Credit Assessment: RED SCIENTIFIC REPLY LIMITED

1. Credit Opinion: CONDITIONAL

Rationale: The company presents a fundamentally sound balance sheet with net assets of £869,500 and positive working capital of £881,549. However, the significant deterioration in the 2025 financial position—net assets fell by £304,279 (26%) and cash declined by £306,340 (41%)—requires explanation before full credit confidence can be established. The recent acquisition by Reply Limited (evidenced by the name change and PSC structure) introduces both opportunity (group support) and uncertainty (restructuring impact). Credit approval is recommended subject to clarification of the 2025 decline and confirmation of group backing.

2. Financial Strength

Balance Sheet Summary (FY2025 vs FY2024)

Key Concern: The £300,576 decline in retained earnings is material. Without a profit & loss account (filleted small company accounts), it is unclear whether this represents: - A trading loss - A dividend distribution to the parent - A combination of both

Positive Indicators: - Long-term growth trajectory from near-insolvency in 2017 (net assets of £28,189) to a substantial position by 2024 - No negative equity or balance sheet stress - Modest fixed asset base (£36,211) appropriate for a consultancy business - CBILS loan being actively repaid (reduced from £91,667 to £41,667)

Gearing Analysis: - Total liabilities to net assets: 85% (2025) vs 55% (2024) — deteriorating but still manageable - Debt structure is predominantly short-term trade and operational creditors rather than bank debt

3. Cash Flow Assessment

Liquidity Position

Cash Ratio Deterioration: The drop from 1.17x to 0.61x cash cover on current liabilities is concerning. The company no longer holds sufficient cash to settle all current liabilities immediately—a shift from a highly liquid to a moderately liquid position.

Debtors: Trade debtors increased from £387,943 to £427,812 (+10%), and other debtors from £737,304 to £745,815. The other debtors figure is substantial and may include intercompany balances with the Reply Group. Debtor collection efficiency requires monitoring.

Other Creditors Surge: The increase from £224,740 to £383,283 (+70%) in other creditors is the most concerning balance sheet movement. This could represent accrued group charges, deferred income, or intercompany liabilities. Clarification is essential.

CBILS Obligation: £50,000 current + £41,667 long-term = £91,667 total remaining on the Coronavirus Business Interruption Loan. The 80% government guarantee provides some comfort, but this remains a contractual obligation requiring service.

Working Capital Assessment: Net current assets of £881,549 remain comfortable, but the trajectory is downward. The business model (IT/defence consultancy) is typically cash-generative with low capital requirements, so this decline warrants investigation.

4. Monitoring Points

Immediate Clarifications Required:

1. Cause of 2025 net asset decline: Confirm whether the £300k reduction reflects trading losses, dividend extraction by Reply Limited, or restructuring costs
2. Other creditors composition: Explain the 70% increase to £383,283—identify nature and any related party elements
3. Other debtors detail: Clarify the £745,815 other debtors balance—likely intercompany with Reply Group
4. Group support confirmation: Obtain comfort letter or guarantee from Reply Limited regarding obligations of this subsidiary

Ongoing Monitoring:

• Cash position: Track quarterly to ensure no further deterioration below £300k
• Current ratio: Maintain above 1.5x; current 2.19x provides headroom
• Intercompany balances: Monitor for aggressive cash extraction by parent
• Dividend policy: Watch for excessive upstream distributions that weaken the entity
• Trade debtor days: Assess collection efficiency given the defence/IT client base
• CBILS repayment: Confirm continued compliance with loan terms
• Employee headcount: Stable at 39 (up from 37)—monitor for further changes post-acquisition

Sector Considerations:

• Defence and IT consultancy revenues are typically contractually stable but subject to government procurement cycles
• The Reply Group acquisition may bring cross-selling opportunities but also potential for group reorganisation or restructuring