MAGIC SOFTWARE ENTERPRISES LTD
Buildings
Motor
vehicles
Total
$
40,452
$
4,871
$
45,323
1,150
910
871
37
62
1,575
66
72
212
-
2,725
976
943
249
62
(298)
(378)
(676)
$
43,184
$
6,418
$
49,602
15,250
3,689
929
(192)
2,537
1,470
428
(227)
17,787
5,159
1,357
(419)
19,676
4,208
23,884
$
23,508
$
2,210
$
25,718
Under the Company’s 2007 Stock Option Plan, as amended (“the 2007 Plan”), options may be granted to employees, officers, directors and
consultants of the Company and its subsidiaries. Pursuant to the original 2007 Stock Option Plan, which is valid until August 1, 2027, the
Company reserved 2,750,000 Ordinary shares for issuance. As of December 31, 2023, an aggregate of 952,500 Ordinary shares of the
Company are available for future grants under the 2007 Plan. Each option granted under the 2007 Plan is exercisable for a period of ten
years from the date of the grant of the option.
The exercise price for each option is determined by the Board of Directors and set forth in the Company’s award agreement. Unless
determined otherwise by the Board of Directors, the option exercise price shall be equal to or higher than the share market price at the grant
date. The options generally vest over 3-4 years. Any option that is forfeited or canceled before expiration becomes available for future
grants under the 2007 Plan.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method
over the requisite service period of each of the awards. The Company accounts for forfeitures as they occur.
The Company uses the Binomial option-pricing model (“the Binomial model”) to estimate the fair value for any options granted. The
Binomial model takes into account variables such as volatility, dividend yield rate, and risk-free interest rate and also allows for the use of
dynamic assumptions and considers the contractual term of the option, the probability that the option will be exercised prior to the end of its
contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- SHARE BASED PAYMENTS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD
The fair value of each option granted using the Binomial model, was estimated on the date of grant with the following assumptions:
expected volatility was based upon actual historical stock price movements and was calculated as of the grant dates for different periods,
since the Binomial model can be used for different expected volatilities for different periods. The risk-free interest rate was based on the
yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the options. The expected term of options
granted was derived from the output of the option valuation model and represented the period of time that options granted were expected to
be outstanding. Estimated forfeitures were based on actual historical pre-vesting forfeitures. Since dividend payments are applied to reduce
the exercise price of the option, the effect of the dividend protection was reflected by using an expected dividend assumption of zero.
No grants were made to employees or directors in 2022 and 2023.
A summary of employee option activity under the 2007 Plan as of December 31, 2023 and changes during the year ended December 31,
2023 are as follows:
Outstanding at January 1, 2023
Exercised
Forfeited
Outstanding at December 31, 2023
Exercisable at December 31, 2023
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
0.91
3.51
-
-
-
5.95
$
397
-
-
$
$
-
-
Number
of options
26,250
(6,250)
(20,000)
-
-
$
$
$
The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had
all option holders exercised their options on December 31, 2023. This amount is changed based on the market value of the Company’s
Ordinary shares. Total intrinsic value of options exercised during the years ended December 31, 2022 and 2023 was $344 and $61
respectively.
b. Stock Option Plan of Comm-IT Solutions:
Under the Comm-IT Solutions’ 2022 Stock Option Plan, (“Comm-IT Solutions 2022 Plan”), options may be granted to employees, officers,
directors and consultants of the Company and its subsidiaries. Pursuant to Comm-IT Solutions 2022 Plan, Comm-IT Technology Solutions
Ltd. (“Comm-IT Solutions”) shall reserve in its registered and reserved capital, such sufficient number of shares (subject to any adjustment
in the capital under the Comm-IT Solutions 2022 Plan) required in order to consummate the Comm-IT Solutions 2022 Plan.
In December 2022, Magic’s Israeli subsidiary, Comm-IT Technology Solutions Ltd., awarded 12 of its senior officers 4,028 options to
purchase 4,028 shares of Comm-IT Solutions, at an exercise price ranging between $0.28-$1,822. 827 of the options fully vested upon their
grant, whereas the vesting of the remainder of the options are subject to Comm-IT Solutions and its subsidiaries meeting certain EBITDA
targets to be achieved by one of the years 2023-2024. In 2023, CommIT fully achieved plan EBITDA targets. Subject to the achievement of
the EBITDA targets, as well as the officers continued employment with Comm-IT Solutions throughout 2027, the options will vest at
certain points in time throughout the years 2024 to 2027.
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- SHARE BASED PAYMENTS (Cont.)
A summary of employee option activity under the Comm-IT Solutions 2022 Plan as of December 31, 2023 and changes during the year
ended December 31, 2023 are as follows:
MAGIC SOFTWARE ENTERPRISES LTD
Outstanding at January 1, 2023
Granted
Outstanding at December 31, 2023
Exercisable at December 31, 2023
Number
of options
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
$
4,028
-
4,028
264.67
-
256.79
7.94
$
6.94
7,499
7,276
1,847
$
27.72
6.93
$
3,760
As of December 31, 2023, there was $1,465 of total unrecognized compensation cost related to non-vested options, which is expected to be
recognized in full over a weighted average period of 1.1 years.
The options outstanding as of December 31, 2023, have been separated into exercise price categories, as follows:
Exercise price
In $
0.28
455
1,822
Weighted
average
remaining
contractual
life
(years)
Options
exercisable
Weighted
average
exercise
price of
exercisable
options
6.92
6.99
6.99
6.94
1,736
111
-
1,847
$
$
0.28
455
-
27.72
Options
outstanding
3,238
297
493
4,028
F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- SHARE BASED PAYMENTS (Cont.)
