Credit Assessment: SOFTWERX LTD

1. Credit Opinion: CONDITIONAL

Reasoning: Softwerx demonstrates a strengthening balance sheet with significant cash accumulation and positive equity growth over the past two years. However, the credit position is constrained by: (a) substantial and rapidly growing intercompany liabilities (£858k, up 138% year-on-year) which represent 50% of total liabilities and could be called upon by the parent entity; (b) lack of full profit & loss visibility due to small company filing exemptions; and (c) an unexplained sharp deterioration in net assets between 2021 and 2022 (from £1.75M to £319K). The company is a subsidiary of Clearsprings (Management) Limited, and any credit exposure should ideally be supported by a parent company guarantee given the scale of intra-group obligations.

2. Financial Strength

Balance Sheet Summary (Jan 2024):

Positive Indicators: - Net assets have grown consistently over the past two years (£319K → £526K → £614K), demonstrating recovery and accumulation of retained profits - Cash position has strengthened dramatically, more than quadrupling from 2021 levels to £1.35M - No long-term debt on the balance sheet - Unqualified audit opinion for 2024 - Shareholders' funds positive and growing

Concerning Indicators: - The collapse in net assets between 2021 and 2022 (from £1.75M to £319K) represents an 82% decline – this requires explanation as it may indicate a significant one-off loss, write-down, or distribution - Intercompany debt owed to group undertakings stands at £858,124, up from £360,081 – this is a material related-party exposure that effectively subordinates independent creditors - Share capital remains minimal at £100, offering negligible equity cushion

Equity Position: Net assets of £613K against minimal share capital of £100 indicates the business is entirely dependent on retained profits, which is typical for mature SMEs but offers limited downside protection if trading deteriorates.

3. Cash Flow Assessment

Liquidity Position:

Working Capital Analysis: - Net current assets are positive and growing (£499K → £578K), which is encouraging - Current ratio has weakened slightly from 1.45x to 1.34x, primarily driven by the increase in creditors outpacing current asset growth - Cash represents 59% of current assets, providing strong liquid coverage - Debtors of £936,877 require monitoring – this represents 41% of current assets and collection efficiency will impact cash flow

Creditor Composition (2024):

Key Observations: - The intercompany balance (£858K) is the single largest liability – while this may be on flexible terms given the group relationship, it represents a contingent risk if the parent requires repayment - Trade creditors of £420K have increased 18% year-on-year (£356K), which could indicate either business growth or stretched payment terms - Corporation tax of £24K confirms profitability in the period

Cash Generation: Cash increased by £449K during the year, which is positive. However, without a P&L statement, it is difficult to assess the quality of earnings versus working capital movements driving this increase.

4. Monitoring Points

Critical Metrics to Watch:

1. Intercompany Liabilities: The £858K owed to group undertakings has more than doubled year-on-year. Monitor whether this continues to escalate and understand the terms (is it interest-bearing? repayable on demand?). Request confirmation from the parent regarding the permanence of this funding.

2. Debtor Collection: Debtors of £937K against unknown turnover makes it impossible to calculate debtor days. Request management accounts to assess whether debtor days are extending, which could signal collection issues or revenue recognition concerns.

3. Trade Creditor Days: Trade creditors have risen 18%. Without turnover data, it is unclear whether this reflects genuine growth or payment stretching. Request turnover figures from management accounts.

4. Profitability Visibility: As a small company, Softwerx files abbreviated accounts with no P&L. Request full management accounts to verify margin trends, EBITDA, and interest coverage ratios.

5. Parent Financial Health: Given the company is a subsidiary of Clearsprings (Management) Limited and ultimate control rests with G King, the parent's financial position is material. Obtain and review the group's consolidated accounts.

6. Historical Anomaly: The 2021-to-2022 decline in net assets from £1.75M to £319K requires explanation. This may have been a dividend distribution, write-off, or trading loss – the cause materially affects risk assessment.

7. Employee Growth: Headcount has increased from 30 to 36 (20% growth), which suggests expansion. Monitor whether this is generating proportionate revenue growth or creating fixed cost pressure.

8. Operating Lease Commitments: Only £30K per annum in lease commitments is disclosed, which appears modest for a 36-person IT consultancy. Verify whether all premises and equipment obligations are captured.

Additional Considerations for Credit Decision

Recommended Conditions if Approving: - Obtain and review parent company (Clearsprings Management Limited) accounts - Request parent company guarantee for any significant exposure - Obtain quarterly management accounts to monitor trading performance - Seek explanation for the 2021-2022 net asset decline - Confirm terms and expected repayment profile of the intercompany balance

Sector Context: IT consultancy (SIC 62020) is a people-dependent business with limited tangible asset backing. The value resides in client relationships and staff expertise, which can dissipate rapidly if key personnel depart. The five current directors and PSC (Graham Ian King) represent key person risk.