Water Intelligence : Annual Report and Accounts 2021

Water Intelligence plc

Group Annual Report and Financial Statements for the Year Ended 31 December 2021

Company number 03923150

Group Annual Report and Financial Statements

for the year ended 31 December 2021

Contents

Page

1. Company Information
2. Chairman's Statement

6 Strategic Report

13 Directors' Report

18 Corporate Governance Statement

1. Statement of Directors' Responsibilities
2. Independent Auditors' report to the members of Water Intelligence plc

1. Consolidated Statement of Comprehensive Income
2. Consolidated Statement of Financial Position
3. Company Statement of Financial Position
4. Consolidated Statement of Changes in Equity
5. Company Statement of Changes in Equity
6. Consolidated Statement of Cash Flows
7. Company Statement of Cash Flows
8. Notes to the Financial Statements

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Company Information

Directors & Advisers
Directors	Patrick DeSouza	Executive Chairman
	Laura Hills	Executive Director
	Bobby Knell	Non-Executive Director
	Michael Reisman	Non-Executive Director
	C. Daniel Ewell	Non-Executive Director
		(Appointed 8, April 2021)
Company Secretary	Adrian Hargrave
and Registered Office	27-28 Eastcastle Street
	London
	United Kingdom
	W1W 8DH
Company number	Registered in England and Wales number 03923150
Nominated adviser and broker WH Ireland Limited
	24 Martin Lane
	London
	EC4R 0DR
Brokers	Dowgate Capital Limited
	15 Fetter Lane
	London
	EC4A 1BW

RBC Europe Limited

100 Bishopsgate London

EC2M 1GT

Independent Auditor	Crowe UK LLP
	55 Ludgate Hill
	London EC4M 7JW
Registrar	Neville Registrars Limited
	Neville House
	18 Laurel Lane
	Halesowen West Midlands
	B63 3DA
Bankers	CITI Bank	People's United Bank a division of M&T Bank
	CGC Centre,	265 Church Street
	Canary Wharf	New Haven
	London	CT 06510
	E14 5LB	USA

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Chairman's Statement

Overview

Despite the challenges of navigating the global marketplace over the last few years, we continue to reaffirm our primary objective, one that has been set forth in the Chairman's Statement for the last decade: to create a leading multinational growth company for water and wastewater infrastructure solutions whose growth is not only strong but sustainable. Global market demand for services and products to preserve our most precious natural resource and to address the reality of aging water infrastructure underpins our mission. We are proud that we were awarded the Green Economy Mark from the London Stock Exchange.

In our 2020 Chairman's Statement, we provided a simple message: full steam ahead for 2021 despite the disruptions caused by Covid. Demonstrated in this year's report and consistent with that message, we produced strong growth in 2021 and reinforced our enviable compounded annual growth rate ("CAGR") from 2016 when we launched our current growth plan. Revenue increased 44% to $54.5 million (2020: $37.9 million). Statutory profit before tax (PBT) increased 80% to $7.6 million (2020: $4.2 million). However, $1.9 million of statutory PBT represented a one-time gain. Not including the one-time gain, statutory PBT grew 35% to $5.7 million (2020: $4.2 million). Meanwhile PBT Adjusted for non-cash costs (amortisation and share-based payments) and non-core costs increased by 36% to $6.9 million (2020: $5.1 million). Not counting our one-time statutory PBT gain, for the span of 2016 -2021 our CAGRs still show revenue growth of 35% and statutory PBT growth of 49%.

For 2022, we have a new set of challenges layered upon the lingering effects of Covid. We are all aware of the inflationary challenges ranging from the conflict in Ukraine to supply chain and inflationary concerns that create market uncertainty. For our business, we face fuel and material prices that have doubled over the course of 1H 2022 as we service our customers to solve their leakage problems. Moreover, we face rising labour costs and retention issues as our technicians and managers themselves need to cope with economy-wide inflation. Tactically, as outlined below, we are responding to these new challenges. Overall, our Chairman's Statement strategic message remains similar to last year's: Full steam ahead but with prudence as we balance rising costs.

We have several operational attributes that enable us to navigate these market-wide challenges better than most. Importantly, global market demand for water infrastructure solutions remains strong as we rise to meet new execution challenges. Second, our core American Leak Detection (ALD) business operates in the United States, and we benefit from earning money in dollars as interest rates rise to cope with inflation and produce a stronger dollar. Third, we have made timely technology investments in making our business more efficient. These investments will help combat inflationary pressures on our costs. Most importantly, this year we are completing our Salesforce (and related applications) implementation to automate many of our business processes and help drive greater productivity by our workforce. Further, we are introducing during Q3 a proprietary new tool for water surveys that should lower labour costs for delivering that municipal offering. We have executed successful field trials in the UK and are now planning similar trials in Australia. In navigating 1Q 2022, our growth trajectory remained firm with revenue increasing by 44% (Q1 2022: $16.5 million vs. Q1 2021: $11.4 million). Our PBT Adjusted still grew by 16% to $2.1 million (Q1 2021: $1.7 million).