The fair value of the options granted in 2022 using the Binomial model, was estimated on the date of grant with the following assumptions:
MAGIC SOFTWARE ENTERPRISES LTD
Share price
Contractual life
Expected exercise factor
Dividend yield
Expected volatility (weighted average)
Risk-free interest rate
Fair value of option at the grant date
c. Cost of share-based payment:
Year ended
December 31,
2022
$2,110
8 years
1.5
0%
41%
3.28%-3.65%
$1,078-$2,126
During the years ended December 31 2021, 2022 and 2023 the Company share-based payment expense under the 2007 plan and CommIT
Solution 2022 amounted to $956, $2,079 and $3,798, respectively, as follows:
Selling and marketing expenses
General and administrative expenses
NOTE 16:- EMPLOYEE BENEFIT LIABILITIES
Employee benefits consist of post-employment benefits and termination benefits.
a) Post-employment benefits:
Year ended December 31,
2022
2021
2023
$
$
956
-
956
$
$
(56) $
2,135
2,079
$
(225)
4,023
3,798
According to the labor laws and Severance Pay Law in Israel, the Israeli companies in the Group are required to pay compensation to an
employee upon dismissal or retirement or to make current contributions in defined contribution plans pursuant to section 14 to the Severance Pay
Law, as specified below. These liabilities are accounted for as a post-employment benefit. The computation of the employee benefit liability is
made according to the current employment contract based on an employee’s salary and employment term which establish the entitlement to
receive the compensation.
The post-employment employee benefits are normally financed by contributions classified as a defined benefit plan or as a defined contribution
plan, as detailed below.
1) Defined contribution plans:
Section 14 of the Severance Pay Law, 1963 applies to part of the compensation payments, pursuant to which the fixed contributions paid
into pension funds and/or policies of insurance companies release the Company from any additional liability to employees for whom said
contributions were made. These contributions and contributions for benefits represent defined contribution plans.
Severance expenses for the years 2021, 2022 and 2023 were $5,267, $7,078 and $5,464, respectively.
F-49
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- EMPLOYEE BENEFIT LIABILITIES (Cont.)
2) U.S. employees defined contribution plan:
The Company’s U.S. Subsidiaries have a 401(k) defined contribution plan covering certain employees in the U.S. All eligible employees
may elect to contribute up to 100% of their annual compensation to the plan through salary deferrals, subject to Internal Revenue Service
limits. The U.S. Subsidiary matches up to 3% of employee contributions up to the plan with no limitation.
3) Defined benefit plans:
The Company accounts for that part of the payment of compensation that is not covered by contributions in defined contribution plans, as
above, as a defined benefit plan for which an employee benefit liability is recognized and for which the Company deposits amounts in
central severance pay funds and in qualifying insurance policies.
b) Composition of defined benefit plans is as follows:
Defined benefit obligation
Fair value of plan assets
Net defined benefit liability
NOTE 17:- COMMITMENTS AND CONTINGENCIES
a.
Guarantees and Collaterals:
December 31,
2022
2023
2,476
(1,575)
$
2,665
(1,549)
901
$
1,116
$
$
As of December 31, 2023, the Company has provided performance bank guarantees as security for the performance of various contracts with
customers as well as to secure future payments in respect of lease agreements in the amount of $1,776 and $902, respectively. As of December
31, 2023, the Company has restricted bank deposits of $728 in favor of the issuing banks.
b.
From time to time, the Company and/or its subsidiaries are subject to legal, administrative and regulatory proceedings, claims, demands and
investigations in the ordinary course of business, including claims with respect to intellectual property, contracts, employment and other matters.
The Company accrues a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably
estimable. These accruals are reviewed and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other
information and events pertaining to a particular matter.
Lawsuits have been brought against the Company in the ordinary course of business. The Company intends to defend itself vigorously against
those lawsuits.
In September 2016, an Israeli software company, that was previously involved in an arbitration proceeding with us in 2015 and won damages
from us of $2.4 million, filed a lawsuit seeking damages of NIS 34,106 against the Company and one its subsidiaries. This lawsuit was filed as
part of an arbitration proceeding. In the lawsuit, the software company claimed that warning letters that the Company sent to its clients in Israel
and abroad, warning those clients against the possibility that the conversion procedure offered by the software company may amount to an
infringement of the Company’s copyrights (the “Warning Letters”), as well as other alleged actions, have caused the software company damages
resulting from loss of potential business. The lawsuit is based on rulings given in the 2015 arbitration proceeding in which it was allegedly ruled
that the Warning Letters constituted a breach of a non-disclosure agreement (NDA) signed between the parties.
The Company rejected the claims by the Israeli software company and moved to dismiss the lawsuit entirely. In July 2021, an arbitrator assigned
to the case rendered his decision and determined that the Company should pay the plaintiffs damages in the amount of $1.6 million, which was
paid in August 2021 and included in the Company’s results of operations for the year ended December 31, 2021.
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- EQUITY
a.
b.
The Ordinary shares of the Company are listed on the NASDAQ Global Select Market in the United States and are traded on the Tel-Aviv Stock
Exchange in Israel.
Accumulated other comprehensive loss:
MAGIC SOFTWARE ENTERPRISES LTD
Accumulated foreign currency translation adjustments
Accumulated unrealized gain on derivative instruments, net
Total other comprehensive income (loss)
c.
Dividend distribution policy
December 31,
2022
2023
(6,585)
26
(10,340)
26
$
(6,559) $
(10,314)
On August 9, 2017, the Company’s Board of Directors decided to amend the dividend distribution policy announced in 2012. According to the
Company’s amended policy, each year the Company will distribute a dividend of up to 75% of its annual distributable profits. The Company’s
Board of Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a change in policy, the rate of
dividend distributions and/or decide not to distribute a dividend, all at its discretion.
On March 8, 2021, the Company declared a dividend distribution of $0.21 per share ($10,297 in the aggregate) which was paid on April 7, 2021.
On August 12, 2021, the Company declared a dividend distribution of $0.23 per share ($11,480 in the aggregate) which was paid on September
14, 2021.
On March 2, 2022, the Company declared a dividend distribution of $0.216 per share ($10,612 in the aggregate) which was paid on April 7,
2022. On August 11, 2022, the Company declared a dividend distribution of $0.29 per share ($14,237 in the aggregate) which was paid on
September 13, 2022.
On March 9, 2023, the Company declared a dividend distribution of $0.3 per share ($14.7 million in the aggregate) which was paid on April 20,
2023. On August 14, 2023, the Company declared a dividend distribution of $0.327 per share ($16.1 million in the aggregate) which was paid on
September 13, 2023.
NOTE 19:- INCOME TAX
a.
Israeli taxation:
1) Corporate tax rate in Israel:
Taxable income of Israeli companies was generally subject to corporate tax at the rate of 23% in 2022 and 2023. Some of our Israeli
subsidiaries are eligible for certain tax benefits, as described below.
F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 19:- INCOME TAX (Cont.)
2) Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Law”):
Amendment 73 to the law:
MAGIC SOFTWARE ENTERPRISES LTD
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018
Budget Years) 2016, which includes Amendment 73 to the Law for the Encouragement of Capital Investments (“the 2017 Amendment”)
was published and was pending the publication of regulations, in May 2017 regulations were promulgated by the Finance Ministry to
implement the “Nexus Principles” based on OECD guidelines published as part of the Base Erosion and Profit Shifting (BEPS) project.
Following the publication of the regulations the 2017 Amendment became fully effective. According to the 2017 Amendment, a Preferred
Technological Enterprise, as defined in the 2017 Amendment, with total consolidated revenues less than NIS 10 billion, shall be subject to
12% tax rate on income derived from intellectual property (in development area A—a tax rate of 7.5%). In order to qualify as a Preferred
technological enterprise certain criterion must be met, such as a minimum ratio of annual R&D expenditure and R&D employees, as well as
having at least 25% of annual revenues derived from exports.
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a Special Preferred
Technology Enterprise (“SPTE”) (an enterprise for which, among others, total consolidated revenues of its parent company and all
subsidiaries is at least NIS 10 billion) and will thereby enjoy a reduced corporate tax rate of 6% on PTI regardless of the company’s
geographic location within Israel. In addition, a SPTE will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of
certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were either developed by the Special
Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017.
Starting from 2017 under Amendment 73 to the Investment Law, part of the Company’s taxable income in Israel is entitled to a preferred
12% tax rate. Since 2019, under SPTE the tax rate for part of the Company’s taxable income in Israel has been reduced to a 6% corporate
tax rate.
One of Company’s Israeli subsidiaries has elected to apply the new incentives regime under the Amendment to their industrial activity in
Israel, subject to meeting its requirements, starting in 2011.
In 2015, the Company transitioned to the preferred enterprise track entitling it to a preferred 16% tax rate under Amendment 73 to the
Investment Law.
Amendment 74 to the Encouragement Law:
On November 15, 2021, the Economic Efficiency Law (Legislative Amendments for Achieving Budget Targets for the 2021 and 2022
Budget Years), 2021 (the “Economic Efficiency Law”), was enacted. This Law establishes a temporary order allowing Israeli companies to
release tax-exempt earnings (“trapped earnings” or “accumulated earnings”) accumulated until December 31, 2020, through a mechanism
established for a reduced corporate income tax rate applicable to those earnings (the “Temporary Order”).
In addition to the reduced corporate income tax (CIT) rate, Article 74 to the Encouragement Law was amended whereby effective from
August 15, 2021, for any dividend distribution (including a dividend as per Article 51B to the Encouragement Law) by a company which
has trapped earnings, there will be a requirement to allocate a portion of that distribution to the trapped earnings.
F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 19:- INCOME TAX (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD
The tax-exempt income is attributable to certain Group members’ previous status as “Approved Enterprise” and “Benefited Enterprise”.
Such tax-exempt income cannot be distributed to shareholders without subjecting the Company to payable income taxes. If dividends are
distributed from previous tax-exempt profits, the Company will be liable for income tax at the rate applicable to its profits from the
Approved Enterprise in at the tax rate enacted in the year in which the income was earned.
According to the Temporary Order, the reduction of CIT will apply to earnings that are released (with no requirement for an actual
distribution) within a period of one year from the date of enactment of the Temporary Order. The reduction in the CIT is dependent on the
proportion of the trapped earnings that are released in relation to the total trapped earnings, and on the applicable CIT rate in the years the
earnings were generated. Consequently, the larger the proportion of the trapped earnings that are released, the lower the tax in respect of the
distribution. The minimum tax rate is 6%. Further, a company that elects to pay a reduced CIT is required to invest in its industrial
enterprise a designated amount in accordance with the Economic Efficiency Law within a period of five years commencing from the tax
year in which the election is made. The designated investment should be utilized for the acquisition of production assets, and/or investments
in research and development and/or compensation to additional new employees.
In November 2022, the Company elected to benefit from the Temporary Order and filed its application for the Temporary Order and paid
the required reduced CIT as per the provisions of the Economic Efficiency Law in respect of its total accumulated tax-exempt earnings
amounting to NIS 25,022 (approximately $7,100), and accordingly recognized a tax expense of NIS 2,502 (approximately $711). As of
December 31, 2022, all the trapped earnings were released.
The Company and its subsidiaries have received final tax assessments (or assessments that are deemed final) through the year 2018.
Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:
The Company qualifies as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the
“Industrial Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident in
Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends,
from an enterprise whose major activity in a given tax year is industrial production. Under the Industrial Encouragement Law, the Company
is entitled to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes as well as accelerated
depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industrial Encouragement Law is not subject to receipt of prior approval from any governmental
authority.
3) Foreign Exchange Regulations:
Under the Foreign Exchange Regulations, the Company and one of its Israeli subsidiaries calculate their tax liability in U.S. dollars
according to certain orders. The tax liability, as calculated in U.S. dollars is translated into NIS according to the exchange rate as of
December 31 of each year.
F-53
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 19:- INCOME TAX (Cont.)
4)
Income tax on non-Israeli subsidiaries
Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in
the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax
credits) and foreign withholding tax rates.
Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the
non-Israeli subsidiaries. This is because the Company intends to permanently reinvest undistributed earnings in the foreign subsidiaries in
which those earnings arose. If these earnings were distributed in the form of dividends or otherwise, the Company would be subject to
additional Israeli income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding taxes.
As of December 31, 2023, the Company had $27,134 of cash and cash equivalents that are currently held outside of Israel that would be
subject to income taxes if distributed as dividends. However, a determination of the amount of the unrecognized deferred tax liability for
temporary difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure
of our group of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.
5) Net operating loss carried forward:
As of December 31, 2023, two Israeli subsidiaries of the Company had operating loss carryforwards of $9,874 (mainly F.T.S Formula
Telecom Solutions, Ltd. which accounts for $9,225), which can be carried forward to offset against taxable income in the future for an
indefinite period.
One of the Company’s subsidiaries in England had estimated total available tax loss carryforwards of $3,684 as of December 31, 2023,
which can be carried forward to offset against future taxable income.
Two of the Company’s subsidiaries in U.S. had estimated total available tax loss carryforwards of $13,898 as of December 31, 2023, which
can be carried forward to offset against future taxable income.
