API SOFTWARE LIMITED

1. Risk Rating: MEDIUM

While the company presents a technically insolvent balance sheet with net liabilities of £5.9M and shareholders' funds of £-6.3M that have deteriorated significantly since 2022, this requires important contextual interpretation. The strategic report explicitly clarifies that £14.3M of liabilities comprises deferred income from contracted Annual Recurring Revenue (ARR) — cash received in advance of revenue recognition under SaaS accounting treatment — rather than external borrowings or overdue obligations. Operationally, the business is demonstrating improving fundamentals: 34% revenue growth to £28.0M, a return to operating profitability (£0.9M vs. prior year loss of £1.1M), positive operating cash inflows of £3.5M, and a strengthening cash position of £6.9M (up from £4.1M). The auditor has issued an unqualified opinion with no material going concern uncertainties identified. However, the persistent and deepening negative equity position warrants ongoing monitoring.

2. Key Concerns:

• Deteriorating Net Asset Position: Net assets have moved from positive £1.4M (Jan 2022) to negative £5.9M (Jan 2026), with shareholders' funds worsening from £1.4M to £-6.3M over the same period. Even accounting for the deferred income adjustment, this trajectory indicates accumulated losses are compounding. The company is technically insolvent on a balance sheet basis, which could restrict access to certain financing or create covenant issues if not carefully managed.

• Complex Ownership and Control Structure: The PSC register reveals a layered ownership structure with Api Software Holdings Limited (75%+ shares, 75%+ voting rights, right to appoint/remove directors) and SEP V LP (50-75% shares, 50-75% voting rights, right to appoint/remove directors) both holding significant control. This dual-entity control with overlapping rights creates potential for governance complexity, and the involvement of a private equity firm (Scottish Equity Partners) suggests the company may be under pressure for growth and eventual exit, which can influence strategic risk-taking.

• Rapid Asset Growth Without Corresponding Equity Improvement: Total assets grew from £6.9M (2022) to £16.1M (2026), yet net assets declined by £7.3M over the same period. This indicates the asset expansion has been funded almost entirely through liabilities rather than retained earnings or equity injection, raising questions about the sustainability of the funding model and whether the growth is creating genuine shareholder value.

3. Positive Indicators:

• Strong Revenue Growth and Return to Profitability: Revenue increased 34% to £28.0M, with US revenue specifically growing 107% to £2.9M. The shift from an operating loss of £1.1M to an operating profit of £0.9M before exceptional costs demonstrates improving operational leverage in the SaaS model.

• Robust Cash Generation and Liquidity: Operating cash inflows of £3.5M (up from £2.9M) combined with a year-end cash position of £6.9M (up from £4.1M) provides a meaningful buffer. The cash reserve represents approximately 3 months of revenue, and the positive cash trajectory suggests the business is self-funding its growth without reliance on external debt.

• Quality Customer Base and Regulatory Tailwinds: The company serves 100+ global customers including large banks, insurers, and payment providers. Regulatory drivers (FCA CASS 15 rules, SEC T+1 settlement, forthcoming UK T+1) create structural demand for reconciliation and compliance software. ISO27001, ISO9001, SOC1 Type 2 and SOC2 Type 2 certifications demonstrate operational credibility with regulated clients.

• Auditor Confirmation of Going Concern: Johnston Carmichael LLP issued an unqualified opinion and explicitly concluded no material uncertainties exist regarding the company's ability to continue as a going concern for at least twelve months from the authorisation date of the financial statements.

4. Due Diligence Notes:

• Deferred Income Composition: Request a detailed breakdown of the £14.3M deferred income liability. Understand the typical contract duration, renewal rates, and recognition timeline. Assess what proportion is contracted versus at-risk of churn.

• Retained Losses and Dividend Capacity: Examine the P&L reserve trend to understand the cumulative loss position. With no dividends paid or recommended, clarify the board's timeline for restoring positive equity and whether any capital restructuring or share premium conversion is planned.

• Related Party Transactions: Given the complex PSC structure involving Api Software Holdings Limited and SEP V LP, investigate inter-company balances, management fees, or financial arrangements between the parent entities and the operating company. Understand whether SEP has provided shareholder loans, convertible instruments, or guarantees.

• Exceptional Costs: The operating profit figure is stated "before exceptional costs." Quantify these exceptional items and understand their nature — whether they relate to restructuring, acquisition integration, or one-off investments — and their impact on the actual bottom-line loss.

• Director Resignation: Chris Livesey resigned on 2 September 2026, shortly after the year-end. Determine the circumstances of this departure and whether it has any operational or governance implications.

• Capitalisation Policy for Development Costs: Given the significant R&D investment mentioned, understand the accounting policy for software development cost capitalisation versus expensing, and how this impacts both the asset base and reported profitability.

• Customer Concentration: Assess revenue dependency on the top 5 and top 10 customers, particularly given the high-value financial services client base where individual contract loss could be material.