Glasgow-based McLaren Software is continuing to trade at a substantial loss and has warned that it might need further external funding if sales leads are not converted into new business.

McLaren's annual accounts, obtained by The Herald from Companies House, reveal the company made a pre-tax loss of £448,000 in the 2007 calendar year, an improvement on the £1.6m deficit it recorded the previous year, as a new product launch helped boost gross profit margins from 1% to 93%.

But the company, which produces applications for sectors including the oil and gas, utilities, construction and engineering, still had to turn to new and existing investors to raise more than £1.5m.

Major investor Sigma Capital, of which McLaren chairman Neil Crabb was a director and is a large shareholder, upped its equity stake by 25% over the course of the financial year and in a smaller transaction after the financial year ended.

It also increased its holding of loan stock from £1.6m to £2m.

Other major investors in the company include HBOS subsidiary Uberior Investments and the Edinburgh-based Artemis Aim Venture Capital Trust, according to Companies House.

Over the year the firm's balance sheet weakened with its net deficit widening by £72,000 to £2.5m.

But the company noted that some £3.55m of its liabilities are in loan stock from its investors.

Crabb said, in a statement attached to the accounts: "The board is optimistic about the outlook for the business."

But auditor Grant Thornton took the unusual step of drawing investors' attention to the company's statement on its ability to continue as a going concern.

McLaren, which had 76 employees during the year, said the accounts had been prepared on a going concern basis.

But it added: "The group did not perform as antici-pated in 2007, however additional new investment funds were obtained and significant new sales leads developed.

"The nature of the business means that the timing and magnitude of sales contracts are difficult to anticipate beyond the short term and subsequently the business plan is dependant on achieving certain sales levels and the completion of a proposed distribution partnership agreement.

"In the event that leads are not converted to sales the group would need to seek additional funding."

This is the second consecutive year that McLaren has had to attach a note to this effect to its accounts.

The company which gets almost 90% of its business from overseas, saw turnover fall by 2.6% over the year. But despite its problems the emoluments of the highest-paid director, assumed to be chief executive Paul Muir, increased by 27.9% to £197,000.

McLaren has had a tumultuous history. During a restructuring, carried out in 2003 and 2004, Sigma Technology took nearly 50% of McLaren's equity, while HBOS wrote off some £9m of debt in favour of an approximately 25% equity stake.

As a result of these actions, one of McLaren's major early investors, Penta Capital, took a step back from the operation.

Meanwhile, February 2008 saw the departure of David Craig, the firm's long-time chief operating officer.

McLaren did not respond to a request for comment.