6) Presentation of net deferred tax assets and liabilities, in the consolidated statements of financial position:
Deferred taxes assets
Deferred tax liabilities
F-54
December 31,
2022
2023
$
$
$
3,618
(10,686)
(7,068) $
6,729
(11,610)
(4,881)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 19:- INCOME TAX (Cont.)
7) Significant components of the Company’s deferred tax assets and liabilities are as follows:
MAGIC SOFTWARE ENTERPRISES LTD
Deferred tax liabilities:
Intangible assets
Reserves and allowances
Right-of-use assets
Gross deferred tax liabilities
Deferred tax assets:
Carry-forwards losses
Intangible assets
Reserves and allowances
Lease liabilities
Gross deferred tax assets
Net deferred tax liabilities
8)
Income tax (tax benefit) consist of the following:
Current:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
Taxes on income
F-55
December 31,
2022
2023
$
12,311
1,142
5,133
13,789
530
5,169
18,586
$
19,488
$
349
540
5,628
5,001
3,668
1,495
4,054
5,390
11,518
$
(7,068) $
14,607
(4,881)
$
$
$
$
$
Year ended December 31,
2022
2021
2023
$
$
7,847
6,123
11,368
6,304
$
13,970
17,672
(1,149)
(2,543)
(3,692)
(1,318)
(5,216)
(6,534)
11,108
5
11,113
(1,588)
409
(1,179)
$
10,278
$
11,138
$
9,934
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 19:- INCOME TAX (Cont.)
9) Theoretical tax:
The following table presents reconciliation between the theoretical tax expense, assuming that all income was taxed at statutory tax rates,
and the actual income tax expense, as recorded in the Company’s consolidated statements of profit or loss:
Year ended December 31,
2022
2023
2021
Income before income taxes, as per the statement of operations
$
45,617
$
57,417
$
52,436
Statutory tax rate in Israel
Tax computed at the statutory tax rate
Tax adjustment in respect of different tax rates
Deferred taxes on losses for which deferred taxes were not created
Tax-deductible costs, not included in the accounting costs
Non-deductible expenses and tax expenses in respect of prior years, net
Uncertain tax positions and other
Taxes on income
NOTE 20:- REVENUE RECOGNITION
23%
23%
23%
10,494
13,205
12,060
283
(80)
(1,041)
1,001
(379)
(1,756)
(511)
(2,680)
2,670
210
(1,345)
(2,764)
-
534
1,448
$
10,278
$
11,138
$
9,934
Remaining performance obligations represent contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will
be invoiced and recognized as revenue in future periods. The aggregate amount of consideration allocated to performance obligations either not satisfied
or partially unsatisfied was approximately $105.8 million as of December 31, 2023. The Company expects to recognize approximately 68% in 2024 from
remaining performance obligations as of December 31, 2023, and the remainder thereafter. Remaining performance obligations include the
remaining non-cancelable, committed and fixed portion of these contracts for their entire duration; the remaining performance obligations related to
professional services contracts that are on a time and materials basis were excluded, as the Company elected to apply the practical expedient in
accordance with IFRS 15.
F-56
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- REVENUE RECOGNITION (Cont.)
Contract balances:
The following table provides information about trade receivables, unbilled receivables, contract assets, and contract liabilities (deferred revenues) from
contracts with customers (in thousands):
Trade receivables (net of allowance for credit losses of $5,416 and $7,066 at December 31, 2022 and 2023,
respectively)
Unbilled receivables
Contract assets
Long-term unbilled receivables *)
Long-term trade receivables *)
Deferred revenues (short-term contract liabilities)
*)
Included in Other long-term receivables in the consolidated statements of financial position.
An analysis of past due but not impaired trade receivables with reference to reporting date:
December 31,
2022
2023
$
$
118,126
26,114
4,240
2,548
735
9,808
$
$
108,385
15,953
6,760
2,240
1,029
13,537
Neither
past
due nor
impaired
$
67,793 $
December 31, 2022
Past due trade receivables with aging of
Up to 30
days
31-60
days
61-90
days
91-120
days
Over 121
days
Total
Unpaid
deferred
revenues
Allowance
for credit
losses
24,150 $
16,869 $
12,863 $
4,125 $
13,311 $ 139,111 $
December 31, 2023
$
71,545 $
30,191 $
7,065 $
3,407 $
1,801 $
15,818 $ 129,826 $
Total trade
receivables,
net
118,126
108,385
(15,569) $
(14,375) $
(5,416) $
(7,066) $
Trade receivables are recorded when the right to consideration becomes unconditional, and an invoice is issued to the customer.
Billing terms and conditions generally vary by contract type. Amounts are billed as work progresses in accordance with agreed-upon contractual terms,
either at periodic intervals (e.g., monthly or quarterly) or upon achievement of contractual milestones.
Unbilled receivables relate to revenue recognized in excess of amounts invoiced as the Company has an unconditional right to invoice and receive
payment in the future related to its fulfilled obligations.
Contract assets relate to unbilled receivables, which represent revenue recognized on arrangements for which billings have not yet been presented to
customers because the amounts were earned but not contractually billable as of the balance sheet date, and the right to consideration is generally subject
to milestone completion, client acceptance or factors other than the passage of time.
F-57
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 20:- REVENUE RECOGNITION (Cont.)
Deferred revenues represent contract liabilities, and include unearned amounts received under contracts with customers and not yet recognized as
revenues.
During the year ended December 31, 2023, the Company recognized $9,808 that was included in deferred revenues (short-term contract liability) balance
at December 31, 2022.
Revenue by timing of revenue recognition was as follows:
Products and services transferred over time
Products transferred at a point in time
NOTE 21:- SELECTED STATEMENTS OF INCOME DATA
a.
Research and development costs, net:
Total costs
Less - capitalized software costs
Research and development, net
b.
Selling and marketing expenses:
Salary and related expenses
Advertising expenses
Cost of share-based payment
Others
Total selling and marketing expenses
F-58
Year ended December 31,
2022
2021
2023
$
449,391
30,934
480,325
$
533,862
32,930
566,792
502,358
32,694
535,052
Year ended December 31,
2022
2021
2023
12,188
(3,193)
$
13,149
(3,059)
$
13,511
(3,183)
8,995
$
10,090
$
10,328
Year ended December 31,
2022
2021
2023
26,100
2,522
956
8,569
38,147
$
$
33,474
2,676
(56)
10,763
46,857
$
$
31,188
2,802
(225)
10,735
44,500
$
$
$
$
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 21:- SELECTED STATEMENTS OF INCOME DATA (Cont.)
c.