As we navigate 2022, we are helped by the fact that we have a critical mass of customers and a matrix of business lines - residential, commercial, municipal, clean water, sewer - that help offset volatility in any one segment. Our overall market presence in 2022 will surpass $150 million in annual network-wide gross sales to customers. Network-wide gross sales is a non-statutory concept that illuminates the actual sales to customers executed under the same brand whether by franchisees or by corporate technicians. Network-wide gross sales includes both indirect sales to our customers by our franchisees from which royalty income to the Group is derived (which is recorded in statutory terms) plus direct sales from corporate operations. To reiterate, both franchisees and corporate locations operate under the same ALD brand and to the customers there is no difference in franchise or corporate execution. This critical mass of sales, across

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Chairman's Statement

our more than 150 locations spread across the United States and in the UK, Australia and Canada, establishes a solid foundation of customers from which to launch our next stage of growth.

In building from this foundation, despite market-wide challenges, we are well-positioned for the short-run,medium-run and long-run to execute our growth plan. With our strong balance sheet and our ability to generate cash each year, we have the working capital to reinvest in the business for short to medium term projects that reinforce sustainable growth. Over the last six months, we have accelerated investment in human capital; expanding our execution team both in terms of senior management and on- the-ground trained technicians. More broadly, as noted above, over the last five years, we have also made investments in technology products (sewer diagnostic tools, open channel liners, video e-commerce, Salesforce) that will over the next several years expand our business lines and make our business more scalable. Finally, we have also positioned ourselves for the longer-run horizon with two sets of financings during 2021 and Q1 2022. We expanded our institutional equity base during July and November 2021. In parallel, during February 2021 and April 2022, we lowered our cost of capital by blending in low-cost bank debt. Such short-run,medium-run and long-run tactics enable us to meet the marketplace challenges ahead.

Operating KPIs

Water Intelligence Key Performance Indicators (KPIs) are explained more fully in the Strategic Report. These KPIs serve to underscore two key dimensions of our overall strategic growth plan. First, we prioritize Network-wide growth in order to establish a strong foundation of market presence. With over 40 years of operations, American Leak Detection (ALD) is a well-developed and highly regarded brand that sells to customers - residential, commercial and municipal - across the United States and in Australia and Canada. ALD represents approximately 90% of the Group's revenue. In 2021 through franchise operated and corporate operated locations, ALD customers purchased services and products amounting to approximately $141 million of gross sales. Our Water Intelligence International (WII) brand added another $6 million in gross sales operating primarily in the UK. In implementing Salesforce, we are creating efficiencies to further grow Network-wide sales.

For 2021, KPIs illuminate the growth of both ALD and WII brands. KPI #1 or ALD royalty income grew 2% to $6.8 million (2020: $6.7 million). This royalty income represents approximately $99 million of Network gross sales (2020: $97 million). ALD and WII corporate sales or KPIs #2, #3 and #4 (respectively franchise related activities such as the Corporate insurance channel; US Corporate direct sales; and International Corporate direct sales) grew 53% to $47.7 million (2020: $31.2 million). Captured by these 4 KPIs, total Network gross sales (ALD and WII) grew 14% to approximately $147 million (2020: $129 million). With 44% WI revenue growth during 1Q, Network sales is on pace to significantly pass $150 million for 2022.

Second, beyond expanding Network sales, we also seek to unlock shareholder value and add profits to the Group's consolidated accounts by selectively reacquiring franchises and then delivering solutions through corporate-run locations more efficiently. Our Salesforce implementation enables us to create corporate regional hubs that will help scale ALD's dispatch and scheduling. In executing for the same customers under the ALD brand but with corporate-run operations, we are bringing a portion of the approximately $99 million of franchise operated sales and associated profits directly onto the Water Intelligence Group (WI) accounts.

As explained more fully in KPI #3, we have unlocked significant value by growing former franchise locations faster both in terms of sales and profits. For comparison purposes, corporate-run locations acquired from franchisees before 1 January 2020 grew 18% to $18.3 million (2020: $15.5 million); profits from those reacquired locations increased 8% to $3.3 million (2020: $3.1 million) even as we reinvested in these new corporate locations after acquisition for future growth. The profit yield of $3.3 million under corporate execution at these locations is significantly higher than the profit yield from the same $18.3 million of sales if executed by a franchisee. Profit to the Group from franchise royalty would be approximately $0.3 million. The difference in yield is even more pronounced when one considers the $31.9 million of sales at

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