Credit Assessment: ARUN TECHNOLOGY LTD

1. Credit Opinion: CONDITIONAL

Reasoning: The company presents a fundamentally insolvent balance sheet with net liabilities of £714,048 and negative shareholders' funds of £880,155 at 31 December 2024. However, several mitigating factors support a conditional rather than outright decline: (i) a clear and sustained improvement trajectory since 2021, (ii) achieved profitability of £70,448 in 2024, (iii) a strengthening cash position, and (iv) explicit parent company support confirmed by Focused Process Instruments (Hong Kong) Ltd. Any credit facility must be conditional upon a parent company guarantee and ongoing financial monitoring.

2. Financial Strength

Balance Sheet Position: Severely Weak but Improving

The company has been technically insolvent since at least 2017, with accumulated losses eroding the equity base substantially. However, the trajectory tells an important story:

The business has undergone a significant transformation since 2020-2021, with total assets quadrupling and the deficit reducing by approximately £439,000 over three years. This suggests either a genuine trading recovery or substantial intercompany funding support — likely a combination of both.

Capital Structure: - Share capital: £98,500 (unchanged) - Other reserves: £67,607 (unchanged) - P&L reserve: (£880,155) — improving from (£950,603) in 2023 - The P&L reserve improvement of £70,448 aligns with the reported net profit

Intercompany Dominance: The balance sheet is overwhelmingly shaped by group obligations. Amounts owed to group companies total £2,034,619 (current) plus £500,000 (non-current) = £2,534,619, representing approximately 92% of total liabilities. This means the parent company effectively controls the company's solvency.

Tangible Net Worth: After excluding intangibles (minimal at £40 for leasehold improvements at cost less depreciation), tangible net worth remains deeply negative at (£714,048).

3. Cash Flow Assessment

Liquidity Position: Strained on Paper, Supported in Practice

The current ratio below 1.0x indicates the company cannot cover short-term obligations from current assets alone. However, this must be contextualised:

• Intercompany creditors of £2,034,619 dominate current liabilities — these are unlikely to be called in by the parent while support continues
• Cash of £997,373 is substantial relative to third-party current liabilities (trade creditors £15,925, tax/social security £10,028, BBLS £10,000, accruals £41,271, other creditors £3,120, deferred income £87,867 = approximately £168,311 in third-party current obligations)
• The company can comfortably meet third-party obligations from cash reserves

Working Capital Analysis: - Stocks: £523,132 (increased from £464,623) — suggests inventory build-up, potentially for anticipated demand or longer supply chains - Trade debtors: £159,834 (decreased from £174,758) — improved collection - Other debtors: £91,374 (increased from £63,314) — needs clarification on nature - Deferred tax asset: £195,593 (current portion) + additional long-term — substantial, suggests accumulated tax losses being recognised

Cash Generation: Cash has grown consistently from £129,113 (2020) to £997,373 (2024), a remarkable increase. This likely reflects both improved trading performance and intercompany funding flows.

Debt Service: - BBLS: £18,333 total (£10,000 current + £8,333 non-current) at 2.5% — minimal annual cost - Parent loan: £500,000 non-current at 3.25%, but interest waived — no cash cost - Group current liabilities: £2,034,619 — terms not specified but presumably at parent's discretion

4. Monitoring Points

Critical: 1. Parent Company Financial Health — Obtain and review audited financial statements of Focused Process Instruments (Hong Kong) Ltd and ultimate parent Focus Photonics (Hangzhou) Inc. The entire creditworthiness rests on their continued support. 2. Intercompany Position — Monitor whether group creditors are being repaid or increasing. If the parent reduces support, the company faces immediate liquidity crisis. 3. Going Concern Status — The auditor's material uncertainty note requires ongoing attention. Any withdrawal of parent company support confirmation would be a significant red flag.

Important: 4. Profitability Sustainability — The 2024 profit of £70,448 is encouraging but represents only a small step toward eliminating the £880,155 accumulated deficit. Monitor whether this trajectory continues. 5. Stock Levels — Inventory has increased to £523,132. Assess whether this represents genuine demand or potential obsolescence risk, particularly for certified reference materials with finite useful lives. 6. Trade Creditor Days — Trade creditors are remarkably low at £15,925 against stock of £523,132, suggesting either prompt payment or limited trade credit availability. 7. Operating Lease Commitments — £314,155 outstanding on a lease running to September 2030 represents a significant fixed commitment.

Ongoing: 8. Foreign Ownership Risk — Hong Kong/Chinese ownership introduces geopolitical and regulatory risk. Monitor for any changes in ownership structure or control. 9. Deferred Tax Asset Recoverability — At £195,593 (current) plus long-term amounts, this is substantial. Assess whether projected profits make recovery probable. 10. Other Debtors — The increase to £91,374 warrants investigation regarding nature and recoverability. 11. Name Change History — Formerly MetalScan Limited (changed 2017), coinciding approximately with the period of deepest losses. Understand the business rationale and whether this reflected a strategic pivot under new ownership.

Summary Risk Assessment

Recommended Facility Structure (if approved): - Maximum exposure: Limited to amounts recoverable from third-party assets - Parent company guarantee: Mandatory from Focused Process Instruments (Hong Kong) Ltd - Financial covenants: Minimum cash threshold, profit notification, negative pledge on intercompany repayments without bank consent - Reporting: Quarterly management accounts, annual audited financials within 9 months of year-end - Review trigger: Any change in parent company ownership, withdrawal of going concern support, or deterioration in net assets position