General and administrative expenses:
Salary and related expenses
Subcontractors
Cost of share-based payment
Others
Total general and administrative expenses
MAGIC SOFTWARE ENTERPRISES LTD
Year ended December 31,
2022
2021
2023
24,072
3,842
-
3,308
31,222
$
$
21,492
5,335
2,135
8,590
37,552
$
$
27,425
4,726
4,023
4,637
40,811
d.
The following table provides detailed breakdown of the Company’s financial income and expenses:
Financial expenses:
Interest expenses on loans and borrowings
Interest expenses attributed to leases
Bank charges, negative foreign exchange differences and other financial expenses
Financial income:
Interest income attributed to bank deposits
Interest income from deposits, positive foreign exchange differences and other financial income
Year ended December 31,
2022
2021
2023
615
719
2,468
3,802
36
77
113
1,743
691
2,559
4,993
305
1,087
1,392
5,039
964
3,224
9,227
1,166
3,735
4,901
Financial expenses, net
$
3,689
$
3,601
$
4,326
F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 21:- SELECTED STATEMENTS OF INCOME DATA (Cont.)
e.
Earnings per share:
The following table presents the computation of basic and diluted net earnings per share for the Company:
MAGIC SOFTWARE ENTERPRISES LTD
Numerator:
Net income attributable to Magic shareholders
Denominator:
Basic earnings per share - weighted average shares outstanding
Effect of dilutive securities
Diluted earnings per share – adjusted weighted average shares outstanding
Basic and diluted net earnings per share
NOTE 22: - OPERATING SEGMENTS
Year ended December 31,
2022
2021
2023
$
29,767
$
40,470
$
37,031
49,055,082
44,972
49,100,054
0.61
49,089,044
42,267
49,131,311
0.82
49,095,760
2,660
49,098,420
0.75
a.
The Company reports its results on the basis of two reportable business segments: software services (which include proprietary and non-
proprietary software technology) and IT professional services. The Company’s chief operating decision maker is the Chief Executive Officer
who makes operating decisions, assesses performance and allocates resources on a consolidated basis.
The Company evaluates segment performance based on revenues and operating income of each segment. The accounting policies of the
operating segments are the same as those described in the summary of material accounting policies.
Headquarters’ general and administrative costs have not been allocated between the different segments.
Software services
The Company develops markets, sells and supports a proprietary and none proprietary application platform, software applications, business and
process integration solutions and related services.
IT professional services
The Company offers advanced and flexible IT services in the areas of infrastructure design and delivery, application development, technology
planning and implementation services, communications services and solutions, as well as supplemental outsourcing services.
F-60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- OPERATING SEGMENTS (Cont.)
There are no significant transactions between the two segments.
b.
The following is information about reported segment results of operation:
MAGIC SOFTWARE ENTERPRISES LTD
2021
Total revenues
Expenses
Operating income (loss)
Depreciation and amortization
2022
Total revenues
Expenses
Operating income (loss)
Depreciation and amortization
2023
Total revenues
Expenses
Operating income (loss)
Depreciation and amortization
Software
services
IT
professional
services
Unallocated
expense
Total
$
$
$
$
$
$
$
$
$
95,589
74,863
20,726
10,619
99,374
72,115
27,259
10,321
92,906
71,863
21,043
9,717
$
$
$
$
$
$
$
$
$
384,736
347,712
37,024
8,846
467,418
427,446
39,972
9,102
442,146
400,949
41,197
10,432
$
$
$
$
$
$
$
$
$
-
5,627
480,325
428,202
(5,627) $
52,123
372
$
19,837
$
-
5,469
566,792
505,030
(5,469) $
61,762
372
$
19,795
$
-
5,132
535,052
477,944
(5,132) $
57,108
404
$
20,553
F-61
MAGIC SOFTWARE ENTERPRISES LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 22:- OPERATING SEGMENTS (Cont.)
c.
The Company’s business is divided into the following geographic areas: United States, Israel, Europe, Japan and other regions. Total revenues
are attributed to geographic areas based on the location of the customers.
The following table presents total revenues classified according to geographical destination for the years ended December 31 2021, 2022 and
2023:
United States
Israel
Europe
Japan
Other
Total revenues
d.
The Company’s long-lived assets are located as follows:
United States
Israel
Europe
Japan
Other
$
Year ended December 31,
2022
2021
2023
$
254,342
180,462
30,085
11,443
3,993
$
308,485
205,258
39,247
10,121
3,681
250,842
214,129
55,180
10,847
4,054
$
480,325
$
566,792
$
535,052
$
2021
76,369
138,071
4,423
5,543
2,939
December 31,
2022
$
$
82,325
148,819
7,885
4,696
2,905
2023
77,120
158,144
7,596
4,222
3,347
$
227,345
$
246,630
$
250,429
e.
f.
The Company does not allocate its assets or liabilities to its reportable segments; accordingly, asset or liabilities information by reportable
segments is not presented.
In 2022 and 2023, the Company had one major customer, included in the IT professional services segment, which accounted for 15% and 11.2%
of the Company revenues, respectively.
NOTE 23:- SUBSEQUENT EVENTS
On April 4, 2024, the Company acquired Theoris, Inc. (“Theoris”), a U.S. based full-services company, specializes in IT staffing and recruiting, for a
total consideration of $12.5 million, of which $10 million was paid upon closing and the remaining $2.5 million was payable in two equal installments
following the first- and second-year anniversaries.
- - - - - - - - - - - - - - - - - - -
F-62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magic Software Japan K. K.
Opinion on the Financial Statements
We have audited the accompanying statements of financial position of Magic Software Japan K.K. (the “Company”) December 31, 2022 and
December 31, 2023, and the related statements of profit or loss, comprehensive income, changes in equity, and cash flows and for each of the three years
in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, based on our audits
the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and December 31, 2023, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with International
Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 13, 2024 expressed an
unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Tokyo, Japan
May 13, 2024
/s/ KDA Audit Corporation
KDA Audit Corporation
F-63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
MAGIC SOFTWARE JAPAN K. K.
Opinion on Internal Control over Financial Reporting
We have audited Magic Software Japan K. K.’s internal control over financial reporting as of December 31, 2023, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the
COSO criteria). In our opinion, based on our audit, Magic Software Japan K. K. (the Company) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2022 and 2023, the related statements of profit or loss, comprehensive income, changes
in equity and cash flows for each of the three years in the period ended December 31, 2023 and the related notes, and our report dated May 13, 2024
expressed an unqualified opinion thereon based on our audit.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining and understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Tokyo, Japan
May 13, 2024
/s/ KDA Audit Corporation
KDA Audit Corporation
F-64
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
S I G N A T U R E S
MAGIC SOFTWARE ENTERPRISES LTD.
By: /s/ Guy Bernstein
Name: Guy Bernstein
Title: Chief Executive Officer
Dated: May 13, 2024
104
C.
ORGANIZATIONAL STRUCTURE
The following table sets forth the legal name, location and country or state of incorporation and percentage ownership of our subsidiaries as of December
31, 2023:
Exhibit 8.1
Subsidiaries and affiliate
9540 Y.G. Soft I.T Ltd. (shares held by CommIT Software Ltd.)
Allstates Consulting Services LLC (shares held by Magic Software Enterprises Inc.)
AppBuilder Solutions Ltd
Appush Technologies Ltd (Formerly known as Vidstart Ltd)
Appush Inc. (Shares held by Appush Technologies Ltd)
Aptonet, Inc.
B.A Microwaves Ltd. (shares held by CommIT Embedded Ltd.)
BridgeQuest Labs, Inc. (shares held by BridgeQuest, Inc.)
BridgeQuest, Inc. (shares held by Magic Software Enterprises Inc.)
Comblack IT Ltd
Comblack Municipal Services Ltd. (shares held by Comblack IT Ltd.)
CommIT Technology Solutions Ltd
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Comm-IT USA, Inc. (shares held by Comm-IT Technology Solutions Ltd.)
Complete Business Solutions Ltd
Coretech Consulting Group Inc (shares held by Magic Software Enterprises Inc)
Coretech Consulting Group LLC (shares held by Magic Software Enterprises Inc)
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Datamind Technologies Ltd (shares held by Complete Business Solutions Ltd)
Enable IT Consulting Services Canada Inc. (shares held by Enable IT LLC.)
Enable IT LLC. (shares held by Coretech Consulting Group LLC)
F.T.S. - Formula Telecom Solutions Ltd.
Fusion Solutions LLC. (shares held by Coretech Consulting Group LLC)
Fusion Technical Solutions LLC. (shares held by Fusion Solutions LLC)
Futurewave Systems, Inc. (shares held by Fusion Solutions LLC.)
The Goodkind Group LLC
Goodkind Hospitality, LLC (shares held by Coretech Consulting Group LLC)
Hermes Logistics Technologies Limited (shares held by Magic Software Enterprises (UK) Ltd)
Infinigy (UK) Holdings Limited
Infinigy (US) Holding Inc (shares held by Infinigy (UK) Holdings Limited)
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.).
Infinigy Solutions LLC. (shares held by Infinigy (US) Holding Inc)
Intrabases SAS
K.M.T. (M.H.) Technologies Communication Computer Ltd.
Knowledge & Solutions Software B.V.
Country of
Incorporation
Israel
Delaware
United Kingdom
Israel
Delaware
Georgia
Israel
North Carolina
North Carolina
Israel
Israel
Israel
Israel
Israel
Delaware
Israel
Pennsylvania
Delaware
Israel
Israel
Canada
Delaware
Israel
Delaware
Delaware
Georgia
New York
Delaware
United Kingdom
United Kingdom
Georgia
Georgia
Georgia
France
Israel
Netherlands
Ownership
Percentage
60%
100%
100%
100%
100%
100%
56.67%
100%
100%
80.1%
70%
77.8%
100%
75%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
60%
100%
Subsidiaries and affiliate
Magic Beheer B.V. (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Benelux B.V. (shares held by Magic Beheer B.V.)
Magic Hands B.V.
Magic Software Enterprises (Israel) Ltd
Magic Software Enterprises (UK) Ltd (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Software Enterprises France (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Software Enterprises GMBH (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Software Enterprises Inc.
Magic Software Enterprises India Pvt. Ltd
Magic Software Enterprises Netherlands B.V.
Magic Software Enterprises Spain Ltd (shares held by Magic Software Enterprises Netherlands B.V.)
Magic Software Japan K.K
Magix Integration (Proprietary) Ltd
Menarva Ltd.
Mobisoft Ltd.
NetEffects, Inc. (shares held by Coretech Consulting Group LLC)
OnTarget Group, Inc
OnTarget Labs Inc
OnTarget Labs Latvia
OnTarget Labs LLC Russia
Magic Quest Labs LLC
Onyx Magyarorszag Szsoftverhaz (shares held by Magic Software Enterprises Netherlands B.V.)
Pilat (North America), Inc.
Pilat Europe Ltd.
PowWow Inc.
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Roshtov Software Industries Ltd
Sanjer AI Ltd. (shares held by CommIT Software Ltd.)
Shavit Human resource Ltd.
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
Skysoft Solutions Ltd. (shares held by CommIT Embedded Ltd.)
Stockell Information Systems Inc.
The Goodkind Group, LLC
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
Xsell Resources Inc. (shares held by Coretech Consulting Group LLC)
Yes-IT Ltd. (shares held by Comblack IT Ltd)
Country of
Incorporation
Netherlands
Netherlands
Netherlands
Israel
United Kingdom
France
Germany
Delaware
India
Netherlands
Spain
Japan
South Africa
Israel
Israel
Missouri
North Carolina
Russia
Latvia
Russia
Georgia
Hungary
New Jersey
United Kingdom
California
Israel
Israel
Israel
Israel
Israel
Israel
Missouri
New York
Israel
Israel
Pennsylvania
Israel
Ownership
Percentage
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
98.52%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
80%
33%
100%
100%
75%
100%
100%
60%
100%
100%
100%
Exhibit 12.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
I, Guy Bernstein, certify that:
1.
I have reviewed this annual report on Form 20-F of Magic Software Enterprises Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15
(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: May 13, 2024
/s/ Guy Bernstein
Guy Bernstein
Chief Executive Officer
(Principal Executive Officer)
Exhibit 12.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
I, Asaf Berenstin, certify that:
1.
I have reviewed this annual report on Form 20-F of Magic Software Enterprises Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15
(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated Subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: May 13, 2024
/s/ Asaf Berenstin
Asaf Berenstin
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of Magic Software Enterprises Ltd. (the “Company”) on Form 20-F for the period ending December 31,
2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guy Bernstein, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
May 13, 2024
/s/ Guy Bernstein
Guy Bernstein
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report of Magic Software Enterprises Ltd. (the “Company”) on Form 20-F for the period ending December 31,
2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Asaf Berenstin, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
May 13, 2024
/s/ Asaf Berenstin
Asaf Berenstin
Chief Financial Officer
(Principal Financial Officer)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-149553) pertaining to the 2007 Incentive Compensation Plan of Magic Software Enterprises Ltd.,
(2) Registration Statement (Form S-8 No. 333-132221) pertaining to the 2000 Employee Stock Option Plan of Magic Software Enterprises Ltd.,
(3) Registration Statement (Form S-8 No. 333-113552) pertaining to the 2000 Employee Stock Option Plan of Magic Software Enterprises Ltd.,
of our reports dated May 13, 2024, with respect to the consolidated financial statements of Magic Software Enterprises Ltd. and the effectiveness of
internal control over financial reporting of Magic Software Enterprises Ltd. included in this Annual Report (Form 20-F) of Magic Software Ltd. for the
year ended December 31, 2023.
Exhibit 15.1
Tel Aviv, Israel
May 13, 2024
/s/ KOST FORER GABBAY AND KASIERER
KOST FORER GABBAY AND KASIERER
A member of EY Global
CONSENT OF INDEPENDENT AUDITORS
OF
Magic Software Japan K.K
Exhibit 15.2
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-113552, 333-132221 and 333-149553)
of Magic Software Enterprises Ltd., of our report dated May 13, 2024, with respect to the financial statements of Magic Software Japan K.K. as of
December 31, 2023, which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31, 2023.
/s/ KDA Audit Corporation
KDA Audit Corporation
Registered Auditors
Tokyo, Japan
May 13, 2024
Exhibit 97.1
MAGIC SOFTWARE ENTERPRISES LTD.
POLICY FOR RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION
Magic Software Enterprises Ltd. (the “Company”) has adopted this Policy for Recovery of Erroneously Awarded Compensation (the “Policy”),
effective as of December 1, 2023 (the “Effective Date”). Capitalized terms used in this Policy and not otherwise defined herein are defined in Section 11
hereof.
Persons Subject to Policy
This Policy shall apply to and be binding and enforceable on current and former Officers. In addition, the Committee and the Board may apply
this Policy to persons who are not Officers, and such application shall apply in the manner determined by the Committee and the Board in their sole
discretion.
Compensation Subject to Policy
This Policy shall apply to Incentive-Based Compensation received on or after the Effective Date. For purposes of this Policy, the date on which
Incentive-Based Compensation is “received” shall be determined under the Applicable Rules, which generally provide that Incentive-Based
Compensation is “received” in the Company’s fiscal period during which the relevant Financial Reporting Measure is attained or satisfied, without regard
to whether the grant, vesting or payment of the Incentive-Based Compensation occurs after the end of that period.
Recovery of Compensation
In the event that the Company is required to prepare a Restatement, the Company shall recover, reasonably promptly and in accordance with
Section 4 below, the portion of any Incentive-Based Compensation that is Erroneously Awarded Compensation, unless the Committee and the Board
have determined that recovery from the relevant current or former Officer would be Impracticable. Recovery shall be required in accordance with the
preceding sentence regardless of whether the applicable Officer engaged in misconduct or otherwise caused or contributed to the requirement for the
Restatement and regardless of whether or when restated financial statements are filed by the Company. For clarity, the recovery of Erroneously Awarded
Compensation under this Policy will not give rise to any Officer’s right to voluntarily terminate employment for “good reason” or due to a “constructive
termination” (or any similar term of like effect) under any plan, program or policy of or agreement with the Company or any of its affiliates.
Manner of Recovery; Limitation on Duplicative Recovery
The Committee and the Board shall, in its sole discretion, determine the manner of recovery of any Erroneously Awarded Compensation, which
may include, without limitation, reduction or cancellation by the Company or an affiliate of the Company of Incentive-Based Compensation or
Erroneously Awarded Compensation, reimbursement or repayment by any person subject to this Policy, and, to the extent permitted by law, an offset of
the Erroneously Awarded Compensation against other compensation payable by the Company or an affiliate of the Company to such person. Generally,
unless the Committee and the Board determine otherwise, when Erroneously Awarded Compensation consists of options to purchase Ordinary Shares or
restricted share units (“RSUs”) that may be settled for Ordinary Shares, if the options or RSUs have vested but have not been exercised or settled (as
applicable), the means of recovery shall be the cancellation of the options or RSUs (as applicable) and the return of the underlying Ordinary Shares to the
pool available under the subject equity incentive plan of the Company under which the options or RSUs (as applicable) were granted. If the subject
options or RSUs have been exercised or settled when there is a Restatement, the cash value of the Officer’s profit from the exercise of the options or the
settlement of the RSUs will be recovered by the Company. Notwithstanding the foregoing, unless otherwise prohibited by the Applicable Rules, to the
extent this Policy provides for recovery of Erroneously Awarded Compensation already recovered by the Company pursuant to Section 304 of the
Sarbanes-Oxley Act of 2002 or Other Recovery Arrangements, the amount of Erroneously Awarded Compensation already recovered by the Company
from the recipient of such Erroneously Awarded Compensation may be credited to the amount of Erroneously Awarded Compensation required to be
recovered pursuant to this Policy from such person.
Administration
This Policy shall be administered, interpreted and construed by the Committee, which is authorized to make all determinations necessary,
appropriate or advisable for such purpose. The Board may re-vest in itself the authority to administer, interpret and construe this Policy in accordance
with applicable law, and in such event references herein to the “Committee” shall be deemed to be references to the Board. Subject to any permitted
review by the applicable national securities exchange or association pursuant to the Applicable Rules, all determinations and decisions made by the
Committee pursuant to the provisions of this Policy shall be final, conclusive and binding on all persons, including the Company and its affiliates,
shareholders and employees. The Committee may delegate administrative duties with respect to this Policy to one or more directors or employees of the
Company, as permitted under applicable law, including any Applicable Rules.
Interpretation
This Policy shall be interpreted and applied in a manner that is consistent with the requirements of the Applicable Rules, and to the extent this
Policy is inconsistent with such Applicable Rules, it shall be deemed amended to the minimum extent necessary to ensure compliance therewith.
No Indemnification; No Liability
The Company shall not indemnify or insure any person against the loss of any Erroneously Awarded Compensation pursuant to this Policy, nor
shall the Company directly or indirectly pay or reimburse any person for any premiums for third-party insurance policies that such person may elect to
purchase to fund such person’s potential obligations under this Policy. None of the Company, an affiliate of the Company or any member of the
Committee or the Board shall have any liability to any person as a result of actions taken under this Policy.
Application; Enforceability
Except as otherwise determined by the Committee or the Board, the adoption of this Policy does not limit, and is intended to apply in addition to,
any Other Recovery Arrangements. Subject to Section 4, the remedy specified in this Policy shall not be exclusive and shall be in addition to every other
right or remedy at law or in equity that may be available to the Company or an affiliate of the Company or is otherwise required by applicable law and
regulations.
Severability
The provisions in this Policy are intended to be applied to the fullest extent of the law; provided, however, to the extent that any provision of this
Policy is found to be unenforceable or invalid under any applicable law, such provision will be applied to the maximum extent permitted, and shall
automatically be deemed amended in a manner consistent with its objectives to the extent necessary to conform to any limitations required under
applicable law.
Amendment and Termination
The Board or the Committee may amend, modify or terminate this Policy in whole or in part at any time and from time to time in its sole
discretion. This Policy will terminate automatically when the Company does not have a class of securities listed on a national securities exchange or
association in the U.S.
Definitions
“Applicable Rules” means Section 10D of the Exchange Act, Rule 10D-1 promulgated thereunder, the listing rules of the national securities
exchange or association on which the Company’s securities are listed, and any applicable rules, standards or other guidance adopted by the Securities and
Exchange Commission or any national securities exchange or association on which the Company’s securities are listed.
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“Board” means the Board of Directors of the Company.
“Committee” means the Compensation Committee of the Board or, in the absence of such a committee, a majority of the independent directors
serving on the Board.
“Ordinary Shares” means the Company’s Ordinary shares, par value 0.1 NIS per share.
“Erroneously Awarded Compensation” means the amount of Incentive-Based Compensation received by a current or former Officer that
exceeds the amount of Incentive-Based Compensation that would have been received by such current or former Officer based on a restated Financial
Reporting Measure, as determined on a pre-tax basis in accordance with the Applicable Rules.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Financial Reporting Measure” means any measure determined and presented in accordance with the accounting principles used in preparing
the Company’s financial statements, and any measures derived wholly or in part from such measures, including GAAP, IFRS and non-GAAP/IFRS
financial measures, as well as stock price and total shareholder return.
“GAAP” means International Financial Reporting Standards as issued by the International Accounting Standards Board.
“IFRS” means international financial reporting standards as issued by the International Accounting Standards Board.
“Impracticable” means (a) the direct expense paid to third parties to assist in enforcing recovery would exceed the Erroneously Awarded
Compensation; provided that the Company has (i) made reasonable attempt(s) to recover the Erroneously Awarded Compensation, (ii) documented such
reasonable attempt(s) and (iii) provided such documentation to the relevant listing exchange or association, (b) the recovery would violate the Company’s
home country laws adopted prior to November 28, 2022 pursuant to an opinion of home country counsel; provided that the Company has (i) obtained an
opinion of home country counsel, acceptable to the relevant listing exchange or association, that recovery would result in such a violation and (ii)
provided such opinion to the relevant listing exchange or association, or (c) recovery would likely cause an otherwise tax-qualified retirement plan, under
which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and the
regulations thereunder.
“Incentive-Based Compensation” means, with respect to a Restatement, any compensation that is granted, earned, or vested based wholly or in
part upon the attainment of one or more Financial Reporting Measures and received by a person: (a) after such person began service as an Officer; (b)
who served as an Officer at any time during the performance period for that compensation; (c) while the Company has a class of securities listed on a
national securities exchange or association; and (d) during the applicable Three-Year Period.
“Officer” means each person who the Company determines serves as a Company officer, as defined in Section 16 of the Securities Exchange
Act of 1934, as amended.
“Other Recovery Arrangements” means any clawback, recoupment, forfeiture or similar policies or provisions of the Company or its affiliates,
including any such policies or provisions of such effect contained in any employment agreement, bonus plan, incentive plan, equity-based plan or award
agreement thereunder or similar plan, program or agreement of the Company or an affiliate or required under applicable law.
“Restatement” means an accounting restatement to correct the Company’s material noncompliance with any financial reporting requirement
under securities laws, including restatements that correct an error in previously issued financial statements (a) that is material to the previously issued
financial statements or (b) that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current
period.
“Three-Year Period” means, with respect to a Restatement, the three completed fiscal years immediately preceding the date that the Board, a
committee of the Board, or the officer or officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably
should have concluded, that the Company is required to prepare such Restatement, or, if earlier, the date on which a court, regulator or other legally
authorized body directs the Company to prepare such Restatement. The “Three-Year Period” also includes any transition period (that results from a
change in the Company’s fiscal year) within or immediately following the three completed fiscal years identified in the preceding sentence. However, a
transition period between the last day of the Company’s previous fiscal year end and the first day of its new fiscal year that comprises a period of nine to
12 months shall be deemed a completed fiscal year.
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ACKNOWLEDGMENT AND CONSENT TO
POLICY FOR RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION
The undersigned has received a copy of the Policy for Recovery of Erroneously Awarded Compensation (the “Policy”) adopted by Magic
Software Enterprises Ltd. (the “Company”), and has read and understands the Policy. Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Policy.
As a condition of receiving Incentive-Based Compensation from the Company, the undersigned agrees that any Incentive-Based Compensation
received on or after the Effective Date is subject to recovery pursuant to the terms of the Policy. To the extent the Company’s recovery right conflicts
with any other contractual rights the undersigned may have with the Company, the undersigned understands that the terms of the Policy shall supersede
any such contractual rights. The terms of the Policy shall apply in addition to any right of recoupment against the undersigned under applicable law and
regulations.
Date
Signature
Name
Title
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